<PAGE>
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
----------------
FORM 10-Q
For the quarterly period ended
------------------------------
December 31, 1999
Commission File No. 1-6407
----------------
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
- ------------------- -----------------------------------------
Common Stock, par New York Stock Exchange
value $1 per share
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes No
--- ---
The number of shares of the registrant's Common Stock outstanding
on February 4, 2000 was 47,945,778.
=================================================================
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
December 31, 1999
Index
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated statements of operations - three, six and
twelve months ended December 31, 1999 and 1998
Consolidated balance sheet - December 31, 1999 and
1998 and June 30, 1999
Consolidated statement of stockholders' equity - six
months ended December 31, 1999 and twelve months
ended June 30, 1998
Consolidated statements of cash flows - three, six and
twelve months ended December 31, 1999 and 1998
Notes to consolidated financial statements
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "COMMITMENTS AND CONTINGENCIES" in Notes to
Consolidated Financial Statements)
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 3(a) -- Certificate of Amendment of Re-
stated Certificate of Incorpora-
tion of Southern Union Company
(b) Exhibit 3(b) -- Bylaws of Southern Union Com-
pany, as amended
(c) Exhibit 10(a) -- Employment agreement between
Thomas F. Karam and Southern
Union Company dated December 28,
1999
(d) Exhibit 10(b) -- Secured Promissory Note and
Security Agreements between
Thomas F. Karam and Southern
Union Company dated December 20,
1999
(e) Exhibit 27 -- Financial Data Schedule
(f) Reports on Form 8-K
Date
Filed Description of Filing
-------- ---------------------------------------
11/18/99 Announcement of completed merger on
November 4, 1999 with Pennsylvania
Enterprises, Inc.
11/19/99 Form of purchase and pricing agreement
dated October 27, 1999 with respect to
8.25% Senior Notes issued on
November 3, 1999.
11/19/99 Announcement of definitive merger
agreement on November 15, 1999 with
Providence Energy Corporation.
12/06/99 Announcement of definitive merger
agreement on November 30, 1999 with
Valley Resources, Inc.
12/30/99 Mortgage Bonds of Pennsylvania
Enterprises, Inc.'s utility subsidiary
that were assumed by Southern Union
Company in connection with the consum-
mation of the November 4, 1999 merger.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended December 31,
-------------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues.............. $ 239,595 $ 174,224
Cost of gas and other energy.... 145,113 103,938
----------- -----------
Operating margin.............. 94,482 70,286
Revenue-related taxes........... 11,256 9,244
----------- -----------
Net operating margin.......... 83,226 61,042
Operating expenses:
Operating, maintenance and
general..................... 34,194 27,074
Depreciation and amortization. 13,500 10,496
Taxes, other than on income
and revenues................ 4,634 3,486
----------- -----------
Total operating expenses.... 52,328 41,056
----------- -----------
Net operating revenues...... 30,898 19,986
----------- -----------
Other income (expenses):
Interest...................... (13,299) (9,142)
Dividends on preferred securi-
ties of subsidiary trust.... (2,370) (2,370)
Other, net.................... (3,336) (162)
----------- -----------
Total other expenses, net... (19,005) (11,674)
----------- -----------
Earnings before income
taxes..................... 11,893 8,312
Federal and state income taxes.. 4,761 2,938
----------- -----------
Net earnings available for
common stock.................. $ 7,132 $ 5,374
=========== ===========
Net earnings per share:
Basic......................... $ .17 $ .17
=========== ===========
Diluted....................... $ .17 $ .16
=========== ===========
Weighted average shares
outstanding:
Basic....................... 41,365,566 31,121,780
=========== ===========
Diluted..................... 43,224,186 32,621,213
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended December 31,
-----------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues................ $ 324,381 $ 251,679
Cost of gas and other energy...... 184,390 138,613
----------- -----------
Operating margin................ 139,991 113,066
Revenue-related taxes............. 15,220 12,681
----------- -----------
Net operating margin............ 124,771 100,385
Operating expenses:
Operating, maintenance and
general....................... 59,458 53,121
Depreciation and amortization... 24,348 20,913
Taxes, other than on income and
revenues...................... 8,259 6,992
----------- -----------
Total operating expenses.... 92,065 81,026
----------- -----------
Net operating revenues...... 32,706 19,359
----------- -----------
Other income (expenses):
Interest........................ (21,663) (17,882)
Dividends on preferred securi-
ties of subsidiary trust...... (4,740) (4,740)
Other, net...................... (4,493) 563
----------- -----------
Total other expenses, net..... (30,896) (22,059)
----------- -----------
Earnings (loss) before income
taxes (benefit)............. 1,810 (2,700)
Federal and state income taxes
(benefit)....................... 778 (1,026)
----------- -----------
Net earnings (loss) available
for common stock................ $ 1,032 $ (1,674)
=========== ===========
Net earnings (loss) per share:
Basic........................... $ .03 $ (.05)
=========== ===========
Diluted......................... $ .03 $ (.05)
=========== ===========
Weighted average shares
outstanding:
Basic......................... 36,145,598 31,110,226
=========== ===========
Diluted....................... 37,936,744 31,110,226
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended December 31,
--------------------------------
1999 1998
------------ ------------
(thousands of dollars, except
shares and per share amounts)
Operating revenues............. $ 677,933 $ 625,782
Cost of gas and other energy... 388,078 367,917
----------- -----------
Operating margin............. 289,855 257,865
Revenue-related taxes.......... 34,573 32,936
----------- -----------
Net operating margin......... 255,282 224,929
Operating expenses:
Operating, maintenance and
general.................... 116,030 110,189
Depreciation and
amortization............... 45,291 40,203
Taxes, other than on income
and revenues............... 15,768 14,444
----------- -----------
Total operating expenses. 177,089 164,836
----------- -----------
Net operating revenues... 78,193 60,093
----------- -----------
Other income (expenses):
Interest..................... (39,779) (35,192)
Dividends on preferred
securities of subsidiary
trust...................... (9,480) (9,480)
Write-off of regulatory
assets..................... -- (8,163)
Other, net................... (6,870) 2,273
----------- -----------
Total other expenses, net.. (56,129) (50,562)
----------- -----------
Earnings before income
taxes.................... 22,064 9,531
Federal and state income taxes. 8,913 3,805
----------- -----------
Net earnings available for
common stock................. $ 13,151 $ 5,726
=========== ===========
Net earnings per share:
Basic........................ $ .39 $ .18
=========== ===========
Diluted...................... $ .37 $ .18
=========== ===========
Weighted average shares
outstanding:
Basic...................... 33,680,640 31,096,197
=========== ===========
Diluted.................... 35,308,213 32,387,646
=========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
December 31, June 30,
------------------------- ------------
1999 1998 1999
------------ ------------ ------------
(unaudited)
(thousands of dollars)
Property, plant and
equipment:
Plant in service... $ 1,529,005 $ 1,087,434 $ 1,106,905
Construction work
in progress...... 33,414 9,814 13,271
----------- ----------- -----------
1,562,419 1,097,248 1,120,176
Less accumulated
depreciation and
amortization..... (489,223) (372,584) (376,212)
1,073,196 724,664 743,964
Additional purchase
cost assigned to
utility plant,
net.............. 388,472 136,344 134,296
----------- ----------- -----------
Net property, plant
and equipment.... 1,461,668 861,008 878,260
----------- ----------- -----------
Current assets:
Accounts receivable,
billed and
unbilled........... 149,233 101,765 50,693
Inventories, princi-
pally at average
cost............... 70,405 36,434 29,373
Prepayments and
other.............. 7,141 2,757 4,692
----------- ----------- -----------
Total current
assets......... 226,779 140,956 84,758
----------- ----------- -----------
Deferred charges....... 133,022 90,636 96,635
Investment securities.. 12,160 5,000 12,000
Real estate............ 12,520 9,520 9,420
Other.................. 15,021 7,953 6,275
----------- ----------- -----------
Total assets......... $ 1,861,170 $ 1,115,073 $ 1,087,348
=========== =========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
STOCKHOLDERS' EQUITY AND LIABILITIES
December 31, June 30,
------------------------- ------------
1999 1998 1999
------------ ------------ ------------
(unaudited)
(thousands of dollars)
Common stockholders'
equity:
Common stock, $1
par value; autho-
rized 200,000,000
shares; issued
48,049,438
shares........... $ 48,049 $ 29,733 $ 31,240
Premium on capital
stock............ 592,097 260,093 276,610
Less treasury
stock, at cost... (2,120) (794) (794)
Less common stock
held in trust.... (10,019) -- (5,562)
Accumulated other
comprehensive
income (loss).... (436) -- (436)
Retained earnings.. 1,032 6,166 --
----------- ----------- -----------
Total common stock-
holders' equity.. 628,603 295,198 301,058
Company-obligated
mandatorily redeem-
able preferred
securities of sub-
sidiary trust
holding solely
subordinated notes
of Southern Union.... 100,000 100,000 100,000
Long-term debt and
capital lease obliga-
tion................. 734,878 411,971 390,931
----------- ----------- -----------
Total capitalization. 1,463,481 807,169 791,989
Current liabilities:
Long-term debt and
capital lease
obligation due
within one year.... 1,971 2,001 2,066
Notes payable........ 12,903 50,003 21,003
Accounts payable..... 75,294 54,741 37,834
Federal, state and
local taxes........ 12,467 14,667 13,300
Accrued interest..... 16,278 12,324 12,176
Customer deposits.... 17,834 18,662 17,682
Deferred gas pur-
chase costs........ 19,292 4,415 22,955
Other................ 20,231 16,496 16,612
----------- ----------- -----------
Total current
liabilities...... 176,270 173,309 143,628
----------- ----------- -----------
Deferred credits and
other................ 98,843 73,250 81,493
Accumulated deferred
income taxes......... 122,576 61,345 70,238
Commitments and
contingencies........ -- -- --
----------- ----------- -----------
Total................ $ 1,861,170 $ 1,115,073 $ 1,087,348
=========== =========== ===========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Accum-
Common ulated
Stock, Premium Common Other
$1 Capital Treasury Stock Compre- Retained
Par on Stock at Held hensive Earnings
Value Stock Cost in Trust Income (Deficit) Total
------- -------- -------- -------- ------- --------- --------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance
July 1,
1998..... $28,252 $252,638 $ (794) $ -- $ -- $ 16,738 $296,834
Compre-
hensive
income:
Net
earn-
ings.. -- -- -- -- -- 10,445 10,445
Minimum
pen-
sion
lia-
bility
ad-
just
ment;
net of
tax... -- -- -- -- (436) -- (436)
--------
Compre-
hen-
sive
in-
come.. 10,009
--------
Common
stock
held in
Trust.. -- -- (5,562) -- -- (5,562)
5% stock
divi-
dend -
de-
clared
Novem-
ber 11,
1998... 1,411 7,483 -- -- -- (8,898) (4)
5% stock
divi-
dend -
de-
clared
July
13,
1999... 1,485 16,797 -- -- -- (18,285) (3)
Exercise
of
stock
options 92 (308) -- -- -- -- (216)
------- -------- ------- -------- ----- ------- --------
Balance
June 30,
1999..... 31,240 276,610 (794) (5,562) (436) -- 301,058
Net
earn-
ings... -- -- -- -- -- 1,032 1,032
Issuance
of
stock
for ac-
quisi-
tion... 16,714 315,235 -- -- -- -- 331,949
Purchase
of
trea-
sury
stock.. -- -- (1,326) -- -- -- (1,326)
Common
stock
held in
trust -- -- (4,457) -- -- (4,457)
Exercise
of
stock
options 95 252 -- -- -- -- 347
------- -------- ------- -------- ------ -------- --------
Balance
December
31, 1999. $48,049 $592,097 $(2,120) $(10,019) $ (436) $ 1,032 $628,603
======= ======== ======= ======== ====== ======== ========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
December 31,
-----------------------
1999 1998
---------- ----------
(thousands of dollars)
Cash flows from (used in) operating
activities:
Net earnings........................ $ 7,132 $ 5,374
Adjustments to reconcile net
earnings to net cash flows from
(used in) operating activities:
Depreciation and amortization... 13,500 10,496
Deferred income taxes........... 1,385 1,095
Provision for bad debts......... (866) 1,068
Deferred interest expense....... 46 169
Other........................... 442 339
Changes in assets and liabili-
ties, net of acquisitions:
Accounts receivable, billed
and unbilled.............. (82,108) (65,875)
Accounts payable............ 32,352 28,263
Taxes and other liabilities. 11,581 12,799
Customer deposits........... 292 1,012
Deferred gas purchases...... 5,037 5,683
Inventories................. 817 2,117
Other....................... (2,647) 22
--------- ---------
Net cash flows from (used in)
operating activities.............. (13,037) 2,562
--------- ---------
Cash flows used in investing activities:
Additions to property, plant and
equipment........................... (22,404) (20,730)
Acquisition of operations, net of
cash received....................... (35,831) --
Purchase of investment securities..... (10,634) --
Notes receivable...................... (4,000) --
Increase (decrease) in customer
advances............................ (1) 555
Increase in deferred charges and
credits............................. 2,615 3,751
Other................................. (37) (89)
--------- ---------
Net cash flows used in investing
activities........................ (70,292) (16,513)
--------- ---------
Cash flows from (used in) financing
activities:
Issuance of long-term debt.......... 300,000 --
Issuance cost of debt............... (6,498) --
Repayment of debt and capital lease
obligation........................ (137,413) (556)
Premium on early extinguishment of
acquired debt..................... (719) --
Net (payments) borrowings under
revolving credit facility......... (71,200) 7,900
Purchase of treasury stock.......... (1,326) --
Increase in cash overdrafts......... -- 6,516
Other............................... (111) 91
--------- ---------
Net cash flows from financing
activities...................... 82,733 13,951
--------- ---------
Decrease in cash and cash equivalents... (596) --
Cash and cash equivalents at beginning
of period............................. 596 --
--------- ---------
Cash and cash equivalents at end of
period................................ $ -- $ --
========= =========
Supplemental disclosures of cash flow
information:
Cash paid (refunded) during the
period for:
Interest........................ $ 5,763 $ 2,507
========= =========
Income taxes.................... $ -- $ (1,034)
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended
December 31,
-----------------------
1999 1998
---------- ----------
(thousands of dollars)
Cash flows from (used in) operating
activities:
Net earnings (loss)................. $ 1,032 $ (1,674)
Adjustments to reconcile net
earnings (loss) to net cash flows
used in operating activities:
Depreciation and amortization... 24,348 20,913
Deferred income taxes........... (230) (1,260)
Provision for bad debts......... (346) 1,179
Deferred interest expense....... 79 364
Other........................... 797 712
Changes in assets and liabili-
ties, net of acquisitions:
Accounts receivable, billed
and unbilled.............. (72,744) (49,185)
Accounts payable............ 20,870 21,939
Taxes and other liabilities. (88) 275
Customer deposits........... 152 976
Deferred gas purchases...... (7,531) (7,844)
Inventories................. (10,054) (10,273)
Other....................... 9 668
--------- ---------
Net cash flows used in operating
activities........................ (43,706) (23,210)
Cash flows used in investing activities:
Additions to property, plant and
equipment........................... (42,822) (34,965)
Acquisition of operations, net of
cash received....................... (35,831) --
Purchase of investment securities..... (12,047) --
Notes receivable...................... (4,000) --
Increase in customer advances......... 834 1,708
Increase (decrease) in deferred
charges and credits................. (1,908) 1,095
Other................................. 421 1,751
--------- ---------
Net cash flows used in investing
activities........................ (95,353) (30,411)
--------- ---------
Cash flows from (used in) financing
activities:
Issuance of long-term debt.......... 300,000 --
Issuance cost of debt............... (6,498) --
Repayment of debt and capital lease
obligation........................ (137,908) (1,039)
Premium on early extinguishment of
acquired debt..................... (719) --
Net (payments) borrowings under
revolving credit facility......... (8,100) 48,403
Purchase of treasury stock.......... (1,326) --
Change in cash overdrafts........... (6,655) 6,231
Other............................... 265 26
--------- ---------
Net cash flows from financing
activities...................... 139,059 53,621
--------- ---------
Change in cash and cash equivalents..... -- --
Cash and cash equivalents at beginning
of period............................. -- --
--------- ---------
Cash and cash equivalents at end of
period................................ $ -- $ --
========= =========
Supplemental disclosures of cash flow
information:
Cash paid (refunded) during the
period for:
Interest........................ $ 23,217 $ 17,779
========= =========
Income taxes.................... $ -- $ (934)
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended
December 31,
------------------------
1999 1998
---------- ----------
(thousands of dollars)
Cash flows from operating activities:
Net earnings......................... $ 13,151 $ 5,726
Adjustments to reconcile net
earnings to net cash flows from
operating activities:
Depreciation and amortization.... 45,291 40,203
Deferred income taxes............ 8,896 5,364
Provision for bad debts.......... 1,754 4,588
Deferred interest expense........ 334 (588)
Write-off of regulatory assets... -- 8,163
Other............................ 1,089 1,614
Changes in assets and liabili-
ties, net of acquisitions:
Accounts receivable, billed
and unbilled............... (23,771) 28,145
Accounts payable............. 4,159 (23,632)
Taxes and other liabilities.. (1,603) (6,278)
Customer deposits............ (828) 1,142
Deferred gas purchases....... 11,011 33,378
Inventories.................. (2,994) 1,410
Other........................ (132) 1,750
--------- ---------
Net cash flows from operating
activities....................... 56,357 100,985
--------- ---------
Cash flows used in investing
activities:
Additions to property, plant and
equipment........................ (81,004) (72,808)
Acquisition of operations, net of
cash received.................... (35,831) 7,247
Purchase of investment securities.. (19,047) --
Notes receivable................... (4,000) --
Increase in customer advances...... 1,265 3,014
Increase (decrease) in deferred
charges and credits.............. (7,089) 3,059
Other.............................. (445) 3,829
--------- ---------
Net cash flows used in investing
activities..................... (146,151) (55,659)
--------- ---------
Cash flows from (used in) financing
activities:
Issuance of long-term debt......... 300,000 --
Issuance cost of debt.............. (6,498) --
Repayment of debt and capital
lease obligation................. (157,706) (1,868)
Premium on early extinguishment of
acquired debt.................... (719) --
Net payments under revolving
credit facility.................. (37,100) (43,797)
Purchase of treasury stock......... (1,326) --
Change in cash overdrafts.......... (6,853) 731
Other.............................. (4) (392)
--------- ---------
Net cash flows from (used in)
financing activities........... 89,794 (45,326)
--------- ---------
Change in cash and cash equivalents.... -- --
Cash and cash equivalents at beginning
of period............................ -- --
--------- ---------
Cash and cash equivalents at end of
period............................... $ -- $ --
========= =========
Supplemental disclosures of cash flow
information:
Cash paid during the period for:
Interest......................... $ 50,477 $ 34,203
========= =========
Income taxes..................... $ 2,118 $ 1,827
========= =========
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
These financial statements should be read in conjunction with the
financial statements and notes thereto contained in Southern
Union Company's (Southern Union and, together with its wholly-
owned subsidiaries, the Company) Annual Report on Form 10-K for
the fiscal year ended June 30, 1999. Certain prior period
amounts have been reclassified to conform with the current period
presentation.
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. Also,
as described below, the Company acquired Pennsylvania Enter-
prises, Inc. on November 4, 1999. Accordingly, the income from
the acquired operations are consolidated with the Company
beginning on that date. Thus, the results of operations for the
three-, six- and twelve-month periods ended December 31, 1999 are
not indicative of results that would necessarily be achieved for
a full year since the majority of the Company's operating margin
is recorded during the winter heating season. For these reasons,
the results of operations of the Company for the periods subse-
quent to this acquisition are not comparable to those periods
prior to the acquisition nor are the 1999 results of operations
comparable with prior periods.
ACQUISITIONS
Pennsylvania Enterprises, Inc.
- ------------------------------
On November 4, 1999, the Company acquired Pennsylvania Enter-
prises, Inc. (hereafter referred to as the "Pennsylvania Opera-
tions") in a transaction valued at approximately $500 million,
including assumption of debt of approximately $150 million. The
Company issued approximately 17 million shares 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 152,000 gas customers in northeastern and
central Pennsylvania. Subsidiaries of the Company included in
the Pennsylvania Operations include PG Energy Services Inc.,
Keystone Pipeline Services, Inc. (a wholly-owned subsidiary of PG
Energy Services, Inc.), PEI Power Corporation, and Theta Land
Corporation. PG Energy Services Inc. markets a diversified range
of energy-related products and services under the name of PG
Energy Power Plus and supplies propane under the name of PG
Energy Propane. Keystone Pipeline Services, Inc. provides pipe-
line and fiber optic cable construction, installation, mainte-
nance, 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 subsequent to December 31,
1999. In accordance with generally accepted accounting princi-
ples relative to business combinations, no gain or loss was
recognized on this transaction.
The Company funded the acquisition 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 assets of the Pennsylvania Operations have been
included in the consolidated balance sheet of the Company at
December 31, 1999 and income from the Pennsylvania Operations
have been included in the statement of consolidated operations
beginning November 4, 1999. The acquisition was accounted for
using the purchase method. The additional purchase cost assigned
to utility plant of approximately $257,290,000 reflects the
excess of the purchase price over the historical book carrying
value of the utility plant purchased. Amortization of the
additional purchase cost assigned to utility plant is provided on
a straight-line basis over forty years.
Prior to the consummation of the acquisition, the Company pur-
chased 358,500 shares of Pennsylvania Enterprises, Inc. stock for
$11,887,000 during both the first and second quarter of the Com-
pany's fiscal year 2000. As all necessary approvals for the
merger had not been obtained, these purchases were treated as
investment securities.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Pro Forma Financial Information
- -------------------------------
The following unaudited pro forma financial information for the
six-month periods ended December 31, 1999 and 1998 is presented
as though the following events had occurred at the beginning of
the earliest period presented: (i) the acquisition of
Pennsylvania Enterprises, Inc.; (ii) the sale of the 8.25% Senior
Notes; and (iii) the refinancing of certain short-term and long-
term debt at the time of acquisition. The pro forma financial
information is not necessarily indicative of the results which
would have actually been obtained had the acquisition of
Pennsylvania Enterprises, Inc., 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.
Six Months Ended
December 31,
-----------------------
1999 1998
---------- ----------
Operating revenues...................... $ 372,866 $ 339,651
Income (loss) before extraordinary item. (9,907) (6,657)
Net earnings (loss) available for
common stock.......................... (9,907) (6,657)
Net earnings (loss) per common stock:
Basic................................. (.21) (.14)
Diluted............................... (.21) (.14)
Other Acquisitions
- ------------------
On December 1, 1999, Southern Union and Valley Resources, Inc.
("Valley Resources") (AMEX: VR) announced a definitive merger
agreement. The agreement calls for Valley Resources to merge
into Southern Union in a transaction valued at approximately $160
million, including the assumption of debt of approximately $30
million. If approved, each Valley Resources shareholder will
receive $25.00 per Valley Resources share in cash. The merger
will be accounted for using the purchase method. Valley
Resources is a public utility holding company with natural gas
distribution systems in northeastern and eastern Rhode Island
serving a total of 66,000 customers.
On November 15, 1999, Southern Union and Providence Energy Corpo-
ration ("Providence Energy") (NYSE: PVY) announced a definitive
merger agreement. The agreement calls for Providence Energy to
merge into Southern Union in a transaction valued at approxi-
mately $400 million, including the assumption of debt of approxi-
mately $93 million. If approved, each Providence Energy
shareholder will receive $42.50 per Providence Energy share in
cash. The merger will be accounted for using the purchase
method. Providence Energy distributes and markets natural gas,
heating oil, and petroleum products and also markets electricity
and energy services. Providence Energy serves approximately
181,000 customers principally in Rhode Island and Massachusetts.
On October 5, 1999, Southern Union announced a definitive merger
agreement with Fall River Gas Company ("Fall River") (AMEX: FAL)
in a transaction valued at approximately $75 million, including
the assumption of debt of approximately $20 million. If
approved, each Fall River shareholder will receive Southern Union
common stock and/or cash having a value of $23.50, subject to
adjustment. At least half of the outstanding Fall River shares
must be exchanged for Southern Union common stock. The merger
will be accounted for using the purchase method. Fall River is a
natural gas distribution company that serves nearly 48,000 custo-
mers in the city of Fall River and the towns of Somerset, Swansea
and Westport, all located in Southeastern Massachusetts.
Southern Union anticipates having all necessary approvals for
each of these mergers by September 2000.
WRITE-OFF OF REGULATORY ASSETS
During 1998, the Company was impacted by pre-tax non-cash write-
offs totaling $8,163,000 of previously recorded regulatory
assets. Pursuant to a 1989 Missouri Public Service Commission
(MPSC) order, Missouri Gas Energy, a division of the Company, is
engaged in a major gas safety program. In connection with this
program, the MPSC
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
issued an accounting authority order in 1994 which authorized
Missouri Gas Energy to defer carrying costs at a rate of 10.54%.
The MPSC rate order of January 22, 1997, however, retroactively
reduced the 10.54% carrying cost rate used since early 1994 to an
Allowance for Funds Used During Construction (AFUDC) rate of
approximately 6%. The Company filed an appeal of this portion of
the rate order in the Missouri State Court of Appeals, Western
District, and on August 18, 1998 was notified that the appeal was
denied. This resulted in a one-time non-cash write-off of
$5,942,000 by the Company of previously deferred costs in its
fiscal year ended June 30, 1998.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a rate increase which, among other
things, disallowed certain previously recorded deferred costs
associated with the rate filing, requiring an additional pre-tax
non-cash write-off of $2,221,000. The Company recorded this
charge to earnings in its fiscal year ended June 30, 1998. See
Utility Regulation and Rates.
EARNINGS PER SHARE
Average shares outstanding for basic earnings per share were
41,365,566 and 31,121,780 for the three-month period ended
December 31, 1999 and 1998, respectively; 36,145,598 and
31,110,226 for the six-month period ended December 31, 1999 and
1998, respectively; and 33,680,640 and 31,096,197 for the twelve-
month period ended December 31, 1999 and 1998, respectively.
Diluted earnings per share includes average shares outstanding as
well as common stock equivalents from stock options and warrants.
Common stock equivalents were 1,466,923 and 1,499,433 for the
three-month periods ended December 31, 1999 and 1998, respec-
tively; 1,450,765 and nil for the six-month period ended
December 31, 1999 and 1998, respectively; and 1,455,984 and
1,291,449 for the twelve-month period ended December 31, 1999 and
1998, respectively. At December 31, 1999, 521,289 shares of
common stock were held by various rabbi trusts for certain of the
Company's benefit plans.
UTILITY REGULATION AND RATES
On October 18, 1999, Southern Union Gas, a division of the Com-
pany, filed a $1,696,000 rate increase request for the El Paso
service area with the City of El Paso. A decision on this rate
case is expected by late February, 2000.
On August 21, 1998, Missouri Gas Energy, a division of the Com-
pany, 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.
The MPSC will conduct further proceedings to take additional
evidence on those matters for which it granted Missouri Gas
Energy a rehearing. If the MPSC adopts Missouri Gas Energy's
positions on rehearing, then Missouri Gas Energy would be
authorized an additional $2,200,000 of base revenues increasing
the $13,300,000 initially authorized in its August 21, 1998 order
to $15,500,000. The MPSC's orders are 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.
On April 13, 1998, Southern Union Gas had also filed a $2,228,000
request for a rate increase from the city of El Paso, a request
the city subsequently denied. On April 21, 1998, the city
council of El Paso voted to reduce the Company's rates by
$1,570,000 annually and to order a one-time cost of gas refund of
$475,000. On May 21, 1998, Southern Union Gas filed with the
Railroad Commission of Texas (RRC) an appeal of the city of El
Paso's actions to reduce the Company's rates and require a one-
time cost of gas refund. On December 21, 1998, the RRC issued
its order implementing approximately a $1,000,000 one-time cost
of gas refund and a $99,000 base rate reduction. The cost of gas
refund was completed in February 1999.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
PREFERRED SECURITIES OF SUBSIDIARY TRUST
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a
consolidated wholly-owned subsidiary of Southern Union, issued
$100,000,000 of 9.48% Trust Originated Preferred Securities (Pre-
ferred Securities). In connection with the Subsidiary Trust's
issuance of the Preferred Securities and the related purchase by
Southern Union of all of the Subsidiary Trust's common securities
(Common Securities), Southern Union issued to the Subsidiary
Trust $103,092,800 principal amount of its 9.48% Subordinated
Deferrable Interest Notes, due 2025 (Subordinated Notes). The
sole assets of the Subsidiary Trust are the Subordinated Notes.
The interest and other payment dates on the Subordinated Notes
correspond to the distribution and other payment dates on the
Preferred Securities and the Common Securities. Under certain
circumstances, the Subordinated Notes may be distributed to
holders of the Preferred Securities and holders of the Common
Securities in liquidation of the Subsidiary Trust. The Subordi-
nated Notes are redeemable at the option of the Company on or
after May 17, 2000, at a redemption price of $25 per Subordinated
Note plus accrued and unpaid interest. The Preferred Securities
and the Common Securities will be redeemed on a pro rata basis to
the same extent as the Subordinated Notes are repaid, at $25 per
Preferred Security and Common Security plus accumulated and
unpaid distributions. Southern Union's obligations under the
Subordinated Notes and related agreements, taken together,
constitute a full and unconditional guarantee by Southern Union
of payments due on the Preferred Securities. As of December 31,
1999 and 1998, 4,000,000 shares of Preferred Securities were
outstanding.
DEBT AND CAPITAL LEASE
December 31, June 30,
1999 1999
------------ ----------
(thousands of dollars)
7.60% Senior Notes due 2024............ $ 364,515 $ 364,515
8.25% Senior Notes due 2029............ 300,000 --
8.375% First Mortgage bonds, due 2002.. 30,000 --
9.34% First Mortgage bonds, due 2019... 15,000 --
Capital lease and other................ 27,334 28,482
========== ==========
Total long-term debt and capital lease. $ 736,849 $ 392,997
========== ==========
On November 3, 1999, the Company completed the sale of
$300,000,000 of 8.25% Senior Notes due 2029. The net proceeds
from the sale of these senior 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
debt assumed in the acquisition. See Management's Discussion and
Analysis of Financial Condition and Results of Operations --
Financial Condition.
Credit Facilities The Company has availability under two
- -----------------
revolving credit facilities (Revolving Credit Facilities) under-
written by a syndicate of banks. Of the Revolving Credit
Facilities, $40,000,000 is available under a short-term facility
which expires June 29, 2000, while $60,000,000 is available under
a long-term facility expiring on June 30, 2002. The Company has
additional availability under uncommitted line of credit facili-
ties (Uncommitted Facilities) with various banks. Covenants
under the Revolving Credit Facilities allow for up to $50,000,000
of borrowings under Uncommitted Facilities at any one time.
Borrowings under the facilities are available for Southern
Union's working capital, letter of credit requirements and other
general corporate purposes. A balance of $12,900,000 was out-
standing under the facilities at December 31, 1999.
Capital Lease The Company completed the installation of an
- -------------
Automated Meter Reading (AMR) system at Missouri Gas Energy
during 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 December 31,
1999, the capital lease
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
obligation outstanding was $25,863,000 with a fixed rate of
5.79%. This system has improved meter reading accuracy and pro-
vided electronic accessibility to meters in residential custo-
mers' basements, thereby assisting in the reduction of the number
of estimated bills.
COMMITMENTS AND CONTINGENCIES
Environmental Southern Union and Western Resources entered into
- -------------
an Environmental Liability Agreement at the closing of the
Missouri Acquisition. Subject to the accuracy of certain repre-
sentations made by Western Resources in the Missouri Asset Pur-
chase Agreement, the Environmental Liability Agreement provides
for a tiered approach to the allocation of substantially all
liabilities under environmental laws that may exist or arise with
respect to Missouri Gas Energy. At the present time and based
upon information available to management, the Company believes
that the costs of any remediation efforts that may be required
for these sites for which it may ultimately have responsibility
will not exceed the aggregate amount subject to substantial
sharing by Western Resources.
In a letter dated May 10, 1999, the Missouri Department of
Natural Resources ("MDNR") sent notice of a planned site inspec-
tion/removal site evaluation of the Kansas City Coal Gas Former
Manufactured Gas Plant ("FMGP") site. This site (comprised of
two FMGP operations previously owned by two separate companies)
is located at East First Street and Campbell in Kansas City,
Missouri and is owned by Missouri Gas Energy. A 1988 investiga-
tion of the site performed by an Environmental Protection Agency
("EPA") contractor determined that further remedial assessment
was not required under the Comprehensive Environmental Response,
Compensation and Liability Act of 1980 (CERCLA), as amended by
the Superfund Amendments and Reauthorization Act of 1986. The
MDNR has stated that the reassessment of the Kansas City coal gas
site is part of a statewide effort to identify, evaluate, and
prioritize the potential hazards posed by all of Missouri's FMGP
sites. During July 1999, the Company sent applications to MDNR
submitting the two sites to the agency's Voluntary Cleanup Pro-
gram ("VCP"). The sites were accepted into the VCP on August 2,
1999.
After receiving MDNR's approval of environmental assessment
workplans, the Company performed environmental assessments of the
sites. The Company is currently preparing environmental assess-
ment reports that will be submitted to MDNR in the Spring of
2000.
The Company received a letter dated December 16, 1999 from MDNR
notifying the Company of a Pre-CERCLIS Site Screening (SS)
investigation of a former manufactured gas plant located at
Pacific Avenue & South River Boulevard in Independence, Missouri.
The Company has 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.
In addition to the various Missouri Gas Energy sites described
above, the Company is investigating the possibility that the
Company or predecessor companies may have been associated with
Manufactured Gas Plant (MGP) sites in other of its former service
territories, principally in Arizona and New Mexico, and present
service territories in Texas. At the present time, the Company
is aware of certain plant sites in some of these areas and is
investigating those and certain other locations.
While the Company's evaluation of these Texas, Arizona and New
Mexico MGP sites is in its preliminary stages, it is likely that
some compliance costs may be identified and become subject to
reasonable quantification. To the extent that such potential
costs are quantified, the Company expects to provide any appro-
priate accruals and seek recovery for such remediation costs
through all appropriate means, including insurance and regulatory
relief. Although significant charges to earnings could be
required prior to rate recovery, management does not believe that
environmental expenditures for such FMGP and MGP sites will have
a material adverse effect on the Company's financial position,
results of operations or cash flows.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Southwest Gas/ONEOK On February 1, 1999, Southern Union sub-
- -------------------
mitted a proposal to the Board of Directors of Southwest Gas
Corporation (Southwest) to acquire all of Southwest's out-
standing common stock for $32.00 per share. Southwest then had a
pending merger agreement with ONEOK, Inc. (ONEOK) at $28.50 per
share. On February 22, 1999, Southern Union and Southwest both
publicly announced Southern Union's proposal, after the Southwest
Board of Directors determined that Southern Union's proposal was
a Superior Proposal (as defined in the Southwest merger agreement
with ONEOK). At that time Southern Union entered into a Confi-
dentiality and Standstill Agreement with Southwest at Southwest's
insistence. On April 25, 1999, Southwest's Board of Directors
rejected Southern Union's $32.00 per share offer and accepted an
amended offer of $30.00 per share from ONEOK. On April 27, 1999,
Southern Union increased its offer to $33.50 per share and agreed
to pay interest which, together with dividends, would provide
Southwest shareholders with a 6% annual rate of return on its
$33.50 offer, commencing February 15, 2000, until closing.
Southern Union's revised proposal was also rejected by
Southwest's Board of Directors.
There are three lawsuits pending in three federal district courts
- -- in Arizona, Nevada and Oklahoma -- 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 Oklahoma federal district court. On
October 11, 1999, Southern Union filed its first amended com-
plaint in the Arizona action to include additional individual
defendants and to incorporate additional facts required in the
discovery process. On January 21, 2000, ONEOK terminated its
agreement to merge with Southwest, and additionally filed an
action against Southwest in federal district court in Oklahoma.
On January 24, 2000, Southwest filed an action against ONEOK and
Southern Union in federal district court in Arizona.
Southern Union is vigorously pursuing its claims against
Southwest, ONEOK, and certain individual defendants, and is also
vigorously defending itself against certain 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.
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 pur-
suing reversal on appeal. The Company believes it will ulti-
mately 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.
In December 1999, the Company advanced $4,000,000 and entered
into a note agreement with an executive officer. Also in
December 1999, the Company entered into an employment contract
with an executive officer. The aggregate minimum commitment for
future compensation under this employment contract is approxi-
mately $6,400,000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company's core business is the distribution of natural gas as
a public utility principally through four divisions: Southern
Union Gas, Missouri Gas Energy (MGE), Atlantic Utilities, doing
business as South Florida Natural Gas (SFNG), and effective as of
November 4, 1999, PG Energy. In addition, subsidiaries of
Southern Union have been established to support and expand
natural gas sales and to capitalize on the Company's gas energy
expertise. These subsidiaries operate natural gas pipeline sys-
tems, market natural gas and electricity to end-users and distri-
bute propane. By providing "one-stop shopping," the Company can
serve its various customers' specific energy needs, which encom-
pass substantially all of the natural gas distribution and sales
businesses from natural gas sales to specialized energy con-
sulting services. Certain subsidiaries own or hold interests in
real estate and other assets, which are primarily used in the
Company's utility business.
Several of these business activities are subject to regulation by
federal, state or local authorities where the Company operates.
Thus, the Company's financial condition and results of operations
have been and will continue to be dependent upon the receipt of
adequate and timely adjustments in rates. In addition, the Com-
pany's business is affected by seasonal weather impacts, competi-
tive factors within the energy industry and economic development
and residential growth in its service areas.
The Company acquired Pennsylvania Enterprises, Inc. on
November 4, 1999. Subsidiaries of the Company included in the
Pennsylvania Operations include PG Energy Services Inc., Keystone
Pipeline Services, Inc. (a wholly-owned subsidiary of PG Energy
Services, Inc.), PEI Power Corporation, and Theta Land Corpora-tion.
PG Energy Services Inc. markets a diversified range
of energy-related products and services under the name of PG
Energy Power Plus and supplies propane under the name of PG
Energy Propane. Keystone Pipeline Services, Inc. provides pipe-
line and fiber optic cable construction, installation, mainte-
nance, 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 subsequent to December 31,
1999. In accordance with generally accepted accounting princi-
ples relative to business combinations, no gain or loss was
recognized on this transaction. Accordingly, the income from the
acquired operations (hereto collectively referred to as the
"Pennsylvania Operations") are consolidated with the Company
beginning on that date. Thus, the results of operations for the
three-, six- and twelve-month periods ended December 31, 1999 are
not indicative of results that would necessarily be achieved for
a full year since the majority of the Company's operating margin
is recorded during the winter heating season. For these reasons,
the results of operations of the Company for the periods subse-
quent to this acquisition are not comparable to those periods
prior to the acquisition nor are the 1999 results of operations
comparable with prior periods.
RESULTS OF OPERATIONS
Three Months Ended December 31, 1999 and 1998
- ---------------------------------------------
The Company recorded net earnings available for common stock of
$7,132,000 for the three-month period ended December 31, 1999 an
increase of 33% compared with net earnings of $5,374,000 for the
same period in 1998. Earnings per diluted share were $.17 in
1999, compared to $.16 in 1998. Weighted average shares out-
standing increased 33% in 1999 primarily due to the issuance of
16,714,000 shares of the Company's common stock on November 4,
1999 in connection with the acquisition of the Pennsylvania
Operations.
Operating revenues were $239,595,000 for the three-month period
ended December 31, 1999, compared with operating revenues of
$174,224,000 in 1998. Gas purchase and other energy costs for
the three-month period ended December 31, 1999 were $145,113,000,
compared with $103,938,000 in 1998. The Company's operating
revenues are affected by the level of sales volumes and by the
pass-through of increases or decreases in the Company's gas
purchase costs through its purchased gas adjustment clauses.
Additionally, revenues are affected by increases or decreases in
gross receipts taxes (revenue-related taxes) which are levied on
sales revenue as
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 an 15%
increase in gas sales volume to 36,098 MMcf in 1999 from 31,299
MMcf in 1998 and by a 9% increase in the average cost of gas from
$3.30 per Mcf in 1998 to $3.61 per Mcf in 1999. The acquisition
of the Pennsylvania Operations contributed 5,754 MMcf of the
increase while the remaining operations of the Company resulted
in a gas sales volume decrease of 955 MMcf. These volume
decreases were primarily the result of warmer than normal weather
and the loss of certain marketing customers. 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 $56,476,000 to
the overall increase in operating revenues and $35,919,000 in gas
purchase and other energy costs.
Weather for MGE's service territories was 78% of a 30-year
measure for the three-month period ended December 31, 1999, com-
pared with 83% in 1998. Southern Union Gas service territories
experienced weather which was 85% of a 30-year measure in 1999,
compared with 86% in 1998. About half of the customers served by
Southern Union Gas are weather normalized. Weather in PG Energy
service territories was 89% of a 30-year measure for the two-
month period ended December 31, 1999.
Net operating margin (operating margin less revenue-related
taxes) increased $22,184,000 for the three-month period ended
December 31, 1999 compared with the same period in 1998. Net
operating margin increased due principally to the acquisition of
the Pennsylvania Operations as previously discussed, which con-
tributed $19,122,000 to net operating margin. Also contributing
to the increase in net operating margin in 1999 was a one-time
cost of gas expense during the three-month period ended
December 31, 1998 of $1,000,000 associated with a cost of gas
refund to the City of El Paso customers as authorized by the
Railroad Commission of Texas and a charge for certain lost and
unaccounted for gas in other Southern Union Gas service
territories.
Operating expenses, which include operating, maintenance and
general expenses, depreciation and amortization, and taxes other
than on income and revenues, were $52,328,000 for the three-month
period ended December 31, 1999, an increase of $11,272,000,
compared with $41,056,000 in 1998. An increase of $9,499,000 was
the result of the acquisition of the Pennsylvania Operations.
Also impacting operating expenses during the three-month period
ended December 31, 1999 was an increase in costs associated with
certain employee benefits and increases in property taxes.
Interest expense was $13,299,000 for the three-month period ended
December 31, 1999, compared with $9,142,000 in 1998. Interest
expense increased in 1999 primarily due to the issuance of
$300,000,000 of 8.25% Senior Notes on November 3, 1999, ("8.25%
Senior Notes") which was used to extinguish $136,000,000 in
existing Pennsylvania Enterprises, Inc. debt assumed at the time
of the merger, and the assumption of $45,000,000 of Pennsylvania
Enterprises, Inc. debt by the Company. See "Debt and Capital
Lease" in the Notes to the Consolidated Financial Statements
included herein.
Other expense of $3,336,000 for the three-month period ended
December 31, 1999 primarily consists of $4,000,000 of costs
associated with unsuccessful acquisition activities and related
litigation. This amount was offset by $442,000 in net rental
income from Lavaca Realty Company ("Lavaca Realty"), the Com-
pany's real estate subsidiary. Other expense of $162,000 for the
three-month period ended December 31, 1998 primarily consisted of
net expense of $169,000 related to the amortization and current
deferral of interest and other expenses associated with the MGE
Safety Program.
The effective federal and state income tax rate was 40% and 35%
for the three months ended December 31, 1999 and 1998, respec-
tively. The increase in the effective federal and state income
tax rate is a result of non-tax deductible amortization of addi-
tional purchase cost associated with the purchase of Pennsylvania
Enterprises, Inc.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Six Months Ended December 31, 1999 and 1998
- -------------------------------------------
The Company recorded net earnings available for common stock of
$1,032,000 for the six-month period ended December 31, 1999 com-
pared with a net loss of $1,674,000 for the same period in 1998.
Net earnings per diluted share were $.03 in 1999 compared with a
net loss per share of $.05 in 1998. Weighted average common
shares increased 22% during the six-month period ended
December 31, 1999 compared with 1998 due to the issuance of
common stock for the acquisition of the Pennsylvania Operations,
previously discussed.
Operating revenues were $324,381,000 for the six-month period
ended December 31, 1999, compared with operating revenues of
$251,679,000 in 1998. Gas purchase and other energy costs for
the six-month period ended December 31, 1999 were $184,390,000,
compared with $138,613,000 in 1998. The increase in both
operating revenues and gas purchase costs between periods was
primarily impacted by an 11% increase in gas sales volume to
48,125 MMcf in 1999 from 43,450 MMcf in 1998. The acquisition
of the Pennsylvania Operations, previously discussed, accounted
for 5,754 MMcf of the increase. Additionally, operating revenues
and gas purchase costs were affected by an 11% increase in the
average cost of gas from $3.16 per Mcf in 1998 to $3.51 per Mcf
in 1999, due to changes in average spot market gas prices. Also
impacting operating revenues was a $13,300,000 annual increase to
revenues granted to MGE, effective as of September 2, 1998. The
effect of this rate order was marginal as it is earned volu-
metrically and therefore was impacted by the warmer than normal
weather in both 1998 and 1999.
MGE's service territories experienced weather which was 80% of a
30-year measure for the six months ended December 31, 1999 com-
pared with 81% in 1998. Weather for Southern Union Gas service
territories was 85% of a 30-year measure for the six-month period
ended December 31, 1999 and 1998.
Net operating margin increased $24,386,000 for the six-month
period ended December 31, 1999 compared with the same period in
1998. Net operating margin increased $19,122,000 due to
increased gas sales volumes as a result of the acquisition of the
Pennsylvania Operations, as previously discussed, and the effect
of a $13,300,000 annual increase to revenues in the Missouri ser-
vice territories granted by the MPSC effective as of September 2,
1998, also previously discussed. Also contributing to the
increase in net operating margin was a one-time expense during
the six-month period ended December 31, 1998 of $1,000,000
associated with a cost of gas refund to the City of El Paso
customers and a charge during the same period for certain lost
and unaccounted for gas, both previously discussed.
Operating expenses were $92,065,000 for the six-month period
ended December 31, 1999, an increase of $11,039,000, compared
with $81,026,000 in 1998. The increase is primarily a result of
the acquisition of the Pennsylvania Operations, as previously
discussed. Also contributing to the increase was additional
depreciation and amortization and property taxes as a result of
including certain costs into rate base that had been previously
deferred.
Interest expense was $21,663,000 for the six-month period ended
December 31, 1999, compared with $17,882,000 in 1998. The
increase is primarily due to the issuance of the 8.25% Senior
Notes, previously discussed, to extinguish $136,000,000 in
existing Pennsylvania Enterprises, Inc. debt, and the assumption
in that acquisition of $45,000,000 of debt by the Company. See
"Debt and Capital Lease" in the Notes to the Financial Statements
included herein.
Other expense for the six-month period ended December 31, 1999
was $4,493,000 compared with other income of $563,000 in 1998.
Other expense for the six-month period ended December 31, 1999
primarily consists of $5,250,000 of costs associated with unsuc-
cessful acquisition activities and related litigation. This
amount was offset by $664,000 in net rental income from Lavaca
Realty. Other income for the six-month period ended December 31,
1998 included the receipt of $750,000 to assist in the promotion
of gas usage in certain Southern Union Gas service territories
and
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
$649,000 in net rental income from Lavaca Realty. This was
partially offset by net expense of $364,000 related to the
amortization and current deferral of interest and other expenses
associated with the MGE Safety Program.
The Company's consolidated federal and state effective income tax
rate was 43% and 38% for the six months ended December 31, 1999
and 1998, 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 Pennsylvania Enterprises, Inc.
Twelve Months Ended December 31, 1999 and 1998
- ----------------------------------------------
The Company recorded net earnings available for common stock of
$13,151,000 for the twelve-month period ended December 31, 1999,
an increase of 130%, compared with net earnings of $5,726,000 in
1998. Earnings per diluted share were $.37 in 1999 compared with
earnings per diluted share of $.18 in 1998. Weighted average
common and common share equivalents increased 9% during the
twelve-month period ended December 31, 1999 compared with 1998
due to the issuance of common stock in the acquisition of the
Pennsylvania Operations, previously discussed.
During fiscal year 1998, the Company was impacted by pre-tax non-
cash write-offs totaling $8,163,000 of previously recorded
regulatory assets. On August 18, 1998, the Missouri Court of
Appeals denied the previously disclosed appeal by the Company of
the MPSC's January 1997 Rate Order granted to MGE. Because of
this decision, the Company recorded a one-time non-cash write-off
of $5,942,000 of deferred costs recorded since 1994. On
August 21, 1998, the MPSC also granted MGE a rate increase which,
among other things, disallowed certain previously recorded
deferred costs requiring an additional pre-tax non-cash write-off
of $2,221,000. See "Write-Off of Regulatory Assets" and "Com-
mitments and Contingencies" in the Notes to the Consolidated
Financial Statements included herein.
Operating revenues were $677,933,000 for the twelve-month period
ended December 31, 1999, compared with operating revenues of
$625,782,000 in 1998. Gas purchase and other energy costs for
the twelve-month period ended December 31, 1999 were
$388,078,000, compared with $367,917,000 in 1998. The increase
in both operating revenues and gas purchase costs between periods
was primarily the result of an increase in gas sales volume to
110,711 MMcf in 1999 from 109,139 MMcf in 1998. The increase in
sales volumes was due to the acquisition of the Pennsylvania
Operations, previously discussed, which was offset by a decrease
in sales volumes in Texas due to significantly warmer weather
during the twelve-month period ended December 31, 1999. Addi-
tionally, operating revenues and gas purchase costs were affected
by a slight increase in the average cost of gas from $3.34 per
Mcf in 1998 to $3.36 per Mcf in 1999, due to increases in average
spot market gas prices. Operating revenues were also impacted by
a $13,300,000 annual increase to revenues granted to MGE,
effective as of September 2, 1998. The effect of this rate
increase has been marginal as it earns volumetrically and has
also been impacted by the warmer than normal weather.
MGE's service territories experienced weather which was 84% of a
30-year measure for the twelve months ended December 31, 1999
compared with 83% in 1998. Weather for Southern Union Gas ser-
vice territories for the twelve-month period ended December 31,
1999 was 74% of a 30-year measure compared with 86% in 1998.
About half of the customers served by Southern Union Gas are
weather normalized.
Net operating margin increased $30,353,000 for the twelve-month
period ended December 31, 1999 compared with the same period in
1998. Net operating margin increased $19,122,000 due to
increased gas sales volumes as a result of the acquisition of the
Pennsylvania Operations and the $13,300,000 annual increase to
revenues effective September 2, 1998, both previously discussed.
Also contributing to the increase in net operating margin in 1999
was a one-time expense during the twelve-month period ended
December 31, 1998 of $1,000,000 associated with a cost of gas
refund to the City of El Paso customers and a charge during the
same period for certain lost and unaccounted for gas, both
previously discussed.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Operating expenses were $177,089,000 for the twelve-month period
ended December 31, 1999, an increase of $12,253,000, compared
with $164,836,000 in 1998. The increase is primarily a result of
the acquisition of the Pennsylvania Operations and an increase in
depreciation and amortization and property taxes as a result of
including certain costs into rate base that had been previously
deferred.
Interest expense was $39,779,000 for the twelve-month period
ended December 31, 1999, compared with $35,192,000 in 1998. The
increase is primarily due to the issuance of the of 8.25% Senior
Notes, previously discussed which was used to extinguish
$136,000,000 in existing Pennsylvania Enterprises, Inc. debt, and
the assumption in that acquisition of $45,000,000 of debt by the
Company. See "Debt and Capital Lease" in the Notes to the Con-
solidated Financial Statements included herein.
Other expense for the twelve-month period ended December 31, 1999
was $6,870,000 compared with other income of $2,273,000 in 1998.
Other expense for the twelve-month period ended December 31, 1999
primarily consists of $9,090,000 of costs associated with unsuc-
cessful acquisition activities and related litigation. This
amount was partially offset by $1,466,000 in net rental income of
Lavaca Realty. Other income for the twelve-month period ended
December 31, 1998 included $1,281,000 in net rental income of
Lavaca Realty and $587,000 in deferral of interest and other
expenses associated with the MGE Safety Program.
For the twelve-month period ended December 31, 1999, federal and
state income taxes increased $5,108,000 over the same period in
1998 due to an increase in pre-tax earnings as discussed above.
The Company's consolidated federal and state effective income tax
rate was 40% for the twelve months ended December 31, 1999 and
1998.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the
Company's gas utility operations for the three- and twelve-month
periods ended December 31, 1999 and 1998:
Three Months Twelve Months
Ended December 31, Ended December 31,
1999 1998 1999 1998
---------- ---------- ---------- ----------
Average number of
gas sales customers
served:
Residential....... 1,002,663 894,546 926,997 889,778
Commercial........ 98,717 86,851 91,751 88,238
Industrial and
irrigation....... 686 557 604 565
Public authorities
and other........ 3,072 2,852 2,915 2,830
Pipeline and
marketing........ 229 232 235 231
---------- ---------- ---------- ----------
Total average
customers
served......... 1,105,367 985,038 1,022,502 981,642
========== ========== ========== ==========
Gas sales in
millions of cubic
feet (MMcf)
Residential....... 15,248 11,708 60,756 58,681
Commercial........ 6,483 5,263 26,871 26,039
Industrial and
irrigation....... 343 299 1,412 1,631
Public authorities
and other........ 720 576 2,431 2,526
Pipeline and
marketing........ 4,334 5,302 17,518 19,644
---------- ---------- ---------- ----------
Gas sales
billed......... 27,128 23,148 108,988 108,521
Net change in
unbilled gas
sales............ 8,970 8,151 1,723 618
---------- ---------- ---------- ----------
Total gas sales. 36,098 31,299 110,711 109,139
========== ========== ========== ==========
Gas sales revenues
(thousands of
dollars):
Residential....... $ 107,949 $ 79,131 $ 397,902 $ 378,532
Commercial........ 38,619 29,373 151,662 145,815
Industrial and
irrigation....... 1,963 1,416 7,022 7,369
Public authorities
and other........ 3,315 2,163 9,905 9,804
Pipeline and
marketing........ 10,944 11,385 42,778 46,507
---------- ---------- ---------- ----------
Gas revenues
billed......... 162,790 123,468 609,269 588,027
Net change in
unbilled gas
sales revenues... 48,586 41,210 13,082 2,233
---------- ---------- ---------- ----------
Total gas sales
revenues....... $ 211,376 $ 164,678 $ 622,351 $ 590,260
========== ========== ========== ==========
Gas sales margin
(thousands of
dollars)........... $ 70,087 $ 52,238 $ 216,435 $ 192,777
========== ========== ========== ==========
Gas sales revenue
per thousand cubic
feet (Mcf) billed:
Residential....... $ 7.080 $ 6.759 $ 6.549 $ 6.451
Commercial........ 5.957 5.581 5.644 5.600
Industrial and
irrigation....... 5.728 4.739 4.972 4.518
Public authorities
and other........ 4.608 3.756 4.074 3.882
Pipeline and
marketing........ 2.525 2.148 2.442 2.368
Weather:
Degree days:
Southern Union Gas
service
territories...... 714 719 1,573 1,865
Missouri Gas
Energy service
territories...... 1,510 1,614 4,418 4,377
PG Energy service
territories...... 1,595 -- 1,595 --
30-year measure:
Southern Union Gas
service
territories...... 86% 86% 74% 86%
Missouri Gas
Energy service
territories...... 78% 83% 84% 83%
PG Energy service
territories...... 89% -- 89% --
Gas transported in
millions of cubic
feet (MMcf)........ 19,516 14,423 61,013 53,844
Gas transportation
revenues (thousands
of dollars)........ $ 8,685 $ 5,854 $ 25,896 $ 19,834
- -------------------
Information for PG Energy is included for the two months subse-
quent to the date of the acquisition, November 4, 1999. The
above information does not include the Company's 43% equity
ownership in a natural gas distribution company serving 20,000
customers in Piedras Negras, Mexico.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FINANCIAL CONDITION
The Company's gas utility operations are seasonal in nature with
a significant percentage of the annual revenues and earnings
occurring in the traditional heating-load months. This sea-
sonality 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 Com-
pany has historically used internally generated funds and its
revolving loan and credit facilities to provide funding for its
seasonal working capital, continuing construction and maintenance
programs and operational requirements.
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 out-
standing 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 obliga-
tions, including the 7.60% Senior Notes due 2024. This offering
was the principal source of funds during the three-month period
ended December 31, 1999. Specific uses of funds during this
period included: payments of $35,831,000 for the acquisition of
Pennsylvania Enterprises, Inc.; $137,413,000 for the retirement
of long-term debt of Pennsylvania Enterprises, Inc. in connection
with that acquisition; $71,200,000 for the pay-down of the
Company's Revolving Credit Facilities (see below); $10,634,000
for the purchase of investment securities; $6,498,000 in debt
issuance costs on the 8.25% Senior Notes; and $22,404,000 for on-
going property, plant and equipment additions as well as seasonal
working capital needs of the Company.
The principal source of funds during the six-month period ended
December 31, 1999 was also the $300,000,000 received from the
issuance of the 8.25% Senior Notes, as noted above. The princi-
pal uses of funds during this period included: payments of
$35,831,000 for the acquisition of Pennsylvania Enterprises,
Inc.; $137,908,000 for the retirement of long-term debt which
primarily consists of debt acquired in the Pennsylvania
Enterprises, Inc. acquisition; $8,100,000 for the pay-down of the
Company's Revolving Credit Facilities; $12,047,000 for the
purchase of investment securities; $6,498,000 in debt issuance
costs on the 8.25% Senior Notes; and $42,822,000 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 8.05% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt).
The Company has availability under two revolving credit
facilities (the "Revolving Credit Facilities") underwritten by a
syndicate of banks. Of the Revolving Credit Facilities,
$40,000,000 is a short-term facility which expires June 29, 2000,
while $60,000,000 is a long-term facility which expires June 30,
2002. The Company has additional availability under uncommitted
line of credit facilities (Uncommitted Facilities) with various
banks. Covenants under the Revolving Credit Facilities allow for
up to $50,000,000 of borrowings under Uncommitted Facilities at
any one time. Borrowings under the facilities are available for
the Company's working capital, letter of credit requirements and
other general corporate purposes. A balance of $12,900,000 was
outstanding under the facilities at December 31, 1999.
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. From time to time, the
Company may also repurchase shares of its common stock in the
open
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
market in order to minimize any adverse effect from potential
selling activity that may result from the increase in its public
float of its common stock subsequent to the Pennsylvania
Enterprises, Inc. merger.
YEAR 2000
The Company did not experience any significant malfunctions or
errors in its operating or business systems when the date changed
from 1999 to 2000. Based on operations since January 1, 2000,
the Company does not expect any significant impact to its ongoing
business as a result of the Year 2000 problem. The Year 2000
problem is the inability of computer application software pro-
grams to distinguish between the year 1900 and 2000 due to a
commonly-used programming convention. Unless such programs were
modified or replaced prior to 2000, calculations and interpreta-
tions based on date-based arithmetic or logical operations
performed by such programs may have been incorrect.
It is possible that the full impact of the date change has not
been fully recognized. For example, it is possible that Year
2000 or similar issues such as leap year-related problems may
occur with billing, payroll, or financial closings at month,
quarterly or year-end. The Company believes that any such
problems are likely to be minor and correctable. In addition,
the Company could still be negatively affected if its customers
or suppliers are adversely affected by the Year 2000 or similar
issues. The Company currently is not aware of any significant
Year 2000 or similar problems that have arisen for its customers
and suppliers.
The Company incurred costs of approximately $2,125,000 through
December 31, 1999 to complete this project. The Company also
expects to spend approximately $1,500,000 in equipment leasing
expenses that will be incurred over the life of the equipment.
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, 1999, 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 are 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, 1999.
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
This Management's Discussion and Analysis of Financial Condition
and Results of Operations and other sections of this Form 10-Q
contain forward-looking statements that are based on current
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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Factors that could cause or contribute to actual results dif-
fering materially from such forward-looking statements include
the following: cost of gas; gas sales volumes; weather condi-
tions in the Company's service territories; the achievement of
operating efficiencies and the purchases and implementation of
new technologies for attaining such efficiencies; impact of rela-
tions with labor unions of bargaining-unit employees; the receipt
of timely and adequate rate relief; the outcome of pending and
future litigation; governmental regulations and proceedings
affecting or involving the Company; and the nature and impact of
any extraordinary transactions such as any acquisition or dives-
titure of a business unit or any assets. These are representa-
tive of the factors that could affect the outcome of the
forward-looking statements. In addition, such statements could
be affected by general industry and market conditions, and general
economic conditions, including interest rate fluctua-
tions, federal, state and local laws and regulations affecting
the retail gas industry or the energy industry generally, and
other factors.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
SOUTHERN UNION COMPANY
----------------------
(Registrant)
Date February 14, 2000 By RONALD J. ENDRES
------------------- ----------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date February 14, 2000 By DAVID J. KVAPIL
------------------- ---------------
David J. Kvapil
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
<PAGE>
EXHIBIT 3(a)
CERTIFICATE OF AMENDMENT OF
RESTATED CERTIFICATE OF INCORPORATION OF
SOUTHERN UNION COMPANY
It is hereby certified that:
1. The name of the corporation (the "Corporation") is Southern
Union Company.
2. The restated certificate of incorporation of the Corporation
is hereby amended by striking out Article FOURTH thereof and
by substituting in lieu of said Article the following new
Article FOURTH:
"FOURTH: The total number of shares of all classes of stock
which the Corporation shall have authority to issue
shall be 206,000,000, 6,000,000 shares of which shall
be Preferred Stock without par value (the "Preferred
Stock"), and 200,000,000 shares of which shall be com-
mon stock, par value $1.00 per share (the "Common
Stock").
The Board of Directors is authorized, subject to limitations
prescribed by law and the provisions of this Article FOURTH, to
prescribe by resolution or resolutions for the issuance of the
shares of Preferred Stock in one or more series, and by filing a
certificate pursuant to the applicable law of the State of
Delaware, to establish from time to time the number of shares to
be included in each such series, and to fix the designation,
powers, preferences and rights of the shares of each such series
and the qualifications, limitations or restrictions thereof.
The authority of the Board of Directors with respect to each
series shall include, but not be limited to, determination of the
following:
(a) The number of shares constituting that series and the
distinctive designation of each such series;
(b) The dividend rate on the shares of that series, whether
dividends shall be cumulative, and, if so, from which
date or dates, and the relative rights of priority, if
any, of payment of dividends on shares of each series;
(c) Whether each series shall have voting rights, in addi-
tion to the voting rights provided by law, and, if so,
the terms of such voting rights;
(d) Whether each series shall have conversion privileges,
and, if so, the terms and conditions of such conversion,
including provision for adjustment of the conversion
rate in such events as the Board of Directors shall
determine;
(e) Whether or not the shares of each series shall be
redeemable, and, if so, the terms and conditions of such
redemption, including the date or date upon or after
which they shall be redeemable, and the amount per share
payable in case of redemption, which amount may vary
under different conditions and at different redemption
dates;
(f) Whether each series shall have a sinking fund for the
redemption or purchase of shares of each such series,
and, if so, the terms and amount of such sinking fund;
(g) The rights of the shares of each series in the event of
voluntary or involuntary liquidation, dissolution or
winding up of the Corporation, and the relative rights
of priority, if any, of payment of shares of each
series; and
(h) Any other relative rights, preferences and limitations
of each series."
3. The restated certificate of incorporation of the Corporation
is hereby further amended by striking out Article EIGHTH
thereof and by substituting in lieu of said Article the fol-
lowing new Article EIGHTH:
"EIGHTH: The following additional provisions are inserted for
the management of the business and for the conduct of
the affairs of the Corporation and for the creation,
definition, limitation and regulation of the powers of
the Corporation, the directors and stockholders:
Subject to the rights of the holders of the Preferred Stock to
elect additional directors under specified circumstances, the
number of directors which shall constitute the whole Board of
Directors shall be not less than five (5) nor more than fifteen
(15). Within such limits, the number of directors shall be fixed
from time to time exclusively by the Board of Directors pursuant
to a resolution adopted by a majority of the total number of
authorized directors (whether or not there exist any vacancies in
previously authorized directorships at the time any such resolu-
tion is presented to the Board of Directors for adoption). At
the special meeting of stockholders at which this paragraph is
adopted, the directors shall be divided into three classes,
designated Class I, Class II and Class III (which at all times
shall be as nearly equal in number as possible), with the term of
office of Class I directors to expire at the 1985 annual meeting
of stockholders, the term of office of Class II directors to
expire at the 1986 annual meeting of stockholders, and the term
of office of Class III directors to expire at the 1987 annual
meeting of stockholders. At each annual meeting of stockholders
following such initial classification and election, directors
elected to succeed those directors whose terms expire shall be
elected for a term of office to expire at the third succeeding
annual meeting of stockholders after their election.
Subject to the rights of the holders of any class or series of
capital stock of the Corporation entitled to vote generally in
the election of directors (hereinafter referred to as the "Voting
Stock") then outstanding, any director, or the entire Board of
Directors, may be removed from office at any time, but only for
cause and only by the affirmative vote of the holders of a
majority of the voting power of all of the then outstanding
shares of the Voting Stock, voting together as a single class.
Except as may otherwise be provided by law, cause for removal
shall be construed to exist only if the director whose removal is
proposed has been convicted of a felony by a court of competent
jurisdiction and such conviction is no longer subject to direct
appeal, or has been adjudged by a court of competent jurisdiction
to be liable for negligence, or misconduct, in the performance of
his duty to the Corporation in a matter of substantial importance
to the Corporation, and such adjudication is no longer subject to
direct appeal.
Subject to the rights of the holders of any class or series of
the Voting Stock then outstanding, newly created directorships
resulting from any increase in the authorized number of directors
or any vacancies on the Board of Directors resulting from death,
resignation, retirement, disqualification, removal from office or
other cause may be filled by a majority vote of the directors
then in office, though less than a quorum, and directors so
chosen shall hold office for a term expiring at the annual
meeting of stockholders at which the term of office of the class
to which they have been elected expires. No decrease in the
number of authorized directors constituting the entire Board of
Directors shall shorten the term of any incumbent director.
Notwithstanding the foregoing, whenever the holders of the Pre-
ferred Stock shall have the right to elect directors at an annual
or special meeting of stockholders, the election, term of office,
filling of vacancies, and other features of such directorships
shall be governed by the terms of this Restated Certificate of
Incorporation applicable thereto, and such directors so elected
shall not be divided into classes pursuant to this Article unless
expressly provided by such terms.
Subject to any voting rights created for the benefit of any
series of Preferred Stock by any resolution or resolutions of the
Board of Directors providing for the issue of Preferred Stock
adopted as authorized in Article FOURTH, the Board of Directors
shall also have power, without the assent or vote of the stock-
holders, from time to time:
(1) to fix the times for the declaration and payment of
dividends;
(2) to fix and vary the amount to be reserved as working
capital or for any other proper purpose or purposes;
(3) to authorize and cause to be executed mortgages and
liens upon all the property and assets of the Corpora-
tion, or any part thereof, whether at the time owned or
thereafter acquired, upon such terms and conditions as
it may determine;
(4) to determine the use and disposition of any surplus or
net assets in excess of capital;
(5) to make and alter by-laws of the Corporation, subject to
the right of the stockholders to make and alter by-laws
of the Corporation; provided, however, that the direc-
tors shall not modify or repeal any by-law hereafter
made by the stockholders;
(6) to pay for, in cash or property, any property or rights
acquired by the Corporation or to authorize the issue
and exchange therefor of shares of the capital stock of
the Corporation or bonds, debentures, notes or other
obligations or other securities of the Corporation,
whether secured or unsecured; and
(7) to borrow or otherwise raise moneys, without limit to
amount, for any of the purposes of the Corporation; to
authorize the issue of bonds, debentures, notes or other
obligations of the Corporation, of any nature or in any
manner, secured or unsecured, for moneys so borrowed; to
authorize the creation of mortgages upon, or the pledge
or conveyance or assignment in trust of, the whole or
any part of the property and assets of the Corporation,
real or personal, whether at the time owned or there-
after acquired, including contracts, choses in action
and other rights, to secure the payment of any bonds,
debentures or notes or other obligations of the Corpora-
tion and the interest thereon; and to authorize the sale
or pledge or other disposition of the bonds, debentures,
notes or other obligations of the Corporation for its
corporate purposes.
The Board of Directors shall also have power, with the consent in
writing of the holders of a majority of the stock issued and out-
standing having voting power, or upon the affirmative vote of the
holders of a majority of the stock issued and outstanding having
voting power, to sell, lease, or exchange all of the property and
assets of the Corporation, including its goodwill and its corpo-
rate franchises, upon such terms and conditions as the Board of
Directors deems expedient and for the best interests of the
Corporation; subject, however, to any voting rights created for
the benefit of any series of Preferred Stock by any resolution or
resolutions of the Board of Directors providing for the issue of
Preferred Stock adopted as in Article FOURTH hereof authorized.
In addition to the powers and authorities hereinbefore or by
statute expressly conferred upon them, the directors are hereby
empowered to exercise all such powers and do all such acts and
things as may be exercised or done by the Corporation, subject,
nevertheless, to the provisions of the statutes of Delaware, of
the Restated Certificate of Incorporation, and amendments
thereto, and other contracts of the Corporation, and by-laws."
4. The amendments of the Restated Certificate of Incorporation
herein certified have been duly adopted in accordance with
the provisions of Sections 141 and 242 of the General Corpo-
ration Law of the State of Delaware.
IN WITNESS WHEREOF, Southern Union Company has, on this 26th day
of October, 1999, caused this certificate to be signed by
Peter H. Kelley, its President, and attested by Dennis K. Morgan,
its Secretary, and the corporate seal of Southern Union Company
to be affixed to this certificate by the said Dennis K. Morgan.
Southern Union Company
By: PETER H. KELLEY
-----------------
Peter H. Kelley
President
ATTEST:
By: DENNIS K. MORGAN
------------------
Dennis K. Morgan
Secretary
<PAGE>
EXHIBIT 3(b)
BYLAWS OF SOUTHERN UNION COMPANY
(as amended through October 26, 1999)
ARTICLE I - STOCKHOLDERS
------------
Section 1. Annual Meetings. Annual meetings of stockholders for
---------------
the election of directors and the transaction of such other busi-
ness as may properly be brought before the meeting shall be held
on the second Tuesday in November at such time and place or on
such other date and time, either within or without the State of
Delaware, as may be designated from time to time by the Board of
Directors and stated in the notice of the meeting.
Section 2. Special Meetings. Special meetings of stockholders
----------------
of the Company may be called only by the Board of Directors pur-
suant to a resolution adopted by a majority of the total number
of authorized directors (whether or not there exists any
vacancies in previously authorized directorships at the time any
such resolution is presented to the Board for adoption) or by the
holders of not less than a majority of the voting power of all of
the then-outstanding shares of any class or series of capital
stock of the Company entitled to vote generally in the election
of directors. Any such special meeting shall be held at such
time and such place, either within or without the State of
Delaware, as designated in the call of such meeting. The
business to be transacted at any such meeting shall be limited to
that stated in the call and notice thereof.
Section 3. Notice of Meetings. At least ten (10) days before
------------------
each meeting of stockholders, other than an adjourned meeting,
written or printed notice, stating the time and place of the
meeting and generally the nature of the business to be con-
sidered, shall be given by the Secretary to each stockholder
entitled to vote at the meeting, at such stockholder's last known
address as shown by the Company's stock records.
Section 4. Record Date. The Board of Directors shall fix a
-----------
record date for determination of stockholders entitled to receive
notice of and vote at each stockholders' meeting, which such date
shall not be more than sixty (60) days or less than ten (10) days
before the date of the meeting; provided, however, that when a
meeting is adjourned to another time, no new record date need be
fixed for the adjourned meeting, unless the adjournment is for
more than thirty (30) days. In the absence of any action by the
Board of Directors, the date upon which the notice is mailed
shall be the record date.
Section 5. Quorum. Except as provided in the next section, a
------
quorum for the transaction of business at any duly called meeting
of stockholders shall be any number of stockholders, present in
person or represented by proxy at the meeting, who together are
the holders of at least a majority of the shares of issued and
outstanding stock the holders of which are entitled to vote at
the meeting. The stockholders present at a duly organized
meeting may continue to transact business until adjournment,
notwithstanding the withdrawal of enough stockholders to leave
less than a quorum.
Section 6. Adjournment of Meetings. If any meeting of stock-
-----------------------
holders cannot be organized for failure of a quorum to be present
as provided above, the meeting may, after the lapse of at least
half an hour, be adjourned form time to time by the affirmative
vote of the holders of a majority of the stock having voting
power who are present in person or represented by proxy, and
unless adjournment is for more than thirty (30) days or a new
record date is fixed, no notice shall be required for any such
adjourned meeting. If, however, notice of such adjourned meeting
is sent to the stockholders entitled to receive the same at least
ten (10) days in advance thereof, such notice stating (a) the
purpose of the meeting, (b) that the previous meeting could not
be organized for lack of a quorum, and (c) that under the provi-
sions of this section, it is proposed to hold the adjourned
meeting with a quorum of those present, though representing less
than a majority of the stock, then any number of stockholders
entitled to vote who are present in person or represented by
proxy shall constitute a quorum at such adjourned meeting for the
transaction of business, unless the number of stockholders
present constitutes less than one-third (1/3) of the shares
entitled to vote at the meeting.
Section 7. Voting.
------
(a) Election of Directors. In voting for election of direc-
tors, the voting shall be by written ballot, each stock-
holder shall be entitled to as many votes as shall equal
the number of votes which (except for this provision as to
cumulative voting) such stockholder would be entitled to
cast for election of directors with respect to the shares
of stock held by the stockholder multiplied by the number
of directors to be elected by the stockholder, and the
stockholder may cast all of such votes for a single direc-
tor or may distribute them among the number of directors
to be voted for or for any two or more of them as the
stockholder may see fit. Any stockholder who intends to
cumulate votes shall give written notice of such intention
to the Secretary of the Company no later than ten days
after the date on which notice of such meeting was first
sent to stockholders. The number of nominees for election
as director up to the number of directors to be elected
receiving the greatest number of votes shall be those
elected.
(b) Other Matters. At all meetings of stockholders all ques-
tions except the election of directors, and except as
otherwise expressly provided by statute or the Certificate
of Incorporation, shall be determined by the vote of the
holders of a majority of the stock having voting power
represented at the meeting in person or by proxy. The
manner of voting (by ballot, voice vote or showing of
hands) shall be at the discretion of the chairman of the
meeting, unless otherwise provided by statute, the Cer-
tificate of Incorporation, or these By-Laws.
Section 8. Proxies. A stockholder may vote through a proxy
-------
appointed by a written instrument signed by the stockholder or by
the stockholder's duly authorized attorney-in-fact and delivered
to the Secretary at or prior to the meeting. No proxy shall be
valid after six (6) months of the date of its execution unless a
longer period is expressly provided therein. Each proxy shall be
revocable unless expressly provided to be irrevocable and if, and
only as long as, it is coupled with an interest sufficient in law
to support an irrevocable power.
Section 9. Certain Rules of Procedure Relating to Stockholder
--------------------------------------------------
Meetings. All stockholder meetings, annual or special, shall be
- --------
governed in accordance with the following rules:
(i) The Inspectors of Election and Tellers Committee shall
be composed of such persons designated by resolution of
the Board of Directors in advance of any such meeting.
(ii) Only stockholders of record will be permitted to present
motions from the floor at any meeting of stockholders.
(iii) The Chairman of the Board and Chief Executive Officer or
the President shall preside over and conduct the meeting
in a fair and reasonable manner, and all questions of
procedure or conduct of the meeting shall be decided
solely by the Chairman of the Board and Chief Executive
Officer or the President (whichever is presiding). The
Chairman of the Board and Chief Executive Officer or the
President (whichever is presiding) shall have all power
and authority vested in a presiding officer by law or
practice to conduct an orderly meeting. Among other
things, the Chairman of the Board and Chief Executive
Officer or the President (whichever is presiding) shall
have the power to adjourn or recess the meeting (except
as provided in Article I, Section 6), to silence or
expel persons to insure the orderly conduct of the
meeting, to declare motions or persons out of order, to
prescribe rules of conduct and an agenda for the
meeting, to impose reasonable time limits on questions
and remarks by any stockholder, to limit the number of
questions a stockholder may ask, to limit the nature of
questions and comments to one subject matter at a time
as dictated by any agenda for the meeting, to limit the
number of speakers or persons addressing the Chairman of
the Board and Chief Executive Officer or President
(whichever is presiding) or the meeting, to determine
when the polls shall be closed, to limit the attendance
at the meeting to stockholders of record, beneficial
owners of stock who present letters from the record
holders confirming their status as beneficial owners,
and the proxies of such record and beneficial holders,
and to limit the number of proxies a stockholder may
name.
Section 10. Requests for Stockholder List and Company Records.
-------------------------------------------------
Stockholders shall have those rights afforded under the General
Corporation Law of the State of Delaware to inspect a list of
stockholders and other related records and to make copies or
extracts therefrom. Such request shall be in writing in compli-
ance with Section 220 of the General Corporation Law of the State
of Delaware. In addition, any stockholder making such a request
must agree that any information so inspected, copied or extracted
by the stockholder shall be kept confidential, that any copies or
extracts of such information shall be returned to the Company and
that such information shall only be used for the purpose stated
in the request. Information so requested shall be made available
for inspecting, copying or extracting at the principal executive
offices of the Company. Each stockholder desiring a photostatic
or other duplicate copies of any of such information requested
shall make arrangements to provide such duplicating or other
equipment necessary in the city where the Company's principal
executive offices are located. Alternative arrangements with
respect to this Section 10 may be permitted in the discretion of
the President of the Company or by vote of the Board of Direc-
tors.
Section 11. New Business. Any new business to be taken up at
------------
any annual meeting of stockholders shall be stated in writing and
filed with the Secretary at least ten (10) days before the date
of the annual meeting, and all business so stated, proposed and
filed shall be considered at the annual meeting, but no other
proposal shall be acted upon at the annual meeting of stock-
holders. Any stockholder may make any other proposal at the
annual meeting, and the proposal may be discussed and considered,
but unless stated in writing and filed with the Secretary at
least ten (10) days before the meeting such proposal shall be
postponed for action at an adjourned, special or annual meeting
of stockholders taking place thirty (30) days or more thereafter.
This provision shall not prevent the consideration and approval
or disapproval at the annual meeting of stockholders of reports
of officers, directors and committees, but in connection with
such reports no new business shall be acted upon at such annual
meeting unless stated as herein provided."
ARTICLE II - DIRECTORS
---------
Section 1. Powers. The business, property and affairs of the
------
Company shall be managed by or under the direction of its Board
of Directors which may exercise all such powers of the Company
and do all such lawful acts and things as are not by statute, the
Certificate of Incorporation or these By-Laws required to be
exercised or done by the stockholders.
Section 2. Number and Term of Office. Except as otherwise pro-
-------------------------
vided in the Company's Restated Certificate of Incorporation and
subject to the rights of the holders of any series of the Com-
pany's Preferred Stock to elect additional directors, the number
of directors which shall constitute the whole Board of Directors
shall be not less than five (5) nor more than fifteen (15).
Within such limits, the number of directors shall be fixed from
time to time exclusively by the Board of Directors pursuant to a
resolution adopted by a majority of the total number of autho-
rized directors (whether or not there exists any vacancies in
previously authorized directorships at the time any such resolu-
tion is presented to the Board of Directors for adoption). Any
decrease in the authorized number of directors shall not become
effective until the expiration of the term of the directors whose
directorships are being eliminated (as determined by the Board of
Directors) unless, at the time of such decrease, there shall be
vacancies on the Board of Directors which are being eliminated by
the decrease. The Board of Directors shall be divided into three
(3) classes serving for those initial terms as provided in
Article EIGHTH of the Company's Restated Certificate of Incorpo-
ration. At each annual meeting of stockholders following such
initial classification and election, directors elected to succeed
those directors whose terms expire shall be elected for a term of
office to expire at the third succeeding annual meeting of stock-
holders. Notwithstanding any provision of this Section 2 or
Section 3 below, whenever the holders of the Company's Preferred
Stock shall have the right to elect directors at an annual or
special meeting of stockholders, the election, term of office,
filling of vacancies, and other features of directorships shall
be governed by the terms of the Company's Restated Certificate of
Incorporation applicable thereto.
Section 3. Filling of Vacancies. Subject to the rights of the
--------------------
holders of any class or series of any capital stock of the Com-
pany entitled to vote generally in the election of directors then
outstanding, newly created directorships resulting from any
increase in the authorized number of directors or any vacancies
on the Board of Directors resulting from death, resignation,
retirement, disqualification, removal from office or other cause
may be filled by a majority vote of the directors then in office,
though less than a quorum, and directors so chosen shall hold
office for a term expiring at the annual meeting of stockholders
at which the term of office of the class to which they have been
elected expires. No decrease in the number of authorized direc-
tors constituting the entire Board of Directors shall shorten the
term of any incumbent director.
Section 4. Place and Manner of Meetings. The Board of Directors
----------------------------
and any committee of the Board of Directors may hold meetings,
both regular and special, either within or without the State of
Delaware. Members of the Board of Directors may participate in
such meetings by means of conference telephone or similar com-
munications equipment by means of which all persons participating
in the meeting can hear each other and such participation consti-
tutes presence in person at such meeting.
Section 5. Organizational Meetings. Immediately after each
-----------------------
annual meeting of stockholders, the newly elected directors shall
meet for the purpose of organization, election of officers and
the transaction of any business, if a quorum be present. No
notice of any such organizational meeting shall be required.
Section 6. Regular Meetings. Regular meetings of the Board of
----------------
Directors may be held without notice at such places and times as
shall be determined from time to time by the Board of Directors.
Section 7. Special Meetings. Special meetings of the Board of
----------------
Directors may be called by the Chairman of the Board, the Chair-
man of the Executive Committee or the President and shall be
called by the Secretary on the written request of any two (2)
directors, upon at least two (2) days notice stating the time and
place of the meeting given to each director by mail, telegraph or
telephone. Except as otherwise expressly provided by statute,
the Certificate of Incorporation, or these By-Laws, neither the
business to be transacted at, nor the purpose of, any special
meeting must be specified in the notice or waiver of notice.
Section 8. Action Without Meeting. Any action which may be
----------------------
taken at a meeting of the Board of Directors or at any meeting of
a Committee of the Board of Directors, may be taken without a
meeting if a consent in writing, setting forth the action so
taken, shall be signed by all the members of the Board of Direc-
tors or the committee and filed with the minutes of the pro-
ceedings of the Board of Directors or the committee. Such
consent shall have the same force and effect as a unanimous vote
at a meeting.
Section 9. Quorum. A majority of the directors shall constitute
------
a quorum for the transaction of business at any meeting of the
Board of Directors, and the act of a majority of the directors
present, if a quorum exists, shall be the act of the Board of
Directors except as may be otherwise expressly provided by
statute, the Certificate of Incorporation or these By-Laws. In
the case of an equality of votes on any question before the Board
of Directors, the Chairman of the Board of the Company shall have
a second and deciding vote.
Section 10. Adjourned Meetings. Any meeting of the Board of
------------------
Directors may be adjourned from time to time to reconvene at the
same or a different place, upon resolution of the Board of Direc-
tors or a majority of the directors present, if less than a
quorum, and no notice of any adjourned meeting or meetings or the
business to be transacted thereat shall be necessary.
Section 11. Advisory Directors. The Board of Directors from
------------------
time to time may appoint one or more persons as advisory direc-
tors of the Company, to serve in such capacity until the next
organizational meeting of the Board of Directors provided for in
Section 5 of this Article. No such advisory director shall be
entitled to vote at any meeting of the Board of Directors nor
shall such advisory director be counted for purposes of deter-
mining the presence of a quorum at any such meeting. Each such
advisory director, however, shall be entitled to notice of, to
attend, and to participate in the deliberations of, all meetings
of the Board of Directors.
Section 12. Compensation of Directors and Advisory Directors.
------------------------------------------------
Directors and advisory directors shall not receive any salary for
their services as directors, but as authorized by the Board of
Directors they shall be paid their expenses of attendance at
meetings of the Board of Directors and any committees of the
Board of Directors and a fixed fee for attendance at each such
meeting, series of meetings, and/or a regular retainer payable
quarterly, monthly or otherwise. Nothing herein contained shall
be construed to preclude any director or advisory director from
serving the Company in any other capacity and receiving compensa-
tion therefor.
Section 13. Nominating Procedure for Directors and Qualifica-
------------------------------------------------
tions.
- -----
(a) Nominating Procedure. Except as otherwise provided in the
Company's Restated Certificate of Incorporation relating
to the rights of the holders of any series of the Com-
pany's Preferred Stock to elect additional directors,
nominations for the election of directors may be made by
the Board of Directors or a committee appointed by the
Board of Directors or by any stockholder entitled to vote
in the election of directors generally. However, any
stockholder entitled to vote in the election of directors
generally may nominate one or more persons for election as
directors at a meeting of stockholders only if written
notice of such stockholders's intent to make such nomina-
tion or nominations has been given to the Secretary of the
Company not later than (1) with respect to an election to
be held at an annual meeting of stockholders, at least
forty-five (45) days in advance of such meeting and (2)
with respect to an election to be held at a special
meeting of stockholders, no later than ten days after the
date on which notice of such meeting was first sent to
stockholders. Each such notice shall set forth (i) the
name, age, residence address and business address of the
nominating stockholder and of the person or persons to be
nominated; (ii) a representation that the nominating
stockholder is a holder of record of stock of the Company
entitled to vote at such meeting and intends to appear in
person or by proxy at the meeting to nominate the person
or persons specified in the notice; (iii) a description of
all arrangements or understandings between the nominating
stockholder and each nominee and any other person or per-
sons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stock-
holder or such nominees are to be elected; (iv) such other
information regarding each nominee proposed by such stock-
holder as would be required to be included in a proxy
statement filed pursuant to the proxy rules of the Securi-
ties and Exchange Commission, had the nominee been nomi-
nated, or intended to be nominated, by the Board of
Directors or a committee thereof; (v) a statement as to
each proposed nominee and a statement as to the nominating
stockholder stating whether the nominee or stockholder has
been a participant in any proxy contest or other change of
corporate control within the past ten years, and, if so,
the statement shall indicate the principals involved, the
subject matter of the contest, the outcome thereof and the
relationship of the nominee and the stockholder to the
principals; (vi) if any shares of the Company's stock
owned of record or beneficially, directly or indirectly,
by each proposed nominee or the nominating stockholder
were acquired in the last two years, a statement of the
dates of acquisition and amounts acquired on each date;
(vii) a description of any arrangement or understanding of
each nominee and of the nominating stockholder with any
person regarding future employment by the nominee or
stockholder with the Company or any future transaction to
which the Company will or may be a party; (viii) a state-
ment as to each nominee and a statement as to the nomi-
nating stockholder as to whether or not the nominee or
stockholder will bear any part of the expense incurred in
any proxy solicitation, and, if so, the amount thereof;
(ix) the consent of each nominee to serve as a director of
the Company if so elected; and (x) any plans or proposals
that each nominee or the nominating stockholder may have
that relate to or may result in the acquisition or dispo-
sition of securities of the Company, an extraordinary
corporate transaction (such as a merger, reorganization or
liquidation) involving the Company or any of its subsidi-
aries, a sale or transfer of a material amount of assets
of the Company or of any of its subsidiaries, any change
in the Board of Directors or management of the Company
(including any plans or proposals to change the number or
term of directors or to fill any existing vacancies on the
Board), any material change in the present capitalization
or dividend policy of the Company, any change in the Com-
pany's Restated Certificate of Incorporation or By-Laws,
causing a class of securities of the Company to be
delisted from a national securities exchange or to cease
to be quoted on an inter-dealer quotation system of a
registered national securities association, a class of
equity securities of the Company becoming eligible for
termination of registration pursuant to Section 12(g)(4)
of the Securities Exchange Act of 1934, or any other
material change in the Company's business or corporate
structure or any action similar to those listed above.
The Board of Directors of the Company may disqualify any
nominee who fails to provide it with complete and accurate
information as required above. The President may, in his
discretion, determine and declare to the meeting that a
nomination not made in accordance with the foregoing pro-
cedure shall be disregarded.
(b) Certain Qualifications. No person shall be a member of
the Board of Directors, (i) who owns, together with his
family residing with him, directly or indirectly, more
than one percent (1%) of the outstanding shares of any
other entity, or an affiliate or subsidiary thereof, that
competes with the Company or any of its subsidiaries, (ii)
who is a director, officer, employee, agent, a nominee,
attorney or investment banker of or for any other entity,
or an affiliate or subsidiary thereof, that competes with
the Company or any of its subsidiaries or (iii) who has or
is the nominee of anyone who has any contract, arrangement
or understanding with any other entity, or an affiliate of
subsidiary thereof, that competes with the Company or any
of its subsidiaries or with any officer, employee, agent,
nominee, attorney or other representative thereof, that he
will reveal or in any way utilize information obtained as
a director or that he will directly or indirectly attempt
to effect or encourage any action of the Company. Direc-
tors must be stockholders of the Company. Notwithstanding
any limitation in this subsection 14(b), the Board of
Directors in their discretion may waive any or all of the
above requirements.
Section 14. Interested Directors. No contract, transaction or
--------------------
act of the Company shall be affected by the fact that a director
of the Company is in any way interested in, or connected with,
any party to such contract, transaction or act, if the interested
director shall at least five days prior to the date of any
meeting of the Board of Directors, regular or special, at which
such contract, transaction or act is to be considered, give
notice in writing to each of the remaining directors of his
interest in or in connection with the proposed contract, transac-
tion or act. If such condition is complied with, the interested
director may be counted in determining a quorum at any meeting of
the Board of Directors which shall authorize any such contract,
transaction or act, but may not vote thereat.
Section 15. Evaluation of Business Combinations. The Board of
-----------------------------------
Directors of the Company, when evaluating any offer of another
party to make a tender or exchange offer for any equity security
of the Company or to otherwise effect a Business Combination,
shall, in connection with the exercise of its judgment as to what
is in the best interests of the Company as a whole, be authorized
to give due consideration to such factors as the Board of Direc-
tors determines to be relevant, including, without limitation:
(i) the interests of the Company's stockholders;
(ii) whether the proposed transaction violates federal or
state law;
(iii) an analysis of not only the consideration being offered
in the proposed transaction, in relation to the then-
current market price for the outstanding capital stock
of the Company, but also in relation to the market for
the capital stock of the Company over a period of years,
the estimated price which might be achieved in a nego-
tiated sale of the Company as a whole or in part or
through orderly liquidation, the premiums over market
price for the securities of other corporations in other
similar transactions, current political, economic and
other factors bearing on securities prices and the Com-
pany's financial condition and future prospects; and
(iv) the social, legal and economic effects upon employees,
suppliers, customers and others having similar relation-
ships with the Company and the communities in which the
Company conducts it business.
In connection with any such evaluation, the Board of Directors is
authorized to conduct its investigation and to engage in such
legal proceedings as the Board of Directors may determine.
ARTICLE III - EXECUTIVE COMMITTEE
-------------------
Section 1. How Appointed. By the affirmative vote of a majority
-------------
of the directors, the Board of Directors may appoint an Executive
Committee made up of members of the Board of Directors consisting
of a Chairman and at least one additional member. Vacancies
occurring in the Executive Committee may be filled at any meeting
of the Board of Directors.
Section 2. Powers. During the intervals between meetings of the
------
Board of Directors, the Executive Committee shall have and may
exercise all of the powers of the Board of Directors in the man-
agement of the business, property and affairs of the Company, in
such manner as the Executive Committee shall deem best for the
interests of the Company in all cases in which specific direc-
tions shall not have been given by the Board of Directors, and as
respects all matters which are not by statute, the Certificate of
Incorporation or these By-Laws required to be acted upon by the
Board of Directors. Incident to the exercise of such powers the
Executive Committee shall have the power to authorize the seal of
the Company to be affixed to all papers which may require it.
Section 3. Procedures, Meetings and Quorum. The Executive Com-
-------------------------------
mittee of the Board of Directors may make its own rules or pro-
cedures. It shall meet on the call of the Chairman or any two
(2) of its members, and at any other time or times specified by
the Board of Directors. A majority of the members of the Execu-
tive Committee shall constitute a quorum for the transaction of
business, and in every case the affirmative vote of a majority of
the Committee's members shall be necessary for the taking of any
action.
Section 4. Committee to Report to Board of Directors. All
-----------------------------------------
actions by the Executive Committee of the Board of Directors
shall be recorded in minutes of the Committee's proceedings and
shall be reported to the Board of Directors at the next meeting
of the Board of Directors and, unless copies thereof shall
previously have been distributed to the directors, the minutes of
the Committee reflecting such actions shall be made available for
the information of the directors attending such meeting of the
Board.
Section 5. Chairman of the Executive Committee. The Chairman of
-----------------------------------
the Executive Committee shall be entitled to preside at the
meetings of the Committee.
ARTICLE IV - AUDIT COMMITTEE
---------------
Section 1. How Appointed. By the affirmative vote of a majority
-------------
of the directors, the Board of Directors may appoint an Audit
Committee made up of members of the Board of Directors who are
not also employed as full time officers of the Company and con-
sisting of a Chairman and at least one (1) and not more than two
(2) additional members. Vacancies occurring in the Audit Com-
mittee may be filled at any meeting of the Board of Directors.
Section 2. Powers. The Audit Committee shall have the following
------
powers, responsibilities and duties: the recommendation to the
Board of Directors of the engagement or discharge of the inde-
pendent auditor; the review with the independent auditor of the
plan and results of the auditing engagement; the review of the
scope and results of the Company's internal auditing procedures;
the approval of each professional service provided or to be pro-
vided by the independent auditor; the consideration of the range
of audit and nonaudit fees; and the review of the Company's sys-
tem of internal accounting controls. And, to the extent not
otherwise required by statute, the Certificate of Incorporation
or these By-Laws to be exercised or done by the stockholders or
the Board of Directors, the Audit Committee shall have and may
exercise all powers and authority of the Board of Directors in
the management of the business, property and affairs of the Com-
pany that are delegated or assigned to the Audit Committee from
time to time by the Board of Directors.
Section 3. Procedures, Meetings and Quorum. The Audit Committee
-------------------------------
may make its own rules of procedures. It shall meet on the call
of the Chairman or other member and at any other time or times
specified by the Board of Directors. Both members of the Audit
Committee shall be necessary to constitute a quorum for the
transaction of business, and in every case the affirmative vote
of both of the Committee's members shall be necessary for the
taking of any action.
Section 4. Committee to Report to Board of Directors. All
-----------------------------------------
actions by the Audit Committee shall be reported to the Board of
Directors at the next meeting of the Board and, unless copies
thereof shall previously have been distributed to the directors,
the minutes of the Committee reflecting such action shall be made
available for the information of the directors attending such
meeting of the Board.
ARTICLE V - EXECUTIVE COMPENSATION COMMITTEE
--------------------------------
Section 1. How Appointed. By the affirmative vote of a majority
-------------
of the directors, the Board of Directors may appoint an Executive
Compensation Committee made up of members of the Board of Direc-
tors who are not also employed as full time officers of the
Company and consisting of a Chairman and not less than two (2)
additional members. Vacancies occurring in the Executive Compen-
sation Committee may be filled at any meeting of the Board of
Directors.
Section 2. Powers and Duties. The Executive Compensation Com-
-----------------
mittee shall review from time to time the compensation being paid
by the Company to officers of the Company and all plans, provi-
sions and policies of the Company covering the payment of various
kinds of benefits to the various classifications of Company
employees including, without being limited to, retirement income,
group insurance, savings plans, retirement income plans,
severance pay plans, stock option plans and long-term disability
plans and based upon such review, the Executive Compensation
Committee shall from time to time make recommendations to the
entire Board of Directors with respect to changes and modifica-
tions in such plans and benefits as the Executive Compensation
Committee shall have determined to be appropriate. In addition,
the Executive Compensation Committee shall have and may exercise
such powers and authority to the extent not otherwise required by
statute, the Certificate of Incorporation or these By-Laws to be
acted upon the Board of Directors or stockholders, as may be
delegated or assigned to the Executive Compensation Committee
from time to time by the Board of Directors.
Section 3. Procedures, Meetings and Quorum. The Executive Com-
-------------------------------
pensation Committee may make its own rules of procedures. It
shall meet on the call of the Chairman of any two (2) of its
members and at any other time or times specified by the Board of
Directors. A majority of the members of the Executive Compensa-
tion Committee shall constitute a quorum for the transaction of
business, and in every case the affirmative vote of a majority of
the Committee's members shall be necessary for the taking of any
action.
Section 4. Committee to Report to Board of Directors. All
-----------------------------------------
actions by the Executive Compensation Committee shall be reported
to the Board of Directors at the next meeting of the Board of
Directors and, unless copies thereof shall previously have been
distributed to the directors, the minutes of the Committee
reflecting such actions shall be made available for the informa-
tion of the directors attending such meeting of the Board.
ARTICLE VI - OTHER COMMITTEES
Section 1. Designation. The Board of Directors may, from time
-----------
to time, designate other committees, with such lawfully delegated
powers and duties with regard to the management of the business,
property and affairs of the Company as the Board of Directors may
confer, to serve at the pleasure of the Board and shall, for
those committees, elect a director or directors to serve as the
member of members. The Board of Directors shall have the power
at any time to fill vacancies in, to change the size or members
of, and to discharge any such committee.
Section 2. Conduct of Business. Each committee may determine
-------------------
the procedural rules for meeting and conducting its business and
shall act in accordance therewith, except as otherwise provided
by statute, the Board of Directors or these By-Laws. Adequate
provisions shall be made for notice to members of all meetings; a
majority of the members shall constitute a quorum and all matters
shall be determined by a majority vote of the members present.
Section 3. Committees to Report to Board of Directors. All
------------------------------------------
actions by each committee of the Board of Directors shall be
recorded in minutes of each committee's proceedings and shall be
reported to the Board of Directors at the next meeting of the
Board of Directors and, unless copies thereof shall previously
have been distributed to the directors, the minutes of the com-
mittee reflecting such actions shall be made available for the
information of the directors attending such meeting of the Board.
ARTICLE VII - OFFICERS
--------
Section 1. Executive and Other Officers. The officers of the
----------------------------
Company shall include a Chairman of the Board, a President, a
Treasurer, a Secretary and a Controller. The officers of the
Company may also include one or more Vice Presidents, any one or
more of whom may be designated an Executive Vice President or a
Senior Vice president, a General Counsel, and such other officers
and assistant officers as the Board of Directors from time to
time may deem necessary for the proper conduct of the company's
business. Only the President need be a director. Divisions of
the company may also have officers as designated by the Board of
Directors. One person may be elected to any one or more of the
officer positions specified in these By-Laws.
Section 2. Election and Term of Office. The officers of the
---------------------------
Company and any divisions of the Company shall be elected
annually by the Board of Directors at the first meeting thereof
after each annual meeting of stockholders. Additional officers
may also be elected by the Board of Directors at any time. Each
officer shall hold office until death, removal or resignation or
until a successor is duly elected and qualified.
Section 3. Removal and Vacancies. Any officer may be removed by
---------------------
the Board of Directors at any time whenever in its judgment the
best interests of the Company would be served thereby. All
vacancies among the officers shall be filled by the Board of
Directors, except that the Board of Directors in its discretion
may abolish or leave unfilled when vacant any offices other than
those of the President, the Treasurer and the Secretary.
Section 4. Chairman of the Board. The Chairman of the Board
---------------------
shall be the chief executive officer and chief policy officer of
the Company elected from among the directors and shall be
entitled to preside at all meetings of the stockholders and of
the Board of Directors at which the Chairman of the Board is
present. The Chairman of the Board shall perform the duties
incident to the office of the Chairman of the Board and chief
executive officer and, subject to the direction of the Board of
Directors, shall have overall responsibility for the management
and direction of the business, property and affairs of the Com-
pany, unless some other officer of the Company shall have been
designated by the Board of Directors to serve as such chief
executive officer. The Chairman of the Board shall also have
such other powers and duties as may be prescribed from time to
time by the Board of Directors.
Section 5. President. The President shall be the chief
---------
operating officer of the Company and, subject to the direction of
the Board of Directors, shall be responsible for supervising the
day to day operations of the business of the Company; shall have
the authority to execute bonds, mortgages, guaranties and other
contracts on behalf of the Company, and shall also have such
other powers and duties as may be prescribed from time to time by
the Board of Directors.
Section 6. Vice Presidents. The Vice Presidents in the order
---------------
designated by the Board of Directors or in the absence of any
designation, then in the order of their rank (Executive Vice
president, Senior Vice President, Vice President) and within
their rank by their seniority, shall in the absence or disability
of the President, be vested with all the powers and shall perform
all the duties of the President unless and until the Board of
Directors shall otherwise determine. The Vice Presidents shall
also have such other powers and duties as may from time to time
be prescribed by the President or by the Board of Directors.
Section 7. General Counsel. The General Counsel shall be the
---------------
chief legal officer of the Company and as such, shall:
(a) Be responsible for the supervision and management of all
judicial, administrative and other legal proceedings
involving the Company;
(b) Prepare, review or review or cause to be prepared, revised
or reviewed legal documents proposed to be executed on be-
half of the Company as may be requested from time to time
by the directors, officers and employees of the Company;
(c) Render legal opinions to the directors, officers and
employees of the Company on all matters of concern to the
Company as may be requested from time to time; and
(d) Be responsible for retaining outside counsel for the Com-
pany, as approved by the President of the company.
In addition, the General Counsel shall also have such other
powers and duties as may from time to time be prescribed by the
President or by the Board of Directors.
Section 8. Treasurer. The Treasurer shall have custody of and
---------
be responsible for all funds and securities of the Company except
as otherwise provided by the Board of Directors. The Treasurer
shall disburse the funds and pledge the credit of the Company as
may be directed by the Board of Directors and shall also have
such other powers and duties as may from time to time be
prescribed by the President or by the Board of Directors.
Section 9. Secretary. The Secretary or any Assistant Secretary
---------
designated by the Secretary or the President shall give, or cause
to be given, notice of all meetings of stockholders and directors
and all other notices required to be given to holders of the
Company's securities, and shall keep minutes of all meetings of
the stockholders, the Board of Directors, the Executive Committee
when required, or any other committee, if requested. The Secre-
tary or any Assistant Secretary shall have custody of the seal of
the Company and shall have authority to affix and attest to the
same on instruments requiring it. In addition, the Secretary
shall also be responsible for supervision of the activities of
the Transfer Agent of the Company with regard to transfer of
stock, maintenance of a list of stockholders of record and pay-
ment of dividends on Company stock. The Secretary shall also
have such other powers and duties as may from time to time be
prescribed by the President or by the Board of Directors.
Section 10. Controller. The Controller shall be the chief
----------
accounting officer of the Company. The Controller shall cause to
be maintained accurate accounts reflecting all business transac-
tions of the Company and shall develop, coordinate and administer
procedures for adequate accounting control of the Company's
revenues, expenses and capital investments. The Controller shall
report and interpret the financial results of operations to all
levels of management and perform other duties as may from time to
time be prescribed by the President or by the Board of Directors.
Section 11. Other Officers. Each of the officers elected by the
--------------
Board of Directors, other than those referred to in Sections 5
through 10 of this Article, shall have such powers and duties as
may from time to time be prescribed by the President or by the
Board of Directors.
ARTICLE VIII - CAPITAL STOCK
-------------
Section 1. Stock Certificates. Each stockholder of the Company
------------------
shall be entitled to one or more certificates, under the seal of
the Company or a facsimile thereof, signed by the President or
Vice president and the Treasurer or Assistant Treasurer or Secre-
tary or Assistant Secretary of the Company, certifying the number
of shares owned by the Stockholder in the Company provided, how-
ever, that where such certificate is signed by a registrar acting
on behalf of the Company, the signature of any such President,
Vice President, Treasurer, Assistant Treasurer, Secretary or
Assistant Secretary of the Company, or any officer or employee of
the transfer agent, may be facsimile.
In case any officer of the Company, or officer or employee of the
transfer agent, who has signed or whose facsimile signature has
been used on any such certificate shall cease to be such officer
of the Company, or officer or employee of the transfer agent,
because of death, resignation, or otherwise, before the certifi-
cate is issued, such certificate shall nevertheless be deemed
adopted by the Company and may thereafter be issued and delivered
by the Company as though the person who signed such certificate
or whose facsimile signature has been used thereon had not ceased
to be such officer of the Company, or officer or employee of the
transfer agent.
The Company shall be entitled to treat the holder of record of
any share or shares of stock as the holder in fact thereof, and
accordingly shall not be bound to recognize any equitable or
other claim to or interest in such share of shares on the part of
any other person, whether or not it has actual or other notice
thereof.
Section 2. Transfer of Shares. The shares of stock of the Com-
------------------
pany shall be transferable upon its books by the holders thereof
in person or by their duly authorized attorneys or legal repre-
sentatives, and upon such transfer the old certificates shall be
surrendered to the Company by the delivery thereof to the person
in charge of the stock and transfer books and ledgers, or to such
other person as the Board of Directors may designate, by whom
they shall be canceled, and new certificates shall thereupon be
issued.
Section 3. Lost Certificates. A new certificate or certificates
-----------------
of stock may be issued in the place of any certificate alleged to
have been lost, stolen, mutilated, or destroyed theretofore
issued by the Company and/or by any corporation of which the
Company is the successor upon the making of an affidavit of that
fact by the person claiming the certificate to be lost, stolen,
mutilated, or destroyed. The Board of Directors may, in its
discretion, require the owner or the owner's legal representa-
tives, as a condition precedent to the issue of a new certifi-
cate, in the case of a mutilated certificate, to surrender the
mutilated certificate, or in the case of a lost, destroyed or
stolen certificate, to give the Company a bond sufficient to
indemnify it or its transfer agent, or both, against any claim
that may be made on account of the alleged loss, destruction or
theft of any such certificate or the issuance of any such new
certificate.
Section 4. Dividends. Subject to the provisions of law and the
---------
Certificate of Incorporation, dividends upon the capital stock of
the Company or any class or series of shares thereof may be
declared by the Board of Directors at any regular or special
meeting, payable in cash, property or shares of the Company's
capital stock, at such times and in such amounts as the Board of
Directors, in its sole discretion, may think appropriate and in
the best interest of the Company.
ARTICLE IX - EXECUTION OF DOCUMENTS AND INSTRUMENTS
--------------------------------------
Section 1. Deeds, Leases and Contracts. Except as otherwise
---------------------------
provided by the Board of Directors, all deeds, leases, contracts,
agreements and other formal documents shall be signed on behalf
of the Company or any division of the Company by the President or
a Vice President of the Company or of such division and, where a
seal is required, sealed with the Company's seal or the seal of
such division and attested by the Secretary or an Assistant
Secretary of the Company or such division.
Section 2. Checks, Drafts and Notes. All checks, drafts or
------------------------
other orders for the payment of money and all notes or other
evidences of indebtedness issued in the name of the Company or
any division of the Company shall be signed by the President or
such other officer or officers or agent or agents of the Company
or such division, and in such manner, as shall from time to time
be determined by the Board of Directors.
ARTICLE X - MISCELLANEOUS PROVISIONS
------------------------
Section 1. Corporate Seal. The corporate seal shall be circu-
--------------
lar, shall bear the name of the Company, the year of its organi-
zation and the words "Corporate Seal, Delaware," and shall be in
such form as shall be prescribed by the Board of Directors from
time to time. Divisions of the Company may have seals as
prescribed by the Board of Directors.
Section 2. Fiscal Year. The fiscal year of the Company shall
-----------
end on June 30th of each year.
Section 3. Notices. Whenever the provisions of statute, the
-------
Certificate of Incorporation or these By-laws require notice to
be given to any director or stockholder, such notice, if in
writing, shall be deemed validly given if delivered personally or
by depositing the same in a United States post office or letter
box in a sealed postpaid wrapper addressed to the last known
address of the director or to the address of the stockholder
appearing on the Company's stock records. Notices so mailed
shall be deemed to have been given at the time of their mailing.
Stockholders not entitled to vote at any meeting need not be
given notice thereof except as otherwise provided by statute.
Section 4. Waiver of Notices. A waiver in writing of any notice
-----------------
referred to in Section 3 of this Article, if signed by the direc-
tor or stockholder entitled thereto, shall be deemed equivalent
to the giving of such notice, regardless of when such waiver is
signed or delivered to the Company. Attendance at a meeting
shall constitute a waiver of notice of such meeting, except where
such person attends for the express purpose of objecting to the
transaction of any business on the grounds that the meeting is
not lawfully called or convened.
Section 5. Resignations. Any resignation of a director shall be
------------
made in writing and shall take effect on the earlier of its
acceptance by the board of directors or ten days after its re-
ceipt by the President or Secretary. Any resignation of a member
of a committee or officer shall be made in writing and shall take
effect at the time specified therein or, if no time be specified,
at the time of its receipt by the President or Secretary.
Section 6. Inspection of Books. The Board of Directors shall
-------------------
determine from time to time whether the accounts and books of the
Company, or any of them, shall be opened to the inspection of
stockholders and, if permitted, when and under what conditions
and regulations the accounts and books of the Company, or any of
them, shall be open to the inspection of stockholders, and the
stockholders' rights in this respect shall be restricted and
limited accordingly.
Section 7. Indemnification of Directors, Officers and Others.
-------------------------------------------------
Directors and officers of the Company shall be indemnified to the
fullest extent now or hereafter permitted by law in connection
with any actual or threatened action or proceeding (including
civil, criminal, administrative or investigative proceedings)
arising out of their service to the Company or to any other
organization at the Company's request. Employees and agents of
the Company who are not directors of officers thereof may be
similarly indemnified in respect of such service to the extent
authorized at any time by the Board of Directors. The provisions
of this Section shall be applicable to actions or proceedings
commenced after the adoption hereof, whether arising from acts or
omissions occurring before or after the adoption hereof, whether
arising from acts or omissions occurring before or after the
adoption hereof, and to persons who have ceased to be directors,
officers or employees and shall inure to the benefit of their
heirs, executors, and administrators. For the purposes of this
Section, directors, officers, trustees or employees of an organi-
zation shall be deemed to be rendering service thereto at the
Company's request if such organization is, directly or indi-
rectly, a wholly-owned subsidiary of the Company or it designated
by the Board of Directors as an organization service to which
shall be deemed to be so rendered.
Section 8. Amendment of By-Laws. The Stockholders, by the
--------------------
affirmative vote of the holders of a majority of the voting power
of the then-outstanding shares of stock entitled to vote
generally in the election of directors, voting together as a
single class, or the Board of Directors, by the affirmative vote
of a majority of the directors, may at any meeting, if the sub-
stance of the proposed amendment shall have been stated in the
notice of meeting, amend, alter or repeal any of these By-Laws.
Section 9. Severability. In case any one or more of the provi-
------------
sions contained in these By-Laws shall be for any reason be held
to be invalid, illegal or unenforceable in any respect, such
invalidity, illegality or unenforceability shall not affect any
other provision hereof, and these By-Laws shall be construed as
if such invalid, illegal, or unenforceable provision had never
been contained herein.
<PAGE>
EXHIBIT 10(a)
THOMAS F. KARAM
EMPLOYMENT AGREEMENT
This EMPLOYMENT AGREEMENT is made and entered into as of this
28th day of December, 1999, by and between Southern Union Company
(hereinafter referred to as the "Company"), a Delaware corpora-
tion, and Thomas F. Karam (hereinafter referred to as the
"Executive").
WHEREAS, the Executive is presently employed by the Company in
the capacity of Executive Vice President Corporate Development
and Chief Executive Officer of the PG Energy Division;
WHEREAS, the Company is desirous of assuring the continued
employment of the Executive as a senior executive of Southern
Union Company and the PG Energy Division, and Executive is
desirous of having such assurance.
NOW, THEREFORE, in consideration of the foregoing and of the
mutual covenants and agreements of the parties set forth in this
Agreement, and of other good and valuable consideration the
receipt and sufficiency of which are hereby acknowledged, the
parties hereto, intending to be legally bound, agree as follows:
Section 1. Term of Employment; Prior Agreements
1.1 Employment Term. Subject to the provisions of Section 6
---------------
of this Agreement, the Company hereby agrees to employ
the Executive and the Executive hereby agrees to serve
the Company, in accordance with the terms and conditions
set forth herein, until June 30, 2010, commencing as of
the date hereof (the "Term"). If, in the sole discretion
of the President of Southern Union Company (the "Presi-
dent"), certain mutually agreed financial and performance
goals are achieved, the agreement will be automatically
renewed for 12 months, effective July 1 of each year and
a new Employment Agreement will be executed. Notwith-
standing the foregoing, in the event a Change of Control
of the Company (as defined in Section 6.7) occurs during
the Term of this agreement or any renewal thereof, the
Term shall continue until the second anniversary of the
Change of Control (or such later date as may be agreed to
by the parties).
1.2 Prior Agreements. This Agreement supersedes all prior
----------------
agreements and understandings (including verbal agree-
ments) between Executive and the Company and/or any of
its affiliates regarding the terms of Executive's employ-
ment with the Company and/or its affiliates including,
without limitation, the Employment Agreement dated May 6,
1998 between the Executive and Pennsylvania Enterprises,
Inc, the Change of Control Agreement dated March 6, 1996
between the Executive and Pennsylvania Enterprises, Inc.,
and any assumption of those agreements by the Company and
the parties, shall have no liabilities under any such
prior agreements.
Section 2. Position and Responsibilities
During the Term of this Agreement, the Executive agrees to serve
as a senior executive of Southern Union Company and the PG Energy
Division. In such capacity, the Executive shall have such level
of duties and responsibilities as he may be assigned from time to
time by the President of the Company. The Executive shall have
the same status, privileges, and responsibilities normally
inherent in similarly situated executives of the Company.
Section 3. Standard of Care
During the term of this Agreement, the Executive agrees to devote
his full business time and reasonable best efforts to the busi-
ness of the Company and the PG Energy Division. Executive shall
not be engaged in any other business activity, whether or not
such business activity is pursued for gain, profit, or other
pecuniary advantage, without the prior written consent of the
President. The Executive may serve on the board of directors or
trustees of any business corporation or charitable organization
so long as such service is not injurious to the Company and is
agreed upon by the President. This Section 3 shall not be
construed as preventing the Executive from holding, as a passive
investor, up to two percent (2%) of the common stock of any
public company.
Section 4. Compensation
As remuneration for all services to be rendered by the Executive
during the term of this Agreement, and as consideration for
complying with the covenants herein, the Company shall pay and
provide to the Executive the following:
4.1 Base Salary. During the Term, the Company shall pay the
-----------
Executive a Base Salary in an amount which shall be
established from time to time by the President; provided,
however, that such Base Salary shall not be less than
$16,346.15 per biweekly pay period. This Base Salary
shall be paid to the Executive in equal installments
throughout the year, consistent with the normal payroll
practices of the PG Energy Division.
While this Agreement is in force, the annual Base Salary
shall be reviewed at least annually, to ascertain
whether, in the judgment of the President, such Base
Salary should be increased, based primarily on the per-
formance of the Executive during the year and on the base
salary of similarly situated executives at comparable
companies. If so increased, the Base Salary as stated
above shall, likewise, be increased for all purposes of
this Agreement.
4.2 Sign-On Bonus. The Company shall pay to the Executive an
-------------
amount equal to $906,618.31 as a sign-on bonus. This
sign-on bonus shall not be treated as compensation for
purposes of any other benefit plan or agreement
(including any retirement or severance benefits payable
to Executive, under this Agreement or otherwise).
4.3 Annual Bonus. July 1st of each year of the employment
------------
agreement the company shall pay to the executive an
amount equal to $600,000 as an annual bonus related to
the Executives corporate responsibilities.
4.4 Annual Cash Incentive Compensation. The Company shall
----------------------------------
provide the Executive with the opportunity to earn an
annual cash incentive compensation payment, at a level no
less favorable than that provided to similarly situated
executives of the Company, based upon goals and measures
for the Executive, the PG Energy Division and/or the
Company established by the President.
4.5 Long-Term Incentives. The Company shall provide the
--------------------
Executive with the opportunity to earn a long-term
incentive award by participating in the Company's Long-
Term Incentive Stock Option Plan at a level no less
favorable than that provided to similarly situated
executives of the Company.
4.6 Supplemental Retirement Benefits. The Company shall
--------------------------------
provide the Executive the opportunity to participate in
the Southern Union Company Supplemental Deferred
Compensation Plan.
4.7 Employee Benefits. During the Term, the Company shall
-----------------
provide to the Executive all qualified retirement plan
benefits and welfare benefits to which other senior
executives of the PG Energy Division are generally
entitled, without duplication of benefits. The Executive
shall be entitled to paid vacation in accordance with the
standard written policy of the PG Energy Division with
regard to vacations of employees. The Company shall
provide to the Executive, at the Company's cost, all
perquisites to which other similarly situated executives
are entitled.
Section 5. Expenses
The Company shall pay, or reimburse the Executive, for all
ordinary and necessary expenses that the Executive incurs in
performing his duties under this Agreement in accordance with the
Company's policy.
Section 6. Termination of Employment
6.1 General. Executive's employment may be terminated in
-------
accordance with any of the provisions set forth in this
Section 6, and the Term shall terminate upon the effective
date of such termination of employment. Upon such
termination, Executive shall be entitled solely to the
rights and benefits set forth in the applicable provision
of this Section 6.
6.2 Termination Due to Death or Disability
(a) Executive's employment may be terminated by the
Company on account of Executive's Disability, and
shall be terminated upon Executive's death. The
Company shall have the right to terminate Executive's
employment on account of Disability if, as a result
of Executive's incapacity due to physical or mental
illness, Executive shall have been absent from the
full-time performance of his duties with the Company
for six consecutive months.
(b) If the Executive's employment is terminated due to
death or Disability, the Company shall pay Executive
his accrued but unpaid Base Salary, unpaid bonus
earned in the previous year, a pro rata portion of
his target annual bonus for the year of termination,
based on the portion of the year elapsed prior to
such termination, plus any amounts otherwise payable
to Executive under the terms of the Company benefit
plans and programs in which he is a participant, at
the times such payments are due. With the exception
of the foregoing obligations of the Company, and, in
the case of Disability, the covenants of Executive
contained in Section 7 (which shall survive such
termination), the Company and the Executive there-
after shall have no further obligations under this
Agreement.
6.3 Voluntary Termination by the Executive
(a) The Executive may terminate this Agreement at any
time other than for Good Reason, death or Disability
by giving the President written notice of intent to
terminate, delivered at least thirty (30) calendar
days prior to the effective date of such termina-
tion. The termination shall become effective
automatically upon the expiration of the thirty (30)
day notice period. Such notice shall also
constitute the resignation by the Executive of his
positions as an officer and/or director of the
Company and its subsidiaries and affiliates.
(b) In the event of such termination, the Company shall
pay to the Executive his accrued but unpaid Base
Salary, plus any amounts otherwise payable to
Executive under the terms of the Company benefit
plans and programs in which he is a participant, at
the times such payments are due. With the exception
of the foregoing obligations of the Company and the
covenants of the Executive contained in Section 7
(which shall survive such termination), the Company
and the Executive thereafter shall have no further
obligations under this Agreement.
6.4 Involuntary Termination by the Company Without Cause.
----------------------------------------------------
The Company may terminate the Executive's employment at
any time by notifying the Executive in writing of the
Company's intent to terminate, effective thirty (30)
calendar days following the date on which the Company
delivers such notice to the Executive. If Executive's
employment is terminated by the Company for reasons other
than death, Disability, or for Cause, then the Executive
shall be entitled to the benefits provided below:
(a) The Company shall pay the Executive his full Base
Salary through the effective date of termination,
unpaid bonus earned in the previous year, the unpaid
annual bonus payments referred to in Section 4.3 (on
either an annual basis or at the discretion of the
company a lump sum present value of the bonus
payments), plus any amounts otherwise payable to
Executive under the terms of the Company benefit
plans and programs in which he is a participant, at
the times such payments are due;
(b) In lieu of any further salary and bonus payment to
the Executive for periods subsequent to the effec-
tive date of termination (other than the unpaid
annual bonus referred to in Section 4.3), the Com-
pany shall pay as a severance payment to the Execu-
tive, not later than the fifth business day
following the effective date of termination, a lump
sum severance payment equal to one times the Execu-
tive's Covered Compensation. "Covered Compensation"
shall mean the Executive's annualized Base Salary
(determined by multiplying the biweekly rate of base
salary in effect at the effective date of termina-
tion by 26). This severance payment will be in lieu
of payments (if any) from any other Company's
Severance Plans.
With the exceptions of the foregoing obligations of
the Company and the Executive's covenants contained
in Section 7 herein (which shall survive such
termination), the Company and the Executive
hereafter shall have no further obligations under
this Agreement.
6.5 Termination for Cause
(a) The Company may terminate the Executive's employment
for "Cause" which shall mean (i) the willful and
continued failure by the Executive to substantially
perform his duties with the Company (other than any
such failure resulting from the Executive's incapa-
city due to physical or mental illness or any such
actual or anticipated failure after the occurrence
of circumstances giving rise to a notice of termina-
tion by the Executive for Good Reason) after a
written demand for substantial performance is
delivered to the Executive by the President, which
demand specifically identifies the manner in which
the President believes that the Executive has not
substantially performed his duties, or (ii) the
willful engaging by the Executive in conduct which
is demonstrably injurious to the Company, monetarily
or otherwise, in a not insignificant amount or
manner. For this purpose, no act, or failure to
act, by the Executive shall be deemed "willful"
unless done, or omitted to be done, by the Executive
not in good faith and without reasonable belief that
the Executive's action or omission was in the best
interest of the Company. Notwithstanding the
foregoing, the Executive shall not be deemed to have
been terminated for Cause unless and until there
shall have been delivered to the Executive a copy of
a written notice of termination which shall include
a determination by the President (after reasonable
notice to the Executive and an opportunity for the
Executive, together with the Executive's counsel, to
be heard) finding that in the good faith opinion of
the President, the Executive was guilty of conduct
constituting "Cause" as set forth in this paragraph
and specifying the particulars thereof in detail.
The termination of employment shall be effective
upon the giving of such notice.
(b) In the event of a termination of the Executive's
employment for "Cause," the Company shall pay the
Executive his accrued and unpaid Base Salary through
the date notice of termination is delivered to the
Executive, plus any amounts otherwise payable to
Executive under the terms of the Company benefit
plans and programs in which he is a participant, at
the times such payments are due. Except for the
foregoing obligations of the Company and the
Executive's covenants under Section 7 (which shall
survive such termination), upon delivery to the
Executive of written notice of termination, the
Company and the Executive thereafter shall have no
further obligations under this Agreement.
6.6 Termination for Good Reason
(a) The Executive may terminate his employment for Good
Reason (as defined below) by giving the President 30
days' written notice of termination, stating in rea-
sonable detail the facts and circumstances claimed
to provide a basis for such termination. In the
event of termination for Good Reason, the Company
shall pay and provide to the Executive the amounts
and benefits set forth in Section 6.4 hereof. With
the exceptions of the foregoing obligations of the
Company and the Executive's covenants contained in
Section 7 herein (which shall survive such termina-
tion), the Company and the Executive hereafter shall
have no further obligations under this Agreement.
(b) Good Reason shall mean, without the Executive's
express written consent, the occurrence of any one
or more of the following:
(i) The assignment to the Executive of any duties
inconsistent with his status as a senior exe-
cutive of the Company or a substantial reduc-
tion in the nature or status of the
Executive's responsibilities from those set
forth in Section 2 hereof.
(ii) A reduction by the Company in the Executive's
Base Salary payable under Section 4.1 hereof,
as the same may be increased from time to
time;
(iii) The Company's requiring the Executive to be
based at a location which is more than fifty
(50) miles from the current principal
location of Executive's employment;
(iv) The failure by the Company to continue to
provide the Executive with the incentive
compensation and benefits set forth in
Section 4 hereof;
(v) The failure by the Company to pay to the
Executive any portion of the Executive's
current cash compensation, when due;
(vi) The failure of the Company to obtain a
satisfactory agreement from any successor to
assume and agree to perform this Agreement,
as contemplated in Section 9.1 hereof; or
(vii) Any purported termination of the Executive's
employment which does not comply, with the
applicable provisions of Section 6 of this
agreement; and for purposes of this Agree-
ment, no such purported termination shall be
effective.
Notwithstanding the foregoing, none of the events
described in clauses (i) through (vii) of this
Section 6.6(b) shall constitute Good Reason unless
Executive shall have notified the Company in writing
describing the events which constitute Good Reason
and then only if the Company shall have failed to
cure such event within thirty (30) days after the
Company's receipt of such written notice.
The Executive's right to terminate employment for
Good Reason shall not be affected by the Executive's
incapacity due to physical or mental illness. How-
ever, the Executive's failure to assert Good Reason
within six (6) months from the time he had knowledge
of the circumstance constituting Good Reason shall
constitute a waiver of his right to terminate em-
ployment for Good Reason with respect to such event.
6.7 Involuntary Termination by the Company Without Cause or
Termination for Good Reason, following a "Change of
Control" (as defined below.) Notwithstanding the provi-
sions of Sections 6-4 and 6-6, in the event the Company
terminates the Executive's employment without cause or
the Executive terminates his employment for good reason,
in either case, within two years following the date of a
Change of Control of the Company then the Executive shall
be entitled to the benefits provided below:
(a) The Company shall pay the Executive his full Base
Salary through the effective date of termination,
unpaid bonus earned in the previous year, the unpaid
annual bonus payments referred to in Section 4.3 (on
either an annual basis or at the discretion of the
company a lump sum present value of the bonus
payments), and a pro-rata portion of the target
bonus established prior to Change of Control plus
any amounts otherwise payable to Executive under the
terms of the Company benefit plans and programs in
which he is a participant, at the times such
payments are due;
b) In lieu of any further salary and bonus payment to
the Executive for periods subsequent to the effec-
tive date of termination, the Company shall pay as a
severance payment to the Executive, not later than
the fifth business day following the effective date
of termination, a lump sum severance payment equal
to three (3) times the Executive's Covered Compensa-
tion. "Covered Compensation" shall mean the Execu-
tive's annual Base Salary (at the rate in effect at
the effective date of termination) and the target
bonus potential established prior to Change of
Control; and
(c) For three (3) years after such termination, the
Company shall provide the Executive with life and
medical benefits substantially similar to those
provided from time to time to active employees of
the PG Energy Division. In the event that the
Employee obtains substantially similar benefits or
coverage from another employer, these benefits shall
be reduced during such period following the Execu-
tive's termination. Executive agrees to report any
such coverage or benefits he obtains to the Company;
With the exception of the foregoing obligations of
the Company and the Executive's covenants contained
in Section 7 herein (which shall survive such
termination), the Company and the Executive
hereafter shall have no further obligations.
For purposes of this agreement, a "Change of Control" of
the Company shall be deemed to have occurred if and when:
(a) there shall be consummated either (i) any consolida-
tion or merger of the Company in which the majority
of the Board of Directors are not on the continuing
or surviving Board of Directors or pursuant to which
shares of the Company's common stock are converted
into cash, securities or other property, other than
a consolidation or merger of the Company in which
each holder of the Company's common stock immedi-
ately prior to the merger has upon consummation of
the merger the same proportionate ownership of
common stock of the surviving corporation as such
holder had of the Company's common stock immediately
prior to the merger, or (ii) any sale, lease
exchange or other transfer (in one transaction or a
series of transactions contemplated or arranged by
any party as a single plan) of all or substantially
all of the assets of the Company;
(b) the shareholders of the Company shall approve any
plan or proposal for the liquidation or dissolution
of the Company;
6.8 Excise Tax Equalization Payment
(a) Anything in this Agreement to the contrary notwith-
standing, in the event it shall be determined that
any payment or distribution by the Company to the
Executive or for the Executive's benefit (whether
paid or payable or distributed or distributable
pursuant to the terms of this Agreement or other-
wise) but determined without regard to any addi-
tional payments required under this Section (a
"Payment") would be subject to the excise tax
imposed by Section 4999 of the Code or any interest
or penalties are incurred by the Executive with
respect to such excise tax (such excise tax,
together with any such interest and penalties, are
hereinafter collectively referred to as the "Excise
Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment")
in an amount such that after payment by the
Executive of all taxes (including any interest or
penalties imposed with respect to such taxes),
including, without limitation, any income taxes (and
any interest and penalties imposed with respect
thereto) and Excise Tax imposed upon the Gross-Up
Payment, the Executive retains an amount of the
Gross-Up Payment equal to the Excise Tax imposed
upon the Payments.
(b) Subject to the provisions of Section 6.8(c) below,
all determinations required to be made under this
Section, including whether and when a Gross-Up Pay-
ment is required and the amount of such Gross-Up
Payment and the assumptions to be utilized in
arriving at such determination, shall be made by the
Company's independent audit firm (the "Accounting
Firm") which shall provide detailed supporting cal-
culations both to the Company and to the Executive
within fifteen (15) business days of the making of
the Payment by the Company or the Company's receipt
of notice from the Executive that there has been a
Payment, or such earlier time as is requested by the
Company. All fees and expenses of the Accounting
Firm shall be borne solely by the Company. Any
Gross-Up Payment, as determined pursuant to this
Section 6.8, shall be paid by the Company to the
Executive within ten (10) business days of the
receipt of the Accounting Firm's determination. If
the Accounting Firm determines that no Excise Tax is
payable by the Executive, it shall furnish the Exe-
cutive with a written opinion that failure to report
the Excise Tax on the Executive's applicable federal
income tax return would not result in the imposition
of a negligence or similar penalty. Any determina-
tion by the Accounting Firm shall be binding upon
the Company and the Executive for purposes of this
Agreement. As a result of the uncertainty in the
application of Section 4999 of the Code at the time
of the initial determination by the Accounting Firm
hereunder, it is possible that the Gross-Up Payment
made by the Company is less than the payment which
should have been made ("Underpayment"), consistent
with the calculations required to be made hereunder.
In the event that the Company exhausts its remedies
pursuant to this Section and the Executive is there-
after required to make a payment of any Excise Tax,
the Accounting Firm shall determine the amount of
the Underpayment that has occurred and any such
Underpayment shall be promptly paid by the Company
to the Executive or for the Executive's benefit.
(c) The Executive shall notify the Company in writing of
any claim by the Internal Revenue Service that, if
successful, would require the payment by the Company
of the Gross-Up Payment. Such notification shall be
given as soon as practicable but no later than ten
(10) business days after the Executive is informed
in writing of such claim and shall apprise the Com-
pany of the nature of such claim and the date on
which such claim is requested to be paid. The Exe-
cutive shall not pay such claim prior to the expira-
tion of the 30-day period following the date on
which the Executive gives such notice to the Company
(or such shorter period ending on the date that any
payment of taxes with respect to such claim is due).
If the Company notifies the Executive in writing
prior to the expiration of such period that it
desires to contest such claim, the Executive shall:
(1) give the Company any information reasonably
requested by the Company relating to such
claim,
(2) take such action in connection with contesting
such claim as the Company shall reasonably
request in writing from time to time,
including, without limitation, accepting legal
representation with respect to such claim by an
attorney reasonably selected by the Company,
(3) cooperate with the Company in good faith in
order to effectively contest such claim, and
(4) permit the Company to participate in any
proceedings relating to such claim;
provided, however, that the Company shall bear and
pay directly all costs and expenses (including
additional interest and penalties) incurred in
connection with such contest and shall indemnify and
hold the Executive harmless, on an after-tax basis,
for any Excise Tax or income tax (including interest
and penalties with respect thereto) imposed as a
result of such representation (to the extent it
relates to issues with respect to which a Gross-Up
Payment would be payable hereunder) and payment of
related costs and expenses. Without limitation on
the foregoing provisions of this Section 6.8, the
Company shall control all proceedings taken in con-
nection with such contest and, at its sole option,
may pursue or forgo any and all administrative
appeals, proceedings, hearings and conferences with
the taxing authority in respect of such claim and
may, at its sole option, either direct the Executive
to pay the tax claimed and sue for a refund or
contest the claim in any permissible manner, and the
Executive agrees to prosecute such contest to a
determination before any administrative tribunal, in
a court of initial jurisdiction and in one or more
appellate courts, as the Company shall determine;
provided, however, that if the Company directs the
Executive to pay such claim and sue for a refund,
the Company shall advance the amount of such payment
to the Executive, on an interest-free basis, and
shall indemnify and hold the Executive harmless, on
an after-tax basis, from any Excise Tax or income
tax (including interest or penalties with respect
thereto) imposed with respect to such advance or
with respect to any imputed income with respect to
such advance; and further provided that any
extension of the statute of limitations relating to
payment of taxes for the Executive's taxable year
with respect to which such contested amount is
claimed to be due is limited solely to such
contested amount. Furthermore, the Company's
control of the contest shall be limited to issues
with respect to which a Gross-Up Payment would be
payable hereunder, and the Executive shall be
entitled to settle or contest, as the case may be,
any other issue raised by the Internal Revenue
Service or any other taxing authority.
(d) If, after the Executive's receipt of an amount
advanced by the Company pursuant to this Section
6.8, the Executive becomes entitled to receive any
refund with respect to such claim, the Executive
shall (subject to the Company's complying with the
requirements of this Section 6.8) promptly pay to
the Company the amount of such refund (together with
any interest paid or credited thereon after taxes
applicable thereto). If, after the Executive's
receipt of an amount advanced by the Company pursu-
ant to this Section 6.8, a determination is made
that the Executive shall not be entitled to any
refund with respect to such claim and the Company
does not notify the Executive in writing of its
intent to contest such denial of refund prior to the
expiration of thirty (30) days after such determina-
tion, then such advance shall be forgiven and shall
not be required to be repaid and the amount of such
advance shall offset, to the extent thereof, the
amount of Gross-Up Payment required to be paid.
6.9 Payments Conditioned on Waiver. Notwithstanding any
------------------------------
other provision of this Agreement, where a payment is due
to Executive under Section 6.4, 6.6 or 6.7 hereunder, no
such payments shall be made unless and until Executive
(or his Estate) shall have executed a copy of a waiver
and release in the form annexed hereto as Exhibit "A";
provided, however, that any such waiver and release shall
expressly protect all rights and benefits of Executive
under this Agreement, including without limitation, the
rights under Sections 6.4, 6.6 and 6.7.
Section 7. Confidentiality
7.1 Confidentiality. During the Term of this Agreement and
---------------
thereafter in perpetuity, the Executive will not directly
or indirectly divulge or appropriate to his own use, or
to the use of any third party, any "trade secrets" or
"confidential information" (as defined in Section 7.2) of
the Company or any of the Company's subsidiaries or
affiliates (hereinafter, the Company and its subsidiaries
and affiliates shall be collectively referred to as the
"Company Group"), except as may be in the public domain
other than by violation of this Agreement or as may be
required by law.
7.2 Trade Secrets and Confidential Information. "Trade
------------------------------------------
Secrets" as used herein means all secret discoveries,
inventions, formulae, designs, methods, processes,
techniques of production and know-how relating to the
Company Group's business. "Confidential Information" as
used herein means the Company Group's internal policies
and procedures, suppliers, customers, financial informa-
tion and marketing practices, as well as secret dis-
coveries, inventions, formulae, designs, techniques of
production, know-how and other information relating to
the Company Group's business not rising to the level of a
trade secret under applicable law.
Section 8. Indemnification
The Company hereby covenants and agrees, to the fullest extent
permitted by law, to indemnify and hold harmless the Executive
fully, completely and absolutely against and in respect to any
and all actions, suits, proceedings, claims, demands, judgments,
costs, expenses (including reasonable attorney's fees), losses,
and damages resulting from the Executive's good faith performance
of his duties and obligations under the terms of this Agreement.
Section 9. Assignment
9.1 Assignment by Company. This Agreement may be assigned or
---------------------
transferred to, and shall be binding upon and shall inure
to the benefit of, any successor of the Company, and any
such successor shall be deemed substituted for the "Com-
pany" for all purposes under this Agreement. As used in
this Agreement, the term "successor" shall mean any
person, firm, corporation, or business entity which at
any time, whether by merger, purchase, or otherwise,
acquires all or substantially all of the assets of the
Company. Except as herein provided, this Agreement may
not be assigned by the Company.
9.2 Assignment by Executive. This Agreement shall inure to
-----------------------
the benefit of and be enforceable by the Executive's
personal or legal representatives, executors, and
administrators, successors, heirs, distributees,
devisees, and legatees. If the Executive should die
while any amounts payable to the Executive hereunder
remain outstanding, all such amounts, unless otherwise
provided herein, shall be paid in accordance with the
terms of this Agreement to the Executive's devisee,
legatee, or other designee or, in the absence of such
designee, to the Executive's estate.
Section 10. Dispute Resolution and Notice
10.1 Arbitration. Any dispute or controversy arising under or
-----------
in connection with this Agreement shall be settled by
arbitration, conducted before a panel of three (3)
arbitrators sitting in a location selected by the
Executive within fifty (50) miles of the location of his
employment with the Company, in accordance with the rules
of the American Arbitration Association then in effect.
Judgment may be entered on the award of the arbitrator in
any court having proper jurisdiction. All expenses of
such arbitration, other than the fees and expenses of the
counsel for the Executive shall be borne, by the Company.
10.2 Notice. For the purpose of this Agreement, any notices,
------
requests, demands, or other communications provided for
by this Agreement shall be in writing and shall be deemed
to have been duly given when delivered or mailed by
United States registered or certified mail, return
receipt requested, postage prepaid, or by recognized
overnight delivery service (such as, but not limited to,
Federal Express), to the Executive at the last address he
has filed in writing with the Company or, in the case of
the Company, at its principal offices, to the attention
of the President.
Section 11. Miscellaneous
11.1 Gender and Number. Except where otherwise indicated by
-----------------
the context, any masculine term used herein also shall
include the feminine, the plural shall include the
singular, and the singular shall include the plural.
11.2 Modification. This Agreement shall not be varied,
------------
altered, modified, canceled, changed, or in any way
amended except by mutual agreement of the parties in a
written instrument executed by the parties hereto or
their legal representatives.
11.3 Severability. In the event that any provision or portion
------------
of this Agreement shall be determined to be invalid or
unenforceable for any reason, the remaining provisions of
this Agreement shall be unaffected thereby and shall
remain in full force and effect.
11.4 Counterparts. This Agreement may be executed in one (1)
------------
or more counterparts, each of which shall be deemed to be
an original, but all of which together will constitute
one and the same Agreement.
11.5 Tax Withholding. The Company may withhold from any
---------------
benefits payable under this Agreement all federal, state,
city, or other taxes as may be required pursuant to any
law or governmental regulation or ruling.
11.6 Beneficiaries. The Executive may designate one or more
-------------
persons or entities as the primary and/or contingent
beneficiaries of any amounts to be received under this
Agreement. Such designation must be in the form of a
signed writing acceptable to the President. The Execu-
tive may make or change such designation at any time.
Section 12. Governing Law
To the extent not preempted by federal law, the provisions of
this Agreement shall be construed and enforced in accordance with
the laws of the state of Texas, without regard to conflicts of
law principles.
IN WITNESS WHEREOF, the Executive and the Company has executed
this Agreement, as of the day and year first above written.
SOUTHERN UNION COMPANY Executive:
By: NANCY CAPEZZUTI THOMAS F. KARAM
------------------------- ----------------------------
Name: Nancy Capezzuti
Title: Senior Vice
President -- HR
<PAGE>
EXHIBIT 10(b)
SECURED PROMISSORY NOTE
FOR VALUE RECEIVED, the undersigned, Thomas F. Karam ("Maker")
promises to pay to the order of Southern Union Company, a Dela-
ware corporation ("Payee"), at 504 Lavaca, Suite 800, Austin,
Texas 78701, the sum of Four Million Dollars ($4,000,000.00) in
lawful money of the United States of America, together with
interest from the date of this Note on the principal amount from
time to time remaining unpaid, at the rate per annum described
below.
So long as no event of default hereunder has occurred, this Note
shall bear interest at the rate of seven percent (7%) per annum.
From and after the occurrence of any event of default hereunder,
the unpaid principal balance of this note shall bear interest at
a rate equal to the lesser of (a) the maximum rate permitted by
Texas law or (b) the prime lending rate of Chase Texas National
Bank, N.A., plus two percent per annum.
This note shall be paid in ten (10) annual installments. The
first nine installments will be in the amount of Five Hundred
Sixty-Nine Thousand Five Hundred Ten Dollars ($569,510.00) each
commencing on December 20, 2000, and on December 20 of the next
nine years thereafter. The outstanding principal balance and any
accrued but unpaid interest owing hereunder shall be due and
payable on December 20, 2009. Maker may at any time prepay, in
whole in part, and without any premium or penalty therefore, the
principal amount of this Note then remaining unpaid, together
with all accrued interest payable on the Note, and interest shall
cease to run from the date of payment of such part on all of the
principal amount of this Note as shall be so prepaid.
Any such prepayment under this Note shall be applied first to
accrued interest and the balance to principal, but no part
prepayment shall delay or otherwise affect the maturity date of
this Note with respect to the unpaid balance thereof.
Payment of this Note is secured by a certain security agreement
of even date herewith between Maker and Payee.
If this Note is not paid at maturity, and after maturity this
Note is placed in the hands of an attorney for collection, or if
any amounts owed under this Note are collected through any legal
proceedings, including but not limited to probate, insolvency, or
bankruptcy proceedings, or if suit is brought on the same, Maker
agrees to pay a reasonable amount as attorney's fees and expenses
of collection.
In the event of a default in Maker's performance of this Note,
the above described security agreement or any other agreement
securing payment hereof, and if Maker shall not have cured such
default within ten (10) days after Maker shall have received from
Payee written notice of such Payee's intent to accelerate the
maturity of this Note, then Payee may, without further demand,
notice or presentment, all of which are hereby severally waived
by Maker, and waived by any and all sureties, guarantors, and
endorsers of this Note, may accelerate the maturity of this Note,
upon which the entire unpaid balance of the principal of this
Note, together with all accrued but unpaid interest on the Note,
shall be at once due and payable.
As used in this Note, the term "Maker" shall be deemed to include
Thomas F. Karam and his heirs, personal representatives, succes-
sors or assigns. The term "Payee" shall be deemed to include
Southern Union Company and its successors and assigns.
Executed this 20th day of December, 1999.
THOMAS F. KARAM
---------------
Thomas F. Karam, an individual
<PAGE>
SECURITY AGREEMENT
THIS AGREEMENT is made as of the 20th day of December, 1999, by
and between SOUTHERN UNION COMPANY, a Delaware corporation
("Secured Party") and THOMAS F. KARAM ("Debtor").
WHEREAS, Debtor is indebted to Secured Party pursuant to a
certain promissory note of even date herewith in the principal
amount of Four Million Dollars ($4,000,000.00) (the "Note")
executed by Debtor and payable to the order of Secured Party; and
WHEREAS, Debtor desires to secure the prompt payment and
performance of the Note by executing this Agreement in favor of
Secured Party.
NOW, THEREFORE, in consideration of the extension of credit
described above and the mutual covenants contained herein, the
parties agree as follows:
1. Defined Terms. The following terms will have the meanings
-------------
indicated below:
1.1 "Collateral" shall mean the Stock Options, and any
proceeds or products thereof, including stock and cash
or stock dividends.
1.2 "Default" shall mean Debtor's breach of any covenant
contained herein or in the Note, or any renewal,
modification, extension or amendment thereof.
1.3 "Stock Options" shall mean all options, warrants, rights
under any shareholders' rights agreements, or any other
rights whatsoever to acquire the common stock of
Southern Union Company, whether now owned or hereafter
acquired by Debtor.
2. Grant of Security Interest. As security for the prompt per-
--------------------------
formance and payment of the Note, together with all accrued
interest thereon and all renewals, extensions, modifications,
amendments and increases thereof (all of the foregoing is
referred to herein as the "Secured Indebtedness"), Debtor
hereby pledges and grants to Secured Party a security
Interest in and to the Collateral. Upon Secured Party's
request, Debtor shall deliver to Secured Party all certifi-
cates evidencing Debtor's ownership of the Pledged Stock,
along with duly executed assignments separate from certifi-
cate for such stock certificates.
2.1 Voting Rights. Prior to the occurrence of a Default,
-------------
Debtor will retain all voting rights with respect to the
Collateral. Immediately and without further notice, on
and after any Default, Secured Party shall have the
right to exercise all voting rights, all other corporate
shareholder's rights with respect to the Collateral as
if Secured Party were the absolute owner thereof.
2.2 Dividends. Unless a Default has occurred and is
---------
continuing, Debtor shall be entitled to receive for his
own use all cash dividends paid on the Pledged Stock.
On the occurrence of a Default hereunder, Secured Party
may require that any such cash dividends be delivered to
Secured Party as additional security hereunder or
applied toward satisfaction of the Secured Indebtedness.
2.3 Sale of Collateral. On the occurrence of a Default,
------------------
Secured Party may, without demand of performance or
other demand, advertisement, or notice of any kind to
Debtor or to any other person, forthwith foreclose on
the Collateral or any part thereof by self-help
repossession or by any other method permitted by the
Uniform Commercial Code or otherwise, and sell or
otherwise dispose of an deliver the Collateral or any
part thereof, in one or more parcels, at public or
private sale or sales, at such prices and on such terms
as Secured party deems acceptable, with the right to
Secured Party or any other party to purchase all or any
part of the Collateral free of any right or equity of
redemption in Debtor, which right or equity is hereby
expressly waived and released.
2.4 Application of Proceeds of Sale. In the event of any
-------------------------------
sale or disposition pursuant to Section 2.3 above, the
proceeds of such sale or disposition shall be applied as
follows: (i) first, to the costs and expenses of
retaking, preparation for sale and sale of the
Collateral, including Secured Party's legal expenses;
(ii) second, to satisfaction of the Secured Indebted-
ness; (iii) third, to the payment of any other amounts
required or permitted to be paid under Section 9-504 of
the Uniform Commercial Code; and (iv) fourth, to Debtor
to the extend of any surplus proceeds.
2.5 Notice of Sale. Secured Party will give Debtor at least
--------------
ten (10) days' prior notice of the time and place of any
public sale or of the time after which a private sale
may take place, which notice Debtor hereby agrees is
reasonable.
2.6 Deficiency. In the event the Secured Indebtedness is no
----------
completely satisfied from the proceeds of sale or dispo-
sition, Debtor shall remain liable for such deficiency.
3. Debtor's Representations and Warranties. Debtor represents
---------------------------------------
and warrants that the Collateral is owned by Debtor free of
any pledge, mortgage, hypothecation, lien, charge, emcum-
brance or security interest other than the Security Interest
granted herein.
4. Negative Covenants. During the term of this Agreement,
------------------
Debtor will not sell, convey, or otherwise dispose of any of
the Collateral, nor will Debtor create, incur or permit to
exist any pledge, mortgage, lien, charge, encumbrance or any
security interest whatsoever in or with respect to any of the
Collateral, other than the Security Interest granted hereby.
5. Notices. All notices permitted or required under this
-------
Agreement shall be delivered to the parties at the following
addresses:
Debtor Thomas F. Karam
-----------------------------
-----------------------------
-----------------------------
Secured Party Southern Union Company
504 Lavaca, Suite 800
Austin, TX 78701
Attention: Peter H. Kelley
Any such notice shall be deemed to have been given on the
earlier of actual receipt or the date two business days after
deposited in the U.S. Mail, postage prepaid, at the address
set forth above, or at such other address as the recipient
shall have designated in writing.
6. Controlling Law. This Agreement shall be governed by the
---------------
internal laws of the State of Texas without regard to
principles of conflicts of laws.
IN WITNESS WHEREOF, the parties have duly executed this Agreement
effective as of the date set forth above.
THOMAS F. KARAM
------------------------------
Thomas F. Karam, an individual
SOUTHERN UNION COMPANY
By: PETER H. KELLEY
---------------------------
Peter H. Kelley, President
</PAGE>
FINANCIAL DATA SCHEDULE
<TABLE> <S> <C>
<ARTICLE> UT
<FISCAL-YEAR-END> JUN-30-1999
<PERIOD-END> DEC-31-1999
<PERIOD-TYPE> 6-MOS
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> $ 1,461,668,000
<OTHER-PROPERTY-AND-INVEST> $ 24,680,000
<TOTAL-CURRENT-ASSETS> $ 226,779,000
<TOTAL-DEFERRED-CHARGES> $ 133,022,000
<OTHER-ASSETS> $ 15,021,000
<TOTAL-ASSETS> $ 1,861,170,000
<COMMON> $ 48,619,000
<CAPITAL-SURPLUS-PAID-IN> $ 603,414,000
<RETAINED-EARNINGS> $ 1,032,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> $ 628,603,000
$ 0
$ 100,000,000
<LONG-TERM-DEBT-NET> $ 734,878,000
<SHORT-TERM-NOTES> $ 12,903,000
<LONG-TERM-NOTES-PAYABLE> $ 0
<COMMERCIAL-PAPER-OBLIGATIONS> $ 0
<LONG-TERM-DEBT-CURRENT-PORT> $ 1,971,000
$ 0
<CAPITAL-LEASE-OBLIGATIONS> $ 0
<LEASES-CURRENT> $ 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> $ 161,396,000
<TOT-CAPITALIZATION-AND-LIAB> $ 1,861,170,000
<GROSS-OPERATING-REVENUE> $ 324,381,000
<INCOME-TAX-EXPENSE> $ 778,000
<OTHER-OPERATING-EXPENSES> $ 59,458,000
<TOTAL-OPERATING-EXPENSES> $ 92,065,000
<OPERATING-INCOME-LOSS> $ 32,706,000
<OTHER-INCOME-NET> $ (4,493,000)
<INCOME-BEFORE-INTEREST-EXPEN> $ 22,695,000
<TOTAL-INTEREST-EXPENSE> $ 21,663,000
<NET-INCOME> $ 1,032,000
$ 0
<EARNINGS-AVAILABLE-FOR-COMM> $ 1,032,000
<COMMON-STOCK-DIVIDENDS> $ 0
<TOTAL-INTEREST-ON-BONDS> $ 0
<CASH-FLOW-OPERATIONS> $ (43,706,000)
<EPS-BASIC> $ .03
<EPS-DILUTED> $ .03
</TABLE>
