UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Fiscal Year Ended June 30, 2000
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission File No. 1-6407
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which registered
------------------- -----------------------------------------
Common Stock, par value $1 per share New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes |X| No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
The aggregate market value of the voting stock held by non-affiliates of the
registrant on September 15, 2000, was $673,574,656. The number of shares of the
registrant's Common Stock outstanding on September 15, 2000 was 49,589,799.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for the year ended
June 30, 2000, are incorporated by reference in Parts II and IV.
Portions of the registrant's proxy statement for its annual meeting of
stockholders to be held on November 14, 2000, are incorporated by reference into
Part III.
<PAGE>
PART I
ITEM 1. Business.
Introduction
Southern Union Company (Southern Union and together with its subsidiaries, the
Company) was incorporated under the laws of the State of Delaware in 1932.
Southern Union is one of the top ten natural gas utilities in the United States,
as measured by number of customers. The Company's principal line of business is
the distribution of natural gas as a public utility through its operating
divisions principally in Texas, Missouri, Florida, Pennsylvania since November
1999, and Rhode Island and Massachusetts effective with three acquisitions
completed in September 2000 (see Acquisitions Subsequent to Year-End).
Southern Union Gas, headquartered in Austin, Texas, serves approximately 523,000
customers in Texas (including Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur). Missouri Gas Energy, headquartered in
Kansas City, Missouri, serves approximately 491,000 customers in central and
western Missouri (including Kansas City, St. Joseph, Joplin and Monett). PG
Energy, headquartered in Wilkes-Barre, Pennsylvania, serves approximately
154,000 customers in northeastern and central Pennsylvania (including
Wilkes-Barre, Scranton and Williamsport). SFNG, headquartered in New Smyrna
Beach, Florida, serves approximately 5,000 customers in central Florida
(including New Smyrna Beach, Edgewater and areas of Volusia County, Florida.)
With the acquisition of Providence Energy Corporation, Valley Resources, Inc.
and Fall River Gas Company in September 2000 (collectively hereafter referred to
as the New England Division), the Company now serves approximately 286,000
customers in Rhode Island and Massachusetts (including Providence, Newport and
Cumberland, Rhode Island and Fall River, North Attleboro and Somerset,
Massachusetts.) This diverse geographic area of the Company's natural gas
distribution systems should reduce the overall sensitivity of Southern Union's
operations to weather risk and local economic conditions.
Pennsylvania Enterprises, Inc. Acquisition
On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc.
(hereafter referred to as the Pennsylvania Operations) for approximately 16.7
million pre-stock dividend shares of Southern Union common stock and
approximately $36 million in cash plus the assumption of approximately $115
million in long-term debt. The acquisition was accounted for using the purchase
method. The income from the acquired Pennsylvania Operations is consolidated
with the Company beginning on November 4, 1999. Thus, the results of operations
for the year ended June 30, 2000 are not comparable to prior periods. PG Energy,
the regulated gas utility within the Pennsylvania Operations, is a division of
the Company serving approximately 154,000 customers in northeastern and central
Pennsylvania. Other subsidiaries of the Company acquired in the acquisition of
the Pennsylvania Operations include PG Energy Services Inc., (Energy Services),
PEI Power Corporation (PEI Power), and Theta Land Corporation. Theta Land
Corporation, which was engaged in the sale of property for residential and
commercial development, was sold for $12.1 million in January 2000. Through
Energy Services, the Company markets a diversified range of energy-related
products and services under the name PG Energy PowerPlus, principally in
northeastern and central Pennsylvania. Through PEI Power, an exempt wholesale
generator (within the meaning of the Public Utility Holding Company Act of
1935), the Company generates and sells electricity in Pennsylvania and
surrounding states. Also included in the acquisition of the Pennsylvania
Operations was Keystone Pipeline Services, Inc. (Keystone, a wholly-owned
subsidiary of Energy Services). Keystone is engaged primarily in the
construction, maintenance and rehabilitation of natural gas distribution
pipelines. Concurrent with the acquisition, the Company decided to dispose of
Keystone and the propane operations of Energy Services; these operations are not
material to the Company.
<PAGE>
Acquisitions Subsequent to Year-End
On September 20, 2000, Southern Union completed the acquisition of Valley
Resources, Inc. (Valley Resources) for approximately $125 million in cash plus
the assumption of $30 million in long-term debt. Valley Resources is engaged in
natural gas distribution operating as Valley Gas Company and Bristol and Warren
Gas Company which are now included as part of the New England Division of
Southern Union. The non-utility subsidiaries of Valley Resources are now
subsidiaries of Southern Union. Valley Resources, which is headquartered in
Cumberland, Rhode Island, provides natural gas utility service to more than
64,000 customers within a 92 square mile area in the northeastern portion of
Rhode Island that has a population of approximately 250,000 and an approximately
15 square mile area in the eastern portion of Rhode Island that has a population
of approximately 35,000. The non-utility subsidiaries rent and sell appliances,
offer a service contract program, sell liquid propane in Rhode Island and nearby
Massachusetts, and distribute as a wholesaler franchised lines to plumbing and
heating contractors. Included in the acquisition was Valley Resources' 90%
interest in Alternate Energy Corporation, which sells, installs and designs
natural gas conversion systems and facilities, is an authorized representative
of the ONSI Corporation fuel cell, holds patents for a natural gas/diesel
co-firing system and for a device to control the flow of fuel on dual-fuel
equipment.
On September 28, 2000, Southern Union completed the acquisition of Providence
Energy Corporation (ProvEnergy) for approximately $270 million in cash plus the
assumption of $90 million in long-term debt. The ProvEnergy natural gas
distribution operations are Providence Gas and North Attleboro Gas. Providence
Gas serves approximately 168,000 natural gas customers in Providence and
Newport, Rhode Island, and 23 other cities and towns in Rhode Island and
Massachusetts. North Attleboro Gas serves approximately 6,000 customers in North
Attleboro and Plainville, Massachusetts, towns adjacent to the northeastern
Rhode Island border. The ProvEnergy utility service territories encompass
approximately 760 square miles with a population of approximately 850,000. These
operations are also now included as part of the New England Division of the
Company. Subsidiaries of the Company acquired in the ProvEnergy merger are
ProvEnergy Oil Enterprises, Inc., Providence Energy Services, Inc., and
ProvEnergy Power Company, LLC. ProvEnergy Oil Enterprises, Inc. operates a fuel
oil distribution business through its subsidiary, ProvEnergy Fuels, Inc.
(ProvEnergy Fuels). ProvEnergy Fuels serves over 14,000 residential and
commercial customers in Rhode Island and Massachusetts. Providence Energy
Services, Inc., whose operations are planned to be sold, markets natural gas and
energy services throughout New England. ProvEnergy Power Company owns 50% of
Capital Center Energy Company, LLC., a joint venture formed between ProvEnergy
and ERI Services, Inc. to provide retail power.
Also on September 28, 2000, Southern Union completed the acquisition of Fall
River Gas Company (Fall River Gas) for approximately 1.5 million shares of
Southern Union common stock and approximately $27 million in cash plus
assumption of $20 million in long-term debt. Also now included as a part of the
New England Division of the Company, Fall River Gas serves approximately 48,000
customers in the city of Fall River and the towns of Somerset, Swansea and
Westport, all located in southeastern Massachusetts. Fall River Gas'
non-regulated subsidiary, Fall River Gas Appliance Company, Inc., is now a
subsidiary of Southern Union. Headquartered in Fall River, Massachusetts, Fall
River Gas Appliance Company, Inc., rents water heaters and conversion burners
(primarily for residential use) in Fall River Gas' service area.
The aforementioned acquisitions subsequent to year-end will be accounted for
under the purchase method.
Company Operations
The Company's principal line of business is the distribution of natural gas
through its Southern Union Gas, Missouri Gas Energy, PG Energy, and SFNG
divisions, and, effective with the September 2000 acquisitions, its New England
Division. (See Acquisitions Subsequent to Year-End) . The Company's gas utility
operations are generally seasonal in nature, with a significant percentage of
its annual revenues and earnings occurring in the traditional winter heating
season. As such, the Company is a sales and market-driven energy company whose
management is committed to achieving profitable growth of its utility businesses
in an increasingly competitive business environment and partnering with
companies which complement Southern Union's existing customer service and core
utility business. Management's strategies for achieving these objectives
principally consist of: (i) promoting new sales opportunities and markets for
natural gas; (ii) enhancing financial and operating performance; (iii) expanding
the Company through development of existing utility businesses and selective
acquisition of new utility businesses; and (iv) selective investments in
complementary businesses. Management develops and continually evaluates these
strategies and their implementation by applying their experience and expertise
in analyzing the energy industry, technological advances, market opportunities
and general business trends. Each of these strategies, as implemented throughout
the Company's existing businesses, reflects the Company's commitment to its core
natural gas utility business.
<PAGE>
The Company may consider, when appropriate and if financially practicable to
pursue, the acquisition of other utility distribution or transmission
businesses. The nature and location of any such properties, the structure of any
such acquisitions, and the method of financing any such expansion or growth will
be determined by management and the Southern Union Board of Directors. See
Management's Discussion and Analysis of Results of Operations and Financial
Condition (MD&A) -- Cautionary Statement Regarding Forward-Looking Information
contained in the Company's Annual Report to Stockholders for the year ended June
30, 2000 (the Annual Report), portions of which are filed as Exhibit 13 hereto.
Subsidiaries of Southern Union have been established to support and expand
natural gas sales and other energy sales and to capitalize on the Company's
energy expertise. These subsidiaries market natural gas and electricity to
end-users, operate natural gas pipeline systems, generate electricity,
distribute propane and sell commercial gas air conditioning and other gas-fired
engine-driven applications. The Company distributes propane to 7,500, 2,000 and
1,000 customers in Texas, Pennsylvania and Florida, respectively. With the
subsequent acquisition of the companies in New England, the Company will now
also serve 14,000 and 3,700 fuel oil and propane customers, respectively, in
Rhode Island and Massachusetts. Additionally, certain subsidiaries own or hold
interests in real estate and other assets, which are primarily used in the
Company's utility business. Central to all of the Company's present businesses
and strategies is the sale and transportation of natural gas.
Southern Union Energy International, Inc. (SUEI) and Southern Union
International Investments, Inc. (Investments), both wholly-owned subsidiaries of
Southern Union, participate in energy-related projects internationally. Energia
Estrella del Sur, S. A. de C. V. (Estrella), a wholly-owned Mexican subsidiary
of SUEI and Investments, seeks to participate in energy-related projects in
Mexico. Estrella has a 43% equity ownership in a natural gas distribution
company, along with other related operations, which currently serves 22,000
customers in Piedras Negras, Mexico, across the border from Southern Union Gas'
Eagle Pass, Texas service area.
Mercado Gas Services Inc. (Mercado), a wholly-owned subsidiary of Southern
Union, markets natural gas to commercial and industrial customers. Mercado's
sales and purchasing activities are made through short-term and long-term
contracts. These contracts and business activities are not subject to direct
rate regulation.
Southern Transmission Company (STC), a wholly-owned subsidiary of Southern
Union, owns and operates 165.3 miles of intrastate pipeline that serves
commercial, industrial and utility customers in central, south and coastal
Texas.
Norteno Pipeline Company (Norteno), a wholly-owned subsidiary of Southern Union,
owns and operates interstate pipelines that serve the gas distribution
properties of Southern Union Gas and the Public Service Company of New Mexico.
Norteno also transports gas through its interstate network to the country of
Mexico for Pemex Gas y Petroquimica Basica (PEMEX).
SUPro Energy Company (SUPro), a wholly-owned subsidiary of Southern Union,
provides propane gas services to customers located principally in Austin, El
Paso and Alpine, Texas as well as Las Cruces, New Mexico and surrounding
communities.
Atlantic Gas Corporation, a wholly-owned subsidiary of Southern Union, provides
propane gas services to 1,000 customers located in and around the communities of
New Symrna Beach, Lauderhill and Dunnellon, Florida. Atlantic Gas Corporation
sold 1,193,000 and 1,348,000 gallons of propane for the year ended June 30, 2000
and 1999, respectively.
PG Energy Services Inc. (Energy Services), a wholly-owned subsidiary of Southern
Union, markets a broad array of energy and energy-related products and services
under the name PG Energy PowerPlus. Presently, PG Energy PowerPlus offers the
sale of natural gas and electricity to 17,000 residential, commercial and
industrial users primarily in central and northeastern Pennsylvania; and the
inspection, maintenance and servicing of residential and small commercial
gas-fired equipment.
PEI Power Corporation (Power Corp.), a wholly-owned subsidiary of Southern
Union, an exempt wholesale generator (within the meaning of the Public Utility
Holding Company Act of 1935), generates and sells electricity provided by a
cogeneration facility it acquired in November 1997. This 25-megawatt facility,
located in Archbald, Pennsylvania, is fueled by a combination of natural gas and
methane recovered from a nearby landfill.
Southern Union Total Energy Systems, Inc., a wholly-owned subsidiary of
Southern Union, markets and sells gas-fired engine-driven applications and
related services to the industrial and commercial marketplace.
<PAGE>
See Acquisitions Subsequent to Year-End for a description of other subsidiaries
subsequently acquired in the acquisitions of ProvEnergy, Valley Resources and
Fall River Gas.
The Company also holds investments in commercially developed real estate in
Austin, El Paso, Harlingen and Kansas City through Southern Union's wholly-owned
subsidiary, Lavaca Realty Company (Lavaca Realty). Additionally, through the
acquisition of the Pennsylvania Operations, the Company has investments in
several tracts of land, certain of which is being prepared for development,
situated in northeastern Pennsylvania, primarily Lackawanna County. Depending
upon market conditions the Company may sell certain of these investments from
time to time.
Southern Union's strategy for long-term growth includes acquiring the right
assets that will position the Company favorably in an evolving competitive
marketplace. The Pennsylvania Operations acquisition, which closed in November
1999, provides Southern Union with a strong presence in the attractive
northeastern market. In addition, the acquisitions of Fall River Gas, ProvEnergy
and Valley Resources completed subsequent to year-end have further expanded
Southern Union's territory into New England. These four acquisitions also
provide geographic and weather diversity to the Company's service areas. Within
the past several years, the Company's growth strategy also has resulted in
Southern Union expanding its gas service into Mexico in a service area adjacent
to Southern Union Gas, and Florida. Going forward, Southern Union may consider
other acquisitions which will financially enhance growth and take advantage of
future market opportunities.
The information about the Company in the remainder of Item 1 -- Business does
not include information related to Fall River Gas, ProvEnergy or Valley
Resources, the companies acquired subsequent to year-end. (See Acquisitions
Subsequent to Year-End.)
Company Investments
Southern Union's culture promotes independent thinking and encourages
innovation. Southern Union is involved in several strategic projects.
Over the past several years, the Company acquired an equity interest in Capstone
Turbine Corporation (Capstone). This company has developed a microturbine fueled
by natural gas or propane that produces electricity and creates less pollution
than conventional systems. The refrigerator-sized microturbine unit can
efficiently provide nearly 30 kilowatts of electricity to a small business.
Additionally, this technology is highly reliable and requires low maintenance.
The Company's cost basis in Capstone is $10,625,000. In late June 2000, Capstone
completed its initial public offering (IPO). As of June 30, 2000 and August 31,
2000, the value of the Company's investment on Capstone was $187,817,000 and
$384,753,000, respectively, based on the closing prices for Capstone shares on
those days.
Southern Union also holds a $2,586,000 equity interest in PointServe, Inc.
(PointServe) a business-to-business online scheduling solution for Internet
portals seeking to enrich the consumer value of their site, and service
industries seeking to harness the power of the Internet. Patent-pending, online
scheduling technology should enable service providers to spend less and earn
more by creating accountability of marketing dollars, increasing operational
efficiencies, and increasing customer satisfaction and loyalty. PointServe
technology is intended to allow consumers to "wait less and do more" by making
it easier to find, select and schedule a service provider.
Southern Union has a $3,000,000 equity interest in Servana.com, Inc. (Servana).
Based in Austin, Texas Servana partners with utility companies to deliver
comprehensive e-commerce solutions to the customer's home. The company is
positioning itself to become the dominant utility-based home-service portal,
leveraging the utility's brand identity and prominence in local markets. For
example, a new resident who moves to Austin, Texas and needs to establish gas
service will be able to access Southern Union's website, schedule service
through PointServe, and register for a variety of other services (i.e.,
electric, pest control, lawn service, etc.).
<PAGE>
As of June 30, 2000, Southern Union had a $2,000,000 equity interest in Advent
Networks, Inc. (Advent), headquartered in Austin, Texas. Southern Union intends
to make an additional investment of up to approximately $2,500,000 in Advent
this Fall. Advent is developing a next generation UltraBand(TM) platform, which
is expected to deliver digital broadband services 50 times faster than digital
subscriber lines (DSL) or cable modems, and 1,000 times faster than dial-up
modems, over the "last mile". UltraBand(TM) should provide cable network
overbuilders a competitive advantage with its capability to deliver content at a
quality and speed that cannot be provided over cable modem. Beta testing of
UltraBand(TM) is expected in Spring 2001 in Missouri Gas Energy's Kansas City
service area.
Competition
Natural gas distribution has been evolving from a highly regulated environment
to one where competition and customer choice is being promoted. The
restructuring of natural gas distribution began in the 1990's when the Federal
Energy Regulatory Commission (FERC) required interstate pipeline companies to
separate, or unbundle, the merchant function of selling natural gas from the
transportation and storage services they provide and offer those services to end
users on the same terms as local distribution companies. As a result, certain
large volume customers, primarily industrial and significant commercial
customers, have had opportunities to access alternative natural gas supplies
and, in some instances, delivery service from other pipeline systems. The
Company has offered transportation arrangements to customers who secure their
own gas supplies. These transportation arrangements, coupled with the efforts of
Southern Union's unregulated marketing subsidiaries, enable the Company to
provide competitively priced gas service to these large volume customers. In
addition, the Company has successfully used flexible rate provisions, when
needed, to retain customers who may have access to alternative energy sources.
As energy providers, Southern Union Gas, Missouri Gas Energy, PG Energy and SFNG
have historically competed with alternative energy sources, particularly
electricity and also propane, coal, natural gas liquids and other refined
products available in the Company's service areas. At present rates, the cost of
electricity to residential and commercial customers in the Company's service
areas generally is higher than the effective cost of natural gas service. There
can be no assurance, however, that future fluctuations in gas and electric costs
will not reduce the cost advantage of natural gas service. The cost of expansion
for peak load requirements of electricity in some of Southern Union Gas' and
Missouri Gas Energy's service areas has historically provided opportunities to
allow energy switching to natural gas pursuant to integrated resource planning
techniques. Electric competition has responded by offering equipment rebates and
incentive rates.
Competition between the use of fuel oils, natural gas and propane, particularly
by industrial, electric generation and agricultural customers, has also
increased due to the volatility of natural gas prices and increased marketing
efforts from various energy companies. In order to be more competitive with
certain alternate fuels in Pennsylvania, PG Energy offers an Alternate Fuel Rate
for eligible customers. This rate applies to large commercial and industrial
accounts that have the capability of using fuel oils or propane as alternate
sources of energy. Whenever the cost of such alternate fuel drops below the cost
of natural gas at PG Energy's normal tariff rates, PG Energy is permitted by the
Pennsylvania Public Utility Commission (PPUC) to lower its price to these
customers so that PG Energy can remain competitive with the alternate fuel.
However, in no instance may PG Energy sell gas under this special arrangement
for less than its average commodity cost of gas purchased during the month.
While competition between such fuels is generally more in Pennsylvania than the
Company's other service areas, this competition affects the nationwide market
for natural gas. Additionally, the general economic conditions in the Company's
service areas continue to affect certain customers and market areas, thus
impacting the results of the Company's operations.
The Company's gas distribution divisions are not currently in significant direct
competition with any other distributors of natural gas to residential and small
commercial customers within their service areas, other than in Pennsylvania. In
1999, the Commonwealth of Pennsylvania enacted the Natural Gas Choice and
Competition Act, which extended the ability to choose suppliers to small
commercial and residential customers as well. In accordance with the provisions
of the legislation, PG Energy submitted a restructuring plan to the PPUC on
August 2, 1999. This plan describes the terms and conditions, including the
tariffs, by which PG Energy proposed to offer unbundled transportation service
and the rules alternate natural gas suppliers must follow to operate on PG
Energy's distribution system. Following extensive review and negotiations by PG
Energy and various interested stakeholders, including representatives of the
PPUC, a Settlement Agreement was reached in November 1999. PG Energy filed
revised tariffs in accordance with the Settlement Agreement on February 1, 2000
for PPUC review and approval. Based upon the legislation, the Settlement
Agreement and the tariffs as filed, PG Energy does not believe any significant
amount of transition costs will be incurred and that any transition costs that
are incurred will generally be recoverable through rates or other customer
charges.
<PAGE>
Following PPUC review, PG Energy filed final tariffs, with modifications, on
April 28, 2000. Effective April 29, 2000, all of PG Energy's customers have the
ability to select an alternate supplier of natural gas, which PG Energy will
continue to deliver through its distribution system. Customers can also choose
to remain with PG Energy as their supplier under regulated natural gas rates. In
either case, PG Energy serves as the supplier of last resort. To date, few small
commercial and residential customers have switched due to the lack of supplier
offers that provide any savings over PG Energy's current regulated gas rates.
The natural gas industry is currently experiencing higher than normal wholesale
prices for natural gas, which is preventing suppliers from offering competitive
rates. However, the number of supplier offers and the occurrence of customers
switching suppliers may likely increase as the wholesale market moderates over
time and PG Energy's regulated rates are adjusted to reflect the market.
Gas Supply
The historically low cost of natural gas service is dependent upon the Company's
ability to contract for natural gas using favorable mixes of long-term and
short-term supply arrangements and favorable transportation contracts. The
Company has been directly acquiring its gas supplies since the mid-1980s when
interstate pipeline systems opened their systems for transportation service. The
Company has the organization, personnel and equipment necessary to dispatch and
monitor gas volumes on a daily, hourly and even a real-time basis to ensure
reliable service to customers.
The FERC required the "unbundling" of services offered by interstate pipeline
companies beginning in 1992. As a result, gas purchasing and transportation
decisions and associated risks have been shifted from the pipeline companies to
the gas distributors. The increased demands on distributors to effectively
manage their gas supply in an environment of volatile gas prices provides an
advantage to distribution companies such as Southern Union who have demonstrated
a history of contracting favorable and efficient gas supply arrangements in an
open market system.
The majority of Southern Union Gas' 2000 gas requirements for utility operations
were delivered under short- and long-term transportation contracts through five
major pipeline companies. The majority of Missouri Gas Energy's 2000 gas
requirements were delivered under short- and long-term transportation contracts
through four major pipeline companies. The majority of PG Energy's 2000 gas
requirements were delivered under short- and long-term transportation contracts
through four major pipeline companies. The majority of SFNG's 2000 gas
requirements were delivered under a management supply contract through one major
pipeline company. These contracts have various expiration dates ranging from
calendar year 2000 through 2018. Southern Union Gas also purchases significant
volumes of gas under long- and short-term arrangements with suppliers. The
amounts of such short-term purchases are contingent upon price. Southern Union
Gas, Missouri Gas Energy and SFNG all have firm supply commitments for all areas
that are supplied with gas purchased under short-term arrangements. Missouri Gas
Energy also holds contract rights to over 16 Bcf of storage capacity and PG
Energy holds contract rights to over 11 Bcf of storage capacity to assist in
meeting peak demands.
Due to the operation of purchase gas adjustment (PGA) clauses, gas purchase
costs generally do not directly affect earnings of our regulated utility
operations. However, the Company's unregulated gas marketing operations are
subject to price risk related to fixed price sales commitments that are not
matched with corresponding fixed price purchase agreements. At June 30, 2000,
the Company had fixed-price sales commitments with various customers that
provide for the delivery of approximately 1,922,201 Dekatherms of natural gas
through April 2001 at an average sales price per Dekatherm of $3.00. The Company
has exposure to the changes in gas prices related to fluctuating commodity
prices, which can impact the Company's financial position or results of
operations, either favorably or unfavorably. The Company's open positions are
actively managed, and the impact of changing prices on the Company's financial
position at a point in time is not necessarily indicative of the impact of price
movements throughout the year.
Gas sales and/or transportation contracts with interruption provisions, whereby
large volume users purchase gas with the understanding that they may be forced
to shut down or switch to alternate sources of energy at times when the gas is
needed for higher priority customers, have been utilized for load management by
Southern Union and the gas industry as a whole. In addition, during times of
special supply problems, curtailments of deliveries to customers with firm
contracts may be made in accordance with guidelines established by appropriate
federal and state regulatory agencies. There have been no supply-related
curtailments of deliveries to Southern Union Gas, Missouri Gas Energy, PG Energy
or SFNG utility sales customers during the last ten years except for one
instance relating to PG Energy in January 1997.
<PAGE>
The Company is committed under various agreements to purchase certain quantities
of gas in the future. At June 30, 2000, the Company has purchase commitments for
certain quantities of gas at variable, market-based prices that have an annual
value of $113,666,000. The Company's purchase commitments may extend over a
period of several years depending upon when the required quantity is purchased.
The Company has purchase gas tariffs in effect for all its utility service areas
that provide for recovery of its purchase gas costs under defined methodologies.
In August 1997, the Missouri Public Service Commission (MPSC) issued an order
authorizing Missouri Gas Energy to begin making semi-annual PGAs in November and
April, instead of more frequent adjustments as previously made. Additionally,
the order authorized Missouri Gas Energy to establish an Experimental Price
Stabilization Fund for purposes of procuring natural gas financial instruments
to hedge a minimal portion of its gas purchase costs for the winter heating
season. The cost of purchasing these financial instruments and any gains derived
from such activities are passed on to the Missouri customers through the PGA.
Accordingly, there is no earnings impact as a result of the use of these
financial instruments. These procedures help stabilize the monthly heating bills
for Missouri customers. The Company believes it bears minimal risk under the
authorized transactions.
The MPSC approved a three year, experimental gas supply incentive plan for
Missouri Gas Energy effective July 1, 1996. Under the plan, the Company and
Missouri Gas Energy's customers shared in certain savings below benchmark levels
of gas costs achieved as a result of the Company's gas procurement activities.
Likewise, if natural gas was acquired above benchmark levels, both the Company
and customers shared in such costs. For the years ended June 30, 1999 and 1998,
the incentive plan achieved a reduction of overall gas costs of $6,900,000 and
$9,200,000, respectively, resulting in savings to Missouri customers of
$4,000,000 and $5,100,000, respectively. The Company recorded revenues of
$2,900,000 and $4,100,000 in 1999 and 1998, respectively, under this plan.
Missouri Gas Energy received authorization from the MPSC for a new gas supply
incentive plan that became effective August 31, 2000. Earnings under the plan
are primarily dependent on market prices for natural gas declining to certain
preauthorized levels which are now below current market prices. There is no
assurance that the Company will have an opportunity to generate earnings under
this aspect of the plan during fiscal 2001.
Utility Regulation and Rates
The Company's rates and operations are subject to regulation by local, state and
federal authorities. In Texas, municipalities have primary jurisdiction over
natural gas rates within their respective incorporated areas. Rates in adjacent
environs and appellate matters are the responsibility of the Railroad Commission
of Texas (RRC). In Missouri, natural gas rates are established by the MPSC on a
system-wide basis. In Pennsylvania, natural gas rates for PG Energy are approved
by the PPUC on a system-wide basis. In Florida, natural gas rates are
established by the Florida Public Service Commission on a system-wide basis. The
FERC has jurisdiction over rates, facilities and services of Norteno and Power
Corp., and the RRC has jurisdiction over STC.
The Company holds non-exclusive franchises with varying expiration dates in all
incorporated communities where it is necessary to carry on its business as it is
now being conducted. Kansas City, Missouri; El Paso, Texas; Austin, Texas; Port
Arthur, Texas; and St. Joseph, Missouri are the five largest cities in which the
Company's utility customers are located. The franchises in the following cities
expire as follows: El Paso, Texas in 2030; Austin, Texas in 2006; Port Arthur,
Texas in 2013; and Kansas City, Missouri in 2010. The Company fully expects
these franchises to be renewed upon their expiration. The franchise in St.
Joseph, Missouri is perpetual.
Gas service rates are established by regulatory authorities to permit utilities
the opportunity to recover operating, administrative and financing costs, and
the opportunity to earn a reasonable return on equity. Gas costs are billed to
customers through PGA clauses which permit the Company to adjust its sales price
as the cost of purchased gas changes. This is important because the cost of
natural gas accounts for a significant portion of the Company's total expenses.
The appropriate regulatory authority must receive notice of such adjustments
prior to billing implementation.
Other than in Pennsylvania, the Company supports any service rate changes to its
regulators using a historic test year of operating results adjusted to normal
conditions and for any known and measurable revenue or expense changes. Because
the regulatory process has certain inherent time delays, rate orders may not
reflect the operating costs at the time new rates are put into effect. In
Pennsylvania, a future test year is utilized for ratemaking purposes, therefore,
there is no delay and rate orders more closely reflect the operating costs at
the time new rates are put into effect.
<PAGE>
The monthly customer bill contains a fixed service charge, a usage charge for
service to deliver gas, and a charge for the amount of natural gas used. While
the monthly fixed charge provides an even revenue stream, the usage charge
increases the Company's annual revenue and earnings in the traditional heating
load months when usage of natural gas increases. In recent years, the majority
of the Company's rate increases in Texas have resulted in increased monthly
fixed charges which help stabilize earnings. Weather normalization clauses, in
place in the City of Austin, El Paso environs, Galveston, Port Arthur and two
other service areas in Texas, also help stabilize earnings.
On April 3, 2000, PG Energy filed an application with the PPUC seeking an
increase in its base rates designed to produce $17,900,000 in additional annual
revenues, to be effective June 2, 2000. On May 11, 2000, the PPUC suspended this
rate increase request for seven months, until January 2, 2001, in order to
investigate the reasonableness of the proposed rates. On August 30, 2000, PG
Energy and the principal parties to the base rate proceeding informed the
Administrative Law Judge (ALJ) assigned to the proceeding that a complete
settlement of the proceeding had been reached. The proposed settlement is
designed to produce $10,800,000 of additional annual revenue. The parties are
currently in the process of finalizing a Settlement Agreement and Joint Petition
for Settlement of Rate Investigation (the Settlement Petition) which will be
filed with the ALJ upon its completion. The Settlement Petition will request
PPUC approval for the rate increase to become effective on January 1, 2001. It
is not presently possible to determine what action either the ALJ or the PPUC
will ultimately take with respect to this rate increase request or the
Settlement Petition.
On October 18, 1999, Southern Union Gas filed a $1,696,000 rate increase request
for the El Paso service area with the City of El Paso. In February 2000, the
City of El Paso approved a $650,000 revenue increase, and an improved rate
design that collects a greater portion of the Company's revenue stream from the
monthly customer charge. Additionally, the City of El Paso approved a new
30-year franchise for Southern Union Gas.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision
to grant a $13,300,000 annual increase to revenue effective on September 2,
1998, which is primarily earned volumetrically. The MPSC rate order reflected a
10.93% return on common equity. The rate order, however, disallowed certain
previously recorded deferred costs requiring a non-cash write-off of $2,221,000.
The Company recorded this charge to earnings in its fiscal year ended June 30,
1998. On December 8, 1998, the MPSC denied rehearing requests made by all
parties other than Missouri Gas Energy and granted a portion of Missouri Gas
Energy's rehearing request. On June 15, 2000, the MPSC ruled that it would not
rehear or reconsider its decision on one issue valued at $1,500,000. If the MPSC
adopts Missouri Gas Energy's positions on rehearing, then Missouri Gas Energy
would be authorized an additional $700,000 of base revenues increasing the
$13,300,000 initially authorized in its August 21, 1998 order to $14,000,000.
The MPSC is expected to rule on this rehearing in October 2000. The MPSC's
orders may be subject to judicial review and although certain parties may argue
for a reduction in Missouri Gas Energy's authorized base revenue increase on
judicial review, Missouri Gas Energy expects such arguments to be unsuccessful.
On April 13, 1998, Southern Union Gas filed a $2,228,000 request for a rate
increase from the city of El Paso, a request the city subsequently denied. On
April 21, 1998, the city council of El Paso voted to reduce the Company's rates
by $1,570,000 annually and to order a one-time cost of gas refund of $475,000.
On May 21, 1998, Southern Union Gas filed with the RRC an appeal of the city of
El Paso's actions to reduce the Company's rates and require a one-time cost of
gas refund. On December 21, 1998, the RRC issued its order implementing an
$884,000 one-time cost of gas refund and a $99,000 base rate reduction. The cost
of gas refund was completed in February 1999.
<PAGE>
On January 22, 1997, Missouri Gas Energy was notified by the MPSC of its
decision to grant an $8,847,000 annual increase to revenue effective on February
1, 1997. Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in a
major gas safety program in its service area (Missouri Safety Program). In
connection with this program, the MPSC issued an accounting authority order
(AAO) in Case No. GO-92-234 in 1994 which authorized Missouri Gas Energy to
defer depreciation expenses, property taxes and carrying costs at a rate of
10.54% on the costs incurred in the Missouri Safety Program. This AAO was
consistent with those which were issued by the MPSC from 1990 to 1993 to
Missouri Gas Energy's prior owner. The MPSC rate order of January 22, 1997,
however, retroactively reduced the carrying cost rate applied by the Company on
the expenditures incurred on the Missouri Safety Program since early 1994 to an
Allowance for Funds Used During Construction (AFUDC) rate of approximately 6%.
The Company filed an appeal of that portion of the rate order in the Missouri
State Court of Appeals, Western District. On August 18, 1998, the Missouri State
Court of Appeals denied the Company's appeal resulting in a one-time non-cash
write-off of $5,942,000 of previously recorded deferred costs which was recorded
as of June 30, 1998. The Company believes that the inconsistent treatment by the
MPSC in subsequently changing to the AFUDC rate from the previously ordered
10.54% rate constitutes retroactive ratemaking. Unfortunately, the decision by
the Missouri State Court of Appeals failed to address certain specific language
within the 1994 AAO that the Company believed prevented the MPSC from
retroactively changing the carrying cost rate. Southern Union requested transfer
to the Missouri Supreme Court, but was denied that request.
The approval of the January 31, 1994 acquisition of the Missouri properties by
the MPSC was subject to the terms of a stipulation and settlement agreement,
which, among other things, requires Missouri Gas Energy to reduce rate base by
$30,000,000 (amortized over a ten-year period on a straight-line basis) to
compensate rate payers for rate base reductions that were eliminated as a result
of the acquisition.
During the three-year period ended June 30, 2000, the Company did not file for
any other rate increases in any of its major service areas, although several
annual cost of service adjustments were filed.
In addition to the regulation of its utility and pipeline businesses, the
Company is affected by numerous other regulatory controls, including, among
others, pipeline safety requirements of the United States Department of
Transportation, safety regulations under the Occupational Safety and Health Act,
and various state and federal environmental statutes and regulations. The
Company believes that its operations are in compliance with applicable safety
and environmental statutes and regulations.
Environmental
The Company is investigating the possibility that the Company or predecessor
companies may have been associated with Manufactured Gas Plant (MGP) sites in
its former service territories, principally in Arizona and New Mexico, and
present service territories in Texas, Missouri and its newly acquired service
territories in Pennsylvania. While the Company's evaluation of these Texas,
Missouri, 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. See MD&A -- Cautionary Statement Regarding
Forward-Looking Information and Commitments and Contingencies in the Notes to
the Consolidated Financial Statements contained in the Annual Report.
Investments in Real Estate
Lavaca Realty owns a commercially developed tract of land in the central
business district of Austin, Texas, containing a combined 11-story office
building, parking garage and drive-through bank (Lavaca Plaza). Approximately
52% of the office space at Lavaca Plaza is used in the Company's business while
the remainder is leased to non-affiliated entities. Lavaca Realty also owns a
two-story office building in El Paso, Texas as well as a one-story office
building in Harlingen, Texas. Other significant real estate investments held at
June 30, 2000 include 39,341 square feet of undeveloped land in McAllen, Texas
and 25,000 square feet of improved property in Kansas City, Missouri, of which
40% is occupied by Missouri Gas Energy and the remainder by a non-affiliated
entity. Additionally, through the acquisition of the Pennsylvania Operations,
the Company owns several tracts of land, certain of which is being prepared for
development, situated in northeastern Pennsylvania, primarily Lackawanna County.
Depending upon market conditions the Company may sell certain of these
investments from time to time.
Employees
As of July 31, 2000, the Company had 2,296 employees, of whom 1,757 are paid on
an hourly basis and 539 are paid on a salary basis. Of the 1,757 hourly paid
employees, 44% are represented by unions. Of those employees represented by
unions, 68% are employed by Missouri Gas Energy, 29% are employed by PG Energy
and 3% by Southern Union Gas. During fiscal 2000, the Company agreed to a
one-year contract and a three-year contract with bargaining units representing
Pennsylvania employees, which were effective on April 1, 2000 and August 1,
2000, respectively. In December 1998, the Company agreed to five-year contracts
with each bargaining-unit representing Missouri employees, which were effective
in May 1999.
From time to time the Company may be subject to labor disputes; however, such
disputes have not previously disrupted its business. The Company believes that
its relations with its employees are good.
<PAGE>
Statistics of Principal Utility and Related Operations
The following table shows certain operating statistics of the Company's gas
distribution divisions with operations in Texas, Missouri and Pennsylvania,
which the Company owned during part or all of the year ended June 30, 2000:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year Ended June 30,
--------------------------------
2000 1999 1998
--------------------------------
Southern Union Gas:
Average number of gas sales customers served:
Residential ........................................... 483,220 473,563 465,844
Commercial ............................................ 31,860 30,847 29,828
Industrial and irrigation ............................. 253 258 252
Public authorities and other .......................... 2,862 2,849 2,755
------- ------- -------
Total average customers served .................... 518,195 507,517 498,679
======= ======= =======
Gas sales in millions of cubic feet (MMcf):
Residential ........................................... 19,524 19,553 23,217
Commercial ............................................ 8,677 8,539 9,425
Industrial and irrigation ............................. 969 1,082 1,208
Public authorities and other .......................... 2,377 2,266 2,752
------ ------ ------
Gas sales billed .................................. 31,547 31,440 36,602
Net change in unbilled gas sales ...................... 137 175 (82)
------ ------ ------
Total gas sales ................................... 31,684 31,615 36,520
====== ====== ======
Weather:
Degree days (a) ....................................... 1,516 1,576 2,118
Percent of 30-year measure (b) ........................ 71% 74% 99%
Gas transported in MMcf .................................... 17,472 16,668 16,535
Missouri Gas Energy:
Average number of gas sales customers served:
Residential ........................................... 424,771 418,266 413,703
Commercial ............................................ 58,323 57,247 57,693
Industrial ............................................ 309 313 312
------- ------- -------
Total average customers served .................... 483,403 475,826 471,708
======= ======= =======
Gas sales in MMcf:
Residential ........................................... 34,999 36,578 41,104
Commercial ............................................ 15,640 16,842 18,705
Industrial ............................................ 412 375 400
------ ------ ------
Gas sales billed ................................. 51,051 53,795 60,209
Net change in unbilled gas sales ...................... 37 204 35
------ ------ ------
Total gas sales ................................... 51,088 53,999 60,244
====== ====== ======
Weather:
Degree days (a) ....................................... 4,176 4,438 4,723
Percent of 30-year measure (b) ....................... 80% 85% 90%
Gas transported in MMcf .................................... 31,644 31,774 30,165
</TABLE>
(a) "Degree days" are a measure of the coldness of the weather experienced. A
degree day is equivalent to each degree that the daily mean temperature for
a day falls below 65 degrees Fahrenheit.
(b) Information with respect to weather conditions is provided by the National
Oceanic and Atmospheric Administration. Percentages of 30-year measure are
computed based on the weighted average volumes of gas sales billed.
<PAGE>
Eight Months
Ended June 30,
2000(a)
PG Energy:
Average number of gas sales customers served:
Residential ............................ 140,019
Commercial ............................. 13,872
Industrial ............................. 209
Public Authorities and Other ........... 314
--------
Total average customers served ..... 154,414
========
Gas sales in MMcf:
Residential ............................ 14,830
Commercial ............................. 4,969
Industrial ............................. 215
Public Authorities and Other ........... 213
--------
Gas sales billed ................... 20,227
Net change in unbilled gas sales ....... (314)
--------
Total gas sales .................... 19,913
========
Weather:
Degree days (b) ........................ 5,287
Percent of 30-year measure (c) ......... 92%
Gas transported in MMcf ..................... 19,403
(a) PG Energy was acquired on November 4, 1999. See Pennsylvania
Enterprises, Inc. Acquisition. (b) "Degree days" are a measure of the coldness
of the weather experienced. A degree day is equivalent to each degree that the
daily mean temperature for a day falls below 65 degrees Fahrenheit. (c)
Information with respect to weather conditions is provided by the National
Oceanic and Atmospheric Administration. Percentages of 30-year measure are
computed based on the weighted average volumes of gas sales billed.
<PAGE>
Customers. The following table shows the number of customers served by the
Company, through its divisions, subsidiaries and affiliates, as of the end of
its last three fiscal years.
<TABLE>
<CAPTION>
Gas Utility Customers as of June 30,
2000 1999 1998
--------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Southern Union Gas:
Austin and other central and south Texas communities .... 183,872 175,596 173,228
El Paso and other west Texas communities ................ 187,189 182,516 178,812
Galveston and Port Arthur ............................... 50,237 50,543 50,673
Panhandle and north Texas communities ................... 24,584 24,728 24,900
Rio Grande Valley communities and Eagle Pass ............ 75,608 75,983 76,840
--------- --------- ---------
521,490 509,366 504,453
--------- --------- ---------
Missouri Gas Energy:
Kansas City, Missouri Metropolitan Area ................. 379,804 354,189 348,543
St. Joseph, Joplin, Monett and others ................... 104,432 122,883 121,766
--------- --------- ---------
484,236 477,072 470,309
--------- --------- ---------
PG Energy .................................................... 154,399 -- --
Other (a) .................................................... 25,971 24,947 20,874
--------- --------- ---------
Total ......................................................... 1,186,096 1,011,385 995,636
========= ========= =========
</TABLE>
(a) Includes Mercado, South Florida Natural Gas, Atlantic Gas Corporation,
SUPro Energy Services, PG Energy Services, Inc. and 43% (the Company's
equity ownership) of the customers of a natural gas distribution company
serving Piedras Negras, Mexico, in each case for the year-end in which the
Company had such operations or investments.
ITEM 2. Properties.
See Item 1, Business, for information concerning the general location and
characteristics of the important physical properties and assets of the Company.
Southern Union Gas has 9,651 miles of mains, 4,428 miles of service lines and
164 miles of transmission lines. STC and Norteno have 171 miles and 7 miles,
respectively, of transmission lines. Missouri Gas Energy has 7,709 miles of
mains, 5,004 miles of service lines and 47 miles of transmission lines. PG
Energy has 2,449 miles of mains, 1,452 miles of service lines and 9 miles of
transmission lines. SFNG has 140 miles of mains and 85 miles of service lines.
The Company considers its systems to be in good condition and well-maintained,
and it has continuing replacement programs based on historical performance and
system surveillance.
Power Corp. owns a 25-megawatt cogeneration facility located in Lackawanna
County, Pennsylvania which burns methane and natural gas. Power Corp. also owns
a methane recovery facility at a nearby landfill which supplies methane gas
burned at its cogeneration facility.
The information above does not include Fall River Gas, ProvEnergy or Valley
Resources, the companies acquired subsequent to year-end. (See Item 1 Business
-- Acquisitions Subsequent to Year-End.)
ITEM 3. Legal Proceedings.
See Commitments and Contingencies in the Notes to Consolidated Financial
Statements contained in the Annual Report for a discussion of the Company's
legal proceedings. See MD&A -- Cautionary Statement Regarding Forward-Looking
Information contained in the Annual Report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of Southern Union
during the quarter ended June 30, 2000.
<PAGE>
PART II
ITEM 5.Market for the Registrant's Common Stock and Related Stockholder Matters.
Market Information
Southern Union's common stock is traded on the New York Stock Exchange under the
symbol "SUG". The high and low sales prices (adjusted for any stock dividends
and stock splits) for shares of Southern Union common stock since July 1, 1998
are set forth below:
$/Share
High Low
July 1 to September 15, 2000 $ 20.75 $ 16.00
(Quarter Ended)
June 30, 2000 .............. 17.27 14.41
March 31, 2000 ............. 18.16 12.63
December 31, 1999 .......... 20.00 16.61
September 30, 1999 ......... 20.66 17.14
(Quarter Ended)
June 30, 1999 .............. 20.75 16.78
March 31, 1999 ............. 22.11 15.77
December 31, 1998 .......... 22.22 16.80
September 30, 1998 ......... 19.33 13.50
Holders
As of August 31, 2000, there were 7,888 holders of record of Southern Union's
common stock. This number does not include persons whose shares are held of
record by a bank, brokerage house or clearing agency, but does include any such
bank, brokerage house or clearing agency that is a holder of record.
There were 49,589,799 shares of Southern Union's common stock outstanding on
August 31 2000 of which 33,547,896 shares were held by non-affiliates (i.e., not
beneficially held by directors, executive officers, their immediate family
members, or holders of 10% or more of shares outstanding).
Dividends
Provisions in certain of Southern Union's long-term debt and its bank credit
facilities limit the payment of cash or asset dividends on capital stock. Under
the most restrictive provisions in effect, Southern Union may not declare or pay
any cash or asset dividends on its common stock or acquire or retire any of
Southern Union's common stock, unless no event of default exists and the Company
meets certain financial ratio requirements, which presently are met.
<PAGE>
Southern Union has a policy of reinvesting its earnings in its businesses,
rather than paying cash dividends. Since 1994, Southern Union has distributed an
annual stock dividend of 5%. There have been no cash dividends on its common
stock during this period. On June 30, 2000, August 6, 1999, December 9, 1998 and
December 10, 1997, the Company distributed its annual 5% common stock dividend
to stockholders of record on June 19, 2000, July 23, 1999, November 23, 1998 and
November 21, 1997, respectively. A portion of each of the 5% stock dividends
distributed on June 30, 2000, August 6, 1999 and December 9, 1998 was
characterized as a distribution of capital due to the level of the Company's
retained earnings available for distribution as of the declaration date. On July
13, 1998, Southern Union effected a 3-for-2 stock split by distributing a 50%
stock dividend to holders of record on June 30, 1998. The Massachusetts
Department of Telecommunications and Energy order approving the Company's
acquisitions of Fall River Gas and ProvEnergy's North Attleboro Gas requires
that Southern Union cease distributing stock dividends because of a
Massachusetts law prohibition. Rhode Island law may also restrict Southern
Union's ability to distribute stock dividends, or at least require prior
regulatory approval. Southern Union intends to seek relief from or authority
under Massachusetts and Rhode Island law, including, if appropriate, legislative
action, in order to continue distributing its annual stock dividend. Although it
hopes to resolve these issues successfully prior to next summer, there can be no
assurance that Southern Union will be able to distribute any stock dividends in
the future including its next anticipated annual 5% stock dividend in summer
2001.
ITEM 6. Selected Financial Data.
<TABLE>
<CAPTION>
As of and for the Year Ended June 30,
------------------------------------------------------------
2000(a) 1999(b) 1998(b) 1997 1996
------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
(dollars in thousands, except per share amounts)
Total operating revenues .................. $ 831,704 $ 605,231 $ 669,304 $ 717,031 $ 620,391
Earnings from continuing operations (c) ... 11,052 10,445 12,229 19,032 20,839
Earnings per common and common share
equivalents (d) ...................... .24 .31 .37 .59 .65
Total assets .............................. 2,021,460 1,087,348 1,047,764 990,403 964,460
Common stockholders' equity ............... 735,854 301,058 296,834 267,462 245,915
Short-term debt and capital lease
obligation ........................... 2,193 2,066 1,777 687 615
Long-term debt and capital lease
obligation, excluding current portion 733,774 390,931 406,407 386,157 385,394
Company-obligated mandatorily
redeemable preferred securities of
subsidiary trust .................... 100,000 100,000 100,000 100,000 100,000
Average customers served .................. 1,132,699 998,476 979,186 955,838 952,934
</TABLE>
(a) The Pennsylvania Operations were acquired on November 4, 1999 and were
accounted for as a purchase. The Pennsylvania Operations' assets were
included in the Company's consolidated balance sheet at June 30, 2000 and
its results of operations have been included in the Company's consolidated
results of operations since November 4, 1999. For these reasons, the
consolidated results of operations of the Company for the periods
subsequent to the acquisition are not comparable to the same periods in
prior years.
(b) On December 31, 1997, Southern Union acquired Atlantic for 755,650
pre-split and pre-stock dividend shares of common stock valued at
$18,041,000 and cash of $4,436,000.
(c) As of June 30, 1998, Missouri Gas Energy wrote off $8,163,000 pre-tax in
previously recorded regulatory assets as a result of announced rate orders
and court rulings.
(d) Earnings per share for all periods presented were computed based on the
weighted average number of shares of common stock and common stock
equivalents outstanding during the year adjusted for (i) the 5% stock
dividends distributed on June 30, 2000, August 6, 1999, December 9, 1998,
December 10, 1997 and December 10, 1996, and (ii) the 50% stock dividend
distributed on July 13, 1998, and the 33_% stock dividend distributed on
March 11, 1996.
ITEM 7. Management's Discussion and Analysis of Results of Operations and
Financial Condition.
"Management's Discussion and Analysis of Results of Operations and Financial
Condition" on pages 15 through 29 of the Company's Annual Report to Stockholders
for the year ended June 30, 2000, is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of Southern Union and its
consolidated subsidiaries, included in the Company's Annual Report to
Stockholders for the year ended June 30, 2000 are incorporated herein by
reference:
Consolidated statement of operations -- years ended June 30, 2000, 1999 and
1998. Consolidated balance sheet -- June 30, 2000 and 1999. Consolidated
statement of cash flows -- years ended June 30, 2000, 1999 and 1998.
Consolidated statement of common stockholders' equity -- years ended June
30, 2000, 1999 and 1998. Notes to consolidated financial statements.
Report of independent accountants.
<PAGE>
ITEM 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of Registrant.
There is incorporated in this Item 10 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the captions Board of Directors -- Board Size and Composition and
Executive Officers and Compensation -- Executive Officers Who Are Not Directors.
ITEM 11. Executive Compensation.
There is incorporated in this Item 11 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the captions Executive Officers and Compensation -- Executive Compensation
and Certain Relationships.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management.
There is incorporated in this Item 12 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the caption Security Ownership.
ITEM 13. Certain Relationships and Related Transactions.
There is incorporated in this Item 13 by reference the information in the
Company's definitive proxy statement for the 2000 Annual Meeting of Stockholders
under the caption Certain Relationships.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K.
(a)(1) Financial Statements. The following consolidated financial statements
of Southern Union and its consolidated subsidiaries, included in the
Company's Annual Report to Stockholders for the year ended June 30,
2000, are incorporated by reference to Part II, Item 8:
Consolidated statement of operations -- years ended June 30, 2000,
1999 and 1998.
Consolidated balance sheet -- June 30, 2000 and 1999.
Consolidated statement of cash flows -- years ended June 30, 2000,
1999 and 1998.
Consolidated statement of common stockholders' equity -- years
ended June 30, 2000, 1999 and 1998.
Notes to consolidated financial statements.
Report of independent accountants.
(a)(2) Financial Statement Schedules. All schedules are omitted as the
required information is not applicable or the information is
presented in the consolidated financial statements or related notes.
<PAGE>
(a)(3) Exhibits.
--------
Exhibit No. Description
2(a) Agreement of Merger between Southern Union Company and Fall River
Gas Company dated as of October 4, 1999. (Filed as Exhibit 2 to
Southern Union's Current Report on Form 8-K filed on October 4,
1999 and incorporated herein by reference.)
2(b) Agreement and Plan of Merger among Southern Union Company, GUS
Acquisition Corporation and Providence Energy Corporation dated
November 15, 1999. (Filed as Exhibit 2 to Southern Union's Current
report on Form 8-K filed on November 19, 1999 and incorporated
herein by reference.)
2(c) Agreement and Plan of Merger among Southern Union Company, SUG
Acquisition Corporation and Valley Resources, Inc. dated November
30, 1999. (Filed as Exhibit 2 to Southern Union's Current Report
on Form 8-K filed on December 6, 1999 and incorporated herein by
reference.)
2(d) Agreement of Merger between Southern Union Company and
Pennsylvania Enterprises, Inc. dated as of June 7, 1999. (Filed
as Exhibit 2 to Southern Union's Current Report on Form 8-K filed
on June 15, 1999 and incorporated herein by reference.)
3(a) Restated Certificate of Incorporation of Southern Union Company.
(Filed as Exhibit 3(a) to Southern Union's Transition Report on
Form 10-K for the year ended June 30, 1994 and incorporated herein
by reference.)
3(b) Amendment to Restated Certificate of Incorporation of Southern
Union Company which was filed with the Secretary of State of
Delaware and became effective on October 26, 1999. (Filed as
Exhibit 3(a) to Southern Union's Quarterly Report on Form 10-Q for
the quarter ended December 31, 1999 and incorporated herein by
reference.)
3(c) Southern Union Company Bylaws, as amended. (Filed as Exhibit 3(a)
to Southern Union's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999 and incorporated herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit 4(a) to
Southern Union's Annual Report on Form 10-K for the year ended
December 31, 1989 and incorporated herein by reference.)
4(b) Indenture between Chase Manhattan Bank, N.A., as trustee, and
Southern Union Company dated January 31, 1994. (Filed as
Exhibit 4.1 to Southern Union's Current Report on Form 8-K dated
February 15, 1994 and incorporated herein by reference.)
4(c) Officers' Certificate dated January 31, 1994 setting forth the
terms of the 7.60% Senior Debt Securities due 2024. (Filed as
Exhibit 4.2 to Southern Union's Current Report on Form 8-K dated
February 15, 1994 and incorporated herein by reference.)
4(d) Officer's Certificate of Southern Union Company dated November 3,
1999 with respect to 8.25% Senior Notes due 2029. (Filed as
Exhibit 99.1 to Southern Union's Current Report on Form 8-K filed
on November 19, 1999 and incorporated herein by reference.)
4(e) Certificate of Trust of Southern Union Financing I. (Filed as
Exhibit 4-A to Southern Union's Registration Statement on
Form S-3 (No. 33-58297) and incorporated herein by reference.)
4(f) Certificate of Trust of Southern Union Financing II. (Filed as
Exhibit 4-B to Southern Union's Registration Statement
on Form S-3 (No. 33-58297) and incorporated herein by reference.)
4(g) Certificate of Trust of Southern Union Financing III. (Filed as
Exhibit 4-C to Southern Union's Registration Statement
on Form S-3 (No. 33-58297) and incorporated herein by reference.)
<PAGE>
Exhibit No. Description
4(h) Form of Amended and Restated Declaration of Trust of Southern
Union Financing I. (Filed as Exhibit 4-D to Southern Union's
Registration Statement on Form S-3 (No. 33-58297) and incorporated
herein by reference.)
4(i) Form of Subordinated Debt Securities Indenture among Southern
Union Company and The Chase Manhattan Bank, N. A., as Trustee.
(Filed as Exhibit 4-G to Southern Union's Registration Statement
on Form S-3 (No. 33-58297) and incorporated herein by reference.)
4(j) Form of Supplemental Indenture to Subordinated Debt Securities
Indenture with respect to the Subordinated Debt Securities issued
in connection with the Southern Union Financing I Preferred
Securities. (Filed as Exhibit 4-H to Southern Union's Registration
Statement on Form S-3 (No. 33-58297) and incorporated herein by
reference.)
4(k) Form of Southern Union Financing I Preferred Security (included
in 4(g) above.) (Filed as Exhibit 4-I to Southern Union's
Registration Statement on Form S-3 (No. 33-58297) and incorporated
herein by reference.)
4(l) Form of Subordinated Debt Security (included in 4(i) above.)
(Filed as Exhibit 4-J to Southern Union's Registration
Statement on Form S-3 (No. 33-58297) and incorporated herein by
reference.)
4(m) Form of Guarantee with respect to Southern Union Financing I
Preferred Securities. (Filed as Exhibit 4-K to Southern
Union's Registration Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(n) First Mortgage Bonds Debenture of Mortgage and Deed of Trust dated
as of March 15, 1946 by Southern Union Company (as successor to PG
Energy, Inc. formerly, Pennsylvania Gas and Water Company, and
originally, Scranton-Spring Brook Water Service Company to
Guaranty Trust Company of New York. (Filed as Exhibit 4.1 to
Southern Union's Current Report on Form 8-K filed on December 30,
1999 and incorporated herein by reference.)
4(o) Twenty-Third Supplemental Indenture dated as of August 15, 1989
(Supplemental to Indenture dated as of March 15, 1946) between
Southern Union Company and Morgan Guaranty Trust Company of New
York (formerly Guaranty Trust Company of New York). (Filed as
Exhibit 4.2 to Southern Union's Current Report on Form 8-K filed
on December 30, 1999 and incorporated herein by reference.)
4(p) Twenty-Sixth Supplemental Indenture dated as of December 1, 1992
(Supplemental to Indenture dated as of March 15, 1946) between
Southern Union Company and Morgan Guaranty Trust Company of New
York. (Filed as Exhibit 4.3 to Southern Union's Current Report on
Form 8-K filed on December 30, 1999 and incorporated herein by
reference.)
4(q) Thirtieth Supplemental Indenture dated as of December 1, 1995
(Supplemental to Indenture dated as of March 15, 1946) between
Southern Union Company and First Trust of New York, National
Association (as successor trustee to Morgan Guaranty Trust Company
of New York). (Filed as Exhibit 4.4 to Southern Union's Current
Report on Form 8-K filed on December 30, 1999 and incorporated
herein by reference.)
4(r) Thirty-First Supplemental Indenture dated as of November 4, 1999
(Supplemental to Indenture dated as of March 15, 1946) between
Southern Union Company and U. S. Bank Trust, National Association
(formerly, First Trust of New York, National Association). (Filed
as Exhibit 4.5 to Southern Union's Current Report on Form 8-K
filed on December 30, 1999 and incorporated herein by reference.)
4(s) Pennsylvania Gas and Water Company Bond Purchase Agreement dated
September 1, 1989. (Filed as Exhibit 4.6 to Southern Union's
Current Report on Form 8-K filed on December 30, 1999 and
incorporated herein by reference.)
<PAGE>
Exhibit No. Description
4(t) Southern Union is a party to other debt instruments, none of which
authorizes the issuance of debt securities in an amount which
exceeds 10% of the total assets of Southern Union. Southern Union
hereby agrees to furnish a copy of any of these instruments to the
Commission upon request.
10(a) Amended and Restated Revolving Credit Agreement (Long-Term Credit
Facility) between Southern Union Company and the Banks named
therein dated May 31, 2000.
10(b) Amended and Restated Revolving Credit Agreement (Short-Term Credit
Facility) between Southern Union Company and the Banks named
therein dated May 31, 2000.
10(c) Term Loan Credit Agreement between Southern Union Company and the
Banks named therein dated August 28, 2000.
10(d) Southern Union Company 1982 Incentive Stock Option Plan and form
of related Stock Option Agreement. (Filed as Exhibits 4.1 and
4.2 to Form S-8, File No. 2-79612 and incorporated herein by
reference.)(*)
10(e) Form of Indemnification Agreement between Southern Union Company
and each of the Directors of Southern Union Company. (Filed as
Exhibit 10(i) to Southern Union's Annual Report on Form 10-K for
the year ended December 31, 1986 and incorporated herein by
reference.)
10(f) Southern Union Company 1992 Long-Term Stock Incentive Plan, As
Amended. (Filed as Exhibit 10(l) to Southern Union's Annual Report
on Form 10-K for the year ended June 30, 1998 and incorporated
herein by reference.)(*)
10(g) Southern Union Company Director's Deferred Compensation Plan.
(Filed as Exhibit 10(g) to Southern Union's Annual Report on Form
10-K for the year ended December 31, 1993 and incorporated herein
by reference.)(*)
10(h) Southern Union Company Amended Supplemental Deferred Compensation
Plan with Amendments. (Filed as Exhibit 4 to Southern Union's
Form S-8 filed March 27, 1999 and incorporated herein by
reference.)(*)
10(i) Form of warrant granted to Fleischman and Walsh L.L.P. (Filed as
Exhibit 10(j) to Southern Union's Transition Report on Form 10-K
for the year ended June 30, 1994 and incorporated herein by
reference.)
10(j) Renewal Promissory Note Agreement between Peter H. Kelley and
Southern Union Company dated May 31, 1995. (Filed as Exhibit 10(i)
to Southern Union's Annual Report on Form 10-K for the year ended
June 30, 1995 and incorporated herein by reference.)
10(k) Employment agreement between Thomas F. Karam and Southern Union
Company dated December 28, 1999. (Filed as Exhibit 10(a) to
Southern Union's Quarterly Report on Form 10-Q for the quarter
ended December 31, 1999 and incorporated herein by reference.)
10(l) Secured Promissory Note and Security Agreements between Thomas F.
Karam and Southern Union Company dated December 20, 1999. (Filed
as Exhibit 10(b) to Southern Union's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1999 and incorporated herein by
reference.)
10(m) Southern Union Company Pennsylvania Division Stock Incentive
Plan. (Filed as Exhibit 4 to Form S-8, SEC File No. 333-36146,
filed on May 3, 2000 and incorporated herein by reference.)*
* Indicates Management Compensation Plan.
<PAGE>
Exhibit No. Description
10(n) Southern Union Company Pennsylvania Division 1992 Stock Option
Plan. (Filed as Exhibit 4 to Form S-8, SEC File No. 333-36150,
filed on May 3, 2000 and incorporated herein by reference.)*
13 Portions of Company's Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
(b) Reports on Form 8-K. Southern Union's Current Report on Form 8-K dated
June 5, 2000 providing certain historical financial statements and
related notes thereto of Valley Resources, Inc. and Providence Energy
Corporation.
* Indicates Management Compensation Plan.
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, Southern Union has duly caused this report to be signed by the
undersigned, thereunto duly authorized, on September 28, 2000.
SOUTHERN UNION COMPANY
By PETER H. KELLEY
--------------------------
Peter H. Kelley
President and Chief Operating Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons on behalf of Southern Union and in the
capacities indicated as of September 28, 2000.
Signature/Name Title
GEORGE L. LINDEMANN* Chairman of the Board, Chief Executive Officer
and Director
JOHN E. BRENNAN* Director
FRANK W. DENIUS* Director
AARON I. FLEISCHMAN* Director
KURT A. GITTER, M.D.* Director
THOMAS F. KARAM* Director
PETER H. KELLEY Director
-----------------------
Peter H. Kelley
ADAM M. LINDEMANN* Director
ROGER J. PEARSON* Director
GEORGE ROUNTREE, III* Director
RONALD W. SIMMS* Director
DAN K. WASSONG* Director
RONALD J. ENDRES Executive Vice President and Chief Financial
---------------------- Officer
Ronald J. Endres
DAVID J. KVAPIL Senior Vice President and Corporate Controller
------------------------ (Principal Accounting Officer)
David J. Kvapil
*By PETER H. KELLEY
-----------------------
Peter H. Kelley
Attorney-in-fact
<PAGE>
INDEX TO EXHIBITS
Exhibit 10(c) Term Loan Credit Agreement between Southern Union Company and the
Banks named therein dated August 28, 2000.
Exhibit 13 Portions of Company's Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Company
Exhibit 23 Consent of Independent Accountants
Exhibit 24 Power of Attorney
Exhibit 27 Financial Data Schedule
