-----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, HaqrjwijZCc9xi6cyd3zRgD9WBzP6JUz1yJm4JeOIssFndJscaY5NBS5GnOhaK3L K9NKO7n6AK6AjTSPZZydYg== 0000203248-01-500015.txt : 20010426 0000203248-01-500015.hdr.sgml : 20010426 ACCESSION NUMBER: 0000203248-01-500015 CONFORMED SUBMISSION TYPE: 10-Q/A PUBLIC DOCUMENT COUNT: 1 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010425 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/A SEC ACT: SEC FILE NUMBER: 001-06407 FILM NUMBER: 1610761 BUSINESS ADDRESS: STREET 1: 504 LAVACA ST 8TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124775852 10-Q/A 1 sug10qdec.txt DECEMBER 2000 10Q/A UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 FORM 10-Q/A Amendment No. 1 For the quarterly period ended December 31, 2000 Commission File No. 1-6407 SOUTHERN UNION COMPANY (Exact name of registrant as specified in its charter) Delaware 75-0571592 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 504 Lavaca Street, Eighth Floor 78701 Austin, Texas (Zip Code) (Address of principal executive offices) Registrant's telephone number, including area code: (512) 477-5852 Securities Registered Pursuant to Section 12(b) of the Act: Title of each class Name of each exchange in which registered - ------------------- ----------------------------------------- Common Stock, par value $1 per share New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes T No The number of shares of the registrant's Common Stock outstanding on February 8, 2001 was 50,972,091. SOUTHERN UNION COMPANY AND SUBSIDIARIES FORM 10-Q/A December 31, 2000 Index PART I. FINANCIAL INFORMATION Page(s) Item 1. Financial Statements Consolidated statements of operations - three, six and twelve months ended December 31, 2000 and 1999 2-4 Consolidated balance sheet - December 31, 2000 and 1999 and June 30, 2000 5-6 Consolidated statement of stockholders' equity - six months ended December 31, 2000 and twelve months ended June 30, 1999 7 Consolidated statements of cash flows - three, six and twelve months ended December 31, 2000 and 1999 8-10 Notes to consolidated financial statements 11-21 Item 2. Management's Discussion and Analysis of Financial Condition and Results 22-30 of Operations Item 3. Quantitative and Qualitative Disclosures about Market Risk 30 PART II. OTHER INFORMATION Item 1. Legal Proceedings (See "COMMITMENTS AND CONTINGENCIES" in Notes to Consolidated Financial Statements) 18-21 Item 4. Result of Votes of Security Holders 31 Item 6. Exhibits and Reports on Form 8-K (a) Reports on Form 8-K -- Announcement of completed acquisitions of Valley Resources on September 20, 2000, Providence Energy Corporation on September 28, 2000 and Fall River Gas Company on September 28, 2000 (Filed on October 5, 2000) SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended December 31, 2000 1999 ------------ ----------- (Restated) (thousands of dollars, except shares and per share amounts) Operating revenues ........................... $ 605,339 $ 239,595 Cost of gas and other energy ................. 433,925 145,113 ------------ ------------ Operating margin ........................ 171,414 94,482 Revenue-related taxes ........................ 23,854 11,256 ------------ ------------ Net operating margin .................... 147,560 83,226 Operating expenses: Operating, maintenance and general ...... 62,151 34,194 Depreciation and amortization ........... 23,738 13,500 Taxes, other than on income and revenues 7,950 4,634 - ---------------------------------------------- ------------ ------------ Total operating expenses ........... 93,839 52,328 - ---------------------------------------------- ------------ ------------ Net operating revenues ............. 53,721 30,898 ------------ ------------ Other income (expense): Interest ............................... (30,303) (13,299) Dividends on preferred securities of subsidiary trust ..................... (2,370) (2,370) Other, net ............................. 14,911 (3,336) ------------ ------------ Total other expenses, net ......... (17,762) (19,005) ------------ ------------ Earnings before income taxes ...... 35,959 11,893 Federal and state income taxes .............. 16,641 4,761 ------------ ------------ Net earnings available for common stock ..... $ 19,318 $ 7,132 ============ ============ Net earnings per share: Basic .................................. $ .39 $ .16 ============ ============ Diluted ................................ $ .37 $ .16 ============ ============ Weighted average shares outstanding: Basic ................................. 49,924,123 43,421,029 ============ ============ Diluted ............................... 52,749,286 45,383,264 ============ ============ See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Six Months Ended December 31, 2000 1999 ------------ ------------ (Restated) (thousands of dollars, except shares and per share amounts) Operating revenues ....................................... $ 749,808 $ 324,381 Cost of gas and other energy ............................. 518,458 184,390 - ---------------------------------------------------------- ------------ ----------- Operating margin ..................................... 231,350 139,991 Revenue-related taxes ..................................... 28,933 15,220 ------------ ------------ Net operating margin ................................. 202,417 124,771 Operating expenses: Operating, maintenance and general ................... 99,169 59,458 Depreciation and amortization ........................ 39,704 24,348 Taxes, other than on income and revenues ............. 12,810 8,259 ------------ ------------ Total operating expenses ........................ 151,683 92,065 ------------ ------------ Net operating revenues .......................... 50,734 32,706 ------------ ------------ Other income (expense): Interest ............................................. (46,609) (21,663) Dividends on preferred securities of subsidiary trust (4,740) (4,740) Other, net ........................................... 9,397 (4,493) ------------ ------------ Total other expenses, net ...................... (41,952) (30,896) ------------ ------------ Earnings before income taxes and cumulative effect of change in accounting principle ............. 8,782 1,810 Federal and state income taxes ........................... 4,040 778 ------------ ------------ Earnings before cumulative effect of change in accounting principle .................................. 4,742 1,032 Cumulative effect of change in accounting principle, net of tax ............................................. 602 -- ------------ ------------ Net earnings available for common stock .................. $ 5,344 $ 1,032 ============ ============ Net earnings per share: Basic Before cumulative effect of change in accounting principle ........................ $ .10 $ .03 Cumulative effect of change in accounting principle, net of tax ....................... .01 -- - --------------------------------------------------------- ------------ ----------- $ .11 $ .03 ========================================================= ============ =========== Diluted Before cumulative effect of change in accounting principle ....................... $ .09 $ .03 Cumulative effect of change in accounting principle, net of tax ...................... .01 -- - --------------------------------------------------------- ------------ ----------- $ .10 $ .03 =========================================================== ============ =========== Weighted average shares outstanding: Basic ................................................ 49,255,805 37,944,658 =========================================================== ============ =========== Diluted .............................................. 51,889,835 39,831,493 =========================================================== ============ ============
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS
Twelve Months Ended December 31, 2000 1999 ------------- -------------- (Restated) (thousands of dollars, except shares and per share amounts) Operating revenues ...................................................... $ 1,257,131 $ 677,933 Cost of gas and other energy ............................................ 831,767 388,078 ------------ ------------ Operating margin ................................................... 425,364 289,855 Revenue-related taxes ................................................... 48,608 34,573 ------------ ------------ Net operating margin ............................................... 376,756 255,282 Operating expenses: Operating, maintenance and general ................................. 176,298 116,030 Depreciation and amortization ...................................... 70,495 45,291 Taxes, other than on income and revenues ........................... 21,820 15,768 ------------ ------------ Total operating expenses ...................................... 268,613 177,089 ------------ ------------ Net operating revenues ........................................ 108,143 78,193 ------------ ------------ Other income (expense): Interest ........................................................... (76,438) (39,779) Dividends on preferred securities of subsidiary trust .............. (9,480) (9,480) Other, net ......................................................... 4,183 (6,870) ------------ ----------- Total other expenses, net ..................................... (81,735) (56,129) ------------ ----------- Earnings before income taxes and cumulative effect of change in accounting principle ............................ 26,408 22,064 Federal and state income taxes .......................................... 12,853 8,913 ------------ ------------ Earnings before cumulative effect of change in accounting principle ..... 13,555 13,151 Cumulative effect of change in accounting principle, net of tax ......... 602 -- ------------ ------------ Net earnings available for common stock ................................. $ 14,157 $ 13,151 ============ ============ Net earnings per share: Basic Before cumulative effect of change in accounting principle .... $ .28 $ .37 Cumulative effect of change in accounting principle, net of tax .01 -- ------------ ------------ $ .29 $ .37 Diluted Before cumulative effect of change in accounting principle .... $ .27 $ .35 Cumulative effect of change in accounting principle, net of tax .01 -- ------------ ------------ $ .28 $ .35 ============ ============ Weighted average shares outstanding: Basic .............................................................. 49,080,587 35,359,486 ============ ============ Diluted ............................................................ 51,417,448 37,071,537 ============ ============
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS
December 31, June 30, ------------------------ 2000 1999 2000 ----------- ------------- ------------- (Restated) (Restated) (thousands of dollars) Property, plant and equipment: Plant in service ........................................ $ 2,162,069 $ 1,529,005 $ 1,580,077 Construction work in progress ........................... 30,611 33,414 30,192 ----------- ----------- ----------- 2,192,680 1,562,419 1,610,269 Less accumulated depreciation and amortization .......... (746,779) (489,223) (509,947) - -------------------------------------------------------------- ----------- ----------- ----------- 1,445,901 1,073,196 1,100,322 Additional purchase cost assigned to utility plant, net 733,893 388,472 386,839 ----------- ----------- ----------- Net property, plant and equipment ....................... 2,179,794 1,461,668 1,487,161 - -------------------------------------------------------------- ----------- ----------- ----------- Current assets: Cash and cash equivalents .............................. 7,840 -- 27,829 Accounts receivable, billed and unbilled, net .......... 410,419 149,233 74,959 Inventories, principally at average cost ............... 118,543 70,405 60,259 Deferred gas purchase costs ............................ 32,110 -- -- Investment securities available for sale ............... 105,587 -- 187,817 Prepayments and other .................................. 14,296 7,141 877 ----------- ----------- ----------- Total current assets .............................. 688,795 226,779 351,741 ----------- ----------- ---------- Deferred charges ............................................ 209,594 133,022 145,006 Investment securities, at cost .............................. 20,081 12,160 10,489 Real estate ................................................. 2,599 12,520 9,461 Other ....................................................... 37,815 15,021 17,602 ----------- ----------- ----------- Total assets .......................................... $ 3,138,678 $ 1,861,170 $ 2,021,460 =========== =========== ===========
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) STOCKHOLDERS' EQUITY AND LIABILITIES
December 31, June 30, ------------------------- 2000 1999 2000 ---------- ----------- ------------ (Restated) (Restated) (thousands of dollars) Common stockholders' equity: Common stock, $1 par value; authorized 200,000,000 shares; issued 51,982,168 shares ................. $ 51,982 $ 48,049 $ 50,521 Premium on capital stock ............................. 626,251 592,097 599,835 Less treasury stock, 1,010,077 shares at cost ........ (15,895) (2,120) (15,554) Less common stock held in trust ...................... (16,990) (10,019) (15,330) Directors deferred compensation ...................... 899 712 808 Accumulated other comprehensive income (loss) ........ 62,983 (436) 115,175 Retained earnings .................................... 5,344 1,032 -- - ----------------------------------------------------------- ----------- ----------- ----------- Total common stockholders' equity .................... 714,574 629,315 735,455 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely subordinated notes of Southern Union .............................. 100,000 100,000 100,000 Long-term debt and capital lease obligation ............... 1,375,760 734,878 733,774 - ----------------------------------------------------------- ----------- ----------- ----------- Total capitalization ................................. 2,190,334 1,464,193 1,569,229 Current liabilities: Long-term debt and capital lease obligation due within one year ........................................ 5,173 1,971 2,193 Notes payable ........................................ 175,000 12,903 3 Accounts payable ..................................... 282,110 75,294 77,488 Federal, state and local taxes ....................... 27,761 12,467 7,359 Accrued interest ..................................... 21,290 16,278 15,922 Customer deposits .................................... 20,952 17,834 17,255 Deferred gas purchase costs .......................... -- 19,292 11,708 Other ................................................ 72,187 20,231 30,778 - ----------------------------------------------------------- ----------- ----------- ----------- Total current liabilities ........................ 604,473 176,270 162,706 - ----------------------------------------------------------- ----------- ----------- ----------- Deferred credits and other ................................ 148,240 98,131 106,015 Accumulated deferred income taxes ......................... 195,631 122,576 183,510 Commitments and contingencies ............................. -- -- -- ----------- ----------- ----------- Total ................................................ $ 3,138,678 $ 1,861,170 $ 2,021,460 =========================================================== =========== =========== ===========
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Common Accumulated Common Premium Treasury Stock Other Retained Stock, $1 on Capital Stock, at Held in Comprehen- Earnings/ Par Value Stock Cost Trust sive Income (Deficit) Total --------- ------------ ---------- ------------ ---------- ----------- -------- (thousands of dollars) Balance July 1, 1999 ......................$ 31,240 $ 276,610 $ (794) $ (4,927) $ (436) $ -- $ 301,693 Comprehensive income: Net earnings (restated) .............. -- -- -- -- -- 9,845 9,845 Unrealized gain in investment securities, net of tax ............. -- -- -- -- 115,175 -- 115,175 Minimum pension liability adjustment; net of tax ............. -- -- -- -- 436 -- 436 Comprehensive income ................. 125,456 Purchase of common stock held in trust ........................ -- -- -- (9,864) -- -- (9,864) 5% stock dividend (restated) ........... 2,359 7,452 -- -- -- (9,845) (34) Purchase of treasury stock ............. -- -- (14,425) -- -- -- (14,425) Issuance of stock for acquisition ...... 16,714 315,235 -- -- -- -- 331,949 Exercise of stock options .............. 208 538 (335) 269 -- -- 680 --------- --------- --------- --------- --------- --------- --------- Balance June 30, 2000 .................... 50,521 599,835 (15,554) (14,522) 115,175 -- 735,455 Comprehensive income: Net earnings (restated) ............. -- -- -- -- -- 5,344 5,344 Unrealized loss in investment securities, net of tax benefit . -- -- -- -- (51,822) -- (51,822) Cumulative effect of change in accounting principle ........... -- -- -- -- 826 -- 826 Unrealized loss on hedging activities ..................... -- -- -- -- (1,196) -- (1,196) Comprehensive income (loss) ......... (46,848) Payment on note receivable ............ -- 290 -- -- -- -- 290 Purchase of common stock held in trust ....................... -- -- -- (1,865) -- -- (1,865) Issuance of stock for acquisition ..... 1,371 25,505 -- -- -- -- 26,876 Exercise of stock options ............. 90 621 (341) 296 -- -- 666 --------- --------- --------- --------- --------- --------- -------- Balance December 31, 2000 ............... $ 51,982 $ 626,251 $ (15,895) $ (16,091) $ 62,983 $ 5,344 714,574 ========================================= ========= ========= ========= ========= ========= ========= =========
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended December 31, 2000 1999 --------- --------- (Restated) (thousands of dollars) Cash flows used in operating activities: Net earnings .............................................................. $ 19,318 $ 7,132 Adjustments to reconcile net earnings to net cash flows used in operating activities: Depreciation and amortization ......................................... 23,738 13,500 Deferred income taxes ................................................. (4,235) 1,385 Non-cash compensation expense ......................................... 2,038 -- Provision for bad debts ............................................... 5,231 (866) Financial derivative trading losses ................................... 5,849 -- Gain on sale of investment securities ................................. (8,869) -- Gain on sale of real estate ........................................... (13,532) -- Deferred interest expense ............................................. (380) 46 Other ................................................................. 1,186 442 Changes in assets and liabilities, net of acquisitions: Accounts receivable, billed and unbilled ............................ (288,525) (82,108) Accounts payable .................................................... 177,660 32,352 Taxes and other liabilities ......................................... 19,534 11,581 Customer deposits ................................................... (127) 292 Deferred gas purchase costs ......................................... (8,261) 5,037 Inventories ......................................................... 954 817 Other ............................................................... (3,884) (2,647) --------- --------- Net cash flows used in operating activities ............................. (72,305) (13,037) --------- --------- Cash flows used in investing activities: Additions to property, plant and equipment ................................ (39,795) (22,404) Acquisition of operations, net of cash received ........................... 1,527 (35,831) Purchase of investment securities ......................................... (12,495) (10,634) Notes receivable .......................................................... 290 (4,000) Decrease in customer advances ............................................. (545) (1) Increase in deferred charges and credits .................................. 8,883 2,615 Proceeds from sale of investment securities ............................... 11,372 -- Proceeds from sale of real estate, net of closing costs ................... 20,638 -- Other ..................................................................... (353) (37) --------- --------- Net cash flows used in investing activities ............................. (10,478) (70,292) --------- --------- Cash flows from (used in) financing activities: Issuance of long-term debt ................................................ 55,000 300,000 Issuance cost of debt ..................................................... -- (6,498) Repayment of debt and capital lease obligation ............................ (7,174) (137,413) Premium on early extinguishment of acquired debt .......................... -- (719) Net borrowings (payments) under revolving credit facility ................. 39,547 (71,200) Purchase of treasury stock ................................................ -- (1,326) Other ..................................................................... 560 (111) --------- --------- Net cash flows from financing activities ................................ 87,933 82,733 --------- --------- Increase (decrease) in cash and cash equivalents ............................. 5,150 (596) Cash and cash equivalents at beginning of period ............................. 2,690 596 --------- --------- Cash and cash equivalents at end of period ................................... $ 7,840 $ - ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................................ $ 29,627 $ 5,763 ========= ========= Income taxes ............................................................ $ 52 $ -- ========= =========
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Six Months Ended December 31, 2000 1999 --------- ----------- (Restated) (thousands of dollars) Cash flows used in operating activities: Net earnings .............................................................. $ 5,344 $ 1,032 Adjustments to reconcile net earnings to net cash flows used in operating activities: Depreciation and amortization ......................................... 39,704 24,348 Deferred income taxes ................................................. (5,960) (230) Non-cash compensation expense ......................................... 2,455 - Provision for bad debts ............................................... 5,947 (346) Financial derivative trading losses ................................... 9,044 - Gain on sale of investment securities ................................. (8,869) - Gain on sale of real estate ........................................... (13,532) - Deferred interest expense ............................................. (658) 79 Cumulative effect of change in accounting principle ................... (602) -- Other ................................................................. 1,695 797 Changes in assets and liabilities, net of acquisitions: Accounts receivable, billed and unbilled ............................ (293,923) (72,744) Accounts payable .................................................... 164,448 20,870 Taxes and other liabilities ......................................... 18,478 (88) Customer deposits ................................................... (484) 152 Deferred gas purchase costs ......................................... (34,815) (7,531) Inventories ......................................................... (43,588) (10,054) Other ............................................................... (11,604) 9 --------- --------- Net cash flows used in operating activities ............................. (166,920) (43,706) --------- --------- Cash flows used in investing activities: Additions to property, plant and equipment ................................ (61,703) (42,822) Acquisition of operations, net of cash received ........................... (405,303) (35,831) Purchase of investment securities ......................................... (12,495) (12,047) Notes receivable .......................................................... 290 (4,000) Increase (decrease) in customer advances .................................. (16) 834 Increase (decrease) in deferred charges and credits ....................... 8,475 (1,908) Proceeds from sale of investment securities ............................... 11,372 -- Proceeds from sale of real estate, net of closing costs ................... 20,638 -- Other ..................................................................... (575) 421 --------- --------- Net cash flows used in investing activities ............................. (439,317) (95,353) --------- --------- Cash flows from (used in) financing activities: Issuance of long-term debt ................................................ 535,000 300,000 Issuance cost of debt ..................................................... (2,538) (6,498) Repayment of debt and capital lease obligation ............................ (7,709) (137,908) Premium on early extinguishment of acquired debt .......................... -- (719) Net borrowings (payments) under revolving credit facility ................. 174,997 (8,100) Purchase of treasury stock ................................................ -- (1,326) Change in cash overdrafts ................................................. -- (6,655) Payment of merger debt assumed ............................................ (114,171) -- Other ..................................................................... 669 265 --------- --------- Net cash flows from financing activities ................................ 586,248 139,059 --------- --------- Change in cash and cash equivalents .......................................... (19,989) -- Cash and cash equivalents at beginning of period ............................. 27,829 -- --------- --------- Cash and cash equivalents at end of period ................................... $ 7,840 $ -- ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................................ $ 47,422 $ 23,217 ========= ========= Income taxes ............................................................ $ 52 $ - ========= =========
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS
Twelve Months Ended December 31, 2000 1999 ---------- ---------- (Restated) (thousands of dollars) Cash flows from (used in) operating activities: Net earnings .............................................................. $ 14,157 $ 13,151 Adjustments to reconcile net earnings to net cash flows from (used in) operating activities: Depreciation and amortization ......................................... 70,495 45,291 Deferred income taxes ................................................. (5,294) 8,896 Provision for bad debts ............................................... 11,291 1,754 Financial derivative trading losses ................................... 11,280 -- Deferred interest expense ............................................. (1,049) 334 Cumulative effect of change in accounting principle ................... (602) -- Non-cash compensation expense ......................................... 2,311 -- Gain on sale of investment securities ................................. (8,869) -- Gain on sale of real estate ........................................... (13,532) -- Other ................................................................. 2,606 1,089 Changes in assets and liabilities, net of acquisitions: Accounts receivable, billed and unbilled ............................ (225,009) (23,771) Accounts payable .................................................... 166,180 4,159 Taxes and other liabilities ......................................... 12,930 (1,603) Customer deposits ................................................... (4,043) (828) Deferred gas purchase costs ......................................... (42,398) 11,011 Inventories ......................................................... (33,443) (2,994) Other ............................................................... (9,703) (132) --------- --------- Net cash flows from (used in)operating activities ....................... (52,692) 56,357 --------- --------- Cash flows used in investing activities: Additions to property, plant and equipment ................................ (119,327) (81,004) Acquisition of operations, net of cash received ........................... (407,838) (35,831) Purchase of investment securities ......................................... (21,449) (19,047) Notes receivable .......................................................... 290 (4,000) Increase in customer advances ............................................. 500 1,265 Increase (decrease) in deferred charges and credits ....................... 6,726 (7,089) Proceeds from sale of subsidiary .......................................... 12,150 -- Proceeds from sale of investment securities ............................... 11,372 -- Proceeds from sale of real estate, net of closing costs ................... 20,638 -- Other ..................................................................... (1,549) (445) --------- --------- Net cash flows used in investing activities ............................. (498,487) (146,151) --------- --------- Cash flows from (used in) financing activities: Issuance of long-term debt ................................................ 535,000 300,000 Issuance cost of debt ..................................................... (3,332) (6,498) Repayment of debt and capital lease obligation ............................ (8,592) (157,706) Premium on early extinguishment of acquired debt .......................... -- (719) Net borrowings (payments) under revolving credit facility ................. 162,097 (37,100) Purchase of treasury stock ................................................ (13,099) (1,326) Change in cash overdrafts ................................................. -- (6,853) Payment of merger debt assumed ............................................ (114,171) -- Other ..................................................................... 1,116 (4) --------- --------- Net cash flows from financing activities ................................ 559,019 89,794 --------- --------- Change in cash and cash equivalents .......................................... 7,840 -- Cash and cash equivalents at beginning of period ............................. -- -- --------- --------- Cash and cash equivalents at end of period ................................... $ 7,840 $ -- ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest ................................................................ $ 81,940 $ 50,477 ========= ======== Income taxes ............................................................ $ 4,373 $ 2,118 ========= ========
See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS These interim financial statements should be read in conjunction with the financial statements and notes thereto contained in Southern Union Company's (Southern Union and, together with its wholly-owned subsidiaries, the Company) Annual Report on Form 10-K/A for the fiscal year ended June 30, 2000. Certain prior period amounts have been reclassified to conform with the current period presentation. The interim financial statements are unaudited but, in the opinion of management, reflect all adjustments (including both normal recurring as well as any non-recurring) necessary for a fair presentation of the results of operations for such periods. Because of the seasonal nature of the Company's operations, the results of operations and cash flows for any interim period are not necessarily indicative of results for the full year. As further described below, the Company acquired Providence Energy Corporation and Fall River Gas Company on September 28, 2000, Valley Resources, Inc. on September 20, 2000 and Pennsylvania Enterprises, Inc. on November 4, 1999. Accordingly, the operating activities of the acquired operations are consolidated with the Company beginning on the respective acquisition dates. Thus, the results of operations of the Company for the periods subsequent to the acquisitions are not comparable to those periods prior to the acquisitions nor are the fiscal 2001 results of operations comparable with prior periods. RESTATED FINANCIAL STATEMENTS In March 2001, the Company discovered unauthorized financial derivative energy trading activity by a non-regulated, wholly-owned subsidiary. During March 2001 and April 2001, all unauthorized trading activity was closed resulting in a cumulative cash expense of $191,000, net of taxes. However, due to certain accounting rules, such trading contracts must be recorded at fair value as of each balance sheet date with gains and losses included in earnings. As a result, a restatement of financial information for the fiscal year ended June 30, 2000 and the two subsequent quarters was required. This restatement resulted in non-cash losses of $3,158,000 ($.06 per diluted share) and $4,884,000 ($.10 per diluted share), net of taxes, for the three- and six-month periods ended December 31, 2000, respectively, and cumulative non-cash losses of $6,092,000 ($.11 per diluted share), net of taxes, for the twelve-month period ended December 31, 2000, which is recorded in other, net. ACQUISITIONS On September 28, 2000, Southern Union completed the acquisition of Providence Energy Corporation (ProvEnergy) for approximately $270,000,000 in cash plus the assumption of approximately $90,000,000 in long-term debt. The ProvEnergy natural gas distribution operations are Providence Gas and North Attleboro Gas, which collectively serve approximately 176,000 natural gas customers. Providence Gas serves natural gas customers in Providence and Newport, Rhode Island, and 23 other cities and towns in Rhode Island. North Attleboro Gas serves customers in North Attleboro and Plainville, Massachusetts, towns adjacent to the northeastern Rhode Island border. Subsidiaries of the Company acquired in the ProvEnergy merger include ProvEnergy Oil Enterprises, Inc. ("ProvEnergy Oil"), and ProvEnergy Power Company, LLC. ProvEnergy Oil operates a fuel oil distribution business through its subsidiary, ProvEnergy Fuels, Inc. (ProvEnergy Fuels). ProvEnergy Fuels serves over 15,000 residential and commercial customers in Rhode Island and Massachusetts. ProvEnergy Power Company owns 50% of Capital Center Energy Company, LLC., a joint venture formed between ProvEnergy and ERI Services, Inc. to provide retail power. On September 28, 2000, Southern Union completed the acquisition of Fall River Gas Company (Fall River Gas) for approximately 1,400,000 shares of Southern Union common stock and approximately $27,000,000 in cash plus assumption of approximately $20,000,000 in long-term debt. Fall River Gas serves approximately 49,000 customers in the city of Fall River and the towns of Somerset, Swansea and Westport, all located in southeastern Massachusetts. Also acquired in the Fall River Gas merger was Fall River Gas Appliance Company, Inc., which rents water heaters and conversion burners (primarily for residential use) in Fall River Gas' service area. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS On September 20, 2000, Southern Union completed the acquisition of Valley Resources, Inc. (Valley Resources) for approximately $125,000,000 in cash plus the assumption of approximately $30,000,000 in long-term debt. Valley Resources natural gas distribution operations are Valley Gas Company and Bristol and Warren Gas Company, which collectively serve approximately 65,000 natural gas customers. Valley Resources' three non-utility subsidiaries acquired in the merger rent and sell appliances, offer service contract programs, sell liquid propane in Rhode Island and nearby Massachusetts, and distribute as a wholesaler franchised lines to plumbing and heating contractors. Also, acquired in the acquisition was Valley Resources' 90% interest in Alternate Energy Corporation, which sells, installs and designs natural gas conversion systems and facilities, is an authorized representative of the ONSI Corporation fuel cell, holds patents for a natural gas/diesel co-firing system and for a device to control the flow of fuel on dual-fuel equipment. The Company funded the cash portion of the above described acquisitions and any related refinancings of assumed debt with a bank note (the Term Note). See Debt and Capital Lease. The assets of ProvEnergy, Fall River Gas and Valley Resources (hereafter referred to as the Company's "New England Operations") have been included in the consolidated balance sheet of the Company at December 31, 2000 and the results of operations from the New England Operations have been included in the statement of consolidated operations since their respective acquisition dates. The New England Operations' primary business is the distribution of natural gas through its public utility companies (collectively referred to as the "New England Division"). The acquisitions were accounted for using the purchase method. The additional purchase cost assigned to utility plant of approximately $355,000,000 reflects the excess of the purchase price over the historical book carrying value of the utility plant. Amortization of the additional purchase cost assigned to utility plant is provided on a straight-line basis over forty years. The final allocation of the purchase price of the New England Operations acquisition is expected to be completed in the fourth quarter of fiscal year 2001. The Company plans to sell or dispose of certain non-core businesses acquired in the New England Operations. Prior to the consummation of the acquisition of the New England Operations, the Company purchased shares of Providence Energy Corporation, Fall River Gas Company and Valley Resources, Inc. common stock for $2,882,000. As all necessary approvals for the merger had not been obtained when these shares were purchased, these purchases were treated as investment securities prior to closing the mergers. On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc. (hereafter referred to as the "Pennsylvania Operations") in a transaction valued at approximately $500,000,000, including assumption of long-term debt of approximately $115,000,000. The Company issued approximately 16,700,000 shares (before adjustment for any subsequent stock dividend) of common stock and paid approximately $36,000,000 in cash to complete the transaction. The Company funded the cash portion of the acquisition of the Pennsylvania Operations and related refinancings with the sale of $300,000,000 of 8.25% Senior Notes due 2029 completed on November 3, 1999 (8.25% Senior Notes). See Debt and Capital Lease. The Pennsylvania Operations are headquartered in Wilkes-Barre, Pennsylvania with natural gas distribution being its primary business. The principal operating division of the Pennsylvania Operations is the PG Energy division of the Company which serves more than 156,000 gas customers in northeastern and central Pennsylvania. Subsidiaries of the Company included in the Pennsylvania Operations merger included PG Energy Services Inc., (Energy Services), Keystone Pipeline Services, Inc. (Keystone, a wholly-owned subsidiary of PG Energy Services Inc.), PEI Power Corporation, and Theta Land Corporation. Through Energy Services the Company markets a diversified range of energy-related products and services under the name of PG Energy PowerPlus and supplies propane under the name of PG Energy Propane. Keystone provides pipeline and fiber optic cable construction, installation, maintenance, and rehabilitation services. PEI Power Corporation operates a cogeneration plant that generates steam and electricity for resale. Theta Land Corporation, which owned and provided land management and development services for more than 44,000 acres of land, was sold for $12,150,000 in January 2000. No gain or loss was SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS recognized on this transaction. The Company plans to sell or dispose of both Keystone and the propane operations of Energy Services, which are not material to the Company. The Company has not yet sold these operations and there can be no assurance that a sale on terms satisfactory to the Company will be completed. The assets of the Pennsylvania Operations are included in the consolidated balance sheet of the Company at December 31, 2000 and the results of operations from the Pennsylvania Operations have been included in the statement of consolidated operations since November 4, 1999. The acquisition was accounted for using the purchase method. The additional purchase cost assigned to utility plant of approximately $261,000,000 reflects the excess of the purchase price over the historical book carrying value of the utility plant. Amortization of the additional purchase cost assigned to utility plant is provided on a straight-line basis over forty years. Prior to the consummation of the acquisition of the Pennsylvania Operations, the Company purchased 358,500 shares of Pennsylvania Enterprises, Inc. stock for $11,887,000 during both the first and second quarters of the Company's fiscal year 2000. As all necessary approvals for the merger had not been obtained, these purchases were treated as investment securities. Pro Forma Financial Information The following unaudited pro forma financial information for the six-month periods ended December 31, 2000 and 1999 is presented as though the following events had occurred at the beginning of the earliest period presented: (i) acquisition of the New England Operations and the Pennsylvania Operations; (ii) the issuance of the Term Note and the sale of the 8.25% Senior Notes; and (iii) the refinancing of certain short-term and long-term debt at the time of the acquisitions. The pro forma financial information is not necessarily indicative of the results which would have actually been obtained had the acquisition of the New England Operations and Pennsylvania Operations, the issuance of the Term Note, the sale of senior notes or the refinancings been completed as of the assumed date for the periods presented or which may be obtained in the future. Six Months Ended December 31, 2000 1999 ------------------------ (Restated) Operating revenues ........................... $ 793,467 $ 507,195 Income (loss) before extraordinary item ...... (16,273) (29,307) Net earnings (loss) available for common stock (16,273) (29,307) Net earnings (loss) per common stock: Basic ................................... (.32) (.58) Diluted ................................. (.32) (.58) EARNINGS PER SHARE Average shares outstanding, which excludes treasury stock, for basic earnings per share were 49,924,123 and 43,421,029 for the three-month period ended December 31, 2000 and 1999 respectively; 49,255,805 and 37,944,658 for the six-month period ended December 31, 2000 and 1999, respectively; and 49,080,587 and 35,359,486 for the twelve-month period ended December 31, 2000 and 1999, respectively. Diluted earnings per share includes average shares outstanding as well as common stock equivalents from stock options and warrants. Common stock equivalents were 1,813,679 and 1,540,243 for the three-month period ended December 31, 2000 and 1999, respectively; 1,639,167 and 1,523,318 for the six-month period ended December 31, 2000 and 1999, respectively; and 1,391,032 and 1,528,799 for the twelve-month period ended December 31, 2000 and 1999, respectively. At December 31, 2000, 1,000,335 shares of common stock were held by various rabbi trusts for certain of the Company's benefit plans and 193,669 shares were held in a rabbi trust for certain employees who deferred receipt of Company shares for stock options exercised. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS INVESTMENT SECURITIES At December 31, 2000, the Company held securities of Capstone Turbine Corporation (Capstone). This investment is classified as "available for sale" under the Statement of Financial Accounting Standards Board (FASB) Accounting for Certain Investments in Debt and Equity Securities; accordingly, these securities are stated at fair value, with unrealized gains and losses recorded as a separate component of common stockholders' equity. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations when realized. In November, 2000, the Company sold approximately 9.5% of its holdings in Capstone, realizing a before-tax gain of $8,869,000. As of December 31, 2000, the Company's remaining investment in Capstone had a fair value of $105,587,000 and unrealized gain, net of tax, of $63,353,000. As of February 8, 2001, the fair value of the Company's investment in Capstone was $129,646,000. Subject to market conditions that are not detrimental to the Company, and as opportunities arise following the completion of the applicable lock-up periods to which it was subject, the Company expects to monetize its investment. The Company intends to use the proceeds from such sales to reduce outstanding debt. All other securities owned by the Company are accounted for under the cost method. The Company's other investments in securities consist of common and/or preferred stock in non-public companies whose stock is not traded on a securities exchange. Realized gains and losses on sales of these investments, as determined on a specific identification basis, are included in the Consolidated Statement of Operations when incurred, and dividends are recognized as income when received. REAL ESTATE On December 15, 2000, the Company sold its Austin, Texas headquarters building, Lavaca Plaza. The property, purchased by the Company in 1991, netted pre-tax cash proceeds of $20,638,000, resulting in a pre-tax gain of approximately $13,532,000. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES Accounting Policies of Derivatives and Hedging Activities The Company recognizes derivatives on the consolidated balance sheet at their fair value. On the date of the derivative contract, the Company designates the derivative as: (i) a hedge of the fair value of a recognized asset or liability or of an unrecognized firm commitment ("fair value" hedge); (ii) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge), or (iii) "held for trading" ("trading" instruments). Changes in the fair value of a derivative that qualifies as a fair-value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk (including gains or losses on firm commitments), are recorded in earnings. Changes in the fair value of a derivative that qualifies as a cash-flow hedge are recorded in other comprehensive income, until earnings are affected by the variability of cash flows. Lastly, changes in the fair value of derivative trading instruments are reported in current-period earnings. Adoption of Accounting Pronouncement The Company adopted Accounting for Derivative Instruments and Hedging Activities on July 1, 2000. In accordance with that Statement, the Company recorded a net-of-tax cumulative-effect gain of $602,000 in earnings to recognize the fair value of the gas derivative contracts at Energy Services that are not designated as hedges. The Company also recorded $826,000 in accumulated other comprehensive income which recognizes the fair value of two interest rate swap derivatives that were designated as cash flow hedges. Derivative Activities The Company manages certain business risks through the limited use of derivative instruments. Interest rate swaps are employed to hedge the effect of changes in interest rates related to certain debt instruments and commodity swaps and options to manage price risk associated with certain energy contracts, SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS primarily heating oil. The Company was previously party to an interest rate swap designed to reduce exposure to changes in the fair value of a fixed rate lease commitment. This interest rate swap, designated as a fair value hedge, was terminated in October 2000 resulting in a pre-tax gain of $182,000 which will be amortized into earnings through December 2004. The Company also continues to be obligated under two interest rate swaps created to hedge exposure to potential volatility in interest payments on variable rate debt. As such, the Company recorded a net-of-tax loss as an adjustment to accumulated other comprehensive income of $351,000 for the quarter, and $622,000 year-to-date to recognize the change in fair value of these two interest rate derivatives designated as cash flow hedges. The Company initiated a new interest rate swap during the second quarter to hedge exposure to variability in interest rate payments on a portion of the short-term variable rate debt issued in conjunction with our New England Operations. The Company recognized a $691,000 net-of-tax loss as an adjustment to other comprehensive income to recognize the fair value of this swap derivative. The Company expects to reclassify as earnings during the next twelve months $546,000 net-of-tax in derivative losses from accumulated other comprehensive income as the settlement of swap payments occur. The maximum term over which the Company is hedging exposures to the variability of cash flows is 36 months. The Company was also previously committed under two gas derivative contracts related to certain non-regulated operations acquired in conjunction with the acquisition of the Pennsylvania Operations. These two contracts were not designated as hedging instruments and therefore did not qualify to receive hedge accounting treatment under the Statement. During the quarter, these derivative contracts expired and the Company recognized a pre-tax loss of $526,000 in recording the expiration of these derivative contracts. This loss was offset by a pre-tax gain of $494,000 arising from the monthly settlement of the two derivative contracts that expired in November 2000. In conjunction with the acquisition of Providence Energy Corporation, the Company also acquired ProvEnergy Oil, a distributor of fuel oil to retail and commercial customers. ProvEnergy Oil offers certain retail customers price caps for winter heating oil and purchases heating oil call options as a hedge against price fluctuations on the related anticipated commodity purchases. As of December 31, 2000, the Company owned options representing 3.4 million gallons of fuel oil at an average strike price of $.81 a gallon. These options are reflected on the balance sheet as assets at their fair value of $195,000. The instruments are designated as cash flow hedges and the change in fair value of the effective portion of the hedging options was a net-of-tax gain of $117,000 recorded in other comprehensive income while the change in the ineffective portion was a pre-tax charge of $288,000 recorded in earnings. The maximum term over which the Company is hedging exposures to the variability of cash flows for forecasted purchases of home heating oil is five months. Trading Contracts The Company, through one of its non-regulated Pennsylvania subsidiaries, is also a party to certain energy trading contracts for the purchase and sale of energy commodities. These contracts are accounted for in accordance with Emerging Issues Task Force Issue Accounting for Contracts Involved in Energy Trading and Risk Management Activities which requires that energy trading contracts be recorded at fair value as of each balance sheet date with gains and losses included in earnings. During the second quarter ended December 31, 2000, the Company received settlements of $660,000. At December 31, 2000 the trading asset was $352,000, which represents the fair market value of the outstanding contracts. As a result of the unauthorized financial derivative energy trading activity, an open contract of a non-regulated, wholly-owned subsidiary was present at December 31, 2000 for 10,000 MMBtu's of natural gas per day for the contract period of January 2001 to December 2001 at a fixed price of $2.72 per MMBtu. During March 2001 and April 2001, all unauthorized trading contracts were closed, resulting in a cumulative cash expense of $191,000, net of tax to the Company. For the quarter ending December 31, 2000, the Company recorded a liability of $11,280,000 representing the fair market value of the contract and a pre-tax non-cash loss of $5,849,000. 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 (Preferred Securities). In connection with the Subsidiary Trust's issuance of the Preferred Securities and the related purchase by Southern Union of all of the Subsidiary Trust's common securities (Common Securities), Southern Union issued to the Subsidiary Trust $103,092,800 principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025 (Subordinated Notes). The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest and other payment dates on the Subordinated Notes correspond to the distribution and other payment dates on the Preferred Securities and the Common Securities. Under certain circumstances, the Subordinated Notes may be distributed to holders of the Preferred Securities and holders of the Common Securities in liquidation of the Subsidiary Trust. The Subordinated Notes are redeemable at the option of the Company 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, 2000 and 1999, 4,000,000 shares of Preferred Securities were outstanding. DEBT AND CAPITAL LEASE December 31, June 30, 2000 2000 ---------- ---------- (thousands of dollars) 7.60% Senior Notes due 2024 ............ $ 364,515 $ 364,515 8.25% Senior Notes due 2029 ............ 300,000 300,000 8.375% First Mortgage Bonds, due 2002 .. 30,000 30,000 5.62% First Mortgage Bonds, due 2003 ... 4,800 -- 10.25% First Mortgage Bonds, due 2008 .. 1,909 -- 6.82% First Mortgage Bonds, due 2018 ... 15,000 -- 9.34% First Mortgage Bonds, due 2019 ... 15,000 15,000 9.63% First Mortgage Bonds, due 2020 ... 10,000 -- 9.44% First Mortgage Bonds, due 2020 ... 6,500 -- 8.09% First Mortgage Bonds, due 2022 ... 12,500 -- 8.46% First Mortgage Bonds, due 2022 ... 12,500 -- 7.50% First Mortgage Bonds, due 2025 ... 15,000 -- 7.99% First Mortgage Bonds, due 2026 ... 7,000 -- 7.24% First Mortgage Bonds, due 2027 ... 6,000 -- 6.50% First Mortgage Bonds, due 2029 ... 14,531 -- 7.70% Debentures, due 2027 ............. 6,839 -- Term Note, due 2002 .................... 529,000 -- Capital lease and other ................ 29,839 26,452 ---------- ---------- Total debt and capital lease ........... 1,380,933 735,967 Less current portion ............... 5,173 2,193 ---------- ---------- Total long-term debt and capital lease . $1,375,760 $ 733,774 ======================================== ========== ========== Senior Notes On November 3, 1999, the Company completed the sale of $300,000,000 of 8.25% Senior Notes (8.25% Notes) due 2029. The net proceeds from the sale of these 8.25% Notes were used to: (i) fund the acquisition of Pennsylvania Enterprises, Inc.; (ii) repay approximately $109,900,000 of borrowings under the revolving credit facility, and (iii) repay approximately $136,000,000 of long- and short-term debt assumed in the acquisition. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Assumed Debt In connection with the acquisition of the Pennsylvania Operations, the Company assumed $45,000,000 of First Mortgage Bonds bearing interest between 8.375% and 9.34%. In connection with the acquisition of ProvEnergy, the Company assumed $86,916,000 of First Mortgage Bonds bearing interest between 5.62% and 10.25%. In connection with the acquisition of Fall River Gas, the Company assumed $19,500,000 of First Mortgage Bonds bearing interest between 7.24% and 9.44%. In connection with the acquisition of Valley Resources, the Company assumed $6,905,000 of 7.70% Debentures. Capital Lease The Company completed the installation of an Automated Meter Reading (AMR) system at Missouri Gas Energy during the first quarter of fiscal year 1999. The installation of the AMR system involved an investment of approximately $30,000,000 which is accounted for as a capital lease obligation. As of December 31, 2000, the capital lease obligation outstanding was $24,166,000 with a fixed rate of 5.79%. This system has significantly improved meter reading accuracy and timeliness and provided electronic accessibility to meters in residential customers' basements, thereby assisting in the reduction of the number of estimated bills. Credit Facilities On May 31, 2000, the Company restated and amended its short-term and long-term credit facilities (together referred to as "Revolving Credit Facilities"). The Company has available $90,000,000 under the short-term facility, which expires May 30, 2001, and $135,000,000 under the long-term facility, which expires on May 31, 2003. The Company has additional availability under uncommitted line of credit facilities with various banks. Borrowings under the Revolving Credit Facilities are available for Southern Union's working capital, letter of credit requirements and other general corporate purposes. A balance of $175,000,000 was outstanding under the Revolving Credit Facilities at December 31, 2000. Term Note On August 28, 2000 the Company entered into the Term Note to fund (i) the cash portion of the consideration to be paid to the Fall River Gas' stockholders; (ii) the all cash consideration to be paid to the ProvEnergy and Valley Resources stockholders, (iii) repayment of approximately $50,000,000 of long- and short-term debt assumed in the mergers, and (iv) all related acquisition costs. As of December 31, 2000, a balance of $529,000,000 was outstanding under this Term Note. The Term Note expires August 27, 2001 but may be extended at the Company's option through August 26, 2002 for a 12.5 basis point fee. No additional draws can be made on the Term Note. UTILITY REGULATION AND RATES Missouri On November 7, 2000, Missouri Gas Energy filed a $39,384,000 request for a rate increase with the Missouri Public Service Commission (MPSC). Statutes require that the MPSC reach a decision in the case within an eleven-month period. On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision to grant a $13,300,000 annual increase to revenue effective on September 2, 1998, which is primarily earned volumetrically. The MPSC rate order reflected a 10.93% return on common equity. The rate order, however, disallowed certain previously recorded deferred costs requiring a non-cash write-off of $2,221,000. The Company recorded this charge to earnings in its fiscal year ended June 30, 1998. On December 8, 1998, the MPSC denied rehearing requests made by all parties other than Missouri Gas Energy and granted a portion of Missouri Gas Energy's rehearing request. On October 10, 2000, the MPSC issued its decision on rehearing Missouri Gas Energy's request which served to reduce the $13,300,000 annual revenue increase by $70,000. The MPSC's orders are subject to judicial review and although certain parties have argued for a reduction in Missouri Gas Energy's authorized base revenue increase on judicial review, Missouri Gas Energy expects such arguments to be unsuccessful. Rhode Island Effective October 1, 2000, the Rhode Island Public Utilities Commission (RIPUC) approved a settlement agreement between Providence Gas, the Rhode Island Division of Public Utilities and Carriers, the Energy Council of Rhode Island, and The George Wiley Center. The settlement agreement recognizes the need for an SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS increase in distribution system revenues of $4.5 million, recovered through an adjustment to the throughput portion of the gas charge, and provides for a 21-month base rate freeze. In the settlement agreement, the RIPUC authorized system improvement programs. Additionally, higher levels of support for low income bill payment assistance was authorized as well as the continuation of the utility's demand side management and weatherization assistance programs. The settlement agreement also contains a weather mitigation clause and a non-firm margin incentive mechanism (non-firm margin is margin earned from interruptible customers with the ability to switch to alternative fuels). The weather mitigation clause is designed to mitigate the impact of weather volatility on customer billings, which will assist customers in paying bills and stabilize the revenue stream to Providence Gas. Providence Gas will defer the margin impact of weather that is greater than 2 percent colder-than-normal and will recover the margin impact of weather that is greater than 2 percent warmer-than-normal by making the corresponding adjustment to the deferred revenue account (DRA). The non-firm margin incentive mechanism is designed to encourage Providence Gas to promote the development of non-firm margins, which will reduce the cost of service to all customers. Providence Gas will retain 25 percent of all non-firm margins earned in excess of $1.2 million. Under the settlement agreement, Providence Gas may earn up to 10.7 percent but not less than 7.0 percent using the average return on equity for the two 12 month periods of October 2000 through September 2001 and July 2001 through June 2002. Pennsylvania On April 3, 2000, PG Energy filed an application with the Pennsylvania Public Utility Commission (PPUC) seeking an increase in its base rates designed to produce $17,900,000 in additional annual revenues. On December 7, 2000, the PPUC approved a settlement agreement that provides for a rate increase designed to produce $10,800,000 of additional annual revenue. The new rates became effective on January 1, 2001. El Paso, Texas On October 18, 1999, Southern Union Gas filed a $1,696,000 rate increase request for the El Paso service area with the City of El Paso. In February 2000, the City of El Paso approved a $650,000 revenue increase, and an improved rate design that collects a greater portion of the Company's revenue stream from the monthly customer charge. Additionally, the City of El Paso approved a new 30-year franchise for Southern Union Gas. COMMITMENTS AND CONTINGENCIES Environmental The Company is subject to federal, state and local laws and regulations relating to the protection of the environment. These evolving laws and regulations may require expenditures over a long period of time to control environmental impacts. The Company has established procedures for the on-going evaluation of its operations to identify potential environmental exposures and assure compliance with regulatory policies and procedures. The Company is investigating the possibility that the Company or predecessor companies may have been associated with Manufactured Gas Plant (MGP) sites in its former service territories, principally in Arizona and New Mexico, and present service territories in Texas, Missouri and its newly acquired service territories in Pennsylvania, Massachusetts and Rhode Island. At the present time, the Company is aware of certain MGP sites in these areas and is investigating those and certain other locations. While the Company's evaluation of these Texas, Missouri, Arizona, New Mexico, Pennsylvania, Massachusetts and Rhode Island MGP sites is in its preliminary stages, it is likely that some compliance costs may be identified and become subject to reasonable quantification. Within the Company's service territories certain MGP sites are currently the subject of governmental actions. Certain of these sites are as follows: Kansas City, Missouri MGP Sites In a letter dated May 10, 1999, the Missouri Department of Natural Resources (MDNR) sent notice of a planned Site Inspection/Removal Site Evaluation of the Kansas City Coal Gas Former MGP site. This site (comprised of two adjacent MGP operations previously owned by two separate companies and SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS hereafter referred to as Station A and Station B) is located at East 1st Street and Campbell in Kansas City, Missouri and is owned by Missouri Gas Energy. A 1988 investigation of the site performed by an Environmental Protection Agency (EPA) contractor determined that further remedial assessment was not required under the Comprehensive Environmental Response Compensation and Liability Act of 1980 (CERCLA), as amended by the SUPERFUND Amendments and Reauthorization Act of 1986. The MDNR has stated that the reassessment of the Kansas City Coal Gas site is part of a statewide effort to identify, evaluate, and prioritize the potential hazards posed by all of Missouri's MGP sites. During July 1999, the Company sent applications to MDNR submitting the two sites to the agency's Voluntary Cleanup Program (VCP). The sites were accepted into the VCP on August 2, 1999 and MDNR subsequently approved the Company's proposed work plans for the environmental assessment of the sites. The final environment reports were sent to the state on March 6, 2000. In a letter dated June 21, 2000, MDNR responded to the Station A environmental report submitted by the Company. In that letter, MDNR stated that soil remediation will be necessary at the site (Station A) but that further exploration and delineation of site contamination should be performed before remedial methods can be determined. In response to MDNR's request, the Company submitted a work plan for further investigation of the site to the agency on September 18, 2000. MDNR has not responded to the Station B environmental report submitted by the Company. Independence, Missouri MGP Site The Company received a letter dated December 16, 1999 from MDNR notifying the Company of a Pre-Comprehensive Environmental Response Compensation and Liability Information System (CERCLIS) Site Screening investigation of a former MGP located at Pacific Avenue & South River Boulevard in Independence, Missouri. The Company contacted the MDNR to inform the state that, as this property is not owned by the Company, it cannot grant access to the property for MDNR's investigation. MDNR proceeded to investigate the site in cooperation with the site's current owner. In a letter dated May 17, 2000, MDNR reported that the site is not recommended for CERCLIS entry and no further CERCLA action is recommended. However, due to the presence of characteristic waste, the site is eligible for the state's Registry of Confirmed Abandoned or Uncontrollable Hazardous Waste Disposal Sites in Missouri. Providence, Rhode Island Sites During 1995, Providence Gas began an environmental evaluation at its primary gas distribution facility located at 642 Allens Avenue in Providence, Rhode Island. Environmental studies and a subsequent remediation work plan were completed at an approximate cost of $4.5 million. Providence Gas also began a soil remediation project on a portion of the site in July 1999. As of December 31, 2000, approximately $8.9 million had been expended on soil remediation under the remediation work plan. Based on the results of the environmental investigation and the site information learned during the performance of work under the remediation work plan, the Company is now revising the remediation work plan. Because of the uncertainties associated with the revision of the remediation work plan and the development of a remedial solution for the entire site, the Company cannot offer any conclusions as to the total future cost of remediation of the property at this time. In November 1998, Providence Gas received a letter of responsibility from the Department of Environmental Management (DEM) relating to possible contamination on previously owned property at 170 Allens Avenue in Providence. The current operator of the property has also received a letter of responsibility. A work plan has been created and approved by DEM. An investigation has begun to determine the extent of contamination, as well as the extent of the Company's responsibility. Providence Gas entered into a cost-sharing agreement with the current operator of the property, under which Providence Gas is responsible for approximately twenty percent (20%) of the costs related to the investigation. Costs of testing at this site as of December 31, 2000 were approximately $300,000. Until the results of the investigation are known, the Company cannot offer any conclusions as to its responsibility. Tiverton, Rhode Island Site Fall River Gas Company is a defendant in a civil action seeking to recover anticipated remediation costs associated with contamination found at property owned by the plaintiffs. This claim is based on alleged dumping of material by Fall River Gas Company trucks at the site in the 1930s and 1940s. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Valley Resources Sites Valley Resources is a party to an action in which Blackstone Valley Electric Company ("Blackstone") brought suit for contribution to its expenses of cleanup of a site on Mendon Road in Attleboro, Massachusetts, to which coal manufacturing waste was transported from a former MGP site in Pawtucket, Rhode Island (the "Blackstone Litigation"). Blackstone Valley Electric Company v. Stone & Webster, Inc., Stone & Webster Engineering Corporation, Stone & Webster Management Consultants, Inc. and Valley Gas Company, C. A. No. 94-10178JLT, United States District Court, District of Massachusetts. Valley Resources takes the position in that litigation that it is indemnified for any cleanup expenses by Blackstone pursuant to a 1961 agreement signed at the time of Valley Resources' creation. This suit was stayed in 1995 pending the issuance of rulemaking at the United States EPA (Commonwealth of Massachusetts v. Blackstone Valley Electric Company, 67 F.3d 981 (1995)). In January 2001, the EPA issued a Preliminary Administrative Decision on this issue and announced that, until March 21, 2001, it is soliciting comments on the Decision. While this suit has been stayed, Valley Resources and Blackstone (merged with Narragansett Electric Company in May 2000) have received letters of responsibility from the Rhode Island DEM with respect to releases from two MGP sites in Rhode Island. DEM issued letters of responsibility to Valley Resources and Blackstone in September 1995 for the Tidewater MGP in Pawtucket, Rhode Island, and in February 1997 for the Hamlet Avenue MGP in Woonsocket, Rhode Island. Valley Resources entered into an agreement with Blackstone (now Narragansett) in which Valley Resources and Blackstone agreed to share equally the expenses for the costs associated with the Tidewater site subject to reallocation upon final determination of the legal issues that exist between the companies with respect to responsibility for expenses for the Tidewater site and otherwise. No such agreement has been reached with respect to the Hamlet site. To the extent that potential costs associated with former MGPs are quantified, the Company expects to provide any appropriate accruals and seek recovery for such remediation costs through all appropriate means, including in rates charged to customers, insurance and regulatory relief. At the time of the closing of the acquisition of the Company's Missouri service territories, the Company entered into an Environmental Liability Agreement that provides that Western Resources retains financial responsibility for certain liabilities under environmental laws that may exist or arise with respect to Missouri Gas Energy. In addition, at the time it was acquired, Providence Gas had in place a regulatory plan that created a mechanism for the recovery of environmental-related costs. This plan provided for recovery of environmental investigation and remediation costs incurred through September 30, 1997, as well as costs incurred during the three-year term of the plan, are to be amortized over a 10-year period, at a level authorized under the plan. A new plan, effective October 1, 2000 through June 30, 2002, establishes an environmental fund for the recovery of evaluation, remedial and clean-up costs arising out of the Company's MGPs and sites associated with the operation and disposal activities from MGPs. Although significant charges to earnings could be required prior to rate and insurance recovery, management does not believe that environmental expenditures for MGP sites will have a material adverse effect on the Company's financial position, results of operations or cash flows. The Company follows the provisions of an American Institute of Certified Public Accountants Statement of Position, Environmental Remediation Liabilities, for recognition, measurement, display and disclosure of environmental remediation liabilities. Southwest Gas Litigation On February 1, 1999, Southern Union submitted a proposal to the Board of Directors of Southwest Gas Corporation (Southwest) to acquire all of Southwest's outstanding common stock for $32.00 per share. Southwest then had a pending merger agreement with ONEOK, Inc. (ONEOK) at $28.50 per share. On February 22, 1999, Southern Union and Southwest both publicly announced Southern Union's proposal, after the Southwest Board of Directors determined that Southern Union's proposal was a Superior Proposal (as defined in the Southwest merger agreement with ONEOK). At that time Southern Union entered into a Confidentiality and Standstill Agreement with Southwest at Southwest's insistence. On April 25, 1999, Southwest's Board of Directors rejected Southern Union's $32.00 per share offer and accepted an amended offer of $30.00 per share from ONEOK. On April 27, 1999, Southern Union increased its offer to $33.50 per share and agreed to pay interest which, together with SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 rejected by Southwest's Board of Directors. On January 21, 2000, ONEOK announced that it was withdrawing from the Southwest merger agreement. There are several lawsuits pending that relate to activities surrounding Southern Union's efforts to acquire Southwest. In addition, there is before the U. S. Court of Appeals for the Tenth Circuit, an appeal by Southern Union of a preliminary injunction entered by the U. S. District Court for the Northern District of Oklahoma. Southern Union intends to vigorously pursue its claims against Southwest, ONEOK, and certain individual defendants, and vigorously defend itself against the claims by Southwest and ONEOK. With the exception of ongoing legal fees associated with the aforementioned litigation, the Company believes that the results of the above-noted Southwest litigation will not have a materially adverse effect on the Company's financial condition, results of operations or cash flows. Regulatory In August 1998, a jury in Edinburg, Texas concluded deliberations on the City of Edinburg's franchise fee lawsuit against PG&E Gas Transmission, Texas Corporation (formerly Valero Energy Corporation (Valero)) and a number of its subsidiaries, as well as former Valero subsidiary Rio Grande Valley Gas Company (RGV) and RGV's successor company, Southern Union Company. 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 trial court's decision was appealed to the Thirteenth District of the Texas Court of Appeals (Court of Appeals). In December 2000, the Court of Appeals reversed and modified the trial court's judgment of approximately $8,500,000 and awarded the City of Edinburg $585,000, plus pre-judgment interest of $190,000 against RGV and Valero for breach of contract. The Court of Appeals upheld the award for attorneys' fees of approximately $3,500,000 against Valero, RGV and Southern Union. The Company will continue to pursue reversal of this judgment on appeal. The Company believes it will ultimately prevail, and that the outcome of this matter will not have a material adverse impact on the Company's results of operations, financial position or cash flows. The Company also has entered into a preliminary settlement agreement to settle a related class action lawsuit with a majority of the cities served by the Company in Texas. The preliminary settlement will not have a material adverse impact on the Company's results of operations, financial position or cash flows. Other Southern Union and its subsidiaries are parties to other legal proceedings that management considers to be normal actions to which an enterprise of its size and nature might be subject, and not to be material to the Company's overall business or financial condition, results of operations or cash flows. Commitments Due to the operation of purchase gas adjustment clauses, gas purchase costs generally do not directly affect earnings of our regulated utility operations. However, the Company's unregulated gas marketing operations are subject to price risk related to fixed-price sales commitments that are not matched with corresponding fixed-price purchase agreements. At December 31, 2000, Energy Services had fixed-price sales commitments with various customers that provide for the delivery of approximately 468,000 Dekatherms of natural gas through April 2001 at an average sales price per Dekatherm of $3.13. The Company has exposure to the changes in natural gas prices related to fluctuating commodity prices, which can impact the Company's financial position or results of operations, either favorably or unfavorably. The impact of changing prices on the Company's financial position at a point in time is not necessarily indicative of the impact of price movements throughout the year. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Overview Southern Union Company's (the "Company") core business is the distribution of natural gas as a public utility through: Southern Union Gas, Missouri Gas Energy (MGE); Atlantic Utilities, doing business as South Florida Natural Gas (SFNG); PG Energy, acquired on November 4, 1999; and, effective with the September 2000 acquisitions of Providence Energy Corporation, Valley Resources, Inc. and Fall River Gas Company, collectively its New England Division. In addition, subsidiaries of Southern Union support and expand natural gas sales and capitalize on the Company's gas energy expertise. These subsidiaries operate natural gas pipeline systems, generate electricity, market natural gas and electricity to end-users and distribute propane and fuel oil. Certain subsidiaries also own or hold interests in real estate and other assets, which are primarily used in the Company's utility business. Most of the Company's business activities are subject to regulation by federal, state or local authorities where the Company operates. Thus, the Company's financial condition and results of operations have been and will continue to be dependent upon the receipt of adequate and timely adjustments in rates. In addition, the Company's business is affected by seasonal weather impacts, competitive factors within the energy industry and economic development and residential growth in its service areas. Acquisitions On September 28, 2000, Southern Union completed the acquisition of Providence Energy Corporation (ProvEnergy) for approximately $270,000,000 in cash plus the assumption of $90,000,000 in long-term debt. The ProvEnergy natural gas distribution operations are Providence Gas and North Attleboro Gas, which collectively serve approximately 176,000 natural gas customers. Providence Gas serves natural gas customers in Providence and Newport, Rhode Island, and 23 other cities and towns in Rhode Island. North Attleboro Gas serves customers in North Attleboro and Plainville, Massachusetts, towns adjacent to the northeastern Rhode Island border. Subsidiaries of the Company acquired in the ProvEnergy merger include ProvEnergy Oil Enterprises, Inc. (ProvEnergy Oil), and ProvEnergy Power Company, LLC. ProvEnergy Oil operates a fuel oil distribution business through its subsidiary, ProvEnergy Fuels, Inc. (ProvEnergy Fuels). ProvEnergy Fuels serves over 15,000 residential and commercial customers in Rhode Island and Massachusetts. ProvEnergy Power Company owns 50% of Capital Center Energy Company, LLC., a joint venture formed between ProvEnergy and ERI Services, Inc. to provide retail power. On September 28, 2000, Southern Union also completed the acquisition of Fall River Gas Company (Fall River Gas) for approximately 1,400,000 shares of Southern Union common stock and approximately $27,000,000 in cash plus assumption of $20,000,000 in long-term debt. Fall River Gas serves approximately 49,000 customers in the city of Fall River and the towns of Somerset, Swansea and Westport, all located in southeastern Massachusetts. Also acquired in the Fall River Gas merger was Fall River Gas Appliance Company, Inc. which rents water heaters and conversion burners in Fall River Gas' service area. On September 20, 2000, Southern Union completed the acquisition of Valley Resources, Inc. (Valley Resources) for approximately $125,000,000 in cash plus the assumption of $30,000,000 in long-term debt. Valley Resources natural gas distribution operations are Valley Gas Company and Bristol and Warren Gas Company, which collectively serve approximately 65,000 natural gas customers. Valley Resources' three non-utility subsidiaries acquired in the merger rent and sell appliances, offer service contract programs, sell liquid propane in Rhode Island and nearby Massachusetts, and distribute as a wholesaler franchised lines to plumbing and heating contractors. Also acquired in the acquisition was Valley Resources' 90% interest in Alternate Energy Corporation, which sells, installs and designs natural gas conversion systems and facilities, is an authorized representative of the ONSI Corporation fuel cell, holds patents for a natural gas/diesel co-firing system and for a device to control the flow of fuel on dual-fuel equipment. Collectively, the operations from the above-mentioned acquisitions are referred to as the "New England Operations." The Company plans to sell or dispose of certain non-core businesses acquired in the New England Operations. On November 4, 1999, the Company acquired Pennsylvania Enterprises, Inc. (hereafter referred to as the "Pennsylvania Operations") in a transaction valued at approximately $500,000,000, including assumption of SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS long-term debt of approximately $115,000,000. The Company issued approximately 16,700,000 shares (before adjustment for any subsequent stock dividend) of common stock and paid approximately $36,000,000 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 156,000 gas customers in northeastern and central Pennsylvania. Subsidiaries of the Company included in the Pennsylvania Operations include PG Energy Services Inc., (Energy Services); Keystone Pipeline Services, Inc. (Keystone, a wholly-owned subsidiary of PG Energy Services Inc.); and PEI Power Corporation. Through Energy Services the Company markets a diversified range of energy-related products and services under the name of PG Energy PowerPlus and supplies propane under the name of PG Energy Propane. Keystone provides pipeline and fiber optic cable construction, installation, maintenance, and rehabilitation services. PEI Power Corporation operates a cogeneration plant that generates steam and electricity for resale. The Company plans to sell or dispose of both Keystone and the propane operations of Energy Services; these operations are not material to the Company. The Company has not yet sold these operations and there can be no assurance that a sale on terms satisfactory to the Company will be completed. The operating activities of the acquired operations are consolidated with the Company beginning on their respective acquisition dates. Thus, the results of operations for the three-, six- and twelve-month periods ended December 31, 2000 are not indicative of results that would necessarily be achieved for a full year since the majority of the Company's operating margin is earned during the winter heating season. For these reasons, the results of operations of the Company for the periods subsequent to the acquisitions are not comparable to those periods prior to the acquisitions nor are the fiscal 2001 results of operations comparable with prior periods. Trading Losses In March 2001, the Company discovered unauthorized financial derivative energy trading activity by a non-regulated, wholly-owned subsidiary. During March 2001 and April 2001, all unauthorized trading activity was closed resulting in a cumulative cash expense of $191,000, net of tax. However, due to certain accounting rules, such trading contracts must be recorded at fair value as of each balance sheet date with gains and losses included in earnings. As a result, a restatement of financial information for the fiscal year ended June 30, 2000 and the two subsequent quarters was required. This restatement resulted in non-cash losses of $3,158,000 and $4,884,000, net of taxes, for the three- and six-month periods ended December 31, 2000, respectively, and cumulative non-cash losses of $6,092,000, net of taxes, for the twelve-month period ended December 31, 2000. RESULTS OF OPERATIONS Three Months Ended December 31, 2000 and 1999 The Company recorded net earnings available for common stock of $19,318,000 for the three-month period ended December 31, 2000 compared with net earnings of $7,132,000 for the same period in 1999. Earnings per diluted share were $.37 in 2000, compared to $.16 in 1999. Weighted average diluted shares outstanding increased 16% in 2000 due to the issuance of 1,370,629 shares and 16,713,731 shares (before adjustment for any subsequent stock dividend) of the Company's common stock on September 28, 2000 and November 4, 1999, respectively, in connection with the acquisition of Fall River Gas and the Pennsylvania Operations, respectively. Operating revenues were $605,339,000 for the three-month period ended December 31, 2000, compared with $239,595,000 in 1999. Gas purchase and other energy costs for the three-month period ended December 31, 2000 were $433,925,000, compared with $145,113,000 in 1999. The Company's operating revenues are affected by the level of sales volumes and by the pass-through of increases or decreases in the Company's gas purchase costs through its purchased gas adjustment clauses. Additionally, revenues are affected by increases or decreases in gross receipts taxes (revenue-related taxes) which are levied on sales revenue as collected from customers and remitted to the various taxing authorities. The increase in both operating revenues and gas purchase costs between SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS periods was primarily due to a 75% increase in gas sales volume to 63,031 MMcf in 2000 from 36,098 MMcf in 1999 and by a 73% increase in the average cost of gas from $3.61 per Mcf in 1999 to $6.23 per Mcf in 2000. Changes in the average cost of gas resulted from seasonal impacts on demands for natural gas. The New England Operations contributed $138,711,000 to the overall increase in operating revenues, $87,737,000 in gas purchase and other energy costs and 10,900 MMcf of the increase in gas sales volume. The Pennsylvania Operations generated a net increase of $45,093,000 in operating revenues, $41,122,000 in gas purchase and other energy costs, and 3,183 MMcf of the increase in gas sales volume. The remaining increases in both operating revenues and gas purchase and other energy costs was primarily due to the previously mentioned increase in the average cost of gas as well as a 12,842 MMcf increase in sales volume in the Texas and Missouri service territories as a result of the colder-than-normal weather in these territories in 2000 as compared to the unusually mild temperatures in 1999. Weather in MGE's service territories was 123% of a 30-year measure for the three-month period ended December 31, 2000, compared with 78% in 1999. Southern Union Gas service territories experienced weather which was 131% of a 30-year measure in 2000, compared with 86% in 1999. About half of the customers served by Southern Union Gas are weather normalized. Additionally, with the February 2000 revenue increase in El Paso, Texas, the new rate design collects a greater portion of the Company's revenue stream from the monthly customer charge instead of being earned volumetrically. Weather for the PG Energy service territories was 113% of a 30-year measure for the three-month period ended December 31, 2000, compared with 89% of a 30-year measure for the two-month period ended December 31, 1999. Weather in the New England division service territories was 110% of a 30-year measure for the three-month period ended December 31, 2000. Net operating margin (operating margin less revenue-related taxes) increased $64,334,000 for the three-month period ended December 31, 2000 compared with the same period in 1999. Growth in net operating margin is primarily due to the colder-than-normal weather, previously discussed; the acquisition of the New England Operations which generated $47,665,000 in net operating margin; and the Pennsylvania Operations, which contributed a net increase of $5,237,000. Operating expenses, which include operating, maintenance and general expenses, depreciation and amortization, and taxes other than on income and revenues, were $93,839,000 for the three-month period ended December 31, 2000, an increase of $41,511,000, compared with $52,328,000 in 1999. An increase of $31,797,000 and $3,987,000 was the result of the acquisition of the New England Operations and the Pennsylvania Operations, respectively. Also impacting operating expenses was an increase in bad debt expense in the Texas and Missouri service territories of $2,800,000 due to an increase in customer receivables as a result of higher gas prices as previously discussed. Additionally, a $7.32 increase in the Company's common stock price during the three-month period ended December 31, 2000 resulted in $2,038,000 of non-cash compensation expense associated with shares of common stock held in a trust for one of the Company's benefit plans. The Company will amend this plan during the third quarter of fiscal year 2001 to eliminate future expense, or income volitility, associated with the accounting treatment for such benefit plan. Interest expense was $30,303,000 for the three-month period ended December 31, 2000, compared with $13,299,000 in 1999. Interest expense increased primarily due to a $535,000,000 bank note (the Term Note) entered into by the Company on August 28, 2000 for the acquisition of the New England Operations and the issuance of $300,000,000 of 8.25% Senior Notes on November 3, 1999 (8.25% Senior Notes) for the acquisition of the Pennsylvania Operations. The Company entered into the Term Note to (i) fund the cash consideration paid to stockholders of Fall River Gas, ProvEnergy and Valley Resources, (ii) refinance and repay long- and short-term debt assumed in the New England Operations, and (iii) acquisition costs of the New England Operations. In addition, the Company issued 8.25% Senior Notes to fund the acquisition of Pennsylvania Enterprises, Inc. and to extinguish $136,000,000 in existing debt of the Pennsylvania Operations. The Company also assumed $158,321,000 in long-term debt of the New England and Pennsylvania Operations which was not refinanced or extinguished with the Term Note or the SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8.25% Senior Notes. As a result of the previously discussed high cost of gas in 2000, the Company incurred additional interest expense of $2,191,000 under its short-term credit facilities during the three-month period ended December 31, 2000 compared with the same period in 1999. Southern Union is required to make payments to natural gas suppliers in advance of the receipt of cash payments from the Company's customers. See "Debt and Capital Lease" in the Notes to the Consolidated Financial Statements included herein. Other income for the three-month period ended December 31, 2000 was $14,911,000 compared with other expense of $3,336,000 in 1999. Other income for the three-month period ended December 31, 2000, includes a $13,532,000 gain on the sale of non-core real estate, realized gains on the sale of investment securities of $8,869,000 and $1,652,000 of interest and dividend income. This was partially offset by $5,849,000 of non-cash trading losses and $2,857,000 of legal costs associated with ongoing litigation associated with the unsuccessful acquisition of Southwest Gas Corporation (Southwest). Other expense for the three-month period ended December 31, 1999 primarily consisted of $4,000,000 of legal costs associated with the aforementioned ongoing litigation which was partially offset by $442,000 in net rental income from Lavaca Realty Company ("Lavaca Realty"). The effective federal and state income tax rate is 46% and 40% for the three months ended December 31, 2000 and 1999, respectively. The increase in the effective federal and state income tax rate is a result of non-tax deductible amortization of additional purchase cost recorded at the acquisitions of both the New England Operations and Pennsylvania Operations. Six Months Ended December 31, 2000 and 1999 The Company recorded net earnings available for common stock of $5,344,000 for the six-month period ended December 31, 2000 compared with net earnings of $1,032,000 for the same period in 1999. Net earnings per diluted share were $.10 in 2000 compared to $.03 in 1999. Weighted average diluted shares outstanding increased 30% in 2000 due to the issuance of the Company's common stock in connection with the acquisition of Fall River Gas and the Pennsylvania Operations, previously discussed. Operating revenues were $749,808,000 for the six-month period ended December 31, 2000, compared with $324,381,000 in 1999. Gas purchase and other energy costs for the six-month period ended December 31, 2000 were $518,458,000, compared with $184,390,000 in 1999. The increase in both operating revenues and gas purchase costs between periods was primarily due to a 60% increase in gas sales volume to 76,762 MMcf in 2000 from 48,125 MMcf in 1999 and by a 69% increase in the average cost of gas from $3.51 per Mcf in 1999 to $5.93 per Mcf in 2000 due to increases in average gas prices. The New England Operations contributed $141,179,000 to the overall increase in operating revenues, $89,110,000 in gas purchase and other energy costs and 10,900 MMcf of the increase in gas sales volume. The Pennsylvania Operations generated a net increase of $82,388,000 in operating revenues, $66,880,000 in gas purchase and other energy costs, and 4,749 MMcf of the increase in gas sales volume. The remaining increase in operating revenues, gas purchase and other energy costs, and gas sales volume resulted principally from the colder-than-normal weather in the Texas and Missouri service territories in 2000 as compared to the unusually mild temperatures in 1999. MGE's service territories experienced weather which was 123% of a 30-year measure for the six-month period ended December 31, 2000 compared with 80% in 1999. Weather for Southern Union Gas service territories was 131% of a 30-year measure in 2000, compared with 85% in 1999. About half of the customers served by Southern Union Gas are weather normalized. Additionally, with the February 2000 revenue increase in El Paso, Texas, the new rate design collects a greater portion of the Company's revenue stream from the monthly customer charge instead of being earned volumetrically. Weather in the PG Energy service territories was 119% of a 30-year measure for the six-month period ended December 31, 2000, compared with 89% of a 30-year measure for the two-month period ended December 31, 1999. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net operating margin increased $77,646,000 for the six-month period ended December 31, 2000 compared with the same period in 1999. Growth in net operating margin is primarily due to the acquisition of the New England Operations which generated $48,713,000 in net operating margin and the Pennsylvania Operations which contributed a net increase of $16,597,000. The remaining increase is due to the colder-than-normal weather in the Missouri and Texas service territories, previously discussed. Operating expenses were $151,683,000 for the six-month period ended December 31, 2000, an increase of $59,618,000, compared with $92,065,000 in 1999. Increases of $33,118,000 and $17,492,000 were the result of the acquisitions of the New England Operations and the Pennsylvania Operations, respectively. Also contributing to the increase was an increase in bad debt expense in the Texas and Missouri service territories of $3,281,000 due to an increase in customer receivables as a result of higher gas prices and $2,455,000 in non-cash compensation expense from one of the Company's benefit plans, both previously discussed. Interest expense was $46,609,000 for the six-month period ended December 31, 2000, compared with $21,663,000 in 1999. Interest expense increased primarily due to the Term Note entered into by the Company for the acquisition of the New England Operations, the 8.25% Senior Notes issued by the Company for the acquisition of the Pennsylvania Operations and the assumption of debt by the Company from the New England Operations and Pennsylvania Operations, all previously discussed. See "Debt and Capital Lease" in the Notes to the Financial Statements included herein. Other income for the six-month period ended December 31, 2000 was $9,397,000 compared with other expense of $4,493,000 in 1999. Other income for the six-month period ended December 31, 2000 includes a $13,532,000 gain on the sale of non-core real estate, realized gains on the sale of investment securities of $8,869,000 and $2,325,000 of interest and dividend income. This was partially offset by $9,044,000 of non-cash trading losses and $4,898,000 of legal costs associated with ongoing litigation from the unsuccessful acquisition of Southwest. Other expense for the six-month period ended December 31, 1999 primarily consisted of $5,250,000 of legal costs associated with the aforementioned ongoing litigation which was partially offset by $664,000 in rental income from Lavaca Realty. The Company's consolidated federal and state effective income tax rate was 46% and 43% for the six months ended December 31, 2000 and 1999, respectively. The increase in the effective federal and state income tax rate is a result of non-tax deductible amortization of additional purchase cost associated with the acquisition of the New England Operations and Pennsylvania Operations. The Company adopted the Statement of Financial Accounting Standards Board (FASB) Accounting for Derivative Instruments and Hedging Activities on July 1, 2000. In accordance with the transition provisions of the Statement, the Company recorded a net-of-tax cumulative-effect-type gain of $602,000 in earnings to recognize the fair value of the derivative instruments that do not qualify for hedge accounting treatment under the Statement. Twelve Months Ended December 31, 2000 and 1999 The Company recorded net earnings available for common stock of $14,157,000 for the twelve-month period ended December 31, 2000, compared with net earnings of $13,151,000 in 1999. Earnings per diluted share were $.28 in 2000 compared with earnings per diluted share of $.35 in 1999. Weighted average diluted shares outstanding increased 39% due to the issuance of the Company's common stock in connection with the acquisition of Fall River Gas and the Pennsylvania Operations, previously discussed. Operating revenues were $1,257,131,000 for the twelve-month period ended December 31, 2000, compared with $677,933,000 in 1999. Gas purchase and other energy costs for the twelve-month period ended December 31, 2000 SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS were $831,767,000, compared with $388,078,000 in 1999. The increase in both operating revenues and gas purchase costs between periods was primarily due to a 34% increase in gas sales volume to 148,418 MMcf in 2000 from 110,711 MMcf in 1999 and by a 46% increase in the average cost of gas from $3.36 per Mcf in 1999 to $4.89 per Mcf in 2000 due to increases in average gas prices. The Pennsylvania Operations generated a net increase of $223,901,000 in operating revenues, $159,763,000 in gas purchase and other energy costs and 18,908 MMcf of the increase in gas sales volume. The New England Operations contributed $141,179,000 to the overall increase in operating revenues and $89,110,000 in gas purchase and other energy costs and 10,900 MMcf of the increase in gas sales volume. The remaining increases in operating revenues, gas purchase and other energy costs, and gas sales volume resulted principally from the colder weather in the Texas and Missouri service territories in 2000 as compared to 1999. MGE's service territories experienced weather which was 96% of the 30-year measure for the twelve-month period ended December 31, 2000 compared with 84% in 1999. Weather for Southern Union Gas service territories was 88% of a 30-year measure compared with 74% in 1999. About half of the customers served by Southern Union Gas are weather normalized. Weather for the PG Energy service territories was 103% of a 30-year measure for the twelve-month period ended December 31, 2000. Net operating margin increased $121,474,000 for the twelve-month period ended December 31, 2000 compared with the same period in 1999. Growth in net operating margin is primarily due to the Pennsylvania Operations which contributed a net increase of $64,443,000 and to the acquisition of the New England Operations which generated $48,713,000. The remaining increase is due to the colder weather in the Missouri and Texas service territories, previously discussed. Operating expenses were $268,613,000 for the twelve-month period ended December 31, 2000, an increase of $91,524,000, compared with $177,089,000 in 1999. Increases of $48,547,000 and $33,118,000 were the result of the acquisitions of the Pennsylvania Operations and the New England Operations, respectively. Also impacting operating expenses for the twelve-month period ended December 31, 2000 were increases in employee benefit costs and bad debt expense and inventory write-downs associated with a propane operation. Interest expense was $76,438,000 for the twelve-month period ended December 31, 2000, compared with $39,779,000 in 1999. Interest expense increased primarily due to the Term Note entered into by the Company for the acquisition of the New England Operations, the 8.25% Senior Notes issued by the Company for the acquisition of the Pennsylvania Operations and the assumption of debt by the Company from the New England Operations and Pennsylvania Operations, all previously discussed. See "Debt and Capital Lease" in the Notes to the Consolidated Financial Statements included herein. Other income for the twelve-month period ended December 31, 2000 was $4,183,000 compared with other expense of $6,870,000 in 1999. Other income for the twelve-month period ended December 31, 2000 includes a $13,532,000 gain on the sale of non-core real estate and realized gains on the sale of investment securities of $8,869,000. This was partially offset by $11,280,000 of non-cash trading losses and $11,261,000 of legal costs associated with ongoing litigation from the unsuccessful acquisition of Southwest. Other expense for the twelve-month period ended December 31, 1999 primarily consisted of $9,090,000 of costs associated with unsuccessful acquisition activities and related litigation which was partially offset by $1,466,000 in net rental income from Lavaca Realty. The Company's consolidated federal and state effective income tax rate was 49% and 40% for the twelve-month period ended December 31, 2000 and 1999, respectively. The increase in the effective federal and state income tax rate is a result of non-tax deductible amortization of additional purchase cost associated with the acquisition of the New England Operations and Pennsylvania Operations. 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, 2000 and 1999:
Three Months Twelve Months Ended December 31, Ended December 31, 2000 1999 2000 1999 ---------- ---------- --------- ---------- Average number of gas sales customers served: Residential ...................................... 1,328,725 1,002,663 1,125,688 926,997 Commercial ....................................... 127,758 98,717 111,069 91,751 Industrial and irrigation ........................ 4,282 686 1,651 604 Public authorities and other ..................... 3,129 3,072 3,161 2,915 Pipeline and marketing ........................... 367 229 298 235 ---------- ---------- ---------- ---------- Total average customers served .............. 1,464,261 1,105,367 1,241,867 1,022,502 ========== ========== ========== ========== Gas sales in millions of cubic feet (MMcf) Residential ...................................... 27,250 15,248 82,273 60,756 Commercial ....................................... 10,908 6,483 34,311 26,871 Industrial and irrigation ........................ 1,372 343 2,827 1,412 Public authorities and other ..................... 957 720 2,863 2,431 Pipeline and marketing ........................... 4,394 4,334 17,143 17,518 --------- ---------- ---------- ---------- Gas sales billed ............................ 44,881 27,128 139,417 108,988 Net change in unbilled gas sales ................. 18,150 8,970 9,001 1,723 --------- ---------- ---------- ---------- Total gas sales ............................. 63,031 36,098 148,418 110,711 ========= ========== ========== ========== Gas sales revenues (thousands of dollars): Residential ...................................... $ 252,896 $ 107,949 $ 639,076 $ 397,902 Commercial ....................................... 93,476 38,619 238,108 151,662 Industrial and irrigation ........................ 10,760 1,963 19,291 7,022 Public authorities and other ..................... 7,031 3,315 16,618 9,905 Pipeline and marketing ........................... 17,750 10,944 58,957 42,778 ---------- ---------- ---------- ---------- Gas revenues billed ......................... 381,913 162,790 972,050 609,269 Net change in unbilled gas sales revenues ........ 140,152 48,586 95,230 13,082 ---------- ---------- ---------- ---------- Total gas sales revenues .................... $ 522,065 $ 211,376 $1,067,280 $ 622,351 ========== ========== ========== ========== Gas sales margin (thousands of dollars) ............... $ 105,968 $ 70,087 $ 293,475 $ 216,435 ========== ========== ========== ========== Gas sales revenue per thousand cubic feet (Mcf) billed: Residential ...................................... $ 9.28 $ 7.08 $ 7.77 $ 6.55 Commercial ....................................... 8.57 5.96 6.94 5.64 Industrial and irrigation ........................ 7.84 5.73 6.82 4.97 Public authorities and other ..................... 7.35 4.61 5.80 4.07 Pipeline and marketing ........................... 4.04 2.53 3.44 2.44 Weather: Degree days: Southern Union Gas service territories ...... 1,087 714 1,891 1,573 Missouri Gas Energy service territories ..... 2,405 1,510 5,045 4,418 PG Energy service territories ............... 2,508 1,595 6,460 1,595 New England service territories ............. 2,194 -- 2,194 -- 30-year measure: Southern Union Gas service territories ...... 131% 86% 88% 74% Missouri Gas Energy service territories ..... 123% 78% 96% 84% PG Energy service territories ............... 113% 89% 103% 89% New England service territories ............. 110% -- 110% -- Gas transported in millions of cubic feet (MMcf) ...... 28,354 19,516 90,180 61,013 Gas transportation revenues (thousands of dollars) .... $ 14,612 $ 8,685 $ 42,193 $ 25,896
The above information does not include the Company's 43% equity ownership in a natural gas distribution company serving 22,000 customers in Piedras Negras, Mexico. Information for Fall River Gas and ProvEnergy, acquired September 28, 2000, and Valley Resources, acquired September 20, 2000, is included since October 1, 2000. The 30-year measure is used above for consistent external reporting purposes. Measures of normal weather used by the Company's regulatory authorities to set rates vary by jurisdiction. Periods used to measure normal weather for regulatory purposes range from 10 years to 30 years. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The Company's gas utility operations are seasonal in nature with a significant percentage of the annual revenues and earnings occurring in the traditional heating-load months. This seasonality results in a high level of cash flow needs immediately preceding the peak winter heating season months, resulting from the required payments to natural gas suppliers in advance of the receipt of cash payments from the Company's customers. The Company has historically used internally generated funds and its credit facilities to provide funding for its seasonal working capital, continuing construction and maintenance programs and operational requirements. On May 31, 2000, the Company restated and amended its short-term and long-term credit facilities (together referred to as "Revolving Credit Facilities"). The Company has available $90,000,000 under the short-term facility, which expires May 30, 2001, and $135,000,000 under the long-term facility, which expires on May 31, 2003. The Company has additional availability under uncommitted line of credit facilities with various banks. Borrowings under the Revolving Credit Facilities are available for Southern Union's working capital, letter of credit requirements and other general corporate purposes. A balance of $175,000,000 was outstanding under the Revolving Credit Facilities at December 31, 2000. On August 28, 2000 the Company entered into the Term Note to fund (i) the cash portion of the consideration to be paid to the Fall River Gas' stockholders; (ii) the all cash consideration to be paid to the ProvEnergy and Valley Resources stockholders, (iii) repayment of approximately $50,000,000 of long- and short-term debt assumed in the New England mergers, and (iv) related acquisition costs. As of December 31, 2000, a balance of $529,000,000 was outstanding on this Term Note. The Term Note expires August 27, 2001 but may be extended at the Company's option through August 26, 2002 for a 12.5 basis point fee. No additional draws can be made on the Term Note. Concurrent with the closing of the Pennsylvania Enterprises, Inc. merger on November 4, 1999, the Company issued $300,000,000 of 8.25% Senior Notes due 2029 which were used to: (i) fund the cash portion of the consideration to be paid to the Pennsylvania Enterprises, Inc. shareholders; (ii) refinance and repay certain debt of Pennsylvania Enterprises, Inc., and (iii) repay outstanding borrowings under the Company's then existing various credit facilities. These senior notes are senior unsecured obligations and rank equally in right of payment with each other and with the Company's other unsecured and unsubordinated obligations, including the 7.60% Senior Notes due 2024. The principal sources of funds during the three-month period ended December 31, 2000 were $55,000,000 borrowed under the Term Note, $39,547,000 borrowed under the Company's Revolving Credit Facilities, proceeds from the sale of real estate of $20,638,000 and proceeds from the sale of investment securities of $11,372,000. The principal uses of funds during this period included $39,795,000 for on-going property, plant and equipment additions; $12,495,000 for the purchase of investment securities; $7,174,000 for the retirement of long-term debt; as well as seasonal working capital needs of the Company. The principal sources of funds during the six-month period ended December 31, 2000 were $535,000,000 borrowed under the Term Note, $175,000,000 borrowed under the Company's Revolving Credit Facilities, proceeds from the sale of real estate of $20,638,000 and proceeds from the sale of investment securities of $11,372,000. This provided funds of $405,303,000 for acquisition and related expenses of the New England Operations; $114,171,000 for the retirement of merger debt assumed from the New England Operations; $61,703,000 for on-going property, plant and equipment additions; as well as seasonal working capital needs of the Company. The effective interest rate under the Company's current debt structure is 7.92% (including interest and the amortization of debt issuance costs and redemption premiums on refinanced debt). SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 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. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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/A for the year ended June 30, 2000. 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/A for the year ended June 30, 2000, in addition to the interim consolidated financial statements, accompanying notes, and Management's Discussion and Analysis of Financial Condition and Results of Operations presented in Items 1 and 2 of this Quarterly Report on Form 10-Q/A. 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/A contain forward-looking statements that are based on current expectations, estimates and projections about the industry in which the Company operates, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are outside the Company's control. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward-looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to put undue reliance on such forward-looking statements. Stockholders may review the Company's reports filed in the future with the Securities and Exchange Commission for more current descriptions of developments that could cause actual results to differ materially from such forward-looking statements. Factors that could cause or contribute to actual results differing materially from such forward-looking statements include the following: cost of gas; availability of cash flow; gas sales volumes; weather conditions in the Company's service territories; the achievement of operating efficiencies and the purchases and implementation of new technologies for attaining such efficiencies; impact of relations with labor unions of bargaining-unit employees; the receipt of timely and adequate rate relief; the outcome of pending and future litigation; governmental regulations and proceedings affecting or involving the Company; and the nature and impact of any extraordinary transactions such as any acquisition or divestiture of a business unit or any assets. These are representative of the factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions, and general economic conditions, including interest rate fluctuations, federal, state and local laws and regulations affecting the retail gas industry or the energy industry generally, and other factors. OTHER On February 10, 2001, James H. Dodge resigned from the Board of Directors of the Company. SOUTHERN UNION COMPANY AND SUBSIDIARIES RESULTS OF VOTES OF SECURITY HOLDERS Southern Union held an Annual Meeting of Stockholders on November 14, 2000. The following matter was submitted for a vote by Southern Union's security holders: the election of four persons to serve as the Class I directors until the 2003 Annual Meeting of Stockholders or until their successors are duly elected and qualified. The number of votes cast for, abstaining or withheld for each nominee for director, and for any proposal voted on at the Annual Meeting of Stockholders, were: For Abstain Withheld Election of nominees as Class I Directors: John E. Brennan...................... 43,218,694 -- 538,260 Frank W. Denius...................... 43,238,170 -- 518,784 Roger J. Pearson..................... 43,430,695 -- 326,259 Ronald W. Simms...................... 43,412,176 -- 344,778 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 April 25, 2001 By RONALD J. ENDRES -------------- ------------------------------------ Ronald J. Endres Executive Vice President and Chief Financial Officer Date April 25, 2001 By DAVID J. KVAPIL -------------- ------------------------------------- David J. Kvapil Senior Vice President and Corporate Controller (Principal Accounting Officer) -----END PRIVACY-ENHANCED MESSAGE-----