UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
For the quarterly period ended
March 31, 2000
Commission File No. 1-6407
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
------------------- ------------------------------------------
Common Stock, par value $1 per share New York Stock Exchange
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
The number of shares of the registrant's Common Stock outstanding on May 5, 2000
was 47,135,583.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
March 31, 2000
Index
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements
Consolidated statements of operations - three, nine and
twelve months ended March 31, 2000 and 1999 2-4
Consolidated balance sheets - March 31, 2000 and 1999 and
June 30, 1999 5-6
Consolidated statements of stockholders' equity - nine months
ended March 31, 2000 and twelve months ended June 30, 1999 7
Consolidated statements of cash flows - three, nine and
twelve months ended March 31, 2000 and 1999 8-10
Notes to consolidated financial statements 11-17
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 18-26
Item 3. Quantitative and Qualitative Disclosures about Market Risk 25
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "COMMITMENTS AND CONTINGENCIES" under Notes to Consolidated
Financial Statements) 15-17
Item 5. Other Information
(See "OTHER" under Management's Discussion and Analysis of Financial
Condition and Results of Operations) 26
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibit 27 -- Financial Data Schedule E-1
(b) Reports on Form 8-K -- None --
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
------------ ------------
(thousands of dollars, except
shares and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ....................................... $ 344,789 $ 251,863
Cost of gas and other energy ............................. 217,793 153,757
------------ ------------
Operating margin .................................... 126,996 98,106
Revenue-related taxes ................................... 14,195 14,487
------------ ------------
Net operating margin ................................ 112,801 83,619
------------ ------------
Operating expenses:
Operating, maintenance and general .................. 39,189 28,655
Depreciation and amortization ....................... 15,191 10,535
Taxes, other than on income and revenues ............ 5,520 3,782
------------ ------------
Total operating expenses ........................ 59,900 42,972
------------ ------------
Net operating revenues .......................... 52,901 40,647
------------ ------------
Other income (expenses):
Interest ............................................ (14,940) (8,962)
Dividends on preferred securities of subsidiary trust (2,370) (2,370)
Other, net .......................................... (1,034) (252)
------------ ------------
Total other expenses, net ....................... (18,344) (11,584)
------------ ------------
Earnings before income taxes .................... 34,557 29,063
Federal and state income taxes ........................... 15,042 11,439
------------ ------------
Net earnings available for common stock .................. $ 19,515 $ 17,624
============ ============
Net earnings per share:
Basic ............................................... $ .42 $ .57
============ ============
Diluted ............................................. $ .40 $ .54
============ ============
Weighted average shares outstanding:
Basic ............................................... 46,919,654 31,170,179
============ ============
Diluted ............................................. 48,877,873 32,624,604
============ ============
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Nine Months Ended March 31,
2000 1999
------------ ------------
(thousands of dollars, except
shares and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ....................................... $ 669,170 $ 503,543
Cost of gas and other energy ............................. 402,182 292,370
----------- ------------
Operating margin .................................... 266,988 211,173
Revenue-related taxes .................................... 29,416 27,169
----------- ------------
Net operating margin ................................ 237,572 184,004
----------- ------------
Operating expenses:
Operating, maintenance and general .................. 98,647 81,776
Depreciation and amortization ....................... 39,539 31,449
Taxes, other than on income and revenues ............ 13,779 10,774
Total operating expenses ....................... 151,965 123,999
----------- ------------
Net operating revenues ......................... 85,607 60,005
----------- ------------
Other income (expenses):
Interest ............................................ (36,603) (26,843)
Dividends on preferred securities of subsidiary trust (7,110) (7,110)
Other, net .......................................... (5,527) 311
----------- ------------
Total other expenses, net ...................... (49,240) (33,642)
----------- ------------
Earnings before income taxes ................... 36,367 26,363
Federal and state income taxes ........................... 15,820 10,413
----------- ------------
Net earnings available for common stock .................. $ 20,547 $ 15,950
=========== ============
Net earnings per share:
Basic ............................................... $ .52 $ .51
=========== ============
Diluted ............................................. $ .49 $ .49
=========== ============
Weighted average shares outstanding:
Basic ............................................... 39,706,933 31,129,919
=========== ============
Diluted ............................................. 41,654,456 32,571,140
=========== ============
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
2000 1999
------------ ------------
(thousands of dollars, except
shares and per share amounts)
<S> <C> <C> <C> <C> <C> <C>
Operating revenues ....................................... $ 770,858 $ 612,469
Cost of gas and other energy ............................. 452,113 351,174
------------ ------------
Operating margin .................................... 318,745 261,295
Revenue-related taxes .................................... 34,281 32,183
------------ ------------
Net operating margin ................................ 284,464 229,112
------------ ------------
Operating expenses:
Operating, maintenance and general .................. 126,563 109,701
Depreciation and amortization ....................... 49,946 40,963
Taxes, other than on income and revenues ............ 17,506 14,649
------------ ------------
Total operating expenses ....................... 194,015 165,313
------------ ------------
Net operating revenues ......................... 90,449 63,799
------------ ------------
Other income (expenses):
Interest ............................................ (45,759) (35,182)
Dividends on preferred securities of subsidiary trust (9,480) (9,480)
Write-off of regulatory assets ...................... -- (8,163)
Other, net .......................................... (7,651) 763
------------ ------------
Total other expenses, net ...................... (62,890) (52,062)
------------ ------------
Earnings before income taxes ................... 27,559 11,737
Federal and state income taxes ........................... 12,516 4,636
------------ ------------
Net earnings available for common stock .................. $ 15,043 $ 7,101
============ ============
Net earnings per share:
Basic ............................................... $ .40 $ .23
============ ============
Diluted ............................................. $ .38 $ .22
============ ============
Weighted average shares outstanding:
Basic ............................................... 37,586,705 31,119,598
============ ============
Diluted ............................................. 39,474,512 32,500,561
============ ============
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
March 31, June 30,
-------------------------- -----------
2000 1999 1999
----------- ----------- -----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Property, plant and equipment:
Plant in service ...................................... $ 1,545,099 $ 1,093,881 $ 1,106,905
Construction work in progress ......................... 37,306 13,199 13,271
----------- ----------- -----------
1,582,405 1,107,080 1,120,176
Less accumulated depreciation and amortization ........ (497,227) (376,629) (376,212)
----------- ----------- -----------
1,085,178 730,451 743,964
Additional purchase cost assigned to utility plant, net 378,085 135,317 134,296
----------- ----------- -----------
Net property, plant and equipment ..................... 1,463,263 865,768 878,260
----------- ----------- -----------
Current assets:
Cash and cash equivalents ............................. 52,327 -- --
Accounts receivable, billed and unbilled .............. 129,650 101,553 50,693
Inventories, principally at average cost .............. 26,698 25,716 29,373
Prepayments and other ................................. 7,854 2,179 4,692
----------- ----------- -----------
Total current assets ............................. 216,529 129,448 84,758
----------- ----------- -----------
Deferred charges ........................................... 139,313 90,218 96,635
Investment securities ...................................... 15,587 10,000 12,000
Real estate ................................................ 9,438 9,438 9,420
Other ...................................................... 20,841 7,953 6,275
----------- ----------- -----------
Total ................................................. $ 1,864,971 $ 1,112,825 $ 1,087,348
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (Continued)
STOCKHOLDERS' EQUITY AND LIABILITIES
<TABLE>
<CAPTION>
March 31, June 30,
-------------------------- -----------
2000 1999 1999
----------- ----------- -----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Common stockholders' equity:
Common stock, $1 par value; authorized
200,000,000 shares; issued 48,134,860 shares ........ $ 48,135 $ 29,741 $ 31,240
Premium on capital stock ................................. 592,274 260,167 276,610
Less treasury stock, at cost ............................. (14,313) (794) (794)
Less common stock held in trust .......................... (15,254) -- (5,562)
Accumulated other comprehensive loss ..................... (436) -- (436)
Retained earnings ........................................ 20,547 23,790 --
----------- ----------- -----------
Total common stockholders' equity ........................ 630,953 312,904 301,058
----------- ----------- -----------
Company-obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely subordinated
notes of Southern Union .................................. 100,000 100,000 100,000
Long-term debt and capital lease obligation ................... 734,320 411,460 390,931
----------- ----------- -----------
Total capitalization ..................................... 1,465,273 824,364 791,989
----------- ----------- -----------
Current liabilities:
Long-term debt and capital lease obligation due within
one year ............................................ 2,169 2,033 2,066
Notes payable ............................................ 3 18,603 21,003
Accounts payable ......................................... 64,660 49,917 37,834
Federal, state and local taxes ........................... 22,526 28,448 13,300
Accrued interest ......................................... 16,067 5,256 12,176
Customer deposits ........................................ 17,805 18,352 17,682
Deferred gas purchase costs .............................. 21,674 14,968 22,955
Other .................................................... 16,052 16,642 16,612
----------- ----------- -----------
Total current liabilities ........................... 160,956 154,219 143,628
----------- ----------- -----------
Deferred credits and other .................................... 112,581 71,763 81,493
Accumulated deferred income taxes ............................. 126,161 62,479 70,238
Commitments and contingencies ................................. -- -- --
----------- ----------- -----------
Total .................................................... $ 1,864,971 $ 1,112,825 $ 1,087,348
=========== =========== ===========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
Common Premium Common Accumulated
Stock, on Treasury Stock Other Com-
$1 Par Capital Stock, Held in prehensive Retained
Value Stock at Cost Trust Loss Earnings Total
--------- --------- --------- -------- ----------- --------- ---------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Balance July 1, 1998 ........... $ 28,252 $ 252,638 $ (794) $ -- $ -- $ 16,738 $ 296,834
Net earnings ................ -- -- -- -- -- 10,445 10,445
Minimum pension liability
adjustment; net of tax .... -- -- -- -- (436) -- (436)
---------
Comprehensive income ........ 10,009
---------
Common stock held in
trust ..................... -- -- -- (5,562) -- -- (5,562)
5% stock dividend --
declared November 11,
1998 ...................... 1,411 7,483 -- -- -- (8,898) (4)
5% stock dividend --
declared 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 earnings ................ -- -- -- -- -- 20,547 20,547
Issuance of stock for
acquisition ............... 16,714 315,235 -- -- -- -- 331,949
Purchase of treasury
stock ..................... -- -- (13,519) -- -- -- (13,519)
Common stock held in
trust ..................... -- -- -- (9,692) -- -- (9,692)
Exercise of stock options ... 181 429 -- -- -- -- (610)
--------- --------- --------- --------- --------- --------- ---------
Balance March 31, 2000 ......... $ 48,135 $ 592,274 $ (14,313) $ (15,254) $ (436) $ 20,547 $ 630,953
========= ========= ========= ========= ========= ========= =========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Three Months Ended March 31,
2000 1999
----------- -----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings .................................................................. $ 19,515 $ 17,624
Adjustments to reconcile net earnings to net cash flows from operating
activities:
Depreciation and amortization ......................................... 15,191 10,535
Deferred income taxes ................................................. 3,585 1,133
Provision for bad debts ............................................... 2,011 1,192
Deferred interest expense ............................................. 108 153
Other ................................................................. 428 358
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, billed and unbilled .......................... 17,577 (980)
Accounts payable .................................................. (10,635) 1,429
Taxes and other liabilities ....................................... 9,807 6,714
Customer deposits ................................................. (29) (311)
Deferred gas purchase costs ....................................... 2,382 10,554
Inventories ....................................................... 43,706 10,718
Other ............................................................. (10,099) 725
-------- --------
Net cash flows from operating activities .............................. 93,547 59,844
-------- --------
Cash flows used in investing activities:
Additions to property, plant and equipment ..................................... (26,608) (15,433)
Acquisitions of operations ..................................................... (2,252) --
Proceeds from sale of subsidiary ............................................... 12,150 --
Purchase of investment securities .............................................. (2,961) (5,000)
Increase (decrease) in customer advances ....................................... 608 (98)
Increase (decrease) in deferred charges and credits ............................ 1,667 (1,024)
Other .......................................................................... 1,538 (233)
-------- --------
Net cash flows used in investing activities ............................... (15,858) (21,788)
-------- --------
Cash flows used in financing activities:
Repayment of debt and capital lease obligation ................................. (361) (477)
Net payments under revolving credit facility ................................... (12,900) (31,400)
Purchase of treasury stock ..................................................... (12,193) --
Decrease in cash overdrafts .................................................... -- (6,250)
Other .......................................................................... 92 71
-------- --------
Net cash flows used in financing activities ............................... (25,362) (38,056)
-------- --------
Change in cash and cash equivalents ................................................. 52,327 --
Cash and cash equivalents at beginning of period .................................... -- --
-------- --------
Cash and cash equivalents at end of period .......................................... $ 52,327 $ --
======== ========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest .................................................................. $ 17,295 $ 15,654
======== ========
Income taxes .............................................................. $ 1,711 $ 1
======== ========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended March 31,
2000 1999
---------- ---------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings ................................................................... $ 20,547 $ 15,950
Adjustments to reconcile net earnings to net cash flows from operating
activities:
Depreciation and amortization .......................................... 39,539 31,449
Deferred income taxes .................................................. 3,355 (127)
Provision for bad debts ................................................ 1,665 2,371
Deferred interest expense .............................................. 187 517
Other .................................................................. 1,225 1,069
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, billed and unbilled ........................... (55,167) (50,165)
Accounts payable ................................................... 10,235 23,368
Taxes and other liabilities ........................................ 9,719 6,989
Customer deposits .................................................. 123 665
Deferred gas purchase costs ........................................ (5,149)
2,710
Inventories ........................................................ 33,652 445
Other .............................................................. (10,090) 1,393
--------- ---------
Net cash flows from operating activities ............................... 49,841 36,634
--------- ---------
Cash flows used in investing activities:
Additions to property, plant and equipment ...................................... (69,430) (50,398)
Acquisition of operations, net of cash received ................................. (38,083) --
Proceeds from sale of subsidiary ................................................ 12,150 --
Purchase of investment securities ............................................... (15,008) (5,000)
Note receivable ................................................................. (4,000) --
Net change in customer advances ................................................. 1,442 1,610
Net change in deferred charges and credits ...................................... (241) 71
Other ........................................................................... 1,959 1,518
--------- ---------
Net cash flows used in investing activities ................................ (111,211) (52,199)
--------- ---------
Cash flows from financing activities:
Issuance of long-term debt ...................................................... 300,000 --
Issuance cost of debt ........................................................... (6,643) --
Repayment of debt and capital lease obligation .................................. (138,269) (1,516)
Premium on early extinguishment of acquired debt ................................ (745) --
(Payments)/ borrowings under revolving credit facility .......................... (21,000) 17,003
Purchase of treasury stock ...................................................... (13,519) --
Decrease in cash overdrafts ..................................................... (6,655) (19)
Other ........................................................................... 528 97
--------- ---------
Net cash flows from financing activities ................................... 113,697 15,565
--------- ---------
Change in cash and cash equivalents .................................................. 52,327 --
Cash and cash equivalents at beginning of period ..................................... -- --
--------- ---------
Cash and cash equivalents at end of period ........................................... $ 52,327 $ --
========= =========
Supplemental disclosures of cash flow information: Cash paid (refunded) during
the period for:
Interest ................................................................... $ 40,512 $ 33,434
========= =========
Income taxes ............................................................... $ 1,711 $ (933)
========= =========
</TABLE>
See accompanying notes.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Twelve Months Ended March 31,
2000 1999
----------- ----------
(thousands of dollars)
<S> <C> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net earnings .................................................................... $ 15,043 $ 7,101
Adjustments to reconcile net earnings to net cash flows from operating
activities:
Depreciation and amortization ........................................... 49,946 40,963
Deferred income taxes ................................................... 11,349 5,165
Provision for bad debts ................................................. 2,573 3,521
Deferred interest expense ............................................... 289 92
Write-off of regulatory assets .......................................... -- 8,163
Other ................................................................... 1,160 1,760
Changes in assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, billed and unbilled ............................ (5,216) 13,754
Accounts payable .................................................... (7,905) (11,437)
Taxes and other liabilities ......................................... 1,490 (1,376)
Customer deposits ................................................... (546) 437
Deferred gas purchase costs ......................................... 2,839 12,777
Inventories ......................................................... 29,994 (8,073)
Other ............................................................... (10,956) (615)
--------- ---------
Net cash flows from operating activities ................................ 90,060 72,232
--------- ---------
Cash flows used in investing activities:
Additions to property, plant and equipment ....................................... (92,179) (75,588)
Acquisition of operations, net of cash received .................................. (38,083) --
Proceeds from sale of subsidiary ................................................. 12,150 --
Purchase of investment securities ................................................ (17,008) (5,000)
Note receivable .................................................................. (4,000) --
Increase in customer advances .................................................... 1,971 2,349
Deferred charges and credits ..................................................... (4,398) 1,480
Other ............................................................................ 1,326 4,389
--------- ---------
Net cash flows used in investing activities ................................. (140,221) (72,370)
--------- ---------
Cash flows from (used in) financing activities:
Issuance of long-term debt ....................................................... 300,000 --
Issuance cost of debt ............................................................ (6,643) --
Repayment of debt and capital lease obligation ................................... (157,590) (2,004)
Premium on early extinguishment of debt .......................................... (745) --
Net borrowings (payments) under revolving credit facility ........................ (18,600) 1,603
Purchase of treasury stock ....................................................... (13,519) --
Increase in cash overdraft ....................................................... (603) 603
Other ............................................................................ 188 (329)
Net cash flows from (used in) financing activities .......................... 102,488 (127)
--------- ---------
Change in cash and cash equivalents ................................................... 52,327 (265)
Cash and cash equivalents at beginning of period ...................................... -- 265
--------- ---------
Cash and cash equivalents at end of period ............................................ $ 52,327 $ --
========= =========
Supplemental disclosures of cash flow information: Cash paid during the period
for:
Interest .................................................................... $ 52,117 $ 34,114
========= =========
Income taxes ................................................................ $ 3,617 $ 1,503
========= =========
</TABLE>
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 Enterprises, Inc. on November 4, 1999.
Accordingly, the operating activities of the acquired operations are
consolidated with the Company beginning on that date. Thus, the results of
operations for the three-, nine- and twelve-month periods ended March 31, 2000
are not indicative of results that would necessarily be achieved for a full year
since the majority of the Company's operating margin is recorded during the
winter heating season. For these reasons, the results of operations of the
Company for the periods subsequent to this acquisition are not comparable to
those periods prior to the acquisition nor are the fiscal 2000 results of
operations comparable with prior periods.
ACQUISITION ACTIVITIES
Pennsylvania Enterprises, Inc.
On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc.
(hereafter referred to as the "Pennsylvania Operations") in a transaction valued
at approximately $500 million, including assumption of 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 154,000 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 pipeline and fiber optic cable construction,
installation, maintenance, and rehabilitation services. PEI Power Corporation
operates a cogeneration plant that generates steam and electricity for resale.
Theta Land Corporation, which provided land management and development services
for more than 44,000 acres of land, was sold for $12,150,000 in January, 2000.
In accordance with generally accepted accounting principles relative to business
combinations, no gain or loss was recognized on this transaction.
The Company funded the acquisition of the Pennsylvania Operations and related
refinancings with the sale of $300,000,000 of 8.25% Senior Notes due 2029
completed on November 3, 1999 (8.25% Senior Notes). See Debt and Capital Lease.
The assets of the Pennsylvania Operations are included in the consolidated
balance sheet of the Company at March 31, 2000 and income from the Pennsylvania
Operations has 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
$249,477,000 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. The final allocation of the purchase price of the Pennsylvania
Operations acquisition is expected to be completed in the fourth quarter of
fiscal year 2000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Prior to the consummation of the acquisition, the Company purchased 358,500
shares of Pennsylvania Enterprises, Inc. stock for $11,887,000 during both the
first and second quarter of the Company's fiscal year 2000. As all necessary
approvals for the merger had not been obtained, these purchases were treated as
investment securities.
Pro Forma Financial Information
The following unaudited pro forma financial information for the nine-month
periods ended March 31, 2000 and 1999 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.
Nine Months Ended March 31,
2000 1999
-------------------
Operating revenues .................... $717,655 $693,388
Income before extraordinary item ...... 9,835 16,625
Net earnings available for common stock 9,835 16,625
Net earnings per common stock:
Basic ............................ .21 .35
Diluted .......................... .20 .34
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 Corporation
("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 approximately $400 million, including the assumption of
debt of approximately $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
customers 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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
WRITE-OFF OF REGULATORY ASSETS
During 1998, the Company was impacted by pre-tax non-cash write-offs totaling
$8,163,000 of previously recorded regulatory assets. Pursuant to a 1989 Missouri
Public Service Commission (MPSC) order, Missouri Gas Energy, a division of the
Company, is engaged in a major gas safety program. In connection with this
program, the MPSC issued an accounting authority order in 1994 which authorized
Missouri Gas Energy to defer carrying costs at a rate of 10.54%. The MPSC rate
order of January 22, 1997, however, retroactively reduced the 10.54% carrying
cost rate used since early 1994 to an Allowance for Funds Used During
Construction (AFUDC) rate of approximately 6%. The Company filed an appeal of
this portion of the rate order in the Missouri State Court of Appeals, Western
District, and on August 18, 1998 was notified that the appeal was denied. This
resulted in a one-time non-cash write-off of $5,942,000 by the Company of
previously deferred costs in its fiscal year ended June 30, 1998.
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 46,919,654 and
31,170,179 for the three-month period ended March 31, 2000 and 1999,
respectively; 39,706,933 and 31,129,919 for the nine-month period ended March
31, 2000 and 1999, respectively; and 37,586,705 and 31,119,598 for the
twelve-month period ended March 31, 2000 and 1999, respectively. Diluted
earnings per share includes average shares outstanding as well as common stock
equivalents from stock options and warrants. Common stock equivalents were
1,156,945 and 1,454,425 for the three-month period ended March 31, 2000 and
1999, respectively; 1,450,730 and 1,441,221 for the nine-month period ended
March 31, 2000 and 1999, respectively; and 1,514,534 and 1,380,963 for the
twelve-month period ended March 31, 2000 and 1999, respectively. At March 31,
2000, 894,297 shares of common stock were held by various rabbi trusts for
certain of the Company's benefit plans.
INVESTMENT SECURITIES
In March 2000, the Company acquired an 11% interest in a development stage
communications company for $2,000,000.
At March 31, 2000, all securities owned by the Company are accounted for under
the cost method. These securities consist of equity ownership in non-public
companies. Realized gains and losses on sales of investments, as determined on a
specific identification basis, are included in the Consolidated Statement of
Operations when incurred, and dividends are recognized as income when received.
PREFERRED SECURITIES OF SUBSIDIARY TRUST
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated
wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust
Originated Preferred Securities (Preferred Securities). In connection with the
Subsidiary Trust's issuance of the Preferred Securities and the related purchase
by Southern Union of all of the Subsidiary Trust's common securities (Common
Securities), Southern Union issued to the Subsidiary Trust $103,092,800
principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025
(Subordinated Notes). The sole assets of the Subsidiary Trust are the
Subordinated Notes. The interest and other payment dates on the Subordinated
Notes correspond to the distribution and other payment dates on the Preferred
Securities and the Common Securities. Under certain circumstances, the
Subordinated Notes may be distributed to holders of the Preferred Securities and
holders of the Common Securities in liquidation of the Subsidiary Trust. The
Subordinated
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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
March 31, 2000 and 1999, 4,000,000 shares of Preferred Securities were
outstanding.
DEBT AND CAPITAL LEASE
March 31, June 30,
2000 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 .............. 26,974 28,482
-------- --------
Total debt and capital lease ......... 736,489 392,997
Less current portion ............. 2,169 2,066
-------- --------
Total long-term debt and capital lease $734,320 $390,931
======== ========
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) underwritten by a syndicate of banks.
Of the Revolving Credit Facilities, $40,000,000 is available under a short-term
facility which expires June 29, 2000, while $60,000,000 is available under a
long-term facility expiring on 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 Southern Union's
working capital, letter of credit requirements and other general corporate
purposes. The Company had no balance outstanding under the facilities at March
31, 2000.
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 March
31, 2000, the capital lease obligation outstanding was $25,561,000 with a fixed
rate of 5.79%. This system has improved meter reading accuracy and provided
electronic accessibility to meters in residential customers' basements, thereby
assisting in the reduction of the number of estimated bills.
UTILITY REGULATION AND RATES
On April 3, 2000, PG Energy, a division of the Company, filed an application
with the Pennsylvania Public Utility Commission (the PPUC) seeking an increase
in its base rates designed to produce $17.9 million in additional annual
revenues. On May 11, 2000, the PPUC suspended this rate increase request for
seven months, until January 2, 2001, in order to investigate the reasonableness
of the proposed rates.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
On October 18, 1999, Southern Union Gas, a division of the Company, filed a
$1,696,000 rate increase request for the El Paso service area with the City of
El Paso. In February 2000, the City of El Paso approved a $650,000 revenue
increase, and an improved rate design that collects a greater portion of the
Company's revenue stream from the monthly customer charge. Additionally, the
City of El Paso approved a new 30-year franchise for Southern Union Gas.
On August 21, 1998, Missouri Gas Energy, a division of the Company, 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.
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 representations made by Western Resources in the Missouri
Asset Purchase Agreement, the Environmental Liability Agreement provides for a
tiered approach to the allocation of substantially all liabilities under
environmental laws that may exist or arise with respect to Missouri Gas Energy.
At the present time and based upon information available to management, the
Company believes that the costs of any remediation efforts that may be required
for these sites for which it may ultimately have responsibility will not exceed
the aggregate amount subject to substantial sharing by Western Resources.
In a letter dated May 10, 1999, the Missouri Department of Natural Resources
("MDNR") sent notice of a planned site inspection/removal site evaluation of the
Kansas City Coal Gas Former Manufactured Gas Plant ("FMGP") site. This site
(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 investigation of the site performed by an
Environmental Protection Agency ("EPA") contractor determined that further
remedial assessment was not required under the Comprehensive Environmental
Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the
Superfund Amendments and Reauthorization Act of 1986. The MDNR has stated that
the reassessment of the Kansas City coal gas site is part of a statewide effort
to identify, evaluate, and prioritize the potential hazards posed by all of
Missouri's FMGP sites. During July 1999, the Company sent applications to MDNR
submitting the two sites to the agency's Voluntary Cleanup Program ("VCP"). The
sites were accepted into the VCP on August 2, 1999 and MDNR subsequently
approved the Company's proposed workplans for the environmental assessment of
the sites. The final environmental reports were sent to the state on March 6,
2000.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 and its newly acquired service
territories in Pennsylvania. 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, New Mexico and
Pennsylvania 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 appropriate 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.
Southwest Gas/ONEOK On February 1, 1999, Southern Union submitted a proposal to
the Board of Directors of Southwest Gas Corporation (Southwest) to acquire all
of Southwest's outstanding common stock for $32.00 per share. Southwest then had
a pending merger agreement with ONEOK, Inc. (ONEOK) at $28.50 per share. On
February 22, 1999, Southern Union and Southwest both publicly announced Southern
Union's proposal, after the Southwest Board of Directors determined that
Southern Union's proposal was a Superior Proposal (as defined in the Southwest
merger agreement with ONEOK). At that time Southern Union entered into a
Confidentiality and Standstill Agreement with Southwest at Southwest's
insistence. On April 25, 1999, Southwest's Board of Directors rejected Southern
Union's $32.00 per share offer and accepted an amended offer of $30.00 per share
from ONEOK. On April 27, 1999, Southern Union increased its offer to $33.50 per
share and agreed to pay interest which, together with dividends, would have
provided 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 four lawsuits pending in two federal district courts -- in Arizona 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 complaint 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
claims by Southwest and ONEOK. The Company believes that the results of the
above-noted Southwest Gas litigation will not have a materially adverse effect
on the Company's financial condition, results of operations or cash flows.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Regulatory In August 1998, a jury in Edinburg, Texas concluded deliberations on
the City of Edinburg's franchise fee lawsuit against PG&E Gas Transmission,
Texas Corporation (formerly Valero Energy Corporation (Valero)) and a number of
its subsidiaries, as well as former Valero subsidiary Rio Grande Valley Gas
Company (RGV) and RGV's successor company, Southern Union Company. The case,
based upon events that occurred between 1985-1987, centers on specific
contractual language in the 1985 franchise agreement between RGV and the City of
Edinburg. Southern Union purchased RGV from Valero in October 1993. The jury
awarded the plaintiff damages, against all defendants under several largely
overlapping but mutually exclusive claims, totaling approximately $13,000,000.
The trial judge subsequently reduced the award to approximately $700,000 against
Southern Union and $7,800,000 against Valero and Southern Union together. The
Company is pursuing reversal on appeal. The Company believes it will ultimately
prevail, and that the outcome of this matter will not have a material adverse
impact on the Company's results of operations, financial position or cash flows.
Furthermore, the Company has not determined what impact, if any, this jury
decision may have on other city franchises in Texas.
Other Southern Union and its subsidiaries are parties to other legal proceedings
that management considers to be normal actions to which an enterprise of its
size and nature might be subject. Management does not consider these actions 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 the executive officer. The aggregate minimum
commitment for future compensation under this employment contract is
approximately $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 systems, market natural gas and
electricity to end-users and distribute propane. By providing "one-stop
shopping," the Company can serve its various customers' specific energy needs,
which encompass substantially all of the natural gas distribution and sales
businesses from natural gas sales to specialized energy consulting services.
Certain subsidiaries own or hold interests in real estate and other assets,
which are primarily used in the Company's utility business.
Several of these business activities are subject to regulation by federal, state
or local authorities where the Company operates. Thus, the Company's financial
condition and results of operations have been and will continue to be dependent
upon the receipt of adequate and timely adjustments in rates. In addition, the
Company's business is affected by seasonal weather impacts, competitive factors
within the energy industry and economic development and residential growth in
its service areas.
The Company acquired Pennsylvania Enterprises, Inc. (hereafter referred to as
the "Pennsylvania Operations") on November 4, 1999. In addition to the PG Energy
division of the Company, the following subsidiaries of the Company are included
in the Pennsylvania Operations: PG Energy Services Inc., Keystone Pipeline
Services, Inc. (a wholly-owned subsidiary of PG Energy Services, Inc.), PEI
Power Corporation and Theta Land Corporation. Theta Land Corporation, which
provided land management and development services for more than 44,000 acres of
land, was sold for $12,150,000 in January 2000. In accordance with generally
accepted accounting principles relative to business combinations, no gain or
loss was recognized on this transaction. 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 pipeline and fiber optic cable
construction, installation, maintenance, and rehabilitation services. PEI Power
Corporation operates a cogeneration plant that generates steam and electricity
for resale. The income from the acquired Pennsylvania Operations is consolidated
with the Company beginning on November 4, 1999. Thus, the results of operations
for the three-, nine- and twelve-month periods ended March 31, 2000 are not
indicative of results that would necessarily be achieved for a full year since
the majority of the Company's operating margin is recorded during the winter
heating season. For these reasons, the results of operations of the Company for
the periods subsequent to this acquisition are not comparable to those periods
prior to the acquisition nor are the 2000 results of operations comparable with
prior periods.
RESULTS OF OPERATIONS
Three Months Ended March 31, 2000 and 1999
The Company recorded net earnings available for common stock of $19,515,000 for
the three-month period ended March 31, 2000, an increase of 11%, compared with
net earnings of $17,624,000 for the same period in 1999. Earnings per diluted
share were $.40 in 2000 compared to $.54 in 1999. Weighted average shares
outstanding increased 49% in 2000 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 $344,789,000 for the three-month period ended March 31,
2000, compared with operating revenues of $251,863,000 in 1999. Gas purchase and
other energy costs for the three-month period ended March 31, 2000 were
$217,793,000, compared with $153,757,000 in 1999. The Company's operating
revenues are affected by the level of sales volumes and by the pass-through of
increases or decreases in the Company's gas purchase costs
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
through its purchased gas adjustment clauses. Additionally, revenues are
affected by increases or decreases in gross receipts taxes (revenue-related
taxes) which are levied on sales revenue as collected from customers and
remitted to the various taxing authorities. The increase in both operating
revenues and gas purchase costs between periods was primarily due to a 15%
increase in gas sales volume to 53,101 MMcf in 2000 from 46,068 MMcf in 1999 and
by a 10% increase in the average cost of gas from $3.33 per Mcf in 1999 to $3.66
per Mcf in 2000. The acquisition of the Pennsylvania Operations contributed
11,038 MMcf of the increase while the remaining operations of the Company
resulted in a gas sales volume decrease of 4,005 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 $96,023,000 to the overall
increase in operating revenues and $63,249,000 in gas purchase and other energy
costs.
Weather for MGE's service territories was 79% of a 30-year measure for the
three-month period ended March 31, 2000, compared with 87% in 1999. Southern
Union Gas service territories experienced weather that was 62% of a 30-year
measure in 2000, compared with 65% in 1999. About half of the customers served
by Southern Union Gas are weather normalized. Weather in PG Energy service
territories was 92% of a 30-year measure for the three-month period ended March
31, 2000.
Net operating margin (operating margin less revenue-related taxes) increased
$29,182,000 to $112,801,000 for the three-month period ended March 31, 2000
compared with the same period in 1999. Net operating margin increased due
principally to the acquisition of the Pennsylvania Operations as previously
discussed, which contributed $32,537,000 to net operating margin. This was
partially offset by lower net operating margins in the MGE and Southern Union
Gas service territories in 2000 compared to 1999 due to the warmer weather as
previously discussed.
Operating expenses, which include operating, maintenance and general expenses,
depreciation and amortization and taxes, other than on income and revenues, were
$59,900,000 for the three-month period ended March 31, 2000, an increase of
$16,928,000, compared with $42,972,000 in 1999. An increase of $15,336,000 was
the result of the acquisition of the Pennsylvania Operations. Also impacting
operating expenses during the three-month period ended March 31, 2000 was an
increase in costs associated with certain employee benefits and increases in
property taxes.
Interest expense was $14,940,000 for the three-month period ended March 31,
2000, compared with $8,962,000 in 1999. Interest expense increased in 2000
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 debt of the Pennsylvania Operations at the time of the merger, and the
assumption of $45,000,000 of Pennsylvania Operations' debt by the Company. This
was partially offset by reduced interest expense on short-term debt due to a
reduction in the average short-term debt outstanding during 2000 as a result of
utilizing a portion of the 8.25% Senior Notes proceeds for working capital
needs. See "Debt and Capital Lease" in the Notes to the Consolidated Financial
Statements included herein.
Other expense of $1,034,000 for the three-month period ended March 31, 2000
primarily consists of $1,400,000 of costs associated with an unsuccessful
acquisition. This amount was offset by $663,000 in net rental income from Lavaca
Realty Company ("Lavaca Realty"), the Company's real estate subsidiary. Other
expense of $252,000 for the three-month period ended March 31, 1999 primarily
consisted of net expense of $153,000 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 39% for the three months ended March 31, 2000 and 1999, respectively. The
increase in the effective federal and state income tax rate is a result of
non-tax deductible amortization of additional purchase cost associated with the
purchase of the Pennsylvania Operations.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Nine Months Ended March 31, 2000 and 1999
The Company recorded net earnings available for common stock of $20,547,000 for
the nine-month period ended March 31, 2000, compared with net earnings of
$15,950,000 for the same period in 1999. Earnings per diluted share were $.49 in
both 2000 and 1999. Weighted average common and common share equivalents
increased 27% during 2000 compared with 1999 due to the issuance of common stock
for the acquisition of the Pennsylvania Operations as previously discussed.
Operating revenues were $669,170,000 for the nine-month period ended March 31,
2000, compared with operating revenues of $503,543,000 in 1999. Gas purchase and
other energy costs for the nine-month period ended March 31, 2000 were
$402,182,000 compared with $292,370,000 in 1999. The increase in both operating
revenues and gas purchase costs between periods was primarily impacted by a 13%
increase in gas sales volume to 101,225 MMcf in 2000 from 89,518 MMcf in 1999.
The acquisition of the Pennsylvania Operations, previously discussed, accounted
for 16,792 MMcf of the increase while the remaining operations of the Company
resulted in a gas sales volume decrease of 5,085 MMcf. Additionally, operating
revenues and gas purchase costs were affected by an 11% increase in the average
cost of gas from $3.24 per Mcf in 1999 to $3.59 per Mcf in 2000, 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
volumetrically and therefore was impacted by the warmer than normal weather in
both 2000 and 1999.
MGE's service territories experienced weather which was 79% of a 30-year measure
for the nine months ended March 31, 2000 compared with 84% in 1999. Weather for
Southern Union Gas service territories for the nine-month period ended March 31,
2000 was 72% of a 30-year measure compared with 73% in 1999. Weather in PG
Energy service territories was 91% of a 30-year measure for the five-month
period ended March 31, 2000.
Net operating margin increased $53,568,000 to $237,572,000 for the nine-month
period ended March 31, 2000 compared with the same period in 1999. Net operating
margin increased $51,659,000 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 service
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 nine-month period ended March 31, 1999 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.
This was partially offset by lower net operating margins in the MGE and Southern
Union Gas service territories in 2000 compared to 1999 due to the warmer
weather, also previously discussed.
Operating expenses were $151,965,000 for the nine-month period ended March 31,
2000, an increase of $27,966,000, compared with $123,999,000 in 1999. An
increase of $24,835,000 was the 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 $36,603,000 for the nine-month period ended March 31, 2000,
compared with $26,843,000 in 1999. The increase is primarily due to the issuance
of the 8.25% Senior Notes, as previously discussed, which was used to extinguish
$136,000,000 in existing debt of the Pennsylvania Operations at the time of the
merger, and the assumption of $45,000,000 of Pennsylvania Operations' debt by
the Company. This was partially offset by reduced interest expense on short-term
debt due to a reduction in the average short-term debt outstanding during 2000
as a result of utilizing a portion of the 8.25% Senior Notes proceeds for
working capital needs. See "Debt and Capital Lease" in the Notes to the
Financial Statements included herein.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Other expense for the nine-month period ended March 31, 2000 was $5,527,000
compared with other income of $311,000 in 1999. Other expense for the nine-month
period ended March 31, 2000 primarily consists of $6,664,000 of litigation costs
associated with an unsuccessful acquisition. This amount was offset by
$1,327,000 in net rental income from Lavaca Realty. Other income for the
nine-month period ended March 31, 1999 included net rental income from Lavaca
Realty of $935,000, which was partially offset by net expense of $517,000
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 39% for the nine-month periods ended March 31, 2000 and 1999, respectively.
The increase in the effective federal and state income tax rate is a result of
non-tax deductible amortization of additional purchase cost associated with the
purchase of the Pennsylvania Operations.
Twelve Months Ended March 31, 2000 and 1999
The Company recorded net earnings available for common stock of $15,043,000 for
the twelve-month period ended March 31, 2000 compared with net earnings of
$7,101,000 in 1999. Earnings per diluted share were $.38 in 2000 compared to
$.22 in 1999. Weighted average common and common share equivalents increased 21%
during the twelve-month period ended March 31, 2000 compared with 1999 due to
the issuance of common stock in the acquisition of the Pennsylvania Operations
as 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 "Commitments and
Contingencies" in the Notes to the Consolidated Financial Statements included
herein.
Operating revenues were $770,858,000 for the twelve-month period ended March 31,
2000 compared with operating revenues of $612,469,000 in 1999. Gas purchase and
other energy costs for the twelve-month period ended March 31, 2000 were
$452,113,000, compared with $351,174,000 in 1999. The increase in both operating
revenues and gas purchase costs between periods was primarily the result of an
increase in gas sales volume to 117,777 MMcf in 2000 from 108,113 MMcf in 1999.
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 both Missouri and Texas due to warmer weather during the twelve-month
period ended March 31, 2000 compared with 1999. Additionally, operating revenues
and gas purchase costs were affected by an increase of 8% in the average cost of
gas from $3.23 per Mcf in 1999 to $3.50 per Mcf in 2000, 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 that was 80% of the 30-year
measure for the twelve-month period ended March 31, 2000 compared with 84% in
1999. Weather for Southern Union Gas service territories for the twelve-month
period ended March 31, 2000 was 72% of a 30-year measure compared with 75% in
1999. About half of the customers served by Southern Union Gas are weather
normalized.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net operating margin increased $55,352,000 to $284,464,000 for the twelve-month
period ended March 31, 2000 compared with the same period in 1999. Net operating
margin increased $51,659,000 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 service
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 twelve-month period ended March 31, 1999 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.
This was partially offset by lower net operating margins in the MGE and Southern
Union Gas service territories in 2000 compared to 1999 due to the warmer
weather, also previously discussed.
Operating expenses were $194,015,000 for the twelve-month period ended March 31,
2000, an increase of $28,702,000, compared with operating expenses of
$165,313,000 in 1999. 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 $45,759,000 for the twelve-month period ended March 31,
2000, compared with $35,182,000 in 1999. The increase is primarily due to the
issuance of the 8.25% Senior Notes as previously discussed, which was used to
extinguish $136,000,000 in existing debt of the Pennsylvania Operations at the
time of the merger, and the assumption of $45,000,000 of Pennsylvania
Operations' debt by the Company. The increase was partially offset by reduced
interest expense on short-term debt due to a reduction in the average short-term
debt outstanding during 2000 as a result of utilizing a portion of the 8.25%
Senior Notes proceeds for working capital needs. See "Debt and Capital Lease" in
the Notes to the Consolidated Financial Statements included herein.
Other expense for the twelve-month period ended March 31, 2000 was $7,651,000
compared with other income of $763,000 in 1999. Other expense for the
twelve-month period ended March 31, 2000 primarily consists of $10,503,000 of
costs associated with unsuccessful acquisition activities and related
litigation. This amount was partially offset by $1,841,000 in net rental income
of Lavaca Realty. Other income for the twelve-month period ended March 31, 1999
included $1,298,000 in net rental income from Lavaca Realty.
The Company's consolidated federal and state effective income tax rate was 45%
and 39% for the twelve-month periods ended March 31, 2000 and 1999,
respectively. The increase in the effective federal and state income tax rate is
a result of non-tax deductible amortization of additional purchase cost
associated with the purchase of the Pennsylvania Operations.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following table sets forth certain information regarding the Company's gas
utility operations for the three- and twelve-month periods ended March 31, 2000
and 1999:
<TABLE>
<CAPTION>
Three Months Twelve Months
Ended March 31, Ended March 31,
2000 1999 2000 1999
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
Average number of gas sales customers served:
Residential ...................................... 1,062,100 906,268 965,954 892,196
Commercial ....................................... 107,699 91,432 95,818 88,308
Industrial and irrigation ........................ 764 572 651 569
Pipeline and marketing ........................... 225 237 232 233
Public authorities and other ..................... 3,195 2,887 2,992 2,841
----------- ----------- ----------- -----------
Total average customers served .............. 1,173,983 1,001,396 1,065,647 984,147
=========== =========== =========== ===========
Gas sales in millions of cubic feet (MMcf):
Residential ...................................... 36,566 30,156 67,166 57,438
Commercial ....................................... 14,468 12,415 28,923 25,624
Industrial and irrigation ........................ 504 394 1,522 1,520
Pipeline and marketing ........................... 5,542 5,807 17,253 20,338
Public authorities and other ..................... 1,193 1,076 2,548 2,322
----------- ----------- ----------- -----------
Gas sales billed ............................ 58,273 49,848 117,412 107,242
Net change in unbilled gas sales ................. (5,172) (3,780) 365 871
----------- ----------- ----------- -----------
Total gas sales ............................. 53,101 46,068 117,777 108,113
=========== =========== =========== ===========
Gas sales revenues (thousands of dollars):
Residential ...................................... $ 225,712 $ 172,746 $ 450,861 $ 368,947
Commercial ....................................... 84,356 68,446 167,577 141,510
Industrial and irrigation ........................ 2,814 1,913 7,923 6,800
Pipeline and marketing ........................... 14,119 13,232 43,664 47,714
Public authorities and other ..................... 5,457 3,932 11,428 8,818
----------- ----------- ----------- -----------
Gas sales revenues billed ................... 332,458 260,269 681,453 573,789
Net change in unbilled gas sales revenues ........ (28,811) (19,390) 3,660 4,261
----------- ----------- ----------- -----------
Total gas sales revenues .................... $ 303,647 $ 240,879 $ 685,113 $ 578,050
=========== =========== =========== ===========
Gas sales margin (thousands of dollars) ............... $ 95,223 $ 73,169 $ 238,484 $ 197,143
=========== =========== =========== ===========
Gas sales revenue per thousand cubic feet (Mcf) billed:
Residential ...................................... $ 6.17 $ 5.73 $ 6.71 $ 6.42
Commercial ....................................... 5.83 5.51 5.79 5.52
Industrial and irrigation ........................ 5.59 4.86 5.21 4.47
Pipeline and marketing ........................... 2.55 2.28 2.53 2.35
Public authorities and other ..................... 4.57 3.65 4.49 3.80
Weather:
Degree days:
Southern Union Gas service territories ...... 777 800 1,550 1,609
Missouri Gas Energy service territories ..... 2,211 2,429 4,200 4,418
PG Energy service territories ............... 2,929 -- 4,524 --
Percent of normal, based on 30-year measure:
Southern Union Gas service territories ...... 62% 65% 72% 75%
Missouri Gas Energy service territories ..... 79% 87% 80% 84%
PG Energy service territories ............... 92% -- 91% --
Gas transported in millions of cubic feet (MMcf) ...... 25,738 16,700 70,093 55,314
Gas transportation revenues (thousands of dollars) .... $ 12,174 $ 6,351 $ 29,405 $ 19,963
</TABLE>
Information for PG Energy is included for the five months subsequent to the date
of 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 seasonality results in a high level of cash flow needs
immediately preceding the peak winter heating season months, resulting from the
required payments to natural gas suppliers in advance of the receipt of cash
payments from the Company's customers. The Company has historically used
internally generated funds and its 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 outstanding
borrowings under the Company's various credit facilities. These senior notes are
senior unsecured obligations and will rank equally in right of payment with each
other and with the Company's other unsecured and unsubordinated obligations,
including the 7.60% Senior Notes due 2024.
The principal source of funds during the three-month period ended March 31, 2000
included $93,547,000 in cash flow from operations. This source provided funds
for additions to property, plant and equipment of $26,608,000, $12,900,000 in
net repayments under the Company's revolving credit facility, and $12,193,000
for the repurchase of Company stock.
The principal sources of funds during the nine-month period ended March 31, 2000
included $49,841,000 in cash flow from operations and $300,000,000 received from
the issuance of the 8.25% Senior Notes, as noted above. The principal uses of
funds during this period included: payments of $38,083,000 for the acquisition
of Pennsylvania Enterprises, Inc.; $138,269,000 for the retirement of long-term
debt which primarily consists of debt extinguished in the Pennsylvania
Enterprises, Inc. acquisition; $21,000,000 for the pay-down of the Company's
Revolving Credit Facilities; $15,008,000 for the purchase of investment
securities; $6,643,000 in debt issuance costs on the 8.25% Senior Notes; and
$69,430,000 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 8.07%
(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. The Company had no balance outstanding under
the facilities at March 31, 2000.
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 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.
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Before the completion of the Fall River Gas, ProvEnergy and Valley Resources
mergers, Southern Union will evaluate various sources and methods of financing
the amount necessary to fund the cash portion of the consideration to be paid to
Fall River Gas stockholders, the all cash consideration to be paid to ProvEnergy
stockholders, the all cash consideration to be paid to Valley Resources
stockholders, and all related costs and refinancings anticipated in connection
with these mergers. If all existing debt of the pending mergers is refinanced,
Southern Union could require new financing of up to approximately $600 million,
which may be in the form of bank lines of credit, debt and preferred securities
of various maturities and terms and common stock.
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 programs 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 interpretations 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. The Company believes that any such problems are not likely. 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 $2,922,000 through March 31, 2000 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 that were incurred in order to be Year 2000 compliant.
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
<PAGE>
SOUTHERN UNION COMPANY AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
from what is expressed or forecasted in such forward-looking statements. The
Company undertakes no obligation to update publicly any forward-looking
statements, whether as a result of new information, future events or otherwise.
Readers are cautioned not to put undue reliance on such forward-looking
statements. Stockholders may review the Company's reports filed in the future
with the Securities and Exchange Commission for more current descriptions of
developments that could cause actual results to differ materially from such
forward-looking statements.
Factors that could cause or contribute to actual results differing materially
from such forward-looking statements include the following: cost of gas; gas
sales volumes; weather conditions in the Company's service territories; the
achievement of operating efficiencies and the purchases and implementation of
new technologies for attaining such efficiencies; impact of relations with labor
unions of bargaining-unit employees; the receipt of timely and adequate rate
relief; the outcome of pending and future litigation; governmental regulations
and proceedings affecting or involving the Company; and the nature and impact of
any extraordinary transactions such as any acquisition or divestiture of a
business unit or any assets. These are representative of the factors that could
affect the outcome of the forward-looking statements. In addition, such
statements could be affected by general industry and market conditions, and
general economic conditions, including interest rate fluctuations, federal,
state and local laws and regulations affecting the retail gas industry or the
energy industry generally, and other factors.
OTHER
On April 3, 2000, Kenneth M. Pollock resigned from the Board of Directors of
Southern Union Company.
<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 May 15, 2000 By RONALD J. ENDRES
------------------------- ----------------
Ronald J. Endres
Executive Vice President and
Chief Financial Officer
Date May 15, 2000 By DAVID J. KVAPIL
-------------------------- ---------------
David J. Kvapil
Senior Vice President and
Corporate Controller
(Principal Accounting Officer)
<PAGE>
<TABLE> <S> <C>
<ARTICLE> UT
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> JUN-30-2000
<PERIOD-END> MAR-31-2000
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 1,463,263,000
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 216,529,000
<TOTAL-DEFERRED-CHARGES> 139,313,000
<OTHER-ASSETS> 45,866,000
<TOTAL-ASSETS> 1,864,971,000
<COMMON> 48,135,000
<CAPITAL-SURPLUS-PAID-IN> 592,274,000
<RETAINED-EARNINGS> 20,547,000
<TOTAL-COMMON-STOCKHOLDERS-EQ> 630,953,000
0
100,000,000
<LONG-TERM-DEBT-NET> 734,320,000
<SHORT-TERM-NOTES> 3,000
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 2,169,000
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 397,526,000
<TOT-CAPITALIZATION-AND-LIAB> 1,864,971,000
<GROSS-OPERATING-REVENUE> 669,170,000
<INCOME-TAX-EXPENSE> 15,820,000
<OTHER-OPERATING-EXPENSES> 98,647,000
<TOTAL-OPERATING-EXPENSES> 151,965,000
<OPERATING-INCOME-LOSS> 85,607,000
<OTHER-INCOME-NET> (5,527,000)
<INCOME-BEFORE-INTEREST-EXPEN> 57,150,000
<TOTAL-INTEREST-EXPENSE> (36,603,000)
<NET-INCOME> 20,547,000
0
<EARNINGS-AVAILABLE-FOR-COMM> 20,547,000
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 0
<CASH-FLOW-OPERATIONS> 49,841,000
<EPS-BASIC> .52
<EPS-DILUTED> .49
</TABLE>
