-----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, ACQ+Ymt9hogXQLZnjwG99//LAAHc0m7fwjmHya1AMuBE/IdaNIRRSFxMxDAQY4mM 8GC9OEGRKWbsVH78T83qhg== 0000203248-96-000018.txt : 19961205 0000203248-96-000018.hdr.sgml : 19961205 ACCESSION NUMBER: 0000203248-96-000018 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19960930 FILED AS OF DATE: 19961021 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN UNION CO CENTRAL INDEX KEY: 0000203248 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 750571592 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-06407 FILM NUMBER: 96645618 BUSINESS ADDRESS: STREET 1: 504 LAVACA ST 8TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124775852 10-Q 1 ================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------ FORM 10-Q For the quarterly period ended September 30, 1996 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: Name of each exchange in Title of each class which registered ------------------- ------------------------ Common Stock, par value $1 per share New York Stock Exchange Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the registrant's Common Stock outstanding on October 15, 1996 was 16,223,667. ================================================================= SOUTHERN UNION COMPANY AND SUBSIDIARIES FORM 10-Q September 30, 1996 Index PART I. FINANCIAL INFORMATION Page(s) ------- Item 1. Financial Statements Consolidated statements of operations - three and twelve months ended September 30, 1996 and 1995 Consolidated balance sheet - September 30, 1996 and 1995 and June 30, 1996 Consolidated statement of stockholders' equity - three months ended September 30, 1996 and twelve months ended June 30, 1996 Consolidated statements of cash flows - three and twelve months ended September 30, 1996 and 1995 Notes to consolidated financial statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings (See "CONTINGENCIES" under Notes to Consolidated Financial Statements) Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11 -- Computation of primary and fully diluted earnings per share (b) Exhibit 27 -- Financial Data Schedule (c) Reports on Form 8-K -- None SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended September 30, -------------------------------- 1996 1995 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues........... $ 80,830 $ 70,227 Gas purchase costs........... 39,415 27,829 ----------- ----------- Operating margin........... 41,415 42,398 Revenue-related taxes........ 3,910 3,496 ----------- ----------- Net operating margin....... 37,505 38,902 Operating expenses: Operating, maintenance and general.............. 25,315 25,715 Depreciation and amortization............. 8,488 8,540 Taxes, other than on income and revenues...... 3,263 3,065 ----------- ----------- Total operating expenses............. 37,066 37,320 ----------- ----------- Net operating revenues. 439 1,582 ----------- ----------- Other income (expenses): Interest................... (8,287) (9,138) Dividends on preferred securities of subsidiary trust.................... (2,370) (2,370) Other, net................. 1,735 1,420 ----------- ----------- Total other expenses, net.................... (8,922) (10,088) ----------- ----------- Loss before income taxes (benefit)........ (8,483) (8,506) Federal and state income taxes (benefit)............ (3,078) (2,908) Net loss attributable to common stock............... $ (5,405) $ (5,598) =========== =========== Net loss per common share.... $ (.33) $ (.35) =========== =========== Weighted average common shares outstanding......... 16,223,667 16,126,071 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Twelve Months Ended September 30, --------------------------------- 1996 1995 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues........... $ 630,993 $ 480,906 Gas purchase costs........... 373,125 240,844 ----------- ----------- Operating margin........... 257,868 240,062 Revenue-related taxes........ 35,300 26,915 ----------- ----------- Net operating margin....... 222,568 213,147 Operating expenses: Operating, maintenance and general.................. 107,121 101,667 Depreciation and amortization............. 32,929 32,669 Taxes, other than on income and revenues...... 13,857 12,180 ----------- ----------- Total operating expenses. 153,907 146,516 ----------- ----------- Net operating revenues... 68,661 66,631 ----------- ----------- Other income (expenses): Interest................... (34,981) (39,119) Dividends on preferred securities of subsidiary trust.................... (9,480) (3,529) Other, net................. 11,641 3,878 ----------- ----------- Total other expenses, net.................... (32,820) (38,770) ----------- ----------- Earnings before income taxes.................. 35,841 27,861 Federal and state income taxes...................... 14,809 11,222 ----------- ----------- Net earnings available for common stock............... $ 21,032 $ 16,639 =========== =========== Net earnings per common and common share equivalents... $ 1.25 $ 1.01 =========== =========== Weighted average common and common share equivalents outstanding................ 16,822,813 16,484,503 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS September 30, June 30, ---------------------- ---------- 1996 1995 1996 ---------- ---------- ---------- (thousands of dollars) Property, plant and equipment: Plant in service....... $ 922,470 $ 894,468 $ 912,552 Construction work in progress............. 11,418 14,701 8,411 --------- --------- --------- 933,888 909,169 920,963 Less accumulated depreciation and amortization......... (317,083) (308,875) (310,289) --------- --------- --------- 616,805 600,294 610,674 Additional purchase cost assigned to utility plant, net... 133,641 143,531 133,780 --------- --------- --------- Net property, plant and equipment........ 750,446 743,825 744,454 --------- --------- --------- Current assets: Cash and cash equivalents............ -- -- 2,887 Accounts receivable, billed and unbilled.... 37,239 34,036 47,846 Inventories, principally at average cost........ 43,219 33,064 27,023 Deferred gas purchase costs.................. 9,211 22,664 2,650 Prepayments and other.... 2,460 2,513 1,947 --------- --------- --------- Total current assets... 92,129 92,277 82,353 --------- --------- --------- Deferred charges........... 116,890 112,944 116,286 Investment securities...... 19,168 -- 8,848 Real estate................ 9,258 10,398 9,513 Other...................... 2,943 2,045 3,006 --------- --------- --------- Total assets............. $ 990,834 $ 961,489 $ 964,460 ========= ========= ========= See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) STOCKHOLDERS' EQUITY AND LIABILITIES September 30, June 30, ---------------------- ---------- 1996 1995 1996 ---------- ---------- ---------- (thousands of dollars) Common stockholders' equity: Common stock, $1 par value; authorized 50,000,000 shares; issued 16,275,292 shares............... $ 16,275 $ 11,570 $ 16,275 Premium on capital stock................ 206,047 198,819 206,047 Less treasury stock, at cost.............. (794) (794) (794) Retained earnings...... 20,226 10,471 25,631 Unrealized holding gain (loss).......... 1,978 -- (1,244) --------- --------- --------- Total common stock- holders' equity...... 243,732 220,066 245,915 Company-obligated manda- torily redeemable pre- ferred securities of subsidiary trust holding solely $103,093,000 prin- cipal amount of 9.48% subordinated notes of Southern Union due 2025.. 100,000 100,000 100,000 Long-term debt............. 386,143 442,320 385,394 --------- --------- --------- Total capitalization..... 729,875 762,386 731,309 Current liabilities: Long-term debt due within one year........ 680 780 615 Notes payable............ 55,500 -- -- Accounts payable......... 24,421 28,432 39,238 Federal, state and local taxes.................. 10,119 6,088 16,741 Accrued interest......... 5,727 6,303 12,773 Accrued dividends on preferred securities of subsidiary trust.... -- 2,370 2,370 Customer deposits........ 16,157 14,487 15,656 Other.................... 17,170 15,864 15,937 --------- --------- --------- Total current liabilities.......... 129,774 74,324 103,330 --------- --------- --------- Deferred credits and other. 84,374 88,424 86,287 Accumulated deferred income taxes............. 46,811 36,355 43,534 Commitments and con- tingencies............... -- -- -- --------- --------- --------- Total.................... $ 990,834 $ 961,489 $ 964,460 ========= ========= ========= See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Trea- Unrea- Common Premium sury lized Stock, on Stock, Holding $1 Par Capital at Retained Gain Value Stock Cost Earnings (Loss) Total ------- --------- ------ --------- -------- --------- (thousands of dollars) Balance July 1, 1995...... $11,570 $198,819 $(794) $ 16,069 $ -- $225,664 Net earnings. -- -- -- 20,839 -- 20,839 5% stock dividend. 576 10,701 -- (11,277) -- -- Four-for- three stock split.... 4,054 (4,054) -- -- -- -- Unrea- lized holding loss..... -- -- -- -- (1,244) (1,244) Exercise of stock options.. 75 581 -- -- -- 656 ------- -------- ----- -------- ------- -------- Balance June 30, 1996...... 16,275 206,047 (794) 25,631 (1,244) 245,915 Net loss.. -- -- -- (5,405) -- (5,405) Unrealized holding gain..... -- -- -- -- 3,222 3,222 ------- -------- ----- -------- ------- -------- Balance Sep- tember 30, 1996...... $16,275 $206,047 $(794) $ 20,226 $ 1,978 $243,732 ======= ======== ===== ======== ======= ======== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended September 30, -------------------------------- 1996 1995 ------------ ------------ (thousands of dollars) Cash flows used in operating activities: Net loss..................... $ (5,405) $ (5,598) Adjustments to reconcile net loss to net cash flows from operating activities: Depreciation and amortiza- tion...................... 8,488 8,540 Deferred income taxes...... 1,529 299 Provision for bad debts.... 1,115 395 Deferral of interest and other expenses............ (1,557) (1,019) Other, net................. 107 409 Changes in assets and lia- bilities, net of acquisi- tions and dispositions: Decrease in accounts receivable, billed and unbilled................ 9,492 1,035 Decrease in accounts payable................. (14,817) (352) Decrease in taxes and other liabilities....... (13,668) (4,499) Increase in customer deposits................ 501 321 Decrease in deferred gas purchase costs.......... (6,560) (15,023) Increase in inventories.. (16,034) (9,503) Increase in other accounts................ (1,882) (1,316) ----------- ----------- Net cash flows used in operating activities......... (38,691) (26,311) ----------- ----------- Cash flows from (used in) investing activities: Additions to property, plant and equipment......... (13,468) (14,060) Acquisition of operations, net of cash received........ (1,162) -- Purchase of investment securities.................. (5,363) -- Maturity of short-term investments................. -- 19,582 Increase in customer advances.................... 1,404 1,080 Decrease in deferred charges and credits................. (1,654) (70) Proceeds from sale of land... 752 -- Other, net................... (19) 269 ----------- ----------- Net cash flows from (used in) investing activities... (19,510) 6,801 ----------- ----------- Cash flows from (used in) financing activities: Repayment of debt............ (186) (19,649) Net borrowings under revolving credit facility... 55,500 -- Other, net................... -- 144 ----------- ----------- Net cash flows from (used in) financing activities... 55,314 (19,505) ----------- ----------- Decrease in cash and cash equivalents................... (2,887) (39,015) Cash and cash equivalents at beginning of period........... 2,887 39,015 ----------- ----------- Cash and cash equivalents at end of period................. $ -- $ -- =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................... $ 15,007 $ 17,557 =========== =========== Income taxes (refund)...... $ 500 $ (5,386) =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Ended September 30, --------------------------------- 1996 1995 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings................ $ 21,032 $ 16,639 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amorti- zation................... 32,929 32,669 Deferred income taxes..... 10,643 6,239 Provision for bad debts... 6,255 4,557 Deferral of interest and other expenses........... (7,221) (3,638) Other, net................ 909 1,960 Changes in assets and lia- bilities, net of acquisi- tions and dispositions: Increase in accounts receivable, billed and unbilled............... (9,286) (1,038) Decrease in accounts payable................ (4,417) (3,391) Increase (decrease) in taxes and other lia- bilities............... (28) 3,054 Increase in customer deposits............... 1,669 1,177 Increase (decrease) in deferred gas purchase costs.................. 13,454 (31,381) Decrease (increase) in inventories............ (10,138) 15,745 Decrease (increase) in other accounts......... (716) 1,083 ----------- ----------- Net cash flows from operating activities....... 55,085 43,675 ----------- ----------- Cash flows used in investing activities: Additions to property, plant and equipment........ (58,784) (67,213) Acquisition of operations, net of cash received....... (1,162) -- Purchase of investment securities................. (16,126) -- Litigation settlement proceeds................... 4,250 -- Increase in customer advances................... 3,871 1,805 Decrease in deferred charges and credits........ (5,395) (2,465) Proceeds from sale of various operations......... 14,770 -- Proceeds from sale of land.. 752 336 Other, net.................. 54 2,057 ----------- ----------- Net cash flows used in investing activities...... (57,770) (65,480) ----------- ----------- Cash flows from financing activities: Repayment of debt........... (53,327) (35,649) Net borrowings (payments) under revolving credit facility................... 55,500 (41,400) Issuance of preferred securities of subsidiary trust...................... -- 100,000 Issuance cost of preferred securities of subsidiary trust...................... -- (3,799) Other, net.................. 512 727 ----------- ----------- Net cash flows from financing activities...... 2,685 19,879 ----------- ----------- Increase (decrease) in cash and cash equivalents......... -- (1,926) Cash and cash equivalents at beginning of period.......... -- 1,926 ----------- ----------- Cash and cash equivalents at end of period................ $ -- $ -- =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest.................. $ 34,343 $ 38,046 =========== =========== Income taxes (refund)..... $ 5,897 $ (2,857) =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS FINANCIAL STATEMENTS 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 for any interim period are not necessarily indicative of results for the full year. These financial statements should be read in conjunction with the financial statements and notes thereto contained in Southern Union Company's (Southern Union and, together with its wholly- owned subsidiaries, the Company) Annual Report on Form 10-K for the fiscal year ended June 30, 1996. Certain prior period amounts have been reclassified to conform with the current period presentation. Under the Company's cash management system, checks issued but not presented to banks frequently result in overdraft balances for accounting purposes and are classified in accounts payable in the consolidated balance sheet. The computation of both primary and fully diluted earnings per share is based on the weighted average number of outstanding common stock during the period plus, when their effect is dilutive, common stock equivalents consisting of certain shares subject to stock options and warrants. INVESTMENT SECURITIES At September 30, 1996, all securities owned by the Company were classified as available for sale and are intended to be held by the Company for an indefinite period of time. Accordingly, these securities are stated at fair value, with unrealized gains and losses reported in 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 incurred. As of September 30, 1996, investment securities consisted of common stock with a specific cost of $16,125,000 and a fair value of $19,168,000. The net unrealized holding gain, included as a separate component of common stockholders' equity, totaled $1,978,000 at September 30, 1996. There were no adjustments to unrealized holding gain on securities available-for-sale in previous years as no investment securities were held. As of October 15, 1996, the investment securities available-for-sale had a fair value of $19,008,000 and a net unrealized holding gain of $1,874,000. The net unrealied holding gain is accounted for as required by the Financial Accounting Standards Board standard Accounting for Certain Investments in Debt and Equity Securities. - - ---------------------------------------------------------------- DIVESTITURE On October 16, 1995, Southern Union Company entered into an agreement to sell certain gas distribution operations of the Com- pany in the Texas and Oklahoma Panhandles and to sell Western Gas Interstate Company (WGI), a wholly-owned subsidiary of the Com- pany, exclusive of the Del Norte interconnect operation which transports natural gas into Mexico, for $14,770,000, subject to post-closing adjustments. The sale was closed on May 1, 1996. PREFERRED SECURITIES OF SUBSIDIARY TRUST On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust Originated Preferred Securities (Pre- ferred Securities). In connection with the Subsidiary Trust's issuance of the Preferred Securities and the related purchase by Southern Union of all of the Subsidiary Trust's common securities (Common Securities), Southern Union issued to the Subsidiary Trust $103,092,800 principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025 (Subordinated Notes). The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest and other payment dates on the Subordinated Notes SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS correspond to the distribution and other payment dates on the Preferred Securities and the Common Securities. Under certain circumstances, the Subordinated Notes may be distributed to holders of the Preferred Securities and holders of the Common Securities in liquidation of the Subsidiary Trust. The Subordi- nated Notes are redeemable at the option of the Company on or after May 17, 2000, at a redemption price of $25 per Subordinated Note plus accrued and unpaid interest. The Preferred Securities and the Common Securities will be redeemed on a pro rata basis to the same extent as the Subordinated Notes are repaid, at $25 per Preferred Security and Common Security plus accumulated and unpaid distributions. Southern Union's obligations under the Subordinated Notes and related agreements, taken together, con- stitute a full and unconditional guarantee by Southern Union of payments due on the Preferred Securities. As of September 30, 1996 and 1995, 4,000,000 shares of Preferred Securities were outstanding. DEBT September 30, June 30, 1996 1996 ------------ ------------ (thousands of dollars) 7.60% Senior notes due 2024....... $ 384,515 $ 384,515 Other............................. 2,308 1,494 --------- --------- Total debt........................ 386,823 386,009 Less current portion............ 680 615 --------- --------- Total long-term debt.............. $ 386,143 $ 385,394 ========= ========= The Company has availability under a $100,000,000 revolving credit facility (Revolving Credit Facility) underwritten by a syndicate of banks. Borrowings under the Revolving Credit Facility are available for Southern Union's working capital, letter of credit requirements and other general corporate pur- poses. At June 30, 1996 the outstanding balance under the Revolving Credit Facility was nil. The amount outstanding under the Revolving Credit Facility at September 30, 1996 and October 15, 1996 was $55,500,000 and $52,000,000, respectively. UTILITY REGULATION AND RATES Pursuant to a 1989 Missouri Public Service Commission (MPSC) order, Missouri Gas Energy is engaged in a major gas safety pro- gram in its service territories. This program includes replace- ment of company- and customer-owned gas service and yard lines, the movement and resetting of meters, the replacement of cast iron mains and the replacement and cathodic protection of bare steel mains (Missouri Safety Program). In recognition of the significant capital expenditures associated with this safety pro- gram, the MPSC permits the deferral, and subsequent recovery through rates, of depreciation expense, property taxes and asso- ciated carrying costs, related to the Missouri Safety Program. Missouri Gas Energy has deferred depreciation expense, property taxes and carrying costs of $2,358,000 for the three-month period ended September 30, 1996. The continuation of the Missouri Safety Program will result in significant levels of future capi- tal expenditures. The Company estimates incurring capital expenditures of $20,000,000 in fiscal 1997 related to this pro- gram. Under the order of the Federal Energy Regulatory Commission, a major supplier of gas to Missouri Gas Energy is allowed recovery of certain unrecovered deferred gas costs with a remaining balance of $18,981,000 at September 30, 1996. These costs were related to gas deliveries prior to April 30, 1994. Missouri Gas Energy filed a mechanism to recover these costs with the MPSC which was approved and allows recovery of these costs from its Missouri customers. The receivable and liability associated with these costs have been recorded as a deferred charge and a deferred credit, respectively, on the consolidated balance sheet as of September 30, 1996 and 1995. Missouri Gas Energy filed a $34,000,000 request for rate increases with the MPSC on March 1, 1996. An evidentiary hearing will be conducted in late October, 1996. The proposed effective date for the rate increase, in accordance with the MPSC Stipula- tion, is February 1, 1997. In addition to the requested increase, Missouri Gas Energy proposed an annual rider to recoup costs associated with the Missouri Safety Program; an annual incentive regulation rider; a change in Missouri Gas Energy's main extension policy; a weather normalization clause; and a change in transportation service availability that would extend transportation service to more customers on their system. Addi- tionally, the SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS proposed rates would recover a larger percentage of fixed costs through the monthly customer charge and reduce the level of fixed costs recovered through the volumetric charge. CONTINGENCIES Southern Union is aware of the possibility that it may become a defendant in an action brought by the United States Environmental Protection Agency (EPA) for reimbursement of costs associated with removing hazardous substances from the site of a former coal gasification plant (Pine Street Canal Site) in Burlington, Vermont. This knowledge arises out of the existence of a prior action, United States v. Green Mountain Power Corp., et al, -------------------------------------------------- (Green Mountain Power) in which Southern Union became involved as a third-party defendant in January 1989. Green Mountain Power was an action under 42 U.S.C. Section 9607(a) by the federal government to recover clean-up costs associated with the Maltex Pond, which is part of the Pine Street Canal Site. Two defen- dants in Green Mountain Power, Vermont Gas Systems and Green Mountain Power Corp., claimed that Southern Union is the corpo- rate successor to People's Light and Power Corporation, an upstream corporate parent of Green Mountain Power Corp. during the years 1928-1931. Green Mountain Power was settled without admission or determination of liability with respect to Southern Union by order dated December 26, 1990. The EPA has since con- ducted studies of the clean-up costs for the remainder of the Pine Street Canal Site, but the ultimate costs are unknown at this time. On November 30, 1992, Southern Union was named as a potentially responsible party in a special notice letter from the EPA. The Company has denied liability for any clean-up costs for various reasons, including that it is not a successor to any entity that owned or operated the site in question. Should Southern Union be made party to any action seeking recovery of remaining clean-up costs, the Company intends to vigorously defend against such an action. The Company has made demands of the appropriate insurers that they assume the defense of and liability for any such claim that may be asserted. The Company does not believe the outcome of this matter will have a material adverse effect on its financial position, results of operations or cash flows. Southern Union and Western Resources entered into an Environmen- tal Liability Agreement (Environmental Liability Agreement) at the closing of the Missouri Acquisition. Subject to the accuracy of certain representations made by Western Resources in the Missouri Asset Purchase Agreement, the Environmental Liability Agreement provides for a tiered approach to the allocation of substantially all liabilities under environmental laws that may exist or arise with respect to Missouri Gas Energy. At the present time and based upon information available to management, the Company believes that the costs of any remediation efforts that may be required for these sites for which it may ultimately have responsibility will not exceed the aggregate amount subject to substantial sharing by Western Resources. In addition to the Pine Street Canal Site and various Missouri Gas Energy sites described above, the Company is investigating the possibility that the Company or predecessor companies may have been associated with Manufactured Gas Plant (MGP) sites in other of its past, principally in Arizona and New Mexico, and present service areas in Texas. At the present time, the Company is aware of certain plant sites in some of these areas and is investigating those and certain other locations. The municipal owner of a property adjacent to one of the Com- pany's service locations has raised concerns over the continued operation of that property as a park due to its former use as a portion of an MGP site. The Texas Water Commission (TWC), in cooperation with the EPA, conducted a site inspection and prelim- inary assessment of this MGP site. Correspondence received from the TWC in 1989 concluded that the site "did not appear at the time of our inspection to pose an apparent threat to the public or the environment." In April 1996 the city closed the park pending the performance of a risk assessment report. Based upon currently available information, Southern Union does not believe the outcome of this matter will have a material adverse effect on its financial position, results of operations or cash flows. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS While the Company's evaluation of these Texas, Arizona and New Mexico MGP sites is in its preliminary stages, it is likely that some compliance costs may be identified and become subject to reasonable quantification. To the extent that such potential costs are quantified, the Company expects to provide any appro- priate accruals and seek recovery for such remediation costs through all appropriate means, including insurance and regulatory relief. Although significant charges to earnings could be required prior to rate recovery, management does not believe that environmental expenditures for such MGP sites will have a material adverse effect on the Company's financial position, results of operations or cash flows. Southern Union and its subsidiaries are parties to other legal proceedings that its management considers to be the normal kinds of 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. As a result of the acquisition of Missouri Gas Energy, the Com- pany assumed certain obligations related to a 1990 settlement of a Wyoming Tight Sands anti-trust claim. To secure the refund of the settlement proceeds, the MPSC authorized the establishment of an independently administered trust to collect cash receipts under the Tight Sands settlement and repay credit-facility borrowings used for the lump sum payment. In the event the trust does not receive cash payments from the gas suppliers as provided by the Tight Sands settlement agreements, the Company is com- mitted to pay its applicable portion of the amount owed the lender of the credit-facility borrowings. The Company's allo cable unpaid portion of the amount the trust owes the lender at September 30, 1996 was $6,335,000. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's principal line of business is the distribution of natural gas as a public utility through Southern Union Gas and Missouri Gas Energy, each of which is a division of the Company. In addition, subsidiaries of Southern Union have been established to support and expand natural gas sales and to capitalize on the Company's gas energy expertise. These subsidiaries market natural gas to end-users, operate natural gas pipeline systems, distribute and sell propane and sell commercial gas air condi- tioning and other gas-fired engine-driven applications. By pro- viding "one-stop shopping," the Company can serve its various customers' specific energy needs, which encompass substantially all of the natural gas distribution and sales businesses from natural gas sales to specialized energy consulting services. Certain subsidiaries also own or hold interests in real estate and other assets, which are primarily used in the Company's utility business. Several of these business activities are subject to regulation by federal, state or local authorities where the Company operates. Thus, the Company's financial condition and results of operations have been and will continue to be dependent upon the receipt of adequate and timely adjustments in rates. In addition, the Com- pany's business is affected by seasonal weather impacts, competi- tive factors within the energy industry and economic development and residential growth in its service areas. RESULTS OF OPERATIONS Three Months Ended September 30, 1996 and 1995 - - ---------------------------------------------- The Company recorded a net loss attributable to common stock of $5,405,000 for the three-month period ended September 30, 1996 compared to a net loss of $5,598,000 for the three-month period ended September 30, 1995. Net loss per common share, based on weighted average shares outstanding during the period, was $.33 in 1996 compared with a net loss per common share of $.35 in 1995. Due to the seasonal nature of the gas utility business, the three-month period ending September 30 is typically a loss period. Operating revenues were $80,830,000 for the three-month period ended September 30, 1996, an increase of 15%, compared with operating revenues of $70,227,000 in 1995. Gas purchase costs for the three-month period ended September 30, 1996 were $39,415,000, an increase of 42%, compared with $27,829,000 in 1995. 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 pur- chased gas adjustment clauses. The increase in operating reve- nues and gas purchase costs between periods was the result of a 7% increase in gas sales volumes to 13,258 MMcf in 1996 from 12,423 MMcf in 1995. Additionally, operating revenues and gas purchase costs were effected by the increase in the average cost of gas from $2.24 per Mcf in 1995 to $2.97 per Mcf in 1996. The increase in the average cost of gas primarily is the result of increases in average spot market gas prices throughout the com- pany's distribution system as a result of seasonal impacts on demands for natural gas and the ensuing competitive pricing within the industry. Operating margin (operating revenues less gas purchase costs) for the three-month period ended September 30, 1996 was $41,415,000 compared to $42,398,000 in 1995. The 2% decrease in operating margin is the result of a decrease in number of customers served due to the sale of certain operations in the Texas and Oklahoma Panhandles which was effective on May 1, 1996, and reduced gas sales to various electric power plants in the Missouri service territories as a result of the milder summer weather. Operating expenses, which include operating, maintenance and general expenses, taxes other than on income and revenues, and depreciation and amortization, were $37,066,000 for the three- month period ended September 30, 1996, a decrease of $254,000, compared with $37,320,000 in 1995. The decrease is primarily a result of a $400,000 decrease in operating, maintenance and general expenses resulting from the sale of certain operations as previously SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS discussed. Offsetting the decrease in operating, maintenance and general expenses was an increase in taxes, other than on income and revenues, due to an increase in property taxes. Interest expense was $8,287,000 for the three-month period ended September 30, 1996, a decrease of 9%, compared to $9,138,000 in 1995. The decrease in interest expense is primarily due to the repurchase of $90,485,000 of the Senior Notes at various dates from June 1995 to June 1996. The funds used for the various repurchases of debt were obtained, in part, from the May 1995 issuance of $100,000,000 of 9.48% Trust Originated Preferred Securities (Preferred Securities) and working capital. See "Debt" in the Notes to the Consolidated Financial Statements for the three-month period ended September 30, 1996. Other income for the three-month period ended September 30, 1996 was $1,735,000 compared to $1,420,000 in 1995. Other income for the three-month period ended September 30, 1996 consists of $1,557,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program and net rental income from Lavaca Realty Company ("Lavaca Realty"), the Company's real estate subsidiary, of $353,000. Offsetting the increase was a $374,000 loss recognized on a donation of emis- sions analysis equipment and software to the University of Texas in Austin, Texas. Other income for 1995 included $1,019,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program and net rental income from Lavaca Realty of $344,000. For the three-month period ended September 30, 1996, the federal and state income tax benefit increased $170,000, or 6%, over the same period in 1995 due primarily to an increase in the effective tax rate from 34% to 36% in 1995 and 1996, respectively. Twelve Months Ended September 30, 1996 and 1995 - - ----------------------------------------------- The Company recorded net earnings available for common stock of $21,032,000 for the twelve-month period ended September 30, 1996 compared with net earnings of $16,639,000 in 1995. Net earnings per common share, based on weighted average shares outstanding during the period, were $1.25 in 1996 compared with net earnings per common share of $1.01 in 1995. Operating revenues were $630,993,000 for the twelve-month period ended September 30, 1996, an increase of 31%, compared with operating revenues of $480,906,000 in 1995. Gas purchase costs for the twelve-month period ended September 30, 1996 were $373,125,000, an increase of 55%, compared with gas purchase costs of $240,844,000 in 1995. Operating revenues increased during the twelve-month period ended September 30, 1996 as a result of a 13% increase in gas sales volume from 105,617 MMcf in 1995 to 119,362 MMcf in 1996. The increase in volumes is princi- pally due to a colder 1995/1996 winter season throughout most of the Company's service territories. Gas purchase costs were also effected by the increase in sales volume and the increase in the average cost of gas from $2.28 per Mcf in 1995 to $3.13 per Mcf in 1996, discussed above. Weather for Texas and Oklahoma service territories for the twelve-month period ended September 30, 1996 was 95% of a 30-year measure compared to 82% in 1995. Weather for Missouri Gas Energy's service territories was 104% of a 30-year measure for 1996 compared to 91% in 1995. Operating margin for the twelve-month period ended September 30, 1996 was $257,868,000 compared to $240,062,000 in 1995. The increase in operating margin resulted primarily from the colder winter mentioned above. Operating expenses, which include operating, maintenance and general expenses, taxes other than on income and revenues, and depreciation and amortization, were $153,907,000 for the twelve- month period ended September 30, SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 1996, an increase of 5%, compared with operating expenses of $146,516,000 in 1995. The increase in operating expenses resulted primarily from an increase in bad debt expense associated with the increase in operating revenues, an increase in provisions for workers' compensation obligations, an increase in employee medical costs and certain severance costs at Missouri Gas Energy. Interest expense was $34,981,000 for the twelve-month period ended September 30, 1996, a decrease of 11%, compared to $39,119,000 in 1995. The decrease in interest expense is due to the decrease in total long-term debt previously discussed. See also "Debt" in the Notes to the Consolidated Financial Statements for the twelve months ended September 30, 1996 included herein. Dividends on preferred securities of subsidiary trust were $9,480,000 for the twelve-month period ended September 30, 1996, compared with $3,529,000 in 1995. The increase is due to the May 1995 issuance of the Preferred Securities. See "Preferred Securities of Subsidiary Trust" in the Notes to the Consolidated Financial Statements for the three-month period ended September 30, 1996. Other income for the twelve-month period ended September 30, 1996 was $11,641,000 compared to $3,878,000 in 1995. Other income for the twelve-month period ended September 30, 1996 included: $6,202,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program; net rental income from Lavaca Realty of $1,400,000; a pre-tax gain of $2,300,000 on the sale of Western Gas Interstate Company (WGI) and other operations; and a $1,448,000 gain on the repurchase of Senior Notes. Other income for the twelve-month period ended September 30, 1995 included $3,278,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program and net rental income from Lavaca Realty of $1,402,000. This was partially offset by $750,000 for the write- down to estimated fair market value of certain Lavaca Realty real estate held for sale. For the twelve-month period ended September 30, 1996, federal and state income taxes increased $3,587,000, or 32%, over the same period in 1995 due to improved pre-tax earnings and as a result of a gain on the sale of WGI and other distribution properties, also discussed above. 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 September 30, 1996 and 1995: Three Months Twelve Months Ended Ended September 30, September 30, 1996 1995 1996 1995 -------- -------- -------- -------- Average number of gas sales customers served: Residential............. 858,093 857,411 870,146 869,737 Commercial.............. 86,123 86,359 89,505 89,148 Industrial and irriga- tion................... 591 685 644 689 Public authorities and other.................. 2,572 2,720 2,775 2,799 Pipeline and marketing.. 174 644 378 475 -------- -------- -------- -------- Total average custo- mers served........... 947,553 947,819 963,448 962,848 ======== ======== ======== ======== Gas sales in millions of cubic feet (MMcf) Residential............. 4,837 5,066 69,506 62,927 Commercial.............. 2,986 3,165 31,381 28,764 Industrial and irriga- tion................... 516 603 2,497 2,305 Public authorities and other.................. 230 228 2,709 3,267 Pipeline and marketing.. 3,866 2,668 13,131 8,221 -------- -------- -------- -------- Gas sales billed....... 12,435 11,730 119,224 105,484 Net change in unbilled gas sales.............. 823 693 138 133 -------- -------- -------- -------- Total gas sales........ 13,258 12,423 119,362 105,617 ======== ======== ======== ======== Gas sales revenues (thousands of dollars): Residential............. $ 42,769 $ 38,590 $392,787 $305,119 Commercial.............. 16,356 13,806 156,639 118,255 Industrial and irriga- tion................... 1,851 1,930 10,526 8,185 Public authorities and other.................. 884 736 9,479 7,839 Pipeline and marketing.. 9,122 5,119 31,625 16,847 -------- -------- -------- -------- Gas revenues billed.... 70,982 60,181 601,056 456,245 Net change in unbilled gas sales revenues..... 4,146 3,704 2,500 469 -------- -------- -------- -------- Total gas sales revenues.............. $ 75,128 $ 63,885 $603,556 $456,714 ======== ======== ======== ======== Gas sales margin (thousands of dollars)... $ 35,713 $ 36,056 $230,431 $215,870 ======== ======== ======== ======== Gas sales revenue per thousand cubic feet (Mcf) billed: Residential............. $ 8.841 $ 7.617 $ 5.651 $ 4.849 Commercial.............. 5.478 4.362 4.992 4.111 Industrial and irriga- tion................... 3.591 3.201 4.215 3.551 Public authorities and other.................. 3.852 3.226 3.499 2.399 Pipeline and marketing.. 2.360 1.919 2.408 2.049 Weather effect: Degree days: Southern Union Gas service territories.... 3 14 1,886 1,679 Missouri Gas Energy ser- vice territories....... 85 105 5,476 4,820 Normal, based on 30-year measure: Southern Union Gas service territories... 0 0 1,976 2,057 Missouri Gas Energy ser- vice territories...... 61 61 5,246 5,293 Gas transported in millions of cubic feet (MMcf)................... 14,688 15,321 62,187 69,698 Gas transportation reve- nues (thousands of dollars)................. $ 3,828 $ 3,797 $ 19,309 $ 19,892 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 season- ality results in a high level of cash flow needs during the peak winter heating season months, resulting from the required pay- ments to natural gas suppliers in advance of the receipt of cash payments from the Company's customers. The Company has histori- cally used its revolving loan and credit facilities to provide funding for its seasonal working capital, continuing construction and maintenance programs and operational requirements. The principal source of funds during the three-month period ended September 30, 1996 was $55,500,000 borrowed under the revolving credit facility. This source, along with beginning cash balances of $2,887,000, provided funds for the purchase of $5,363,000 in investment securities, additions to property, plant and equipment of $13,468,000, operating outflows of $38,691,000 and other seasonal working capital needs of the Company. The effective interest rate under the Company's current debt structure is 7.9% (including interest and the amortization of debt issuance costs and redemption premiums on refinanced debt). The Company has availability under a $100,000,000 revolving credit facility (Revolving Credit Facility) underwritten by a syndicate of banks. Borrowings under the Revolving Credit Facility are available for Southern Union's working capital, letter of credit requirements and other general corporate pur- poses. At June 30, 1996 the outstanding balance under the Revolving Credit Facility was nil. The amount outstanding under the Revolving Credit Facility at September 30, 1996 and October 15, 1996 was $55,500,000 and $52,000,000, respectively. On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated wholly-owned subsidiary of Southern Union, issued $100,000,000 of Preferred Securities. The issuance of the Pre- Preferred Securities was part of a $300,000,000 shelf registra- tion filed with the Securities and Exchange Commission on March 29, 1995. Southern Union may sell a combination of pre- ferred securities of financing trusts and senior and subordinated debt securities of Southern Union of up to $196,907,200 (the remaining shelf) from time to time, at prices determined at the time of any offering. The net proceeds from the Preferred Securities offering, along with working capital from operations, were used to repurchase $90,485,000 of 7.60% Senior Notes through June, 1996 with the remaining balance used to provide working capital for seasonal needs. Depending upon market conditions and available cash balances, the Company may repurchase additional Senior Notes in the future. See Preferred Securities of Subsid- iary Trust and Debt in the Notes to the Consolidated Financial Statements. 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 October 18, 1996 By RONALD J. ENDRES -------------------- -------------------- Ronald J. Endres Executive Vice President and Chief Financial Officer Date October 18, 1996 By DAVID J. KVAPIL -------------------- -------------------- David J. Kvapil Vice President and Controller (Principal Accounting Officer) EX-11 2 SOUTHERN UNION COMPANY AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Three Months Twelve Months Ended Ended September 30, September 30, ----------------- ----------------- 1996 1995 1996 1995 -------- -------- -------- -------- (in thousands of dollars, except per share amounts) Net earnings (loss) avail- able for common stock..... $(5,405) $(5,598) $ 21,032 $ 16,639 ======= ======= ======== ======== Primary earnings per share: Average shares out- standing................. 16,224 16,126 16,206 16,095 Stock options issued or granted.................. -- -- 577 350 ------- ------- -------- -------- Average shares out- standing................. 16,224 16,126 16,783 16,445 ======= ======= ======== ======== Primary earnings (loss) per share................ $ (.33) $ (.35) $ 1.25 $ 1.01 ======= ======= ======== ======== Fully diluted earnings per share: Average shares out- standing................ 16,224 16,126 16,206 16,095 Stock options issued or granted................. -- -- 617 390 ------- ------- -------- -------- Average shares out- standing................ 16,224 16,126 16,823 16,485 ======= ======= ======== ======== Fully diluted earnings (loss) per share........ $ (.33) $ (.35) $ 1.25 $ 1.01 ======= ======= ======== ======== EX-27 3
UT JUN-30-1996 SEP-30-1996 3-MOS PER-BOOK $750,446,000 $ 9,258,000 $ 92,129,000 $116,890,000 $ 22,111,000 $990,834,000 $ 16,275,000 $206,047,000 $ 20,226,000 $243,732,000 $ 0 $100,000,000 $386,143,000 $ 55,500,000 $ 0 $ 0 $ 680,000 $ 0 $ 0 $ 0 $205,963,000 $990,834,000 $ 80,830,000 $ (3,078,000) $ 25,315,000 $ 37,066,000 $ 439,000 $ 1,735,000 $ 2,882,000 $ 8,287,000 $ (5,405,000) $ 0 $ (5,405,000) $ 0 $ 0 $(38,691,000) $ (.33) $ (.33)
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