<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
-------------------
FORM 10-Q
For the quarterly period ended
------------------------------
September 30, 1999
Commission File No. 1-6407
-------------------
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
- - ------------------- -----------------------------------------
Common Stock, par New York Stock Exchange
value $1 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No
--- ---
The number of shares of the registrant's Common Stock outstanding
on October 19, 1999 was 31,239,726.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
September 30, 1999
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations -
three and twelve months ended
September 30, 1999 and 1998
Consolidated balance sheet - September 30,
1999 and 1998 and June 30, 1999
Consolidated statement of stockholders'
equity - three months ended
September 30, 1999 and twelve months
ended June 30, 1999
Consolidated statements of cash flows -
three and twelve months ended
September 30, 1999 and 1998
Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "CONTINGENCIES" under Notes to
Consolidated Financial Statements)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 -- Financial Data Schedule
(b) Reports on Form 8-K. Southern Union's
Current Report on Form 8-K dated
October 8, 1999 announcing the
definitive merger agreement with Fall
River Gas Company.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............... $ 84,786 $ 77,455
Gas purchase costs............... 39,277 34,674
----------- -----------
Operating margin.............. 45,509 42,781
Revenue-related taxes............ 3,964 3,437
----------- -----------
Net operating margin.......... 41,545 39,344
Operating expenses:
Operating, maintenance and
general.................... 25,264 26,047
Depreciation and amortization. 10,848 10,418
Taxes, other than on income
and revenues............... 3,625 3,506
----------- -----------
Total operating expenses... 39,737 39,971
----------- -----------
Net operating revenues..... 1,808 (627)
----------- -----------
Other income (expenses):
Interest...................... (8,364) (8,740)
Dividends on preferred
securities of subsidiary
trust...................... (2,370) (2,370)
Other, net.................... (1,157) 724
----------- -----------
Total other expenses, net.. (11,891) (10,386)
----------- -----------
Loss before income tax
benefit................. (10,083) (11,013)
Federal and state income tax
benefit....................... (3,983) (3,965)
----------- -----------
Net loss attributable to common
stock........................ $ (6,100) $ (7,048)
=========== ===========
Net loss per share:
Basic......................... $ (.20) $ (.23)
=========== ===========
Diluted ...................... $ (.20) $ (.23)
=========== ===========
Weighted average shares
outstanding:
Basic...................... 30,925,242 31,098,672
=========== ===========
Diluted.................... 31,214,696 31,098,672
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended
September 30,
-----------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues................ $ 612,562 $ 672,720
Gas purchase costs................ 346,904 407,812
----------- -----------
Operating margin............... 265,658 264,908
Revenue-related taxes............. 32,561 35,340
----------- -----------
Net operating margin........... 233,097 229,568
Operating expenses:
Operating, maintenance and
general..................... 108,910 109,785
Depreciation and amortization.. 42,286 39,257
Taxes, other than on income
and revenues................ 14,620 13,890
----------- -----------
Total operating expenses.... 165,816 162,932
----------- -----------
Net operating revenues...... 67,281 66,636
----------- -----------
Other income (expenses):
Interest ...................... (35,622) (35,174)
Dividends on preferred securi-
ties of subsidiary trust.... (9,480) (9,480)
Write-off of regulatory assets. -- (8,163)
Other, net..................... (3,695) 3,027
----------- -----------
Total other expenses, net... (48,797) (49,790)
----------- -----------
Earnings before income
taxes.................... 18,484 16,846
Federal and state income taxes.... 7,091 6,757
----------- -----------
Net earnings available for
common stock................... $ 11,393 $ 10,089
=========== ===========
Net earnings per share:
Basic.......................... $ .37 $ .33
=========== ===========
Diluted........................ $ .35 $ .32
=========== ===========
Weighted average shares
outstanding:
Basic....................... 31,098,547 30,751,737
=========== ===========
Diluted..................... 32,631,942 31,987,057
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
September 30, June 30,
----------------------
1999 1998 1999
---------- ---------- ----------
(unaudited)
(thousands of dollars)
Property, plant and
equipment:
Plant in service...... $1,112,703 $1,069,645 $1,106,905
Construction work
in progress......... 17,331 8,872 13,271
---------- ---------- ----------
1,130,034 1,078,517 1,120,176
Less accumulated
depreciation and
amortization........ (376,440) (364,876) (376,212)
---------- ---------- ----------
753,594 713,641 743,964
Additional purchase
cost assigned to
utility plant, net.. 133,275 137,360 134,296
---------- ---------- ----------
Net property, plant
and equipment....... 886,869 851,001 878,260
---------- ---------- ----------
Current assets:
Cash and cash
equivalents........... 596 -- --
Accounts receivable,
billed and unbilled,
net................... 40,809 36,958 50,693
Inventories, principally
at average cost....... 40,244 38,551 29,373
Deferred gas purchase
costs................. -- 1,269 --
Prepayments and other... 3,023 4,084 4,692
---------- ---------- ----------
Total current assets.. 84,672 80,862 84,758
---------- ---------- ----------
Deferred charges.......... 97,425 95,270 96,635
Investment securities..... 13,413 5,000 12,000
Real estate............... 9,352 9,601 9,420
Other..................... 5,899 5,246 6,275
---------- ---------- ----------
Total................... $1,097,630 $1,046,980 $1,087,348
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
September 30, June 30,
----------------------
1999 1998 1999
---------- ---------- ----------
(unaudited)
(thousands of dollars)
Common stockholders'
equity:
Common stock, $1 par
value; authorized
50,000,000 shares;
issued 31,290,177
shares............... $ 31,290 $ 28,262 $ 31,240
Premium on capital
stock................ 277,012 252,568 276,610
Less treasury stock,
at cost.............. (794) (794) (794)
Less common stock held
in trust............. (6,249) -- (5,562)
Accumulated other com-
prehensive income.... (436) -- (436)
Retained earnings
(deficit)............ (6,100) 9,690 --
---------- ---------- ----------
Total common stock-
holders' equity...... 294,723 289,726 301,058
Company-obligated manda-
torily redeemable pre-
ferred securities of
subsidiary trust holding
solely subordinated
notes of Southern Union.. 100,000 100,000 100,000
Long-term debt and capital
lease obligation......... 390,413 412,475 390,931
---------- ---------- ----------
Total capitalization..... 785,136 802,201 791,989
Current liabilities:
Long-term debt and
capital lease obliga-
tion due within one
year................... 2,089 2,051 2,066
Notes payable............ 84,103 42,103 21,003
Accounts payable......... 19,697 19,960 37,834
Federal, state and local
taxes.................. 8,147 8,559 13,300
Accrued interest......... 5,660 5,633 12,176
Customer deposits........ 17,542 17,650 17,682
Deferred gas purchase
costs.................. 10,387 -- 22,955
Other.................... 17,223 15,094 16,612
---------- ---------- ----------
Total current
liabilities.......... 164,848 111,050 143,628
---------- ---------- ----------
Deferred credits and other. 79,023 73,480 81,493
Accumulated deferred
income taxes............. 68,623 60,249 70,238
Commitments and con-
tingencies............... -- -- --
---------- ---------- ----------
Total.................... $1,097,630 $1,046,980 $1,087,348
========== ========== ==========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accumu-
lated
Common Premium Trea- Other
Stock, on sury Compre- Retained
$1 on Capital Stock, hensive Earnings
Value Stock at Cost Income (Deficit) Total
------- -------- ------- ------ -------- ---------
(thousands of dollars)
Balance
July 1,
1998...... $28,252 $252,638 $ (794) $ -- $16,738 $296,834
Comprehen-
sive in-
come:
Net earn-
ings... -- -- -- -- 10,445 10,445
Minimum
pension
liabil-
ity ad-
just-
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
Net loss. -- -- -- -- (6,100) (6,100)
Common
stock
held in
Trust... -- -- (687) -- -- (687)
Exercise
of stock
options. 50 402 -- -- -- 452
------- -------- ------- ----- ------- --------
Balance
Septem-
ber 30,
1999...... $31,290 $277,012 $(7,043) $(436) $(6,100) $294,723
======= ======== ======= ===== ======= ========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
September 30,
----------------------
1999 1998
---------- ----------
(thousands of dollars)
Cash flows used in operating activities:
Net loss............................... $ (6,100) $ (7,048)
Adjustments to reconcile net loss to
net cash flows used in operating
activities:
Depreciation and amortization...... 10,848 10,418
Deferred income taxes.............. (1,615) (2,355)
Provision for bad debts............ 520 111
Deferred interest expense.......... 33 (195)
Other.............................. 355 372
Changes in assets and liabilities,
net of acquisitions and
dispositions:
Accounts receivable, billed
and unbilled................. 9,364 16,690
Accounts payable............... (11,482) (6,324)
Taxes and other liabilities.... (11,669) (12,524)
Customer deposits.............. (140) (36)
Deferred gas purchase costs.... (12,568) (13,527)
Inventories.................... (10,871) (12,390)
Other.......................... 2,656 646
--------- ---------
Net cash flows used in operating
activities....................... (30,669) (26,162)
--------- ---------
Cash flows from (used in) investing
activities:
Additions to property, plant and
equipment.......................... (20,418) (14,235)
Increase in customer advances........ 835 1,153
Decrease in deferred charges and
credits............................ (4,523) (2,266)
Purchase of investment securities.... (1,413) --
Other................................ 458 1,840
--------- ---------
Net cash flows used in investing
activities....................... (25,061) (13,508)
--------- ---------
Cash flows from (used in) financing
activities:
Repayment of debt and capital lease
obligation......................... (495) (483)
Net borrowings under revolving
credit facility.................... 63,100 40,503
Change in cash overdraft............. (6,655) (285)
Other................................ 376 (65)
--------- ---------
Net cash flows from financing
activities....................... 56,326 39,670
--------- ---------
Increase in cash and cash equivalents.... 596 --
Cash and cash equivalents at beginning
of period.............................. -- --
--------- ---------
Cash and cash equivalents at end of
period................................. $ 596 $ --
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................... $ 17,526 $ 15,272
========= =========
Income taxes....................... $ 1,300 $ 100
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended
September 30,
----------------------
1999 1998
---------- ----------
(thousands of dollars)
Cash flows from operating activities:
Net earnings........................... $ 11,393 $ 10,089
Adjustments to reconcile net earnings
to net cash flows from operating
activities:
Depreciation and amortization...... 42,286 39,257
Deferred income taxes.............. 8,607 5,500
Provision for bad debts............ 3,688 5,222
Write-off of regulatory assets..... -- 8,163
Deferred interest expense.......... 847 (1,589)
Other.............................. 987 1,624
Changes in assets and liabilities,
net of acquisitions and
dispositions:
Accounts receivable, billed
and unbilled................. (7,538) (1,526)
Accounts payable............... 70 (3,337)
Taxes and other liabilities.... (385) 648
Customer deposits.............. (108) 666
Deferred gas purchase costs.... 11,657 23,941
Inventories.................... (1,694) (2,344)
Other.......................... 2,536 (1,087)
--------- ---------
Net cash flows from operating
activities....................... 72,346 85,227
--------- ---------
Cash flows from (used in) investing
activities:
Additions to property, plant and
equipment.......................... (79,330) (74,245)
Acquisition of operations, net of
cash received...................... -- 7,247
Purchase of investment securities.... (8,413) (5,000)
Increase in customer advances........ 1,821 3,659
Increase (decrease) in deferred
charges and credits................ (6,343) 563
Other................................ (497) 3,106
--------- ---------
Net cash flows used in investing
activities....................... (92,762) (64,670)
--------- ---------
Cash flows from (used in) financing
activities:
Repayment of debt and capital lease
obligation......................... (20,849) (1,567)
Net (payments) borrowings under
revolving credit facility.......... 42,000 (18,197)
Change in cash overdraft............. (337) (341)
Other................................ 198 (452)
--------- ---------
Net cash flows from (used in)
financing activities............. 21,012 (20,557)
--------- ---------
Increase in cash and cash equivalents.... 596 --
Cash and cash equivalents at beginning
of period.............................. -- --
--------- ---------
Cash and cash equivalents at end of
period................................. $ 596 $ --
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest........................... $ 47,293 $ 34,275
========= =========
Income taxes....................... $ 2,394 $ 2,861
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
The interim financial statements are unaudited but, in the
opinion of management, reflect all adjustments (including both
normal recurring as well as any non-recurring) necessary for a
fair presentation of the results of operations for such periods.
Because of the seasonal nature of the Company's operations, the
results of operations and cash flows for any interim period are
not necessarily indicative of results for the full year.
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in Southern
Union Company's (Southern Union and, together with its wholly-
owned subsidiaries, the Company) Annual Report on Form 10-K for
the fiscal year ended June 30, 1999. Certain prior period
amounts have been reclassified to conform with the current period
presentation.
ACQUISITIONS
On October 5, 1999, Southern Union and Fall River Gas Company
(AMEX: FAL) announced a definitive merger agreement. The agree-
ment calls for FAL to merge into Southern Union in a transaction
valued at approximately $75 million, including the assumption of
debt. If approved, each FAL shareholder will receive Southern
Union common stock having a value of $23.50, subject to adjust-
ment. The merger will be accounted for using the purchase
method. FAL is a natural gas distribution company that serves
nearly 48,000 customers in a service area of approximately 50
square miles in southeastern Massachusetts that includes the city
of Fall River, and the towns of Somerset, Swansea and Westport.
FAL also rents water heaters and conversion burners and sells
central heating and air-conditioning systems and water heaters in
its service area through a wholly owned subsidiary. Southern
Union anticipates having FAL shareholder approval and all regula-
tory approvals for the merger in the middle of calendar year
2000.
On June 7, 1999, Southern Union and Pennsylvania Enterprises,
Inc. (NYSE: PNT) announced a definitive merger agreement. The
agreement calls for PNT to merge into Southern Union in a trans-
action valued at approximately $500 million, including assumption
of debt of approximately $150 million. If approved, each PNT
shareholder will receive Southern Union common stock having a
value of $32.00, plus $3.00 in cash, subject to adjustment. The
merger will be accounted for using the purchase method. PNT is a
multifaceted energy company headquartered in Wilkes-Barre,
Pennsylvania with natural gas distribution being its primary
business. PNT's principal subsidiary, PG Energy, together with
Honesdale Gas Company serve more than 152,000 gas customers in
northeastern and central Pennsylvania. In addition, PNT markets
electricity to more than 20,000 customers through PG Energy Power
Plus. Southern Union and PNT both received their respective
shareholder approval of the merger on October 19, 1999. The
Company has also received all necessary state regulatory
approvals for this merger.
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, how-
ever, retroactively reduced the 10.54% carrying cost rate used
since early 1994 to an Allowance for Funds Used During Construc-
tion (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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
$5,942,000 by the Company of previously deferred costs in its
fiscal year ended June 30, 1998.
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.
EARNINGS PER SHARE
Average shares outstanding for basic earnings per share were
30,925,242 and 31,098,672 for the three-month period ended
September 30, 1999 and 1998, respectively, and 31,098,547 and
30,751,737 for the twelve-month period ended September 30, 1999
and 1998, respectively. Diluted earnings per share includes
average shares outstanding as well as common stock equivalents
from stock options and warrants. Common stock equivalents were
nil for both three-month periods ended September 30, 1999 and
1998, respectively, and 1,460,438 and 1,235,320 for the twelve-
month period ended September 30, 1999 and 1998, respectively. At
September 30, 1999, 324,264 shares of common stock were held by
various rabbi trusts for certain of the Company's benefit plans.
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 September 30,
1999 and 1998, 4,000,000 shares of Preferred Securities were out-
standing.
DEBT AND CAPITAL LEASE
September 30, June 30,
------------- --------
1999 1999
------------- --------
(thousands of dollars)
7.60% Senior notes due 2024.......... $364,515 $364,515
Capital lease and other.............. 27,987 28,482
-------- --------
Total long-term debt and capital
lease.............................. $392,502 $392,997
======== ========
On September 22, 199, the Company filed a $400,000,000 shelf
registration to issue senior or subordinated debt securities in
the future. See Management's Discussion and Analysis of Finan-
cial Condition and Results of Operations -- Financial Condition.
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
Facilities, $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,
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2002. The Company has additional availability under uncommitted
line of credit facilities (Uncommitted Facilities) with various
banks. Covenants under the Revolving Credit Facilities allow for
up to $35,000,000 of borrowings under Uncommitted Facilities at
any one time. Borrowings under the facilities are available for
Southern Union's working capital, letter of credit requirements
and other general corporate purposes. A balance of $84,103,000
was outstanding under the facilities at September 30, 1999.
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 September 30, 1999, the capital lease obligation out-
standing was $26,457,000 with a fixed rate of 5.79%. This system
has improved meter reading accuracy and provided electronic
accessibility to meters in residential customers' basements,
thereby assisting in the reduction of the number of estimated
bills.
UTILITY REGULATION AND RATES
On October 18, 1999, Southern Union Gas filed a $1,696,000 rate
increase request for the El Paso service area with the City of El
Paso.
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 are sub-
ject to judicial review and although certain parties have argued
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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
CONTINGENCIES
Southern Union and Western Resources entered into an Environmen-
tal Liability Agreement (Environmental Liability Agreement) at
the closing of the Missouri Acquisition. Subject to the accuracy
of certain representations made by Western Resources in the
Missouri Asset Purchase Agreement, the Environmental Liability
Agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may
exist or arise with respect to Missouri Gas Energy. At the
present time and based upon information available to management,
the Company believes that the costs of any remediation efforts
that may be required for these sites for which it may ultimately
have responsibility will not exceed the aggregate amount subject
to substantial sharing by Western Resources.
In 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 First Street and Campbell in Kansas
City, Missouri and is owned by Missouri Gas Energy. A 1988 in-
vestigation of the site performed by an Environmental Protection
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 appli-
cations to MDNR submitting the two sites to the agency's Volun-
tary Cleanup Program ("VCP"). The sites were accepted into the
VCP on August 2, 1999. The Company subsequently sent proposed
workplans for the environmental assessment of the sites to the
MDNR.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In addition to the various Missouri Gas Energy sites described
above, the Company is investigating the possibility that the
Company or predecessor companies may have been associated with
Manufactured Gas Plant (MGP) sites in other of its former service
territories, principally in Arizona and New Mexico, and present
service territories in Texas. At the present time, the Company
is aware of certain plant sites in some of these areas and is
investigating those and certain other locations.
While the Company's evaluation of these Texas, Arizona and New
Mexico MGP sites is in its preliminary stages, it is likely that
some compliance costs may be identified and become subject to
reasonable quantification. To the extent that such potential
costs are quantified, the Company expects to provide any appro-
priate accruals and seek recovery for such remediation costs
through all appropriate means, including insurance and regulatory
relief. Although significant charges to earnings could be
required prior to rate recovery, management does not believe that
environmental expenditures for such FMGP and MGP sites will have
a material adverse effect on the Company's financial position,
results of operations or cash flows.
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 three lawsuits pending -- in federal district courts in
Arizona, Nevada and Oklahoma -- 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 Oklahoma federal district court. On October 11,
1999, Southern Union filed its first amended compliant in the
Arizona action to include additional individual defendants and to
incorporate additional facts required in the discovery process.
Southern Union is vigorously pursuing its claims against
Southwest, ONEOK, and certain individual defendants, and is
vigorously defending itself against the claims by Southwest and
ONEOK. 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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
franchises in Texas.
Southern Union and its subsidiaries are parties to other legal
proceedings that management considers to be normal actions to
which an enterprise of its size and nature might be subject, and
not to be material to the Company's overall business or financial
condition, results of operations or cash flows.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's core business is the distribution of natural gas as
a public utility through three divisions: Southern Union Gas,
Missouri Gas Energy (MGE) and Atlantic Utilities doing business
as South Florida Natural Gas (SFNG). In addition, subsidiaries
of Southern Union have been established to support and expand
natural gas sales and to capitalize on the Company's gas energy
expertise. These subsidiaries operate natural gas pipeline
systems, market natural gas to end-users and distribute propane.
By providing "one-stop shopping," the Com-
pany can serve its various customers' specific energy needs,
which encompass substantially all of the natural gas distribution
and sales businesses from natural gas sales to specialized energy
consulting services. Certain subsidiaries own or hold interests
in real estate and other assets, which are primarily used in the
Company's utility business.
Several of these business activities are subject to regulation by
federal, state or local authorities where the Company operates.
Thus, the Company's financial condition and results of operations
have been and will continue to be dependent upon the receipt of
adequate and timely adjustments in rates. In addition, the
Company's business is affected by seasonal weather impacts,
competitive factors within the energy industry and economic
development and residential growth in its service areas.
RESULTS OF OPERATIONS
Three Months Ended September 30, 1999 and 1998
- - ----------------------------------------------
The Company recorded a net loss attributable to common stock of
$6,100,000 for the three-month period ended September 30, 1999
compared to a net loss of $7,048,000 for the three-month period
ended September 30, 1998. Net loss per common share, based on
weighted average shares outstanding during the period, was $.20
in 1999 compared with a net loss per common share of $.23 in
1998. Due to the seasonal nature of the gas utility business,
the three-month period ending September 30 is typically a loss
period.
Operating revenues were $84,786,000 for the three-month period
ended September 30, 1999, compared with operating revenues of
$77,455,000 in 1998. Gas purchase costs for the three-month
period ended September 30, 1999 were $39,277,000, compared with
$34,674,000 in 1998. The Company's operating revenues are
affected by the level of sales volumes and by the pass-through of
increases or decreases in the Company's gas purchase costs
through its purchased gas adjustment clauses. Additionally,
revenues are affected by increases or decreases in gross receipts
taxes (revenue-related taxes) which are levied on sales revenue
as collected from customers and remitted to the various taxing
authorities. Despite a 1% decrease in total gas sales volume
from 12,151 MMcf in 1998 to 12,027 MMcf in 1999, operating
revenues were favorably impacted by the $13,300,000 annual rate
increase granted by the Missouri Public Service Commission (MPSC)
to MGE effective September 2, 1998. Gas purchase costs increased
13% due to increases in the average cost of gas from $2.81 per
Mcf in 1998 to $3.21 per Mcf in 1999. Changes in the average
cost of gas result from seasonal impacts on demands for natural
gas and the ensuing competitive pricing within the industry.
Net operating margin (operating margin less revenue-related
taxes) increased $2,201,000 for the three-month period ended
September 30, 1999 compared with the same period in 1998. Net
operating margin increased principally as a result of the rate
increase granted to MGE in September 1998, discussed above.
Additionally gas distribution volumes increased 8% from 1998 to
1999 due to slightly colder weather during 1999.
Operating expenses, which include operating, maintenance and
general expenses, depreciation and amortization, and taxes other
than on income and revenues, were $39,737,000 for the three-
month period ended September 30, 1999, a decrease of $234,000,
compared with $39,971,000 in 1998.
Interest expense was $8,364,000 for the three-month period ended
September 30, 1999, compared to $8,740,000 in 1998. Interest
expense decreased in 1999 primarily due to a decrease in long-
erm debt resulting from the June 1999 repurchase of $20,000,000
in Senior Notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other expense for the three-month period ended September 30, 1999
was $1,157,000 compared to other income of $724,000 in 1998.
Other expense for the three-month period ended September 30, 1999
primarily consists of $1,200,000 of costs associated with acqui-
sition activities. This amount was offset by $222,000 in net
rental income from Lavaca Realty Company ("Lavaca Realty"), the
Company's real estate subsidiary. Other income for the three-
month period ended September 30, 1998 consists of $340,000 in net
rental income from Lavaca Realty and $195,000 related to the
deferral of interest and other expenses associated with the
Missouri Gas Energy Safety Program.
For the three-month period ended September 30, 1999, the federal
and state income tax benefit increased $18,000 over the same
period in 1998 primarily due to a higher effective tax rate of
39.5% in 1999 compared to 36% in 1998.
Twelve Months Ended September 30, 1999 and 1998
- - -----------------------------------------------
The Company recorded net earnings available for common stock of
$11,393,000 for the twelve-month period ended September 30, 1999
compared with net earnings of $10,089,000 in 1998. Earnings per
diluted share were $.35 in 1999 compared with earnings per
diluted share of $.32 in 1998.
Operating revenues were $612,562,000 for the twelve-month period
ended September 30, 1999, a decrease of 9%, compared with oper-
ating revenues of $672,720,000 in 1998. Gas purchase costs for
the twelve-month period ended September 30, 1999 were
$346,904,000, a decrease of 15%, compared with gas purchase costs
of $407,812,000 in 1998. Both operating revenues and gas pur-
chase costs were primarily impacted by an 8% decrease in gas
sales volume from 115,524 MMcf in 1998 to 105,938 MMcf in 1999.
The decrease in sales volume was primarily due to significantly
warmer weather throughout the Company's service areas during the
twelve-month period ended September 30, 1999. Also contributing
to the decrease in operating revenues and gas purchase costs was
a 7% decrease in the average cost of gas from $3.50 per Mcf in
1998 to $3.25 per Mcf in 1999 as a result of decreases in average
spot market gas prices. Operating revenues were also affected by
an 8% decrease in revenue-related taxes. Offsetting these nega-
tive factors was the $13,300,000 annual rate increase granted to
MGE, as previously discussed.
Missouri Gas Energy service territories experienced weather which
was 86% of a 30-year measure for the twelve-month period ended
September 30, 1999 compared with 90% in 1998. Weather for
Southern Union Gas service territories for the twelve-month
period ended September 30, 1999 was 74% of a 30-year measure
compared with 98% in 1998. About half of the customers served by
Southern Union Gas are weather normalized.
Operating expenses were $165,816,000 for the twelve-month period
ended September 30, 1999, an increase of 2%, compared with oper-
ating expenses of $162,932,000 in 1998. The increase is pri-
marily a result of a $3,029,000 increase in depreciation and
amortization as a result of including certain costs into rate
base that were previously deferred.
Interest expense was $35,622,000 for the twelve-month period
ended September 30, 1999 compared to $35,174,000 in 1998. The
increase in interest expense is primarily due to increased bor-
rowings under the various financing facilities. See "Debt and
Capital Lease" in the Notes to the Consolidated Financial State-
ments for the period ended September 30, 1999 included herein.
During fiscal year 1998, the Company was impacted by pre-tax non-
cash write-offs totaling $8,163,000 of previously recorded regu-
latory assets. On August 18, 1998, the Missouri Court of Appeals
denied the previously disclosed appeal by the Company of the
MPSC's January 1997 Rate Order granted to MGE. Because of this
decision, the Company recorded a one-time non-cash write-off of
$5,942,000 of deferred costs recorded since 1994. On August 21,
1998, the MPSC also granted MGE a rate increase which, among
other things, disallowed certain previously recorded deferred
costs requiring an additional pre-tax non-cash write-off of
$2,221,000. See "Write-Off
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
of Regulatory Assets" and "Contingencies" in the Notes to the
Consolidated Financial Statements for the period ended
September 30, 1999 included herein.
Other expense for the twelve-month period ended September 30,
1999 was $3,695,000 compared to other income of $3,027,000 in
1998. Other expense for the twelve-month period ended
September 30, 1999 included: $5,039,000 of costs associated with
various acquisition efforts which was partially offset by net
rental income of Lavaca Realty of $1,331,000 and $457,000 in
deferral of interest and other expenses associated with the MGE
Safety Program. Other income for the twelve-month period ended
September 30, 1998 included: $1,589,000 in deferral of interest
and other expenses associated with the MGE Safety Program and net
rental income of Lavaca Realty of $1,193,000.
For the twelve-month period ended September 30, 1999, federal and
state income taxes increased $334,000 over the same period in
1998 due to an increase in pre-tax earnings as discussed above.
The Company's consolidated federal and state effective income tax
rate was 38% and 40% for the twelve-month period ended
September 30, 1999 and 1998, respectively.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's domestic gas utility operations for the three- and
twelve-month periods ended September 30, 1999 and 1998:
Three Months Ended Twelve Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
Average number of gas
sales customers
served:
Residential......... 897,281 880,018 899,968 885,363
Commercial.......... 87,375 85,953 88,788 88,152
Industrial and
irrigation......... 574 578 571 565
Public authorities
and other.......... 2,845 2,801 2,860 2,792
Pipeline and
marketing.......... 235 229 236 232
-------- -------- -------- --------
Total average
customers served. 988,310 969,579 992,423 977,104
======== ======== ======== ========
Gas sales in millions
of cubic feet (MMcf)
Residential......... 4,687 4,590 57,215 64,129
Commercial.......... 2,847 2,738 25,649 28,119
Industrial and
irrigation......... 326 414 1,370 1,656
Public authorities
and other.......... 255 233 2,287 2,740
Pipeline and
marketing.......... 3,143 3,960 18,486 18,925
-------- -------- -------- --------
Gas sales billed.. 11,258 11,935 105,007 115,569
Net change in
unbilled gas sales. 769 216 931 (45)
-------- -------- -------- --------
Total gas sales... 12,027 12,151 105,938 115,524
======== ======== ======== ========
Gas sales revenues
(thousands of
dollars):
Residential......... $ 44,290 $ 41,577 $369,084 $409,227
Commercial.......... 16,836 15,287 142,417 159,816
Industrial and
irrigation......... 1,591 1,687 6,475 7,795
Public authorities
and other.......... 1,159 935 8,752 11,139
Pipeline and
marketing.......... 8,731 9,427 43,218 46,403
-------- -------- -------- --------
Gas revenues
billed........... 72,607 68,913 569,946 634,380
Net change in
unbilled gas sales
revenues........... 4,571 1,242 5,706 195
-------- -------- -------- --------
Total gas sales
revenues......... $ 77,178 $ 70,155 $575,652 $634,576
======== ======== ======== ========
Gas sales margin
(thousands of
dollars)............. $ 34,557 $ 32,598 $198,586 $194,731
======== ======== ======== ========
Gas sales revenue per
thousand cubic feet
(Mcf) billed:
Residential......... $ 9.450 $ 9.058 $ 6.451 $ 6.381
Commercial.......... 5.913 5.580 5.553 5.684
Industrial and
irrigation......... 4.875 4.075 4.726 4.707
Public authorities
and other.......... 4.554 4.013 3.826 4.065
Pipeline and
marketing.......... 2.778 2.381 2.338 2.452
Weather:
Degree days:
Southern Union Gas
service
territories........ 3 0 1,580 2,119
Missouri Gas Energy
service
territories........ 92 8 4,522 4,708
30-year measure:
Southern Union Gas
service
territories........ 5 5 2,134 2,152
Missouri Gas Energy
service
territories........ 59 59 5,246 5,243
Gas transported in
millions of cubic
feet (MMcf).......... 12,603 12,374 55,921 55,966
Gas transportation
revenues (thousands
of dollars).......... $ 4,372 $ 3,776 $ 20,752 $ 19,591
- - -------------------------
The above information does not include the Company's 43% equity
ownership in a natural gas distribution company serving 19,500
customers in Piedras Negras, Mexico.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's gas utility operations are seasonal in nature with
a significant percentage of the annual revenues and earnings
occurring in the traditional heating-load months. This season-
ality results in a high level of cash flow needs during the peak
winter heating season months, resulting from the required pay-
ments to natural gas suppliers in advance of the receipt of cash
payments from the Company's customers. The Company has histori-
cally used internally generated funds and its credit facilities
to provide funding for its seasonal working capital, continuing
construction and maintenance programs and operational require-
ments.
The principal source of funds during the three-month period ended
September 30, 1999 was $63,100,000 borrowed under the Company's
credit facilities. This provided funds for additions to
property, plant and equipment of $20,418,000, operating outflows
of $30,669,000 and other seasonal working capital needs of the
Company.
The effective interest rate under the Company's current debt
structure is 7.69% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
The Company has availability under two revolving credit facili-
ties (Revolving Credit Facilities) underwritten by a syndicate of
banks. Of the Revolving Credit Facilities, $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 avail-
ability under uncommitted line of credit facilities (Uncommitted
Facilities) with various banks. Covenants under the Revolving
Credit Facilities allow for up to $35,000,000 of borrowings under
Uncommitted Facilities at any one time. Borrowings under the
facilities are available for Southern Union's working capital,
letter of credit requirements and other general corporate pur-
poses. A balance of $84,103,000 was outstanding under the
facilities at September 30, 1999.
Concurrent with the closing of the Pennsylvania Enterprises, Inc.
(PNT) merger, the Company intends to issue approximately
$350,000,000 of Senior Notes which will be used to (i) fund the
cash portion of the consideration to be paid to the PNT share-
holders; (ii) refinance certain debt of PNT; and (iii) repay
outstanding borrowings under the Company's various credit facili-
ties. These Senior Notes will be senior unsecured obligations
and will rank equally in right of payment with each other and
with the Company's other unsecured and unsubordinated obliga-
tions, including the 7.60% Senior Notes due 2024.
The Company will retain its borrowing availability under its
Revolving Credit Facilities, as discussed above. Borrowing under
these credit facilities will continue to be used to provide
funding for the seasonal working capital needs of the Company.
Internally-generated funds from operations will be used princi-
pally for the Company's ongoing construction and maintenance
programs and operational needs and may also be used periodically
to reduce outstanding debt. From time to time, the Company may
also repurchase shares of common stock in the open market in
order to minimize any adverse effect from potential selling
activity that may result from the increase in public float of its
common stock subsequent to the PNT merger.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
YEAR 2000
The Company is currently winding up its efforts to address the
Year 2000 problem and, as of September 30, 1999, it announced
that its mission-critical systems that provide natural gas ser-
vices are ready for the Year 2000. The Year 2000 problem is the
inability of computer application software programs to distin-
guish between the year 1900 and 2000 due to a commonly-used pro-
gramming convention. Unless such programs are modified or
replaced prior to 2000, calculations and interpretations based on
date-based arithmetic or logical operations performed by such
programs may be incorrect.
Management's plan addressing the impact of the Year 2000 issue on
the Company focuses on the following areas: application systems,
process control systems (embedded chips), technology infrastruc-
ture, physical infrastructure, and third party business partners
and suppliers with which the Company has significant relation-
ships. Management's analysis and review of these areas is com-
prised primarily of five phases: developing an inventory of
hardware, software and embedded chips; assessing the degree to
which each area is currently Year 2000 ready; performing
renovations and repairs as needed to attain Year 2000 readiness;
testing to ensure Year 2000 readiness; and developing a con-
tingency plan if repair and renovation efforts are either unsuc-
cessful 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 cal-
endar 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
$4,500,000 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 has incurred 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 recog-
nized in the months of January, February and March.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Results of Opera-
tions and Financial Condition and other sections of this Form
10-Q contain forward-looking statements that are based on current
expectations, estimates and projections about the industry in
which the Company operates, management's beliefs and assumptions
made by management. Words such as "expects," "anticipates,"
"intends," "plans," "believes," "seeks," "estimates," variations
of such words and similar expressions are intended to identify
such forward-looking statements. These statements are not
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 statements. The
Company undertakes no obligation to update publicly any forward-
looking statements, whether as a result of new information,
future events or otherwise. Readers are cautioned not to put
undue reliance on such forward-looking statements. Stockholders
may review the Company's reports filed in the future with the
Securities and Exchange Commission for more current descriptions
of developments that could cause actual results to differ
materially from such forward-looking statements.
Factors that could cause or contribute to actual results dif-
fering materially from such forward-looking statements include
the following: cost of gas; gas sales volumes; weather condi-
tions in the Company's service territories; the achievement of
operating efficiencies and the purchases and implementation of
new technologies for attaining such efficiencies; impact of rela-
tions with labor unions of bargaining-unit employees; the receipt
of timely and adequate rate relief; the outcome of pending and
future litigation; governmental regulations and proceedings
affecting or involving the Company; 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
RESULTS OF VOTES OF SECURITY HOLDERS
Southern Union held its Annual Meeting of Stockholders on
October 19, 1999. The following matters were submitted for a
vote and approved by Southern Union's security holders: (i) the
re-election of three persons to serve as the Class III directors
until the 2002 Annual Meeting of Stockholders or until their
successors are duly elected and qualified; (ii) approval of (a)
the Agreement of Merger between the Company and Pennsylvania
Enterprises, Inc., a Pennsylvania corporation, dated as of
June 7, 1999 whereby PNT will merge with and into the Company,
with the Company being the surviving corporation and (b) the
issuance of shares of Southern Union common stock pursuant to the
merger agreement; (iii) approval of the following amendments to
the Company's Restated Certificate of Incorporation: (a) to
increase the number of authorized shares of Southern Union common
stock from 50,000,000 to 200,000,000; (b) to grant the Board the
authority to issue 6,000,000 shares of preferred stock in series
the Board deems appropriate and to establish from time to time
the number of shares to be included in each such series and to
fix the designation, powers, preferences and rights of the shares
of each such series and the qualifications, limitations or re-
strictions thereof; and (c) to repeal the rights, powers
privileges and preferences of Southern Union's currently autho-
rized cumulative preferred stock; (iv) approval of an amendment
to the Company's Restated Certificate of Incorporation to
increase the maximum number of directors from 12 to 15; and (v)
approval of an additional 3,000,000 shares of common stock to be
eligible for grant under the Southern Union 1992 Long-Term Stock
Incentive Plan.
The number of votes cast in favor, abstain or withheld for each
nominee for director, and for any proposal voted on at the Annual
Meeting of Stockholders, were:
For Abstain Withheld
---------- ------- --------
Re-election of nominees as
Class III Directors:
George L. Lindemann......... 27,515,630 -- 197,643
Peter H. Kelley............. 27,513,277 -- 197,643
Dan K. Wassong.............. 27,515,684 -- 197,643
Proposal to approve PNT
merger and common stock
issuance..................... 20,464,047 6,140 614,249
Proposal to approve the Com-
pany's Restated Certificate
of Incorporation to increase
authorized shares of
Southern Union common
stock, to allow ability to
issue preferred stock and to
repeal rights of currently
authorized cumulative
preferred stock.............. 20,344,764 11,246 738,427
Proposal to approve an amend-
ment to the Company's
Restated Certificate of
Incorporation to increase
the maximum number of
directors from 12 to 15...... 21,020,790 13,798 49,847
Proposal to approve additional
3,000,000 shares of common
stock to be eligible for
grant under the Southern
Union 1992 Long-Term Stock
Incentive Plan............... 19,601,183 390,740 1,092,514
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
----------------------
(Registrant)
Date October 21, 1999 By RONALD J. ENDRES
------------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date October 21, 1999 By DAVID J. KVAPIL
-----------------
David J. Kvapil
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT 27
FINANCIAL DATA SCHEDULE
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> SEP-30-1999
<PERIOD-TYPE> 3-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 886,869,000
<OTHER-PROPERTY-AND-INVEST> $ 22,765,000
<TOTAL-CURRENT-ASSETS> $ 84,672,000
<TOTAL-DEFERRED-CHARGES> $ 97,425,000
<OTHER-ASSETS> $ 5,899,000
<TOTAL-ASSETS> $ 1,097,630,000
<COMMON> $ 31,290,000
<CAPITAL-SURPLUS-PAID-IN> $ 277,012,000
<RETAINED-EARNINGS> $ (6,100,000)
<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 294,723,000
$ 0
$ 100,000,000
<LONG-TERM-DEBT-NET> $ 390,413,000
<SHORT-TERM-NOTES> $ 84,103,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 2,089,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 226,302,000
<TOT-CAPITALIZATION-AND-LIAB> $ 1,097,630,000
<GROSS-OPERATING-REVENUE> $ 84,786,000
<INCOME-TAX-EXPENSE> $ (3,983,000)
<OTHER-OPERATING-EXPENSES> $ 25,264,000
<TOTAL-OPERATING-EXPENSES> $ 39,737,000
<OPERATING-INCOME-LOSS> $ 1,808,000
<OTHER-INCOME-NET> $ (1,157,000)
<INCOME-BEFORE-INTEREST-EXPEN> $ 2,264,000
<TOTAL-INTEREST-EXPENSE> $ 8,364,000
<NET-INCOME> $ (6,100,000)
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ (6,100,000)
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ (30,669,000)
<EPS-BASIC> $ (.20)
<EPS-DILUTED> $ (.20)
</TABLE>
