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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
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SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-6407
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
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Common Stock, par value $1 New York Stock Exchange
per share
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
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Indicate by check mark if disclosure of delinquent filers pursu-
ant to Item 405 of Regulation S-K is not contained herein, and
will not be contained, to the best of registrant's knowledge, in
definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
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The aggregate market value of the voting stock held by non-
affiliates of the registrant on August 31, 1999, was $371,256,150.
The number of shares of the registrant's Common Stock outstanding
on August 31, 1999 was 31,235,009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for
the year ended June 30, 1999, are incorporated by reference in
Parts II and IV.
Portions of the registrant's proxy statement for its annual
meeting of stockholders to be held on October 19, 1999, are
incorporated by reference into Part III.
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PART I
ITEM 1. Business.
Introduction
Southern Union Company (Southern Union and together with its sub-
sidiaries, the Company) was incorporated under the laws of the
State of Delaware in 1932. Southern Union is one of the top 15
gas utilities in the United States, as measured by number of cus-
tomers. The Company's principal line of business is the distri-
bution of natural gas as a public utility through Southern Union
Gas, Missouri Gas Energy and Atlantic Utilities, doing business
as South Florida Natural Gas (SFNG), each of which is a division
of Southern Union. Southern Union Gas, headquartered in Austin,
Texas, serves 513,000 customers in Texas (including the cities of
Austin, Brownsville, El Paso, Galveston, Harlingen, McAllen and
Port Arthur). Missouri Gas Energy, headquartered in Kansas City,
Missouri, serves 484,000 customers in central and western
Missouri (including the cities of Kansas City, St. Joseph, Joplin
and Monett). SFNG, headquartered in New Smyrna Beach, Florida,
serves 4,400 customers in central Florida (including the cities
of New Smyrna Beach, Edgewater and areas of Volusia County,
Florida.) The diverse geographic area of the Company's natural
gas distribution systems reduces the sensitivity of Southern
Union's operations to weather risk and local economic conditions.
Subsidiaries of Southern Union have been established to support
and expand natural gas sales and to capitalize on the Company's
gas energy expertise. These subsidiaries market natural gas to
end-users, operate natural gas pipeline systems, distribute pro-
pane and sell commercial gas air conditioning and other gas-fired
engine-driven applications. By providing "one-stop shopping,"
the Company can serve its various customers' specific energy
needs, which encompass substantially all of the natural gas dis-
tribution and sales businesses from natural gas sales to
specialized energy consulting services. The Company distributes
propane to 11,000 and 1,100 customers in Texas and Florida,
respectively. Additionally, certain subsidiaries own or hold
interests in real estate and other assets, which are primarily
used in the Company's utility business. Central to all of the
Company's present businesses and strategies is the sale and
transportation of natural gas. See Company Operations and
Investments.
The Company is a sales and market-driven energy company whose
management is committed to achieving profitable growth of its
utility businesses in an increasingly competitive business
environment. Management's strategies for achieving these objec-
tives principally consist of: (i) promoting new sales oppor-
tunities and markets for natural gas and propane; (ii) enhancing
financial and operating performance; and (iii) expanding the
Company through development of existing utility businesses and
selective acquisition of new utility businesses. Management
develops and continually evaluates these strategies and their
implementation by applying their experience and expertise in
analyzing the energy industry, technological advances, market
opportunities and general business trends. Each of these
strategies, as implemented throughout the Company's existing
businesses, reflects the Company's commitment to its core gas
utility business.
The Company has a goal of selected growth and expansion, pri-
marily in the utilities industry. To that extent, the Company
intends to consider, when appropriate, and if financially prac-
ticable to pursue, the acquisition of other utility distribution
or transmission businesses. The nature and location of any such
properties, the structure of any such acquisitions, and the
method of financing any such expansion or growth will be deter-
mined by management and the Southern Union Board of Directors.
See Management's Discussion and Analysis of Results of Operations
and Financial Condition (MD&A) -- Cautionary Statement Regarding
Forward-Looking Information contained in the Company's Annual
Report to Stockholders for the year ended June 30, 1999 (the
Annual Report), portions of which are filed as Exhibit 13 hereto.
Acquisitions
On June 7, 1999, Southern Union and Pennsylvania Enterprises,
Inc. (PEI) announced a definitive merger agreement. The agree-
ment calls for PEI to merge into Southern Union in a transaction
valued at approximately $500 million, including assumption of
debt. If approved, each PEI shareholder will receive Southern
Union common stock having a value of $32.00, plus $3.00 in cash,
subject to adjustment. PEI is a multifaceted energy company
headquartered in Wilkes-Barre, Pennsylvania with natural gas dis-
tribution being its primary business. PEI's principal sub-
sidiary, PG Energy, together with Honesdale Gas Company serve
more than 152,000 gas customers in northeastern and central
Pennsylvania. In addition, PEI markets electricity to more than
20,000 customers through PG Energy Power Plus. Southern Union
anticipates having Southern Union and PEI shareholders approvals
and all regulatory approvals for this merger in the second
quarter of the Company's fiscal year 2000.
Effective December 31, 1997, Southern Union acquired Atlantic
Utilities Corporation and Subsidiaries (Atlantic) for 755,650
pre-split and pre-stock dividend shares of common stock valued at
$18,041,000 and cash of $4,436,000. Atlantic is operated as
SFNG, a natural gas division of Southern Union, and Atlantic Gas
Corporation, a propane subsidiary of the Company. Atlantic cur-
rently serves 4,400 natural gas customers and 1,100 propane cus-
tomers in central Florida.
On July 23, 1997, two subsidiaries of Southern Union acquired an
equity ownership in a natural gas distribution company and other
related operations in Piedras Negras, Mexico for $2,700,000.
Southern Union currently has a 43% equity ownership in this com-
pany. The natural gas distribution company currently serves
19,500 customers and is across the border from the Company's
Eagle Pass, Texas service area. On September 8, 1997, the Com-
pany purchased a 45-mile intrastate pipeline, which augments the
Company's gas supply to the city of Eagle Pass and, subject to
necessary regulatory approvals, ultimately Piedras Negras.
Company Operations and Investments
The Company's principal line of business is the distribution of
natural gas through its Southern Union Gas, Missouri Gas Energy
and SFNG divisions. Southern Union Gas provides service to a
number of communities and rural areas in Texas, including the
municipalities of Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur. Missouri Gas Energy provides
service to various cities and communities in central and western
Missouri including Kansas City, St. Joseph, Joplin and Monett.
SFNG provides service to various cities and communities in
central Florida including New Smyrna Beach and Edgewater. The
Company's gas utility operations are generally seasonal in
nature, with a significant percentage of its annual revenues and
earnings occurring in the traditional winter heating season.
Southern Union Energy International, Inc. (SUEI) and Southern
Union International Investments, Inc. (Investments), both wholly-
owned subsidiaries of Southern Union, participate in energy-
related projects internationally. Energia Estrella del Sur, S.
A. de C. V. (Estrella), a wholly-owned Mexican subsidiary of SUEI
and Investments, seeks to participate in energy-related projects
in Mexico. Estrella has a 43% equity ownership in a natural gas
distribution company, along with other related operations, which
currently serves 19,500 customers in Piedras Negras, Mexico,
across the border from Southern Union Gas' Eagle Pass, Texas ser-
vice area.
Mercado Gas Services Inc. (Mercado), a wholly-owned subsidiary of
Southern Union, markets natural gas to approximately 240 commer-
cial and industrial customers. Mercado's sales and purchasing
activities are made through short-term and long-term contracts.
These contracts and business activities are not subject to direct
rate regulation. Mercado had gas sales of 19,304 MMcf and 18,352
MMcf for the year ended June 30, 1999 and 1998, respectively.
Southern Transmission Company (Southern), a wholly-owned sub-
sidiary of Southern Union, owns and operates intrastate pipelines
which connect the cities of Lockhart, Luling, Cuero, Shiner,
Yoakum, and Gonzales, Texas, as well as a line that provides gas
to an industrial customer in Port Arthur, Texas. Southern also
owns a transmission line which supplies gas to the community of
Sabine Pass, Texas. On September 8, 1997, Southern purchased a
45-mile intrastate pipeline which augments gas supply to the
city of Eagle Pass, Texas, and ultimately into Piedras Negras,
Mexico. Southern transported 873 MMcf and 915 MMcf of gas for
the year ended June 30, 1999 and 1998, respectively.
Norteno Pipeline Company (Norteno), a wholly-owned subsidiary of
Southern Union, operates interstate pipeline systems principally
serving the Company's gas distribution properties in the El Paso,
Texas area. Norteno transported a combined 6.3 billion cubic
feet (Bcf) for the city of Juarez, Mexico and the Samalayuca
Power Plant in north Mexico in fiscal 1999. Norteno transported
6,377 MMcf and 11,538 MMcf of gas for the year ended June 30,
1999 and 1998, respectively.
SUPro Energy Company (SUPro), a wholly-owned subsidiary of
Southern Union, provides propane gas services to 11,000 customers
located principally in El Paso and Alpine, Texas and Las Cruces,
New Mexico and surrounding communities. SUPro sold 5,945,000 and
5,125,000 gallons of propane for the year ended June 30, 1999 and
1998, respectively.
Atlantic Gas Corporation, a wholly-owned subsidiary of Southern
Union, provides propane gas services to 1,100 customers located
in and around the communities of New Symrna Beach, Lauderhill and
Dunnellon, Florida. Atlantic Gas Corporation sold 1,348,000
gallons of propane during the twelve months ended June 30, 1999
and 633,000 gallons of propane during the six months ended
June 30, 1998.
Energy WorX, a wholly-owned subsidiary of Southern Union, pro-
vides interactive computer-based training for the natural gas
transmission and distribution industry.
Southern Union Total Energy Systems, Inc., a wholly-owned sub-
sidiary of Southern Union, markets and sells commercial gas air
conditioning, irrigation pumps and other gas-fired engine-driven
applications and related services.
ConTigo, Inc., a wholly-owned subsidiary of Southern Union formed
in January 1996, provides centralized call center services for
the majority of the Texas service areas. Effective July 1, 1999,
ConTigo was dissolved and became part of Southern Union Gas and
will henceforth be operated as Southern Union Gas Customer Ser-
vice.
During fiscal 1998 and 1999, the Company made equity investments
in a leading developer of advanced gas turbine-driven generator
technology and a developer of a mobile workforce management sys-
tem. The Company also holds investments in commercially
developed real estate in Austin, El Paso, Harlingen and Kansas
City through Southern Union's wholly-owned subsidiary, Lavaca
Realty Company (Lavaca Realty).
Competition
The Company's gas distribution divisions are not currently in
significant direct competition with any other distributors of
natural gas to residential and small commercial customers within
their service areas. However, in recent years, certain large
volume customers, primarily industrial and significant commercial
customers, have had opportunities to access alternative natural
gas supplies and, in some instances, delivery service from other
pipeline systems. The Company has offered transportation
arrangements to customers who secure their own gas supplies.
These transportation arrangements, coupled with the efforts of
Southern Union's unregulated marketing subsidiary, Mercado,
enable the Company to provide competitively priced gas service to
these large volume customers. In addition, the Company has suc-
cessfully used flexible rate provisions, when needed, to retain
customers who may have access to alternative energy sources.
As energy providers, Southern Union Gas, Missouri Gas Energy and
SFNG have historically competed with alternative energy sources,
particularly electricity and also propane, coal, natural gas
liquids and other refined products available in the Company's
service areas. At present rates, the cost of electricity to
residential and commercial customers in the Company's service
areas generally is higher than the effective cost of natural gas
service. There can be no assurance, however, that future fluctu-
ations in gas and electric costs will not reduce the cost
advantage of natural gas service. The cost of expansion for peak
load requirements of electricity in some of Southern Union Gas'
and Missouri Gas Energy's service areas has historically provided
opportunities to allow energy switching to natural gas pursuant
to integrated resource planning techniques. Electric competition
has responded by offering equipment rebates and incentive rates.
Competition between the use of fuel oils, natural gas and pro-
pane, particularly by industrial, electric generation and
agricultural customers, has also increased due to the volatility
of natural gas prices and increased marketing efforts from
various energy companies. While competition between such fuels
is generally more intense outside the Company's service areas,
this competition affects the nationwide market for natural gas.
Additionally, the general economic conditions in its service
areas continue to affect certain customers and market areas, thus
impacting the results of the Company's operations.
Gas Supply
The low cost of natural gas service is dependent upon the Com-
pany's ability to contract for natural gas using favorable mixes
of long-term and short-term supply arrangements and favorable
transportation contracts. The Company has been directly
acquiring its gas supplies since the mid-1980s when interstate
pipeline systems opened their systems for transportation service.
The Company has the organization, personnel and equipment neces-
sary to dispatch and monitor gas volumes on a daily, hourly and
even a real-time basis to ensure reliable service to customers.
The Federal Energy Regulatory Commission (FERC) required the
"unbundling" of services offered by interstate pipeline companies
beginning in 1992. As a result, gas purchasing and transporta-
tion decisions and associated risks have been shifted from the
pipeline companies to the gas distributors. The increased de-
mands on distributors to effectively manage their gas supply in
an environment of volatile gas prices provides an advantage to
distribution companies such as Southern Union who have demon-
strated a history of contracting favorable and efficient gas
supply arrangements in an open market system.
The majority of Southern Union Gas' 1999 gas requirements for
utility operations were delivered under long-term transportation
contracts through four major pipeline companies. The majority of
Missouri Gas Energy's 1999 gas requirements were delivered under
short- and long-term transportation contracts through four major
pipeline companies. The majority of SFNG's 1999 gas requirements
were delivered under a management supply contract through one
major pipeline company. These contracts have various expiration
dates ranging from calendar year 2000 through 2018. Southern
Union Gas also purchases significant volumes of gas under long-
and short-term arrangements with suppliers. The amounts of such
short-term purchases are contingent upon price. Southern Union
Gas, Missouri Gas Energy and SFNG all have firm supply commit-
ments for all areas that are supplied with gas purchased under
short-term arrangements. Missouri Gas Energy also holds contract
rights to over 16 Bcf of storage capacity to assist in meeting
peak demands.
Gas sales and/or transportation contracts with interruption pro-
visions, whereby large volume users purchase gas with the under-
standing that they may be forced to shut down or switch to
alternate sources of energy at times when the gas is needed for
higher priority customers, have been utilized for load management
by Southern Union and the gas industry as a whole. In addition,
during times of special supply problems, curtailments of
deliveries to customers with firm contracts may be made in
accordance with guidelines established by appropriate federal and
state regulatory agencies. There have been no supply-related
curtailments of deliveries to Southern Union Gas, Missouri Gas
Energy or SFNG utility sales customers during the last ten years.
The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 1999, the
Company has purchase commitments for certain quantities of gas
at variable, market-based prices that have an annual value of
$94,275,000. The Company's purchase commitments may extend over
a period of several years depending upon when the required quan-
tity is purchased. The Company has purchase gas tariffs in
effect for all its utility service areas that provide for
recovery of its purchase gas costs under defined methodologies.
In August 1997, the Missouri Public Service Commission (MPSC)
issued an order authorizing Missouri Gas Energy to begin making
semi-annual purchase gas adjustments (PGA) in November and April,
instead of more frequent adjustments as previously made. Addi-
tionally, the order authorized Missouri Gas Energy to establish
an Experimental Price Stabilization Fund for purposes of pro-
curing natural gas financial instruments to hedge a minimal
portion of its gas purchase costs for the winter heating season.
The cost of purchasing these financial instruments and any gains
derived from such activities are passed on to the Missouri custo-
mers through the PGA. Accordingly, there is no earnings impact
as a result of the use of these financial instruments. These
procedures help stabilize the monthly heating bills for Missouri
customers. The Company believes it bears minimal risk under the
authorized transactions.
The MPSC approved a three year, experimental gas supply incentive
plan for Missouri Gas Energy effective July 1, 1996. Under the
plan, the Company and Missouri Gas Energy's customers share in
certain savings below benchmark levels of gas costs achieved as a
result of the Company's gas procurement activities. Likewise, if
natural gas is acquired above benchmark levels, both the Company
and customers share in such costs. For the years ended June 30,
1999, 1998 and 1997, the incentive plan achieved a reduction of
overall gas costs of $6,900,000, $9,200,000 and $10,200,000,
respectively, resulting in savings to Missouri customers of
$4,000,000, $5,100,000 and $5,600,000, respectively. The Company
recorded revenues of $2,900,000, $4,100,000 and $4,600,000 in
1999, 1998 and 1997, respectively, under this plan. Missouri Gas
Energy is currently working with the MPSC to develop an alternate
plan due to the July 1, 1999 expiration of the experimental gas
supply incentive plan, however, there can be no assurance that
this or any similar plan will be approved by the MPSC for
Missouri Gas Energy.
Utility Regulation and Rates
The Company's rates and operations are subject to regulation by
local, state and federal authorities. In Texas, municipalities
have primary jurisdiction over natural gas rates within their
respective incorporated areas. Rates in adjacent environs and
appellate matters are the responsibility of the Railroad Commis-
sion of Texas (RRC). In Missouri, natural gas rates are estab-
lished by the MPSC on a system-wide basis. In Florida, natural
gas rates are established by the Florida Public Service Commis-
sion on a system-wide basis. The FERC and the RRC have jurisdic-
tion over rates, facilities and services of Norteno and Southern,
respectively.
The Company holds non-exclusive franchises with varying expira-
tion dates in all incorporated communities where it is necessary
to carry on its business as it is now being conducted. Kansas
City, Missouri; El Paso, Texas; Austin, Texas; Port Arthur,
Texas; and St. Joseph, Missouri are the five largest cities in
which the Company's utility customers are located. The Kansas
City, Missouri franchise expired in May 1998. The Company is
currently in franchise renewal negotiations with Kansas City and
expects to obtain renewal of such franchise before the end of
calendar year 1999. The franchises in the following cities
expire as follows: El Paso, Texas in 2000, in which the Company
is currently in discussions; Austin, Texas in 2006; and Port
Arthur, Texas in 2013. The Company fully expects these fran-
chises to be renewed upon their expiration. The franchise in St.
Joseph, Missouri is perpetual.
Gas service rates are established by regulatory authorities to
permit utilities the opportunity to recover operating, adminis-
trative and financing costs, and the opportunity to earn a rea-
sonable return on equity. Gas costs are billed to customers
through purchase gas adjustment clauses which permit the Company
to adjust its sales price as the cost of purchased gas changes.
This is important because the cost of natural gas accounts for a
significant portion of the Company's total expenses. The appro-
priate regulatory authority must receive notice of such adjust-
ments prior to billing implementation.
The Company must support any service rate changes to its regula-
tors using a historic test year of operating results adjusted to
normal conditions and for any known and measurable revenue or
expense changes. Because the regulatory process has certain
inherent time delays, rate orders may not reflect the operating
costs at the time new rates are put into effect.
The monthly customer bill contains a fixed service charge, a
usage charge for service to deliver gas, and a charge for the
amount of natural gas used. While the monthly fixed charge pro-
vides an even revenue stream, the usage charge increases the Com-
pany's annual revenue and earnings in the traditional heating
load months when usage of natural gas increases. In recent
years, the majority of the Company's rate increases in Texas have
resulted in increased monthly fixed charges which help stabilize
earnings. Weather normalization clauses, in place in the City of
Austin, El Paso environs, Galveston, Port Arthur and two other
service areas in Texas, also help stabilize earnings.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a $13,300,000 annual increase to revenue
effective on September 2, 1998, which is primarily earned volu-
metrically. The MPSC rate order reflected a 10.93% return on
common equity. The rate order, however, disallowed certain
previously recorded deferred costs requiring a non-cash write-off
of $2,221,000. Generally accepted accounting principles required
the Company to immediately record this charge to earnings which
Southern Union did as of June 30, 1998. On December 8, 1998, the
MPSC denied rehearing requests made by all parties other than
Missouri Gas Energy and granted a portion of Missouri Gas
Energy's rehearing request. The MPSC will conduct further pro-
ceedings to take additional evidence on those matters for which
it granted Missouri Gas Energy a rehearing. If the MPSC adopts
Missouri Gas Energy's positions on rehearing, then Missouri Gas
Energy would be authorized an additional $2,200,000 of base
revenues increasing the $13,300,000 initially authorized in its
August 21, 1998 order to $15,500,000. The MPSC's orders may be
subject to judicial review and although certain parties may argue
for a reduction in Missouri Gas Energy's authorized base revenue
increase on judicial review, Missouri Gas Energy expects such
arguments to be unsuccessful.
On April 13, 1998, Southern Union Gas filed a $2,228,000 request
for a rate increase from the city of El Paso, a request the city
subsequently denied. On April 21, 1998, the city council of El
Paso voted to reduce the Company's rates by $1,570,000 annually
and to order a one-time cost of gas refund of $475,000. On
May 21, 1998, Southern Union Gas filed with the RRC an appeal of
the city of El Paso's actions to reduce the Company's rates and
require a one-time cost of gas refund. On December 21, 1998, the
RRC issued its order implementing an $884,000 one-time cost of
gas refund and a $99,000 base rate reduction. The cost of gas
refund was completed in February 1999.
On January 22, 1997, Missouri Gas Energy was notified by the MPSC
of its decision to grant an $8,847,000 annual increase to revenue
effective on February 1, 1997. Pursuant to a 1989 MPSC order,
Missouri Gas Energy is engaged in a major gas safety program in
its service area (Missouri Safety Program). In connection with
this program, the MPSC issued an accounting authority order (AAO)
in Case No. GO-92-234 in 1994 which authorized Missouri Gas
Energy to defer depreciation expenses, property taxes and
carrying costs at a rate of 10.54% on the costs incurred in the
Missouri Safety Program. This AAO was consistent with those
which were issued by the MPSC from 1990 to 1993 to Missouri Gas
Energy's prior owner. The MPSC rate order of January 22, 1997,
however, retroactively reduced the carrying cost rate applied by
the Company on the expenditures incurred on the Missouri Safety
Program since early 1994 to an Allowance for Funds Used During
Construction (AFUDC) rate of approximately 6%. The Company filed
an appeal of that portion of the rate order in the Missouri State
Court of Appeals, Western District. On August 18, 1998, the
Missouri State Court of Appeals denied the Company's appeal
resulting in a one-time non-cash write-off of $5,942,000 of
previously recorded deferred costs which was recorded as of
June 30, 1998. The Company believes that the inconsistent treat-
ment by the MPSC in subsequently changing to the AFUDC rate from
the previously ordered 10.54% rate constitutes retroactive rate-
making. Unfortunately, the decision by the Missouri State Court
of Appeals failed to address certain specific language within the
1994 AAO that the Company believed prevented the MPSC from retro-
actively changing the carrying cost rate. Southern Union
requested transfer to the Missouri Supreme Court, but was denied
that request.
On September 18, 1997, the MPSC approved a global settlement
among the Company, the Missouri Office of Public Counsel (OPC)
and MPSC staff to resolve complaints brought by the OPC and the
MPSC staff regarding billing errors during the 1995/1996 and
1996/1997 winter heating seasons. The settlement called for
credits to gas bills by Missouri Gas Energy totaling $1,575,000
to those customers overbilled and a $550,000 contribution by
Missouri Gas Energy to a social service organization for the
express purpose of assisting needy Missouri Gas Energy customers
in paying their gas bills. These balances were recorded as of
June 30, 1997.
The approval of the January 31, 1994 acquisition of the Missouri
properties by the MPSC was subject to the terms of a stipulation
and settlement agreement, which, among other things, requires
Missouri Gas Energy to reduce rate base by $30,000,000 (amortized
over a ten-year period on a straight-line basis) to compensate
rate payers for rate base reductions that were eliminated as a
result of the acquisition.
During the three-year period ended June 30, 1999, the Company did
not file for any other rate increases in any of its major service
areas, although several annual cost of service adjustments were
filed.
In addition to the regulation of its utility and pipeline busi-
nesses, the Company is affected by numerous other regulatory
controls, including, among others, pipeline safety requirements
of the United States Department of Transportation, safety regula-
tions under the Occupational Safety and Health Act, and various
state and federal environmental statutes and regulations. The
Company believes that its operations are in compliance with
applicable safety and environmental statutes and regulations.
Environmental
The Company assumed responsibility for certain environmental
matters in connection with the acquisition of Missouri Gas
Energy. Additionally, the Company is investigating the possi-
bility that the Company or predecessor companies may have been
associated with manufactured gas plant sites in other of its
former service territories, principally in Arizona and New
Mexico, and present service territories in Texas. See MD&A --
Cautionary Statement Regarding Forward-Looking Information and
Commitments and Contingencies in the Notes to the Consolidated
Financial Statements contained in the Annual Report.
Investments in Real Estate
Lavaca Realty owns a commercially developed tract of land in the
central business district of Austin, Texas, containing a combined
11-story office building, parking garage and drive-through bank
(Lavaca Plaza). Approximately 52% of the office space at Lavaca
Plaza is used in the Company's business while the remainder is
leased to non-affiliated entities. Lavaca Realty also owns a
two-story office building in El Paso, Texas as well as a one-
story office building in Harlingen, Texas. Other significant
real estate investments held at June 30, 1999 include 39,341
square feet of undeveloped land in McAllen, Texas and 25,000
square feet of improved property in Kansas City, Missouri, of
which 40% is occupied by Missouri Gas Energy and the remainder by
a non-affiliated entity.
Employees
As of July 31, 1999, the Company had 1,563 employees, of whom
1,220 are paid on an hourly basis and 343 are paid on a salary
basis. Of the 1,220 hourly paid employees, 45% are represented
by unions. Of those employees represented by unions, 95% are
employed by Missouri Gas Energy. In December 1998, the Company
agreed to five-year contracts with each bargaining-unit repre-
senting Missouri employees, which were effective in May 1999.
On June 4, 1997, Southern Union Gas employees in Austin, Texas
covered by a collective bargaining agreement voted to decertify
their representing union. Additionally, effective May 1, 1998,
employees in Galveston, Texas chose to withdraw their membership
from their representing union.
From time to time the Company may be subject to labor disputes;
however, such disputes have not previously disrupted its busi-
ness. The Company believes that its relations with its employees
are good.
Statistics of Principal Utility and Related Operations
The following table shows certain operating statistics of the
Company's gas distribution divisions with operations in Texas and
Missouri:
Year Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
Southern Union Gas:
Average number of gas sales
customers served:
Residential.................. 473,563 465,844 456,972
Commercial................... 30,847 29,828 29,030
Industrial and irrigation.... 258 252 274
Public authorities and other. 2,849 2,755 2,673
------- ------- -------
Total average customers
served................... 507,517 498,679 488,949
======= ======= =======
Gas sales in millions of cubic
feet (MMcf):
Residential.................. 19,553 23,217 23,135
Commercial................... 8,539 9,425 9,759
Industrial and irrigation.... 1,082 1,208 1,562
Public authorities and other. 2,266 2,752 2,756
------- ------- -------
Gas sales billed........... 31,440 36,602 37,212
Net change in unbilled gas
sales...................... 175 (82) (70)
------- ------- -------
Total gas sales............ 31,615 36,520 37,142
======= ======= =======
Weather:
Degree days (a)................ 1,576 2,118 1,962
Percent of 30-year measure (b). 74% 99% 92%
Gas transported in MMcf.......... 16,668 16,535 15,118
Missouri Gas Energy:
Average number of gas sales
customers served:
Residential.................. 418,266 413,703 407,505
Commercial................... 57,247 57,693 56,967
Industrial................... 313 312 312
------- ------- -------
Total average customers
served................... 475,826 471,708 464,784
======= ======= =======
Gas sales in Mmcf:
Residential.................... 36,578 41,104 45,074
Commercial..................... 16,842 18,705 20,893
Industrial..................... 375 400 490
------- ------- -------
Gas sales billed............. 53,795 60,209 66,457
Net change in unbilled gas
sales........................ 204 35 (88)
------- ------- -------
Total gas sales.............. 53,999 60,244 66,369
======= ======= =======
Weather:
Degree days (a)................ 4,438 4,723 5,506
Percent of 30-year measure (b). 85% 90% 105%
Gas transported in MMcf.......... 31,774 30,165 29,638
- -------------------------
(a) "Degree days" are a measure of the coldness of the weather
experienced. A degree day is equivalent to each degree that
the daily mean temperature for a day falls below 65 degrees
Fahrenheit.
(b) Information with respect to weather conditions is provided
by the National Oceanic and Atmospheric Administration.
Percentages of 30-year measure are computed based on the
weighted average volumes of gas sales billed.
Customers. The following table shows the number of customers
served by the Company, through its divisions, subsidiaries and
affiliates, as of the end of its last three fiscal years.
Gas Utility Customers as of June 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Southern Union Gas:
Austin and other central
and south Texas
communities............ 175,596 173,228 163,938
El Paso and other west
Texas communities...... 182,516 178,812 173,825
Galveston and Port
Arthur................. 50,543 50,673 50,856
Panhandle and north
Texas communities...... 24,728 24,900 24,903
Rio Grande Valley com-
munities and Eagle
Pass................... 75,983 76,840 76,704
---------- ---------- ----------
509,366 504,453 490,226
---------- ---------- ----------
Missouri Gas Energy:
Kansas City, Missouri
Metropolitan Area...... 354,189 348,543 346,060
St. Joseph, Joplin,
Monett and others...... 122,883 121,766 122,946
---------- ---------- ----------
477,072 470,309 469,006
---------- ---------- ----------
Other (a).................. 24,947 20,874 3,647
---------- ---------- ----------
Total...................... 1,011,385 995,636 962,879
========== ========== ==========
- ----------------------
(a) Includes Mercado, South Florida Natural Gas, Atlantic Gas
Corporation, SUPro and 43% (the Company's equity ownership)
of the customers of a natural gas distribution company
serving Piedras Negras, Mexico, in each case for the year-
end in which the Company had such operations or investments.
ITEM 2. Properties.
See Item 1, Business, for information concerning the general
location and characteristics of the important physical properties
and assets of the Company.
Southern Union Gas has 7,898 miles of mains, 4,305 miles of ser-
vice lines and 218 miles of transmission lines. Southern and
Norteno have 171 miles and 7 miles, respectively, of transmission
lines. Missouri Gas Energy has 7,441 miles of mains, 4,972 miles
of service lines and 47 miles of transmission lines. SFNG has
135 miles of mains and 80 miles of service lines. The Company
considers its systems to be in good condition and well-
maintained, and it has continuing replacement programs based on
historical performance and system surveillance.
ITEM 3. Legal Proceedings.
See Commitments and Contingencies in the Notes to Consolidated
Financial Statements contained in the Annual Report for a discus-
sion of the Company's legal proceedings. See MD&A -- Cautionary
Statement Regarding Forward-Looking Information contained in the
Annual Report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of
Southern Union during the quarter ended June 30, 1999.
<PAGE>
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
Market Information
Southern Union's common stock is traded on the New York Stock
Exchange under the symbol "SUG". The high and low sales prices
(adjusted for any stock dividends and stock splits) for shares of
Southern Union common stock since July 1, 1997 are set forth
below:
$/Share
---------------
High Low
------ ------
July 1 to August 31, 1999................... $21.31 $18.25
(Quarter Ended)
June 30, 1999............................... 21.79 17.62
March 31, 1999.............................. 23.21 16.55
December 31, 1998........................... 23.33 17.63
September 30, 1998.......................... 20.30 14.17
(Quarter Ended)
June 30, 1998............................... 19.73 14.43
March 31, 1998.............................. 14.97 13.84
December 31, 1997........................... 15.61 13.10
September 30, 1997.......................... 14.11 12.53
Holders
As of August 31, 1999, there were 1,142 holders of record of
Southern Union's common stock. This number does not include per-
sons whose shares are held of record by a bank, brokerage house
or clearing agency, but does include any such bank, brokerage
house or clearing agency that is a holder of record.
There were 31,235,009 shares of Southern Union's common stock
outstanding on August 31, 1999 of which 17,731,637 shares were held
by non-affiliates (i.e., not beneficially held by directors,
executive officers, their immediate family members, or holders of
10% or more of shares outstanding).
Dividends
Southern Union's policy is to pay an annual stock dividend of
approximately 5% and, therefore, the Company paid no cash divi-
dends on its common stock during the last ten years ended
June 30, 1999. Provisions in certain of Southern Union's long-
term notes and its bank credit facilities limit the payment of
cash or asset dividends on capital stock. Under the most
restrictive provisions in effect, Southern Union may not declare
or pay any cash or asset dividends on its common stock or acquire
or retire any of Southern Union's common stock, unless no event
of default exists and the Company meets certain financial ratio
requirements, which presently are met.
On August 6, 1999, December 9, 1998 and December 10, 1997, the
Company distributed its annual 5% common stock dividend to stock-
holders of record on July 23, 1999, November 23, 1998 and
November 21, 1997, respectively. A portion of the 5% stock
dividend distributed on August 6, 1999 and December 9, 1998 was
characterized as a distribution of capital due to the level of
the Company's retained earnings available for distribution as of
the declaration date. The 5% stock dividends are consistent with
Southern Union's Board of Directors' February 1994 decision to
commence regular stock dividends of approximately 5% annually.
The specific amount and declaration, record and distribution
dates for an annual stock dividend will be determined by the
Board and announced at a date that is not expected to be later
than the annual stockholders meeting each year. Traditionally,
Southern Union has declared its stock dividend so as to coincide
with its annual shareholder meeting in November. In 1999, and in
the future, the Company expects to declare and pay its stock
dividend prior to the distribution of its annual report to share-
holders, so that the Company's year-end reporting will reflect
the effect of the annual stock dividend.
On July 13, 1998, Southern Union effected a 3-for-2 stock split
by distributing a 50% stock dividend to holders of record on
June 30, 1998.
ITEM 6. Selected Financial Data.
Year Ended June 30,
------------------------------------------------
1999(a)(b) 1998(a)(b) 1997(a) 1996(a) 1995
---------- ---------- -------- -------- --------
(dollars in thousands, except per share amounts)
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
Earnings per
common and com-
mon share
equivalents (d) .32 .39 .62 .68 .54
Total assets.... 1,087,348 1,047,764 990,403 964,460 992,597
Common stock-
holders'
equity......... 301,058 296,834 267,462 245,915 225,664
Short-term debt
and capital
lease obliga-
tion........... 2,066 1,777 687 615 770
Long-term debt
and capital
lease obliga-
tion, exclud-
ing current
portion........ 390,931 406,407 386,157 385,394 462,503
Company-obligated
mandatorily re-
deemable pre-
ferred securi-
ties of sub-
sidiary trust.. 100,000 100,000 100,000 100,000 100,000
Average custo-
mers served.... 998,476 979,186 955,838 952,934 947,691
- ------------------
(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 for
755,650 pre-split and pre-stock dividend shares of common
stock valued at $18,041,000 and cash of $4,436,000.
(c) As of June 30, 1998, Missouri Gas Energy 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 common
stock and 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.
ITEM 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
"Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 28 through 38 of the Company's
Annual Report to Stockholders for the year ended June 30, 1999,
is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of Southern Union
and its consolidated subsidiaries, included in the Company's
Annual Report to Stockholders for the year ended June 30, 1999
are incorporated herein by reference:
Consolidated statement of operations -- years ended June 30,
1999, 1998 and 1997.
Consolidated balance sheet -- June 30, 1999 and 1998.
Consolidated statement of cash flows -- years ended June 30,
1999, 1998 and 1997.
Consolidated statement of common stockholders' equity -- years
ended June 30, 1999, 1998 and 1997.
Notes to consolidated financial statements.
Report of independent accountants.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
<PAGE>
PART III
ITEM 10. Directors and Executive Officers of Registrant.
There is incorporated in this Item 10 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the captions Board of
Directors -- Board Size and Composition and Executive Officers
and Compensation -- Executive Officers Who Are Not Directors.
ITEM 11. Executive Compensation.
There is incorporated in this Item 11 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the captions Executive
Officers and Compensation -- Executive Compensation and Certain
Relationships.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
There is incorporated in this Item 12 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the caption Security Owner-
ship.
ITEM 13. Certain Relationships and Related Transactions.
There is incorporated in this Item 13 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the caption Certain Rela-
tionships.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a)(1) Financial Statements. The following consolidated finan-
--------------------
cial statements of Southern Union and its consolidated
subsidiaries, included in the Company's Annual Report to
Stockholders for the year ended June 30, 1999, are
incorporated by reference to Part II, Item 8:
Consolidated statement of operations -- years ended
June 30, 1999, 1998 and 1997.
Consolidated balance sheet -- June 30, 1999 and 1998.
Consolidated statement of cash flows -- years ended
June 30, 1999, 1998 and 1997.
Consolidated statement of common stockholders' equity
-- years ended June 30, 1999, 1998 and 1997.
Notes to consolidated financial statements.
Report of independent accountants.
(a)(2) Financial Statement Schedules. All schedules are omitted
-----------------------------
as the required information is not applicable or the
information is presented in the consolidated financial
statements or related notes.
(a)(3) Exhibits.
--------
Exhibit
No. Description
- ------- --------------------------------------------------------
3(a) Restated Certificate of Incorporation of Southern Union
Company. (Filed as Exhibit 3(a) to Southern Union's
Transition Report on Form 10-K for the year ended
June 30, 1994 and incorporated herein by reference.)
3(b) Southern Union Company Bylaws, as amended. (Filed as
Exhibit 3(b) to Southern Union's Transition Report on
Form 10-K for the year ended June 30, 1994 and incorpo-
rated herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit
4(a) to Southern Union's Annual Report on Form 10-K for
the year ended December 31, 1989 and incorporated herein
by reference.)
4(b) Indenture between Chase Manhattan Bank, N.A., as
trustee, and Southern Union Company dated January 31,
1994. (Filed as Exhibit 4.1 to Southern Union's Current
Report on Form 8-K dated February 15, 1994 and incorpo-
rated herein by reference.)
4(c) Officers' Certificate dated January 31, 1994 setting
forth the terms of the 7.60% Senior Debt Securities due
2024. (Filed as Exhibit 4.2 to Southern Union's Current
Report on Form 8-K dated February 15, 1994 and incorpo-
rated herein by reference.)
4(d) Certificate of Trust of Southern Union Financing I.
(Filed as Exhibit 4-A to Southern Union's Registration
Statement on Form S-3 (No. 33-58297) and incorporated
herein by reference.)
4(e) Certificate of Trust of Southern Union Financing II.
(Filed as Exhibit 4-B to Southern Union's Registration
Statement on Form S-3 (No. 33-58297)and incorporated
herein by reference.)
4(f) Certificate of Trust of Southern Union Financing III.
(Filed as Exhibit 4-C to Southern Union's Registration
Statement on Form S-3 (No. 33-58297) and incorporated
herein by reference.)
4(g) Form of Amended and Restated Declaration of Trust of
Southern Union Financing I. (Filed as Exhibit 4-D to
Southern Union's Registration Statement on Form S-3 (No.
33-58297) and incorporated herein by reference.)
4(h) Form of Subordinated Debt Securities Indenture among
Southern Union Company and The Chase Manhattan Bank, N.
A., as Trustee. (Filed as Exhibit 4-G to Southern
Union's Registration Statement on Form S-3 (No. 33-
58297) and incorporated herein by reference.)
4(i) Form of Supplemental Indenture to Subordinated Debt
Securities Indenture with respect to the Subordinated
Debt Securities issued in connection with the Southern
Union Financing I Preferred Securities. (Filed as
Exhibit 4-H to Southern Union's Registration Statement
on Form S-3 (No. 33-58297) and incorporated herein by
reference.)
4(j) Form of Southern Union Financing I Preferred Security
(included in 4(g) above.) (Filed as Exhibit 4-I to
Southern Union's Registration Statement on Form S-3 (No.
33-58297) and incorporated herein by reference.)
4(k) Form of Subordinated Debt Security (included in 4(i)
above.) (Filed as Exhibit 4-J to Southern Union's
Registration Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(l) Form of Guarantee with respect to Southern Union
Financing I Preferred Securities. (Filed as Exhibit 4-K
to Southern Union's Registration Statement on Form S-3
(No. 33-58297) and incorporated herein by reference.)
4(m) The Company is a party to other debt instruments, none
of which authorizes the issuance of debt securities in
an amount which exceeds 10% of the total assets of the
Company. The Company hereby agrees to furnish a copy of
any of these instruments to the Commission upon request.
10(a) Revolving Credit Agreement (Long-Term Credit Facility)
between Southern Union Company and the Banks named
therein dated November 10, 1998. (Filed as Exhibit
10(a) to Southern Union's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 and incorporated
herein by reference.)
10(b) Revolving Credit Agreement (Short-Term Credit Facility)
between Southern Union Company and the Banks named
therein dated November 10, 1998. (Filed as Exhibit
10(b) to Southern Union's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 and incorporated
herein by reference.)
10(c) Southern Union Company 1982 Incentive Stock Option Plan
and form of related Stock Option Agreement. (Filed as
Exhibits 4.1 and 4.2 to Form S-8, File No. 2-79612 and
incorporated herein by reference.)(*)
10(d) Form of Indemnification Agreement between Southern Union
Company and each of the Directors of Southern Union Com-
pany. (Filed as Exhibit 10(i) to Southern Union's
Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.)
10(e) Southern Union Company 1992 Long-Term Stock Incentive
Plan, As Amended. (Filed as Exhibit 10(l) to Southern
Union's Annual Report on Form 10-K for the year ended
June 30, 1998 and incorporated herein by reference.)(*)
10(f) Southern Union Company Director's Deferred Compensation
Plan. (Filed as Exhibit 10(g) to Southern Union's
Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by
reference.)(*)
10(g) Southern Union Company Amended Supplemental Deferred
Compensation Plan with Amendments. (Filed as Exhibit 4
to Southern Union's Form S-8 filed March 27, 1999 and
incorporated herein by reference.)(*)
10(h) Form of warrant granted to Fleischman and Walsh L.L.P.
(Filed as Exhibit 10(j) to Southern Union's Transition
Report on Form 10-K for the year ended June 30, 1994 and
incorporated herein by reference.)
10(i) Renewal Promissory Note Agreement between
Peter H. Kelley and Southern Union Company dated May 31,
1995. (Filed as Exhibit 10(i) to Southern Union's
Annual Report on Form 10-K for the year ended June 30,
1995 and incorporated herein by reference.)
13 Portions of Company's Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
- -----------------
(*) Indicates a Management Compensation Plan.
(b) Reports on Form 8-K. Southern Union's Current Report on
-------------------
Form 8-K dated June 15, 1999 announcing the definitive
merger agreement with Pennsylvania Enterprises, Inc.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Southern Union has duly caused
this report to be signed by the undersigned, thereunto duly
authorized, on September 10, 1999.
SOUTHERN UNION COMPANY
By PETER H. KELLEY
-----------------
Peter H. Kelley
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of Southern Union and in the capacities indicated as of
September 10, 1999.
Signature/Name Title
-------------- -----
GEORGE L. LINDEMANN* Chairman of the Board, Chief Executive
Officer and Director
JOHN E. BRENNAN* Director
FRANK W. DENIUS* Director
AARON I. FLEISCHMAN* Director
KURT A. GITTER, M.D.* Director
PETER H. KELLEY Director
- ---------------
Peter H. Kelley
ADAM M. LINDEMANN* Director
ROGER J. PEARSON* Director
GEORGE ROUNTREE, III* Director
DAN K. WASSONG* Director
RONALD J. ENDRES Executive Vice President and Chief
- ----------------
Ronald J. Endres Financial Officer
DAVID J. KVAPIL Senior Vice President and Corporate
- ---------------
David J. Kvapil Controller
(Principal Accounting Officer)
*By PETER H. KELLEY
---------------
Peter H. Kelley
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit 13 Portions of Company's Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Company
Exhibit 23 Consent of Independent Accountants
Exhibit 24 Power of Attorney
Exhibit 27 Financial Data Schedule
<PAGE>
EXHIBIT 13
PORTIONS OF COMPANY'S ANNUAL REPORT TO STOCKHOLDERS
<PAGE>
PORTIONS OF COMPANY'S ANNUAL REPORT TO STOCKHOLDERS Exhibit 13
Management's Discussion and Analysis of Results of Operations and
Financial Condition
Overview Southern Union Company's core business is the distribution
- --------
of natural gas as a public utility through three divisions:
Southern Union Gas, Missouri Gas Energy and Atlantic Utilities doing
business as South Florida Natural Gas (SFNG). Southern Union Gas
serves 513,000 customers in Texas (including the cities of Austin,
Brownsville, El Paso, Galveston, Harlingen, McAllen and Port Arthur),
Missouri Gas Energy serves 484,000 customers in central and western
Missouri (including the cities of Kansas City, St. Joseph, Joplin and
Monett) and SFNG, acquired as of December 31, 1997, serves 4,400
customers in portions of central Florida (including the cities of
New Smyrna Beach, Edgewater and areas of Volusia County,
Florida).
The Company also operates natural gas pipeline systems, markets
natural gas to end-users, distributes propane and holds invest-
ments in real estate and other assets. To achieve profitability
and continued growth, the Company continues to emphasize gas
sales in nontraditional markets, operating efficiencies of
existing systems, and expansion through selective acquisitions of
new systems.
Results of Operations
Net Earnings Southern Union Company's 1999 (fiscal year ended
- ------------
June 30) net earnings were $10,445,000 ($.32 per common share,
diluted for outstanding options and warrants -- hereafter
referred to as per share), compared with $12,229,000 ($.39 per
share) in 1998. The decrease was primarily due to the extremely
warm winter of 1998/1999, which was experienced in all of the
Company's service territories. Weather in the Southern Union Gas
service territories during 1999 was 25% warmer than 1998 while
gas sales volumes in the corresponding period decreased 13%.
Weather in the Missouri service territories during 1999 was 6%
warmer than 1998 while gas sales volumes in the corresponding
period decreased 10%. A $13,300,000 annual rate increase, to be
earned volumetrically, was granted by the MPSC to Missouri Gas
Energy effective as of September 2, 1998. As a result of the
volumetric nature of revenues and unusually warm weather, net
earnings were only marginally impacted by the rate increase. The
decrease in net earnings for 1999 is also attributed to
$3,839,000 of pre-tax costs associated with various acquisition
efforts, impacting per share earnings by $.07. Average common
and common share equivalents outstanding increased 3.2% in 1999
due to the issuance of 755,650 pre-split and pre-stock dividend
shares of the Company's common stock on December 31, 1997 in
connection with the acquisition of Atlantic Utilities Corporation
and Subsidiaries (Atlantic). The Company earned 3.5% on average
common equity in 1999.
The Company's 1998 net earnings were $12,229,000 ($.39 per
share), compared with $19,032,000 ($.62 per share) in 1997. The
decrease was primarily due to the pre-tax write-off of previously
recorded regulatory assets as ordered by the Missouri Public Ser-
vice Commission (MPSC). On August 18, 1998, the Missouri Court
of Appeals denied the previously disclosed appeal by the Company
of the MPSC's January 1997 rate order granted to Missouri Gas
Energy. Because of this decision, the Company recorded a one-
time non-cash write-off of $5,942,000 of deferred costs recorded
since 1994. On August 21, 1998, the MPSC also granted Missouri
Gas Energy a rate increase which, among other things, disallowed
certain previously recorded deferred costs requiring an addi-
tional pre-tax non-cash write-off of $2,221,000. Significantly
warmer weather in the winter of 1997/1998, especially in
Missouri, also contributed to the decrease in earnings, despite
an $8,847,000 annual increase to Missouri Gas Energy revenues
granted by the MPSC effective February 1, 1997. Weather in the
Missouri service territories during 1998 was 14% warmer than 1997
while gas sales volumes in the corresponding period decreased 9%.
Average common and common share equivalents outstanding increased
2.5% in 1998 due to the previously discussed issuance of the Com-
pany's common stock on December 31, 1997 in connection with the
acquisition of Atlantic. The Company earned 4.3% and 7.4% on
average common equity in 1998 and 1997, respectively.
Operating Revenues Operating revenues in 1999 decreased
- ------------------
$64,073,000, or 10%, to $605,231,000, while gas purchase costs
decreased $63,279,000, or 16%, to $342,301,000.
Operating revenues and gas purchase costs in 1999 were affected
by both a reduction in gas sales volumes and decreases in the
cost of gas. Gas sales volumes decreased 9% in 1999 to 105,156
MMcf due to the significantly warmer winter weather in the
Missouri and Texas service territories. Gas sales volumes were
also impacted by a reduction in average usage per customer
throughout the Company's service territories as a result of more
energy efficient housing and appliances. The average cost of gas
decreased $.26 to $3.23 per Mcf in 1999 due to decreases in aver-
age spot market gas prices throughout the Company's distribution
system as a result of seasonal impacts on demands for natural gas
and the ensuing competitive pricing within the industry. The
average spot market price of natural gas decreased 16% to $1.88
per million British thermal units (MMBtu) in 1999. Additionally
impacting operating revenues in 1999 was a $2,852,000 decrease in
gross receipt taxes due to the mild weather in 1999. Gross
receipt taxes are levied on sales revenues billed to the custo-
mers and remitted to the various taxing authorities. Operating
revenues in 1999 compared with 1998 were also impacted by a
$1,200,000 decrease in revenues under a gas supply incentive plan
approved by the MPSC in July, 1996. Under the plan, Southern
Union and its Missouri customers share in certain savings below
benchmark levels of gas costs incurred as a result of the Com-
pany's gas procurement activities. Operating revenues were
favorably impacted by the $13,300,000 annual increase to revenues
granted to Missouri Gas Energy, effective as of September 2,
1998. However, as previously stated, the impact from this rate
increase was marginal as it is earned volumetrically.
Gas purchase costs generally do not directly affect earnings
since these costs are generally passed on to customers pursuant
to purchase gas adjustment (PGA) clauses. Accordingly, while
changes in the cost of gas may cause the Company's operating
revenues to fluctuate, net operating margin is generally not
affected by increases or decreases in the cost of gas. Increases
in gas purchase costs indirectly affect earnings as the custo-
mer's bill increases, usually resulting in increased bad debt and
collection costs being recorded by the Company.
Gas transportation volumes in 1999 decreased 3,461 MMcf to 55,692
MMcf at an average transportation rate per Mcf of $.36 compared
with $.33 in 1998. Transportation volumes increased from 30,165
MMcf to 31,774 MMcf in 1999 for Missouri Gas Energy and decreased
from 28,988 MMcf to 23,918 MMcf in 1999 for Southern Union Gas
and the Company's pipeline subsidiaries. This decrease was
mainly caused by a 45% decrease, or 5,190 MMcf, in the amount of
volumes transported into Mexico by Norteno Pipeline Company
(Norteno), a subsidiary of the Company.
Operating revenues in 1998 compared with 1997 decreased
$47,727,000, or 7%, to $669,304,000 while gas purchase costs
decreased $43,608,000, or 10%, to $405,580,000.
Operating revenues and gas purchase costs in 1998 were affected
by both a reduction in gas sales volumes and decreases in the
cost of gas. Gas sales volumes decreased 6% in 1998 compared
with 1997 to 115,261 MMcf due to the warmer winter weather in the
Missouri service territories. Gas sales volumes were also
impacted by a reduction in average usage per customer throughout
the Company's service territories as a result of more energy
efficient housing and appliances. The average cost of gas
decreased $.18 to $3.49 per Mcf in 1998 due to decreases in
average spot market gas prices throughout the Company's distribu-
tion system as a result of seasonal impacts on demands for
natural gas and the ensuing competitive pricing within the indus-
try. The average spot market price of natural gas decreased 3%
to $2.24 per MMBtu in 1998. Additionally impacting operating
revenues in 1998 was a $4,616,000 decrease in gross receipt
taxes, a $2,104,000 decrease in gas transportation revenues at
Missouri Gas Energy, and decreased revenues of $500,000 under the
previously discussed gas supply incentive plan. Operating reve-
nues were favorably impacted by an $8,847,000 annual increase
to revenues granted by the MPSC effective as of February 1, 1997.
Gas transportation volumes in 1998 decreased 3,380 MMcf to 59,153
MMcf at an average transportation rate per Mcf of $.33 compared
with $.34 in 1997. Transportation volumes increased from 29,638
MMcf to 30,165 MMcf in 1998 for Missouri Gas Energy and decreased
from 32,895 MMcf to 28,988 MMcf in 1998 for Southern Union Gas
and the Company's pipeline subsidiaries. This decrease was
mainly caused by a 32% decrease, or 5,531 MMcf, in the amount of
volumes transported into Mexico by Norteno.
In 1999 and 1998, the gas distribution operations in Texas con-
tributed 29% and 32%, respectively, of the Company's consolidated
operating revenues. In 1999 and 1998, the gas distribution
operations in Missouri contributed 61% and 59%, respectively, of
the Company's consolidated operating revenues. Four suppliers
provided 50% and 45% of gas purchases in 1999 and 1998,
respectively.
Net Operating Margin Net operating margin in 1999 (operating
- --------------------
revenues less gas purchase costs and revenue-related taxes)
increased by $2,058,000, compared with an increase of $497,000,
in 1998. Operating margins and earnings are primarily dependent
upon gas sales volumes, gas service rates and timing of acquisi-
tions. The level of gas sales volumes is sensitive to the
variability of the weather. If normal weather had been present
throughout the Company's service territories in 1999 and 1998,
net operating margin would have increased by approximately
$20,334,000 and $8,443,000, respectively. Texas and Missouri
accounted for 40% and 55%, respectively, of the Company's net
operating margin in 1999 and 43% and 52%, respectively, in 1998.
Weather Weather in the Missouri Gas Energy service territories
- -------
in 1999 was 85% of a 30-year measure, 6% warmer than in 1998.
Weather in the Southern Union Gas service territories in 1999
was 74% of a 30-year measure, 25% warmer than in 1998. Weather
in Missouri in 1998 was 90% of a 30-year measure, 14% warmer than
in 1997, while weather in Texas in 1998 was 99% of a 30-year
measure, 8% colder than in 1997.
Customers The average number of customers served in 1999, 1998
- ---------
and 1997 was 998,476, 979,186 and 955,838, respectively. These
customer totals exclude Southern Union's 43% equity ownership in
a natural gas distribution company in Piedras Negras, Mexico
which currently serves 19,500 customers. Southern Union Gas
served 507,517 customers in Texas during 1999. Missouri Gas
Energy served 475,826 customers in central and western Missouri
during 1999. SFNG and Atlantic Gas Corporation, a propane sub-
sidiary of the Company, served 4,160 and 953 customers,
respectively, during 1999. SUPro Energy Company (SUPro), a
subsidiary of the Company, served 9,785 propane customers during
1999.
Operating Expenses Operating, maintenance and general expenses
- ------------------
in 1999 increased $2,166,000, or 2%, to $109,693,000. The in-
crease is a result of increased expenses associated with various
claims and litigation and increases in employee benefit costs.
Depreciation and amortization expense in 1999 increased
$3,416,000 to $41,855,000 as a result of including certain costs
into rate base that were previously deferred as provided in the
Missouri Gas Energy revenue increase effective as of September 2,
1998 and normal growth in plant. Taxes other than on income and
revenues, principally consisting of property, payroll and state
franchise taxes increased $296,000 to $14,501,000 in 1999. The
increase was primarily due to increases in property taxes
resulting from the inclusion of certain plant assets pursuant to
the Missouri Gas Energy Safety Program that were previously
deferred prior to the September 2, 1998 revenue increase in
Missouri.
Operating, maintenance and general expenses in 1998 decreased
$2,361,000, or 2%, to $107,527,000. Included in this decrease
was $5,837,000 in reduced bad debt expense due to a reduction in
delinquent customer accounts in 1998 compared with 1997. The
significant increase in natural gas prices during 1997 caused
many customers to receive considerably higher heating bills.
Partially offsetting this factor was an increase in reserves for
litigation claims and settlements in 1998 compared with 1997.
Depreciation and amortization expense in 1998 increased
$3,610,000 to $38,439,000 as a result of including certain costs
into rate base that were previously deferred as provided in the
Missouri Gas Energy revenue increase effective as of February 1,
1997 and normal growth in plant. Taxes other than on income and
revenues increased $2,051,000 to $14,205,000 in 1998. The
increase was primarily due to increases in property taxes
resulting from the inclusion of certain plant assets pursuant to
the Missouri Gas Energy Safety Program that were deferred prior
to the February 1, 1997 revenue increase in Missouri.
Employees The Company employed 1,554, 1,594 and 1,595 indi-
- ---------
viduals as of June 30, 1999, 1998, and 1997, respectively. After
gas purchases and taxes, employee costs and related benefits are
the Company's most significant expense. Such expense includes
salaries, payroll and related taxes and employee benefits such as
health, savings, retirement and educational assistance. In
December 1998, the Company agreed to new five-year contracts with
each bargaining-unit representing Missouri employees, which were
effective in May 1999.
Interest Expense and Dividends on Preferred Securities Total
- ------------------------------------------------------
interest expense in 1999 increased by $1,115,000, or 3%, to
$35,999,000. Interest expense on long-term debt and capital
leases increased by $752,000 in 1999 primarily due to an increase
of $14,984,000 in the average capital lease obligation out-
standing associated with the installation of an Automated Meter
Reading (AMR) system at Missouri Gas Energy. The installation of
the AMR system was completed during the first quarter of fiscal
year 1999.
Interest expense on short-term debt in 1999 decreased $849,000 to
$1,550,000 due to the average short-term debt outstanding during
1999 decreasing $11,631,000 to $27,474,000. The average rate of
interest on short-term debt also decreased from 6.1% in 1998 to
5.6% in 1999. Interest expense incurred on PGA liabilities
increased $850,000 during 1999 due to lower than anticipated gas
supply costs.
Total interest expense in 1998 increased by $1,419,000, or 4%, to
$34,884,000. Interest expense on long-term debt and capital
leases increased by $577,000 in 1998 primarily due to Missouri
Gas Energy's capital lease obligation of $22,151,000 incurred in
1998 for the installation of the AMR system.
Interest expense on short-term debt in 1998 increased $566,000 to
$2,399,000, due to the average short-term debt outstanding during
1998 increasing $9,333,000 to $39,105,000. The average rate of
interest on short-term debt was 6.1% in both 1998 and 1997.
Write-Off of Regulatory Assets During 1998, the Company was
- ------------------------------
impacted by pre-tax non-cash write-offs totaling $8,163,000 of
previously recorded regulatory assets. Pursuant to a 1989 MPSC
order, Missouri Gas Energy is engaged in a major gas safety pro-
gram. In connection with this program, the MPSC issued an
accounting authority order in 1994 which authorized Missouri Gas
Energy to defer carrying costs at a rate of 10.54%. The MPSC
rate order of January 22, 1997, however, retroactively reduced
the 10.54% carrying cost rate used since early 1994 to an
Allowance for Funds Used During Construction (AFUDC) rate of
approximately 6%. The Company filed an appeal of this portion of
the rate order in the Missouri State Court of Appeals, Western
District, and on August 18, 1998 was notified that the appeal was
denied. This resulted in a one-time non-cash write-off of
$5,942,000 by the Company of previously deferred costs in its
fiscal year ended June 30, 1998. See Commitments and Contin-
gencies in the Notes to Consolidated Financial Statements.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a $13,300,000 annual increase to revenue
effective on September 2, 1998, which is primarily earned volu-
metrically. The MPSC rate order reflected a 10.93% return on
common equity. The rate order, however, disallowed certain
previously recorded deferred costs associated with the rate
filing, requiring a non-cash write-off of $2,221,000. Though the
Company has requested a rehearing on significant portions of
these disallowances, the Company recorded this charge to earnings
in its fiscal year ended June 30, 1998.
Other Income (Expense), Net Other expense, net, in 1999 was
- ---------------------------
$1,814,000, compared to other income, net, of $4,073,000 in 1998.
Other expense in 1999 included $3,839,000 of costs associated
with various acquisition efforts and a net expense of $619,000
related to the amortization and current deferral of interest and
other expenses associated with the Missouri Gas Energy Safety
Program. This was partially offset by net rental income of
Lavaca Realty Company (Lavaca Realty), the Company's real estate
subsidiary, of $1,448,000 and equity earnings of $609,000 from
Southern Union's 43% equity ownership of a natural gas distribu-
tion company in Piedras Negras, Mexico.
Other income in 1998 included $1,671,000 in deferral of interest
and other expenses associated with the Missouri Gas Energy Safety
Program; realized gains on the sale of investment securities of
$1,088,000; and net rental income of Lavaca Realty of $1,119,000.
This was partially offset by $885,000 of costs associated with
various acquisition efforts.
Other income in 1997 included $3,729,000 in deferral of interest
and other expenses associated with the Missouri Gas Energy Safety
Program; realized gains on the sale of investment securities of
$2,545,000; and net rental income of Lavaca Realty of $1,329,000.
This was partially offset by the payment of $2,125,000 for the
settlement with the Missouri Office of Public Counsel (OPC) and
the MPSC for certain billing errors primarily from the 1996/1997
winter heating season; costs of $1,750,000 associated with
various acquisition efforts; and a $257,000 donation of emissions
analysis equipment and software to a Texas university.
Federal and State Income Taxes Federal and state income tax
- ------------------------------
expense in 1999, 1998, and 1997 was $7,109,000, $7,984,000 and
$12,373,000, respectively. The decrease in income taxes during
1999 and 1998 was due to the decrease in pre-tax income,
previously discussed.
Liquidity and Capital Resources
Operating Activities The seasonal nature of Southern Union's
- --------------------
business results in a high level of cash flow needs to finance
gas purchases, outstanding customer accounts receivable and
certain tax payments. To provide these funds, as well as funds
for its continuing construction and maintenance programs, the
Company has historically used its credit facilities along with
internally-generated funds. Because of available short-term
credit and the ability to obtain various market financing,
management believes it has adequate financial flexibility to meet
its cash needs.
The Company's strategic plan is to increase the scale of its
operations and the size of its customer base by pursuing and con-
summating future business combination transactions. The Company
has entered into a merger agreement with Pennsylvania Enterprises,
Inc. (PEI). See "Other Matters -- Merger Agreement with
Pennsylvania Enterprises, Inc." Acquisitions may require sub-
stantial financial expenditures that will need to be financed
through cash flow from operations or future debt and equity
offerings. The availability and terms of any such financing
sources will depend upon various factors and conditions such as
the Company's combined cash flow and earnings, the Company's
resulting capital structure, and conditions in financial markets
at the time of such offerings. Acquisitions and financings will
also affect the Company's combined results due to factors such
as the Company's ability to realize any anticipated benefits
from the PEI merger and any other acquisitions, successful
integration of new and different operations and businesses, and
effects of different regional economic and weather conditions.
Future acquisitions may involve the issuance of shares of the
Company's common stock, which could have a dilutive effect on the
then-current stockholders of the Company. See "Other Matters --
Cautionary Statement Regarding Forward-Looking Information."
Despite the abnormally warm weather, cash flow from operating
activities in 1999 increased by $8,596,000 to $76,853,000, and
increased by $20,263,000 to $68,257,000 in 1998. Operating ac-
tivities were impacted by a reduction in net earnings in 1999 and
1998, the non-cash write-off of previously recorded regulatory
assets in 1998 discussed above, increased accounts receivable
balances in 1997 due to increases in delinquent customer accounts
discussed above, the timing of natural gas stored in inventory at
Missouri Gas Energy and general changes in other operating
accounts.
At June 30, 1999, 1998 and 1997, the Company's primary source of
liquidity included borrowings available under the Company's
credit facilities. A balance of $21,000,000 and $1,600,000 was
outstanding under the credit facilities at June 30, 1999 and
1998, respectively. A balance of $17,900,000 was outstanding
under the facilities at July 31, 1999.
Investing Activities Cash flow used in investing activities in
- --------------------
in 1999 increased by $15,575,000 to $81,209,000, and increased by
$11,619,000 to $65,634,000 in 1998. Investing activity cash flow
was primarily affected by additions to property, plant and equip-
ment, acquisition of operations and sales and purchases of in-
vestment securities.
During 1999, 1998 and 1997, the Company expended $73,147,000,
$77,018,000 and $64,463,000, respectively, for capital expendi-
tures excluding acquisitions. These expenditures primarily
related to distribution system replacement and expansion.
Included in these capital expenditures were $17,951,000,
$21,125,000 and $20,972,000 for the Missouri Gas Energy Safety
Program in 1999, 1998 and 1997, respectively. Cash flow from
operations has historically been utilized to finance capital
expenditures and is expected to be the primary source for future
capital expenditures.
On December 31, 1997, Southern Union acquired Atlantic for
755,650 pre-split and pre-stock dividend shares of common stock
and $4,436,000 of cash. On the date of acquisition, Atlantic had
$11,683,000 of cash and cash equivalents.
During 1999, the Company purchased investment securities of
$7,000,000. During 1998, the Company purchased investment
securities of $5,000,000 and had proceeds from the sale of
investment securities of $6,531,000. During 1997, the Company
purchased $5,363,000 in investment securities and had proceeds
from the sale of investment securities of $13,327,000. As of
June 30, 1999, the investment securities are accounted for under
the cost method.
The Company completed the installation of an AMR system at
Missouri Gas Energy during the first quarter of fiscal year 1999.
The installation of the AMR system involved an investment of
approximately $30,000,000 which is accounted for as a capital
lease obligation. As of June 30, 1999, the capital lease
obligation outstanding was $26,894,000.
Financing Activities Cash flow from financing activities was
- --------------------
$4,356,000 in 1999. Cash flow used in financing activities was
$2,623,000 in 1998, while cash flow from financing activities was
$3,134,000 in 1997. Financing activity cash flow changes were
primarily due to repayment of debt, net borrowings under the
revolving credit facilities and changes in cash overdrafts. As a
result of these financing transactions, the Company's total debt
to total capital ratio at June 30, 1999 was 49.0%, compared with
50.6% and 51.2% at June 30, 1998 and 1997, respectively. The
Company's effective debt cost rate under the current debt struc-
ture is 7.7% (which includes interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
Southern Union Financing I, a consolidated wholly-owned sub-
sidiary of Southern Union, issued $100,000,000 of Preferred
Securities in May 1995. The issuance of the Preferred Securities
was part of a $300,000,000 shelf registration filed with the
Securities and Exchange Commission on March 29, 1995. Southern
Union may sell a combination of preferred securities of financing
trusts and senior and subordinated debt securities of Southern
Union of up to $196,907,200 (the remaining shelf) from time to
time, at prices determined at the time of any offering.
In June 1999, the Company repurchased $20,000,000 of Senior
Notes. Depending upon market conditions and available cash
balances, the Company may repurchase additional Senior Notes in
the future. See Preferred Securities of Subsidiary Trust and
Debt and Capital Lease in the Notes to the Consolidated Financial
Statements.
The Company has availability under two revolving credit facili-
ties (Revolving Credit Facilities) underwritten by a syndicate of
banks. Of the Revolving Credit Facilities, $40,000,000 is avail-
able under a short-term facility which expires June 29, 2000,
while $60,000,000 is available under a long-term facility which
expires June 30, 2002. The Company has additional availability
under uncommitted line of credit facilities (Uncommitted Facili-
ties) with various banks. Covenants under the Revolving Credit
Facilities allow for up to $35,000,000 of borrowings under Uncom-
mitted Facilities at any one time. Borrowings under the facili-
ties are available for Southern Union's working capital, letter
of credit requirements and other general corporate purposes. The
Revolving Credit Facility is subject to a commitment fee based on
the rating of the Senior Notes. As of June 30, 1999, the commit-
ment fee was an annualized .15% on the unused balance. The in-
terest rate on borrowings on the Revolving Credit Facility is
calculated based on a formula using the LIBOR or prime interest
rates.
The Company had standby letters of credit outstanding of
$1,622,000 at June 30, 1999 and $2,947,000 at June 30, 1998,
which guarantee payment of various insurance premiums and state
taxes.
Quantitative and Qualitative Disclosures About Market Risk
The Company has long-term debt, Preferred Securities and
Revolving Credit Facilities, which subject the Company to the
risk of loss associated with movements in market interest rates.
At June 30, 1999, the Company had issued fixed-rate long-term
debt and Preferred Securities aggregating $466,103,000 in princi-
pal amount and having a fair value of $442,865,000. These in-
struments are fixed-rate and, therefore, do not expose the
Company to the risk of earnings loss due to changes in market
interest rates. However, the fair value of these instruments
would increase by approximately $22,832,000 if interest and
dividend rates were to decline by 10% from their levels at
June 30, 1999. In general, such an increase in fair value would
impact earnings and cash flows only if the Company were to
reacquire all or a portion of these instruments in the open
market prior to their maturity.
The Company's floating-rate obligations aggregated $21,003,000 at
June 30, 1999 and primarily consisted of amounts borrowed under
Revolving Credit Facilities of the Company. These floating-rate
obligations expose the Company to the risk of increased interest
expense in the event of increases in short-term interest rates.
If the floating rates were to increase by 10% from June 30, 1999
levels, the Company's consolidated interest expense would
increase by a total of approximately $14,000 each month in which
such increase continued.
The risk of an economic loss is mitigated at this time as a
result of the Company's regulated status. Any unrealized gains
or losses are accounted for in accordance with the Financial
Accounting Standards Board Accounting for the Effects of Certain
Types of Regulation as a regulatory asset/liability because the
Company believes that its future contributions which are cur-
rently recovered through the rate-making process will be adjusted
for these gains and losses.
The change in exposure to loss in earnings and cash flow related
to interest rate risk from June 30, 1998 to June 30, 1999 is not
material to the Company.
See Preferred Securities of Subsidiary Trust and Debt and Capital
Lease in the Notes to the Consolidated Financial Statements.
Other Matters
Merger Agreement with Pennsylvania Enterprises, Inc. On June 7,
- ----------------------------------------------------
1999, Southern Union and Pennsylvania Enterprises, Inc. announced
a definitive merger agreement. The agreement calls for PEI to
merge into Southern Union in a transaction valued at approximately
$500 million, including assumption of debt. If approved, each PEI
shareholder will receive Southern Union common stock having a value
of $32.00, plus $3.00 in cash, subject to adjustment. PEI is a
multifaceted energy company headquartered in Wilkes-Barre,
Pennsylvania with natural gas distribution being its primary
business. PEI's principal subsidiary, PG Energy, together with
Honesdale Gas Company serve more than 152,000 gas customers in
northeastern and central Pennsylvania. In addition, PEI markets
electricity to more than 20,000 customers through PG Energy Power
Plus. Southern Union anticipates having shareholder and all
regulatory approvals for this merger in the second quarter of the
Company's fiscal year 2000.
The amount of Southern Union common stock to be issued in connec-
tion with the PEI merger and cash to be paid to PEI's stockholders
may vary as a result of fluctuations in the price of the Company's
common stock. Management anticipates that substantially all of
the cash portion of the merger consideration to be paid to PEI's
stockholders under the merger agreement and other merger-related
costs (approximately $35 to $55 million) will be financed through
external sources. In addition, the Company anticipates refinancing
substantially all of the current portion of outstanding long-term
debt of PEI and its subsidiaries, and the preferred stock of a PEI
subsidiary in connection with or soon after completion of the PEI
merger. Sources of financing may include commercial and investment
banks, institutional lenders and investors, and the public securities
markets. Management believes that the Company will have access
to many sources and types of short-term and long-term capital
financing; however, the terms of such financing or refinancing
arrangements may contain covenants that could adversely affect
the financial condition and flexibility of the Company.
Propane Operations SUPro and Atlantic Gas Corporation currently
- ------------------
serve 11,000 and 1,100 customers, respectively. These propane
operations sold 7,293,000 and 5,758,000 gallons of propane during
1999 and 1998, respectively.
Foreign Operations On July 23, 1997, Energia Estrella del Sur,
- ------------------
S. A. de C. V., a wholly-owned subsidiary of Southern Union
Energy International, Inc. and Southern Union International
Investments, Inc., both subsidiaries of the Company, acquired an
equity ownership in a natural gas distribution company and other
operations which currently serves 19,500 customers in Piedras
Negras, Mexico, which is across the border from the Company's
Eagle Pass, Texas service area. Southern Union currently has a
43% equity ownership in this company. On September 8, 1997,
Southern Transmission Company, another subsidiary of the Company,
purchased a 45-mile intrastate pipeline for $305,000 which
augments the Company's gas supply to the city of Eagle Pass and,
subject to necessary regulatory approvals, ultimately Piedras
Negras. Financial results of these foreign operations did not
have a significant impact on the Company's financial results
during 1999 and 1998.
Stock Splits and Dividends On August 6, 1999 and December 9,
- --------------------------
1998, Southern Union distributed its annual 5% common stock divi-
dend to stockholders of record on July 23, 1999 and November 23,
1998. A portion of each of these 5% stock dividends was charac-
terized as a distribution of capital due to the level of the Com-
pany's retained earnings available for distribution as of the
declaration date. Additionally, Southern Union distributed an
annual 5% common stock dividend on December 10, 1997. On
July 13, 1998, a three-for-two stock split was distributed in the
form of a 50% stock dividend. Unless otherwise stated, all per
share data included herein and in the accompanying Consolidated
Financial Statements and Notes thereto have been restated to give
effect to the stock split and stock dividends.
Contingencies The Company assumed responsibility for certain
- -------------
environmental matters in connection with the acquisition of
Missouri Gas Energy. Additionally, the Company is investigating
the possibility that the Company or predecessor companies may
have been associated with Manufactured Gas Plant sites in other
of its former service territories, principally in Arizona and New
Mexico, and present service territories in Texas.
On February 1, 1999, Southern Union submitted a proposal to the
Board of Directors of Southwest Gas Corporation (Southwest) to
acquire all of Southwest's outstanding common stock for $32.00
per share. Southwest then had a pending merger agreement with
ONEOK, Inc. (ONEOK) at $28.50 per share. On February 22, 1999,
Southern Union and Southwest both publicly announced Southern
Union's proposal, after the Southwest Board of Directors deter-
mined that Southern Union's proposal was a Superior Proposal (as
defined in the Southwest merger agreement with ONEOK). At that
time Southern Union entered into a Confidentiality and Standstill
Agreement with Southwest at Southwest's insistence. On April 25,
1999, Southwest's Board of Directors rejected Southern Union's
$32.00 per share offer and accepted an amended offer of $30.00
per share from ONEOK. On April 27, 1999, Southern Union
increased its offer to $33.50 per share and agreed to pay
interest which, together with dividends, would provide Southwest
shareholders with a 6% annual rate of return on its $33.50 offer,
commencing February 15, 2000, until closing. According to public
statements by Southwest, Southern Union's revised proposal has
also been rejected by Southwest's Board of Directors.
There are four lawsuits pending that relate to activities sur-
rounding Southern Union's efforts to acquire Southwest. In
addition, there is before the U. S. Court of Appeals for the
Tenth Circuit, an appeal by Southern Union of a preliminary
injunction entered by the U.S. District Court for the Northern
District of Oklahoma. Southern Union intends to vigorously pur-
sue its claims against Southwest, ONEOK, and certain individual
defendants, and vigorously defend itself against the claims by
Southwest and ONEOK. See Commitments and Contingencies in the
Notes to Consolidated Financial Statements for a discussion of
these lawsuits.
In August 1998, a jury in Edinburg, Texas concluded deliberations
on the City of Edinburg's franchise fee lawsuit against PG&E Gas
Transmission, Texas Corporation (formerly Valero Energy Corpora-
tion (Valero)) and a number of its subsidiaries, as well as
former Valero subsidiary Rio Grande Valley Gas Company (RGV) and
RGV's successor company, Southern Union Company. The case, based
upon events that occurred between 1985-1987, centers on specific
contractual language in the 1985 franchise agreement between RGV
and the City of Edinburg. Southern Union purchased RGV from
Valero in October 1993. The jury awarded the plaintiff damages,
against all defendants under several largely overlapping but
mutually exclusive claims, totaling approximately $13,000,000.
The trial judge subsequently reduced the award to approximately
$700,000 against Southern Union and $7,800,000 against Valero and
Southern Union together. The Company is pursuing reversal on
appeal. The Company believes it will ultimately prevail, and
that the outcome of this matter will not have a material adverse
impact on the Company's results of operations, financial position
or cash flows. Furthermore, the Company has not determined what
impact, if any, this jury decision may have on other city fran-
chises in Texas.
On August 18, 1998, the Missouri State Court of Appeals, Western
District, denied the Company's appeal of the February 1, 1997
rate order which retroactively reduced the carrying cost rate
applied by the Company on expenditures incurred on the Missouri
Gas Energy Safety Program. The Company believes that the incon-
sistent treatment by the MPSC in subsequently changing to the
Allowance for Funds Used During Construction rate of approxi-
mately 6% from the previously ordered rate of 10.54% constitutes
retroactive ratemaking. Unfortunately, the decision by the
Missouri State Court of Appeals failed to address certain
specific language within a 1994 MPSC accounting authority order
that the Company believed prevented the MPSC from retroactively
changing the carrying cost rate. Southern Union sought a trans-
fer of the case to the Missouri Supreme Court which was denied on
November 24, 1998.
Southern Union and its subsidiaries are parties to other legal
proceedings that management considers to be normal actions to
which an enterprise of its size and nature might be subject, and
not to be material to the Company's overall business or financial
condition, results of operations or cash flows.
See Commitments and Contingencies in the Notes to Consolidated
Financial Statements.
Inflation The Company believes that inflation has caused and
- ---------
will continue to cause increases in certain operating expenses
and has required and will continue to require assets to be
replaced at higher costs. The Company continually reviews the
adequacy of its gas service rates in relation to the increasing
cost of providing service and the inherent regulatory lag in
adjusting those rates.
Regulatory The majority of the Company's business activities are
- ----------
subject to various regulatory authorities. The Company's finan-
cial condition and results of operations have been and will con-
tinue to be dependent upon the receipt of adequate and timely
adjustments in rates. Gas service rates, which consist of a
monthly fixed charge and a gas usage charge, are established by
regulatory authorities and are intended to permit utilities the
opportunity to recover operating, administrative and financing
costs and to have the opportunity to earn a reasonable return on
equity. The monthly fixed charge provides a base revenue stream
while the usage charge increases the Company's revenues and
earnings in colder weather when natural gas usage increases.
On September 18, 1997, the MPSC approved a global settlement
among the Company, the OPC and MPSC to resolve complaints brought
by the OPC and the MPSC staff regarding billing errors during the
1995/1996 and 1996/1997 winter heating seasons. The settlement
called for credits to gas bills by Missouri Gas Energy totaling
$1,575,000 to those customers overbilled and a $550,000 contribu-
tion by Missouri Gas Energy to a social service organization for
the express purpose of assisting needy Missouri Gas Energy custo-
mers in paying their gas bills. These balances were recorded as
of June 30, 1997.
In August 1997, the MPSC issued an order authorizing Missouri Gas
Energy to begin making semi-annual PGAs in November and April,
instead of more frequent adjustments as previously made. Addi-
tionally, the order authorized Missouri Gas Energy to establish
an Experimental Price Stabilization Fund for purposes of pro-
curing natural gas financial instruments to hedge a minimal por-
tion of its gas purchase costs for the winter heating season.
The cost of purchasing these financial instruments and any gains
derived from such activities are passed on to the Missouri custo-
mers through the PGA. Accordingly, there is no earnings impact
as a result of the use of these financial instruments. These
procedures help stabilize the monthly heating bills for Missouri
customers. The Company believes it bears minimal risk under the
authorized transactions.
The MPSC approved a three-year, experimental gas supply incentive
plan for Missouri Gas Energy effective July 1, 1996. Under the
plan, the Company and Missouri Gas Energy's customers share in
certain savings below benchmark levels of gas costs achieved as a
result of the Company's gas procurement activities. Likewise, if
natural gas is acquired above benchmark levels, both the Company
and customers share in such costs. For the years ended June 30,
1999, 1998 and 1997, the incentive plan achieved a reduction of
overall gas costs of $6,900,000, $9,200,000 and $10,200,000,
respectively, resulting in savings to Missouri customers of
$4,000,000, $5,100,000 and $5,600,000, respectively. The Company
recorded revenues of $2,900,000, $4,100,000 and $4,600,000 in
1999, 1998 and 1997, respectively under this plan. Missouri Gas
Energy is currently working with the MPSC to develop an alternate
plan due to the July 1, 1999 expiration of the experimental gas
supply incentive plan, however, there can be no assurance that
this or any similar plan will be approved by the MPSC for
Missouri Gas Energy.
On April 13, 1998, Southern Union Gas filed a $2,228,000 request
for a rate increase from the city of El Paso, a request the city
subsequently denied. On April 21, 1998, the city council of El
Paso voted to reduce the Company's rates by $1,570,000 annually
and to order a one-time cost of gas refund of $475,000. On
May 21, 1998, Southern Union Gas filed with the Railroad Commis-
sion of Texas (RRC) an appeal of the city of El Paso's actions to
reduce the Company's rates and require a one-time cost of gas
refund. On December 21, 1998, the RRC issued its order imple-
menting an $884,000 one-time cost of gas refund and a $99,000
base rate reduction. The cost of gas refund was completed in
February 1999.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a $13,300,000 rate increase which also
disallowed certain previously recorded deferred costs, in which
Missouri Gas Energy requested a rehearing on significant portions
of these disallowances. On December 8, 1998, the MPSC denied
rehearing requests made by all parties other than Missouri Gas
Energy and granted a portion of Missouri Gas Energy's rehearing
request. The MPSC will conduct further proceedings to take addi-
tional evidence on those matters for which it granted Missouri
Gas Energy a rehearing. If the MPSC adopts Missouri Gas Energy's
positions on rehearing, then Missouri Gas Energy would be autho-
rized an additional $2,200,000 of base revenues increasing the
$13,300,000 initially authorized in its August 21, 1998 order to
$15,500,000. The MPSC's orders may be subject to judicial review
and although certain parties may argue for a reduction in Missouri
Gas Energy's authorized base revenue increase on judicial review,
Missouri Gas Energy expects such arguments to be unsuccessful.
On January 22, 1997, Missouri Gas Energy was notified by the MPSC
of its decision to grant an $8,847,000 annual increase to revenue
effective as of February 1, 1997. Southern Union Gas also
received several annual cost of service adjustments in 1999, 1998
and 1997. See Utility Regulation and Rates and Commitments and
Contingencies in the Notes to Consolidated Financial Statements.
Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in
a major gas safety program in its service territories. This
program includes replacement of company- and customer-owned gas
service and yard lines, the movement and resetting of meters, the
replacement of cast iron mains and the replacement and cathodic
protection of bare steel mains. In recognition of the signifi-
cant capital expenditures associated with this safety program,
the MPSC permits the deferral, and subsequent recovery through
rates, of depreciation expense, property taxes and associated
carrying costs. The continuation of the Missouri Gas Energy
Safety Program will result in significant levels of future capi-
tal expenditures. The Company estimates incurring capital expen-
ditures of $14,372,000 in fiscal 2000 related to this program
which are expected to be financed through cash flow from opera-
tions. See Utility Regulation and Rates and Commitments and
Contingencies in the Notes to Consolidated Financial Statements.
The Company is continuing to pursue certain changes to rates and
rate structures that are intended to reduce the sensitivity of
earnings to weather including weather normalization clauses and
higher monthly fixed service charges. Southern Union Gas has
weather normalization clauses in the City of Austin, El Paso
environs, Port Arthur, Galveston and in two other service areas
in Texas. These clauses allow for the adjustments that help
stabilize customers' monthly bills and the Company's earnings
from the varying effects of weather.
Year 2000 Similar to all business entities, the Company will be
- ---------
impacted by the inability of computer application software pro-
grams to distinguish between the year 1900 and 2000 due to a
commonly-used programming convention. Unless such programs are
modified or replaced prior to 2000, calculations and interpreta-
tions based on date-based arithmetic or logical operations per-
formed by such programs may be incorrect.
Management's plan addressing the impact of the Year 2000 issue on
the Company focuses on the following areas: application systems,
process control systems (embedded chips), technology infrastruc-
ture, physical infrastructure, and third party business partners
and suppliers with which the Company has significant relation-
ships. Management's analysis and review of these areas is com-
prised primarily of five phases: developing an inventory of
hardware, software and embedded chips; assessing the degree to
which each area is currently Year 2000 ready; performing renova-
tions and repairs as needed to attain Year 2000 readiness;
testing to ensure Year 2000 readiness; and developing a contin-
gency plan if repair and renovation efforts are either unsuccess-
ful or untimely.
Management has completed the inventory, assessment and testing
phases regarding application systems, process control systems and
technology infrastructure, and is performing renovations and
repairs in each of these categories. The Company's renovation
and repair efforts are substantially complete. Validation and
confirmation testing of affected areas will continue through
calendar year 1999. The review of critical business partners,
gas transporters and suppliers is in the assessment stage and the
Company will continue to confirm the readiness of these third
parties through calendar year 1999. Costs incurred to date have
primarily consisted of labor from the redeployment of existing
information technology, legal and operational resources. The
Company has incurred costs to date on this project of approxi-
mately $2,000,000. The Company expects to spend approximately
$6,500,000 for these Year 2000 readiness efforts. Included in
this estimate are equipment leasing expenses of approximately
$1,500,000 that will be incurred over the life of the equipment.
Also included in this estimate are costs associated with contin-
gency planning, software licensing and consulting expenses that
will be incurred prior to the end of 1999. To the extent that
such costs are incurred in Year 2000 readiness efforts, the Com-
pany will attempt recovery for such costs through regulatory
relief.
During the past several years the Company has replaced most of
its financial and operating software programs and Year 2000
testing has established that these programs are now Year 2000
ready. These new programs have significantly reduced the costs
the Company expects to incur to become Year 2000 ready. Addi-
tionally, the Company has developed a contingency plan in the
event that supplier or internal operational failures do occur and
that plan is being implemented throughout the Company. The costs
associated with this effort are being evaluated and cannot yet be
determined. Although the Company does not presently anticipate a
material business interruption as a result of the Year 2000, the
worst case scenario if all of the Company's Year 2000 efforts
failed, including the failure of third party providers to deliver
services, could result in daily lost revenues of approximately
$3,200,000. This estimate is based on historical revenues
recognized in the months of January, February and March.
Accounting Pronouncements In June 1998, the Financial Accounting
- -------------------------
Standards Board issued Accounting for Derivative Instruments and
Hedging Activities, as amended, is required to be adopted by the
Company on July 1, 2000. The Statement permits early adoption as
of the beginning of any fiscal quarter after its issuance. The
Statement will require the Company to recognize all derivatives
on the balance sheet at fair value. Derivatives that are not
hedges must be adjusted to fair value through income. If the
derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabili-
ties, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The
Company has not yet determined what the effect of this statement
will have on the earnings and financial position of the Company.
See the Notes to Consolidated Financial Statements for other
accounting pronouncements followed by the Company.
Cautionary Statement Regarding Forward-Looking Information This
- ----------------------------------------------------------
Management's Discussion and Analysis of Results of Operations and
Financial Condition and other sections of this Annual Report on
Form 10-K contain forward-looking statements that are based on
current expectations, estimates and projections about the indus-
try in which the Company operates, management's beliefs and
assumptions made by management. Words such as "expects,"
"anticipates," "intends," "plans," "believes," "seeks," "esti-
mates," variations of such words and similar expressions are
intended to identify such forward-looking statements. These
statements are not guarantees of future performance and involve
certain risks, uncertainties and assumptions, which are difficult
to predict and many of which are outside the Company's control.
Therefore, actual outcomes and results may differ materially from
what is expressed or forecasted in such forward-looking state-
ments. The Company undertakes no obligation to update publicly
any forward-looking statements, whether as a result of new infor-
mation, future events or otherwise. Readers are cautioned not to
put undue reliance on such forward-looking statements. Stock-
holders may review the Company's reports filed in the future with
the Securities and Exchange Commission for more current descrip-
tions of developments that could cause actual results to differ
materially from such forward-looking statements.
Factors that could cause or contribute to actual results dif-
fering materially from such forward-looking statements include
the following: cost of gas; gas sales volumes; weather condi-
tions in the Company's service territories; the achievement of
operating efficiencies and the purchases and implementation of
new technologies for attaining such efficiencies; impact of rela-
tions with labor unions of bargaining-unit employees; the receipt
of timely and adequate rate relief; the outcome of pending and
future litigation; governmental regulations and proceedings
affecting or involving the Company; the impact of any Year 2000
disruption; and the nature and impact of any extraordinary trans-
actions 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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended June 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
(thousands of dollars, except shares
and per share amounts)
Operating revenues........ $ 605,231 $ 669,304 $ 717,031
Gas purchase costs........ 342,301 405,580 449,188
---------- ---------- ----------
Operating margin........ 262,930 263,724 267,843
Revenue related taxes..... (32,034) (34,886) (39,502)
---------- ---------- ----------
Net operating margin.... 230,896 228,838 228,341
Operating expenses:
Operating, maintenance
and general........... 109,693 107,527 109,888
Depreciation and
amortization.......... 41,855 38,439 34,829
Taxes, other than on
income and revenues... 14,501 14,205 12,154
---------- ---------- ----------
Total operating expenses.. 166,049 160,171 156,871
---------- ---------- ----------
Net operating revenues.... 64,847 68,667 71,470
---------- ---------- ----------
Other income (expenses):
Interest................ (35,999) (34,884) (33,465)
Dividends on preferred
securities of sub-
sidiary trust......... (9,480) (9,480) (9,480)
Write-off of regulatory
assets................ -- (8,163) --
Other, net.............. (1,814) 4,073 2,880
---------- ---------- ----------
Total other expenses,
net................. (47,293) (48,454) (40,065)
---------- ---------- ----------
Earnings before income
taxes................... 17,554 20,213 31,405
Federal and state income
taxes................... 7,109 7,984 12,373
---------- ---------- ----------
Net earnings available
for common stock........ $ 10,445 $ 12,229 $ 19,032
========== ========== ==========
Net earnings per share:
Basic................... $ .34 $ .40 $ .64
========== ========== ==========
Diluted................. $ .32 $ .39 $ .62
========== ========== ==========
Weighted average shares
outstanding:
Basic................. 30,894,613 30,406,832 29,641,523
========== ========== ==========
Diluted............... 32,589,610 31,591,811 30,812,248
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
June 30,
-----------------------
1999 1998
---------- ----------
(thousands of dollars)
Property, plant and equipment:
Plant in service.................. $1,106,905 $1,057,675
Construction work in progress..... 13,271 7,783
---------- ----------
1,120,176 1,065,458
Less accumulated depreciation and
amortization.................... (376,212) (355,430)
---------- ----------
743,964 710,028
Additional purchase cost assigned
to utility plant, net of
accumulated amortization of
$31,115,000 and $27,030,000,
respectively.................... 134,296 138,381
---------- ----------
Net property, plant and equip-
ment.......................... 878,260 848,409
Current assets:
Accounts receivable, billed and
unbilled, net................... 50,693 53,760
Inventories, principally at
average cost.................... 29,373 26,160
Prepayments and other............. 4,692 4,747
---------- ----------
Total current assets.......... 84,758 84,667
Deferred charges.................... 96,635 94,550
Investment securities............... 12,000 5,000
Real estate......................... 9,420 9,741
Other............................... 6,275 5,397
---------- ----------
Total assets...................... $1,087,348 $1,047,764
========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
June 30,
-----------------------
1999 1998
---------- ----------
(thousands of dollars)
Common stockholders' equity:
Common stock, $1 par value; autho-
rized 50,000,000 shares; issued
31,239,662 (including 1,484,988
shares issued on August 6, 1999
as a stock dividend) shares at
June 30, 1999.................... $ 31,240 $ 28,252
Premium on capital stock........... 276,610 252,638
Less treasury stock: 51,625
shares at cost................... (794) (794)
Less common stock held in Trust:
268,513 shares................... (5,562) --
Accumulated other comprehensive
income........................... (436) --
Retained earnings.................. -- 16,738
---------- ----------
301,058 296,834
Company-obligated mandatorily
redeemable preferred securities
of subsidiary trust holding
solely subordinated notes of
Southern Union..................... 100,000 100,000
Long-term debt and capital lease
obligation......................... 390,931 406,407
---------- ----------
Total capitalization............. 791,989 803,241
Current liabilities:
Long-term debt and capital lease
obligation due within one year... 2,066 1,777
Notes payable...................... 21,003 1,600
Accounts payable................... 37,834 26,570
Federal, state and local taxes..... 13,300 14,017
Accrued interest................... 12,176 12,699
Customer deposits.................. 17,682 17,686
Deferred gas purchases............. 22,955 12,257
Other.............................. 16,612 21,095
---------- ----------
Total current liabilities........ 143,628 107,701
Deferred credits and other .......... 81,493 74,217
Accumulated deferred income taxes.... 70,238 62,605
Commitments and contingencies........ -- --
---------- ----------
Total stockholders' equity and
liabilities...................... $1,087,348 $1,047,764
========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
(thousands of dollars)
Cash flows from operating
activities:
Net earnings.................. $ 10,445 $ 12,229 $ 19,032
Adjustments to reconcile net
earnings to net cash flows
from operating activities:
Depreciation and amortiza-
tion....................... 41,855 38,439 34,829
Deferred income taxes....... 7,867 6,363 7,340
Provision for bad debts..... 3,279 5,461 11,298
Write-off of regulatory
assets..................... -- 8,163 --
Deferred interest expense... 619 (1,671) (3,729)
Gain on sale of investment
securities................. -- (1,088) (2,545)
Other....................... 1,004 1,447 1,077
Changes in assets and
liabilities, net of
acquisitions:
Accounts receivable,
billed and unbilled...... (212) 132 (22,111)
Accounts payable.......... 5,228 (7,066) (6,978)
Taxes and other
liabilities.............. (1,240) 146 (2,975)
Customer deposits......... (4) 201 1,558
Deferred gas purchases.... 10,698 8,693 6,215
Inventories............... (3,213) (4,361) 5,691
Other..................... 527 1,169 (708)
-------- -------- --------
Net cash flows from
operating activities....... 76,853 68,257 47,994
-------- -------- --------
Cash flows from (used in)
investing activities:
Additions to property, plant
and equipment................ (73,147) (77,018) (64,463)
Acquisition of operations,
net of cash received......... -- 6,502 (1,861)
Purchase of investment
securities................... (7,000) (5,000) (5,363)
Increase in customer advances. 2,139 3,562 2,470
Increase (decrease) in
deferred charges and credits. (4,086) (1,786) 6
Proceeds from sale of land.... -- -- 1,096
Proceeds from sale of
investment securities........ -- 6,531 13,327
Other......................... 885 1,575 773
-------- -------- --------
Net cash flows used in
investing activities........ (81,209) (65,634) (54,015)
-------- -------- --------
Cash flows from (used in)
financing activities:
Repayment of debt and capital
lease obligation............. (20,837) (1,309) (640)
Net borrowings under
revolving credit facilities.. 19,403 -- 1,600
Increase (decrease) in cash
overdrafts................... 6,033 (945) 1,567
Other......................... (243) (369) 607
-------- -------- --------
Net cash flows from (used
in) financing activities.... 4,356 (2,623) 3,134
-------- -------- --------
Decrease in cash and cash
equivalents.................... -- -- (2,887)
Cash and cash equivalents at
beginning of year.............. -- -- 2,887
-------- -------- --------
Cash and cash equivalents at
end of year.................... $ -- $ -- $ --
======== ======== ========
Cash paid for interest, net of amounts capitalized, in 1999, 1998
and 1997 was $45,039,000, $33,997,000 and $32,282,000,
respectively. Cash paid for income taxes in 1999, 1998 and 1997
was $1,194,000, $4,511,000 and $5,871,000, respectively.
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumu-
Trea- lated
Common Premium sury Other
Stock, on Stock Compre-
$1 Par Capital and hensive Retained
Value Stock Other Income Earnings Total
------- -------- ------ -------- -------- ---------
(thousands of dollars)
Balance
July 1,
1996....... $16,275 $206,047 $(794) $(1,244) $25,631 $245,915
Compre-
hensive
income:
Net earn-
ings.... -- -- -- -- 19,032 19,032
Unrea-
lized
holding
gain,
net of
tax and
reclas-
sifica-
tion
adjust-
ment.... -- -- -- 1,908 -- 1,908
--------
Compre-
hensive
income.. 20,940
--------
5% stock
dividend. 813 18,681 -- -- (19,494) --
Exercise
of stock
options.. 83 524 -- -- -- 607
------- -------- ----- ------- ------- --------
Balance
June 30,
1997....... 17,171 225,252 (794) 664 25,169 267,462
Compre-
hensive
income:
Net earn-
ings.... -- -- -- -- 12,229 12,229
Reclassi-
fication
adjust-
ment for
gains
included
in net
income.. -- -- -- (664) -- (664)
--------
Compre-
hensive
income... 11,565
--------
5% stock
dividend. 856 19,802 -- -- (20,658) --
Three-for-
two stock
split.... 9,400 (9,400) -- -- (2) (2)
Issuance
of stock
for ac-
quisi-
tion..... 756 17,285 -- -- -- 18,041
Exercise
of stock
options.. 69 (301) -- -- -- (232)
------- -------- ----- ------- ------- --------
Balance
June 30,
1998....... 28,252 252,638 (794) -- 16,738 296,834
Compre-
hensive
income:
Net earn-
ings.... -- -- -- -- 10,445 10,445
Minimum
pension
lia-
bility
adjust-
ment;
net of
tax..... -- -- -- (436) -- (436)
--------
Compre-
hensive
income.. 10,009
--------
Common
stock
held in
Trust.... -- -- (5,562) -- -- (5,562)
5% stock
dividend
-- de-
clared
Novem-
ber 11,
1998..... 1,411 7,483 -- -- (8,898) (4)
5% stock
dividend
-- de-
clared
July 13,
1999..... 1,485 16,797 -- -- (18,285) (3)
Exercise
of stock
options.. 92 (308) -- -- -- (216)
------- -------- ----- ------- ------- --------
Balance
June 30,
1999....... $31,240 $276,610 $(6,356)$ (436) $ -- $301,058
======= ======== ===== ======= ======= ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
I Summary of Significant Accounting Policies
Operations Southern Union Company (Southern Union and, together
- ----------
with its wholly-owned subsidiaries, the Company), is a public
utility primarily engaged in the distribution and sale of natural
gas to residential, commercial and industrial customers located
primarily in Texas and Missouri. Subsidiaries of Southern Union
also market natural gas to end-users, distribute propane, operate
natural gas pipeline systems and sell commercial gas air condi-
tioning and other gas-fired engine-driven applications. Certain
subsidiaries own or hold interests in real estate and other
assets, which are primarily used in the Company's utility busi-
ness. Substantial operations of the Company are subject to
regulation.
Principles of Consolidation The consolidated financial state-
- ---------------------------
ments include the accounts of Southern Union and its wholly-owned
subsidiaries. Investments in which the Company owns a 20% to 50%
interest are accounted for using the equity method. All signifi-
cant intercompany accounts and transactions are eliminated in
consolidation. All dollar amounts in the tables herein, except
per share amounts, are stated in thousands unless otherwise
indicated.
Gas Utility Revenues and Gas Purchase Costs Gas utility custo-
- -------------------------------------------
mers are billed on a monthly-cycle basis. The related cost of
gas and revenue taxes are matched with cycle-billed revenues
through utilization of purchased gas adjustment provisions in
tariffs approved by the regulatory agencies having jurisdiction.
Revenues from gas delivered but not yet billed are accrued, along
with the related gas purchase costs and revenue-related taxes.
The distribution and sale of natural gas in Texas and Missouri
contributed in excess of 85% of the Company's total revenue, net
earnings and identifiable assets in 1999, 1998 and 1997. Four
suppliers provided 50%, 45% and 44% of the Company's gas pur-
chases in 1999, 1998 and 1997, respectively.
Earnings Per Share The Company's earnings per share presentation
- ------------------
conforms to the Financial Accounting Standards Board (FASB)
standard, Earnings per Share. All share and per share data have
been restated for all stock dividends and stock splits unless
otherwise noted.
Accumulated Other Comprehensive Income In 1999, the Company
- --------------------------------------
adopted Reporting Comprehensive Income, a FASB standard which
established rules for the reporting of comprehensive income and
its components. The main components of comprehensive income that
relate to the Company are net earnings, unrealized holding gains
on investments and additional minimum pension liability adjust-
ments, all of which are presented in the consolidated statement
of stockholders' equity. Prior to adoption, the unrealized
holding gains were presented as part of stockholders' equity and
the pension liability adjustments were presented in the consoli-
dated balance sheet.
Unrealized holding gains on investment securities were nil, nil
and $3,562,000 in 1999, 1998 and 1997, respectively. The reclas-
sification adjustment for gains included in net income, net of
tax, for reporting other comprehensive income was nil, $664,000
and $1,654,000 in 1999, 1998 and 1997, respectively. The
unrealized holding gains on investment securities and the reclas-
sification adjustment for gains are combined and reflected on the
consolidated statement of stockholders' equity.
Credit Risk Concentrations of credit risk in trade receivables
- -----------
are limited due to the large customer base with relatively small
individual account balances. In addition, Company policy
requires a deposit from certain customers. The Company has
recorded an allowance for doubtful accounts totaling $6,588,000,
$8,267,000, $10,765,000 and $3,779,000 at June 30, 1999, 1998,
1997 and 1996, respectively. The allowance for doubtful accounts
is increased for estimated uncollectible accounts and reduced for
the write-off of trade receivables.
Fair Value of Financial Instruments The carrying amounts
- -----------------------------------
reported in the balance sheet for accounts receivable, accounts
payable and notes payable approximate their fair value. The fair
value of the Company's preferred securities of subsidiary trust
and long-term debt is estimated using current market quotes and
other estimation techniques.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Inventories Inventories consist of natural gas in underground
- -----------
storage and materials and supplies. Natural gas in underground
storage of $23,680,000 and $20,545,000 at June 30, 1999 and 1998,
respectively, consists of 10,429,000 and 9,118,000 British
thermal units, respectively.
Segment Reporting The FASB standard, Disclosures about Segments
- -----------------
of an Enterprise and Related Information, requires disclosure of
segment data based on how management makes decisions about
allocating resources to segments and measuring performance. The
Company is principally engaged in the gas distribution industry
in the United States and has no other reportable industry
segments.
New Pronouncements In June 1998, the Financial Accounting
- ------------------
Standards Board issued Accounting for Derivative Instruments and
Hedging Activities, as amended. The Statement is required to be
adopted by the Company on July 1, 2000 with early adoption
permitted as of the beginning of any fiscal quarter after its
issuance. The Statement will require the Company to recognize
all derivatives on the balance sheet at fair value. Derivatives
that are not hedges must be adjusted to fair value through income.
If the derivative is a hedge, depending on the nature of the hedge,
changes in the fair value of derivatives will either be offset
against the change in fair value of the hedged assets, liabili-
ties, or firm commitments through earnings or recognized in other
comprehensive income until the hedged item is recognized in
earnings. The ineffective portion of a derivative's change in
fair value will be immediately recognized in earnings. The
Company has not yet determined what the effect of this statement
will have on the earnings and financial position of the Company.
Use of Estimates The preparation of financial statements in
- ----------------
conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of con-
tingent assets and liabilities at the date of the financial
statements and reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
II Acquisitions
On June 7, 1999, Southern Union and Pennsylvania Enterprises,
Inc. (PEI) announced a definitive merger agreement. The agree-
ment calls for PEI to merge into Southern Union in a transaction
valued at approximately $500 million, including assumption of
debt of approximately $150 million. If approved, each PEI share-
holder will receive Southern Union common stock having a value of
$32.00, plus $3.00 in cash, subject to adjustment. PEI is a
multifaceted energy company headquartered in Wilkes-Barre,
Pennsylvania with natural gas distribution being its primary
business. PEI's principal subsidiary, PG Energy, together with
Honesdale Gas Company serve more than 152,000 gas customers in
northeastern and central Pennsylvania. In addition, PEI markets
electricity to more than 20,000 customers through PG Energy Power
Plus. Southern Union anticipates having shareholder and all
regulatory approvals for this merger in the second quarter of the
Company's fiscal year 2000.
Effective December 31, 1997, the Company acquired Atlantic
Utilities Corporation and Subsidiaries (Atlantic) for 755,650
pre-split and pre-stock dividend shares of common stock valued at
$18,041,000 and $4,436,000 of cash. Atlantic is operated as
South Florida Natural Gas, a natural gas division of Southern
Union, and Atlantic Gas Corporation, a propane subsidiary of the
Company. Atlantic currently serves 5,500 customers in central
Florida. The assets of Atlantic were included in the Company's
consolidated balance sheet at January 1, 1998 and its results of
operations have been included in the Company's statements of con-
solidated operations and cash flows since January 1, 1998. On
the date of acquisition, Atlantic had $11,683,000 of cash and
cash equivalents. The acquisition was accounted for using the
purchase method. The additional purchase cost assigned to
utility plant of $10,000,000 reflects the excess of the purchase
price over the historical book carrying value of the net assets
acquired. The additional purchase cost is amortized on a
straight-line basis over forty years.
On July 23, 1997 two subsidiaries of Southern Union acquired an
equity ownership in a natural gas distribution company and other
related operations currently serving 19,500 customers in Piedras
Negras, Mexico for $2,700,000. Southern Union currently has a
43% equity ownership in this company. This system is across the
border from the Company's Eagle Pass, Texas service area. On
September 8, 1997, the Company purchased a 45-mile intrastate
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
pipeline, which augments the Company's gas supply to the city of
Eagle Pass and, subject to necessary regulatory approvals,
ultimately Piedras Negras.
On August 30, 1996, SUPro Energy Company, a wholly-owned sub-
sidiary of the Company, purchased certain propane distribution
operations in El Paso, Texas and on June 30, 1997, acquired
propane operations located in and around Alpine, Texas. These
acquisitions, which serve 3,600 customers, were for $1,861,000 in
cash and the assumption of $1,475,000 in long-term debt.
III Write-Off of Regulatory Assets
During 1998, the Company was impacted by pre-tax non-cash write-
offs totaling $8,163,000 of previously recorded regulatory assets.
Pursuant to a 1989 Missouri Public Service Commission (MPSC)
order, Missouri Gas Energy, a division of the Company, is engaged
in a major gas safety program. In connection with this program,
the MPSC issued an accounting authority order in 1994 which
authorized Missouri Gas Energy to defer carrying costs at a rate
of 10.54%. The MPSC rate order of January 22, 1997, however,
retroactively reduced the 10.54% carrying cost rate used since
early 1994 to an Allowance for Funds Used During Construction
(AFUDC) rate of approximately 6%. The Company filed an appeal of
this portion of the rate order in the Missouri State Court of
Appeals, Western District, and on August 18, 1998 was notified
that the appeal was denied. This resulted in a one-time non-cash
write-off of $5,942,000 by the Company of previously deferred
costs in its fiscal year ended June 30, 1998. See Commitments
and Contingencies.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a rate increase which, among other
things, disallowed certain previously recorded deferred costs
associated with the rate filing, requiring an additional pre-tax
non-cash write-off of $2,221,000. The Company recorded this
charge to earnings in its fiscal year ended June 30, 1998. See
Utility Regulation and Rates.
IV Other Income (Expense), Net
Other expense of $1,814,000 in 1999 included: $3,839,000 of
costs associated with various acquisition efforts and a net
expense of $619,000 related to the amortization and current
deferral of interest and other expenses associated with the
Missouri Gas Energy Safety Program. This was partially offset by
net rental income of Lavaca Realty Company (Lavaca Realty), the
Company's real estate subsidiary, of $1,448,000 and equity
earnings of $609,000 from Southern Union's 43% equity ownership
of a natural gas distribution company in Piedras Negras, Mexico.
Other income of $4,073,000 in 1998 included: $1,671,000 related
to the deferral of interest and other expenses associated with
the Missouri Gas Energy Safety Program; realized gains on the
sale of investment securities of $1,088,000; and net rental
income of Lavaca Realty of $1,119,000. This was partially offset
by $885,000 of costs associated with various acquisition efforts.
Other income of $2,880,000 in 1997 included: $3,729,000 related
to the deferral of interest and other expenses associated with
the Missouri Gas Energy Safety Program; realized gains on the
sale of investment securities of $2,545,000; and net rental in-
come of Lavaca Realty, of $1,329,000. This was partially offset
by the payment of $2,125,000 for the settlement with the Missouri
Office of Public Counsel and the MPSC for certain billing errors
primarily from the 1996/1997 winter heating season; costs of
$1,750,000 associated with various acquisition efforts; and a
$257,000 donation of emissions analysis equipment and software to
a Texas university.
V Cash Flow Information
The Company considers all highly liquid investments with an
original maturity of three months or less to be cash equivalents.
Short-term investments are highly liquid investments with
maturities of more than three months when purchased, and are
carried at cost, which approximates market. The Company places
its temporary cash investments with a high credit quality
financial institution which, in turn, invests the temporary funds
in a variety of high-quality short-term financial securities.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Under the Company's cash management system, checks issued but not
presented to banks frequently result in overdraft balances for
accounting purposes and are classified in accounts payable in the
consolidated balance sheet.
VI Earnings Per Share
During the three-year period ended June 30, 1999, no adjustments
were required in net earnings available for common stock for the
earnings per share calculations. Average shares outstanding for
basic earnings per share were 30,894,613, 30,406,832 and
29,641,523 for the years ended June 30, 1999, 1998 and 1997,
respectively. Diluted earnings per share includes average shares
outstanding as well as common stock equivalents from stock
options and warrants. Common stock equivalents were 1,694,997,
1,184,979 and 1,170,725 for the years ended June 30, 1999, 1998
and 1997, respectively.
VII Property, Plant and Equipment
Plant Plant in service and construction work in progress are
- -----
stated at original cost net of contributions in aid of construc-
tion. The cost of additions includes an allowance for funds used
during construction and applicable overhead charges. Gain or
loss is recognized upon the disposition of significant utility
properties and other property constituting operating units. Gain
or loss from minor dispositions of property is charged to accumu-
lated depreciation and amortization. The Company capitalizes the
cost of significant internally-developed computer software sys-
tems and amortizes the cost over the expected useful life. See
Debt and Capital Lease.
June 30,
------------------------
1999 1998
---------- ----------
Distribution plant................... $1,033,281 $ 984,580
General plant........................ 109,178 106,444
Other................................ 16,648 16,172
---------- ----------
Total plant........................ 1,159,107 1,107,196
Less contributions in aid of
construction....................... (52,202) (49,521)
---------- ----------
Plant in service................... 1,106,905 1,057,675
Construction work in progress........ 13,271 7,783
---------- ----------
1,120,176 1,065,458
Less accumulated depreciation and
amortization....................... (376,212) (355,430)
---------- ----------
743,964 710,028
Additional purchase cost assigned
to utility plant, net.............. 134,296 138,381
---------- ----------
Net property, plant and equipment.. $ 878,260 $ 848,409
========== ==========
Acquisitions of rate-regulated entities are recorded at the his-
torical book carrying value of utility plant. On December 31,
1997, Atlantic was acquired in which historical utility plant and
equipment had a cost and accumulated depreciation and amortiza-
tion of $5,253,000 and $2,540,000, respectively. Additional
purchase cost assigned to utility plant is the excess of the pur-
chase price over the book carrying value of the net assets
acquired. In general, the Company has not been allowed recovery
of additional purchase cost assigned to utility plant in rates.
Periodically, the Company evaluates the carrying value of its
additional purchase cost assigned to utility plant, long-lived
assets, capital leases and other identifiable intangibles by
comparing the anticipated future operating income from the busi-
nesses giving rise to the respective asset with the original cost
or unamortized balance. No impairment was indicated or expected
at June 30, 1999.
Depreciation and Amortization Depreciation of utility plant is
- -----------------------------
provided at an average straight-line rate of approximately 3% per
annum of the cost of such depreciable properties less applicable
salvage. Franchises are amortized over their respective lives.
Depreciation and amortization of other property is provided at
straight-line rates estimated to recover the costs of the proper-
ties, after allowance for salvage, over their respective lives.
Internally-developed computer software system costs are amortized
over various regulatory-approved periods. Amortization of
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
additional purchase cost assigned to utility plant is provided on
a straight-line basis over forty years unless the Company's regu-
lators have provided for the recovery of the additional purchase
cost in rates, in which case the Company's policy is to utilize
the amortization period which follows the rate recovery period.
Depreciation of property, plant and equipment in 1999, 1998, and
1997 was $37,771,000, $34,477,000 and $31,051,000, respectively.
VIII Investment Securities
At June 30, 1999 and 1998, all securities owned by the Company
are accounted for under the cost method. These securities con-
sist of preferred stock in non-public companies whose value is
not readily determinable. Realized gains and losses on sales of
investments, as determined on a specific identification basis,
are included in the Consolidated Statement of Operations when
incurred, and dividends are recognized as income when received.
IX Stockholders' Equity
Stock Splits and Dividends On August 6, 1999, December 9, 1998,
- --------------------------
December 10, 1997 and December 10, 1996, Southern Union dis-
tributed its annual 5% common stock dividend to stockholders of
record on July 23, 1999, November 23, 1998, November 21, 1997 and
November 22, 1996, respectively. A portion of the 5% stock divi-
dend distributed on August 6, 1999 and December 9, 1998 was
characterized as a distribution of capital due to the level of
the Company's retained earnings available for distribution as of
the declaration date. On July 13, 1998, Southern Union dis-
tributed a three-for-two stock split in the form of a 50% stock
dividend to stockholders of record on June 30, 1998. Unless
otherwise stated, all per share and share data included herein
have been restated to give effect to the dividends and split.
The 5% common stock dividend declared on July 13, 1999, is
reflected in the Consolidated Balance Sheet at June 30, 1999.
Common Stock The Company maintains its 1992 Long-Term Stock
- ------------
Incentive Plan (1992 Plan) under which options to purchase
3,653,343 shares were provided to be granted to officers and key
employees at prices not less than the fair market value on the
date of grant. The 1992 Plan allows for the granting of stock
appreciation rights, dividend equivalents, performance shares and
restricted stock. The Company also had an incentive stock option
plan (1982 Plan) which provided for the granting of 787,500
options, until December 31, 1991. Upon exercise of an option
granted under the 1982 Plan, the Company may elect, instead of
issuing shares, to make a cash payment equal to the difference at
the date of exercise between the option price and the market
price of the shares as to which such option is being exercised.
Options granted under both the 1992 Plan and the 1982 Plan are
exercisable for periods of ten years from the date of grant or
such lesser period as may be designated for particular options,
and become exercisable after a specified period of time from the
date of grant in cumulative annual installments. Options
typically vest 20% per year for five years but may be a lesser or
greater period as designated for particular options.
The Company accounts for its incentive plans under an Accounting
Principles Board opinion, Accounting for Stock Issued to
Employees. As a result, the Company recorded no compensation ex-
pense for 1999, 1998 and 1997. During 1997, the Company adopted
the FASB standard, Accounting for Stock-Based Compensation, for
footnote disclosure purposes only. Had compensation cost for
these incentive plans been determined consistent with this
standard, the Company's net income and diluted earnings per share
would have been $9,429,000 and $.29, respectively, in 1999,
$11,141,000 and $.35, respectively, in 1998 and $18,489,000 and
$.60, respectively, in 1997. Because this standard has not been
applied to options granted prior to July 1, 1995, the resulting
pro forma compensation cost may not be representative of that to
be expected in future years.
The fair value of each option is estimated on the date of grant
using the Black-Scholes option-pricing model with the following
assumptions used for grants in 1998 and 1997, respectively:
dividend yield of nil for both years; volatility of 19.5% and
21%; risk-free interest rate of 5.5% and 6.2%; and expected life
outstanding of 5.5 to 7.2 years for both years. There were no
options granted during 1999.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1992 Plan 1982 Plan
------------------ -------------------
Weighted Weighted
Shares Average Shares Average
Under Exercise Under Exercise
Option Price Option Price
---------- -------- ---------- --------
Outstanding
July 1, 1996......... 1,526,150 $ 6.53 539,592 $ 3.08
Granted............ 491,974 13.12 -- --
Exercised.......... (61,182) 5.68 (85,612) 3.08
Canceled........... (13,162) 6.58 -- --
--------- ---------
Outstanding
June 30, 1997........ 1,943,780 8.23 453,980 3.08
Granted............ 743,710 16.93 -- --
Exercised.......... (84,983) 4.48 (89,258) 3.08
Canceled........... (21,634) 12.58 -- --
--------- ---------
Outstanding
June 30, 1998........ 2,580,873 10.82 364,722 3.08
Exercised.......... (107,785) 6.41 (41,706) 3.09
Canceled........... (42,302) 14.93 -- --
--------- ---------
Outstanding
June 30, 1999........ 2,430,786 10.94 323,016 3.08
========= =========
The following table summarizes information about stock options
outstanding under the 1992 Plan at June 30, 1999:
Options Outstanding Options Exercisable
- ------------------------------------------ -------------------
Weighted
Average Weighted Weighted
Range of Remaining Average Average
Exercise Number of Contrac- Exercise Number of Exercise
Price Options tual Life Price Options Price
- ------------- --------- --------- -------- --------- --------
$ 0.00-$ 5.00 372,261 3.3 years $ 3.87 372,261 $ 3.87
5.01- 10.00 871,582 5.1 years 7.88 659,361 7.63
10.01- 15.00 457,926 7.8 years 13.04 187,620 13.01
15.01- 20.00 729,017 8.8 years 16.89 139,250 16.93
--------- ---------
2,430,786 1,358,492
========= =========
The shares exercisable under the 1992 Plan and the corresponding
weighted average exercise price at June 30, 1999, 1998 and 1997
were 1,358,492 and $8.29; 1,032,594 and $6.57; and 756,974 and
$5.55, respectively. The shares exercisable under the 1982 Plan
and the corresponding weighted average exercise price at June 30,
1999, 1998 and 1997 were 323,016 and $3.08; 364,722 and $3.08;
and 453,980 and $3.08, respectively. The weighted average
remaining contractual life of options outstanding under the 1982
Plan at June 30, 1999 was 0.9 years. There were 889,792 shares
available for future option grants under the 1992 Plan at
June 30, 1999. No shares were available for future option grants
under the 1982 Plan at June 30, 1999.
On February 10, 1994, Southern Union granted a warrant which
expires on February 10, 2004, to purchase up to 100,506 shares of
Common Stock at an exercise price of $6.90 to the Company's
outside legal counsel.
Retained Earnings Under the most restrictive provisions in
- -----------------
effect, as a result of the sale of Senior Notes, Southern Union
will not declare or pay any cash or asset dividends on common
stock (other than dividends and distributions payable solely in
shares of its common stock or in rights to acquire its common
stock) or acquire or retire any shares of Southern Union's common
stock, unless no event of default exists and the Company meets
certain financial ratio requirements. In addition, Southern
Union's charter relating to the issuance of preferred stock
limits the payment of cash or asset dividends on capital stock.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
X Preferred Securities of Subsidiary Trust
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a
consolidated wholly-owned subsidiary of Southern Union, issued
$100,000,000 of 9.48% Trust Originated Preferred Securities (Pre-
ferred Securities). In connection with the Subsidiary Trust's
issuance of the Preferred Securities and the related purchase by
Southern Union of all of the Subsidiary Trust's common securities
(Common Securities), Southern Union issued to the Subsidiary
Trust $103,092,800 principal amount of its 9.48% Subordinated
Deferrable Interest Notes, due 2025 (Subordinated Notes). The
sole assets of the Subsidiary Trust are the Subordinated Notes.
The interest and other payment dates on the Subordinated Notes
correspond to the distribution and other payment dates on the
Preferred Securities and the Common Securities. Under certain
circumstances, the Subordinated Notes may be distributed to
holders of the Preferred Securities and holders of the Common
Securities in liquidation of the Subsidiary Trust. The Sub-
ordinated Notes are redeemable at the option of the Company on or
after May 17, 2000, at a redemption price of $25 per Subordinated
Note plus accrued and unpaid interest. The Preferred Securities
and the Common Securities will be redeemed on a pro rata basis to
the same extent as the Subordinated Notes are repaid, at $25 per
Preferred Security and Common Security plus accumulated and
unpaid distributions. Southern Union's obligations under the
Subordinated Notes and related agreements, taken together, con-
stitute a full and unconditional guarantee by Southern Union of
payments due on the Preferred Securities. As of June 30, 1999,
the quoted market price per Preferred Security was $25.38. As of
June 30, 1999 and 1998, 4,000,000 shares of Preferred Securities
were outstanding.
XI Debt and Capital Lease
June 30,
-------------------
1999 1998
-------- --------
7.60% Senior Notes, due 2024................ $364,515 $384,515
Capital lease and other..................... 28,482 23,669
-------- --------
Total long-term debt........................ $392,997 $408,184
======== ========
The maturities of long-term debt and capital lease payments for
each of the next five years ending June 30 are: 2000 --
$2,066,000; 2001 -- $2,188,000; 2002 -- $2,330,000; 2003 --
$12,660,000; 2004 -- $8,849,000 and thereafter -- $364,904,000.
Senior Notes On January 31, 1994, Southern Union completed the
- ------------
sale of the 7.60% Senior Debt Securities (Senior Notes). During
1999, $20,000,000 of Senior Notes were repurchased at $941 per
$1,000 note resulting in a net pre-tax gain of $425,000, net of
related debt expense. Debt issuance costs and premiums on the
early extinguishment of debt are accounted for in accordance with
that required by its various regulatory bodies having jurisdic-
tion over the Company's operations. The Company recognizes gains
or losses on the early extinguishment of debt to the extent it is
provided for by its regulatory authorities and in some cases such
gains or losses are deferred and amortized over the term of the
new or replacement debt issues.
The Senior Notes traded at $936 and $895 (per $1,000 note) on
June 30 and July 31, 1999, respectively, as quoted by a major
brokerage firm. The carrying amount of long-term debt at
June 30, 1999 and 1998 was $392,997,000 and $408,184,000,
respectively. The fair value of long-term debt at June 30, 1999
and 1998 was $369,759,000 and $431,628,000, respectively.
Capital Lease The Company completed the installation of an
- -------------
Automated Meter Reading (AMR) system at Missouri Gas Energy
during the first quarter of fiscal year 1999. The installation
of the AMR system involved an investment of approximately
$30,000,000 which is accounted for as a capital lease obligation.
As of June 30, 1999, the capital lease obligation outstanding
was $26,894,000 with a fixed rate of 5.79%. During 1999, the
Company recorded an increase in plant and long-term debt of
$6,824,000. This system will improve meter reading accuracy and
provide electronic accessibility to meters in residential
customers' basements, thereby assisting in the reduction of the
number of estimated bills. Depreciation on the AMR system is
provided at an average straight-line rate of approximately 5% per
annum of the cost of such property.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Credit Facilities The Company has availability under two
- -----------------
revolving credit facilities (Revolving Credit Facilities) under-
written by a syndicate of banks. Of the Revolving Credit Facili-
ties, $40,000,000 is available under a short-term facility which
expires June 29, 2000, while $60,000,000 is available under a
long-term facility which expires June 30, 2002. The Company has
additional availability under uncommitted line of credit facili-
ties (Uncommitted Facilities) with various banks. Covenants
under the Revolving Credit Facilities allow for up to $35,000,000
of borrowings under Uncommitted Facilities at any one time. Bor-
rowings under the facilities are available for Southern Union's
working capital, letter of credit requirements and other general
corporate purposes. The Revolving Credit Facility is subject to
a commitment fee based on the rating of the Senior Notes. As of
June 30, 1999, the commitment fee was an annualized .15% on the
unused balance. The interest rate on borrowings on the Revolving
Credit Facility is calculated based on a formula using the LIBOR
or prime interest rates. The average interest rate under the
facilities was 5.6% for the year ended June 30, 1999 and 6.1% for
the year ended June 30, 1998. A $21,000,000 and $1,600,000
balance was outstanding under the facilities at June 30, 1999 and
1998, respectively. A balance of $17,900,000 was outstanding
under the facilities at July 31, 1999.
XII Employee Benefits
Pension and Other Post-retirement Benefits The Company adopted
- ------------------------------------------
in 1999, Employers Disclosures About Pensions and Other Post-
Retirement Benefits, a FASB standard which changed the Company's
reporting requirements for its pension and post-retirement bene-
fit plans.
The Company maintains two trusteed non-contributory defined bene-
fit retirement plans (Plans) which cover substantially all
employees. The Company funds the Plans' cost in accordance with
federal regulations, not to exceed the amounts deductible for
income tax purposes. The Plans' assets are invested in cash and
bond and stock funds. The Company also has a supplemental non-
contributory retirement plan for certain executive employees and
other post-retirement benefit plans for its employees. Post-
retirement medical and other benefit liabilities are accrued on
an actuarial basis during the years an employee provides ser-
vices. The following table represents a reconciliation of the
plans at June 30, 1999 and 1998.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1999 1998
-------- --------
Change in Benefit Obligation
Benefit obligation at beginning of year.. $188,038 $172,225
Service cost............................. 3,364 3,302
Interest cost............................ 13,829 13,658
Benefits paid............................ (13,563) (12,382)
Actuarial loss........................... 7,968 11,235
Plan amendments.......................... 7,027 --
Curtailment.............................. (2,202) --
-------- --------
Benefit obligation at end of year........ $204,461 $188,038
======== ========
Change in Plan Assets
Fair value of plan assets at
beginning of year...................... $166,353 $132,599
Return on plan assets.................... 3,420 40,262
Employer contributions................... 6,411 5,874
Benefits paid............................ (13,563) (12,382)
-------- --------
Fair value of plan assets at end of year. $162,621 $166,353
======== ========
Funded Status
Funded status at end of year............. $(41,839) $(21,685)
Unrecognized transition obligation....... 2,764 2,891
Unrecognized net actuarial (gain)........ (7,404) (25,977)
Unrecognized prior service cost.......... 9,913 3,455
-------- --------
Accrued benefit cost..................... $(36,566) $(41,316)
======== ========
Amounts Recognized in the Consolidated
Balance Sheet
Prepaid benefit cost..................... $ 4,880 $ 2,339
Accrued benefit liability................ (52,618) (45,806)
Intangible asset......................... 10,501 2,151
Accumulated other comprehensive income... 671 --
-------- --------
Net amount recognized.................... $(36,566) $(41,316)
======== ========
The projected benefit obligation, accumulated benefit obligation
and fair value of plan assets for the plans with accumulated
benefit obligations in excess of plan assets as of June 30, 1999
were $58,985,000; $58,985,000; and $42,181,000, respectively, and
for those same plans were $46,158,000; $37,783,000; and
$41,907,000, respectively as of June 30, 1998.
The weighted-average assumptions used for the year ended June 30,
1999 and 1998 were:
1999 1998
------ ------
Discount rate
Beginning of year............................. 7.00% 7.75%
End of year................................... 7.00% 7.25%
Expected return on assets - tax exempt accounts. 8.00% 8.00%
Expected return on assets - taxable accounts.... 5.25% 8.00%
Rate of compensation increase (average)......... 5.62% 5.62%
Health care cost trend rate..................... 7.25% 7.50%
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Net periodic benefit cost for the year ended June 30, 1999, 1998
and 1997 includes the following components:
1999 1998 1997
-------- -------- --------
Service cost.................... $ 3,364 $ 3,302 $ 3,258
Interest cost................... 13,829 13,658 13,240
Expected return on plan assets.. (13,006) (11,737) (10,335)
Amortization of transition
amount........................ 127 127 127
Amortization of prior service
cost.......................... 438 340 291
Recognized actuarial (gain)..... (3,319) (4,828) (1,980)
Curtailment..................... 131 -- --
-------- -------- --------
Net periodic pension cost....... $ 1,564 $ 862 $ 4,601
======== ======== ========
The assumed health care cost trend rate used in measuring the
accumulated post-retirement benefit obligation was 7.25% during
1999. This rate was assumed to decrease gradually each year to a
rate of 6.0% for 2004 and remain at that level thereafter.
Amortization of unrecognized gains and losses for Missouri Gas
Energy plans were determined using a rolling five year average
gain or loss position with a five year amortization period,
pursuant to a stipulation agreement with the MPSC.
Effect of health care trend rate changes on health care plans:
One Percentage One Percentage
Point Increase Point Decrease
in Health Care in Health Care
Trend Rate Trend Rate
-------------- --------------
Effect on total service and
interest cost components..... $ 29,000 $ (28,000)
Effect on post-retirement
benefit obligation........... 322,000 (319,000)
The Company's two defined benefit retirement Plans cover (i)
those Company employees who are not employed by Missouri Gas
Energy and (ii) those employees who are employed by Missouri Gas
Energy. On December 31, 1998, the Plans, exclusive of Missouri
Gas Energy's union employees were converted from the 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 transi-
tion (December 31, 1998) under the pre-existing traditional de-
fined benefit plan. Future contribution credits to the accounts
are based on a percentage of future compensation, which varies by
individual. Interest credits to the accounts are based on 30-
year Treasury bond yields.
Defined Contribution Plan The Company provides a Savings Plan
- -------------------------
available to all employees. Since January 1, 1997, the Company
contributes $.50 of Company stock for each $1.00 contributed by a
non-Missouri Gas Energy participant up to 5% of the employee's
salary. Additionally, the Company contributes $.75 of Company
stock for each $1.00 contributed by a non-Missouri Gas Energy
participant from 6% to 10% of the employee's salary. Effective
July 1, 1998, Company contributions for Missouri Gas Energy non-
union employees were revised to coincide with that of non-
Missouri Gas Energy participants as described above. For
Missouri Gas Energy union employees, the Company contributes $.50
of Company stock for each $1.00 contributed by such a participant
up to 7% of the employee's salary. Company contributions are
100% vested after six years of continuous service. Company con-
tributions to the plan during 1999, 1998 and 1997, were
$1,717,000, $1,656,000 and $1,476,000, respectively.
Effective January 1, 1999 the Company amended its defined contri-
bution plan to provide contributions of certain employees who
were employed as of December 31, 1998. These contributions were
designed to replace certain benefits previously provided under
defined benefit plans. Employer contributions to these separate
accounts, referred to as Retirement Power Accounts, within the
defined contribution plan were determined based on the employee's
age
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
plus years of service plus accumulated sick leave as of
December 31, 1998. The contribution amounts are determined as a
percentage of compensation and range from 3.5% to 8.5%. Company
contributions to Retirement Power Accounts during 1999 were
$1,118,000.
Post-employment Benefits Certain post-employment benefits such
- ------------------------
as disability and health care continuation coverage provided to
former or inactive employees after employment but before retire-
ment, are accrued if attributable to an employees' previously
rendered service. The Company has recorded a regulatory asset to
the extent it intends to file rate applications to include such
costs in rates and such recovery is probable. As of both
June 30, 1999 and 1998, the Company has recorded a regulatory
asset and a related liability of $1,343,000.
Common Stock Held in Trust From time to time, the Company repur-
- --------------------------
chases outstanding shares of common stock of Southern Union to
fund certain Company employee stock-based compensation plans.
At June 30, 1999, 268,513 shares of common stock were held by
various rabbi trusts for certain of the Company's benefit plans.
XIII Taxes on Income
Year Ended June 30,
-------------------------
1999 1998 1997
------ ------ ------
Current:
Federal............................. $ (516) $1,381 $ 4,437
State............................... (242) 240 596
------ ------ -------
(758) 1,621 5,033
Deferred:
Federal............................. 7,024 5,984 6,690
State............................... 843 379 650
------ ------ -------
7,867 6,363 7,340
------ ------ -------
Total provision....................... $7,109 $7,984 $12,373
====== ====== =======
Deferred credits and other liabilities also include $560,000 and
$593,000 of unamortized deferred investment tax credit as of
June 30, 1999 and 1998, respectively.
Deferred income taxes result from temporary differences between
the financial statement carrying amounts and the tax basis of
existing assets and liabilities.
June 30,
-------------------
1999 1998
-------- --------
Deferred tax assets:
Estimated alternative minimum tax credit. $ 9,557 $ 10,554
Insurance accruals....................... 2,297 3,074
Bad debt reserves........................ 2,715 --
Post-retirement benefits................. 1,466 1,079
Minimum pension liability................ 234 --
Other.................................... 3,020 1,230
-------- --------
Total deferred tax assets.............. 19,289 15,937
-------- --------
Deferred tax liabilities:
Property, plant and equipment............ (74,909) (65,564)
Unamortized debt expense................. (5,049) (5,270)
Other.................................... (6,731) (5,330)
-------- --------
Total deferred tax liabilities......... (86,689) (76,164)
-------- --------
Net deferred tax liability................. (67,400) (60,227)
Less current tax assets.................... 2,838 2,378
-------- --------
Accumulated deferred income taxes.......... $(70,238) $(62,605)
======== ========
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company accounts for income taxes utilizing the liability
method which bases the amounts of current and future tax assets
and liabilities on events recognized in the financial statements
and on income tax laws and rates existing at the balance sheet
date.
Year Ended June 30,
1999 1998 1997
-------- -------- --------
Computed statutory tax expense
at 35%......................... $ 6,144 $ 7,075 $10,992
Changes in taxes resulting from:
State income taxes, net of
federal income tax benefit... 348 402 811
Amortization of acquisition
adjustment................... 830 723 724
Other.......................... (213) (216) (154)
------- ------- -------
Actual tax expense............... $ 7,109 $ 7,984 $12,373
======= ======= =======
XIV Utility Regulation and Rates
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a $13,300,000 annual increase to revenue
effective on September 2, 1998, which is primarily earned volu-
metrically. The MPSC rate order reflected a 10.93% return on
common equity. The rate order, however, disallowed certain
previously recorded deferred costs requiring a non-cash write-off
of $2,221,000. The Company recorded this charge to earnings in
its fiscal year ended June 30, 1998. On December 8, 1998, the
MPSC denied rehearing requests made by all parties other than
Missouri Gas Energy and granted a portion of Missouri Gas
Energy's rehearing request. The MPSC will conduct further pro-
ceedings to take additional evidence on those matters for which
it granted Missouri Gas Energy a rehearing. If the MPSC adopts
Missouri Gas Energy's positions on rehearing, then Missouri Gas
Energy would be authorized an additional $2,200,000 of base
revenues increasing the $13,300,000 initially authorized in its
August 21, 1998 order to $15,500,000. The MPSC's orders may be
subject to judicial review and although certain parties may argue
for a reduction in Missouri Gas Energy's authorized base revenue
increase on judicial review, Missouri Gas Energy expects such
arguments to be unsuccessful.
On April 13, 1998, Southern Union Gas filed a $2,228,000 request
for a rate increase from the city of El Paso, a request the city
subsequently denied. On April 21, 1998, the city council of El
Paso voted to reduce the Company's rates by $1,570,000 annually
and to order a one-time cost of gas refund of $475,000. On
May 21, 1998, Southern Union Gas filed with the Railroad Commis-
sion of Texas (RRC) an appeal of the city of El Paso's actions to
reduce the Company's rates and require a one-time cost of gas
refund. On December 21, 1998, the RRC issued its order imple-
menting an $884,000 one-time cost of gas refund and a $99,000
base rate reduction. The cost of gas refund was completed in
February 1999.
On January 22, 1997, Missouri Gas Energy was notified by the MPSC
of its decision to grant an $8,847,000 annual increase to revenue
effective on February 1, 1997. See Commitments and Contin-
gencies.
The MPSC approved a three-year, experimental gas supply incentive
plan for Missouri Gas Energy effective July 1, 1996. Under the
plan, the Company and Missouri Gas Energy's customers share in
certain savings below benchmark levels of gas costs achieved as a
result of the Company's gas procurement activities. Likewise, if
natural gas is acquired above benchmark levels, both the Company
and customers share in such costs. For the years ended June 30,
1999, 1998 and 1997, the incentive plan achieved a reduction of
overall gas costs of $6,900,000, $9,200,000 and $10,200,000,
respectively, resulting in savings to Missouri customers of
$4,000,000, $5,100,000 and $5,600,000, respectively. The Company
recorded revenues of $2,900,000, $4,100,000 and $4,600,000 in
1999, 1998 and 1997, respectively, under this plan. Missouri Gas
Energy is currently working with the MPSC to develop an alternate
plan due to the July 1, 1999 expiration of the experimental gas
supply incentive plan, however, there can be no assurance that
this or any similar plan will be approved by the MPSC for
Missouri Gas Energy.
Under the order of the Federal Energy Regulatory Commission, a
major supplier of gas to Missouri Gas Energy is allowed recovery
of certain previously unrecovered deferred gas costs with a
remaining balance of $669,000 at
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1999. Missouri Gas Energy is allowed to recover these
costs from its Missouri customers through a purchase gas adjust-
ment mechanism which is filed with and approved by the MPSC. The
receivable and liability associated with these costs have been
recorded as a deferred charge and a deferred credit, respec-
tively, on the consolidated balance sheet as of June 30, 1999 and
1998.
As a result of the January 31, 1994 acquisition of Missouri Gas
Energy, the MPSC required Missouri Gas Energy to reduce rate base
by $30,000,000 to compensate Missouri rate payers for rate base
reductions that were eliminated as a result of the acquisition.
This is amortized over a ten-year period on a straight-line basis
since the date of acquisition.
XV Leases
The Company leases certain facilities, equipment and office space
under cancelable and noncancelable operating leases. The minimum
annual rentals under operating leases for the next five years
ending June 30 are as follows: 2000 -- $6,062,000; 2001 --
$4,973,000; 2002 -- $4,039,000; 2003 -- $2,236,000; 2004 --
$1,225,000 and thereafter $11,162,000. Rental expense was
$7,732,000, $6,054,000 and $6,797,000 for the years ended
June 30, 1999, 1998 and 1997, respectively.
XVI Commitments and Contingencies
Environmental Southern Union and Western Resources, Inc. entered
- -------------
into an Environmental Liability Agreement (Environmental Lia-
bility Agreement) at the time of the closing of the acquisition
of Missouri Gas Energy. Subject to the accuracy of certain
representations made by Western Resources in the Missouri Asset
Purchase Agreement, the Environmental Liability Agreement pro-
vides for a tiered approach to the allocation of certain lia-
bilities under environmental laws that may exist or arise with
respect to Missouri Gas Energy. The Environmental Liability
Agreement contemplates Southern Union first seeking reimbursement
from other potentially responsible parties, or recovery of such
costs under insurance or through rates charged to customers. To
the extent certain environmental liabilities were discovered by
Southern Union prior to January 31, 1996, and are not so reim-
bursed or recovered, Southern Union will be responsible for the
first $3,000,000, if any, of out-of-pocket costs and expenses
incurred to respond to and remediate any such environmental
claim. Thereafter, Western Resources would share one-half of the
next $15,000,000 of any such costs and expenses, and Southern
Union would be solely liable for any such costs and expenses in
excess of $18,000,000. At the present time and based upon
information available to management, the Company believes that
the costs of any remediation efforts that may be required for
these sites for which it may ultimately have responsibility will
not exceed the aggregate amount subject to substantial sharing by
Western Resources. In a letter dated May 10, 1999, the Missouri
Department of Natural Resources (MDNR) sent notice of a planned
Site Inspection/Removal Site Evaluation of the Kansas City Coal
Gas Former Manufactured Gas Plant (FMGP) site. This site (com-
prised of two FMGP operations previously owned by two separate
companies) is located at East 1st Street and Campbell in Kansas
City, Missouri and is owned by Missouri Gas Energy. A 1988
investigation of the site performed by an Environmental Protec-
tion Agency (EPA) contractor determined that further remedial
assessment was not required under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA), as
amended by the Superfund Amendments and Reauthorization Act of
1986. The MDNR has stated that the reassessment of the Kansas
City Coal Gas site is part of a statewide effort to identify,
evaluate, and prioritize the potential hazards posed by all of
Missouri's FMGP sites. During July 1999, the Company sent
applications to MDNR submitting the two sites to the agency's
Voluntary Cleanup Program. In two letters, both dated August 2,
1999, the MDNR accepted the sites into the Voluntary Cleanup
Program. The Company subsequently submitted two work plans for
the environmental assessment of the sites to MDNR.
In addition to the various Missouri Gas Energy sites described
above, the Company is investigating the possibility that the
Company or predecessor companies may have been associated with
Manufactured Gas Plant (MGP) sites in other of its former service
territories, principally in Arizona and New Mexico, and present
service territories in Texas. At the present time, the Company
is aware of certain plant sites in some of these areas and is
investigating those and certain other locations. While the Com-
pany's evaluation of these Texas, Arizona and New Mexico MGP
sites is in its preliminary stages, it is likely that some com-
pliance costs may be identified and become subject to reasonable
quantification. To the extent that such potential costs are
quantified, the Company expects to provide any appropriate
accruals and seek recovery for such remediation costs through all
appropriate means, including insurance and
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
regulatory relief. Although significant charges to earnings
could be required prior to rate recovery, management does not
believe that environmental expenditures for such MGP sites will
have a material adverse effect on the Company's financial posi-
tion, results of operations or cash flows.
The Company follows the provisions of an American Institute of
Certified Public Accountants Statement of Position, Environmental
Remediation Liabilities, for recognition, measurement, display
and disclosure of environmental remediation liabilities.
Regulatory On August 18, 1998, the Missouri State Court of
- ----------
Appeals, Western District, denied the Company's appeal of the
February 1, 1997 rate order which retroactively reduced the
carrying cost rate applied by the Company on expenditures
incurred on the Missouri Gas Energy Safety Program. The Company
believes that the inconsistent treatment by the MPSC in subse-
quently changing to the Allowance for Funds Used During Con-
struction rate of approximately 6% from the previously ordered
rate of 10.54% constitutes retroactive ratemaking. Unfor-
tunately, the decision by the Missouri State Court of Appeals
failed to address certain specific language within a 1994 MPSC
accounting authority order that the Company believed prevented
the MPSC from retroactively changing the carrying cost rate.
Southern Union sought a transfer of the case to the Missouri
Supreme Court which was denied on November 24, 1998.
The continuation of the Missouri Safety Program will result in
significant levels of future capital expenditures. The Company
estimates incurring capital expenditures of $14,372,000 in fiscal
2000 related to this program.
In August 1998, a jury in Edinburg, Texas concluded deliberations
on the City of Edinburg's franchise fee lawsuit against PG&E Gas
Transmission, Texas Corporation (formerly Valero Energy Corpora-
tion (Valero)) and a number of its subsidiaries, as well as
former Valero subsidiary Rio Grande Valley Gas Company (RGV) and
RGV's successor company, Southern Union Company. The case, based
upon events that occurred between 1985-1987, centers on specific
contractual language in the 1985 franchise agreement between RGV
and the City of Edinburg. Southern Union purchased RGV from
Valero in October 1993. The jury awarded the plaintiff damages,
against all defendants under several largely overlapping but
mutually exclusive claims, totaling approximately $13,000,000.
The trial judge subsequently reduced the award to approximately
$700,000 against Southern Union and $7,800,000 against Valero and
Southern Union together. The Company is pursuing reversal on
appeal. The Company believes it will ultimately prevail, and
that the outcome of this matter will not have a material adverse
impact on the Company's results of operations, financial position
or cash flows. Furthermore, the Company has not determined what
impact, if any, this jury decision may have on other city fran-
chises in Texas.
Southwest Gas Litigation On February 1, 1999, Southern Union
- ------------------------
submitted a proposal to the Board of Directors of Southwest Gas
Corporation (Southwest) to acquire all of Southwest's outstanding
common stock for $32.00 per share. Southwest then had a pending
merger agreement with ONEOK, Inc. (ONEOK) at $28.50 per share.
On February 22, 1999, Southern Union and Southwest both publicly
announced Southern Union's proposal, after the Southwest Board of
Directors determined that Southern Union's proposal was a
Superior Proposal (as defined in the Southwest merger agreement
with ONEOK). At that time Southern Union entered into a Confi-
dentiality and Standstill Agreement with Southwest at Southwest's
insistence. On April 25, 1999, Southwest's Board of Directors
rejected Southern Union's $32.00 per share offer and accepted an
amended offer of $30.00 per share from ONEOK. On April 27, 1999,
Southern Union increased its offer to $33.50 per share and agreed
to pay interest which, together with dividends, would provide
Southwest shareholders with a 6% annual rate of return on its
$33.50 offer, commencing February 15, 2000, until closing.
According to public statements by Southwest, Southern Union's
revised proposal also has been rejected by Southwest's Board of
Directors.
There are four lawsuits pending that relate to activities sur-
rounding Southern Union's efforts to acquire Southwest. In addi-
tion, there is before the U.S. Court of Appeals for the Tenth
Circuit, an appeal by Southern Union of a preliminary injunction
entered by the U.S. District Court for the Northern District of
Oklahoma. Southern Union intends to vigorously pursue its claims
against Southwest, ONEOK, and certain individual defendants, and
vigorously defend itself against the claims by Southwest and
ONEOK.
<PAGE>P
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
California Action -- Pursuant to notice given by Southern Union
- -----------------
to Southwest on April 28, 1999, the Superior Court of California
for San Diego County on May 4, 1999, granted a motion by Southern
Union and SU Acquisition Corporation, a Southern Union sub-
sidiary, for leave to file a complaint in intervention in a
pending Southwest shareholders' derivative suit styled, Klein v.
Southwest Gas Corp. Southern Union's complaint sought partial
rescission of the Confidentiality and Standstill Agreement, a
declaration of the rights of the parties under the Confiden-
tiality and Standstill Agreement, and a request for a preliminary
injunction barring Southwest from submitting proxies to its
shareholders seeking their approval of a merger with ONEOK until
the merits of Southern Union's claims could be adjudicated. On
May 17, 1999, Southwest removed the Klein case to the United
States District Court for the Southern District of California.
The shareholder plaintiffs and Southern Union then moved to
remand the case back to the California Superior Court. According
to the definitive Southwest proxy statement with respect to the
ONEOK merger (released on June 29, 1999) on June 9, 1999,
Southwest signed a Memorandum of Understanding (MOU) with the
shareholder plaintiffs' counsel to settle this action as to all
plaintiffs, except Southern Union. The MOU sets forth the
parties' agreement in principle settling all of the shareholders'
claims arising out of the actions of Southwest and its directors
relating to the ONEOK merger, and will be incorporated into a
final Stipulation Settlement. The MOU is not an admission of any
of the plaintiffs' allegations. Southwest and its directors have
denied and continue to deny that they have committed or attempted
to commit any wrongdoing or breached any duty owed to Southwest
or its shareholders. The MOU is subject to several conditions,
including the consummation of the ONEOK merger and the entry of a
final judgment of dismissal with prejudice by the U. S. District
Court that is binding on all shareholders from December 14, 1998
through the date that the shareholders approve the ONEOK merger.
By Order dated August 3, 1999, the federal district court granted
Southern Union's motion to remand the case to California Superior
Court. On August 5, 1999, Southern Union moved the California
Superior Court to sever its claims against Southwest and also
sought a temporary restraining order barring Southwest from par-
ticipating in any further proceedings before the California
Public Service Commission and from taking any other action to
consummate its pending merger with ONEOK until the court deter-
mined the merits of Southern Union's claims. Following a hearing
on August 5, the California Superior Court judge denied Southern
Union's request for a temporary restraining order in a ruling
announced from the bench. Also on August 5, Southwest moved the
court to stay all proceedings in the case. On August 18, the
Court granted Southern Union's motion to sever. On August 24,
1999, the court ruled on Southwest's motion and stayed action
in the state court proceeding pending resolution of the federal
actions filed by the parties.
Nevada Action -- On April 20, 1999, Southwest filed an action
- -------------
against Southern Union Company in the United States District
Court for the District of Nevada. The complaint alleged breach
of the Confidentiality and Standstill Agreement between Southern
Union and Southwest, misappropriation of original trade secrets
in violation of California statutes, intentional interference
with the ONEOK merger agreement, intentional interference with
prospective advantage, breach of a common-law duty of good faith
and fair dealing, and unfair business practices in violation of
California statutes. On May 6, 1999, Southwest filed an amended
complaint that added a claim for breach of the Securities
Exchange Act of 1934 to the claims in the original complaint.
Southwest seeks declaratory and injunctive relief together with
money damages "in excess of $75,000.00." Southern Union has
answered the complaint, denying liability under all counts.
Southern Union has filed a counterclaim alleging breach of
contract, breach of duty of good faith and fair dealing, mistake
of fact and fraudulent inducement with respect to the Confiden-
tiality and Standstill Agreement. The counterclaim seeks partial
rescission of the Confidentiality and Standstill Agreement, or a
declaration that Southern Union is entitled to take all actions
legal and necessary to directly solicit Southwest's shareholders
to oppose Southwest's agreement to merge with ONEOK or any other
party, and to support Southern Union's efforts to merge with or
acquire Southwest, or acquire all or some of Southwest's out-
standing common shares. Southwest has filed a motion to transfer
the case to the United States District Court for the Northern
District of Oklahoma, which Southern Union has opposed. That
motion is currently awaiting decision by the court. On June 30,
1999, Southern Union filed a motion for partial judgment on the
pleadings with respect to Southwest's state law claims. The
motion is based on Nevada Revised Statute 41,650 which, in part,
provides for immunity from civil liability for "good faith com-
munications in connection with the right to petition." That
motion also is pending currently.
Oklahoma Action -- On May 5, 1999, ONEOK filed an action against
- ---------------
Southern Union in the United States District Court for the
Northern District of Oklahoma, asserting third-party beneficiary
status under the Confidentiality and Standstill
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Agreement between Southern Union and Southwest, and alleging a
claim for breach of that Agreement as well as a claim for inten-
tional interference with the ONEOK-Southwest merger agreement.
That same day, ONEOK moved for a temporary restraining order
against Southern Union to bar Southern Union from making any
attempt to solicit proxies from or influence the shareholders of
Southwest with respect to Southern Union's offer to purchase
Southwest, from taking any actions in the regulatory proceedings
that concern the proposed merger of ONEOK and Southwest, from
taking any actions in the Klein v Southwest Gas Corp. case and
from taking any actions that seek to control or influence the
shareholders, management, directors or policies of Southwest,
either alone or in concert with others. On May 10, 1999 the
Court entered a temporary restraining order that barred Southern
Union from breaching the standstill provisions of the Confiden-
tiality and Standstill Agreement. By agreement of the parties,
the temporary restraining order was converted to a preliminary
injunction on May 17, 1999. Southern Union has filed a motion to
dismiss the ONEOK complaint in lieu of an answer denying ONEOK's
allegations. On July 19, 1999, Southern Union moved the Oklahoma
district court to vacate or suspend its preliminary injunction
on the basis of newly-discovered evidence (which also is the
basis for Southern Union's Arizona action described below) that
showed that ONEOK came to court with "unclean hands" and that
Southwest had fraudulently induced Southern Union to enter into
the Confidentiality and Standstill Agreement that was the basis
for the court's injunction. This motion was denied on jurisdic-
tional grounds by order dated July 23, 1999. On August 3, 1999,
ONEOK moved the court to hold Southern Union in contempt for
having filed the Arizona action assertedly in violation of the
Oklahoma court's May 17, 1999 preliminary injunction. At a
status hearing on August 11, 1999, the judge said that the
May 17, 1999 preliminary injunction did not bar Southern Union
from filing the Arizona action. While he did not expressly deny
ONEOK's motion, the judge orally directed ONEOK to amend its
motion if it wished the court to give it any further considera-
tion. ONEOK subsequently moved for an emergency hearing (to
show cause) regarding the preliminary injunction. The court
heard arguments on that motion on August 30, 1999. The judge
has taken the matter under advisement and has requested that
additional information be provided to the court.
Appeal of Oklahoma Action -- On May 17, 1999, Southern Union
- -------------------------
noticed its appeal of the Oklahoma district court's preliminary
injunction in the United States Court of Appeals for the Tenth
Circuit. At the same time Southern Union sought from the court
of appeals a stay of the district court's injunction pending a
decision on the merits of the appeal. On June 1, 1999, the Tenth
Circuit issued a "temporary stay" of the district court's order
to permit Southern Union to file a motion in the Klein case to
Southwest Gas' motion to transfer it to the Northern District of
Oklahoma. On June 3, 1999 Southern Union supplemented its re-
quest for a stay of the district court's order to permit Southern
Union to resume its participation in the various state public
utility commission proceedings considering the proposed ONEOK-
Southwest Gas merger. On June 10, 1999, the Tenth Circuit issued
an order denying Southern Union's request for the further stay and
on August 24, 1999 the Tenth Circuit vacated its temporary stay of
June 3, 1999 as moot and denied Southern Union's request for any
further stay of the district court order pending appeal. Briefing
for the appeal has been completed.
Arizona Action -- On July 19, 1999, Southern Union filed an
- --------------
action in the United States Court for the District of Arizona
against Southwest, ONEOK, Michael O. Maffie (Southwest's Presi-
dent), Thomas Y. Hartley (Southwest's Chairman), Eugene N. Dubay
(President of Kansas Gas Service, a division of ONEOK),
James M. Irvin (an Arizona Corporation Commissioner),
Jack D. Rose (former Executive Director of the Arizona Corpora-
tion Commission), Thomas R. Sheets (Southwest's General Counsel),
and John A. Gaberino, Jr. (ONEOK's General Counsel). The suit
alleges racketeering under federal and state law, fraud in the
inducement, breach of contract, Securities Exchange Act viola-
tions, breach of the covenant of good faith and fair dealing,
rescission, intentional interference with business relationship,
tortious interference with contractual relations and civil
conspiracy. Southern Union seeks damages of $750 million on each
of the two racketeering counts, to be trebled; $750 million on
six other counts; punitive damages on four counts; and rescission
of its Standstill Agreement with Southwest. On August 2, 1999,
Southern Union moved for a temporary restraining order barring
both Southwest and ONEOK from participating in any further regu-
latory proceedings before the Arizona Corporation Commission.
Southern Union also asked the Arizona court to bar Arizona
Corporation Commissioner James Irvin "from any involvement in
ongoing procedures concerning regulatory approval by the ACC."
On August 5, 1999, the court held a hearing on the motion and,
at the conclusion of the hearing, orally denied Southern Union's
request.
The Company believes that the results of the above-noted Southwest
Gas litigation will not have a materially adverse effect on the
Company's financial condition.
Other Southern Union and its subsidiaries are parties to other
- -----
legal proceedings that management considers to be normal actions
to which an enterprise of its size and nature might be subject,
and not to be material to the Company's overall business or
financial condition, results of operations or cash flows.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commitments The Company is committed under various agreements to
- -----------
purchase certain quantities of gas in the future. At June 30,
1999, the Company has purchase commitments for certain quantities
of gas at variable, market-based prices that have an annual value
of $94,275,000. The Company's purchase commitments may extend
over a period of several years depending upon when the required
quantity is purchased. The Company has purchase gas tariffs in
effect for all its utility service areas that provide for
recovery of its purchase gas costs under defined methodologies.
In December 1998, the Company agreed to five-year contracts with
each bargaining-unit representing Missouri employees, which were
effective in May 1999. Of the Company's employees represented by
unions, 95% are employed by Missouri Gas Energy.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company had standby letters of credit outstanding of
$1,622,000 and $2,947,000 at June 30, 1999 and 1998,
respectively, which guarantee payment of various insurance
premiums and state taxes.
XVII Quarterly Operations (Unaudited)
Year Ended Quarter Ended
June 30, ------------------------------------------
1999 September 30 December 31 March 31 June 30 Total
- ------------ ------------ ----------- -------- -------- --------
Total
operating
revenues... $ 77,455 $174,224 $251,863 $101,689 $605,231
Operating
margin..... 42,781 70,286 98,106 51,757 262,930
Net
operating
revenues
(loss)..... (627) 19,986 40,647 4,841 64,847
Net
earnings
(loss)
available
for common
stock...... (7,048) 5,374 17,624 (5,505) 10,445
Earnings
(loss) per
share --
diluted(1). (.23) .16 .54 (.18) .32
Year Ended Quarter Ended
June 30, ------------------------------------------
1998 September 30 December 31 March 31 June 30 Total
- ------------ ------------ ----------- -------- -------- --------
Total
operating
revenues... $ 74,039 $221,162 $265,176 $108,927 $669,304
Operating
margin..... 41,597 77,328 94,676 50,123 263,724
Net
operating
revenues... 1,405 26,530 36,940 3,792 68,667
Net
earnings
(loss)
available
for common
stock(2)... (4,909) 9,738 16,249 (8,849) 12,229
Earnings
(loss) per
share --
diluted(1). (.17) .31 .50 (.28) .39
- -----------------
(1) The sum of earnings per share by quarter may not equal the
net earnings per common and common share equivalents for the
year due to variations in the weighted average common and
common share equivalents outstanding used in computing such
amounts.
(2) During the quarter ended June 30, 1998, Missouri Gas Energy
wrote off $8,163,000 pre-tax in previously recorded regula-
tory assets as a result of announced rate orders and court
rulings.
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Southern Union Company:
In our opinion, the accompanying consolidated balance sheet and
the related consolidated statements of operations, cash flows and
stockholders' equity present fairly, in all material respects,
the financial position of Southern Union Company and its sub-
sidiaries at June 30, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in
the period ended June 30, 1999, in conformity with generally
accepted accounting principles. These financial statements are
the responsibility of the Company's management; our responsibil-
ity is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in
accordance with generally accepted auditing standards which
require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test
basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used
and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our
audits provide a reasonable basis for the opinion expressed
above.
PricewaterhouseCoopers LLP
Austin, Texas
August 12, 1999, except for Note XVI as to
to which the date is September 3, 1999
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF THE COMPANY
<PAGE>
SUBSIDIARIES OF THE COMPANY Exhibit 21
State or Country
Name of Incorporation
- -------------------------------------------- ----------------
Atlantic Gas Corporation Delaware
ConTigo, Inc. Delaware
Energia Estrella del Sur, S. A. de C. V. Mexico
Energy WorX, Inc. Delaware
KellAir Aviation Company Delaware
Lavaca Realty Company Delaware
Mercado Gas Services Inc. Delaware
Norteno Pipeline Company Delaware
Southern Transmission Company Delaware
Southern Union Energy International, Inc. Delaware
Southern Union Financing I Delaware
Southern Union International Investments, Inc. Delaware
Southern Union Total Energy Systems, Inc. Delaware
SUPro Energy Company Delaware
- ----------------------
Note: Seven other wholly-owned subsidiaries of Southern Union
Company, Southern Union Financing II (a Delaware corpora-
tion), Southern Union Financing III (a Delaware corpora-
tion), Southern Union Gas Company, Inc. (a Delaware
corporation), Southern Union Gas Company, Inc. (a Texas
corporation), SU Acquisition Corporation (a California
corporation), Western Utilities, Inc. (a Delaware corpora-
tion) and Western Utilities, Inc. (a New Mexico corpora-
tion), conduct no business except to the extent necessary
to maintain their corporate existence.
<PAGE>
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
<PAGE>
CONSENT OF INDEPENDENT ACCOUNTANTS Exhibit 23
We hereby consent to the incorporation by reference in the
Registration Statements on Form S-3 (File Nos. 33-58297,
333-02965 and 333-10585) and Form S-8 (File Nos. 2-79612,
33-37261, 33-69596, 33-69598, 33-61558 and 333-79443) of
Southern Union Company and Subsidiaries of our report dated
August 12, 1999, except for Note XVI as to which the date is
September 3, 1999, relating to the consolidated financial
statements, which appears in the Annual Report to Stock-
holders, which is incorporated in this Annual Report on
Form 10-K.
PricewaterhouseCoopers LLP
Austin, Texas
September 10, 1999
<PAGE>
EXHIBIT 24
POWER OF ATTORNEY
<PAGE>
POWER OF ATTORNEY Exhibit 24
KNOW ALL PERSONS BY THESE PRESENTS that each person whose
signature appears below constitutes and appoints Peter H. Kelley,
Ronald J. Endres and David J. Kvapil, or any of them, as such
person's true and lawful attorney-in-fact and agent, with full
power of substitution and revocation, for such person and in such
person's name, place and stead, in any and all capacities, to
sign the Annual Report on Form 10-K for the fiscal year ended
June 30, 1999 of Southern Union Company, a Delaware corporation,
and any amendments thereto, and to file the same with all
exhibits thereto, and other documents in connection therewith,
with the Securities and Exchange Commission and the New York
Stock Exchange.
Dated: August 12, 1999
JOHN E. BRENNAN GEORGE L. LINDEMANN
- --------------- --------------------
John E. Brennan George L. Lindemann
FRANK W. DENIUS ROGER J. PEARSON
- --------------- ----------------
Frank W. Denius Roger J. Pearson
AARON I. FLEISCHMAN GEORGE ROUNTREE, III
- ------------------- --------------------
Aaron I. Fleischman George Rountree, III
ADAM M. LINDEMANN DAN K. WASSONG
- ----------------- --------------
Adam M. Lindemann Dan K. Wassong
KURT A. GITTER, M.D.
- --------------------
Kurt A. Gitter
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<PAGE>
FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> JUN-30-1999
<PERIOD-TYPE> YEAR
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 878,260,000
<OTHER-PROPERTY-AND-INVEST> $ 9,420,000
<TOTAL-CURRENT-ASSETS> $ 84,758,000
<TOTAL-DEFERRED-CHARGES> $ 96,635,000
<OTHER-ASSETS> $ 18,275,000
<TOTAL-ASSETS> $ 1,087,348,000
<COMMON> $ 31,240,000
<CAPITAL-SURPLUS-PAID-IN> $ 276,610,000
<RETAINED-EARNINGS> $ 0
<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 301,058,000
$ 0
$ 100,000,000
<LONG-TERM-DEBT-NET> $ 390,931,000
<SHORT-TERM-NOTES> $ 21,003,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 2,066,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 265,498,000
<TOT-CAPITALIZATION-AND-LIAB> $ 1,087,348,000
<GROSS-OPERATING-REVENUE> $ 605,231,000
<INCOME-TAX-EXPENSE> $ 7,109,000
<OTHER-OPERATING-EXPENSES> $ 109,693,000
<TOTAL-OPERATING-EXPENSES> $ 166,049,000
<OPERATING-INCOME-LOSS> $ 64,847,000
<OTHER-INCOME-NET> $ (1,814,000)
<INCOME-BEFORE-INTEREST-EXPEN> $ 46,444,000
<TOTAL-INTEREST-EXPENSE> $ 35,999,000
<NET-INCOME> $ 10,445,000
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ 10,445,000
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ 76,853,000
<EPS-BASIC> $ .34
<EPS-DILUTED> $ .32
</TABLE>
