UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
For the quarterly period ended
September 30, 2000
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 value $1 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
------- -------
The number of shares of the registrant's Common Stock outstanding on November 3,
2000 was 50,976,219.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
September 30, 2000
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations - three and twelve months ended
September 30, 2000 and 1999 2-3
Consolidated balance sheet - September 30, 2000 and 1999 and
June 30, 2000 4-5
Consolidated statement of stockholders' equity - three months ended
September 30, 2000 and twelve months ended June 30, 2000 6
Consolidated statements of cash flows - three and twelve months ended
September 30, 2000 and 1999 7-8
Notes to consolidated financial statements 9-19
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations 20-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "COMMITMENTS and CONTINGENCIES" under Notes to Consolidated
Financial Statements) 16-19
Item 4. Result of Votes of Security Holders 27
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 10 -- Employment agreement between James H. Dodge and
Southern Union Company effective upon the consummation of the
merger with Providence Energy Corporation E-1
(b) Exhibit 27 -- Financial Data Schedule E-12
(c) Reports on Form 8-K -- None
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
------------ ------------
(thousands of dollars, except shares
and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ...................................................... $ 144,468 $ 84,786
Cost of gas and other energy ............................................ 84,534 39,277
------------ ------------
Operating margin ................................................... 59,935 45,509
Revenue-related taxes ................................................... 5,079 3,964
------------ ------------
Net operating margin ............................................... 54,856 41,545
Operating expenses:
Operating, maintenance and general ................................. 37,017 25,264
Depreciation and amortization ...................................... 15,966 10,848
Taxes, other than on income and revenues ........................... 4,860 3,625
------------ ------------
Total operating expenses ...................................... 57,843 39,737
------------ ------------
Net operating revenues (loss) ................................. (2,987) 1,808
------------ ------------
Other expenses:
Interest ........................................................... (16,306) (8,364)
Dividends on preferred securities of subsidiary trust .............. (2,370) (2,370)
Other, net ......................................................... (2,318) (1,157)
------------ ------------
Total other expenses, net ..................................... (20,994) (11,891)
------------ ------------
Loss before income tax benefit and cumulative effect of
change in accounting principle ............................ (23,981) (10,083)
Federal and state income tax benefit .................................... (11,131) (3,983)
------------ ------------
Loss before cumulative effect of change in accounting principle ......... (12,850) (6,100)
Cumulative effect of change in accounting principle, net of tax ......... 602 --
------------ ------------
Net loss attributable to common stock ................................... $ (12,248) $ (6,100)
============ ============
Net loss per share:
Basic:
Before cumulative effect of change in accounting principle .... $ (.26) $ (.19)
Cumulative effect of change in accounting principle, net of tax .01 --
------------ ------------
$ (.25) $ (.19)
============ ============
Diluted:
Before cumulative effect of change in accounting principle .... $ (.26) $ (.19)
Cumulative effect of change in accounting principle, net of tax .01 --
------------ ------------
$ (.25) $ (.19)
============ ============
Weighted average shares outstanding:
Basic .............................................................. 48,573,037 32,468,287
============ ============
Diluted ............................................................ 48,573,037 32,468,287
============ ============
See accompanying notes.
</TABLE>
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
2000 1999
------------ ------------
(thousands of dollars, except shares
and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ...................................................... $ 891,387 $ 612,562
Cost of gas and other energy ............................................ 542,955 346,904
------------ ------------
Operating margin ................................................... 348,432 265,658
Revenue-related taxes ................................................... 36,010 32,561
------------ ------------
Net operating margin ............................................... 312,422 233,097
Operating expenses:
Operating, maintenance and general ................................. 148,342 108,910
Depreciation and amortization ...................................... 60,257 42,286
Taxes, other than on income and revenues ........................... 18,504 14,620
------------ ------------
Total operating expenses ...................................... 227,103 165,816
------------ ------------
Net operating revenues ........................................ 85,319 67,281
------------ ------------
Other expenses:
Interest ........................................................... (59,434) (35,622)
Dividends on preferred securities of subsidiary trust .............. (9,480) (9,480)
Other, net ......................................................... (8,633) (3,695)
------------ ------------
Total other expenses, net ..................................... (77,547) (48,797)
------------ ------------
Earnings before income taxes and cumulative effect of change
in accounting principle ................................... 7,772 18,484
Federal and state income taxes .......................................... 3,470 7,091
------------ ------------
Earnings before cumulative effect of change in accounting principle ..... 4,302 11,393
Cumulative effect of change in accounting principle, net of tax ......... 602 --
------------ ------------
Net earnings available for common stock ................................. $ 4,904 $ 11,393
============ ============
Net earnings per share:
Basic:
Before cumulative effect of change in accounting principle .... $ .09 $ .35
Cumulative effect of change in accounting principle, net of tax .01 --
------------ ------------
$ .10 $ .35
============ ============
Diluted:
Before cumulative effect of change in accounting principle .... $ .09 $ .33
Cumulative effect of change in accounting principle, net of tax .01 --
------------ ------------
$ .10 $ .33
============ ============
Weighted average shares outstanding:
Basic .............................................................. 47,442,298 32,651,091
============ ============
Diluted ............................................................ 49,575,632 34,261,436
============ ============
See accompanying notes.
</TABLE>
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
<TABLE>
<CAPTION>
September 30, June 30,
--------------------------
2000 1999 2000
----------- ----------- -----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Property, plant and equipment:
Plant in service .......................................... $ 2,129,828 $ 1,112,703 $ 1,580,077
Construction work in progress ............................. 28,100 17,331 30,192
----------- ----------- -----------
2,157,928 1,130,034 1,610,269
Less accumulated depreciation and amortization ............ (732,097) (376,440) (509,947)
----------- ----------- -----------
1,425,831 753,594 1,100,322
Additional purchase cost assigned to utility plant, net ... 723,971 133,275 386,839
----------- ----------- -----------
Net property, plant and equipment ......................... 2,149,802 886,869 1,487,161
----------- ----------- -----------
Current assets:
Cash and cash equivalents ................................ 2,690 596 27,829
Accounts receivable, billed and unbilled, net ............ 109,524 40,809 74,959
Inventories, principally at average cost ................. 119,497 40,244 60,259
Deferred gas purchase costs .............................. 23,849 -- --
Investment securities .................................... 288,628 -- 187,817
Prepayments and other .................................... 33,480 3,023 877
----------- ----------- -----------
Total current assets ................................ 577,668 84,672 351,741
----------- ----------- -----------
Deferred charges .............................................. 229,724 97,425 145,006
Investment securities ......................................... 7,608 13,413 10,489
Real estate ................................................... 11,018 9,352 9,461
Other ......................................................... 32,348 5,899 17,602
----------- ----------- -----------
Total .................................................... $ 3,008,168 $ 1,097,630 $ 2,021,460
=========== =========== ===========
See accompanying notes.
</TABLE>
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
<TABLE>
<CAPTION>
September 30, June 30,
--------------------------
2000 1999 2000
----------- ----------- ------------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Common stockholders' equity:
Common stock, $1 par value; authorized 200,000,000
shares; issued 51,903,890 shares ..................................... $ 51,904 $ 31,290 $ 50,521
Premium on capital stock .................................................. 626,662 277,012 601,042
Less treasury stock, at cost .............................................. (15,554) (794) (15,554)
Less common stock held in trust ........................................... (16,506) (6,249) (15,330)
Accumulated other comprehensive income .................................... 181,257 (436) 115,175
Retained deficit .......................................................... (12,248) (6,100) --
----------- ----------- -----------
Total common stockholders' equity ......................................... 815,515 294,723 735,854
Company-obligated mandatorily redeemable preferred securi- ties of subsidiary
trust holding solely subordinated notes of
Southern Union ............................................................ 100,000 100,000 100,000
Long-term debt and capital lease obligation .................................... 1,325,105 390,413 733,774
----------- ----------- -----------
Total capitalization ...................................................... 2,240,620 785,136 1,569,628
Current liabilities:
Long-term debt and capital lease obligation due
within one year ...................................................... 8,004 2,089 2,193
Notes payable ............................................................. 135,453 84,103 3
Accounts payable .......................................................... 104,451 19,697 77,488
Federal, state and local taxes ............................................ 7,493 8,147 7,359
Accrued interest .......................................................... 19,654 5,660 15,922
Accrued dividends on preferred securities of subsidiary
trust ................................................................ 2,370 -- --
Customer deposits ......................................................... 21,080 17,542 17,255
Deferred gas purchase costs ............................................... -- 10,387 11,708
Other ..................................................................... 61,621 17,223 28,542
----------- ----------- -----------
Total current liabilities ............................................ 360,126 164,848 160,470
----------- ----------- -----------
Deferred credits and other ..................................................... 141,870 79,023 106,823
Accumulated deferred income taxes .............................................. 265,552 68,623 184,539
Commitments and contingencies .................................................. -- -- --
----------- ----------- -----------
Total ..................................................................... $ 3,008,168 $ 1,097,630 $ 2,021,460
=========== =========== ===========
See accompanying notes.
</TABLE>
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Accumulated
Common Premium Treasury Stock Other Retained
Stock, $1 on Capital Stock, at Held in Comprehen- Earnings/
Par Value Stock Cost Trust sive Income (Deficit) Total
--------- ------------ ----------- ---------- ------------- ---------- ---------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1999 ................ $ 31,240 $ 276,610 $ (794) $ (5,562) $ (436) $ -- $ 301,058
Comprehensive income:
Net earnings ................... -- -- -- -- -- 11,052 11,052
Unrealized gain in investment
securities, net of tax ....... -- -- -- -- 115,175 -- 115,175
Minimum pension liability
adjustment; net of tax ....... -- -- -- -- 436 -- 436
---------
Comprehensive income ........... 126,663
---------
Common stock held in trust ....... -- -- -- (10,037) -- -- (10,037)
5% stock dividend ................ 2,359 8,659 -- -- -- (11,052) (34)
Purchase of treasury stock ....... -- -- (14,425) -- -- -- (14,425)
Issuance of stock for acquisition 16,714 315,235 -- -- -- -- 331,949
Exercise of stock options ........ 208 538 (335) 269 -- -- 680
--------- --------- --------- --------- --------- --------- ---------
Balance June 30, 2000 ............... 50,521 601,042 (15,554) (15,330) 115,175 -- 735,854
Comprehensive income:
Net loss ....................... -- -- -- -- -- (12,248) (12,248)
Unrealized gain in investment
securities, net of tax .... -- -- -- -- 65,527 -- 65,527
Cumulative effect of change
in accounting principle ...... -- -- -- -- 826 -- 826
Unrealized loss on hedging
activities ................ -- -- -- -- (271) -- (271)
---------
Comprehensive income ........... 53,834
---------
Issuance of stock for acquisition 1,369 25,483 -- -- -- -- 26,852
Common stock held in trust ....... -- -- -- (1,176) -- -- (1,176)
Exercise of stock options ........ 14 137 -- -- -- -- 151
--------- --------- --------- --------- --------- --------- ---------
Balance September 30, 2000 .......... $ 51,904 $ 626,662 $ (15,554) $ (16,506) $ 181,257 $ (12,248) $ 815,515
========= ========= ========= ========= ========= ========= =========
See accompanying notes.
</TABLE>
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended September 30,
2000 1999
---------- ----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Cash flows used in operating activities:
Net loss .................................................................... $ (12,248) $ (6,100)
Adjustments to reconcile net loss to net cash flows used in
operating activities:
Depreciation and amortization ........................................... 15,966 10,848
Deferred income taxes ................................................... (256) (1,615)
Provision for bad debts ................................................. 716 520
Deferred interest expense ............................................... (278) 33
Cumulative effect of change in accounting principle ..................... (602) --
Other ................................................................... 509 355
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, billed and unbilled .............................. (5,398) 9,364
Accounts payable ...................................................... (13,212) (11,482)
Taxes and other liabilities ........................................... (1,056) (11,669)
Customer deposits ..................................................... (357) (140)
Deferred gas purchase costs ........................................... (26,554) (12,568)
Inventories ........................................................... (44,542) (10,871)
Other ................................................................. (7,303) 2,656
--------- ---------
Net cash flows used in operating activities ............................. (94,615) (30,669)
--------- ---------
Cash flows from (used in) investing activities:
Additions to property, plant and equipment .................................. (21,908) (20,418)
Acquisition of operations, net of cash received ............................. (406,830) --
Increase in customer advances ............................................... 529 835
Decrease in deferred charges and credits .................................... (408) (4,523)
Purchase of investment securities ........................................... -- (1,413)
Other ....................................................................... (222) 458
--------- ---------
Net cash flows used in investing activities ............................. (428,839) (25,061)
--------- ---------
Cash flows from (used in) financing activities:
Issuance of long-term debt .................................................. 480,000 --
Issuance cost of debt ....................................................... (2,538) --
Repayment of debt and capital lease obligation .............................. (535) (495)
Payment of merger debt assumed .............................................. (114,171) --
Net borrowings under revolving credit facility .............................. 135,450 63,100
Change in cash overdraft .................................................... -- (6,655)
Other ....................................................................... 109 376
--------- ---------
Net cash flows from financing activities ................................ 498,315 56,326
--------- ---------
Increase (decrease) in cash and cash equivalents ............................... (25,139) 596
Cash and cash equivalents at beginning of period ............................... 27,829 --
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 2,690 $ 596
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest .................................................................. $ 17,795 $ 17,526
========= =========
Income taxes .............................................................. $ -- $ 1,300
========= =========
See accompanying notes.
</TABLE>
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve Months Ended September 30,
2000 1999
---------- ---------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings ................................................................ $ 4,904 $ 11,393
Adjustments to reconcile net earnings to net cash flows from
operating activities:
Depreciation and amortization ........................................... 60,257 42,286
Deferred income taxes ................................................... 2,823 8,607
Provision for bad debts ................................................. 5,194 3,688
Deferred interest expense ............................................... (623) 847
Cumulative effect of change in accounting principle ..................... (602) --
Other ................................................................... 1,862 987
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, billed and unbilled .............................. (18,592) (7,538)
Accounts payable ...................................................... 20,872 70
Taxes and other liabilities ........................................... 4,977 (385)
Customer deposits ..................................................... (3,624) (108)
Deferred gas purchase costs ........................................... (29,100) 11,657
Inventories ........................................................... (33,580) (1,694)
Other ................................................................. (8,192) 2,536
--------- ---------
Net cash flows from operating activities .................................. 6,576 72,346
--------- ---------
Cash flows from (used in) investing activities:
Additions to property, plant and equipment .................................. (101,936) (79,330)
Acquisition of operations, net of cash received ............................. (445,196) --
Purchase of investment securities ........................................... (19,588) (8,413)
Increase in customer advances ............................................... 1,044 1,821
Increase (decrease) in deferred charges and credits ......................... 458 (6,343)
Proceeds from sale of subsidiary ............................................ 12,150 --
Other ....................................................................... (5,233) (497)
--------- ---------
Net cash flows used in investing activities ............................... (558,301) (92,762)
--------- ---------
Cash flows from (used in) financing activities:
Issuance of long-term debt .................................................. 780,000 --
Issuance cost of debt ....................................................... (9,830) --
Repayment of debt and capital lease obligation .............................. (138,831) (20,849)
Premium on early extinguishment of debt ..................................... (719) --
Net borrowings under revolving credit facility .............................. 51,350 42,000
Payment of merger debt assumed .............................................. (114,171) --
Purchase of treasury stock .................................................. (14,425) --
Change in cash overdraft .................................................... -- (337)
Other ....................................................................... 445 198
--------- ---------
Net cash flows from financing activities .................................. 553,819 21,012
--------- ---------
Increase in cash and cash equivalents .......................................... 2,094 596
Cash and cash equivalents at beginning of period ............................... 596 --
--------- ---------
Cash and cash equivalents at end of period ..................................... $ 2,690 $ 596
========= =========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest .................................................................. $ 58,076 $ 47,293
========= =========
Income taxes .............................................................. $ 4,321 $ 2,394
========= =========
See accompanying notes.
</TABLE>
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
These interim 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, 2000. Certain
prior period amounts have been reclassified to conform with the current period
presentation.
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. As further described
below, the Company acquired Providence Energy Corporation and Fall River Gas
Company on September 28, 2000, Valley Resources, Inc. on September 20, 2000 and
Pennsylvania Enterprises, Inc. on November 4, 1999. Accordingly, the operating
activities of the acquired operations are consolidated with the Company
beginning on the respective acquisition dates. Thus, the results of operations
of the Company for the periods subsequent to the acquisitions are not comparable
to those periods prior to the acquisitions nor are the fiscal 2001 results of
operations comparable with prior periods. Also, the results of operations for
the three- and twelve-month periods ended September 30, 2000 are not indicative
of results that would necessarily be achieved for a full year since the majority
of the Company's operating margin is earned during the winter heating season.
ACQUISITIONS
On September 28, 2000, Southern Union completed the acquisition of Providence
Energy Corporation (ProvEnergy) for approximately $270 million in cash plus the
assumption of approximately $90 million in long-term debt. The ProvEnergy
natural gas distribution operations are Providence Gas and North Attleboro Gas.
Providence Gas serves approximately 168,000 natural gas customers in Providence
and Newport, Rhode Island, and 23 other cities and towns in Rhode Island. North
Attleboro Gas serves approximately 6,000 customers in North Attleboro and
Plainville, Massachusetts, towns adjacent to the northeastern Rhode Island
border. Subsidiaries of the Company included in the ProvEnergy merger are
ProvEnergy Oil Enterprises, Inc. ("ProvEnergy Oil"), and ProvEnergy Power
Company, LLC. ProvEnergy Oil operates a fuel oil distribution business through
its subsidiary, ProvEnergy Fuels, Inc. (ProvEnergy Fuels). ProvEnergy Fuels
serves over 14,000 residential and commercial customers in Rhode Island and
Massachusetts. ProvEnergy Power Company owns 50% of Capital Center Energy
Company, LLC., a joint venture formed between ProvEnergy and ERI Services, Inc.
to provide retail power.
On September 28, 2000, Southern Union completed the acquisition of Fall River
Gas Company (Fall River Gas) for approximately 1.4 million shares of Southern
Union common stock and approximately $27 million in cash plus assumption of $20
million in long-term debt. Fall River Gas serves approximately 48,000 customers
in the city of Fall River and the towns of Somerset, Swansea and Westport, all
located in southeastern Massachusetts. Included in the Fall River Gas merger was
Fall River Gas Appliance Company, Inc., which rents water heaters and conversion
burners (primarily for residential use) in Fall River Gas' service area.
On September 20, 2000, Southern Union completed the acquisition of Valley
Resources, Inc. (Valley Resources) for approximately $125 million in cash plus
the assumption of $30 million in long-term debt. Valley Resources natural gas
distribution operations are Valley Gas Company and Bristol and Warren Gas
Company. Valley Resources, which is headquartered in Cumberland, Rhode Island,
provides natural gas utility service to more than 64,000 customers. Valley
Resources' three non-utility subsidiaries included in the merger rent and sell
appliances, offer service contract programs, sell liquid propane in Rhode Island
and nearby Massachusetts,and distribute as a wholesaler franchised lines to
plumbing and heating contractors. Also, included in the acquisition was Valley
Resources' 90% interest in Alternate Energy Corporation, which sells, installs
and designs natural gas conversion systems and facilities, is an
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
authorized representative of the ONSI Corporation fuel cell, holds patents for a
natural gas/diesel co-firing system and for a device to control the flow of fuel
on dual-fuel equipment.
The Company funded the cash portion of the above described acquisitions and any
related refinancings of assumed debt with a bank note (the Term Note). See Debt
and Capital Lease.
The assets of ProvEnergy, Fall River Gas and Valley Resources (hereafter
referred to as the Company's "New England Operations") have been included in the
consolidated balance sheet of the Company at September 30, 2000 and the results
of operations from the New England Operations have been included in the
statement of consolidated operations since their respective acquisition dates.
The acquisitions were accounted for using the purchase method. The additional
purchase cost assigned to utility plant of approximately $339,840,000 reflects
the excess of the purchase price over the historical book carrying value of the
utility plant. Amortization of the additional purchase cost assigned to utility
plant is provided on a straight-line basis over forty years. The final
allocation of the purchase price of the New England Operations acquisition is
expected to be completed in the fourth quarter of fiscal year 2001. The Company
plans to sell or dispose of the non-core businesses acquired in the New England
Operations.
Prior to the consummation of the acquisition of the New England Operations, the
Company purchased shares of Providence Energy Corporation, Fall River Gas
Company and Valley Resources, Inc. common stock for $2,882,000. As all necessary
approvals for the merger had not been obtained, these purchases were treated as
investment securities.
On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc.
(hereafter referred to as the "Pennsylvania Operations") in a transaction valued
at approximately $500 million, including assumption of long-term debt of
approximately $115 million. The Company issued approximately 16.7 million shares
(before adjustment for any subsequent stock dividend) of common stock and paid
approximately $36 million in cash to complete the transaction. The Company
funded the cash portion of the acquisition of the Pennsylvania Operations and
related refinancings with the sale of $300,000,000 of 8.25% Senior Notes due
2029 completed on November 3, 1999 (8.25% Senior Notes). See Debt and Capital
Lease.
The Pennsylvania Operations are headquartered in Wilkes-Barre, Pennsylvania with
natural gas distribution being its primary business. The principal operating
division of the Pennsylvania Operations is the PG Energy division of the Company
which serves more than 154,000 gas customers in northeastern and central
Pennsylvania. Subsidiaries of the Company included in the Pennsylvania
Operations merger included PG Energy Services Inc., (Energy Services), Keystone
Pipeline Services, Inc. (Keystone, a wholly-owned subsidiary of PG Energy
Services Inc.), PEI Power Corporation, and Theta Land Corporation. Through
Energy Services the Company markets a diversified range of energy-related
products and services under the name of PG Energy PowerPlus and supplies propane
under the name of PG Energy Propane. Keystone provides pipeline and fiber optic
cable construction, installation, maintenance, and rehabilitation services. PEI
Power Corporation operates a cogeneration plant that generates steam and
electricity for resale. Theta Land Corporation, which provided land management
and development services for more than 44,000 acres of land, was sold for
$12,150,000 in January 2000. No gain or loss was recognized on this transaction.
The Company plans to sell or dispose of both Keystone and the propane operations
of Energy Services, which are not material to the Company. The Company has not
yet sold these operations and there can be no assurance that a sale on terms
satisfactory to the Company will be completed.
The assets of the Pennsylvania Operations are included in the consolidated
balance sheet of the Company at September 30, 2000 and the results of operations
from the Pennsylvania Operations have been included in the statement of
consolidated operations since November 4, 1999. The acquisition was accounted
for using the purchase method. The additional purchase cost assigned to utility
plant of approximately $261,000,000 reflects the excess of the purchase price
over the historical book carrying value of the utility plant. Amortization of
the additional purchase cost assigned to utility plant is provided on a
straight-line basis over forty years.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the consummation of the acquisition of the Pennsylvania Operations, the
Company purchased 358,500 shares of Pennsylvania Enterprises, Inc. stock for
$11,887,000 during both the first and second quarters of the Company's fiscal
year 2000. As all necessary approvals for the merger had not been obtained,
these purchases were treated as investment securities.
Pro Forma Financial Information
The following unaudited pro forma financial information for the three-month
periods ended September 30, 2000 and 1999 is presented as though the following
events had occurred at the beginning of the earliest period presented: (i)
acquisition of the New England Operations and the Pennsylvania Operations; (ii)
the issuance of the Term Note and the sale of the 8.25% Senior Notes; and (iii)
the refinancing of certain short-term and long-term debt at the time of the
acquisitions. The pro forma financial information is not necessarily indicative
of the results which would have actually been obtained had the acquisition of
the New England Operations and Pennsylvania Operations, the issuance of the Term
Note, the sale of senior notes or the refinancings been completed as of the
assumed date for the periods presented or which may be obtained in the future.
Three Months Ended September 30,
2000 1999
----------------------
Operating revenues ........................... $ 185,659 $ 155,227
Income (loss) before extraordinary item ...... (33,309) (28,283)
Net earnings (loss) available for common stock (33,309) (28,283)
Net earnings (loss) per common stock:
Basic ................................... (0.67) (0.56)
Diluted ................................. (0.67) (0.56)
EARNINGS PER SHARE
Average shares outstanding for basic earnings per share were 48,573,037 and
32,468,287 for the three-month period ended September 30, 2000 and 1999,
respectively, and 47,442,298 and 32,651,091 for the twelve-month period ended
September 30, 2000 and 1999, 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, 2000 and 1999, respectively, and 1,335,808 and
1,533,458 for the twelve-month periods ended September 30, 2000 and 1999,
respectively. At September 30, 2000, 967,982 shares of common stock were held by
various rabbi trusts for certain of the Company's benefit plans and 22,182
shares were held in a rabbi trust for certain employees who deferred receipt of
Company shares for stock options exercised.
INVESTMENT SECURITIES
At September 30, 2000, the Company held securities of Capstone Turbine
Corporation (Capstone). This investment is classified as "available for sale"
under the Statement of Financial Accounting Standards Board (FASB) Accounting
for Certain Investments in Debt and Equity Securities; accordingly, these
securities are stated at fair value, with unrealized gains and losses recorded
as a separate component of common stockholders' equity. Realized gains and
losses on sales of investments, as determined on a specific identification
basis, are included in the Consolidated Statement of Operations when realized.
As of September 30, 2000, the Company's investment in Capstone had a fair value
of $288,628,000 and unrealized gain, net of tax, of $180,702,000. As of November
3, 2000, the fair value of the Company's investment in Capstone was
$189,119,000. The Company has classified this investment as current, as it plans
to monetize its investment as soon as practicable following the completion of
the applicable lock-up periods to which it was subject and use the proceeds to
reduce outstanding debt.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
All other securities owned by the Company are accounted for under the cost
method. The Company's other investments in securities consist of preferred stock
in non-public companies whose value is not readily determinable. Realized gains
and losses on sales of these 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.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
Accounting Policies of Derivatives and Hedging Activities The Company recognizes
derivatives on the consolidated balance sheet at their fair value. On the date
of the derivative contract, the Company designates the derivative as: (i) a
hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment ("fair value" hedge); (ii) a hedge of a forecasted transaction
or of the variability of cash flows to be received or paid related to a
recognized asset or liability ("cash flow" hedge), or (iii) "held for trading"
("trading" instruments). Changes in the fair value of a derivative that
qualifies as a fair-value hedge, along with the gain or loss on the hedged asset
or liability that is attributable to the hedged risk (including gains or losses
on firm commitments), are recorded in earnings. Changes in the fair value of a
derivative that qualifies as a cash-flow hedge are recorded in other
comprehensive income, until earnings are affected by the variability of cash
flows. Lastly, changes in the fair value of derivative trading instruments are
reported in current-period earnings.
Adoption of Accounting Pronouncement The Company adopted Accounting for
Derivative Instruments and Hedging Activities on July 1, 2000. In accordance
with that Statement, the Company recorded a net-of-tax cumulative-effect gain of
$602,000 in earnings to recognize the fair value of the derivative instruments
that are not designated as hedges. The Company also recorded $826,000 in
accumulated other comprehensive income which recognizes the fair value of all
derivative instruments that were designated as cash flow hedging instruments.
The Company expects to reclassify as earnings during the next twelve months
$306,000, net-of-tax from the transition adjustment that was recorded in
accumulated other comprehensive income. During this period, the Company expects
to reclassify these derivative gains to earnings as the settlement of swap
payments occur. The maximum term over which the Company is hedging exposures to
the variability of cash flows is 36 months.
Derivative Activities The Company manages earnings risk through the use of
derivative instruments to minimize the impact of volatility in interest rates
and commodity fuel prices. The Company uses interest rate swaps to hedge
exposure to changes in interest rates and commodity swaps and options to manage
price risk associated with energy contracts. The Company is a party to an
interest rate swap to reduce exposure to changes in the fair value of a fixed
lease commitment. During the quarter, the Company recorded a pre-tax gain of
$241,000 in other earnings to recognize the change in fair value of the
derivative hedging instrument and also recorded an offsetting pre-tax loss of
$241,000 to recognize the change in the difference (attributable to the hedged
risk) between the carrying value and fair value of the related hedged liability.
The interest rate swap associated with the fair value hedge was subsequently
terminated in October 2000 resulting in a pre-tax gain of $182,000 which will be
amortized into earnings through December 2004. The Company is also obligated
under two interest rate swaps designed to hedge exposure to variability in
interest payments on variable rate debt. As such, the Company recorded a
net-of-tax loss of $271,000 as an adjustment to accumulated other comprehensive
income to recognize the change in fair value of all derivative instruments
designated as cash flow hedging instruments.
The Company is also committed under two gas derivative contracts that are not
designated as hedging instruments and therefore do not qualify to receive hedge
accounting treatment under the Statement. During the quarter, the Company
recorded a pre-tax loss of $589,000 in other earnings to recognize the change in
fair value of these two derivative instruments. This loss was off-set by a
pre-tax gain of $683,000 arising from the monthly settlement of these derivative
contracts which was recorded as a reduction in cost of gas. At September 30,
2000, the combined fair market value of the two derivatives not accounted for as
hedges was $448,000 and will expire in the quarter ending December 31, 2000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In conjunction with the acquisition of Providence Energy Corporation, the
Company also acquired ProvEnergy Oil, a distributor of fuel oil to retail and
commercial customers. ProvEnergy Oil offers certain retail customers price caps
for winter heating oil and purchases heating oil call options as a hedge against
price fluctuations on the related anticipated commodity purchases.
As of September 30, 2000, the Company owned options representing 7.4 million
gallons of fuel oil at an average strike price of $0.84 a gallon. These options
are reflected on the balance sheet as assets at their fair value of $816,000.
The instruments are designated as cash flow hedges and in subsequent periods the
change in fair value of the effective portion of the hedging options will be
recorded to other comprehensive income while changes in any ineffective portion
will be recognized immediately in earnings. The maximum term over which the
Company is hedging exposures to the variability of cash flows for forecasted
purchases of home heating oil is eight months.
Trading Contracts The Company is also a party to certain energy trading
contracts for the purchase and sale of energy commodities that are accounted for
in accordance with Emerging Issues Task Force Issue Accounting for Contracts
Involved in Energy Trading and Risk Management Activities which requires that
energy trading contracts be recorded at fair value as of each balance sheet date
with gains and losses included in earnings. For the quarter ended September 30,
2000, the Company recorded an asset of $1,036,000 representing the fair market
value of the trading contracts and a corresponding pre-tax gain of $1,036,000 in
earnings.
PREFERRED SECURITIES OF SUBSIDIARY TRUST
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated
wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust
Originated Preferred Securities (Preferred Securities). In connection with the
Subsidiary Trust's issuance of the Preferred Securities and the related purchase
by Southern Union of all of the Subsidiary Trust's common securities (Common
Securities), Southern Union issued to the Subsidiary Trust $103,092,800
principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025
(Subordinated Notes).
The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest
and other payment dates on the 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 Subordinated Notes are redeemable at
the option of the Company on or after May 17, 2000, at a redemption price of $25
per Subordinated Note plus accrued and unpaid interest. The Preferred Securities
and the Common Securities will be redeemed on a pro rata basis to the same
extent as the Subordinated Notes are repaid, at $25 per Preferred Security and
Common Security plus accumulated and unpaid distributions. Southern Union's
obligations under the Subordinated Notes and related agreements, taken together,
constitute a full and unconditional guarantee by Southern Union of payments due
on the Preferred Securities. As of September 30, 2000 and 1999, 4,000,000 shares
of Preferred Securities were outstanding.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DEBT AND CAPITAL LEASE
September 30, June 30,
2000 2000
---------- -----------
(thousands of dollars)
7.60% Senior Notes due 2024 .............. $ 364,515 $ 364,515
8.25% Senior Notes due 2029 .............. 300,000 300,000
10.25% First Mortgage Bonds, due 2001 .... 910 --
8.375% First Mortgage Bonds, due 2002 .... 30,000 30,000
5.62% First Mortgage Bonds, due 2003 ..... 6,400 --
6.82% First Mortgage Bonds, due 2018 ..... 15,000 --
9.34% First Mortgage Bonds, due 2019 ..... 15,000 15,000
9.63% First Mortgage Bonds, due 2020 ..... 10,000 --
9.44% First Mortgage Bonds, due 2020 ..... 6,500 --
8.09% First Mortgage Bonds, due 2022 ..... 12,500 --
8.46% First Mortgage Bonds, due 2022 ..... 12,500 --
7.50% First Mortgage Bonds, due 2025 ..... 15,000 --
7.99% First Mortgage Bonds, due 2026 ..... 7,000 --
7.24% First Mortgage Bonds, due 2027 ..... 6,000 --
6.50% First Mortgage Bonds, due 2029 ..... 14,606 --
7.70% Debentures, due 2027 ............... 6,905 --
Term Note ................................ 480,000 --
Capital lease and other .................. 30,273 26,452
---------- ----------
Total debt and capital lease ............. 1,333,109 735,967
Less current portion ................. 8,004 2,193
---------- ----------
Total long-term debt and capital lease ... $1,325,105 $ 733,774
========== ==========
Senior Notes On November 3, 1999, the Company completed the sale of $300,000,000
of 8.25% Senior Notes (8.25% Notes) due 2029. The net proceeds from the sale of
these 8.25% Notes were used to: (i) fund the acquisition of Pennsylvania
Enterprises, Inc.; (ii) repay approximately $109,900,000 of borrowings under the
revolving credit facility, and (iii) repay approximately $136,000,000 of long-
and short-term debt assumed in the acquisition.
Assumed Debt In connection with the acquisition of the Pennsylvania Operations,
the Company assumed $45,000,000 of First Mortgage Bonds bearing interest between
8.375% and 9.34%. In connection with the acquisition of ProvEnergy, the Company
assumed $86,916,000 of First Mortgage Bonds bearing interest between 5.62% and
10.25%. In connection with the acquisition of Fall River Gas, the Company
assumed $19,500,000 of First Mortgage Bonds bearing interest between 7.24% and
9.44%. In connection with the acquisition of Valley Resources, the Company
assumed $6,905,000 of 7.70% Debentures.
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, 2000, the capital lease obligation outstanding was
$24,639,000 with a fixed rate of 5.79%. This system has significantly improved
meter reading accuracy and timeliness and provided electronic accessibility to
meters in residential customers' basements, thereby assisting in the reduction
of the number of estimated bills.
Credit Facilities On May 31, 2000, the Company restated and amended its
short-term and long-term credit facilities (together referred to as "Revolving
Credit Facilities"). The Company has available $90,000,000 under the short-term
facility, which expires May 30, 2001, and $135,000,000 under the long-term
facility, which expires on May 31, 2003. The Company has additional availability
under uncommitted line of credit facilities (Uncommitted Facilities) with
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
various banks. Borrowings under the Revolving Credit Facilities are available
for Southern Union's working capital, letter of credit requirements and other
general corporate purposes. A balance of $135,453,000 was outstanding under the
Revolving Credit Facilities at September 30, 2000.
Term Note On August 28, 2000 the Company entered into the Term Note to fund (i)
the cash portion of the consideration to be paid to the Fall River Gas'
stockholders; (ii) the all cash consideration to be paid to the ProvEnergy and
Valley Resources stockholders, (iii) repayment of approximately $50,000,000 of
long- and short-term debt assumed in the mergers, and (iv) all related
acquisition costs. As of September 30, 2000, a balance of $480,000,000 was
outstanding under this Term Note. Subsequently, $55,000,000 was drawn under this
Term Note to refinance the remaining short-term debt of the acquired companies.
Thus, as of October 31, 2000, a balance of $535,000,000 was outstanding under
this Term Note. The Term Note expires August 27, 2001 but may be extended at the
Company's option through August 26, 2002 for a 12.5 basis point fee. No
additional draws can be made on the Term Note.
UTILITY REGULATION AND RATES
Missouri On November 7, 2000, Missouri Gas Energy filed a $39,384,000 request
for a rate increase with the Missouri Public Service Commission (MPSC). Statutes
require that the MPSC reach a decision in the case within an eleven-month
period.
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 volumetrically. 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. On October 10, 2000, the MPSC issued its decision on
rehearing Missouri Gas Energy's request which served to reduce the $13,300,000
annual revenue increase by $70,000. The MPSC's orders are subject 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.
Rhode Island Effective October 1, 2000, the Rhode Island Public Utilities
Commission (RIPUC) approved a settlement agreement between Providence Gas, the
Rhode Island Division of Public Utilities and Carriers, the Energy Council of
Rhode Island, and The George Wiley Center. The settlement agreement recognizes
the need for an increase in distribution system revenues of $4.5 million,
recovered through an adjustment to the throughput portion of the gas charge, and
provides for a 21-month base rate freeze. In the settlement agreement, the RIPUC
authorized system improvement programs. Additionally, higher levels of support
for low income bill payment assistance was authorized as well as the
continuation of the utility's demand side management and weatherization
assistance programs. The agreement incorporates a decrease and freeze in the
fixed component of gas costs of $9.0 million annually, and establishes a
Commodity Cost Adjustment Factor mechanism to adjust the commodity component of
the Gas Charge Clause rate based on projected costs at prevailing market
conditions.
The settlement agreement also contains a weather mitigation clause and a
non-firm margin incentive mechanism (non-firm margin is margin earned from
interruptible customers with the ability to switch to alternative fuels). The
weather mitigation clause is designed to mitigate the impact of weather
volatility on customer billings, which will assist customers in paying bills and
stabilize the revenue stream to Providence Gas. Providence Gas will defer the
margin impact of weather that is greater than 2 percent colder-than-normal and
will recover the margin impact of weather that is greater than 2 percent
warmer-than-normal by making the corresponding adjustment to the deferred
revenue account (DRA). The non-firm margin incentive mechanism is designed to
encourage Providence Gas to
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
promote the development of non-firm margins, which will reduce the cost of
service to all customers. Providence Gas will retain 25 percent of all non-firm
margins earned in excess of $1.2 million.
Under the settlement agreement, Providence Gas may earn up to 10.7 percent but
not less than 7.0 percent using the average return on equity for the two 12
month periods of October 2000 through September 2001 and July 2001 through June
2002.
Pennsylvania On April 3, 2000, PG Energy filed an application with the
Pennsylvania Public Utility Commission (PPUC) seeking an increase in its base
rates designed to produce $17,900,000 in additional annual revenues, to be
effective June 2, 2000. On May 11, 2000, the PPUC suspended this rate increase
request for seven months, until January 2, 2001, in order to investigate the
reasonableness of the proposed rates. On October 10, 2000, PG Energy and the
principal parties to the base rate proceeding filed a Settlement Agreement and
Joint Petition for Settlement of Rate Investigation (the Settlement Petition)
with the PPUC and the Administrative Law Judge (ALJ) assigned to conduct the
investigation of the rate increase request. The Settlement Petition provides for
a rate increase that is designed to produce $10,800,000 of additional annual
revenues. The Settlement Petition requests PPUC approval for the rate increase
to become effective on January 1, 2001. The ALJ issued a Recommended Decision
dated as of October 18, 2000 recommending PPUC approval of the Settlement
Petition without modification. It is not presently possible to determine if the
PPUC will accept the ALJ's Recommended Decision and what action either the ALJ
or the PPUC will ultimately take with respect to this rate increase request or
the Settlement Petition.
El Paso, Texas 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. In
February 2000, the City of El Paso approved a $650,000 revenue increase, and an
improved rate design that collects a greater portion of the Company's revenue
stream from the monthly customer charge. Additionally, the City of El Paso
approved a new 30-year franchise for Southern Union Gas.
COMMITMENTS AND CONTINGENCIES
Environmental The Company is subject to federal, state and local laws and
regulations relating to the protection of the environment. These evolving laws
and regulations may require expenditures over a long period of time to control
environmental impacts. The Company has established procedures for the on-going
evaluation of its operations to identify potential environmental exposures and
assure compliance with regulatory policies and procedures.
The Company is investigating the possibility that the Company or predecessor
companies may have been associated with Manufactured Gas Plant (MGP) sites in
its former service territories, principally in Arizona and New Mexico, and
present service territories in Texas, Missouri and its newly acquired service
territories in Pennsylvania, Massachusetts and Rhode Island. At the present
time, the Company is aware of certain MGP sites in these areas and is
investigating those and certain other locations. While the Company's evaluation
of these Texas, Missouri, Arizona, New Mexico, Pennsylvania, Massachusetts and
Rhode Island MGP sites is in its preliminary stages, it is likely that some
compliance costs may be identified and become subject to reasonable
quantification. Within the Company's service territories certain MGP sites are
currently the subject of governmental actions. Certain of these sites are as
follows:
Kansas City, Missouri MGP Sites 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 MGP site.
This site (comprised of two adjacent MGP operations previously owned by two
separate companies and hereafter referred to as Station A and Station B) 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 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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 MGP sites. During July 1999, the Company sent applications to MDNR
submitting the two sites to the agency's Voluntary Cleanup Program (VCP). The
sites were accepted into the VCP on August 2, 1999 and MDNR subsequently
approved the Company's proposed work plans for the environmental assessment of
the sites. The final environment reports were sent to the state on March 6,
2000. In a letter dated June 21, 2000, MDNR responded to the Station A
environmental report submitted by the Company. In that letter, MDNR stated that
soil remediation will be necessary at the site (Station A) but that further
exploration and delineation of site contamination should be performed before
remedial methods can be determined. In response to MDNR's request, the Company
submitted a work plan for further investigation of the site to the agency on
September 18, 2000. MDNR has not responded to the Station B environmental report
submitted by the Company.
Independence, Missouri MGP Site The Company received a letter dated December 16,
1999 from MDNR notifying the Company of a Pre-Comprehensive Environmental
Response Compensation and Liability Information System (CERCLIS) Site Screening
investigation of a former MGP located at Pacific Avenue & South River Boulevard
in Independence, Missouri. The Company contacted the MDNR to inform the state
that, as this property is not owned by the Company, it cannot grant access to
the property for MDNR's investigation. MDNR proceeded to investigate the site in
cooperation with the site's current owner. In a letter dated May 17, 2000, MDNR
reported that the site is not recommended for CERCLIS entry and no further
CERCLA action is recommended. However, due to the presence of characteristic
waste, the site is eligible for the state's Registry of Confirmed Abandoned or
Uncontrollable Hazardous Waste Disposal Sites in Missouri.
Providence, Rhode Island Sites During 1995, Providence Gas began an
environmental evaluation at its primary gas distribution facility located at 642
Allens Avenue in Providence, Rhode Island. Environmental studies and a
subsequent remediation work plan were completed at an approximate cost of $4.5
million. Providence Gas also began a soil remediation project on a portion of
the site in July 1999 that is expected to be completed in February 2001. As of
September 30, 2000, approximately $5.7 million had been expended on soil
remediation. The Company has compiled a preliminary range of costs, based on
removal and off-site disposal of the most contaminated soil, ranging from $7.0
million to in excess of $9.0 million. While an environmental solution for the
remainder of the site has not been formulated, the Company anticipates
approximately $5.5 million in other costs, including pipe removal, soil
remediation and a groundwater investigation. Because of the uncertainties
associated with the pending investigation and remedial solutions, the Company
cannot offer any conclusions as to the total future cost of remediation of the
property at this time.
In November 1998, Providence Gas received a letter of responsibility from the
Department of Environmental Management (DEM) relating to possible contamination
on previously owned property at 170 Allens Avenue in Providence. The current
operator of the property has also received a letter of responsibility. A work
plan has been created and approved by DEM. An investigation has begun to
determine the extent of contamination, as well as the extent of the Company's
responsibility. Providence Gas entered into a cost-sharing agreement with the
current operator of the property, under which Providence Gas is responsible for
approximately twenty percent (20%) of the costs related to the investigation.
Costs of testing at this site as of September 30, 2000 were approximately
$300,000. Until the results of the investigation are known, the Company cannot
offer any conclusions as to its responsibility.
Tiverton, Rhode Island Site Fall River Gas Company is a defendant in a civil
action seeking to recover anticipated remediation costs associated with
contamination found at property owned by the plaintiffs. This claim is based on
alleged dumping of material by Fall River Gas Company trucks at the site in the
1930s and 1940s.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Valley Resources Sites Valley Resources is a party to an action in which
Blackstone Valley Electric Company ("Blackstone") brought suit for contribution
to its expenses of cleanup of a site on Mendon Road in Attleboro, Massachusetts,
to which coal manufacturing waste was transported from a former MGP site in
Pawtucket, Rhode Island (the "Blackstone Litigation"). Blackstone Valley
Electric Company v. Stone & Webster, Inc., Stone & Webster Engineering
Corporation, Stone & Webster Management Consultants, Inc. and Valley Gas
Company, C. A. No. 94-10178JLT, United States District Court, District of
Massachusetts. Valley Resources takes the position in that litigation that it is
indemnified for any cleanup expenses by Blackstone pursuant to a 1961 agreement
signed at the time of Valley Resources' creation. This suit was stayed in 1995
pending the issuance of rulemaking at the United States EPA. That rulemaking is
still pending (Commonwealth of Massachusetts v. Blackstone Valley Electric
Company, 67 F.3d 981 (1995)). While this suit has been stayed, Valley Resources
and Blackstone (merged with Narragansett Electric Company in May 2000) have
received letters of responsibility from the Rhode Island DEM with respect to
releases from two MGP sites in Rhode Island. DEM issued letters of
responsibility to Valley Resources and Blackstone in September 1995 for the
Tidewater MGP in Pawtucket, Rhode Island, and in February 1997 for the Hamlet
Avenue MGP in Woonsocket, Rhode Island. Valley Resources entered into an
agreement with Blackstone (now Narragansett) in which Valley Resources and
Blackstone agreed to share equally the expenses for the costs associated with
the Tidewater site subject to reallocation upon final determination of the legal
issues that exist between the companies with respect to responsibility for
expenses for the Tidewater site and otherwise. No such agreement has been
reached with respect to the Hamlet site. A new plan, effective October 1, 2000
through June 30, 2000, establishes an environmental fund for the recovery of
evaluation, remedial and clean-up costs arising out of the Company's MGPs and
sites associated with the operation and disposal activities from MGPs.
To the extent that potential costs associated with former MGPs are quantified,
the Company expects to provide any appropriate accruals and seek recovery for
such remediation costs through all appropriate means, including in rates charged
to customers, insurance and regulatory relief. At the time of the closing of the
acquisition of the Company's Missouri service territories, the Company entered
into an Environmental Liability Agreement that provides that Western Resources
retains financial responsibility for certain liabilities under environmental
laws that may exist or arise with respect to Missouri Gas Energy. In addition,
at the time it was acquired, Providence Gas had in place a regulatory plan that
created a mechanism for the recovery of environmental-related costs. This plan
provided for recovery of environmental investigation and remediation costs
incurred through September 30, 1997, as well as costs incurred during the
three-year term of the plan, are to be amortized over a 10-year period, at a
level authorized under the plan.
Although significant charges to earnings could be required prior to rate and
insurance recovery, management does not believe that environmental expenditures
for MGP sites will have a material adverse effect on the Company's financial
position, 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.
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 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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
February 15, 2000, until closing. Southern Union's revised proposal was rejected
by Southwest's Board of Directors. On January 21, 2000, ONEOK announced that it
was withdrawing from the Southwest merger agreement.
There are several lawsuits pending that relate to activities surrounding
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 pursue its claims
against Southwest, ONEOK, and certain individual defendants, and vigorously
defend 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, results of
operations or cash flows.
Regulatory 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 Corporation (Valero)) and a number of
its subsidiaries, as well as former Valero subsidiary Rio Grande Valley Gas
Company (RGV) and RGV's successor company, Southern Union Company. The case,
based upon 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.
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.
Commitments Due to the operation of purchase gas adjustment clauses, gas
purchase costs generally do not directly affect earnings of our regulated
utility operations. However, the Company's unregulated gas marketing operations
are subject to price risk related to fixed-price sales commitments that are not
matched with corresponding fixed-price purchase agreements. At September 30,
2000, the Company had fixed-price sales commitments with various customers that
provide for the delivery of approximately 1,000,000 Dekatherms of natural gas
through April 2001 at an average sales price per Dekatherm of $3.12. The Company
has exposure to the changes in natural gas prices related to fluctuating
commodity prices, which can impact the Company's financial position or results
of operations, either favorably or unfavorably. The impact of changing prices on
the Company's financial position at a point in time is not necessarily
indicative of the impact of price movements throughout the year.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Overview The Company's core business is the distribution of natural gas as a
public utility through: Southern Union Gas, Missouri Gas Energy (MGE); Atlantic
Utilities, doing business as South Florida Natural Gas (SFNG); PG Energy,
acquired on November 4, 1999; and, effective with the September 2000
acquisitions of Providence Energy Corporation, Valley Resources, Inc. and Fall
River Gas Company, collectively its New England division. In addition,
subsidiaries of Southern Union support and expand natural gas sales and to
capitalize on the Company's gas energy expertise. These subsidiaries operate
natural gas pipeline systems, generate electricity, market natural gas and
electricity to end-users and distribute propane and fuel oil. Certain
subsidiaries also 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.
Acquisitions On September 28, 2000, Southern Union completed the acquisition of
Providence Energy Corporation (ProvEnergy) for approximately $270 million in
cash plus the assumption of $90 million in long-term debt. The ProvEnergy
natural gas distribution operations are Providence Gas and North Attleboro Gas.
Providence Gas serves approximately 168,000 natural gas customers in Providence
and Newport, Rhode Island, and 23 other cities and towns in Rhode Island. North
Attleboro Gas serves approximately 6,000 customers in North Attleboro and
Plainville, Massachusetts, towns adjacent to the northeastern Rhode Island
border. Subsidiaries of the Company included in the ProvEnergy merger are
ProvEnergy Oil Enterprises, Inc. (ProvEnergy Oil), and ProvEnergy Power Company,
LLC. ProvEnergy Oil operates a fuel oil distribution business through its
subsidiary, ProvEnergy Fuels, Inc. (ProvEnergy Fuels). ProvEnergy Fuels serves
over 14,000 residential and commercial customers in Rhode Island and
Massachusetts. ProvEnergy Power Company owns 50% of Capital Center Energy
Company, LLC., a joint venture formed between ProvEnergy and ERI Services, Inc.
to provide retail power.
On September 28, 2000, Southern Union also completed the acquisition of Fall
River Gas Company (Fall River Gas) for approximately 1.4 million shares of
Southern Union common stock and approximately $27 million in cash plus
assumption of $20 million in long-term debt. Fall River Gas serves approximately
48,000 customers in the city of Fall River and the towns of Somerset, Swansea
and Westport, all located in southeastern Massachusetts. Included in the Fall
River Gas merger was Fall River Gas Appliance Company, Inc. which rents water
heaters and conversion burners (primarily for residential use) in Fall River
Gas' service area.
On September 20, 2000, Southern Union completed the acquisition of Valley
Resources, Inc. (Valley Resources) for approximately $125 million in cash plus
the assumption of $30 million in long-term debt. Valley Resources natural gas
distribution operations are Valley Gas Company and Bristol and Warren Gas
Company. Valley Resources, which is headquartered in Cumberland, Rhode Island,
provides natural gas utility service to more than 64,000 customers. Valley
Resources' three non-utility subsidiaries included in the merger rent and sell
appliances, offer service contract programs, sell liquid propane in Rhode Island
and nearby Massachusetts, and distribute as a wholesaler franchised lines to
plumbing and heating contractors. Also included in the acquisition was Valley
Resources' 90% interest in Alternate Energy Corporation, which sells, installs
and designs natural gas conversion systems and facilities, is an authorized
representative of the ONSI Corporation fuel cell, holds patents for a natural
gas/diesel co-firing system and for a device to control the flow of fuel on
dual-fuel equipment.
The Company plans to sell or dispose of the non-core businesses acquired in the
New England division.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc.
(hereafter referred to as the "Pennsylvania Operations") in a transaction valued
at approximately $500 million, including assumption of long-term debt of
approximately $115 million. The Company issued approximately 16.7 million shares
(before adjustment for any subsequent stock dividend) of common stock and paid
approximately $36 million in cash to complete the transaction. The Pennsylvania
Operations are headquartered in Wilkes-Barre, Pennsylvania with natural gas
distribution being its primary business. The principal operating division of the
Pennsylvania Operations is the PG Energy division of the Company which serves
more than 154,000 gas customers in northeastern and central Pennsylvania.
Subsidiaries of the Company included in the Pennsylvania Operations include PG
Energy Services Inc., (Energy Services), Keystone Pipeline Services, Inc.
(Keystone, a wholly-owned subsidiary of PG Energy Services Inc.), and PEI Power
Corporation. Through Energy Services the Company markets a diversified range of
energy-related products and services under the name of PG Energy PowerPlus and
supplies propane under the name of PG Energy Propane. Keystone provides pipeline
and fiber optic cable construction, installation, maintenance, and
rehabilitation services. PEI Power Corporation operates a cogeneration plant
that generates steam and electricity for resale. The Company plans to sell or
dispose of both Keystone and the propane operations of Energy Services; these
operations are not material to the Company. The Company has not yet sold these
operations and there can be no assurance that a sale on terms satisfactory to
the Company will be completed.
The operating activities of the acquired operations are consolidated with the
Company beginning on their respective acquisition dates. Thus, the results of
operations for the three- and twelve-month periods ended September 30, 2000 are
not indicative of results that would necessarily be achieved for a full year
since the majority of the Company's operating margin is earned during the winter
heating season. For these reasons, the results of operations of the Company for
the periods subsequent to the acquisitions are not comparable to those periods
prior to the acquisitions nor are the fiscal 2001 results of operations
comparable with prior periods. The operating activities of the New England
division included in the Company's results of operation are not material for the
three- and twelve-month periods ended September 30, 2000.
RESULTS OF OPERATIONS
Three Months Ended September 30, 2000 and 1999
The Company recorded a net loss attributable to common stock of $12,248,000 for
the three-month period ended September 30, 2000 compared with a net loss of
$6,100,000 for the three-month period ended September 30, 1999. Net loss per
common share, based on weighted average shares outstanding during the period,
was $.25 in 2000 compared with a net loss per common share of $.19 in 1999. 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 $144,468,000 for the three-month period ended September
30, 2000, compared with operating revenues of $84,786,000 in 1999. Gas purchase
and other energy costs for the three-month period ended September 30, 2000 were
$84,534,000, compared with $39,277,000 in 1999. The Company's operating revenues
are affected by the level of sales volumes and by the pass-through of increases
or decreases in the Company's gas purchase costs through its purchased gas
adjustment clauses. Additionally, revenues are affected by increases or
decreases in gross receipts taxes (revenue-related taxes) which are levied on
sales revenue as collected from customers and remitted to the various taxing
authorities. The increase in both operating revenues and gas purchase costs
between periods was primarily due to a 14% increase in gas sales volume to
13,731 MMcf in 2000 from 12,027 MMcf in 1999 and by a 42% increase in the
average cost of gas from $3.21 per Mcf in 1999 to $4.56 per Mcf in 2000. Changes
in the average cost of gas resulted from seasonal impacts on demands for natural
gas and the ensuing competitive pricing within the industry. The Pennsylvania
Operations contributed $37,294,000 to the overall increase in operating
revenues, $25,759,000 in gas purchase and other energy costs and 1,566 MMcf of
the increase in gas sales volume.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net operating margin (operating margin less revenue-related taxes) increased
$13,311,000 for the three-month period ended September 30, 2000 compared with
the same period in 1999. Net operating margin increased principally as a result
of the acquisition of the Pennsylvania Operations which contributed $11,359,000
to the net operating margin for the three-month period ended September 30, 2000.
Operating expenses, which include operating, maintenance and general expenses,
depreciation and amortization, and taxes other than on income and revenues, were
$57,843,000 for the three-month period ended September 30, 2000, an increase of
$18,106,000, compared with $39,737,000 in 1999. An increase of $13,505,000 was
the result of the acquisition of the Pennsylvania Operations. Also impacting
operating expenses during the three-month period ended September 30, 2000 was an
increase in Company employee benefit costs and injuries and damages.
Interest expense was $16,306,000 for the three-month period ended September 30,
2000, compared to $8,364,000 in 1999. The increase is primarily due to the
issuance of $300,000,000 of 8.25% Senior Notes on November 3, 1999 ("8.25%
Senior Notes") which were used to extinguish $136,000,000 in existing debt of
the Pennsylvania Operations at the time of the merger and the assumption of
$45,000,000 of Pennsylvania Operations' debt by the Company.
Other expense for the three-month period ended September 30, 2000 was $2,318,000
compared to $1,157,000 in 1999. Other expense for the three-month period ended
September 30, 2000 primarily consists of $2,041,000 of legal costs associated
with ongoing litigation associated with an unsuccessful acquisition. This amount
was offset by $451,000 in net rental income from Lavaca Realty Company ("Lavaca
Realty"). Other expense for the three-month period ended September 30, 1999
primarily consists of $1,200,000 of legal costs associated with ongoing
litigation associated with an unsuccessful acquisition which was also partially
offset by $222,000 in net rental income from Lavaca Realty.
For the three-month period ended September 30, 2000, the federal and state
income tax benefit increased $7,148,000 over the same period in 1999 primarily
due to the increase in net loss as previously described.
The Company adopted the Statement of Financial Accounting Standards Board (FASB)
Accounting for Derivative Instruments and Hedging Activities on July 1, 2000. In
accordance with the transition provisions of the Statement, the Company recorded
a net-of-tax cumulative-effect-type gain of $602,000 in earnings to recognize
the fair value of the derivative instruments that do not qualify for hedge
accounting treatment under the Statement. The Company also recorded a net-of-tax
cumulative effect-type gain of $826,000 in accumulated other comprehensive
income to recognize at fair value all derivative instruments designated as cash
flow hedging instruments.
Twelve Months Ended September 30, 2000 and 1999
The Company recorded net earnings available for common stock of $4,904,000 for
the twelve-month period ended September 30, 2000 compared with net earnings of
$11,393,000 in 1999. Earnings per diluted share were $.10 in 2000 compared with
earnings per diluted share of $.33 in 1999.
Operating revenues were $891,387,000 for the twelve-month period ended September
30, 2000, compared with operating revenues of $612,562,000 in 1999. Gas purchase
and other energy costs for the twelve-month period ended September 30, 2000 were
$542,955,000, compared with $346,904,000 in 1999. Both operating revenues and
gas purchase costs were primarily impacted by a 15% increase in gas sales volume
from 105,938 MMcf in 1999 to 121,483 MMcf in 2000. The acquisition of PG Energy
contributed 21,479 MMcf of the increase while the remaining operations of the
Company resulted in a gas sales volume decrease of 5,934 MMcf. The decrease in
sales volumes in both Missouri and Texas were due to warmer weather during the
twelve-month period ended September 30, 2000 compared with 1999.
Additionally, operating revenues and gas purchase costs were affected by an
increase of 17%
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
in the average cost of gas from $3.25 per Mcf in 1999 to $3.82 per Mcf in 2000,
due to increases in average spot market gas prices.
Missouri Gas Energy service territories experienced weather which was 79% of a
30-year measure for the twelve-month period ended September 30, 2000 compared
with 86% in 1999. Weather for Southern Union Gas service territories for the
twelve-month period ended September 30, 2000 was 71% of a 30-year measure
compared with 74% in 1999. About half of the customers served by Southern Union
Gas are weather normalized. Weather in PG Energy service territories was 95% of
a 30-year measure for the eleven-month period ended September 30, 2000.
Operating expenses were $227,103,000 for the twelve-month period ended September
30, 2000, compared with operating expenses of $165,816,000 in 1999. An increase
of $51,259,000 was the result of the acquisition of the Pennsylvania Operations,
as previously discussed. Also impacting operating expenses during the
twelve-month period ended September 30, 2000 was an increase in bad debt expense
and inventory write-downs associated with a propane operation, as well as
increases in Company employee benefit costs.
Interest expense was $59,434,000 for the twelve-month period ended September 30,
2000 compared to $35,622,000 in 1999. The increase in interest expense was
primarily due to the issuance of the 8.25% Senior Notes, as previously discussed
which was used to extinguish $136,000,000 in existing debt of the Pennsylvania
Operations at the time of the merger and the assumption of $45,000,000 of
Pennsylvania Operations' debt by the Company. This was partially offset by
reduced interest expense on short-term debt due to a reduction in the average
short-term debt outstanding during 2000 as a result of utilizing a portion of
the 8.25% Senior Notes proceeds for working capital needs.
Other expense for the twelve-month period ended September 30, 2000 was
$8,633,000 compared to $3,695,000 in 1999. Other expense for the twelve-month
period ended September 30, 2000 included: $12,404,000 of legal costs associated
with ongoing litigation associated with an unsuccessful acquisition which was
partially offset by net rental income of Lavaca Realty of $1,985,000 and
$623,000 in deferral of interest and other expenses associated with the MGE
Safety Program. Other expense for the twelve-month period ended September 30,
1999 included: $5,039,000 of legal costs associated with ongoing litigation
associated with an unsuccessful acquisition 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.
For the twelve-month period ended September 30, 2000, federal and state income
taxes decreased $3,621,000 over the same period in 1999 due to a decrease in
pre-tax earnings as discussed above. The Company's consolidated federal and
state effective income tax rate was 45% and 38% for the twelve-month period
ended September 30, 2000 and 1999, respectively. The increase in the effective
federal and state income tax rate is a result of non-tax deductible amortization
of additional purchase cost associated with the purchase of the Pennsylvania
Operations.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the Company's gas
utility operations for the three- and twelve-month periods ended September 30,
2000 and 1999:
<TABLE>
<CAPTION>
Three Months Ended Twelve Months Ended
September 30, September 30,
2000 1999 2000 1999
----------- ------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Average number of gas sales customers served:
Residential ...................................... 1,052,786 897,281 1,044,172 899,968
Commercial ....................................... 103,348 87,375 103,775 88,788
Industrial and irrigation ........................ 773 574 751 571
Public authorities and other ..................... 3,151 2,845 3,147 2,860
Pipeline and marketing ........................... 370 235 263 236
----------- ----------- ----------- -----------
Total average customers served .............. 1,160,428 988,310 1,152,108 992,423
=========== =========== =========== ===========
Gas sales in millions of cubic feet (MMcf)
Residential ...................................... 5,518 4,687 70,271 57,215
Commercial ....................................... 3,279 2,847 29,886 25,649
Industrial and irrigation ........................ 527 326 1,797 1,370
Public authorities and other ..................... 290 255 2,625 2,287
Pipeline and marketing ........................... 3,388 3,143 17,083 18,486
----------- ----------- ----------- -----------
Gas sales billed ............................ 13,002 11,258 121,662 105,007
Net change in unbilled gas sales ................. 729 769 (179) 931
----------- ----------- ----------- -----------
Total gas sales ............................. 13,731 12,027 121,483 105,938
=========== =========== =========== ===========
Gas sales revenues (thousands of dollars):
Residential ...................................... $ 61,576 $ 44,290 $ 494,133 $ 369,084
Commercial ....................................... 24,780 16,836 183,246 142,417
Industrial and irrigation ........................ 3,264 1,591 10,493 6,475
Public authorities and other ..................... 1,846 1,159 12,904 8,752
Pipeline and marketing ........................... 13,713 8,731 52,151 43,218
----------- ----------- ----------- -----------
Gas revenues billed ......................... 105,179 72,607 752,927 569,946
Net change in unbilled gas sales revenues ........ 5,363 4,571 3,664 5,706
----------- ----------- ----------- -----------
Total gas sales revenues .................... $ 110,542 $ 77,178 $ 756,591 $ 575,652
=========== =========== =========== ===========
Gas sales margin (thousands of dollars) ............... $ 43,029 $ 34,557 $ 257,593 $ 198,586
=========== =========== =========== ===========
Gas sales revenue per thousand cubic feet (Mcf) billed:
Residential ...................................... $ 11.16 $ 9.45 $ 7.03 $ 6.45
Commercial ....................................... 7.56 5.91 6.13 5.55
Industrial and irrigation ........................ 6.20 4.88 5.84 4.73
Public authorities and other ..................... 6.38 4.55 4.92 3.83
Pipeline and marketing ........................... 4.05 2.78 3.05 2.34
Weather:
Degree days:
Southern Union Gas service territories ...... 5 3 1,516 1,580
Missouri Gas Energy service territories ..... 66 92 4,150 4,522
PG Energy service territories ............... 260 -- 5,547 --
30-year measure:
Southern Union Gas service territories ...... 5 5 2,147 2,134
Missouri Gas Energy service territories ..... 59 59 5,245 5,246
PG Energy service territories ............... 120 -- 5,870 --
Gas transported in millions of cubic feet (MMcf) ...... 15,268 12,603 72,501 55,921
Gas transportation revenues (thousands of dollars) .... $ 7,308 $ 4,372 $ 36,294 $ 20,752
</TABLE>
----------------------
The above information does not include the Company's 43% equity ownership in a
natural gas distribution company serving 22,000 customers in Piedras Negras,
Mexico. The above information does not include the New England division acquired
in various transactions in September 2000. As of September 30, 2000, the New
England division served approximately 286,000 gas sales customers.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's gas utility operations are seasonal in nature with a significant
percentage of the annual revenues and earnings occurring in the traditional
heating-load months. This seasonality results in a high level of cash flow needs
immediately preceding the peak winter heating season months, resulting from the
required payments to natural gas suppliers in advance of the receipt of cash
payments from the Company's customers. The Company has historically used
internally generated funds and its credit facilities to provide funding for its
seasonal working capital, continuing construction and maintenance programs and
operational requirements.
On May 31, 2000, the Company restated and amended its short-term and long-term
credit facilities (together referred to as "Revolving Credit Facilities"). The
Company has available $90,000,000 under the short-term facility, which expires
May 30, 2001, and $135,000,000 under the long-term facility, which expires on
May 31, 2003. The Company has additional availability under uncommitted line of
credit facilities (Uncommitted Facilities) with various banks. Borrowings under
the Revolving Credit Facilities are available for Southern Union's working
capital, letter of credit requirements and other general corporate purposes. A
balance of $135,453,000 was outstanding under the Revolving Credit Facilities at
September 30, 2000.
On August 28, 2000 the Company entered into the Term Note to fund (i) the cash
portion of the consideration to be paid to the Fall River Gas' stockholders;
(ii) the all cash consideration to be paid to the ProvEnergy and Valley
Resources stockholders, (iii) repayment of approximately $50,000,000 of long-
and short-term debt assumed in the mergers, and (iv) all related acquisition
costs. As of September 30, 2000, a balance of $480,000,000 was outstanding under
this Term Note. Subsequently, $55,000,000 was drawn under the Term Note to
refinance the remaining short-term debt of the acquired companies. Thus, as of
October 31, 2000, a balance of $535,000,000 was outstanding on this Term Note.
The Term Note expires August 27, 2001 but may be extended at the Company's
option through August 26, 2002 for a 12.5 basis point fee. No additional draws
can be made on the Term Note.
Concurrent with the closing of the Pennsylvania Enterprises, Inc. merger on
November 4, 1999, the Company issued $300,000,000 of 8.25% Senior Notes due 2029
which were used to: (i) fund the cash portion of the consideration to be paid to
the Pennsylvania Enterprises, Inc. shareholders; (ii) refinance and repay
certain debt of Pennsylvania Enterprises, Inc., and (iii) repay outstanding
borrowings under the Company's various credit facilities. These senior notes are
senior unsecured obligations and will rank equally in right of payment with each
other and with the Company's other unsecured and unsubordinated obligations,
including the 7.60% Senior Notes due 2024.
The principal sources of funds during the three-month period ended September 30,
2000 were $480,000,000 borrowed under the Term Note and $135,450,000 borrowed
under the Company's Revolving Credit Facilities. This provided funds of
$406,830,000 for acquisition and related expenses of the New England Operations;
$535,000 for the retirement of long-term debt; $21,908,000 for on-going
property, plant and equipment additions; as well as seasonal working capital
needs of the Company.
The effective interest rate under the Company's current debt structure is 7.93%
(including interest and the amortization of debt issuance costs and redemption
premiums on refinanced debt).
The Company retains its borrowing availability under its Revolving Credit
Facilities, as discussed above. Borrowings under these credit facilities will
continue to be used, as needed, to provide funding for the seasonal working
capital needs of the Company. Internally-generated funds from operations will be
used principally for the Company's ongoing construction and maintenance programs
and operational needs and may also be used periodically to reduce outstanding
debt.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in Item 3 updates, and should be read in conjunction
with, information set forth in Part II, Item 7 in the Company's Annual Report on
Form 10-K for the year ended June 30, 2000, in addition to the interim
consolidated financial statements, accompanying notes, and Management's
Discussion and Analysis of Financial Condition and Results of Operations
presented in Items 1 and 2 of this Quarterly Report on Form 10-Q.
There were no material changes in market risks faced by the Company from those
reported in the Company's Annual Report on Form 10-K for the year ended June 30,
2000.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Financial Condition and Results of
Operations and other sections of this Form 10-Q may 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 differing materially
from such forward-looking statements include the following: cost of gas; gas
sales volumes; weather conditions 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 relations with labor
unions of bargaining-unit employees; the receipt of timely and adequate rate
relief; the outcome of pending and future litigation; governmental regulations
and proceedings affecting or involving the Company; and the nature and impact of
any extraordinary transactions such as any acquisition or divestiture of a
business unit or any assets. These are 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 a Special Meeting of Stockholders on August 29, 2000. The
following matter was submitted for a vote by Southern Union's security holders
to approve and adopt, separately and jointly: the Agreement of Merger between
Southern Union Company and Fall River Gas, whereby Fall River Gas would merge
with and into Southern Union; and the Agreement and Plan of Merger between
Southern Union, GUS Acquisition Corp., a wholly-owned subsidiary of Southern
Union and Providence Energy Corp., whereby GUS would be merged with and into
ProvEnergy with ProvEnergy becoming the surviving corporation and a wholly-owned
subsidiary of Southern Union, whereupon ProvEnergy would adopt and effect plans
of merger whereby each of North Attleboro Gas Company, a Massachusetts
corporation and Providence Gas Company, a Rhode Island corporation, each of
which was a subsidiary of ProvEnergy, would be merged with and into ProvEnergy,
and Southern Union would adopt and effect an agreement and plan of merger
whereby ProvEnergy would be merged into Southern Union.
The number of votes cast in favor, against or abstain for the proposal voted on
at the Special Meeting of Stockholders, were:
For Against Abstain
Proposal to approve Fall River Gas Company and
Providence Energy Corporation mergers..... 41,666,787 139,912 176,475
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
------------------------
(Registrant)
Date November 14, 2000 By RONALD J. ENDRES
----------------- ------------------------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date November 14, 2000 By DAVID J. KVAPIL
----------------- -------------------------------
David J. Kvapil
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)