-----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, GbaVpTJ2w/o5BReagN4F1LxYD3Awxv3iziH9ZCJERjP3275oupJFQh5ZbwtYnSBB EOaSPaJ+gOmNe1ezsdSAwQ== 0000203248-97-000003.txt : 19970502 0000203248-97-000003.hdr.sgml : 19970502 ACCESSION NUMBER: 0000203248-97-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19961231 FILED AS OF DATE: 19970214 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: 97534376 BUSINESS ADDRESS: STREET 1: 504 LAVACA ST 8TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124775852 10-Q 1 ================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ---------------------------------- FORM 10-Q For the quarterly period ended ------------------------------ December 31, 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: Title of each class Name of each exchange in which registered - - - ------------------- ----------------------------------------- Common Stock, par New York Stock Exchange value $1 per share Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No --- --- The number of shares of the registrant's Common Stock outstanding on February 5, 1997 was 17,074,812. ================================================================= SOUTHERN UNION COMPANY AND SUBSIDIARIES FORM 10-Q December 31, 1996 Index PART I. FINANCIAL INFORMATION Page(s) ------- Item 1. Financial Statements Consolidated statements of operations - three, six and twelve months ended December 31, 1996 and 1995 Consolidated balance sheet - December 31, 1996 and 1995 and June 30, 1996 Consolidated statement of stockholders' equity - six months ended December 31, 1996 and twelve months ended June 30, 1996 Consolidated statements of cash flows - three, six and twelve months ended December 31, 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" in Notes to Consolidated Financial Statements) Item 4. Results of Votes of Security Holders 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 December 31, ------------------------------- 1996 1995 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues.............. $ 230,882 $ 180,939 Gas purchase costs.............. 154,945 106,602 ----------- ----------- Operating margin.............. 75,937 74,337 Revenue-related taxes........... 12,840 10,207 ----------- ----------- Net operating margin.......... 63,097 64,130 Operating expenses: Operating, maintenance and general..................... 27,180 27,761 Depreciation and amortization. 8,395 8,575 Taxes, other than on income and revenues................ 2,537 3,532 ----------- ----------- Total operating expenses.... 38,112 39,868 ----------- ----------- Net operating revenues...... 24,985 24,262 ----------- ----------- Other income (expenses): Interest...................... (8,741) (9,165) Dividends on preferred securities of subsidiary trust....................... (2,370) (2,370) Other, net.................... 1,643 949 ----------- ----------- Total other expenses, net... (9,468) (10,586) ----------- ----------- Earnings before income taxes..................... 15,517 13,676 Federal and state income taxes.. 5,856 4,930 ----------- ----------- Net earnings available for common stock.................. $ 9,661 $ 8,746 =========== =========== Net earnings per common and common share equivalents...... $ .54 $ .50 =========== =========== Weighted average common and common share equivalents outstanding................... 17,742,696 17,566,246 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Six Months Ended December 31, ----------------------------- 1996 1995 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues................ $ 311,712 $ 251,166 Gas purchase costs................ 194,360 134,431 ----------- ----------- Operating margin................ 117,352 116,735 Revenue-related taxes............. 16,751 13,702 ----------- ----------- Net operating margin............ 100,601 103,033 Operating expenses: Operating, maintenance and general....................... 52,495 53,476 Depreciation and amortization... 16,883 17,117 Taxes, other than on income and revenues.................. 5,799 6,597 ----------- ----------- Total operating expenses...... 75,177 77,190 ----------- ----------- Net operating revenues........ 25,424 25,843 ----------- ----------- Other income (expenses): Interest........................ (17,028) (18,303) Dividends on preferred securities of subsidiary trust......................... (4,740) (4,740) Other, net...................... 3,378 2,370 ----------- ----------- Total other expenses, net..... (18,390) (20,673) ----------- ----------- Earnings before income taxes.. 7,034 5,170 Federal and state income taxes.... 2,778 2,022 ----------- ----------- Net earnings available for common stock.................... $ 4,256 $ 3,148 =========== =========== Net earnings per common and common share equivalents........ $ .24 $ .18 =========== =========== Weighted average common and common share equivalents outstanding..................... 17,735,280 17,445,587 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Twelve Months Ended December 31, -------------------------------- 1996 1995 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues............. $ 680,936 $ 514,202 Gas purchase costs............. 421,467 269,811 ----------- ----------- Operating margin............. 259,469 244,391 Revenue-related taxes.......... 37,934 28,845 ----------- ----------- Net operating margin......... 221,535 215,546 Operating expenses: Operating, maintenance and general.................... 106,540 99,378 Depreciation and amortiza- tion....................... 32,748 33,135 Taxes, other than on income and revenues............... 12,863 11,992 ----------- ----------- Total operating expenses... 152,151 144,505 ----------- ----------- Net operating revenues..... 69,384 71,041 ----------- ----------- Other income (expenses): Interest..................... (34,557) (37,957) Dividends on preferred securities of subsidiary trust...................... (9,480) (5,899) Other, net................... 12,335 4,417 ----------- ----------- Total other expenses, net.. (31,702) (39,439) ----------- ----------- Earnings before income taxes.................... 37,682 31,602 Federal and state income taxes. 15,735 12,775 ----------- ----------- Net earnings available for common stock................. $ 21,947 $ 18,827 =========== =========== Net earnings per common and common share equivalents..... $ 1.24 $ 1.08 =========== =========== Weighted average common and common share equivalents outstanding.................. 17,705,591 17,363,041 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS December 31, June 30, -------------------------- ------------ 1996 1995 1996 ------------ ------------ ------------ (unaudited) (thousands of dollars) Property, plant and equipment: Plant in service..... $ 938,980 $ 905,310 $ 912,552 Construction work in progress........... 10,506 16,833 8,411 ----------- ----------- ----------- 949,486 922,143 920,963 Less accumulated depreciation and amortization....... (323,341) (315,413) (310,289) ----------- ----------- ----------- 626,145 606,730 610,674 Additional purchase cost assigned to utility plant, net. 132,700 142,454 133,780 ----------- ----------- ----------- Net property, plant and equipment...... 758,845 749,184 744,454 ----------- ----------- ----------- Current assets: Cash and cash equivalents........ -- 820 2,887 Accounts receivable, billed and unbilled........... 148,059 108,582 47,846 Inventories, principally at average cost....... 33,822 24,658 27,023 Deferred gas purchase costs.............. 4,663 11,369 2,650 Prepayments and other.............. 1,252 1,273 1,947 ----------- ----------- ----------- Total current assets........... 187,796 146,702 82,353 ----------- ----------- ----------- Deferred charges....... 115,738 117,198 116,286 Investment securities.. 15,734 1,463 8,848 Real estate............ 8,956 10,495 9,513 Other.................. 2,771 2,754 3,006 ----------- ----------- ----------- Total assets......... $ 1,089,840 $ 1,027,796 $ 964,460 See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) STOCKHOLDERS' EQUITY AND LIABILITIES December 31, June 30, -------------------------- ------------ 1996 1995 1996 ------------ ------------ ------------ (unaudited) (thousands of dollars) Common stockholders' equity: Common stock, $1 par value; authorized 50,000,000 shares; issued 17,120,648 shares............ $ 17,121 $ 12,212 $ 16,275 Premium on capital stock............. 224,902 210,004 206,047 Less treasury stock, at cost........... (794) (794) (794) Retained earnings... 10,393 7,940 25,631 Unrealized holding gain (loss)....... 1,490 -- (1,244) ----------- ----------- ----------- Total common stock- holders' equity... 253,112 229,362 245,915 Company-obligated man- datorily redeemable preferred securities of subsidiary trust holding solely $103,093,000 princi- pal amount of 9.48% subordinated notes of Southern Union due 2025.............. 100,000 100,000 100,000 Long-term debt........ 385,988 442,161 385,394 ----------- ----------- ----------- Total capitaliza- tion.............. 739,100 771,523 731,309 Current liabilities: Long-term debt due within one year... 700 782 615 Notes payable....... 61,200 13,000 -- Accounts payable.... 89,788 46,644 39,238 Federal, state and local taxes....... 19,379 17,947 16,741 Accrued interest.... 12,372 14,177 12,773 Accrued dividends on preferred securities of sub- sidiary trust..... -- -- 2,370 Customer deposits... 17,215 15,333 15,656 Other............... 17,643 18,500 15,937 ----------- ----------- ----------- Total current liabilities..... 218,297 126,383 103,330 ----------- ----------- ----------- Deferred credits and other............... 83,717 92,517 86,287 Accumulated deferred income taxes........ 48,726 37,373 43,534 Commitments and contingencies....... -- -- -- ----------- ----------- ----------- Total............... $ 1,089,840 $ 1,027,796 $ 964,460 =========== =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Unrea- Common Premium Trea- lized Stock, on sury Holding $1 Par Capital Stock, Retained Gain Value Stock at 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 earnings. -- -- -- 4,256 -- 4,256 5% stock dividend. 812 18,682 -- (19,494) -- -- Unrea- lized holding gain..... -- -- -- -- 2,734 2,734 Exercise of stock options.. 34 173 -- -- -- 207 ------- -------- ------ -------- ------- -------- Balance Decem- ber 31, 1996...... $17,121 $224,902 $ (794) $ 10,393 $ 1,490 $253,112 ======= ======== ====== ======== ======= ======== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended December 31, ------------------------------- 1996 1995 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings................. $ 9,661 $ 8,746 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortiza- tion...................... 8,395 8,575 Deferred income taxes...... 2,178 1,018 Provision for bad debts.... 1,721 1,077 Deferral of interest and other expenses............ (1,694) (1,258) Gain on sale of investment securities................ (759) -- Other, net................. 226 370 Changes in assets and liabilities: Increase in accounts receivable, billed and unbilled................ (109,527) (75,623) Increase in accounts payable................. 60,667 17,805 Increase in taxes and other liabilities....... 15,905 19,999 Increase in customer deposits................ 1,058 846 Decrease in deferred gas purchase costs.......... 4,548 11,295 Decrease in inventories.. 9,397 8,406 Decrease in other accounts................ 1,855 1,350 ----------- ----------- Net cash flows from operating activities...... 3,631 2,606 ----------- ----------- Cash flows used in investing activities: Additions to property, plant and equipment............... (17,642) (14,652) Purchase of investment securities.................. -- (1,463) Proceeds from sale of investment securities....... 527 -- Increase in customer advances.................... 510 775 Increase in deferred charges and credits......... 2,013 1,045 Other, net................... 490 (740) ----------- ----------- Net cash flows used in investing activities....... (14,102) (15,035) ----------- ----------- Cash flows from financing activities: Repayment of debt............ (135) (157) Net borrowings under financing facilities........ 5,700 13,000 Increase (decrease) in cash overdrafts.................. 4,699 (144) Other, net................... 207 550 ----------- ----------- Net cash flows from financing activities....... 10,471 13,249 ----------- ----------- Increase in cash and cash equivalents................... -- 820 Cash and cash equivalents at beginning of period........... -- -- ----------- ----------- Cash and cash equivalents at end of period................. $ -- $ 820 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................... $ 1,935 $ 816 =========== =========== Income taxes............... $ 1,500 $ 200 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended December 31, ----------------------------- 1996 1995 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings................... $ 4,256 $ 3,148 Adjustments to reconcile net earnings to net cash flows used in operating activities: Depreciation and amortiza- tion........................ 16,883 17,117 Deferred income taxes........ 3,707 1,317 Provision for bad debts...... 2,836 1,472 Deferral of interest and other expenses.............. (3,251) (2,277) Gain on sale of investment securities.................. (759) -- Other, net................... 333 777 Changes in assets and liabilities, net of acqui- sitions and dispositions: Increase in accounts receivable, billed and unbilled.................. (100,035) (74,588) Increase in accounts payable................... 45,712 17,453 Increase in taxes and other liabilities......... 2,237 15,500 Increase in customer deposits.................. 1,559 1,167 Increase in deferred gas purchase costs............ (2,012) (3,728) Increase in inventories.... (6,637) (1,097) Decrease (increase) in other accounts............ (27) 34 ----------- ----------- Net cash flows from operating activities........ (35,198) (23,705) ----------- ----------- Cash flows used in investing activities: Additions to property, plant and equipment................. (31,110) (28,712) Acquisition of operations, net of cash received.......... (1,162) -- Purchase of investment securities.................... (5,363) (1,463) Proceeds from sale of investment securities......... 527 -- Maturity of short-term investments................... -- 19,582 Increase in customer advances.. 1,914 1,855 Increase in deferred charges and credits................... 359 975 Other, net..................... 1,223 (471) ----------- ----------- Net cash flows used in investing activities......... (33,612) (8,234) ----------- ----------- Cash flows from (used in) financing activities: Repayment of debt.............. (321) (19,806) Net borrowings under financing facilities.................... 61,200 13,000 Increase in cash overdrafts.... 4,837 -- Other, net..................... 207 550 ----------- ----------- Net cash flows from (used in) financing activities..... 65,923 (6,256) ----------- ----------- Decrease in cash and cash equivalents..................... (2,887) (38,195) Cash and cash equivalents at beginning of period............. 2,887 39,015 ----------- ----------- Cash and cash equivalents at end of period................... $ -- $ 820 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest..................... $ 16,942 $ 18,373 =========== =========== Income taxes (refund)........ $ 2,000 $ (5,188) =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Ended December 31, -------------------------------- 1996 1995 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings................. $ 21,947 $ 18,827 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortiza- tion...................... 32,748 33,135 Deferred income taxes...... 11,803 7,558 Provision for bad debts.... 6,899 6,461 Deferral of interest and other expenses............ (6,638) (4,262) Gain on sale of investment securities................ (759) -- Other, net................. (253) (666) Changes in assets and liabilities, net of acqui- sitions and dispositions: Increase in accounts receivable, billed and unbilled................ (43,190) (27,246) Increase in accounts payable................. 38,307 745 Increase (decrease) in taxes and other liabilities............. (4,122) 8,372 Increase in customer deposits................ 1,881 1,395 Decrease (increase) in deferred gas purchase costs................... 6,707 (40,881) Decrease (increase) in inventories............. (9,147) 22,255 Decrease (increase) in other accounts.......... (211) 3,066 ----------- ----------- Net cash flows from operating activities...... 55,972 28,759 ----------- ----------- Cash flows used in investing activities: Additions to property, plant and equipment............... (61,774) (59,549) Acquisition of operations, net of cash received........ (1,162) -- Purchase of investment securities.................. (14,663) (1,463) Proceeds from sale of investment securities....... 527 -- Litigation settlement proceeds.................... 4,250 -- Increase in customer advances.................... 3,606 2,881 Decrease in deferred charges and credits......... (4,427) (1,515) Proceeds from sale of dis- tribution and transmission properties.................. 14,770 -- Other, net................... 2,036 1,069 ----------- ----------- Net cash flows used in investing activities....... (56,837) (58,577) ----------- ----------- Cash flows from financing activities: Repayment of debt............ (53,305) (35,637) Net borrowings (payments) under financing facilities.. 48,200 (31,000) Increase in cash overdrafts.. 4,837 -- Issuance of perferred securities of subsidiary trust....................... -- 100,000 Issuance cost of preferred securities of subsidiary trust....................... -- (3,799) Other, net................... 313 1,074 ----------- ----------- Net cash flows from financing activities....... 45 30,638 ----------- ----------- Increase (decrease) in cash and cash equivalents.......... (820) 820 Cash and cash equivalents at beginning of period........... 820 -- ----------- ----------- Cash and cash equivalents at end of period................. $ -- $ 820 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................... $ 35,462 $ 38,373 =========== =========== Income taxes (refund)...... $ 7,197 $ (2,620) =========== =========== 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 com- mon shares 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 December 31, 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 December 31, 1996, investment securities consisted of com- mon stock with a specific cost of $13,443,000 and a fair value of $15,734,000. The unrealized holding gain, net of related income taxes and included as a separate component of common stock- holders' equity, totaled $1,490,000 at December 31, 1996. Pro- ceeds and realized gains from the sales of securities classified as available for sale for the three-month period ended December 31, 1996, were $3,542,000 and $759,000, respectively. Of these proceeds, $3,015,000 were received after December 31, 1996 and are classified as accounts receivable at that date and are reflected as a non-cash transaction in the consolidated statement of cash flows. From January 1, 1997 to February 5, 1997, proceeds and realized gains from the sales of securities classified as available for sale at December 31, 1996 were $5,001,000 and $928,000, respec- tively. As of February 5, 1997, the investment securities clas- sified as available-for-sale had a specific cost of $9,370,000 and a fair value of $11,049,000. DIVESTITURE On May 1, 1996, Southern Union Company sold certain gas distribu- tion operations of the Company in the Texas and Oklahoma Pan- handles and Western Gas Interstate Company (WGI), a wholly-owned subsidiary of the Company, exclusive of the Del Norte intercon- nect operation which transports natural gas into Mexico, for $15,900,000. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS UTILITY REGULATION AND RATES MGE Rate Case On January 22, 1997, Missouri Gas Energy was notified by the Missouri Public Service Commission (MPSC) of its decision to grant a $7,533,000 annual increase to revenue effective on February 1, 1997. Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in a major gas safety program in its service area. This program includes replacement 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 connection with this program, the MPSC issued an accounting authority order (AAO) in Case No. GO-92-234 in 1994 which authorized MGE to defer depreciation expenses, property taxes and carrying costs at the rate of 10.54% on the costs incurred in the Missouri Safety Program. Since February 1, 1994, the Company has followed the specifications of the AAO as required by generally accepted accounting principles. The MPSC rate order of January 22, 1997, however, retroactively reduced the carrying cost rate applied by the Company on the expenditures incurred on the Missouri Safety Program since early 1994 to an Allowance for Funds Used During Construction (AFUDC) rate of approximately 6%. The Company has sought rehearing of that por- tion of the rate order and, if necessary, will vigorously pursue a court appeal on this matter. Absent a reversal of this part of the rate order, the Company would have to record a one-time $6,000,000 pre-tax write-off of the previously deferred carrying costs. Associated carrying costs deferred by the Company using the 10.54% rate were $1,694,000 and $3,251,000 for the three and six months ended December 31, 1996, respectively. Had the Com- pany applied an AFUDC rate, as now suggested by the MPSC, the carrying costs would have been $893,000 and $1,708,000 for the three and six months ended December 31, 1996, respectively. The Company has not provided for any potential disallowance relative to this matter in its financial statements because it believes this part of the order is not lawful and that the related regulatory asset ultimately will be recovered in the future. Unrecovered Deferred Gas Costs Under the order of the Federal Energy Regulatory Commission, a major supplier of gas to Missouri Gas Energy is allowed recovery of certain previously unrecovered deferred gas costs with a re- maining balance of $16,235,000 at December 31, 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 de- ferred credit, respectively, on the consolidated balance sheet as of December 31, 1996 and 1995. PREFERRED SECURITIES OF SUBSIDIARY TRUST On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust Originated Preferred Securities (Pre- ferred Securities). In connection with the Subsidiary Trust's issuance of the Preferred Securities and the related purchase by Southern Union of all of the Subsidiary Trust's common securities (Common Securities), Southern Union issued to the Subsidiary Trust $103,092,800 principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025 (Subordinated Notes). The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest and other payment dates on the Subordinated Notes correspond to the distribution and other payment dates on the Preferred Securities and the Common Securities. Under certain circumstances, the Subordinated Notes may be distributed to holders of the Preferred Securities and holders of the Common Securities in liquidation of the Subsidiary Trust. The Subor- dinated 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 December 31, 1996 and 1995, 4,000,000 shares of Preferred Securities were outstanding. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS DEBT December 31, June 30, 1996 1996 ------------ ---------- (thousands of dollars) 7.60% Senior Notes due 2024............ $ 384,515 $ 384,515 Other.................................. 2,173 1,494 ----------- ---------- Total debt............................. 386,688 386,009 Less current portion................. 700 615 ----------- ---------- Total long-term debt................... $ 385,988 $ 385,394 =========== ========== The Company has availability under a $100,000,000 revolving credit facility (Revolving Credit Facility) underwritten by a syndicate of banks. The Company has additional availability under uncommitted line of credit facilities (Uncommitted Facilities) with various banks. Covenants under the Revolving Credit Facility allow for up to $35,000,000 of borrowings under Uncommitted Facilities at any one time. Borrowings under these facilities are available for Southern Union's working capital, letter of credit requirements and other general corporate pur- poses. Amounts outstanding under these facilities at December 31, 1996 and February 5, 1997 were $61,200,000 and $52,800,000, respectively. STOCK DIVIDEND On December 10, 1996, Southern Union distributed its annual 5% common stock dividend to stockholders of record on November 22, 1996. Unless otherwise stated, all per share data included in the accompanying consolidated financial statements and in these Notes to Consolidated Financial Statements has been restated to give effect to the stock dividend. 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, Ver- mont. This knowledge arises out of the existence of a prior ac- tion, 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 govern- ment to recover clean-up costs associated with the Maltex Pond, which is part of the Pine Street Canal Site. Two defendants in Green Mountain Power, Vermont Gas Systems and Green Mountain Power Corp., claimed that Southern Union is the corporate suc- cessor to People's Light and Power Corporation, an upstream cor- porate 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 or- der dated December 26, 1990. The EPA has since conducted 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 finan- cial 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 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 SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS exist or arise with ultimately have responsibility will not ex- ceed 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 pre- liminary 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 pub- lic 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. 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 re- quired 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. On January 31, 1997, the Company filed an application for rehearing with the MPSC relative to the MPSC report and order of January 22, 1997. See Utility Regulation and Rates included herein these Notes to the Consolidated Financial Statements. 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 bor- rowings 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 December 31, 1996 was $5,900,000. 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 natu- ral gas to end-users, operate natural gas pipeline systems, dis- tribute and sell propane and sell commercial gas air conditioning and other gas-fired engine-driven applications. By providing "one-stop shopping," the Company serves 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 sub- sidiaries also own or hold interests in real estate and other as- sets, 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 December 31, 1996 and 1995 The Company recorded net earnings available for common stock of $9,661,000 for the three-month period ended December 31, 1996 compared with net earnings of $8,746,000 for the same period in 1995. Earnings per share, based on weighted average common and common share equivalents outstanding during the period, were $.54 in 1996 compared with earnings per share of $.50 in 1995. Operating revenues were $230,882,000 for the three-month period ended December 31, 1996, an increase of 28%, compared with operating revenues of $180,939,000 in 1995. Gas purchase costs for the three-month period ended December 31, 1996 were $154,945,000, an increase of 45%, compared with $106,602,000 in 1995. The Company's operating revenues are affected by the level of sales volumes and by the pass-through of increases or de- creases in the Company's gas purchase costs through its purchased gas adjustment clauses. The increase in both operating revenues and gas purchase costs between periods was primarily the result of a 36% increase in the average cost of gas from $2.93 per Mcf in 1995 to $3.98 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 Company's distribution system as a result of seasonal impacts on demands for natural gas and the ensuing competitive pricing within the industry. Additionally, operating revenues and gas purchase costs were effected by a 7% increase in gas sales volume to 38,955 MMcf in 1996 from 36,365 MMcf in 1995. The increase in sales volume was due to improved sales results in nontraditional markets and colder weather during the three-month period ended December 31, 1996, which was par- tially offset by a reduction in volumes from the sale of certain operations in the Texas and Oklahoma Panhandles on May 1, 1996. Weather for Missouri Gas Energy's service territories, which in- clude the city of Kansas City, Missouri, was 110% of a 30-year measure for the three-month period ended December 31, 1996, com- pared with 101% in 1995. Southern Union Gas service territories, which include the cities of Austin and El Paso, experienced weather that was 96% of a 30-year measure in 1996, compared with 92% in 1995. Net operating margin (operating margin less revenue-related taxes) decreased $1,033,000 for the three-month period ended December 31, 1996 compared with the same period in 1995. Net operating margin decreased primarily due to the reduction in volumes and the related operating margin as a result of the Texas and Oklahoma Panhandle sale, previously discussed. Despite the sale of these operations, overall net sales volumes increased primarily from the addition of lower margin pipeline and mar- keting volumes. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating expenses, which include operating, maintenance and general expenses, depreciation and amortization, and taxes other than on income and revenue, were $38,112,000 for the three-month period ended December 31, 1996, a decrease of $1,756,000, com- pared with $39,868,000 in 1995. The decrease is primarily a re- sult of the elimination of operating, maintenance and general expenses resulting from the May 1, 1996 sale of Western Gas Interstate Company (WGI) and other operations, previously dis- cussed as well as lower property tax renditions and various prior year property tax refunds. Interest expense was $8,741,000 for the three-month period ended December 31, 1996, a decrease of 5%, compared with $9,165,000 in 1995. The decrease in interest expense is due to the repurchase of $90,485,000 of the Company's 7.60% Senior Notes (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 Pre- ferred Securities (Preferred Securities) and working capital. The reduction of interest expense from the Senior Note repur- chases was partially offset by interest expense on the increased borrowings under the various financing facilities during the three-month period ended December 31, 1996 compared to the same period in 1995. See "Debt" in the Notes to the Consolidated Financial Statements for the quarter ended December 31, 1996. Other income for the three-month period ended December 31, 1996 was $1,643,000, compared with $949,000 in 1995. Other income for the three-month period ended December 31, 1996 consists of $1,694,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program, realized gains on the sale of investment securities of $759,000 and net rental income from Lavaca Realty Company (Lavaca Realty), the Company's real estate subsidiary, of $346,000. This was par- tially offset by the write-off of $1,150,000 of acquisition- related costs as a result of the termination of various acquisition activities. Other income for 1995 included $1,258,000 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 $345,000, which was partially offset by $500,000 in costs in connection with the closing of the Natural Gas Vehicle Technology Centers, L.L.P. (Tech Center). The Tech Center was a joint venture between Econofuel Company (Econofuel), a wholly-owned subsidiary of the Company, and Natural Gas Development Company, Inc. of California. For the three-month period ended December 31, 1996, federal and state income taxes increased $926,000, or 19%, over the same period in 1995 due to an increase in pre-tax earnings as dis- cussed above, as well as an increase in the effective tax rate from 36% to 38% in 1995 and 1996, respectively. Six Months Ended December 31, 1996 and 1995 The Company recorded net earnings available for common stock of $4,256,000 for the six-month period ended December 31, 1996 com- pared with net earnings of $3,148,000 for the same period in 1995. Earnings per share, based on weighted average common and common share equivalents outstanding during the period, were $.24 in 1996 compared with earnings per share of $.18 in 1995. Operating revenues were $311,712,000 for the six-month period ended December 31, 1996, an increase of 24%, compared with operating revenues of $251,166,000 in 1995. Gas purchase costs for the six-month period ended December 31, 1996 were $194,360,000, an increase of 45%, compared with $134,431,000 in 1995. Both operating revenues and gas purchase costs increased in the six-month period ended December 31, 1996 primarily due to a 35% increase in the average cost of gas from $2.76 per Mcf in 1995 to $3.72 per Mcf in 1996 as a result of increases in average spot market gas prices, previously discussed. Additionally, operating revenues and gas purchase costs were effected by a 7% increase in gas sales volume from 48,788 MMcf in 1995 to 52,213 MMcf in 1996. The increase in volumes is principally due to growth in pipeline and marketing sales, improved sales results in nontraditional markets and cooler weather experienced during the six-month period ended December 31, 1996 compared with 1995, which was partially offset by a reduction in volumes from the sale of certain operations on May 1, 1996, previously discussed. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Missouri Gas Energy's service territories experienced weather which was 110% of a 30-year measure for the six months ended December 31, 1996 compared with 103% in 1995. Weather for Southern Union Gas service territories for the six-month period ended December 31, 1996 was 96% of a 30-year measure compared with 94% in 1995. Net operating margin decreased 2% for the six-month period ended December 31, 1996 compared with the same period in 1995. Net operating margin decreased primarily from the reduction in volumes and related operating margin as a result of the Texas and Oklahoma Panhandle sale, previously discussed. Despite the sale of these operations, overall net sales volumes increased 7% pri- marily from the addition of lower margin pipeline and marketing volumes. Operating expenses were $75,177,000 for the six-month period ended December 31, 1996, a decrease of $2,013,000, compared with $77,190,000 in 1995. The decrease is primarily a result of the elimination of operating, maintenance and general expenses re- sulting from the May 1, 1996 sale of WGI and other operations and lower property tax renditions and various prior period tax re- funds, both previously discussed. Interest expense was $17,028,000 for the six-month period ended December 31, 1996, a decrease of 7%, compared with $18,303,000 in 1995. The decrease in interest expense is due to the repurchase of Senior Notes from June 1995 to June 1996 which was partially offset by an increase in interest expense from increased bor- rowings under the various financing facilities, both previously discussed. See "Debt" in the Notes to the Consolidated Financial Statements for the quarter ended December 31, 1996. Other income for the six-month period ended December 31, 1996 was $3,378,000 compared with $2,370,000 in 1995. Other income for the six-month period ended December 31, 1996 included $3,251,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program, realized gains on the sale of investment securities of $759,000 and net rental income from Lavaca Realty of $698,000. This was partially offset by the write-off of $1,150,000 of acquisition-related costs, previously discussed, and a $374,000 expense associated with the donation of emissions analysis equipment and software to a Texas university. Other income for the six-month period ended December 31, 1995 included $2,277,000 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 $690,000. This was partially offset by estimated costs of $500,000 to close Econofuel's Tech Center, previously discussed. For the six-month period ended December 31, 1996, federal and state income taxes increased $756,000 over the same period in 1995 due primarily to improved pre-tax earnings as discussed above. The Company's consolidated federal and state effective income tax rate was 39% for the six months ended December 31, 1996 and 1995. Twelve Months Ended December 31, 1996 and 1995 The Company recorded net earnings available for common stock of $21,947,000 for the twelve-month period ended December 31, 1996 compared with net earnings of $18,827,000 in 1995. Earnings per share, based on weighted average common and common share equiva- lents outstanding during the period, were $1.24 in 1996 compared with earnings per share of $1.08 in 1995. Operating revenues were $680,936,000 for the twelve-month period ended December 31, 1996, an increase of 32%, compared with operating revenues of $514,202,000 in 1995. Gas purchase costs for the twelve-month period ended December 31, 1996 were $421,467,000, an increase of 56%, compared with gas purchase costs of $269,811,000 in 1995. Both operating revenues and gas purchase costs increased during the twelve-month period ended December 31, 1996 as a result of a 10% increase in gas sales volume from 110,525 MMcf in 1995 to 121,786 MMcf in 1996. Addi- tionally, operating revenues and gas purchase costs were affected by an increase in the average cost of gas to $3.46 per Mcf in 1996 from $2.44 per Mcf in 1995 as a result of spot market prices. Operating revenues and gas purchase costs were also impacted by colder weather conditions in 1996. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Missouri Gas Energy's service territories experienced weather which was 107% of a 30-year measure for the twelve-month period ended December 31, 1996 compared with 99% in 1995. Weather for Southern Union Gas service territories for the twelve-month period ended December 31, 1996 was 97% of a 30-year measure com- pared with 88% in 1995. Net operating margin increased 3% for the twelve-month period ended December 31, 1996 compared with the same period in 1995, primarily from a 10% increase in gas sales volumes, previously discussed. This was partially offset from the reduction in volumes and related operating margin as a result of the Texas and Oklahoma Panhandle sale, also previously discussed. Operating expenses were $152,151,000 for the twelve-month period ended December 31, 1996, an increase of 5%, compared with operating expenses of $144,505,000 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 $34,557,000 for the twelve-month period ended December 31, 1996, a decrease of 9%, compared with $37,957,000 in 1995. The decrease in interest expense is due to the repurchase of Senior Notes from June 1995 to June 1996 which was partially offset by interest expense from increased borrowing under the revolving credit facility, both previously discussed. See "Debt" in the Notes to the Consolidated Financial Statements for the quarter ended December 31, 1996 included herein. Dividends on preferred securities of subsidiary trust were $9,480,000 for the twelve-month period ended December 31, 1996, compared with $5,899,000 in 1995. The increase is due to the May 1995 issuance of the Preferred Securities and the recording of dividends since that date. See "Preferred Securities of Sub- sidiary Trust" in the Notes to the Consolidated Financial State- ments for the quarter ended December 31, 1996. Other income for the twelve-month period ended December 31, 1996 was $12,335,000 compared with $4,417,000 in 1995. Other income for the twelve-month period ended December 31, 1996 included $6,638,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program, a pre-tax gain of $2,050,000 on the sale of WGI and other operations, a $1,448,000 gain on the repurchase of Senior Notes, net rental income from Lavaca Realty of $1,401,000 and realized gains on the sale of investment securities of $759,000. This was partially offset by the write-off of $1,150,000 of acquisition-related costs and a $374,000 loss on the donation of emissions analysis equipment and software, previously discussed. Other income for the twelve-month period ended December 31, 1995 included $3,920,000 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 $1,425,000. This was par- tially offset by estimated costs of $500,000 to close Econofuel's Tech Center, also previously discussed. For the twelve-month period ended December 31, 1996, federal and state income taxes increased $2,960,000 over the same period in 1995 due to an increase in pre-tax earnings. 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 distribution, transportation, marketing and trans- mission operations for the three- and twelve-month periods ended December 31, 1996 and 1995: Three Months Twelve Months Ended December 31, Ended December 31, ------------------ ------------------ 1996(1) 1995(1) 1996(1) 1995(1) -------- -------- -------- -------- Average number of gas sales customers served: Residential............ 871,762 872,891 870,408 871,261 Commercial............. 89,294 88,457 89,654 89,434 Industrial and irrigation............ 595 703 626 705 Pipeline and marketing. 185 539 379 513 Public authorities and other............. 2,701 2,765 2,749 2,791 -------- -------- -------- -------- Total average custo- mers served......... 964,537 965,355 963,816 964,704 ======== ======== ======== ======== Gas sales in millions of cubic feet (MMcf) Residential............ 17,743 16,794 70,401 64,901 Commercial............. 8,012 7,579 31,780 29,695 Industrial and irrigation............ 452 598 2,391 2,292 Pipeline and marketing. 4,735 3,066 14,800 9,478 Public authorities and other............. 734 605 2,715 3,147 -------- -------- -------- -------- Gas sales billed..... 31,676 28,642 122,087 109,513 Net change in unbilled gas sales............. 7,279 7,723 (301) 1,012 -------- -------- -------- -------- Total gas sales...... 38,955 36,365 121,786 110,525 ======== ======== ======== ======== Gas sales revenues (thousands of dollars): Residential............ $113,671 $ 91,958 $414,491 $325,228 Commercial............. 45,930 36,128 166,452 127,005 Industrial and irrigation............ 2,483 2,286 10,724 8,752 Pipeline and marketing. 12,188 6,470 37,343 19,365 Public authorities and other............. 3,666 2,046 11,101 7,639 -------- -------- -------- -------- Gas revenues billed.. 177,938 138,888 640,111 487,989 Net increase in unbilled gas sales revenues.............. 44,164 34,272 13,003 7,236 -------- -------- -------- -------- Total gas sales revenues............ $222,102 $173,160 $653,114 $495,225 ======== ======== ======== ======== Gas sales margin (thousands of dollars).. $ 67,157 $ 66,558 $231,647 $225,414 ======== ======== ======== ======== Gas sales revenue per thousand cubic feet (Mcf) billed: Residential............ $ 6.406 $ 5.476 $ 5.888 $ 5.011 Commercial............. 5.733 4.767 5.238 4.277 Industrial and irrigation............ 5.496 3.825 4.486 3.819 Pipeline and marketing. 2.574 2.110 2.523 2.043 Public authorities and other............. 4.991 3.383 4.088 2.428 Weather effect: Degree days: Southern Union Gas service territories.. 760 720 1,917 1,792 Missouri Gas Energy service territories.. 2,133 1,980 5,630 5,206 Percent of normal, based on 30-year measure: Southern Union Gas service territories.. 96% 92% 97% 88% Missouri Gas Energy service territories.. 110% 101% 107% 99% Gas transported in millions of cubic feet (MMcf)................. 15,825 15,542 62,207 52,834 Gas transportation revenues (thousands of dollars)............ $ 6,701 $ 5,268 $ 20,630 $ 15,346 - - - --------------------- (1) Certain gas distribution operations in the Texas and Okla- homa Panhandles were sold on May 1, 1996, which involved 7,000 customers. 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 internally generated funds and its revolving loan and credit facilities to provide funding for its seasonal working capital, continuing construction and maintenance programs and operational requirements. The principal sources of funds during the three-month period ended December 31, 1996 included $5,700,000 from the Company's revolving and uncommitted credit facilities, cash overdrafts of $4,699,000 and $3,631,000 in cash flow from operations. These sources provided funds for additions to property, plant and equipment of $17,642,000 and other working capital needs of the Company. The principal sources of funds during the six-month period ended December 31, 1996 included $61,200,000 from the Company's revolving and uncommitted credit facilities and cash overdrafts of $4,837,000. These sources, along with beginning cash balances of $2,887,000, provided funds for additions to property, plant and equipment of $31,110,000 and provided 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. The Company had additional availability under uncommitted line of credit facilities (Uncommitted Facilities) with various banks. Covenants under the Revolving Credit Facility allow for up to $35,000,000 of borrowings under Uncommitted Facilities at any one time. Borrowings under these facilities are available for Southern Union's working capital, letter of credit requirements and other general corporate pur- poses. Amounts outstanding under these facilities at December 31, 1996 and February 5, 1997 were $61,200,000 and $52,800,000, 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- ferred Securities was part of a $300,000,000 shelf registration filed with the Securities and Exchange Commission on March 29, 1995. Southern Union may sell a combination of preferred securi- ties of financing trusts and senior and subordinated debt securi- ties of Southern Union of up to $196,907,000 (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 avail- able cash balances, the Company may repurchase additional Senior Notes in the future. See Preferred Securities of Subsidiary Trust and Debt in the Notes to the Consolidated Financial State- ments. The Company's financial condition and results of operations have been and will continue to be dependent upon the receipt of ade- quate and timely adjustments in rates. On January 22, 1997, Missouri Gas Energy was notified by the MPSC of its decision to grant a $7,533,000 annual increase to revenue effective on February 1, 1997. See Utility Regulation and Rates in the Notes to the Consolidated Financial Statements for the quarter ended December 31, 1996. SOUTHERN UNION COMPANY AND SUBSIDIARIES RESULTS OF VOTES OF SECURITY HOLDERS Southern Union held its Annual Meeting of Stockholders on November 12, 1996. The following matters were submitted for a vote and approved by Southern Union's security holders: (i) the election of three persons to serve as the Class III directors until the 1999 Annual Meeting of Stockholders or until their suc- cessors are duly elected and qualified; (ii) approval of a propo- sal under the Southern Union Company Supplemental Deferred Compensation Plan to increase maximum permissible employee con- tributions from five percent to ten percent, to increase the Com- pany matching contribution from fifty percent to one hundred percent of employee contributions subject to such Company matching and to increase employee contributions subject to Com- pany matching from five percent to ten percent; and (iii) approval of a proposal under the Southern Union Company Direc- tors' Deferred Compensation Plan to increase directors contribu- tions subject to Company matching from seven percent to ten percent and to increase the Company matching contribution from fifty percent to one hundred percent of directors contributions subject to such Company matching. The number of votes cast in favor, abstain 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 II Directors: George L. Lindemann....... 15,570,388 -- 220,659 Peter H. Kelley........... 15,569,600 -- 221,447 Dan K. Wassong............ 15,557,801 -- 233,246 Proposal of changes under the Southern Union Company Supplemental Deferred Compensation Plan to increase maximum permissible employee contributions from 5% to 10%, to increase the Company matching contribution from 50% to 100% of employee contributions subject to such Company matching and to increase employee contribu- tions subject to Company matching contribution from 5% to 10%..................... 15,535,420 26,184 162,550 Proposal of changes under the Southern Union Company Direc- tors' Deferred Compensation Plan to increase directors contributions subject to Company matching from 7% to 10% and to increase the Com- pany matching contribution from 50% to 100% of direc- tors contributions subject to such Company matching...... 15,113,981 30,391 579,782 SOUTHERN UNION COMPANY AND SUBSIDIARIES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN UNION COMPANY ---------------------- (Registrant) Date February 14, 1997 By RONALD J. ENDRES ------------------- ------------------ Ronald J. Endres Executive Vice President and Chief Financial Officer Date February 14, 1997 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 Six Months Twelve Months Ended Ended Ended December 31, December 31, December 31, -------------- -------------- --------------- 1996 1995 1996 1995 1996 1995 ------ ------ ------ ------ ------ ------ (in thousands of dollars, except per share amounts) Net earnings available for common stock.. $ 9,661 $ 8,746 $ 4,256 $ 3,148 $21,947 $18,827 ======= ======= ======= ======= ======= ======= Primary earnings per share: Average shares out- standing.... 17,050 16,969 17,043 16,950 17,036 16,931 Stock op- tions and warrants issued or granted.... 693 516 678 445 652 401 ------- ------- ------- ------- ------- ------- Average shares out- standing.... 17,743 17,485 17,721 17,395 17,688 17,332 ======= ======= ======= ======= ======= ======= Primary earnings per share... $ .54 $ .50 $ .24 $ .18 $ 1.24 $ 1.09 ======= ======= ======= ======= ======= ======= Fully diluted earnings per share: Average shares out- standing.... 17,050 16,969 17,043 16,950 17,036 16,931 Stock op- tions and warrants issued or granted..... 693 597 692 496 670 432 ------- ------- ------- ------- ------- ------- Average shares out- standing.... 17,743 17,566 17,735 17,446 17,706 17,363 ======= ======= ======= ======= ======= ======= Fully diluted earnings per share... $ .54 $ .50 $ .24 $ .18 $ 1.24 $ 1.08 ======= ======= ======= ======= ======= ======= - - - ------------------------- Note: All periods have been adjusted to reflect the five percent common stock dividends distributed on December 10, 1996 and November 27, 1995 and a four-for-three common stock split distributed in the form of a 33 % stock dividend on March 11, 1996, as applicable. EX-27 3
UT JUN-30-1997 DEC-31-1996 6-MOS PER-BOOK $ 758,845,000 $ 24,690,000 $ 187,796,000 $ 115,738,000 $ 2,771,000 $ 1,089,840,000 $ 17,121,000 $ 224,902,000 $ 10,393,000 $ 253,112,000 $ 0 $ 100,000,000 $ 385,988,000 $ 61,200,000 $ 0 $ 0 $ 700,000 $ 0 $ 0 $ 0 $ 288,046,000 $ 1,089,840,000 $ 230,882,000 $ 5,856,000 $ 27,180,000 $ 38,112,000 $ 24,985,000 $ 1,643,000 $ 18,402,000 $ 8,741,000 $ 9,661,000 $ 0 $ 9,661,000 $ 0 $ 0 $ 3,631,000 $ .54 $ .54
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