-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UeE0q3Rt7v+9s2QTmlKW3QZsqMH/KNE8Jxhr+T0rNFn44bK+/F44MUu2dwFHKarT VvMveSoRQNxYSlLLgq2xKg== 0000203248-00-000005.txt : 20000215 0000203248-00-000005.hdr.sgml : 20000215 ACCESSION NUMBER: 0000203248-00-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19991231 FILED AS OF DATE: 20000214 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN UNION CO CENTRAL INDEX KEY: 0000203248 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 750571592 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06407 FILM NUMBER: 543611 BUSINESS ADDRESS: STREET 1: 504 LAVACA ST 8TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124775852 10-Q 1 ================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------- FORM 10-Q For the quarterly period ended ------------------------------ December 31, 1999 Commission File No. 1-6407 ---------------- SOUTHERN UNION COMPANY (Exact name of registrant as specified in its charter) Delaware 75-0571592 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 504 Lavaca Street, Eighth Floor 78701 Austin, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (512) 477-5852 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange in which registered - ------------------- ----------------------------------------- Common Stock, par New York Stock Exchange value $1 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes No --- --- The number of shares of the registrant's Common Stock outstanding on February 4, 2000 was 47,945,778. ================================================================= SOUTHERN UNION COMPANY AND SUBSIDIARIES FORM 10-Q December 31, 1999 Index PART I. FINANCIAL INFORMATION Item 1. Financial Statements Consolidated statements of operations - three, six and twelve months ended December 31, 1999 and 1998 Consolidated balance sheet - December 31, 1999 and 1998 and June 30, 1999 Consolidated statement of stockholders' equity - six months ended December 31, 1999 and twelve months ended June 30, 1998 Consolidated statements of cash flows - three, six and twelve months ended December 31, 1999 and 1998 Notes to consolidated financial statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk PART II. OTHER INFORMATION Item 1. Legal Proceedings (See "COMMITMENTS AND CONTINGENCIES" in Notes to Consolidated Financial Statements) Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 3(a) -- Certificate of Amendment of Re- stated Certificate of Incorpora- tion of Southern Union Company (b) Exhibit 3(b) -- Bylaws of Southern Union Com- pany, as amended (c) Exhibit 10(a) -- Employment agreement between Thomas F. Karam and Southern Union Company dated December 28, 1999 (d) Exhibit 10(b) -- Secured Promissory Note and Security Agreements between Thomas F. Karam and Southern Union Company dated December 20, 1999 (e) Exhibit 27 -- Financial Data Schedule (f) Reports on Form 8-K Date Filed Description of Filing -------- --------------------------------------- 11/18/99 Announcement of completed merger on November 4, 1999 with Pennsylvania Enterprises, Inc. 11/19/99 Form of purchase and pricing agreement dated October 27, 1999 with respect to 8.25% Senior Notes issued on November 3, 1999. 11/19/99 Announcement of definitive merger agreement on November 15, 1999 with Providence Energy Corporation. 12/06/99 Announcement of definitive merger agreement on November 30, 1999 with Valley Resources, Inc. 12/30/99 Mortgage Bonds of Pennsylvania Enterprises, Inc.'s utility subsidiary that were assumed by Southern Union Company in connection with the consum- mation of the November 4, 1999 merger. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended December 31, ------------------------------- 1999 1998 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues.............. $ 239,595 $ 174,224 Cost of gas and other energy.... 145,113 103,938 ----------- ----------- Operating margin.............. 94,482 70,286 Revenue-related taxes........... 11,256 9,244 ----------- ----------- Net operating margin.......... 83,226 61,042 Operating expenses: Operating, maintenance and general..................... 34,194 27,074 Depreciation and amortization. 13,500 10,496 Taxes, other than on income and revenues................ 4,634 3,486 ----------- ----------- Total operating expenses.... 52,328 41,056 ----------- ----------- Net operating revenues...... 30,898 19,986 ----------- ----------- Other income (expenses): Interest...................... (13,299) (9,142) Dividends on preferred securi- ties of subsidiary trust.... (2,370) (2,370) Other, net.................... (3,336) (162) ----------- ----------- Total other expenses, net... (19,005) (11,674) ----------- ----------- Earnings before income taxes..................... 11,893 8,312 Federal and state income taxes.. 4,761 2,938 ----------- ----------- Net earnings available for common stock.................. $ 7,132 $ 5,374 =========== =========== Net earnings per share: Basic......................... $ .17 $ .17 =========== =========== Diluted....................... $ .17 $ .16 =========== =========== Weighted average shares outstanding: Basic....................... 41,365,566 31,121,780 =========== =========== Diluted..................... 43,224,186 32,621,213 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Six Months Ended December 31, ----------------------------- 1999 1998 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues................ $ 324,381 $ 251,679 Cost of gas and other energy...... 184,390 138,613 ----------- ----------- Operating margin................ 139,991 113,066 Revenue-related taxes............. 15,220 12,681 ----------- ----------- Net operating margin............ 124,771 100,385 Operating expenses: Operating, maintenance and general....................... 59,458 53,121 Depreciation and amortization... 24,348 20,913 Taxes, other than on income and revenues...................... 8,259 6,992 ----------- ----------- Total operating expenses.... 92,065 81,026 ----------- ----------- Net operating revenues...... 32,706 19,359 ----------- ----------- Other income (expenses): Interest........................ (21,663) (17,882) Dividends on preferred securi- ties of subsidiary trust...... (4,740) (4,740) Other, net...................... (4,493) 563 ----------- ----------- Total other expenses, net..... (30,896) (22,059) ----------- ----------- Earnings (loss) before income taxes (benefit)............. 1,810 (2,700) Federal and state income taxes (benefit)....................... 778 (1,026) ----------- ----------- Net earnings (loss) available for common stock................ $ 1,032 $ (1,674) =========== =========== Net earnings (loss) per share: Basic........................... $ .03 $ (.05) =========== =========== Diluted......................... $ .03 $ (.05) =========== =========== Weighted average shares outstanding: Basic......................... 36,145,598 31,110,226 =========== =========== Diluted....................... 37,936,744 31,110,226 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Twelve Months Ended December 31, -------------------------------- 1999 1998 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues............. $ 677,933 $ 625,782 Cost of gas and other energy... 388,078 367,917 ----------- ----------- Operating margin............. 289,855 257,865 Revenue-related taxes.......... 34,573 32,936 ----------- ----------- Net operating margin......... 255,282 224,929 Operating expenses: Operating, maintenance and general.................... 116,030 110,189 Depreciation and amortization............... 45,291 40,203 Taxes, other than on income and revenues............... 15,768 14,444 ----------- ----------- Total operating expenses. 177,089 164,836 ----------- ----------- Net operating revenues... 78,193 60,093 ----------- ----------- Other income (expenses): Interest..................... (39,779) (35,192) Dividends on preferred securities of subsidiary trust...................... (9,480) (9,480) Write-off of regulatory assets..................... -- (8,163) Other, net................... (6,870) 2,273 ----------- ----------- Total other expenses, net.. (56,129) (50,562) ----------- ----------- Earnings before income taxes.................... 22,064 9,531 Federal and state income taxes. 8,913 3,805 ----------- ----------- Net earnings available for common stock................. $ 13,151 $ 5,726 =========== =========== Net earnings per share: Basic........................ $ .39 $ .18 =========== =========== Diluted...................... $ .37 $ .18 =========== =========== Weighted average shares outstanding: Basic...................... 33,680,640 31,096,197 =========== =========== Diluted.................... 35,308,213 32,387,646 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS December 31, June 30, ------------------------- ------------ 1999 1998 1999 ------------ ------------ ------------ (unaudited) (thousands of dollars) Property, plant and equipment: Plant in service... $ 1,529,005 $ 1,087,434 $ 1,106,905 Construction work in progress...... 33,414 9,814 13,271 ----------- ----------- ----------- 1,562,419 1,097,248 1,120,176 Less accumulated depreciation and amortization..... (489,223) (372,584) (376,212) 1,073,196 724,664 743,964 Additional purchase cost assigned to utility plant, net.............. 388,472 136,344 134,296 ----------- ----------- ----------- Net property, plant and equipment.... 1,461,668 861,008 878,260 ----------- ----------- ----------- Current assets: Accounts receivable, billed and unbilled........... 149,233 101,765 50,693 Inventories, princi- pally at average cost............... 70,405 36,434 29,373 Prepayments and other.............. 7,141 2,757 4,692 ----------- ----------- ----------- Total current assets......... 226,779 140,956 84,758 ----------- ----------- ----------- Deferred charges....... 133,022 90,636 96,635 Investment securities.. 12,160 5,000 12,000 Real estate............ 12,520 9,520 9,420 Other.................. 15,021 7,953 6,275 ----------- ----------- ----------- Total assets......... $ 1,861,170 $ 1,115,073 $ 1,087,348 =========== =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (CONTINUED) STOCKHOLDERS' EQUITY AND LIABILITIES December 31, June 30, ------------------------- ------------ 1999 1998 1999 ------------ ------------ ------------ (unaudited) (thousands of dollars) Common stockholders' equity: Common stock, $1 par value; autho- rized 200,000,000 shares; issued 48,049,438 shares........... $ 48,049 $ 29,733 $ 31,240 Premium on capital stock............ 592,097 260,093 276,610 Less treasury stock, at cost... (2,120) (794) (794) Less common stock held in trust.... (10,019) -- (5,562) Accumulated other comprehensive income (loss).... (436) -- (436) Retained earnings.. 1,032 6,166 -- ----------- ----------- ----------- Total common stock- holders' equity.. 628,603 295,198 301,058 Company-obligated mandatorily redeem- able preferred securities of sub- sidiary trust holding solely subordinated notes of Southern Union.... 100,000 100,000 100,000 Long-term debt and capital lease obliga- tion................. 734,878 411,971 390,931 ----------- ----------- ----------- Total capitalization. 1,463,481 807,169 791,989 Current liabilities: Long-term debt and capital lease obligation due within one year.... 1,971 2,001 2,066 Notes payable........ 12,903 50,003 21,003 Accounts payable..... 75,294 54,741 37,834 Federal, state and local taxes........ 12,467 14,667 13,300 Accrued interest..... 16,278 12,324 12,176 Customer deposits.... 17,834 18,662 17,682 Deferred gas pur- chase costs........ 19,292 4,415 22,955 Other................ 20,231 16,496 16,612 ----------- ----------- ----------- Total current liabilities...... 176,270 173,309 143,628 ----------- ----------- ----------- Deferred credits and other................ 98,843 73,250 81,493 Accumulated deferred income taxes......... 122,576 61,345 70,238 Commitments and contingencies........ -- -- -- ----------- ----------- ----------- Total................ $ 1,861,170 $ 1,115,073 $ 1,087,348 =========== =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Accum- Common ulated Stock, Premium Common Other $1 Capital Treasury Stock Compre- Retained Par on Stock at Held hensive Earnings Value Stock Cost in Trust Income (Deficit) Total ------- -------- -------- -------- ------- --------- -------- (thousands of dollars) Balance July 1, 1998..... $28,252 $252,638 $ (794) $ -- $ -- $ 16,738 $296,834 Compre- hensive income: Net earn- ings.. -- -- -- -- -- 10,445 10,445 Minimum pen- sion lia- bility ad- just ment; net of tax... -- -- -- -- (436) -- (436) -------- Compre- hen- sive in- come.. 10,009 -------- Common stock held in Trust.. -- -- (5,562) -- -- (5,562) 5% stock divi- dend - de- clared Novem- ber 11, 1998... 1,411 7,483 -- -- -- (8,898) (4) 5% stock divi- dend - de- clared July 13, 1999... 1,485 16,797 -- -- -- (18,285) (3) Exercise of stock options 92 (308) -- -- -- -- (216) ------- -------- ------- -------- ----- ------- -------- Balance June 30, 1999..... 31,240 276,610 (794) (5,562) (436) -- 301,058 Net earn- ings... -- -- -- -- -- 1,032 1,032 Issuance of stock for ac- quisi- tion... 16,714 315,235 -- -- -- -- 331,949 Purchase of trea- sury stock.. -- -- (1,326) -- -- -- (1,326) Common stock held in trust -- -- (4,457) -- -- (4,457) Exercise of stock options 95 252 -- -- -- -- 347 ------- -------- ------- -------- ------ -------- -------- Balance December 31, 1999. $48,049 $592,097 $(2,120) $(10,019) $ (436) $ 1,032 $628,603 ======= ======== ======= ======== ====== ======== ========
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended December 31, ----------------------- 1999 1998 ---------- ---------- (thousands of dollars) Cash flows from (used in) operating activities: Net earnings........................ $ 7,132 $ 5,374 Adjustments to reconcile net earnings to net cash flows from (used in) operating activities: Depreciation and amortization... 13,500 10,496 Deferred income taxes........... 1,385 1,095 Provision for bad debts......... (866) 1,068 Deferred interest expense....... 46 169 Other........................... 442 339 Changes in assets and liabili- ties, net of acquisitions: Accounts receivable, billed and unbilled.............. (82,108) (65,875) Accounts payable............ 32,352 28,263 Taxes and other liabilities. 11,581 12,799 Customer deposits........... 292 1,012 Deferred gas purchases...... 5,037 5,683 Inventories................. 817 2,117 Other....................... (2,647) 22 --------- --------- Net cash flows from (used in) operating activities.............. (13,037) 2,562 --------- --------- Cash flows used in investing activities: Additions to property, plant and equipment........................... (22,404) (20,730) Acquisition of operations, net of cash received....................... (35,831) -- Purchase of investment securities..... (10,634) -- Notes receivable...................... (4,000) -- Increase (decrease) in customer advances............................ (1) 555 Increase in deferred charges and credits............................. 2,615 3,751 Other................................. (37) (89) --------- --------- Net cash flows used in investing activities........................ (70,292) (16,513) --------- --------- Cash flows from (used in) financing activities: Issuance of long-term debt.......... 300,000 -- Issuance cost of debt............... (6,498) -- Repayment of debt and capital lease obligation........................ (137,413) (556) Premium on early extinguishment of acquired debt..................... (719) -- Net (payments) borrowings under revolving credit facility......... (71,200) 7,900 Purchase of treasury stock.......... (1,326) -- Increase in cash overdrafts......... -- 6,516 Other............................... (111) 91 --------- --------- Net cash flows from financing activities...................... 82,733 13,951 --------- --------- Decrease in cash and cash equivalents... (596) -- Cash and cash equivalents at beginning of period............................. 596 -- --------- --------- Cash and cash equivalents at end of period................................ $ -- $ -- ========= ========= Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Interest........................ $ 5,763 $ 2,507 ========= ========= Income taxes.................... $ -- $ (1,034) ========= ========= See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended December 31, ----------------------- 1999 1998 ---------- ---------- (thousands of dollars) Cash flows from (used in) operating activities: Net earnings (loss)................. $ 1,032 $ (1,674) Adjustments to reconcile net earnings (loss) to net cash flows used in operating activities: Depreciation and amortization... 24,348 20,913 Deferred income taxes........... (230) (1,260) Provision for bad debts......... (346) 1,179 Deferred interest expense....... 79 364 Other........................... 797 712 Changes in assets and liabili- ties, net of acquisitions: Accounts receivable, billed and unbilled.............. (72,744) (49,185) Accounts payable............ 20,870 21,939 Taxes and other liabilities. (88) 275 Customer deposits........... 152 976 Deferred gas purchases...... (7,531) (7,844) Inventories................. (10,054) (10,273) Other....................... 9 668 --------- --------- Net cash flows used in operating activities........................ (43,706) (23,210) Cash flows used in investing activities: Additions to property, plant and equipment........................... (42,822) (34,965) Acquisition of operations, net of cash received....................... (35,831) -- Purchase of investment securities..... (12,047) -- Notes receivable...................... (4,000) -- Increase in customer advances......... 834 1,708 Increase (decrease) in deferred charges and credits................. (1,908) 1,095 Other................................. 421 1,751 --------- --------- Net cash flows used in investing activities........................ (95,353) (30,411) --------- --------- Cash flows from (used in) financing activities: Issuance of long-term debt.......... 300,000 -- Issuance cost of debt............... (6,498) -- Repayment of debt and capital lease obligation........................ (137,908) (1,039) Premium on early extinguishment of acquired debt..................... (719) -- Net (payments) borrowings under revolving credit facility......... (8,100) 48,403 Purchase of treasury stock.......... (1,326) -- Change in cash overdrafts........... (6,655) 6,231 Other............................... 265 26 --------- --------- Net cash flows from financing activities...................... 139,059 53,621 --------- --------- Change in cash and cash equivalents..... -- -- Cash and cash equivalents at beginning of period............................. -- -- --------- --------- Cash and cash equivalents at end of period................................ $ -- $ -- ========= ========= Supplemental disclosures of cash flow information: Cash paid (refunded) during the period for: Interest........................ $ 23,217 $ 17,779 ========= ========= Income taxes.................... $ -- $ (934) ========= ========= See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Ended December 31, ------------------------ 1999 1998 ---------- ---------- (thousands of dollars) Cash flows from operating activities: Net earnings......................... $ 13,151 $ 5,726 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization.... 45,291 40,203 Deferred income taxes............ 8,896 5,364 Provision for bad debts.......... 1,754 4,588 Deferred interest expense........ 334 (588) Write-off of regulatory assets... -- 8,163 Other............................ 1,089 1,614 Changes in assets and liabili- ties, net of acquisitions: Accounts receivable, billed and unbilled............... (23,771) 28,145 Accounts payable............. 4,159 (23,632) Taxes and other liabilities.. (1,603) (6,278) Customer deposits............ (828) 1,142 Deferred gas purchases....... 11,011 33,378 Inventories.................. (2,994) 1,410 Other........................ (132) 1,750 --------- --------- Net cash flows from operating activities....................... 56,357 100,985 --------- --------- Cash flows used in investing activities: Additions to property, plant and equipment........................ (81,004) (72,808) Acquisition of operations, net of cash received.................... (35,831) 7,247 Purchase of investment securities.. (19,047) -- Notes receivable................... (4,000) -- Increase in customer advances...... 1,265 3,014 Increase (decrease) in deferred charges and credits.............. (7,089) 3,059 Other.............................. (445) 3,829 --------- --------- Net cash flows used in investing activities..................... (146,151) (55,659) --------- --------- Cash flows from (used in) financing activities: Issuance of long-term debt......... 300,000 -- Issuance cost of debt.............. (6,498) -- Repayment of debt and capital lease obligation................. (157,706) (1,868) Premium on early extinguishment of acquired debt.................... (719) -- Net payments under revolving credit facility.................. (37,100) (43,797) Purchase of treasury stock......... (1,326) -- Change in cash overdrafts.......... (6,853) 731 Other.............................. (4) (392) --------- --------- Net cash flows from (used in) financing activities........... 89,794 (45,326) --------- --------- Change in cash and cash equivalents.... -- -- Cash and cash equivalents at beginning of period............................ -- -- --------- --------- Cash and cash equivalents at end of period............................... $ -- $ -- ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest......................... $ 50,477 $ 34,203 ========= ========= Income taxes..................... $ 2,118 $ 1,827 ========= ========= See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS These financial statements should be read in conjunction with the financial statements and notes thereto contained in Southern Union Company's (Southern Union and, together with its wholly- owned subsidiaries, the Company) Annual Report on Form 10-K for the fiscal year ended June 30, 1999. Certain prior period amounts have been reclassified to conform with the current period presentation. The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments (including both normal recurring as well as any non-recurring) necessary for a fair presentation of the results of operations for such periods. Because of the seasonal nature of the Company's operations, the results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. Also, as described below, the Company acquired Pennsylvania Enter- prises, Inc. on November 4, 1999. Accordingly, the income from the acquired operations are consolidated with the Company beginning on that date. Thus, the results of operations for the three-, six- and twelve-month periods ended December 31, 1999 are not indicative of results that would necessarily be achieved for a full year since the majority of the Company's operating margin is recorded during the winter heating season. For these reasons, the results of operations of the Company for the periods subse- quent to this acquisition are not comparable to those periods prior to the acquisition nor are the 1999 results of operations comparable with prior periods. ACQUISITIONS Pennsylvania Enterprises, Inc. - ------------------------------ On November 4, 1999, the Company acquired Pennsylvania Enter- prises, Inc. (hereafter referred to as the "Pennsylvania Opera- tions") in a transaction valued at approximately $500 million, including assumption of debt of approximately $150 million. The Company issued approximately 17 million shares of common stock and paid approximately $36 million in cash to complete the transaction. The Pennsylvania Operations are headquartered in Wilkes-Barre, Pennsylvania with natural gas distribution being its primary business. The principal operating division of the Pennsylvania Operations is the PG Energy division of the Company which serves more than 152,000 gas customers in northeastern and central Pennsylvania. Subsidiaries of the Company included in the Pennsylvania Operations include PG Energy Services Inc., Keystone Pipeline Services, Inc. (a wholly-owned subsidiary of PG Energy Services, Inc.), PEI Power Corporation, and Theta Land Corporation. PG Energy Services Inc. markets a diversified range of energy-related products and services under the name of PG Energy Power Plus and supplies propane under the name of PG Energy Propane. Keystone Pipeline Services, Inc. provides pipe- line and fiber optic cable construction, installation, mainte- nance, and rehabilitation services. PEI Power Corporation operates a cogeneration plant that generates steam and electricity for resale. Theta Land Corporation which provided land management and development services for more than 44,000 acres of land was sold for $12,150,000 subsequent to December 31, 1999. In accordance with generally accepted accounting princi- ples relative to business combinations, no gain or loss was recognized on this transaction. The Company funded the acquisition and related refinancings with the sale of $300,000,000 of 8.25% Senior Notes due 2029 completed on November 3, 1999 (8.25% Senior Notes). See Debt and Capital Lease. The assets of the Pennsylvania Operations have been included in the consolidated balance sheet of the Company at December 31, 1999 and income from the Pennsylvania Operations have been included in the statement of consolidated operations beginning November 4, 1999. The acquisition was accounted for using the purchase method. The additional purchase cost assigned to utility plant of approximately $257,290,000 reflects the excess of the purchase price over the historical book carrying value of the utility plant purchased. Amortization of the additional purchase cost assigned to utility plant is provided on a straight-line basis over forty years. Prior to the consummation of the acquisition, the Company pur- chased 358,500 shares of Pennsylvania Enterprises, Inc. stock for $11,887,000 during both the first and second quarter of the Com- pany's fiscal year 2000. As all necessary approvals for the merger had not been obtained, these purchases were treated as investment securities. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pro Forma Financial Information - ------------------------------- The following unaudited pro forma financial information for the six-month periods ended December 31, 1999 and 1998 is presented as though the following events had occurred at the beginning of the earliest period presented: (i) the acquisition of Pennsylvania Enterprises, Inc.; (ii) the sale of the 8.25% Senior Notes; and (iii) the refinancing of certain short-term and long- term debt at the time of acquisition. The pro forma financial information is not necessarily indicative of the results which would have actually been obtained had the acquisition of Pennsylvania Enterprises, Inc., the sale of senior notes or the refinancings been completed as of the assumed date for the periods presented or which may be obtained in the future. Six Months Ended December 31, ----------------------- 1999 1998 ---------- ---------- Operating revenues...................... $ 372,866 $ 339,651 Income (loss) before extraordinary item. (9,907) (6,657) Net earnings (loss) available for common stock.......................... (9,907) (6,657) Net earnings (loss) per common stock: Basic................................. (.21) (.14) Diluted............................... (.21) (.14) Other Acquisitions - ------------------ On December 1, 1999, Southern Union and Valley Resources, Inc. ("Valley Resources") (AMEX: VR) announced a definitive merger agreement. The agreement calls for Valley Resources to merge into Southern Union in a transaction valued at approximately $160 million, including the assumption of debt of approximately $30 million. If approved, each Valley Resources shareholder will receive $25.00 per Valley Resources share in cash. The merger will be accounted for using the purchase method. Valley Resources is a public utility holding company with natural gas distribution systems in northeastern and eastern Rhode Island serving a total of 66,000 customers. On November 15, 1999, Southern Union and Providence Energy Corpo- ration ("Providence Energy") (NYSE: PVY) announced a definitive merger agreement. The agreement calls for Providence Energy to merge into Southern Union in a transaction valued at approxi- mately $400 million, including the assumption of debt of approxi- mately $93 million. If approved, each Providence Energy shareholder will receive $42.50 per Providence Energy share in cash. The merger will be accounted for using the purchase method. Providence Energy distributes and markets natural gas, heating oil, and petroleum products and also markets electricity and energy services. Providence Energy serves approximately 181,000 customers principally in Rhode Island and Massachusetts. On October 5, 1999, Southern Union announced a definitive merger agreement with Fall River Gas Company ("Fall River") (AMEX: FAL) in a transaction valued at approximately $75 million, including the assumption of debt of approximately $20 million. If approved, each Fall River shareholder will receive Southern Union common stock and/or cash having a value of $23.50, subject to adjustment. At least half of the outstanding Fall River shares must be exchanged for Southern Union common stock. The merger will be accounted for using the purchase method. Fall River is a natural gas distribution company that serves nearly 48,000 custo- mers in the city of Fall River and the towns of Somerset, Swansea and Westport, all located in Southeastern Massachusetts. Southern Union anticipates having all necessary approvals for each of these mergers by September 2000. WRITE-OFF OF REGULATORY ASSETS During 1998, the Company was impacted by pre-tax non-cash write- offs totaling $8,163,000 of previously recorded regulatory assets. Pursuant to a 1989 Missouri Public Service Commission (MPSC) order, Missouri Gas Energy, a division of the Company, is engaged in a major gas safety program. In connection with this program, the MPSC SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS issued an accounting authority order in 1994 which authorized Missouri Gas Energy to defer carrying costs at a rate of 10.54%. The MPSC rate order of January 22, 1997, however, retroactively reduced the 10.54% carrying cost rate used since early 1994 to an Allowance for Funds Used During Construction (AFUDC) rate of approximately 6%. The Company filed an appeal of this portion of the rate order in the Missouri State Court of Appeals, Western District, and on August 18, 1998 was notified that the appeal was denied. This resulted in a one-time non-cash write-off of $5,942,000 by the Company of previously deferred costs in its fiscal year ended June 30, 1998. On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision to grant a rate increase which, among other things, disallowed certain previously recorded deferred costs associated with the rate filing, requiring an additional pre-tax non-cash write-off of $2,221,000. The Company recorded this charge to earnings in its fiscal year ended June 30, 1998. See Utility Regulation and Rates. EARNINGS PER SHARE Average shares outstanding for basic earnings per share were 41,365,566 and 31,121,780 for the three-month period ended December 31, 1999 and 1998, respectively; 36,145,598 and 31,110,226 for the six-month period ended December 31, 1999 and 1998, respectively; and 33,680,640 and 31,096,197 for the twelve- month period ended December 31, 1999 and 1998, respectively. Diluted earnings per share includes average shares outstanding as well as common stock equivalents from stock options and warrants. Common stock equivalents were 1,466,923 and 1,499,433 for the three-month periods ended December 31, 1999 and 1998, respec- tively; 1,450,765 and nil for the six-month period ended December 31, 1999 and 1998, respectively; and 1,455,984 and 1,291,449 for the twelve-month period ended December 31, 1999 and 1998, respectively. At December 31, 1999, 521,289 shares of common stock were held by various rabbi trusts for certain of the Company's benefit plans. UTILITY REGULATION AND RATES On October 18, 1999, Southern Union Gas, a division of the Com- pany, filed a $1,696,000 rate increase request for the El Paso service area with the City of El Paso. A decision on this rate case is expected by late February, 2000. On August 21, 1998, Missouri Gas Energy, a division of the Com- pany, was notified by the MPSC of its decision to grant a $13,300,000 annual increase to revenue effective on September 2, 1998, which is primarily earned volumetrically. The MPSC rate order reflected a 10.93% return on common equity. The rate order, however, disallowed certain previously recorded deferred costs requiring a non-cash write-off of $2,221,000. The Company recorded this charge to earnings in its fiscal year ended June 30, 1998. On December 8, 1998, the MPSC denied rehearing requests made by all parties other than Missouri Gas Energy and granted a portion of Missouri Gas Energy's rehearing request. The MPSC will conduct further proceedings to take additional evidence on those matters for which it granted Missouri Gas Energy a rehearing. If the MPSC adopts Missouri Gas Energy's positions on rehearing, then Missouri Gas Energy would be authorized an additional $2,200,000 of base revenues increasing the $13,300,000 initially authorized in its August 21, 1998 order to $15,500,000. The MPSC's orders are subject to judicial review and although certain parties have argued for a reduction in Missouri Gas Energy's authorized base revenue increase on judicial review, Missouri Gas Energy expects such arguments to be unsuccessful. On April 13, 1998, Southern Union Gas had also filed a $2,228,000 request for a rate increase from the city of El Paso, a request the city subsequently denied. On April 21, 1998, the city council of El Paso voted to reduce the Company's rates by $1,570,000 annually and to order a one-time cost of gas refund of $475,000. On May 21, 1998, Southern Union Gas filed with the Railroad Commission of Texas (RRC) an appeal of the city of El Paso's actions to reduce the Company's rates and require a one- time cost of gas refund. On December 21, 1998, the RRC issued its order implementing approximately a $1,000,000 one-time cost of gas refund and a $99,000 base rate reduction. The cost of gas refund was completed in February 1999. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS PREFERRED SECURITIES OF SUBSIDIARY TRUST On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust Originated Preferred Securities (Pre- ferred Securities). In connection with the Subsidiary Trust's issuance of the Preferred Securities and the related purchase by Southern Union of all of the Subsidiary Trust's common securities (Common Securities), Southern Union issued to the Subsidiary Trust $103,092,800 principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025 (Subordinated Notes). The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest and other payment dates on the Subordinated Notes correspond to the distribution and other payment dates on the Preferred Securities and the Common Securities. Under certain circumstances, the Subordinated Notes may be distributed to holders of the Preferred Securities and holders of the Common Securities in liquidation of the Subsidiary Trust. The Subordi- nated Notes are redeemable at the option of the Company on or after May 17, 2000, at a redemption price of $25 per Subordinated Note plus accrued and unpaid interest. The Preferred Securities and the Common Securities will be redeemed on a pro rata basis to the same extent as the Subordinated Notes are repaid, at $25 per Preferred Security and Common Security plus accumulated and unpaid distributions. Southern Union's obligations under the Subordinated Notes and related agreements, taken together, constitute a full and unconditional guarantee by Southern Union of payments due on the Preferred Securities. As of December 31, 1999 and 1998, 4,000,000 shares of Preferred Securities were outstanding. DEBT AND CAPITAL LEASE December 31, June 30, 1999 1999 ------------ ---------- (thousands of dollars) 7.60% Senior Notes due 2024............ $ 364,515 $ 364,515 8.25% Senior Notes due 2029............ 300,000 -- 8.375% First Mortgage bonds, due 2002.. 30,000 -- 9.34% First Mortgage bonds, due 2019... 15,000 -- Capital lease and other................ 27,334 28,482 ========== ========== Total long-term debt and capital lease. $ 736,849 $ 392,997 ========== ========== On November 3, 1999, the Company completed the sale of $300,000,000 of 8.25% Senior Notes due 2029. The net proceeds from the sale of these senior notes were used to: (i) fund the acquisition of Pennsylvania Enterprises, Inc.; (ii) repay approximately $109,900,000 of borrowings under the revolving credit facility, and (iii) repay approximately $136,000,000 of debt assumed in the acquisition. See Management's Discussion and Analysis of Financial Condition and Results of Operations -- Financial Condition. Credit Facilities The Company has availability under two - ----------------- revolving credit facilities (Revolving Credit Facilities) under- written by a syndicate of banks. Of the Revolving Credit Facilities, $40,000,000 is available under a short-term facility which expires June 29, 2000, while $60,000,000 is available under a long-term facility expiring on June 30, 2002. The Company has additional availability under uncommitted line of credit facili- ties (Uncommitted Facilities) with various banks. Covenants under the Revolving Credit Facilities allow for up to $50,000,000 of borrowings under Uncommitted Facilities at any one time. Borrowings under the facilities are available for Southern Union's working capital, letter of credit requirements and other general corporate purposes. A balance of $12,900,000 was out- standing under the facilities at December 31, 1999. Capital Lease The Company completed the installation of an - ------------- Automated Meter Reading (AMR) system at Missouri Gas Energy during fiscal year 1999. The installation of the AMR system involved an investment of approximately $30,000,000 which is accounted for as a capital lease obligation. As of December 31, 1999, the capital lease SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS obligation outstanding was $25,863,000 with a fixed rate of 5.79%. This system has improved meter reading accuracy and pro- vided electronic accessibility to meters in residential custo- mers' basements, thereby assisting in the reduction of the number of estimated bills. COMMITMENTS AND CONTINGENCIES Environmental Southern Union and Western Resources entered into - ------------- an Environmental Liability Agreement at the closing of the Missouri Acquisition. Subject to the accuracy of certain repre- sentations made by Western Resources in the Missouri Asset Pur- chase Agreement, the Environmental Liability Agreement provides for a tiered approach to the allocation of substantially all liabilities under environmental laws that may exist or arise with respect to Missouri Gas Energy. At the present time and based upon information available to management, the Company believes that the costs of any remediation efforts that may be required for these sites for which it may ultimately have responsibility will not exceed the aggregate amount subject to substantial sharing by Western Resources. In a letter dated May 10, 1999, the Missouri Department of Natural Resources ("MDNR") sent notice of a planned site inspec- tion/removal site evaluation of the Kansas City Coal Gas Former Manufactured Gas Plant ("FMGP") site. This site (comprised of two FMGP operations previously owned by two separate companies) is located at East First Street and Campbell in Kansas City, Missouri and is owned by Missouri Gas Energy. A 1988 investiga- tion of the site performed by an Environmental Protection Agency ("EPA") contractor determined that further remedial assessment was not required under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986. The MDNR has stated that the reassessment of the Kansas City coal gas site is part of a statewide effort to identify, evaluate, and prioritize the potential hazards posed by all of Missouri's FMGP sites. During July 1999, the Company sent applications to MDNR submitting the two sites to the agency's Voluntary Cleanup Pro- gram ("VCP"). The sites were accepted into the VCP on August 2, 1999. After receiving MDNR's approval of environmental assessment workplans, the Company performed environmental assessments of the sites. The Company is currently preparing environmental assess- ment reports that will be submitted to MDNR in the Spring of 2000. The Company received a letter dated December 16, 1999 from MDNR notifying the Company of a Pre-CERCLIS Site Screening (SS) investigation of a former manufactured gas plant located at Pacific Avenue & South River Boulevard in Independence, Missouri. The Company has contacted the MDNR to inform the state that, as this property is not owned by the Company, it cannot grant access to the property for MDNR's investigation. In addition to the various Missouri Gas Energy sites described above, the Company is investigating the possibility that the Company or predecessor companies may have been associated with Manufactured Gas Plant (MGP) sites in other of its former service territories, principally in Arizona and New Mexico, and present service territories in Texas. At the present time, the Company is aware of certain plant sites in some of these areas and is investigating those and certain other locations. While the Company's evaluation of these Texas, Arizona and New Mexico MGP sites is in its preliminary stages, it is likely that some compliance costs may be identified and become subject to reasonable quantification. To the extent that such potential costs are quantified, the Company expects to provide any appro- priate accruals and seek recovery for such remediation costs through all appropriate means, including insurance and regulatory relief. Although significant charges to earnings could be required prior to rate recovery, management does not believe that environmental expenditures for such FMGP and MGP sites will have a material adverse effect on the Company's financial position, results of operations or cash flows. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Southwest Gas/ONEOK On February 1, 1999, Southern Union sub- - ------------------- mitted a proposal to the Board of Directors of Southwest Gas Corporation (Southwest) to acquire all of Southwest's out- standing common stock for $32.00 per share. Southwest then had a pending merger agreement with ONEOK, Inc. (ONEOK) at $28.50 per share. On February 22, 1999, Southern Union and Southwest both publicly announced Southern Union's proposal, after the Southwest Board of Directors determined that Southern Union's proposal was a Superior Proposal (as defined in the Southwest merger agreement with ONEOK). At that time Southern Union entered into a Confi- dentiality and Standstill Agreement with Southwest at Southwest's insistence. On April 25, 1999, Southwest's Board of Directors rejected Southern Union's $32.00 per share offer and accepted an amended offer of $30.00 per share from ONEOK. On April 27, 1999, Southern Union increased its offer to $33.50 per share and agreed to pay interest which, together with dividends, would provide Southwest shareholders with a 6% annual rate of return on its $33.50 offer, commencing February 15, 2000, until closing. Southern Union's revised proposal was also rejected by Southwest's Board of Directors. There are three lawsuits pending in three federal district courts - -- in Arizona, Nevada and Oklahoma -- that relate to activities surrounding Southern Union's efforts to acquire Southwest. In addition, there is before the U. S. Court of Appeals for the Tenth Circuit, an appeal by Southern Union of a preliminary injunction entered by the Oklahoma federal district court. On October 11, 1999, Southern Union filed its first amended com- plaint in the Arizona action to include additional individual defendants and to incorporate additional facts required in the discovery process. On January 21, 2000, ONEOK terminated its agreement to merge with Southwest, and additionally filed an action against Southwest in federal district court in Oklahoma. On January 24, 2000, Southwest filed an action against ONEOK and Southern Union in federal district court in Arizona. Southern Union is vigorously pursuing its claims against Southwest, ONEOK, and certain individual defendants, and is also vigorously defending itself against certain claims by Southwest and ONEOK. The Company believes that the results of the above- noted Southwest Gas litigation will not have a materially adverse effect on the Company's financial condition. Regulatory In August 1998, a jury in Edinburg, Texas concluded - ---------- deliberations on the City of Edinburg's franchise fee lawsuit against PG&E Gas Transmission, Texas Corporation (formerly Valero Energy Corporation (Valero)) and a number of its subsidiaries, as well as former Valero subsidiary Rio Grande Valley Gas Company (RGV) and RGV's successor company, Southern Union Company. The case, based upon events that occurred between 1985-1987, centers on specific contractual language in the 1985 franchise agreement between RGV and the City of Edinburg. Southern Union purchased RGV from Valero in October 1993. The jury awarded the plaintiff damages, against all defendants under several largely overlapping but mutually exclusive claims, totaling approximately $13,000,000. The trial judge subsequently reduced the award to approximately $700,000 against Southern Union and $7,800,000 against Valero and Southern Union together. The Company is pur- suing reversal on appeal. The Company believes it will ulti- mately prevail, and that the outcome of this matter will not have a material adverse impact on the Company's results of operations, financial position or cash flows. Furthermore, the Company has not determined what impact, if any, this jury decision may have on other city franchises in Texas. Other Southern Union and its subsidiaries are parties to other - ----- legal proceedings that management considers to be normal actions to which an enterprise of its size and nature might be subject, and not to be material to the Company's overall business or financial condition, results of operations or cash flows. In December 1999, the Company advanced $4,000,000 and entered into a note agreement with an executive officer. Also in December 1999, the Company entered into an employment contract with an executive officer. The aggregate minimum commitment for future compensation under this employment contract is approxi- mately $6,400,000. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's core business is the distribution of natural gas as a public utility principally through four divisions: Southern Union Gas, Missouri Gas Energy (MGE), Atlantic Utilities, doing business as South Florida Natural Gas (SFNG), and effective as of November 4, 1999, PG Energy. In addition, subsidiaries of Southern Union have been established to support and expand natural gas sales and to capitalize on the Company's gas energy expertise. These subsidiaries operate natural gas pipeline sys- tems, market natural gas and electricity to end-users and distri- bute propane. By providing "one-stop shopping," the Company can serve its various customers' specific energy needs, which encom- pass substantially all of the natural gas distribution and sales businesses from natural gas sales to specialized energy con- sulting services. Certain subsidiaries own or hold interests in real estate and other assets, which are primarily used in the Company's utility business. Several of these business activities are subject to regulation by federal, state or local authorities where the Company operates. Thus, the Company's financial condition and results of operations have been and will continue to be dependent upon the receipt of adequate and timely adjustments in rates. In addition, the Com- pany's business is affected by seasonal weather impacts, competi- tive factors within the energy industry and economic development and residential growth in its service areas. The Company acquired Pennsylvania Enterprises, Inc. on November 4, 1999. Subsidiaries of the Company included in the Pennsylvania Operations include PG Energy Services Inc., Keystone Pipeline Services, Inc. (a wholly-owned subsidiary of PG Energy Services, Inc.), PEI Power Corporation, and Theta Land Corpora-tion. PG Energy Services Inc. markets a diversified range of energy-related products and services under the name of PG Energy Power Plus and supplies propane under the name of PG Energy Propane. Keystone Pipeline Services, Inc. provides pipe- line and fiber optic cable construction, installation, mainte- nance, and rehabilitation services. PEI Power Corporation operates a cogeneration plant that generates steam and electricity for resale. Theta Land Corporation which provided land management and development services for more than 44,000 acres of land was sold for $12,150,000 subsequent to December 31, 1999. In accordance with generally accepted accounting princi- ples relative to business combinations, no gain or loss was recognized on this transaction. Accordingly, the income from the acquired operations (hereto collectively referred to as the "Pennsylvania Operations") are consolidated with the Company beginning on that date. Thus, the results of operations for the three-, six- and twelve-month periods ended December 31, 1999 are not indicative of results that would necessarily be achieved for a full year since the majority of the Company's operating margin is recorded during the winter heating season. For these reasons, the results of operations of the Company for the periods subse- quent to this acquisition are not comparable to those periods prior to the acquisition nor are the 1999 results of operations comparable with prior periods. RESULTS OF OPERATIONS Three Months Ended December 31, 1999 and 1998 - --------------------------------------------- The Company recorded net earnings available for common stock of $7,132,000 for the three-month period ended December 31, 1999 an increase of 33% compared with net earnings of $5,374,000 for the same period in 1998. Earnings per diluted share were $.17 in 1999, compared to $.16 in 1998. Weighted average shares out- standing increased 33% in 1999 primarily due to the issuance of 16,714,000 shares of the Company's common stock on November 4, 1999 in connection with the acquisition of the Pennsylvania Operations. Operating revenues were $239,595,000 for the three-month period ended December 31, 1999, compared with operating revenues of $174,224,000 in 1998. Gas purchase and other energy costs for the three-month period ended December 31, 1999 were $145,113,000, compared with $103,938,000 in 1998. The Company's operating revenues are affected by the level of sales volumes and by the pass-through of increases or decreases in the Company's gas purchase costs through its purchased gas adjustment clauses. Additionally, revenues are affected by increases or decreases in gross receipts taxes (revenue-related taxes) which are levied on sales revenue as SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS collected from customers and remitted to the various taxing authorities. The increase in both operating revenues and gas purchase costs between periods was primarily due to an 15% increase in gas sales volume to 36,098 MMcf in 1999 from 31,299 MMcf in 1998 and by a 9% increase in the average cost of gas from $3.30 per Mcf in 1998 to $3.61 per Mcf in 1999. The acquisition of the Pennsylvania Operations contributed 5,754 MMcf of the increase while the remaining operations of the Company resulted in a gas sales volume decrease of 955 MMcf. These volume decreases were primarily the result of warmer than normal weather and the loss of certain marketing customers. Changes in the average cost of gas resulted from seasonal impacts on demands for natural gas and the ensuing competitive pricing within the industry. The Pennsylvania Operations contributed $56,476,000 to the overall increase in operating revenues and $35,919,000 in gas purchase and other energy costs. Weather for MGE's service territories was 78% of a 30-year measure for the three-month period ended December 31, 1999, com- pared with 83% in 1998. Southern Union Gas service territories experienced weather which was 85% of a 30-year measure in 1999, compared with 86% in 1998. About half of the customers served by Southern Union Gas are weather normalized. Weather in PG Energy service territories was 89% of a 30-year measure for the two- month period ended December 31, 1999. Net operating margin (operating margin less revenue-related taxes) increased $22,184,000 for the three-month period ended December 31, 1999 compared with the same period in 1998. Net operating margin increased due principally to the acquisition of the Pennsylvania Operations as previously discussed, which con- tributed $19,122,000 to net operating margin. Also contributing to the increase in net operating margin in 1999 was a one-time cost of gas expense during the three-month period ended December 31, 1998 of $1,000,000 associated with a cost of gas refund to the City of El Paso customers as authorized by the Railroad Commission of Texas and a charge for certain lost and unaccounted for gas in other Southern Union Gas service territories. Operating expenses, which include operating, maintenance and general expenses, depreciation and amortization, and taxes other than on income and revenues, were $52,328,000 for the three-month period ended December 31, 1999, an increase of $11,272,000, compared with $41,056,000 in 1998. An increase of $9,499,000 was the result of the acquisition of the Pennsylvania Operations. Also impacting operating expenses during the three-month period ended December 31, 1999 was an increase in costs associated with certain employee benefits and increases in property taxes. Interest expense was $13,299,000 for the three-month period ended December 31, 1999, compared with $9,142,000 in 1998. Interest expense increased in 1999 primarily due to the issuance of $300,000,000 of 8.25% Senior Notes on November 3, 1999, ("8.25% Senior Notes") which was used to extinguish $136,000,000 in existing Pennsylvania Enterprises, Inc. debt assumed at the time of the merger, and the assumption of $45,000,000 of Pennsylvania Enterprises, Inc. debt by the Company. See "Debt and Capital Lease" in the Notes to the Consolidated Financial Statements included herein. Other expense of $3,336,000 for the three-month period ended December 31, 1999 primarily consists of $4,000,000 of costs associated with unsuccessful acquisition activities and related litigation. This amount was offset by $442,000 in net rental income from Lavaca Realty Company ("Lavaca Realty"), the Com- pany's real estate subsidiary. Other expense of $162,000 for the three-month period ended December 31, 1998 primarily consisted of net expense of $169,000 related to the amortization and current deferral of interest and other expenses associated with the MGE Safety Program. The effective federal and state income tax rate was 40% and 35% for the three months ended December 31, 1999 and 1998, respec- tively. The increase in the effective federal and state income tax rate is a result of non-tax deductible amortization of addi- tional purchase cost associated with the purchase of Pennsylvania Enterprises, Inc. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Six Months Ended December 31, 1999 and 1998 - ------------------------------------------- The Company recorded net earnings available for common stock of $1,032,000 for the six-month period ended December 31, 1999 com- pared with a net loss of $1,674,000 for the same period in 1998. Net earnings per diluted share were $.03 in 1999 compared with a net loss per share of $.05 in 1998. Weighted average common shares increased 22% during the six-month period ended December 31, 1999 compared with 1998 due to the issuance of common stock for the acquisition of the Pennsylvania Operations, previously discussed. Operating revenues were $324,381,000 for the six-month period ended December 31, 1999, compared with operating revenues of $251,679,000 in 1998. Gas purchase and other energy costs for the six-month period ended December 31, 1999 were $184,390,000, compared with $138,613,000 in 1998. The increase in both operating revenues and gas purchase costs between periods was primarily impacted by an 11% increase in gas sales volume to 48,125 MMcf in 1999 from 43,450 MMcf in 1998. The acquisition of the Pennsylvania Operations, previously discussed, accounted for 5,754 MMcf of the increase. Additionally, operating revenues and gas purchase costs were affected by an 11% increase in the average cost of gas from $3.16 per Mcf in 1998 to $3.51 per Mcf in 1999, due to changes in average spot market gas prices. Also impacting operating revenues was a $13,300,000 annual increase to revenues granted to MGE, effective as of September 2, 1998. The effect of this rate order was marginal as it is earned volu- metrically and therefore was impacted by the warmer than normal weather in both 1998 and 1999. MGE's service territories experienced weather which was 80% of a 30-year measure for the six months ended December 31, 1999 com- pared with 81% in 1998. Weather for Southern Union Gas service territories was 85% of a 30-year measure for the six-month period ended December 31, 1999 and 1998. Net operating margin increased $24,386,000 for the six-month period ended December 31, 1999 compared with the same period in 1998. Net operating margin increased $19,122,000 due to increased gas sales volumes as a result of the acquisition of the Pennsylvania Operations, as previously discussed, and the effect of a $13,300,000 annual increase to revenues in the Missouri ser- vice territories granted by the MPSC effective as of September 2, 1998, also previously discussed. Also contributing to the increase in net operating margin was a one-time expense during the six-month period ended December 31, 1998 of $1,000,000 associated with a cost of gas refund to the City of El Paso customers and a charge during the same period for certain lost and unaccounted for gas, both previously discussed. Operating expenses were $92,065,000 for the six-month period ended December 31, 1999, an increase of $11,039,000, compared with $81,026,000 in 1998. The increase is primarily a result of the acquisition of the Pennsylvania Operations, as previously discussed. Also contributing to the increase was additional depreciation and amortization and property taxes as a result of including certain costs into rate base that had been previously deferred. Interest expense was $21,663,000 for the six-month period ended December 31, 1999, compared with $17,882,000 in 1998. The increase is primarily due to the issuance of the 8.25% Senior Notes, previously discussed, to extinguish $136,000,000 in existing Pennsylvania Enterprises, Inc. debt, and the assumption in that acquisition of $45,000,000 of debt by the Company. See "Debt and Capital Lease" in the Notes to the Financial Statements included herein. Other expense for the six-month period ended December 31, 1999 was $4,493,000 compared with other income of $563,000 in 1998. Other expense for the six-month period ended December 31, 1999 primarily consists of $5,250,000 of costs associated with unsuc- cessful acquisition activities and related litigation. This amount was offset by $664,000 in net rental income from Lavaca Realty. Other income for the six-month period ended December 31, 1998 included the receipt of $750,000 to assist in the promotion of gas usage in certain Southern Union Gas service territories and SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS $649,000 in net rental income from Lavaca Realty. This was partially offset by net expense of $364,000 related to the amortization and current deferral of interest and other expenses associated with the MGE Safety Program. The Company's consolidated federal and state effective income tax rate was 43% and 38% for the six months ended December 31, 1999 and 1998, respectively. The increase in the effective federal and state income tax rate is a result of non-tax deductible amortization of additional purchase cost associated with the purchase of Pennsylvania Enterprises, Inc. Twelve Months Ended December 31, 1999 and 1998 - ---------------------------------------------- The Company recorded net earnings available for common stock of $13,151,000 for the twelve-month period ended December 31, 1999, an increase of 130%, compared with net earnings of $5,726,000 in 1998. Earnings per diluted share were $.37 in 1999 compared with earnings per diluted share of $.18 in 1998. Weighted average common and common share equivalents increased 9% during the twelve-month period ended December 31, 1999 compared with 1998 due to the issuance of common stock in the acquisition of the Pennsylvania Operations, previously discussed. During fiscal year 1998, the Company was impacted by pre-tax non- cash write-offs totaling $8,163,000 of previously recorded regulatory assets. On August 18, 1998, the Missouri Court of Appeals denied the previously disclosed appeal by the Company of the MPSC's January 1997 Rate Order granted to MGE. Because of this decision, the Company recorded a one-time non-cash write-off of $5,942,000 of deferred costs recorded since 1994. On August 21, 1998, the MPSC also granted MGE a rate increase which, among other things, disallowed certain previously recorded deferred costs requiring an additional pre-tax non-cash write-off of $2,221,000. See "Write-Off of Regulatory Assets" and "Com- mitments and Contingencies" in the Notes to the Consolidated Financial Statements included herein. Operating revenues were $677,933,000 for the twelve-month period ended December 31, 1999, compared with operating revenues of $625,782,000 in 1998. Gas purchase and other energy costs for the twelve-month period ended December 31, 1999 were $388,078,000, compared with $367,917,000 in 1998. The increase in both operating revenues and gas purchase costs between periods was primarily the result of an increase in gas sales volume to 110,711 MMcf in 1999 from 109,139 MMcf in 1998. The increase in sales volumes was due to the acquisition of the Pennsylvania Operations, previously discussed, which was offset by a decrease in sales volumes in Texas due to significantly warmer weather during the twelve-month period ended December 31, 1999. Addi- tionally, operating revenues and gas purchase costs were affected by a slight increase in the average cost of gas from $3.34 per Mcf in 1998 to $3.36 per Mcf in 1999, due to increases in average spot market gas prices. Operating revenues were also impacted by a $13,300,000 annual increase to revenues granted to MGE, effective as of September 2, 1998. The effect of this rate increase has been marginal as it earns volumetrically and has also been impacted by the warmer than normal weather. MGE's service territories experienced weather which was 84% of a 30-year measure for the twelve months ended December 31, 1999 compared with 83% in 1998. Weather for Southern Union Gas ser- vice territories for the twelve-month period ended December 31, 1999 was 74% of a 30-year measure compared with 86% in 1998. About half of the customers served by Southern Union Gas are weather normalized. Net operating margin increased $30,353,000 for the twelve-month period ended December 31, 1999 compared with the same period in 1998. Net operating margin increased $19,122,000 due to increased gas sales volumes as a result of the acquisition of the Pennsylvania Operations and the $13,300,000 annual increase to revenues effective September 2, 1998, both previously discussed. Also contributing to the increase in net operating margin in 1999 was a one-time expense during the twelve-month period ended December 31, 1998 of $1,000,000 associated with a cost of gas refund to the City of El Paso customers and a charge during the same period for certain lost and unaccounted for gas, both previously discussed. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating expenses were $177,089,000 for the twelve-month period ended December 31, 1999, an increase of $12,253,000, compared with $164,836,000 in 1998. The increase is primarily a result of the acquisition of the Pennsylvania Operations and an increase in depreciation and amortization and property taxes as a result of including certain costs into rate base that had been previously deferred. Interest expense was $39,779,000 for the twelve-month period ended December 31, 1999, compared with $35,192,000 in 1998. The increase is primarily due to the issuance of the of 8.25% Senior Notes, previously discussed which was used to extinguish $136,000,000 in existing Pennsylvania Enterprises, Inc. debt, and the assumption in that acquisition of $45,000,000 of debt by the Company. See "Debt and Capital Lease" in the Notes to the Con- solidated Financial Statements included herein. Other expense for the twelve-month period ended December 31, 1999 was $6,870,000 compared with other income of $2,273,000 in 1998. Other expense for the twelve-month period ended December 31, 1999 primarily consists of $9,090,000 of costs associated with unsuc- cessful acquisition activities and related litigation. This amount was partially offset by $1,466,000 in net rental income of Lavaca Realty. Other income for the twelve-month period ended December 31, 1998 included $1,281,000 in net rental income of Lavaca Realty and $587,000 in deferral of interest and other expenses associated with the MGE Safety Program. For the twelve-month period ended December 31, 1999, federal and state income taxes increased $5,108,000 over the same period in 1998 due to an increase in pre-tax earnings as discussed above. The Company's consolidated federal and state effective income tax rate was 40% for the twelve months ended December 31, 1999 and 1998. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain information regarding the Company's gas utility operations for the three- and twelve-month periods ended December 31, 1999 and 1998: Three Months Twelve Months Ended December 31, Ended December 31, 1999 1998 1999 1998 ---------- ---------- ---------- ---------- Average number of gas sales customers served: Residential....... 1,002,663 894,546 926,997 889,778 Commercial........ 98,717 86,851 91,751 88,238 Industrial and irrigation....... 686 557 604 565 Public authorities and other........ 3,072 2,852 2,915 2,830 Pipeline and marketing........ 229 232 235 231 ---------- ---------- ---------- ---------- Total average customers served......... 1,105,367 985,038 1,022,502 981,642 ========== ========== ========== ========== Gas sales in millions of cubic feet (MMcf) Residential....... 15,248 11,708 60,756 58,681 Commercial........ 6,483 5,263 26,871 26,039 Industrial and irrigation....... 343 299 1,412 1,631 Public authorities and other........ 720 576 2,431 2,526 Pipeline and marketing........ 4,334 5,302 17,518 19,644 ---------- ---------- ---------- ---------- Gas sales billed......... 27,128 23,148 108,988 108,521 Net change in unbilled gas sales............ 8,970 8,151 1,723 618 ---------- ---------- ---------- ---------- Total gas sales. 36,098 31,299 110,711 109,139 ========== ========== ========== ========== Gas sales revenues (thousands of dollars): Residential....... $ 107,949 $ 79,131 $ 397,902 $ 378,532 Commercial........ 38,619 29,373 151,662 145,815 Industrial and irrigation....... 1,963 1,416 7,022 7,369 Public authorities and other........ 3,315 2,163 9,905 9,804 Pipeline and marketing........ 10,944 11,385 42,778 46,507 ---------- ---------- ---------- ---------- Gas revenues billed......... 162,790 123,468 609,269 588,027 Net change in unbilled gas sales revenues... 48,586 41,210 13,082 2,233 ---------- ---------- ---------- ---------- Total gas sales revenues....... $ 211,376 $ 164,678 $ 622,351 $ 590,260 ========== ========== ========== ========== Gas sales margin (thousands of dollars)........... $ 70,087 $ 52,238 $ 216,435 $ 192,777 ========== ========== ========== ========== Gas sales revenue per thousand cubic feet (Mcf) billed: Residential....... $ 7.080 $ 6.759 $ 6.549 $ 6.451 Commercial........ 5.957 5.581 5.644 5.600 Industrial and irrigation....... 5.728 4.739 4.972 4.518 Public authorities and other........ 4.608 3.756 4.074 3.882 Pipeline and marketing........ 2.525 2.148 2.442 2.368 Weather: Degree days: Southern Union Gas service territories...... 714 719 1,573 1,865 Missouri Gas Energy service territories...... 1,510 1,614 4,418 4,377 PG Energy service territories...... 1,595 -- 1,595 -- 30-year measure: Southern Union Gas service territories...... 86% 86% 74% 86% Missouri Gas Energy service territories...... 78% 83% 84% 83% PG Energy service territories...... 89% -- 89% -- Gas transported in millions of cubic feet (MMcf)........ 19,516 14,423 61,013 53,844 Gas transportation revenues (thousands of dollars)........ $ 8,685 $ 5,854 $ 25,896 $ 19,834 - ------------------- Information for PG Energy is included for the two months subse- quent to the date of the acquisition, November 4, 1999. The above information does not include the Company's 43% equity ownership in a natural gas distribution company serving 20,000 customers in Piedras Negras, Mexico. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The Company's gas utility operations are seasonal in nature with a significant percentage of the annual revenues and earnings occurring in the traditional heating-load months. This sea- sonality results in a high level of cash flow needs immediately preceding the peak winter heating season months, resulting from the required payments to natural gas suppliers in advance of the receipt of cash payments from the Company's customers. The Com- pany has historically used internally generated funds and its revolving loan and credit facilities to provide funding for its seasonal working capital, continuing construction and maintenance programs and operational requirements. Concurrent with the closing of the Pennsylvania Enterprises, Inc. merger on November 4, 1999, the Company issued $300,000,000 of 8.25% Senior Notes due 2029 which were used to: (i) fund the cash portion of the consideration to be paid to the Pennsylvania Enterprises, Inc. shareholders; (ii) refinance and repay certain debt of Pennsylvania Enterprises, Inc.; and (iii) repay out- standing borrowings under the Company's various credit facilities. These senior notes are senior unsecured obligations and will rank equally in right of payment with each other and with the Company's other unsecured and unsubordinated obliga- tions, including the 7.60% Senior Notes due 2024. This offering was the principal source of funds during the three-month period ended December 31, 1999. Specific uses of funds during this period included: payments of $35,831,000 for the acquisition of Pennsylvania Enterprises, Inc.; $137,413,000 for the retirement of long-term debt of Pennsylvania Enterprises, Inc. in connection with that acquisition; $71,200,000 for the pay-down of the Company's Revolving Credit Facilities (see below); $10,634,000 for the purchase of investment securities; $6,498,000 in debt issuance costs on the 8.25% Senior Notes; and $22,404,000 for on- going property, plant and equipment additions as well as seasonal working capital needs of the Company. The principal source of funds during the six-month period ended December 31, 1999 was also the $300,000,000 received from the issuance of the 8.25% Senior Notes, as noted above. The princi- pal uses of funds during this period included: payments of $35,831,000 for the acquisition of Pennsylvania Enterprises, Inc.; $137,908,000 for the retirement of long-term debt which primarily consists of debt acquired in the Pennsylvania Enterprises, Inc. acquisition; $8,100,000 for the pay-down of the Company's Revolving Credit Facilities; $12,047,000 for the purchase of investment securities; $6,498,000 in debt issuance costs on the 8.25% Senior Notes; and $42,822,000 for on-going property, plant and equipment additions as well as seasonal working capital needs of the Company. The effective interest rate under the Company's current debt structure is 8.05% (including interest and the amortization of debt issuance costs and redemption premiums on refinanced debt). The Company has availability under two revolving credit facilities (the "Revolving Credit Facilities") underwritten by a syndicate of banks. Of the Revolving Credit Facilities, $40,000,000 is a short-term facility which expires June 29, 2000, while $60,000,000 is a long-term facility which expires June 30, 2002. The Company has additional availability under uncommitted line of credit facilities (Uncommitted Facilities) with various banks. Covenants under the Revolving Credit Facilities allow for up to $50,000,000 of borrowings under Uncommitted Facilities at any one time. Borrowings under the facilities are available for the Company's working capital, letter of credit requirements and other general corporate purposes. A balance of $12,900,000 was outstanding under the facilities at December 31, 1999. The Company retains its borrowing availability under its Revolving Credit Facilities, as discussed above. Borrowings under these credit facilities will continue to be used, as needed, to provide funding for the seasonal working capital needs of the Company. Internally-generated funds from operations will be used principally for the Company's ongoing construction and maintenance programs and operational needs and may also be used periodically to reduce outstanding debt. From time to time, the Company may also repurchase shares of its common stock in the open SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS market in order to minimize any adverse effect from potential selling activity that may result from the increase in its public float of its common stock subsequent to the Pennsylvania Enterprises, Inc. merger. YEAR 2000 The Company did not experience any significant malfunctions or errors in its operating or business systems when the date changed from 1999 to 2000. Based on operations since January 1, 2000, the Company does not expect any significant impact to its ongoing business as a result of the Year 2000 problem. The Year 2000 problem is the inability of computer application software pro- grams to distinguish between the year 1900 and 2000 due to a commonly-used programming convention. Unless such programs were modified or replaced prior to 2000, calculations and interpreta- tions based on date-based arithmetic or logical operations performed by such programs may have been incorrect. It is possible that the full impact of the date change has not been fully recognized. For example, it is possible that Year 2000 or similar issues such as leap year-related problems may occur with billing, payroll, or financial closings at month, quarterly or year-end. The Company believes that any such problems are likely to be minor and correctable. In addition, the Company could still be negatively affected if its customers or suppliers are adversely affected by the Year 2000 or similar issues. The Company currently is not aware of any significant Year 2000 or similar problems that have arisen for its customers and suppliers. The Company incurred costs of approximately $2,125,000 through December 31, 1999 to complete this project. The Company also expects to spend approximately $1,500,000 in equipment leasing expenses that will be incurred over the life of the equipment. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in Item 3 updates, and should be read in conjunction with, information set forth in Part II, Item 7 in the Company's Annual Report on Form 10-K for the year ended June 30, 1999, in addition to the interim consolidated financial statements, accompanying notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q. There are no material changes in market risks faced by the Company from those reported in the Company's Annual Report on Form 10-K for the year ended June 30, 1999. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Management's Discussion and Analysis of Financial Condition and Results of Operations and other sections of this Form 10-Q contain forward-looking statements that are based on current expectations, estimates and projections about the industry in which the Company operates, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are outside the Company's control. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward- looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to put undue reliance on such forward-looking statements. Stockholders may review the Company's reports filed in the future with the Securities and Exchange Commission for more current descriptions of developments that could cause actual results to differ materially from such forward-looking statements. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Factors that could cause or contribute to actual results dif- fering materially from such forward-looking statements include the following: cost of gas; gas sales volumes; weather condi- tions in the Company's service territories; the achievement of operating efficiencies and the purchases and implementation of new technologies for attaining such efficiencies; impact of rela- tions with labor unions of bargaining-unit employees; the receipt of timely and adequate rate relief; the outcome of pending and future litigation; governmental regulations and proceedings affecting or involving the Company; and the nature and impact of any extraordinary transactions such as any acquisition or dives- titure of a business unit or any assets. These are representa- tive of the factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions, and general economic conditions, including interest rate fluctua- tions, federal, state and local laws and regulations affecting the retail gas industry or the energy industry generally, and other factors. SOUTHERN UNION COMPANY AND SUBSIDIARIES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN UNION COMPANY ---------------------- (Registrant) Date February 14, 2000 By RONALD J. ENDRES ------------------- ---------------- Ronald J. Endres Executive Vice President and Chief Financial Officer Date February 14, 2000 By DAVID J. KVAPIL ------------------- --------------- David J. Kvapil Senior Vice President and Corporate Controller (Principal Accounting Officer) EX-3.A 2 EXHIBIT 3(a) CERTIFICATE OF AMENDMENT OF RESTATED CERTIFICATE OF INCORPORATION OF SOUTHERN UNION COMPANY It is hereby certified that: 1. The name of the corporation (the "Corporation") is Southern Union Company. 2. The restated certificate of incorporation of the Corporation is hereby amended by striking out Article FOURTH thereof and by substituting in lieu of said Article the following new Article FOURTH: "FOURTH: The total number of shares of all classes of stock which the Corporation shall have authority to issue shall be 206,000,000, 6,000,000 shares of which shall be Preferred Stock without par value (the "Preferred Stock"), and 200,000,000 shares of which shall be com- mon stock, par value $1.00 per share (the "Common Stock"). The Board of Directors is authorized, subject to limitations prescribed by law and the provisions of this Article FOURTH, to prescribe by resolution or resolutions for the issuance of the shares of Preferred Stock in one or more series, and by filing a certificate pursuant to the applicable law of the State of Delaware, to establish from time to time the number of shares to be included in each such series, and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or restrictions thereof. The authority of the Board of Directors with respect to each series shall include, but not be limited to, determination of the following: (a) The number of shares constituting that series and the distinctive designation of each such series; (b) The dividend rate on the shares of that series, whether dividends shall be cumulative, and, if so, from which date or dates, and the relative rights of priority, if any, of payment of dividends on shares of each series; (c) Whether each series shall have voting rights, in addi- tion to the voting rights provided by law, and, if so, the terms of such voting rights; (d) Whether each series shall have conversion privileges, and, if so, the terms and conditions of such conversion, including provision for adjustment of the conversion rate in such events as the Board of Directors shall determine; (e) Whether or not the shares of each series shall be redeemable, and, if so, the terms and conditions of such redemption, including the date or date upon or after which they shall be redeemable, and the amount per share payable in case of redemption, which amount may vary under different conditions and at different redemption dates; (f) Whether each series shall have a sinking fund for the redemption or purchase of shares of each such series, and, if so, the terms and amount of such sinking fund; (g) The rights of the shares of each series in the event of voluntary or involuntary liquidation, dissolution or winding up of the Corporation, and the relative rights of priority, if any, of payment of shares of each series; and (h) Any other relative rights, preferences and limitations of each series." 3. The restated certificate of incorporation of the Corporation is hereby further amended by striking out Article EIGHTH thereof and by substituting in lieu of said Article the fol- lowing new Article EIGHTH: "EIGHTH: The following additional provisions are inserted for the management of the business and for the conduct of the affairs of the Corporation and for the creation, definition, limitation and regulation of the powers of the Corporation, the directors and stockholders: Subject to the rights of the holders of the Preferred Stock to elect additional directors under specified circumstances, the number of directors which shall constitute the whole Board of Directors shall be not less than five (5) nor more than fifteen (15). Within such limits, the number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exist any vacancies in previously authorized directorships at the time any such resolu- tion is presented to the Board of Directors for adoption). At the special meeting of stockholders at which this paragraph is adopted, the directors shall be divided into three classes, designated Class I, Class II and Class III (which at all times shall be as nearly equal in number as possible), with the term of office of Class I directors to expire at the 1985 annual meeting of stockholders, the term of office of Class II directors to expire at the 1986 annual meeting of stockholders, and the term of office of Class III directors to expire at the 1987 annual meeting of stockholders. At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders after their election. Subject to the rights of the holders of any class or series of capital stock of the Corporation entitled to vote generally in the election of directors (hereinafter referred to as the "Voting Stock") then outstanding, any director, or the entire Board of Directors, may be removed from office at any time, but only for cause and only by the affirmative vote of the holders of a majority of the voting power of all of the then outstanding shares of the Voting Stock, voting together as a single class. Except as may otherwise be provided by law, cause for removal shall be construed to exist only if the director whose removal is proposed has been convicted of a felony by a court of competent jurisdiction and such conviction is no longer subject to direct appeal, or has been adjudged by a court of competent jurisdiction to be liable for negligence, or misconduct, in the performance of his duty to the Corporation in a matter of substantial importance to the Corporation, and such adjudication is no longer subject to direct appeal. Subject to the rights of the holders of any class or series of the Voting Stock then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires. No decrease in the number of authorized directors constituting the entire Board of Directors shall shorten the term of any incumbent director. Notwithstanding the foregoing, whenever the holders of the Pre- ferred Stock shall have the right to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies, and other features of such directorships shall be governed by the terms of this Restated Certificate of Incorporation applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Article unless expressly provided by such terms. Subject to any voting rights created for the benefit of any series of Preferred Stock by any resolution or resolutions of the Board of Directors providing for the issue of Preferred Stock adopted as authorized in Article FOURTH, the Board of Directors shall also have power, without the assent or vote of the stock- holders, from time to time: (1) to fix the times for the declaration and payment of dividends; (2) to fix and vary the amount to be reserved as working capital or for any other proper purpose or purposes; (3) to authorize and cause to be executed mortgages and liens upon all the property and assets of the Corpora- tion, or any part thereof, whether at the time owned or thereafter acquired, upon such terms and conditions as it may determine; (4) to determine the use and disposition of any surplus or net assets in excess of capital; (5) to make and alter by-laws of the Corporation, subject to the right of the stockholders to make and alter by-laws of the Corporation; provided, however, that the direc- tors shall not modify or repeal any by-law hereafter made by the stockholders; (6) to pay for, in cash or property, any property or rights acquired by the Corporation or to authorize the issue and exchange therefor of shares of the capital stock of the Corporation or bonds, debentures, notes or other obligations or other securities of the Corporation, whether secured or unsecured; and (7) to borrow or otherwise raise moneys, without limit to amount, for any of the purposes of the Corporation; to authorize the issue of bonds, debentures, notes or other obligations of the Corporation, of any nature or in any manner, secured or unsecured, for moneys so borrowed; to authorize the creation of mortgages upon, or the pledge or conveyance or assignment in trust of, the whole or any part of the property and assets of the Corporation, real or personal, whether at the time owned or there- after acquired, including contracts, choses in action and other rights, to secure the payment of any bonds, debentures or notes or other obligations of the Corpora- tion and the interest thereon; and to authorize the sale or pledge or other disposition of the bonds, debentures, notes or other obligations of the Corporation for its corporate purposes. The Board of Directors shall also have power, with the consent in writing of the holders of a majority of the stock issued and out- standing having voting power, or upon the affirmative vote of the holders of a majority of the stock issued and outstanding having voting power, to sell, lease, or exchange all of the property and assets of the Corporation, including its goodwill and its corpo- rate franchises, upon such terms and conditions as the Board of Directors deems expedient and for the best interests of the Corporation; subject, however, to any voting rights created for the benefit of any series of Preferred Stock by any resolution or resolutions of the Board of Directors providing for the issue of Preferred Stock adopted as in Article FOURTH hereof authorized. In addition to the powers and authorities hereinbefore or by statute expressly conferred upon them, the directors are hereby empowered to exercise all such powers and do all such acts and things as may be exercised or done by the Corporation, subject, nevertheless, to the provisions of the statutes of Delaware, of the Restated Certificate of Incorporation, and amendments thereto, and other contracts of the Corporation, and by-laws." 4. The amendments of the Restated Certificate of Incorporation herein certified have been duly adopted in accordance with the provisions of Sections 141 and 242 of the General Corpo- ration Law of the State of Delaware. IN WITNESS WHEREOF, Southern Union Company has, on this 26th day of October, 1999, caused this certificate to be signed by Peter H. Kelley, its President, and attested by Dennis K. Morgan, its Secretary, and the corporate seal of Southern Union Company to be affixed to this certificate by the said Dennis K. Morgan. Southern Union Company By: PETER H. KELLEY ----------------- Peter H. Kelley President ATTEST: By: DENNIS K. MORGAN ------------------ Dennis K. Morgan Secretary EX-3.B 3 EXHIBIT 3(b) BYLAWS OF SOUTHERN UNION COMPANY (as amended through October 26, 1999) ARTICLE I - STOCKHOLDERS ------------ Section 1. Annual Meetings. Annual meetings of stockholders for --------------- the election of directors and the transaction of such other busi- ness as may properly be brought before the meeting shall be held on the second Tuesday in November at such time and place or on such other date and time, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors and stated in the notice of the meeting. Section 2. Special Meetings. Special meetings of stockholders ---------------- of the Company may be called only by the Board of Directors pur- suant to a resolution adopted by a majority of the total number of authorized directors (whether or not there exists any vacancies in previously authorized directorships at the time any such resolution is presented to the Board for adoption) or by the holders of not less than a majority of the voting power of all of the then-outstanding shares of any class or series of capital stock of the Company entitled to vote generally in the election of directors. Any such special meeting shall be held at such time and such place, either within or without the State of Delaware, as designated in the call of such meeting. The business to be transacted at any such meeting shall be limited to that stated in the call and notice thereof. Section 3. Notice of Meetings. At least ten (10) days before ------------------ each meeting of stockholders, other than an adjourned meeting, written or printed notice, stating the time and place of the meeting and generally the nature of the business to be con- sidered, shall be given by the Secretary to each stockholder entitled to vote at the meeting, at such stockholder's last known address as shown by the Company's stock records. Section 4. Record Date. The Board of Directors shall fix a ----------- record date for determination of stockholders entitled to receive notice of and vote at each stockholders' meeting, which such date shall not be more than sixty (60) days or less than ten (10) days before the date of the meeting; provided, however, that when a meeting is adjourned to another time, no new record date need be fixed for the adjourned meeting, unless the adjournment is for more than thirty (30) days. In the absence of any action by the Board of Directors, the date upon which the notice is mailed shall be the record date. Section 5. Quorum. Except as provided in the next section, a ------ quorum for the transaction of business at any duly called meeting of stockholders shall be any number of stockholders, present in person or represented by proxy at the meeting, who together are the holders of at least a majority of the shares of issued and outstanding stock the holders of which are entitled to vote at the meeting. The stockholders present at a duly organized meeting may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. Section 6. Adjournment of Meetings. If any meeting of stock- ----------------------- holders cannot be organized for failure of a quorum to be present as provided above, the meeting may, after the lapse of at least half an hour, be adjourned form time to time by the affirmative vote of the holders of a majority of the stock having voting power who are present in person or represented by proxy, and unless adjournment is for more than thirty (30) days or a new record date is fixed, no notice shall be required for any such adjourned meeting. If, however, notice of such adjourned meeting is sent to the stockholders entitled to receive the same at least ten (10) days in advance thereof, such notice stating (a) the purpose of the meeting, (b) that the previous meeting could not be organized for lack of a quorum, and (c) that under the provi- sions of this section, it is proposed to hold the adjourned meeting with a quorum of those present, though representing less than a majority of the stock, then any number of stockholders entitled to vote who are present in person or represented by proxy shall constitute a quorum at such adjourned meeting for the transaction of business, unless the number of stockholders present constitutes less than one-third (1/3) of the shares entitled to vote at the meeting. Section 7. Voting. ------ (a) Election of Directors. In voting for election of direc- tors, the voting shall be by written ballot, each stock- holder shall be entitled to as many votes as shall equal the number of votes which (except for this provision as to cumulative voting) such stockholder would be entitled to cast for election of directors with respect to the shares of stock held by the stockholder multiplied by the number of directors to be elected by the stockholder, and the stockholder may cast all of such votes for a single direc- tor or may distribute them among the number of directors to be voted for or for any two or more of them as the stockholder may see fit. Any stockholder who intends to cumulate votes shall give written notice of such intention to the Secretary of the Company no later than ten days after the date on which notice of such meeting was first sent to stockholders. The number of nominees for election as director up to the number of directors to be elected receiving the greatest number of votes shall be those elected. (b) Other Matters. At all meetings of stockholders all ques- tions except the election of directors, and except as otherwise expressly provided by statute or the Certificate of Incorporation, shall be determined by the vote of the holders of a majority of the stock having voting power represented at the meeting in person or by proxy. The manner of voting (by ballot, voice vote or showing of hands) shall be at the discretion of the chairman of the meeting, unless otherwise provided by statute, the Cer- tificate of Incorporation, or these By-Laws. Section 8. Proxies. A stockholder may vote through a proxy ------- appointed by a written instrument signed by the stockholder or by the stockholder's duly authorized attorney-in-fact and delivered to the Secretary at or prior to the meeting. No proxy shall be valid after six (6) months of the date of its execution unless a longer period is expressly provided therein. Each proxy shall be revocable unless expressly provided to be irrevocable and if, and only as long as, it is coupled with an interest sufficient in law to support an irrevocable power. Section 9. Certain Rules of Procedure Relating to Stockholder -------------------------------------------------- Meetings. All stockholder meetings, annual or special, shall be - -------- governed in accordance with the following rules: (i) The Inspectors of Election and Tellers Committee shall be composed of such persons designated by resolution of the Board of Directors in advance of any such meeting. (ii) Only stockholders of record will be permitted to present motions from the floor at any meeting of stockholders. (iii) The Chairman of the Board and Chief Executive Officer or the President shall preside over and conduct the meeting in a fair and reasonable manner, and all questions of procedure or conduct of the meeting shall be decided solely by the Chairman of the Board and Chief Executive Officer or the President (whichever is presiding). The Chairman of the Board and Chief Executive Officer or the President (whichever is presiding) shall have all power and authority vested in a presiding officer by law or practice to conduct an orderly meeting. Among other things, the Chairman of the Board and Chief Executive Officer or the President (whichever is presiding) shall have the power to adjourn or recess the meeting (except as provided in Article I, Section 6), to silence or expel persons to insure the orderly conduct of the meeting, to declare motions or persons out of order, to prescribe rules of conduct and an agenda for the meeting, to impose reasonable time limits on questions and remarks by any stockholder, to limit the number of questions a stockholder may ask, to limit the nature of questions and comments to one subject matter at a time as dictated by any agenda for the meeting, to limit the number of speakers or persons addressing the Chairman of the Board and Chief Executive Officer or President (whichever is presiding) or the meeting, to determine when the polls shall be closed, to limit the attendance at the meeting to stockholders of record, beneficial owners of stock who present letters from the record holders confirming their status as beneficial owners, and the proxies of such record and beneficial holders, and to limit the number of proxies a stockholder may name. Section 10. Requests for Stockholder List and Company Records. ------------------------------------------------- Stockholders shall have those rights afforded under the General Corporation Law of the State of Delaware to inspect a list of stockholders and other related records and to make copies or extracts therefrom. Such request shall be in writing in compli- ance with Section 220 of the General Corporation Law of the State of Delaware. In addition, any stockholder making such a request must agree that any information so inspected, copied or extracted by the stockholder shall be kept confidential, that any copies or extracts of such information shall be returned to the Company and that such information shall only be used for the purpose stated in the request. Information so requested shall be made available for inspecting, copying or extracting at the principal executive offices of the Company. Each stockholder desiring a photostatic or other duplicate copies of any of such information requested shall make arrangements to provide such duplicating or other equipment necessary in the city where the Company's principal executive offices are located. Alternative arrangements with respect to this Section 10 may be permitted in the discretion of the President of the Company or by vote of the Board of Direc- tors. Section 11. New Business. Any new business to be taken up at ------------ any annual meeting of stockholders shall be stated in writing and filed with the Secretary at least ten (10) days before the date of the annual meeting, and all business so stated, proposed and filed shall be considered at the annual meeting, but no other proposal shall be acted upon at the annual meeting of stock- holders. Any stockholder may make any other proposal at the annual meeting, and the proposal may be discussed and considered, but unless stated in writing and filed with the Secretary at least ten (10) days before the meeting such proposal shall be postponed for action at an adjourned, special or annual meeting of stockholders taking place thirty (30) days or more thereafter. This provision shall not prevent the consideration and approval or disapproval at the annual meeting of stockholders of reports of officers, directors and committees, but in connection with such reports no new business shall be acted upon at such annual meeting unless stated as herein provided." ARTICLE II - DIRECTORS --------- Section 1. Powers. The business, property and affairs of the ------ Company shall be managed by or under the direction of its Board of Directors which may exercise all such powers of the Company and do all such lawful acts and things as are not by statute, the Certificate of Incorporation or these By-Laws required to be exercised or done by the stockholders. Section 2. Number and Term of Office. Except as otherwise pro- ------------------------- vided in the Company's Restated Certificate of Incorporation and subject to the rights of the holders of any series of the Com- pany's Preferred Stock to elect additional directors, the number of directors which shall constitute the whole Board of Directors shall be not less than five (5) nor more than fifteen (15). Within such limits, the number of directors shall be fixed from time to time exclusively by the Board of Directors pursuant to a resolution adopted by a majority of the total number of autho- rized directors (whether or not there exists any vacancies in previously authorized directorships at the time any such resolu- tion is presented to the Board of Directors for adoption). Any decrease in the authorized number of directors shall not become effective until the expiration of the term of the directors whose directorships are being eliminated (as determined by the Board of Directors) unless, at the time of such decrease, there shall be vacancies on the Board of Directors which are being eliminated by the decrease. The Board of Directors shall be divided into three (3) classes serving for those initial terms as provided in Article EIGHTH of the Company's Restated Certificate of Incorpo- ration. At each annual meeting of stockholders following such initial classification and election, directors elected to succeed those directors whose terms expire shall be elected for a term of office to expire at the third succeeding annual meeting of stock- holders. Notwithstanding any provision of this Section 2 or Section 3 below, whenever the holders of the Company's Preferred Stock shall have the right to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies, and other features of directorships shall be governed by the terms of the Company's Restated Certificate of Incorporation applicable thereto. Section 3. Filling of Vacancies. Subject to the rights of the -------------------- holders of any class or series of any capital stock of the Com- pany entitled to vote generally in the election of directors then outstanding, newly created directorships resulting from any increase in the authorized number of directors or any vacancies on the Board of Directors resulting from death, resignation, retirement, disqualification, removal from office or other cause may be filled by a majority vote of the directors then in office, though less than a quorum, and directors so chosen shall hold office for a term expiring at the annual meeting of stockholders at which the term of office of the class to which they have been elected expires. No decrease in the number of authorized direc- tors constituting the entire Board of Directors shall shorten the term of any incumbent director. Section 4. Place and Manner of Meetings. The Board of Directors ---------------------------- and any committee of the Board of Directors may hold meetings, both regular and special, either within or without the State of Delaware. Members of the Board of Directors may participate in such meetings by means of conference telephone or similar com- munications equipment by means of which all persons participating in the meeting can hear each other and such participation consti- tutes presence in person at such meeting. Section 5. Organizational Meetings. Immediately after each ----------------------- annual meeting of stockholders, the newly elected directors shall meet for the purpose of organization, election of officers and the transaction of any business, if a quorum be present. No notice of any such organizational meeting shall be required. Section 6. Regular Meetings. Regular meetings of the Board of ---------------- Directors may be held without notice at such places and times as shall be determined from time to time by the Board of Directors. Section 7. Special Meetings. Special meetings of the Board of ---------------- Directors may be called by the Chairman of the Board, the Chair- man of the Executive Committee or the President and shall be called by the Secretary on the written request of any two (2) directors, upon at least two (2) days notice stating the time and place of the meeting given to each director by mail, telegraph or telephone. Except as otherwise expressly provided by statute, the Certificate of Incorporation, or these By-Laws, neither the business to be transacted at, nor the purpose of, any special meeting must be specified in the notice or waiver of notice. Section 8. Action Without Meeting. Any action which may be ---------------------- taken at a meeting of the Board of Directors or at any meeting of a Committee of the Board of Directors, may be taken without a meeting if a consent in writing, setting forth the action so taken, shall be signed by all the members of the Board of Direc- tors or the committee and filed with the minutes of the pro- ceedings of the Board of Directors or the committee. Such consent shall have the same force and effect as a unanimous vote at a meeting. Section 9. Quorum. A majority of the directors shall constitute ------ a quorum for the transaction of business at any meeting of the Board of Directors, and the act of a majority of the directors present, if a quorum exists, shall be the act of the Board of Directors except as may be otherwise expressly provided by statute, the Certificate of Incorporation or these By-Laws. In the case of an equality of votes on any question before the Board of Directors, the Chairman of the Board of the Company shall have a second and deciding vote. Section 10. Adjourned Meetings. Any meeting of the Board of ------------------ Directors may be adjourned from time to time to reconvene at the same or a different place, upon resolution of the Board of Direc- tors or a majority of the directors present, if less than a quorum, and no notice of any adjourned meeting or meetings or the business to be transacted thereat shall be necessary. Section 11. Advisory Directors. The Board of Directors from ------------------ time to time may appoint one or more persons as advisory direc- tors of the Company, to serve in such capacity until the next organizational meeting of the Board of Directors provided for in Section 5 of this Article. No such advisory director shall be entitled to vote at any meeting of the Board of Directors nor shall such advisory director be counted for purposes of deter- mining the presence of a quorum at any such meeting. Each such advisory director, however, shall be entitled to notice of, to attend, and to participate in the deliberations of, all meetings of the Board of Directors. Section 12. Compensation of Directors and Advisory Directors. ------------------------------------------------ Directors and advisory directors shall not receive any salary for their services as directors, but as authorized by the Board of Directors they shall be paid their expenses of attendance at meetings of the Board of Directors and any committees of the Board of Directors and a fixed fee for attendance at each such meeting, series of meetings, and/or a regular retainer payable quarterly, monthly or otherwise. Nothing herein contained shall be construed to preclude any director or advisory director from serving the Company in any other capacity and receiving compensa- tion therefor. Section 13. Nominating Procedure for Directors and Qualifica- ------------------------------------------------ tions. - ----- (a) Nominating Procedure. Except as otherwise provided in the Company's Restated Certificate of Incorporation relating to the rights of the holders of any series of the Com- pany's Preferred Stock to elect additional directors, nominations for the election of directors may be made by the Board of Directors or a committee appointed by the Board of Directors or by any stockholder entitled to vote in the election of directors generally. However, any stockholder entitled to vote in the election of directors generally may nominate one or more persons for election as directors at a meeting of stockholders only if written notice of such stockholders's intent to make such nomina- tion or nominations has been given to the Secretary of the Company not later than (1) with respect to an election to be held at an annual meeting of stockholders, at least forty-five (45) days in advance of such meeting and (2) with respect to an election to be held at a special meeting of stockholders, no later than ten days after the date on which notice of such meeting was first sent to stockholders. Each such notice shall set forth (i) the name, age, residence address and business address of the nominating stockholder and of the person or persons to be nominated; (ii) a representation that the nominating stockholder is a holder of record of stock of the Company entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (iii) a description of all arrangements or understandings between the nominating stockholder and each nominee and any other person or per- sons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stock- holder or such nominees are to be elected; (iv) such other information regarding each nominee proposed by such stock- holder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the Securi- ties and Exchange Commission, had the nominee been nomi- nated, or intended to be nominated, by the Board of Directors or a committee thereof; (v) a statement as to each proposed nominee and a statement as to the nominating stockholder stating whether the nominee or stockholder has been a participant in any proxy contest or other change of corporate control within the past ten years, and, if so, the statement shall indicate the principals involved, the subject matter of the contest, the outcome thereof and the relationship of the nominee and the stockholder to the principals; (vi) if any shares of the Company's stock owned of record or beneficially, directly or indirectly, by each proposed nominee or the nominating stockholder were acquired in the last two years, a statement of the dates of acquisition and amounts acquired on each date; (vii) a description of any arrangement or understanding of each nominee and of the nominating stockholder with any person regarding future employment by the nominee or stockholder with the Company or any future transaction to which the Company will or may be a party; (viii) a state- ment as to each nominee and a statement as to the nomi- nating stockholder as to whether or not the nominee or stockholder will bear any part of the expense incurred in any proxy solicitation, and, if so, the amount thereof; (ix) the consent of each nominee to serve as a director of the Company if so elected; and (x) any plans or proposals that each nominee or the nominating stockholder may have that relate to or may result in the acquisition or dispo- sition of securities of the Company, an extraordinary corporate transaction (such as a merger, reorganization or liquidation) involving the Company or any of its subsidi- aries, a sale or transfer of a material amount of assets of the Company or of any of its subsidiaries, any change in the Board of Directors or management of the Company (including any plans or proposals to change the number or term of directors or to fill any existing vacancies on the Board), any material change in the present capitalization or dividend policy of the Company, any change in the Com- pany's Restated Certificate of Incorporation or By-Laws, causing a class of securities of the Company to be delisted from a national securities exchange or to cease to be quoted on an inter-dealer quotation system of a registered national securities association, a class of equity securities of the Company becoming eligible for termination of registration pursuant to Section 12(g)(4) of the Securities Exchange Act of 1934, or any other material change in the Company's business or corporate structure or any action similar to those listed above. The Board of Directors of the Company may disqualify any nominee who fails to provide it with complete and accurate information as required above. The President may, in his discretion, determine and declare to the meeting that a nomination not made in accordance with the foregoing pro- cedure shall be disregarded. (b) Certain Qualifications. No person shall be a member of the Board of Directors, (i) who owns, together with his family residing with him, directly or indirectly, more than one percent (1%) of the outstanding shares of any other entity, or an affiliate or subsidiary thereof, that competes with the Company or any of its subsidiaries, (ii) who is a director, officer, employee, agent, a nominee, attorney or investment banker of or for any other entity, or an affiliate or subsidiary thereof, that competes with the Company or any of its subsidiaries or (iii) who has or is the nominee of anyone who has any contract, arrangement or understanding with any other entity, or an affiliate of subsidiary thereof, that competes with the Company or any of its subsidiaries or with any officer, employee, agent, nominee, attorney or other representative thereof, that he will reveal or in any way utilize information obtained as a director or that he will directly or indirectly attempt to effect or encourage any action of the Company. Direc- tors must be stockholders of the Company. Notwithstanding any limitation in this subsection 14(b), the Board of Directors in their discretion may waive any or all of the above requirements. Section 14. Interested Directors. No contract, transaction or -------------------- act of the Company shall be affected by the fact that a director of the Company is in any way interested in, or connected with, any party to such contract, transaction or act, if the interested director shall at least five days prior to the date of any meeting of the Board of Directors, regular or special, at which such contract, transaction or act is to be considered, give notice in writing to each of the remaining directors of his interest in or in connection with the proposed contract, transac- tion or act. If such condition is complied with, the interested director may be counted in determining a quorum at any meeting of the Board of Directors which shall authorize any such contract, transaction or act, but may not vote thereat. Section 15. Evaluation of Business Combinations. The Board of ----------------------------------- Directors of the Company, when evaluating any offer of another party to make a tender or exchange offer for any equity security of the Company or to otherwise effect a Business Combination, shall, in connection with the exercise of its judgment as to what is in the best interests of the Company as a whole, be authorized to give due consideration to such factors as the Board of Direc- tors determines to be relevant, including, without limitation: (i) the interests of the Company's stockholders; (ii) whether the proposed transaction violates federal or state law; (iii) an analysis of not only the consideration being offered in the proposed transaction, in relation to the then- current market price for the outstanding capital stock of the Company, but also in relation to the market for the capital stock of the Company over a period of years, the estimated price which might be achieved in a nego- tiated sale of the Company as a whole or in part or through orderly liquidation, the premiums over market price for the securities of other corporations in other similar transactions, current political, economic and other factors bearing on securities prices and the Com- pany's financial condition and future prospects; and (iv) the social, legal and economic effects upon employees, suppliers, customers and others having similar relation- ships with the Company and the communities in which the Company conducts it business. In connection with any such evaluation, the Board of Directors is authorized to conduct its investigation and to engage in such legal proceedings as the Board of Directors may determine. ARTICLE III - EXECUTIVE COMMITTEE ------------------- Section 1. How Appointed. By the affirmative vote of a majority ------------- of the directors, the Board of Directors may appoint an Executive Committee made up of members of the Board of Directors consisting of a Chairman and at least one additional member. Vacancies occurring in the Executive Committee may be filled at any meeting of the Board of Directors. Section 2. Powers. During the intervals between meetings of the ------ Board of Directors, the Executive Committee shall have and may exercise all of the powers of the Board of Directors in the man- agement of the business, property and affairs of the Company, in such manner as the Executive Committee shall deem best for the interests of the Company in all cases in which specific direc- tions shall not have been given by the Board of Directors, and as respects all matters which are not by statute, the Certificate of Incorporation or these By-Laws required to be acted upon by the Board of Directors. Incident to the exercise of such powers the Executive Committee shall have the power to authorize the seal of the Company to be affixed to all papers which may require it. Section 3. Procedures, Meetings and Quorum. The Executive Com- ------------------------------- mittee of the Board of Directors may make its own rules or pro- cedures. It shall meet on the call of the Chairman or any two (2) of its members, and at any other time or times specified by the Board of Directors. A majority of the members of the Execu- tive Committee shall constitute a quorum for the transaction of business, and in every case the affirmative vote of a majority of the Committee's members shall be necessary for the taking of any action. Section 4. Committee to Report to Board of Directors. All ----------------------------------------- actions by the Executive Committee of the Board of Directors shall be recorded in minutes of the Committee's proceedings and shall be reported to the Board of Directors at the next meeting of the Board of Directors and, unless copies thereof shall previously have been distributed to the directors, the minutes of the Committee reflecting such actions shall be made available for the information of the directors attending such meeting of the Board. Section 5. Chairman of the Executive Committee. The Chairman of ----------------------------------- the Executive Committee shall be entitled to preside at the meetings of the Committee. ARTICLE IV - AUDIT COMMITTEE --------------- Section 1. How Appointed. By the affirmative vote of a majority ------------- of the directors, the Board of Directors may appoint an Audit Committee made up of members of the Board of Directors who are not also employed as full time officers of the Company and con- sisting of a Chairman and at least one (1) and not more than two (2) additional members. Vacancies occurring in the Audit Com- mittee may be filled at any meeting of the Board of Directors. Section 2. Powers. The Audit Committee shall have the following ------ powers, responsibilities and duties: the recommendation to the Board of Directors of the engagement or discharge of the inde- pendent auditor; the review with the independent auditor of the plan and results of the auditing engagement; the review of the scope and results of the Company's internal auditing procedures; the approval of each professional service provided or to be pro- vided by the independent auditor; the consideration of the range of audit and nonaudit fees; and the review of the Company's sys- tem of internal accounting controls. And, to the extent not otherwise required by statute, the Certificate of Incorporation or these By-Laws to be exercised or done by the stockholders or the Board of Directors, the Audit Committee shall have and may exercise all powers and authority of the Board of Directors in the management of the business, property and affairs of the Com- pany that are delegated or assigned to the Audit Committee from time to time by the Board of Directors. Section 3. Procedures, Meetings and Quorum. The Audit Committee ------------------------------- may make its own rules of procedures. It shall meet on the call of the Chairman or other member and at any other time or times specified by the Board of Directors. Both members of the Audit Committee shall be necessary to constitute a quorum for the transaction of business, and in every case the affirmative vote of both of the Committee's members shall be necessary for the taking of any action. Section 4. Committee to Report to Board of Directors. All ----------------------------------------- actions by the Audit Committee shall be reported to the Board of Directors at the next meeting of the Board and, unless copies thereof shall previously have been distributed to the directors, the minutes of the Committee reflecting such action shall be made available for the information of the directors attending such meeting of the Board. ARTICLE V - EXECUTIVE COMPENSATION COMMITTEE -------------------------------- Section 1. How Appointed. By the affirmative vote of a majority ------------- of the directors, the Board of Directors may appoint an Executive Compensation Committee made up of members of the Board of Direc- tors who are not also employed as full time officers of the Company and consisting of a Chairman and not less than two (2) additional members. Vacancies occurring in the Executive Compen- sation Committee may be filled at any meeting of the Board of Directors. Section 2. Powers and Duties. The Executive Compensation Com- ----------------- mittee shall review from time to time the compensation being paid by the Company to officers of the Company and all plans, provi- sions and policies of the Company covering the payment of various kinds of benefits to the various classifications of Company employees including, without being limited to, retirement income, group insurance, savings plans, retirement income plans, severance pay plans, stock option plans and long-term disability plans and based upon such review, the Executive Compensation Committee shall from time to time make recommendations to the entire Board of Directors with respect to changes and modifica- tions in such plans and benefits as the Executive Compensation Committee shall have determined to be appropriate. In addition, the Executive Compensation Committee shall have and may exercise such powers and authority to the extent not otherwise required by statute, the Certificate of Incorporation or these By-Laws to be acted upon the Board of Directors or stockholders, as may be delegated or assigned to the Executive Compensation Committee from time to time by the Board of Directors. Section 3. Procedures, Meetings and Quorum. The Executive Com- ------------------------------- pensation Committee may make its own rules of procedures. It shall meet on the call of the Chairman of any two (2) of its members and at any other time or times specified by the Board of Directors. A majority of the members of the Executive Compensa- tion Committee shall constitute a quorum for the transaction of business, and in every case the affirmative vote of a majority of the Committee's members shall be necessary for the taking of any action. Section 4. Committee to Report to Board of Directors. All ----------------------------------------- actions by the Executive Compensation Committee shall be reported to the Board of Directors at the next meeting of the Board of Directors and, unless copies thereof shall previously have been distributed to the directors, the minutes of the Committee reflecting such actions shall be made available for the informa- tion of the directors attending such meeting of the Board. ARTICLE VI - OTHER COMMITTEES Section 1. Designation. The Board of Directors may, from time ----------- to time, designate other committees, with such lawfully delegated powers and duties with regard to the management of the business, property and affairs of the Company as the Board of Directors may confer, to serve at the pleasure of the Board and shall, for those committees, elect a director or directors to serve as the member of members. The Board of Directors shall have the power at any time to fill vacancies in, to change the size or members of, and to discharge any such committee. Section 2. Conduct of Business. Each committee may determine ------------------- the procedural rules for meeting and conducting its business and shall act in accordance therewith, except as otherwise provided by statute, the Board of Directors or these By-Laws. Adequate provisions shall be made for notice to members of all meetings; a majority of the members shall constitute a quorum and all matters shall be determined by a majority vote of the members present. Section 3. Committees to Report to Board of Directors. All ------------------------------------------ actions by each committee of the Board of Directors shall be recorded in minutes of each committee's proceedings and shall be reported to the Board of Directors at the next meeting of the Board of Directors and, unless copies thereof shall previously have been distributed to the directors, the minutes of the com- mittee reflecting such actions shall be made available for the information of the directors attending such meeting of the Board. ARTICLE VII - OFFICERS -------- Section 1. Executive and Other Officers. The officers of the ---------------------------- Company shall include a Chairman of the Board, a President, a Treasurer, a Secretary and a Controller. The officers of the Company may also include one or more Vice Presidents, any one or more of whom may be designated an Executive Vice President or a Senior Vice president, a General Counsel, and such other officers and assistant officers as the Board of Directors from time to time may deem necessary for the proper conduct of the company's business. Only the President need be a director. Divisions of the company may also have officers as designated by the Board of Directors. One person may be elected to any one or more of the officer positions specified in these By-Laws. Section 2. Election and Term of Office. The officers of the --------------------------- Company and any divisions of the Company shall be elected annually by the Board of Directors at the first meeting thereof after each annual meeting of stockholders. Additional officers may also be elected by the Board of Directors at any time. Each officer shall hold office until death, removal or resignation or until a successor is duly elected and qualified. Section 3. Removal and Vacancies. Any officer may be removed by --------------------- the Board of Directors at any time whenever in its judgment the best interests of the Company would be served thereby. All vacancies among the officers shall be filled by the Board of Directors, except that the Board of Directors in its discretion may abolish or leave unfilled when vacant any offices other than those of the President, the Treasurer and the Secretary. Section 4. Chairman of the Board. The Chairman of the Board --------------------- shall be the chief executive officer and chief policy officer of the Company elected from among the directors and shall be entitled to preside at all meetings of the stockholders and of the Board of Directors at which the Chairman of the Board is present. The Chairman of the Board shall perform the duties incident to the office of the Chairman of the Board and chief executive officer and, subject to the direction of the Board of Directors, shall have overall responsibility for the management and direction of the business, property and affairs of the Com- pany, unless some other officer of the Company shall have been designated by the Board of Directors to serve as such chief executive officer. The Chairman of the Board shall also have such other powers and duties as may be prescribed from time to time by the Board of Directors. Section 5. President. The President shall be the chief --------- operating officer of the Company and, subject to the direction of the Board of Directors, shall be responsible for supervising the day to day operations of the business of the Company; shall have the authority to execute bonds, mortgages, guaranties and other contracts on behalf of the Company, and shall also have such other powers and duties as may be prescribed from time to time by the Board of Directors. Section 6. Vice Presidents. The Vice Presidents in the order --------------- designated by the Board of Directors or in the absence of any designation, then in the order of their rank (Executive Vice president, Senior Vice President, Vice President) and within their rank by their seniority, shall in the absence or disability of the President, be vested with all the powers and shall perform all the duties of the President unless and until the Board of Directors shall otherwise determine. The Vice Presidents shall also have such other powers and duties as may from time to time be prescribed by the President or by the Board of Directors. Section 7. General Counsel. The General Counsel shall be the --------------- chief legal officer of the Company and as such, shall: (a) Be responsible for the supervision and management of all judicial, administrative and other legal proceedings involving the Company; (b) Prepare, review or review or cause to be prepared, revised or reviewed legal documents proposed to be executed on be- half of the Company as may be requested from time to time by the directors, officers and employees of the Company; (c) Render legal opinions to the directors, officers and employees of the Company on all matters of concern to the Company as may be requested from time to time; and (d) Be responsible for retaining outside counsel for the Com- pany, as approved by the President of the company. In addition, the General Counsel shall also have such other powers and duties as may from time to time be prescribed by the President or by the Board of Directors. Section 8. Treasurer. The Treasurer shall have custody of and --------- be responsible for all funds and securities of the Company except as otherwise provided by the Board of Directors. The Treasurer shall disburse the funds and pledge the credit of the Company as may be directed by the Board of Directors and shall also have such other powers and duties as may from time to time be prescribed by the President or by the Board of Directors. Section 9. Secretary. The Secretary or any Assistant Secretary --------- designated by the Secretary or the President shall give, or cause to be given, notice of all meetings of stockholders and directors and all other notices required to be given to holders of the Company's securities, and shall keep minutes of all meetings of the stockholders, the Board of Directors, the Executive Committee when required, or any other committee, if requested. The Secre- tary or any Assistant Secretary shall have custody of the seal of the Company and shall have authority to affix and attest to the same on instruments requiring it. In addition, the Secretary shall also be responsible for supervision of the activities of the Transfer Agent of the Company with regard to transfer of stock, maintenance of a list of stockholders of record and pay- ment of dividends on Company stock. The Secretary shall also have such other powers and duties as may from time to time be prescribed by the President or by the Board of Directors. Section 10. Controller. The Controller shall be the chief ---------- accounting officer of the Company. The Controller shall cause to be maintained accurate accounts reflecting all business transac- tions of the Company and shall develop, coordinate and administer procedures for adequate accounting control of the Company's revenues, expenses and capital investments. The Controller shall report and interpret the financial results of operations to all levels of management and perform other duties as may from time to time be prescribed by the President or by the Board of Directors. Section 11. Other Officers. Each of the officers elected by the -------------- Board of Directors, other than those referred to in Sections 5 through 10 of this Article, shall have such powers and duties as may from time to time be prescribed by the President or by the Board of Directors. ARTICLE VIII - CAPITAL STOCK ------------- Section 1. Stock Certificates. Each stockholder of the Company ------------------ shall be entitled to one or more certificates, under the seal of the Company or a facsimile thereof, signed by the President or Vice president and the Treasurer or Assistant Treasurer or Secre- tary or Assistant Secretary of the Company, certifying the number of shares owned by the Stockholder in the Company provided, how- ever, that where such certificate is signed by a registrar acting on behalf of the Company, the signature of any such President, Vice President, Treasurer, Assistant Treasurer, Secretary or Assistant Secretary of the Company, or any officer or employee of the transfer agent, may be facsimile. In case any officer of the Company, or officer or employee of the transfer agent, who has signed or whose facsimile signature has been used on any such certificate shall cease to be such officer of the Company, or officer or employee of the transfer agent, because of death, resignation, or otherwise, before the certifi- cate is issued, such certificate shall nevertheless be deemed adopted by the Company and may thereafter be issued and delivered by the Company as though the person who signed such certificate or whose facsimile signature has been used thereon had not ceased to be such officer of the Company, or officer or employee of the transfer agent. The Company shall be entitled to treat the holder of record of any share or shares of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in such share of shares on the part of any other person, whether or not it has actual or other notice thereof. Section 2. Transfer of Shares. The shares of stock of the Com- ------------------ pany shall be transferable upon its books by the holders thereof in person or by their duly authorized attorneys or legal repre- sentatives, and upon such transfer the old certificates shall be surrendered to the Company by the delivery thereof to the person in charge of the stock and transfer books and ledgers, or to such other person as the Board of Directors may designate, by whom they shall be canceled, and new certificates shall thereupon be issued. Section 3. Lost Certificates. A new certificate or certificates ----------------- of stock may be issued in the place of any certificate alleged to have been lost, stolen, mutilated, or destroyed theretofore issued by the Company and/or by any corporation of which the Company is the successor upon the making of an affidavit of that fact by the person claiming the certificate to be lost, stolen, mutilated, or destroyed. The Board of Directors may, in its discretion, require the owner or the owner's legal representa- tives, as a condition precedent to the issue of a new certifi- cate, in the case of a mutilated certificate, to surrender the mutilated certificate, or in the case of a lost, destroyed or stolen certificate, to give the Company a bond sufficient to indemnify it or its transfer agent, or both, against any claim that may be made on account of the alleged loss, destruction or theft of any such certificate or the issuance of any such new certificate. Section 4. Dividends. Subject to the provisions of law and the --------- Certificate of Incorporation, dividends upon the capital stock of the Company or any class or series of shares thereof may be declared by the Board of Directors at any regular or special meeting, payable in cash, property or shares of the Company's capital stock, at such times and in such amounts as the Board of Directors, in its sole discretion, may think appropriate and in the best interest of the Company. ARTICLE IX - EXECUTION OF DOCUMENTS AND INSTRUMENTS -------------------------------------- Section 1. Deeds, Leases and Contracts. Except as otherwise --------------------------- provided by the Board of Directors, all deeds, leases, contracts, agreements and other formal documents shall be signed on behalf of the Company or any division of the Company by the President or a Vice President of the Company or of such division and, where a seal is required, sealed with the Company's seal or the seal of such division and attested by the Secretary or an Assistant Secretary of the Company or such division. Section 2. Checks, Drafts and Notes. All checks, drafts or ------------------------ other orders for the payment of money and all notes or other evidences of indebtedness issued in the name of the Company or any division of the Company shall be signed by the President or such other officer or officers or agent or agents of the Company or such division, and in such manner, as shall from time to time be determined by the Board of Directors. ARTICLE X - MISCELLANEOUS PROVISIONS ------------------------ Section 1. Corporate Seal. The corporate seal shall be circu- -------------- lar, shall bear the name of the Company, the year of its organi- zation and the words "Corporate Seal, Delaware," and shall be in such form as shall be prescribed by the Board of Directors from time to time. Divisions of the Company may have seals as prescribed by the Board of Directors. Section 2. Fiscal Year. The fiscal year of the Company shall ----------- end on June 30th of each year. Section 3. Notices. Whenever the provisions of statute, the ------- Certificate of Incorporation or these By-laws require notice to be given to any director or stockholder, such notice, if in writing, shall be deemed validly given if delivered personally or by depositing the same in a United States post office or letter box in a sealed postpaid wrapper addressed to the last known address of the director or to the address of the stockholder appearing on the Company's stock records. Notices so mailed shall be deemed to have been given at the time of their mailing. Stockholders not entitled to vote at any meeting need not be given notice thereof except as otherwise provided by statute. Section 4. Waiver of Notices. A waiver in writing of any notice ----------------- referred to in Section 3 of this Article, if signed by the direc- tor or stockholder entitled thereto, shall be deemed equivalent to the giving of such notice, regardless of when such waiver is signed or delivered to the Company. Attendance at a meeting shall constitute a waiver of notice of such meeting, except where such person attends for the express purpose of objecting to the transaction of any business on the grounds that the meeting is not lawfully called or convened. Section 5. Resignations. Any resignation of a director shall be ------------ made in writing and shall take effect on the earlier of its acceptance by the board of directors or ten days after its re- ceipt by the President or Secretary. Any resignation of a member of a committee or officer shall be made in writing and shall take effect at the time specified therein or, if no time be specified, at the time of its receipt by the President or Secretary. Section 6. Inspection of Books. The Board of Directors shall ------------------- determine from time to time whether the accounts and books of the Company, or any of them, shall be opened to the inspection of stockholders and, if permitted, when and under what conditions and regulations the accounts and books of the Company, or any of them, shall be open to the inspection of stockholders, and the stockholders' rights in this respect shall be restricted and limited accordingly. Section 7. Indemnification of Directors, Officers and Others. ------------------------------------------------- Directors and officers of the Company shall be indemnified to the fullest extent now or hereafter permitted by law in connection with any actual or threatened action or proceeding (including civil, criminal, administrative or investigative proceedings) arising out of their service to the Company or to any other organization at the Company's request. Employees and agents of the Company who are not directors of officers thereof may be similarly indemnified in respect of such service to the extent authorized at any time by the Board of Directors. The provisions of this Section shall be applicable to actions or proceedings commenced after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof, whether arising from acts or omissions occurring before or after the adoption hereof, and to persons who have ceased to be directors, officers or employees and shall inure to the benefit of their heirs, executors, and administrators. For the purposes of this Section, directors, officers, trustees or employees of an organi- zation shall be deemed to be rendering service thereto at the Company's request if such organization is, directly or indi- rectly, a wholly-owned subsidiary of the Company or it designated by the Board of Directors as an organization service to which shall be deemed to be so rendered. Section 8. Amendment of By-Laws. The Stockholders, by the -------------------- affirmative vote of the holders of a majority of the voting power of the then-outstanding shares of stock entitled to vote generally in the election of directors, voting together as a single class, or the Board of Directors, by the affirmative vote of a majority of the directors, may at any meeting, if the sub- stance of the proposed amendment shall have been stated in the notice of meeting, amend, alter or repeal any of these By-Laws. Section 9. Severability. In case any one or more of the provi- ------------ sions contained in these By-Laws shall be for any reason be held to be invalid, illegal or unenforceable in any respect, such invalidity, illegality or unenforceability shall not affect any other provision hereof, and these By-Laws shall be construed as if such invalid, illegal, or unenforceable provision had never been contained herein. EX-10.A 4 EXHIBIT 10(a) THOMAS F. KARAM EMPLOYMENT AGREEMENT This EMPLOYMENT AGREEMENT is made and entered into as of this 28th day of December, 1999, by and between Southern Union Company (hereinafter referred to as the "Company"), a Delaware corpora- tion, and Thomas F. Karam (hereinafter referred to as the "Executive"). WHEREAS, the Executive is presently employed by the Company in the capacity of Executive Vice President Corporate Development and Chief Executive Officer of the PG Energy Division; WHEREAS, the Company is desirous of assuring the continued employment of the Executive as a senior executive of Southern Union Company and the PG Energy Division, and Executive is desirous of having such assurance. NOW, THEREFORE, in consideration of the foregoing and of the mutual covenants and agreements of the parties set forth in this Agreement, and of other good and valuable consideration the receipt and sufficiency of which are hereby acknowledged, the parties hereto, intending to be legally bound, agree as follows: Section 1. Term of Employment; Prior Agreements 1.1 Employment Term. Subject to the provisions of Section 6 --------------- of this Agreement, the Company hereby agrees to employ the Executive and the Executive hereby agrees to serve the Company, in accordance with the terms and conditions set forth herein, until June 30, 2010, commencing as of the date hereof (the "Term"). If, in the sole discretion of the President of Southern Union Company (the "Presi- dent"), certain mutually agreed financial and performance goals are achieved, the agreement will be automatically renewed for 12 months, effective July 1 of each year and a new Employment Agreement will be executed. Notwith- standing the foregoing, in the event a Change of Control of the Company (as defined in Section 6.7) occurs during the Term of this agreement or any renewal thereof, the Term shall continue until the second anniversary of the Change of Control (or such later date as may be agreed to by the parties). 1.2 Prior Agreements. This Agreement supersedes all prior ---------------- agreements and understandings (including verbal agree- ments) between Executive and the Company and/or any of its affiliates regarding the terms of Executive's employ- ment with the Company and/or its affiliates including, without limitation, the Employment Agreement dated May 6, 1998 between the Executive and Pennsylvania Enterprises, Inc, the Change of Control Agreement dated March 6, 1996 between the Executive and Pennsylvania Enterprises, Inc., and any assumption of those agreements by the Company and the parties, shall have no liabilities under any such prior agreements. Section 2. Position and Responsibilities During the Term of this Agreement, the Executive agrees to serve as a senior executive of Southern Union Company and the PG Energy Division. In such capacity, the Executive shall have such level of duties and responsibilities as he may be assigned from time to time by the President of the Company. The Executive shall have the same status, privileges, and responsibilities normally inherent in similarly situated executives of the Company. Section 3. Standard of Care During the term of this Agreement, the Executive agrees to devote his full business time and reasonable best efforts to the busi- ness of the Company and the PG Energy Division. Executive shall not be engaged in any other business activity, whether or not such business activity is pursued for gain, profit, or other pecuniary advantage, without the prior written consent of the President. The Executive may serve on the board of directors or trustees of any business corporation or charitable organization so long as such service is not injurious to the Company and is agreed upon by the President. This Section 3 shall not be construed as preventing the Executive from holding, as a passive investor, up to two percent (2%) of the common stock of any public company. Section 4. Compensation As remuneration for all services to be rendered by the Executive during the term of this Agreement, and as consideration for complying with the covenants herein, the Company shall pay and provide to the Executive the following: 4.1 Base Salary. During the Term, the Company shall pay the ----------- Executive a Base Salary in an amount which shall be established from time to time by the President; provided, however, that such Base Salary shall not be less than $16,346.15 per biweekly pay period. This Base Salary shall be paid to the Executive in equal installments throughout the year, consistent with the normal payroll practices of the PG Energy Division. While this Agreement is in force, the annual Base Salary shall be reviewed at least annually, to ascertain whether, in the judgment of the President, such Base Salary should be increased, based primarily on the per- formance of the Executive during the year and on the base salary of similarly situated executives at comparable companies. If so increased, the Base Salary as stated above shall, likewise, be increased for all purposes of this Agreement. 4.2 Sign-On Bonus. The Company shall pay to the Executive an ------------- amount equal to $906,618.31 as a sign-on bonus. This sign-on bonus shall not be treated as compensation for purposes of any other benefit plan or agreement (including any retirement or severance benefits payable to Executive, under this Agreement or otherwise). 4.3 Annual Bonus. July 1st of each year of the employment ------------ agreement the company shall pay to the executive an amount equal to $600,000 as an annual bonus related to the Executives corporate responsibilities. 4.4 Annual Cash Incentive Compensation. The Company shall ---------------------------------- provide the Executive with the opportunity to earn an annual cash incentive compensation payment, at a level no less favorable than that provided to similarly situated executives of the Company, based upon goals and measures for the Executive, the PG Energy Division and/or the Company established by the President. 4.5 Long-Term Incentives. The Company shall provide the -------------------- Executive with the opportunity to earn a long-term incentive award by participating in the Company's Long- Term Incentive Stock Option Plan at a level no less favorable than that provided to similarly situated executives of the Company. 4.6 Supplemental Retirement Benefits. The Company shall -------------------------------- provide the Executive the opportunity to participate in the Southern Union Company Supplemental Deferred Compensation Plan. 4.7 Employee Benefits. During the Term, the Company shall ----------------- provide to the Executive all qualified retirement plan benefits and welfare benefits to which other senior executives of the PG Energy Division are generally entitled, without duplication of benefits. The Executive shall be entitled to paid vacation in accordance with the standard written policy of the PG Energy Division with regard to vacations of employees. The Company shall provide to the Executive, at the Company's cost, all perquisites to which other similarly situated executives are entitled. Section 5. Expenses The Company shall pay, or reimburse the Executive, for all ordinary and necessary expenses that the Executive incurs in performing his duties under this Agreement in accordance with the Company's policy. Section 6. Termination of Employment 6.1 General. Executive's employment may be terminated in ------- accordance with any of the provisions set forth in this Section 6, and the Term shall terminate upon the effective date of such termination of employment. Upon such termination, Executive shall be entitled solely to the rights and benefits set forth in the applicable provision of this Section 6. 6.2 Termination Due to Death or Disability (a) Executive's employment may be terminated by the Company on account of Executive's Disability, and shall be terminated upon Executive's death. The Company shall have the right to terminate Executive's employment on account of Disability if, as a result of Executive's incapacity due to physical or mental illness, Executive shall have been absent from the full-time performance of his duties with the Company for six consecutive months. (b) If the Executive's employment is terminated due to death or Disability, the Company shall pay Executive his accrued but unpaid Base Salary, unpaid bonus earned in the previous year, a pro rata portion of his target annual bonus for the year of termination, based on the portion of the year elapsed prior to such termination, plus any amounts otherwise payable to Executive under the terms of the Company benefit plans and programs in which he is a participant, at the times such payments are due. With the exception of the foregoing obligations of the Company, and, in the case of Disability, the covenants of Executive contained in Section 7 (which shall survive such termination), the Company and the Executive there- after shall have no further obligations under this Agreement. 6.3 Voluntary Termination by the Executive (a) The Executive may terminate this Agreement at any time other than for Good Reason, death or Disability by giving the President written notice of intent to terminate, delivered at least thirty (30) calendar days prior to the effective date of such termina- tion. The termination shall become effective automatically upon the expiration of the thirty (30) day notice period. Such notice shall also constitute the resignation by the Executive of his positions as an officer and/or director of the Company and its subsidiaries and affiliates. (b) In the event of such termination, the Company shall pay to the Executive his accrued but unpaid Base Salary, plus any amounts otherwise payable to Executive under the terms of the Company benefit plans and programs in which he is a participant, at the times such payments are due. With the exception of the foregoing obligations of the Company and the covenants of the Executive contained in Section 7 (which shall survive such termination), the Company and the Executive thereafter shall have no further obligations under this Agreement. 6.4 Involuntary Termination by the Company Without Cause. ---------------------------------------------------- The Company may terminate the Executive's employment at any time by notifying the Executive in writing of the Company's intent to terminate, effective thirty (30) calendar days following the date on which the Company delivers such notice to the Executive. If Executive's employment is terminated by the Company for reasons other than death, Disability, or for Cause, then the Executive shall be entitled to the benefits provided below: (a) The Company shall pay the Executive his full Base Salary through the effective date of termination, unpaid bonus earned in the previous year, the unpaid annual bonus payments referred to in Section 4.3 (on either an annual basis or at the discretion of the company a lump sum present value of the bonus payments), plus any amounts otherwise payable to Executive under the terms of the Company benefit plans and programs in which he is a participant, at the times such payments are due; (b) In lieu of any further salary and bonus payment to the Executive for periods subsequent to the effec- tive date of termination (other than the unpaid annual bonus referred to in Section 4.3), the Com- pany shall pay as a severance payment to the Execu- tive, not later than the fifth business day following the effective date of termination, a lump sum severance payment equal to one times the Execu- tive's Covered Compensation. "Covered Compensation" shall mean the Executive's annualized Base Salary (determined by multiplying the biweekly rate of base salary in effect at the effective date of termina- tion by 26). This severance payment will be in lieu of payments (if any) from any other Company's Severance Plans. With the exceptions of the foregoing obligations of the Company and the Executive's covenants contained in Section 7 herein (which shall survive such termination), the Company and the Executive hereafter shall have no further obligations under this Agreement. 6.5 Termination for Cause (a) The Company may terminate the Executive's employment for "Cause" which shall mean (i) the willful and continued failure by the Executive to substantially perform his duties with the Company (other than any such failure resulting from the Executive's incapa- city due to physical or mental illness or any such actual or anticipated failure after the occurrence of circumstances giving rise to a notice of termina- tion by the Executive for Good Reason) after a written demand for substantial performance is delivered to the Executive by the President, which demand specifically identifies the manner in which the President believes that the Executive has not substantially performed his duties, or (ii) the willful engaging by the Executive in conduct which is demonstrably injurious to the Company, monetarily or otherwise, in a not insignificant amount or manner. For this purpose, no act, or failure to act, by the Executive shall be deemed "willful" unless done, or omitted to be done, by the Executive not in good faith and without reasonable belief that the Executive's action or omission was in the best interest of the Company. Notwithstanding the foregoing, the Executive shall not be deemed to have been terminated for Cause unless and until there shall have been delivered to the Executive a copy of a written notice of termination which shall include a determination by the President (after reasonable notice to the Executive and an opportunity for the Executive, together with the Executive's counsel, to be heard) finding that in the good faith opinion of the President, the Executive was guilty of conduct constituting "Cause" as set forth in this paragraph and specifying the particulars thereof in detail. The termination of employment shall be effective upon the giving of such notice. (b) In the event of a termination of the Executive's employment for "Cause," the Company shall pay the Executive his accrued and unpaid Base Salary through the date notice of termination is delivered to the Executive, plus any amounts otherwise payable to Executive under the terms of the Company benefit plans and programs in which he is a participant, at the times such payments are due. Except for the foregoing obligations of the Company and the Executive's covenants under Section 7 (which shall survive such termination), upon delivery to the Executive of written notice of termination, the Company and the Executive thereafter shall have no further obligations under this Agreement. 6.6 Termination for Good Reason (a) The Executive may terminate his employment for Good Reason (as defined below) by giving the President 30 days' written notice of termination, stating in rea- sonable detail the facts and circumstances claimed to provide a basis for such termination. In the event of termination for Good Reason, the Company shall pay and provide to the Executive the amounts and benefits set forth in Section 6.4 hereof. With the exceptions of the foregoing obligations of the Company and the Executive's covenants contained in Section 7 herein (which shall survive such termina- tion), the Company and the Executive hereafter shall have no further obligations under this Agreement. (b) Good Reason shall mean, without the Executive's express written consent, the occurrence of any one or more of the following: (i) The assignment to the Executive of any duties inconsistent with his status as a senior exe- cutive of the Company or a substantial reduc- tion in the nature or status of the Executive's responsibilities from those set forth in Section 2 hereof. (ii) A reduction by the Company in the Executive's Base Salary payable under Section 4.1 hereof, as the same may be increased from time to time; (iii) The Company's requiring the Executive to be based at a location which is more than fifty (50) miles from the current principal location of Executive's employment; (iv) The failure by the Company to continue to provide the Executive with the incentive compensation and benefits set forth in Section 4 hereof; (v) The failure by the Company to pay to the Executive any portion of the Executive's current cash compensation, when due; (vi) The failure of the Company to obtain a satisfactory agreement from any successor to assume and agree to perform this Agreement, as contemplated in Section 9.1 hereof; or (vii) Any purported termination of the Executive's employment which does not comply, with the applicable provisions of Section 6 of this agreement; and for purposes of this Agree- ment, no such purported termination shall be effective. Notwithstanding the foregoing, none of the events described in clauses (i) through (vii) of this Section 6.6(b) shall constitute Good Reason unless Executive shall have notified the Company in writing describing the events which constitute Good Reason and then only if the Company shall have failed to cure such event within thirty (30) days after the Company's receipt of such written notice. The Executive's right to terminate employment for Good Reason shall not be affected by the Executive's incapacity due to physical or mental illness. How- ever, the Executive's failure to assert Good Reason within six (6) months from the time he had knowledge of the circumstance constituting Good Reason shall constitute a waiver of his right to terminate em- ployment for Good Reason with respect to such event. 6.7 Involuntary Termination by the Company Without Cause or Termination for Good Reason, following a "Change of Control" (as defined below.) Notwithstanding the provi- sions of Sections 6-4 and 6-6, in the event the Company terminates the Executive's employment without cause or the Executive terminates his employment for good reason, in either case, within two years following the date of a Change of Control of the Company then the Executive shall be entitled to the benefits provided below: (a) The Company shall pay the Executive his full Base Salary through the effective date of termination, unpaid bonus earned in the previous year, the unpaid annual bonus payments referred to in Section 4.3 (on either an annual basis or at the discretion of the company a lump sum present value of the bonus payments), and a pro-rata portion of the target bonus established prior to Change of Control plus any amounts otherwise payable to Executive under the terms of the Company benefit plans and programs in which he is a participant, at the times such payments are due; b) In lieu of any further salary and bonus payment to the Executive for periods subsequent to the effec- tive date of termination, the Company shall pay as a severance payment to the Executive, not later than the fifth business day following the effective date of termination, a lump sum severance payment equal to three (3) times the Executive's Covered Compensa- tion. "Covered Compensation" shall mean the Execu- tive's annual Base Salary (at the rate in effect at the effective date of termination) and the target bonus potential established prior to Change of Control; and (c) For three (3) years after such termination, the Company shall provide the Executive with life and medical benefits substantially similar to those provided from time to time to active employees of the PG Energy Division. In the event that the Employee obtains substantially similar benefits or coverage from another employer, these benefits shall be reduced during such period following the Execu- tive's termination. Executive agrees to report any such coverage or benefits he obtains to the Company; With the exception of the foregoing obligations of the Company and the Executive's covenants contained in Section 7 herein (which shall survive such termination), the Company and the Executive hereafter shall have no further obligations. For purposes of this agreement, a "Change of Control" of the Company shall be deemed to have occurred if and when: (a) there shall be consummated either (i) any consolida- tion or merger of the Company in which the majority of the Board of Directors are not on the continuing or surviving Board of Directors or pursuant to which shares of the Company's common stock are converted into cash, securities or other property, other than a consolidation or merger of the Company in which each holder of the Company's common stock immedi- ately prior to the merger has upon consummation of the merger the same proportionate ownership of common stock of the surviving corporation as such holder had of the Company's common stock immediately prior to the merger, or (ii) any sale, lease exchange or other transfer (in one transaction or a series of transactions contemplated or arranged by any party as a single plan) of all or substantially all of the assets of the Company; (b) the shareholders of the Company shall approve any plan or proposal for the liquidation or dissolution of the Company; 6.8 Excise Tax Equalization Payment (a) Anything in this Agreement to the contrary notwith- standing, in the event it shall be determined that any payment or distribution by the Company to the Executive or for the Executive's benefit (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or other- wise) but determined without regard to any addi- tional payments required under this Section (a "Payment") would be subject to the excise tax imposed by Section 4999 of the Code or any interest or penalties are incurred by the Executive with respect to such excise tax (such excise tax, together with any such interest and penalties, are hereinafter collectively referred to as the "Excise Tax"), then the Executive shall be entitled to receive an additional payment (a "Gross-Up Payment") in an amount such that after payment by the Executive of all taxes (including any interest or penalties imposed with respect to such taxes), including, without limitation, any income taxes (and any interest and penalties imposed with respect thereto) and Excise Tax imposed upon the Gross-Up Payment, the Executive retains an amount of the Gross-Up Payment equal to the Excise Tax imposed upon the Payments. (b) Subject to the provisions of Section 6.8(c) below, all determinations required to be made under this Section, including whether and when a Gross-Up Pay- ment is required and the amount of such Gross-Up Payment and the assumptions to be utilized in arriving at such determination, shall be made by the Company's independent audit firm (the "Accounting Firm") which shall provide detailed supporting cal- culations both to the Company and to the Executive within fifteen (15) business days of the making of the Payment by the Company or the Company's receipt of notice from the Executive that there has been a Payment, or such earlier time as is requested by the Company. All fees and expenses of the Accounting Firm shall be borne solely by the Company. Any Gross-Up Payment, as determined pursuant to this Section 6.8, shall be paid by the Company to the Executive within ten (10) business days of the receipt of the Accounting Firm's determination. If the Accounting Firm determines that no Excise Tax is payable by the Executive, it shall furnish the Exe- cutive with a written opinion that failure to report the Excise Tax on the Executive's applicable federal income tax return would not result in the imposition of a negligence or similar penalty. Any determina- tion by the Accounting Firm shall be binding upon the Company and the Executive for purposes of this Agreement. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm hereunder, it is possible that the Gross-Up Payment made by the Company is less than the payment which should have been made ("Underpayment"), consistent with the calculations required to be made hereunder. In the event that the Company exhausts its remedies pursuant to this Section and the Executive is there- after required to make a payment of any Excise Tax, the Accounting Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Company to the Executive or for the Executive's benefit. (c) The Executive shall notify the Company in writing of any claim by the Internal Revenue Service that, if successful, would require the payment by the Company of the Gross-Up Payment. Such notification shall be given as soon as practicable but no later than ten (10) business days after the Executive is informed in writing of such claim and shall apprise the Com- pany of the nature of such claim and the date on which such claim is requested to be paid. The Exe- cutive shall not pay such claim prior to the expira- tion of the 30-day period following the date on which the Executive gives such notice to the Company (or such shorter period ending on the date that any payment of taxes with respect to such claim is due). If the Company notifies the Executive in writing prior to the expiration of such period that it desires to contest such claim, the Executive shall: (1) give the Company any information reasonably requested by the Company relating to such claim, (2) take such action in connection with contesting such claim as the Company shall reasonably request in writing from time to time, including, without limitation, accepting legal representation with respect to such claim by an attorney reasonably selected by the Company, (3) cooperate with the Company in good faith in order to effectively contest such claim, and (4) permit the Company to participate in any proceedings relating to such claim; provided, however, that the Company shall bear and pay directly all costs and expenses (including additional interest and penalties) incurred in connection with such contest and shall indemnify and hold the Executive harmless, on an after-tax basis, for any Excise Tax or income tax (including interest and penalties with respect thereto) imposed as a result of such representation (to the extent it relates to issues with respect to which a Gross-Up Payment would be payable hereunder) and payment of related costs and expenses. Without limitation on the foregoing provisions of this Section 6.8, the Company shall control all proceedings taken in con- nection with such contest and, at its sole option, may pursue or forgo any and all administrative appeals, proceedings, hearings and conferences with the taxing authority in respect of such claim and may, at its sole option, either direct the Executive to pay the tax claimed and sue for a refund or contest the claim in any permissible manner, and the Executive agrees to prosecute such contest to a determination before any administrative tribunal, in a court of initial jurisdiction and in one or more appellate courts, as the Company shall determine; provided, however, that if the Company directs the Executive to pay such claim and sue for a refund, the Company shall advance the amount of such payment to the Executive, on an interest-free basis, and shall indemnify and hold the Executive harmless, on an after-tax basis, from any Excise Tax or income tax (including interest or penalties with respect thereto) imposed with respect to such advance or with respect to any imputed income with respect to such advance; and further provided that any extension of the statute of limitations relating to payment of taxes for the Executive's taxable year with respect to which such contested amount is claimed to be due is limited solely to such contested amount. Furthermore, the Company's control of the contest shall be limited to issues with respect to which a Gross-Up Payment would be payable hereunder, and the Executive shall be entitled to settle or contest, as the case may be, any other issue raised by the Internal Revenue Service or any other taxing authority. (d) If, after the Executive's receipt of an amount advanced by the Company pursuant to this Section 6.8, the Executive becomes entitled to receive any refund with respect to such claim, the Executive shall (subject to the Company's complying with the requirements of this Section 6.8) promptly pay to the Company the amount of such refund (together with any interest paid or credited thereon after taxes applicable thereto). If, after the Executive's receipt of an amount advanced by the Company pursu- ant to this Section 6.8, a determination is made that the Executive shall not be entitled to any refund with respect to such claim and the Company does not notify the Executive in writing of its intent to contest such denial of refund prior to the expiration of thirty (30) days after such determina- tion, then such advance shall be forgiven and shall not be required to be repaid and the amount of such advance shall offset, to the extent thereof, the amount of Gross-Up Payment required to be paid. 6.9 Payments Conditioned on Waiver. Notwithstanding any ------------------------------ other provision of this Agreement, where a payment is due to Executive under Section 6.4, 6.6 or 6.7 hereunder, no such payments shall be made unless and until Executive (or his Estate) shall have executed a copy of a waiver and release in the form annexed hereto as Exhibit "A"; provided, however, that any such waiver and release shall expressly protect all rights and benefits of Executive under this Agreement, including without limitation, the rights under Sections 6.4, 6.6 and 6.7. Section 7. Confidentiality 7.1 Confidentiality. During the Term of this Agreement and --------------- thereafter in perpetuity, the Executive will not directly or indirectly divulge or appropriate to his own use, or to the use of any third party, any "trade secrets" or "confidential information" (as defined in Section 7.2) of the Company or any of the Company's subsidiaries or affiliates (hereinafter, the Company and its subsidiaries and affiliates shall be collectively referred to as the "Company Group"), except as may be in the public domain other than by violation of this Agreement or as may be required by law. 7.2 Trade Secrets and Confidential Information. "Trade ------------------------------------------ Secrets" as used herein means all secret discoveries, inventions, formulae, designs, methods, processes, techniques of production and know-how relating to the Company Group's business. "Confidential Information" as used herein means the Company Group's internal policies and procedures, suppliers, customers, financial informa- tion and marketing practices, as well as secret dis- coveries, inventions, formulae, designs, techniques of production, know-how and other information relating to the Company Group's business not rising to the level of a trade secret under applicable law. Section 8. Indemnification The Company hereby covenants and agrees, to the fullest extent permitted by law, to indemnify and hold harmless the Executive fully, completely and absolutely against and in respect to any and all actions, suits, proceedings, claims, demands, judgments, costs, expenses (including reasonable attorney's fees), losses, and damages resulting from the Executive's good faith performance of his duties and obligations under the terms of this Agreement. Section 9. Assignment 9.1 Assignment by Company. This Agreement may be assigned or --------------------- transferred to, and shall be binding upon and shall inure to the benefit of, any successor of the Company, and any such successor shall be deemed substituted for the "Com- pany" for all purposes under this Agreement. As used in this Agreement, the term "successor" shall mean any person, firm, corporation, or business entity which at any time, whether by merger, purchase, or otherwise, acquires all or substantially all of the assets of the Company. Except as herein provided, this Agreement may not be assigned by the Company. 9.2 Assignment by Executive. This Agreement shall inure to ----------------------- the benefit of and be enforceable by the Executive's personal or legal representatives, executors, and administrators, successors, heirs, distributees, devisees, and legatees. If the Executive should die while any amounts payable to the Executive hereunder remain outstanding, all such amounts, unless otherwise provided herein, shall be paid in accordance with the terms of this Agreement to the Executive's devisee, legatee, or other designee or, in the absence of such designee, to the Executive's estate. Section 10. Dispute Resolution and Notice 10.1 Arbitration. Any dispute or controversy arising under or ----------- in connection with this Agreement shall be settled by arbitration, conducted before a panel of three (3) arbitrators sitting in a location selected by the Executive within fifty (50) miles of the location of his employment with the Company, in accordance with the rules of the American Arbitration Association then in effect. Judgment may be entered on the award of the arbitrator in any court having proper jurisdiction. All expenses of such arbitration, other than the fees and expenses of the counsel for the Executive shall be borne, by the Company. 10.2 Notice. For the purpose of this Agreement, any notices, ------ requests, demands, or other communications provided for by this Agreement shall be in writing and shall be deemed to have been duly given when delivered or mailed by United States registered or certified mail, return receipt requested, postage prepaid, or by recognized overnight delivery service (such as, but not limited to, Federal Express), to the Executive at the last address he has filed in writing with the Company or, in the case of the Company, at its principal offices, to the attention of the President. Section 11. Miscellaneous 11.1 Gender and Number. Except where otherwise indicated by ----------------- the context, any masculine term used herein also shall include the feminine, the plural shall include the singular, and the singular shall include the plural. 11.2 Modification. This Agreement shall not be varied, ------------ altered, modified, canceled, changed, or in any way amended except by mutual agreement of the parties in a written instrument executed by the parties hereto or their legal representatives. 11.3 Severability. In the event that any provision or portion ------------ of this Agreement shall be determined to be invalid or unenforceable for any reason, the remaining provisions of this Agreement shall be unaffected thereby and shall remain in full force and effect. 11.4 Counterparts. This Agreement may be executed in one (1) ------------ or more counterparts, each of which shall be deemed to be an original, but all of which together will constitute one and the same Agreement. 11.5 Tax Withholding. The Company may withhold from any --------------- benefits payable under this Agreement all federal, state, city, or other taxes as may be required pursuant to any law or governmental regulation or ruling. 11.6 Beneficiaries. The Executive may designate one or more ------------- persons or entities as the primary and/or contingent beneficiaries of any amounts to be received under this Agreement. Such designation must be in the form of a signed writing acceptable to the President. The Execu- tive may make or change such designation at any time. Section 12. Governing Law To the extent not preempted by federal law, the provisions of this Agreement shall be construed and enforced in accordance with the laws of the state of Texas, without regard to conflicts of law principles. IN WITNESS WHEREOF, the Executive and the Company has executed this Agreement, as of the day and year first above written. SOUTHERN UNION COMPANY Executive: By: NANCY CAPEZZUTI THOMAS F. KARAM ------------------------- ---------------------------- Name: Nancy Capezzuti Title: Senior Vice President -- HR EX-10.B 5 EXHIBIT 10(b) SECURED PROMISSORY NOTE FOR VALUE RECEIVED, the undersigned, Thomas F. Karam ("Maker") promises to pay to the order of Southern Union Company, a Dela- ware corporation ("Payee"), at 504 Lavaca, Suite 800, Austin, Texas 78701, the sum of Four Million Dollars ($4,000,000.00) in lawful money of the United States of America, together with interest from the date of this Note on the principal amount from time to time remaining unpaid, at the rate per annum described below. So long as no event of default hereunder has occurred, this Note shall bear interest at the rate of seven percent (7%) per annum. From and after the occurrence of any event of default hereunder, the unpaid principal balance of this note shall bear interest at a rate equal to the lesser of (a) the maximum rate permitted by Texas law or (b) the prime lending rate of Chase Texas National Bank, N.A., plus two percent per annum. This note shall be paid in ten (10) annual installments. The first nine installments will be in the amount of Five Hundred Sixty-Nine Thousand Five Hundred Ten Dollars ($569,510.00) each commencing on December 20, 2000, and on December 20 of the next nine years thereafter. The outstanding principal balance and any accrued but unpaid interest owing hereunder shall be due and payable on December 20, 2009. Maker may at any time prepay, in whole in part, and without any premium or penalty therefore, the principal amount of this Note then remaining unpaid, together with all accrued interest payable on the Note, and interest shall cease to run from the date of payment of such part on all of the principal amount of this Note as shall be so prepaid. Any such prepayment under this Note shall be applied first to accrued interest and the balance to principal, but no part prepayment shall delay or otherwise affect the maturity date of this Note with respect to the unpaid balance thereof. Payment of this Note is secured by a certain security agreement of even date herewith between Maker and Payee. If this Note is not paid at maturity, and after maturity this Note is placed in the hands of an attorney for collection, or if any amounts owed under this Note are collected through any legal proceedings, including but not limited to probate, insolvency, or bankruptcy proceedings, or if suit is brought on the same, Maker agrees to pay a reasonable amount as attorney's fees and expenses of collection. In the event of a default in Maker's performance of this Note, the above described security agreement or any other agreement securing payment hereof, and if Maker shall not have cured such default within ten (10) days after Maker shall have received from Payee written notice of such Payee's intent to accelerate the maturity of this Note, then Payee may, without further demand, notice or presentment, all of which are hereby severally waived by Maker, and waived by any and all sureties, guarantors, and endorsers of this Note, may accelerate the maturity of this Note, upon which the entire unpaid balance of the principal of this Note, together with all accrued but unpaid interest on the Note, shall be at once due and payable. As used in this Note, the term "Maker" shall be deemed to include Thomas F. Karam and his heirs, personal representatives, succes- sors or assigns. The term "Payee" shall be deemed to include Southern Union Company and its successors and assigns. Executed this 20th day of December, 1999. THOMAS F. KARAM --------------- Thomas F. Karam, an individual SECURITY AGREEMENT THIS AGREEMENT is made as of the 20th day of December, 1999, by and between SOUTHERN UNION COMPANY, a Delaware corporation ("Secured Party") and THOMAS F. KARAM ("Debtor"). WHEREAS, Debtor is indebted to Secured Party pursuant to a certain promissory note of even date herewith in the principal amount of Four Million Dollars ($4,000,000.00) (the "Note") executed by Debtor and payable to the order of Secured Party; and WHEREAS, Debtor desires to secure the prompt payment and performance of the Note by executing this Agreement in favor of Secured Party. NOW, THEREFORE, in consideration of the extension of credit described above and the mutual covenants contained herein, the parties agree as follows: 1. Defined Terms. The following terms will have the meanings ------------- indicated below: 1.1 "Collateral" shall mean the Stock Options, and any proceeds or products thereof, including stock and cash or stock dividends. 1.2 "Default" shall mean Debtor's breach of any covenant contained herein or in the Note, or any renewal, modification, extension or amendment thereof. 1.3 "Stock Options" shall mean all options, warrants, rights under any shareholders' rights agreements, or any other rights whatsoever to acquire the common stock of Southern Union Company, whether now owned or hereafter acquired by Debtor. 2. Grant of Security Interest. As security for the prompt per- -------------------------- formance and payment of the Note, together with all accrued interest thereon and all renewals, extensions, modifications, amendments and increases thereof (all of the foregoing is referred to herein as the "Secured Indebtedness"), Debtor hereby pledges and grants to Secured Party a security Interest in and to the Collateral. Upon Secured Party's request, Debtor shall deliver to Secured Party all certifi- cates evidencing Debtor's ownership of the Pledged Stock, along with duly executed assignments separate from certifi- cate for such stock certificates. 2.1 Voting Rights. Prior to the occurrence of a Default, ------------- Debtor will retain all voting rights with respect to the Collateral. Immediately and without further notice, on and after any Default, Secured Party shall have the right to exercise all voting rights, all other corporate shareholder's rights with respect to the Collateral as if Secured Party were the absolute owner thereof. 2.2 Dividends. Unless a Default has occurred and is --------- continuing, Debtor shall be entitled to receive for his own use all cash dividends paid on the Pledged Stock. On the occurrence of a Default hereunder, Secured Party may require that any such cash dividends be delivered to Secured Party as additional security hereunder or applied toward satisfaction of the Secured Indebtedness. 2.3 Sale of Collateral. On the occurrence of a Default, ------------------ Secured Party may, without demand of performance or other demand, advertisement, or notice of any kind to Debtor or to any other person, forthwith foreclose on the Collateral or any part thereof by self-help repossession or by any other method permitted by the Uniform Commercial Code or otherwise, and sell or otherwise dispose of an deliver the Collateral or any part thereof, in one or more parcels, at public or private sale or sales, at such prices and on such terms as Secured party deems acceptable, with the right to Secured Party or any other party to purchase all or any part of the Collateral free of any right or equity of redemption in Debtor, which right or equity is hereby expressly waived and released. 2.4 Application of Proceeds of Sale. In the event of any ------------------------------- sale or disposition pursuant to Section 2.3 above, the proceeds of such sale or disposition shall be applied as follows: (i) first, to the costs and expenses of retaking, preparation for sale and sale of the Collateral, including Secured Party's legal expenses; (ii) second, to satisfaction of the Secured Indebted- ness; (iii) third, to the payment of any other amounts required or permitted to be paid under Section 9-504 of the Uniform Commercial Code; and (iv) fourth, to Debtor to the extend of any surplus proceeds. 2.5 Notice of Sale. Secured Party will give Debtor at least -------------- ten (10) days' prior notice of the time and place of any public sale or of the time after which a private sale may take place, which notice Debtor hereby agrees is reasonable. 2.6 Deficiency. In the event the Secured Indebtedness is no ---------- completely satisfied from the proceeds of sale or dispo- sition, Debtor shall remain liable for such deficiency. 3. Debtor's Representations and Warranties. Debtor represents --------------------------------------- and warrants that the Collateral is owned by Debtor free of any pledge, mortgage, hypothecation, lien, charge, emcum- brance or security interest other than the Security Interest granted herein. 4. Negative Covenants. During the term of this Agreement, ------------------ Debtor will not sell, convey, or otherwise dispose of any of the Collateral, nor will Debtor create, incur or permit to exist any pledge, mortgage, lien, charge, encumbrance or any security interest whatsoever in or with respect to any of the Collateral, other than the Security Interest granted hereby. 5. Notices. All notices permitted or required under this ------- Agreement shall be delivered to the parties at the following addresses: Debtor Thomas F. Karam ----------------------------- ----------------------------- ----------------------------- Secured Party Southern Union Company 504 Lavaca, Suite 800 Austin, TX 78701 Attention: Peter H. Kelley Any such notice shall be deemed to have been given on the earlier of actual receipt or the date two business days after deposited in the U.S. Mail, postage prepaid, at the address set forth above, or at such other address as the recipient shall have designated in writing. 6. Controlling Law. This Agreement shall be governed by the --------------- internal laws of the State of Texas without regard to principles of conflicts of laws. IN WITNESS WHEREOF, the parties have duly executed this Agreement effective as of the date set forth above. THOMAS F. KARAM ------------------------------ Thomas F. Karam, an individual SOUTHERN UNION COMPANY By: PETER H. KELLEY --------------------------- Peter H. Kelley, President FINANCIAL DATA SCHEDULE EX-27 6
UT JUN-30-1999 DEC-31-1999 6-MOS PER-BOOK $ 1,461,668,000 $ 24,680,000 $ 226,779,000 $ 133,022,000 $ 15,021,000 $ 1,861,170,000 $ 48,619,000 $ 603,414,000 $ 1,032,000 $ 628,603,000 $ 0 $ 100,000,000 $ 734,878,000 $ 12,903,000 $ 0 $ 0 $ 1,971,000 $ 0 $ 0 $ 0 $ 161,396,000 $ 1,861,170,000 $ 324,381,000 $ 778,000 $ 59,458,000 $ 92,065,000 $ 32,706,000 $ (4,493,000) $ 22,695,000 $ 21,663,000 $ 1,032,000 $ 0 $ 1,032,000 $ 0 $ 0 $ (43,706,000) $ .03 $ .03
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