-----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, TCBlLhShvdBjrVFf+BR51ODBfgs8a1eyUJiRPnOg0N3paor0MYgXeVgh9XTLsCnu cgDJiHTPbvhrUHvWINpoNg== 0000203248-98-000001.txt : 19980218 0000203248-98-000001.hdr.sgml : 19980218 ACCESSION NUMBER: 0000203248-98-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980217 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN UNION CO CENTRAL INDEX KEY: 0000203248 STANDARD INDUSTRIAL CLASSIFICATION: NATURAL GAS DISTRIBUTION [4924] IRS NUMBER: 750571592 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06407 FILM NUMBER: 98541111 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, 1997 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 6, 1998 was 18,796,384. ================================================================= SOUTHERN UNION COMPANY AND SUBSIDIARIES FORM 10-Q December 31, 1997 Index PART I. FINANCIAL INFORMATION Page(s) ------- Item 1. Financial Statements Consolidated statements of operations - three, six and twelve months ended December 31, 1997 and 1996 Consolidated balance sheet - December 31, 1997 and 1996 and June 30, 1997 Consolidated statement of stockholders' equity - six months ended December 31, 1997 and twelve months ended June 30, 1997 Consolidated statements of cash flows - three, six and twelve months ended December 31, 1997 and 1996 Notes to consolidated financial statements Item 2. Management's Discussion and Analysis of FinancialCondition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings (See "CONTINGENCIES" in Notes to Consoli- dated FinancialStatements) 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, ------------------------------- 1997 1996 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues.............. $ 221,162 $ 231,462 Gas purchase costs.............. 143,834 154,945 ----------- ----------- Operating margin.............. 77,328 76,517 Revenue-related taxes........... 11,647 12,840 ----------- ----------- Net operating margin.......... 65,681 63,677 Operating expenses: Operating, maintenance and general..................... 26,669 27,180 Depreciation and amortization. 9,550 8,395 Taxes, other than on income and revenues................ 2,932 2,537 ----------- ----------- Total operating expenses.... 39,151 38,112 ----------- ----------- Net operating revenues...... 26,530 25,565 ----------- ----------- Other income (expenses): Interest ..................... (9,124) (8,741) Dividends on preferred securities of subsidiary trust....................... (2,370) (2,370) Other, net.................... 592 1,063 ----------- ----------- Total other expenses, net... (10,902) (10,048) ----------- ----------- Earnings before income taxes..................... 15,628 15,517 Federal and state income taxes.. 5,890 5,856 Net earnings available for common stock.................. $ 9,738 $ 9,661 =========== =========== Net earnings per share: Basic.......................... $ .54 $ .54 =========== =========== Diluted........................ $ .52 $ .52 =========== =========== Weighted average shares outstanding: Basic....................... 17,992,823 17,902,751 =========== =========== Diluted..................... 18,726,042 18,629,529 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Six Months Ended December 31, ----------------------------- 1997 1996 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues................ $ 295,201 $ 312,292 Gas purchase costs................ 176,276 194,360 ----------- ----------- Operating margin................ 118,925 117,932 Revenue-related taxes............. 14,631 16,751 ----------- ----------- Net operating margin............ 104,294 101,181 Operating expenses: Operating, maintenance and general....................... 50,459 52,495 Depreciation and amortization... 19,148 16,883 Taxes, other than on income and revenues...................... 6,753 5,799 ----------- ----------- Total operating expenses...... 76,360 75,177 ----------- ----------- Net operating revenues........ 27,934 26,004 ----------- ----------- Other income (expenses): Interest........................ (17,574) (17,028) Dividends on preferred securi- ties of subsidiary trust...... (4,740) (4,740) Other, net...................... 2,362 2,798 ----------- ----------- Total other expenses, net..... (19,952) (18,970) ----------- ----------- Earnings before income taxes.. 7,982 7,034 Federal and state income taxes.... 3,153 2,778 ----------- ----------- Net earnings available for common stock.................... $ 4,829 $ 4,256 =========== =========== Net earnings per share: Basic........................... $ .27 $ .24 =========== =========== Diluted......................... $ .26 $ .23 =========== =========== Weighted average shares outstanding: Basic......................... 17,985,302 17,894,506 =========== =========== Diluted....................... 18,697,892 18,606,723 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Twelve Months Ended December 31, -------------------------------- 1997 1996 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues.............. $ 699,939 $ 681,516 Gas purchase costs.............. 431,103 421,467 ----------- ----------- Operating margin.............. 268,836 260,049 Revenue-related taxes........... 37,383 37,934 ----------- ----------- Net operating margin.......... 231,453 222,115 Operating expenses: Operating, maintenance and general..................... 107,852 106,540 Depreciation and amortization. 37,094 32,748 Taxes, other than on income and revenues................ 13,107 12,863 ----------- ----------- Total operating expenses.... 158,053 152,151 ----------- ----------- Net operating revenues...... 73,400 69,964 ----------- ----------- Other income (expenses): Interest...................... (34,011) (34,557) Dividends on preferred securi- ties of subsidiary trust.... (9,480) (9,480) Other, net.................... 2,444 11,755 ----------- ----------- Total other expenses, net... (41,047) (32,282) ----------- ----------- Earnings before income taxes..................... 32,353 37,682 Federal and state income taxes.. 12,748 15,735 ----------- ----------- Net earnings available for common stock.................. $ 19,605 $ 21,947 =========== =========== Net earnings per share: Basic......................... $ 1.09 $ 1.23 =========== =========== Diluted....................... $ 1.05 $ 1.18 =========== =========== Weighted average shares outstanding: Basic....................... 17,969,871 17,888,060 =========== =========== Diluted..................... 18,676,587 18,572,633 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS December 31, June 30, -------------------------- ---------- 1997 1996 1997 ------------ ------------ ---------- (unaudited) (thousands of dollars) Property, plant and equipment: Plant in service..... $ 1,010,724 $ 938,980 $ 963,269 Construction work in progress........ 6,805 10,506 7,970 ----------- ----------- --------- 1,017,529 949,486 971,239 Less accumulated depreciation and amortization....... (342,397) (323,341) (329,182) ----------- ----------- --------- 675,132 626,145 642,057 Additional purchase cost assigned to utility plant, net. 129,902 132,700 131,539 ----------- ----------- --------- Net property, plant and equipment...... 805,034 758,845 773,596 ----------- ----------- --------- Current assets: Accounts receivable, billed and unbilled.. 133,805 148,059 58,659 Inventories, princi- pally at average cost................. 37,712 33,822 21,523 Deferred gas purchase costs................ 28,964 4,663 -- Investment securities.. -- -- 6,432 Prepayments and other.. 19,269 1,252 9,609 ----------- ----------- --------- Total current assets. 219,750 187,796 96,223 ----------- ----------- --------- Deferred charges......... 104,284 115,738 109,512 Investment securities.... 5,000 15,734 -- Real estate.............. 9,609 8,956 9,046 Other.................... 5,425 2,771 2,026 ----------- ----------- --------- Total assets........... $ 1,149,102 $ 1,089,840 $ 990,403 =========== =========== ========= See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) STOCKHOLDERS' EQUITY AND LIABILITIES December 31, June 30, -------------------------- ---------- 1997 1996 1997 ------------ ------------ ---------- (unaudited) (thousands of dollars) Common stockholders' equity: Common stock, $1 par value; authorized 50,000,000 shares; issued 18,831,446 shares............. $ 18,831 $ 17,121 $ 17,171 Premium on capital stock.............. 262,004 224,902 225,252 Less treasury stock, at cost............ (794) (794) (794) Retained earnings.... 9,340 10,393 25,169 Unrealized holding gain............... -- 1,490 664 ----------- ----------- --------- Total common stock- holders' equity.... 289,381 253,112 267,462 Company-obligated manda- torily redeemable pre- ferred securities of subsidiary trust holding solely $103,093,000 principal amount of 9.48% sub- ordinated notes of Southern Union due 2025................... 100,000 100,000 100,000 Long-term debt........... 395,451 385,988 386,157 ----------- ----------- --------- Total capitalization... 784,832 739,100 753,619 Current liabilities: Long-term debt due within one year...... 1,316 700 687 Notes payable.......... 93,800 61,200 1,600 Accounts payable....... 78,204 89,788 33,827 Federal, state and local taxes.......... 20,909 19,379 13,699 Accrued interest....... 12,329 12,372 12,840 Customer deposits...... 17,249 17,215 17,214 Deferred gas purchase costs................ -- -- 3,565 Other.................. 15,088 17,643 22,291 ----------- ----------- --------- Total current liabilities........ 238,895 218,297 105,723 ----------- ----------- --------- Deferred credits and other.................. 72,016 83,717 77,083 Accumulated deferred income taxes........... 53,359 48,726 53,978 Commitments and contingencies.......... -- -- -- ----------- ----------- --------- Total................ $ 1,149,102 $ 1,089,840 $ 990,403 =========== =========== ========= 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, 1996..... $16,275 $206,047 $(794) $ 25,631 $(1,244) $245,915 Net earn- ings.... -- -- -- 19,032 -- 19,032 5% stock divi- dend.... 813 18,681 -- (19,494) -- -- Change in unrea- lized holding gain or loss.... -- -- -- -- 1,908 1,908 Exercise of stock options. 83 524 -- -- -- 607 ------- -------- ----- -------- ------- -------- Balance June 30, 1997..... 17,171 225,252 (794) 25,169 664 267,462 Net earn- ings.... -- -- -- 4,829 -- 4,829 5% stock divi- dend.... 856 19,802 -- (20,658) -- -- Issuance of stock for acquisi- tion.... 755 17,285 -- -- -- 18,040 Unrea- lized holding gain.... -- -- -- -- (664) (664) Exercise of stock options. 49 (335) -- -- -- (286) ------- -------- ----- -------- ------- -------- Balance Decem- ber 31, 1997..... $18,831 $262,004 $(794) $ 9,340 $ -- $289,381 ======= ======== ===== ======== ======= ======== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended December 31, ------------------------------- 1997 1996 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings.................. $ 9,738 $ 9,661 Adjustments to reconcile net earnings to net cash flows from (used in) operating activities: Depreciation and amortiza- tion....................... 9,550 8,395 Deferred income taxes....... 1,231 2,178 Provision for bad debts..... 1,702 1,721 Deferral of interest and other expenses............. (442) (1,694) Gain on sale of investment securities................. -- (759) Other, net.................. 348 226 Changes in assets and liabilities: Increase in accounts receivable, billed and unbilled................. (95,546) (109,527) Increase in accounts payable.................. 48,558 60,667 Increase in taxes and other liabilities........ 19,725 15,905 Increase in customer deposits.......... ...... 536 1,058 Decrease (increase) in deferred gas purchase costs.................... (3,754) 4,548 Decrease (increase) in inventories.............. (1,637) 9,397 Decrease (increase) in other accounts........... (2,815) 1,855 ----------- ----------- Net cash flows from (used in) operating activities... (12,806) 3,631 Cash flows used in investing activities: Additions to property, plant and equipment................ (22,167) (17,642) Purchase of investment securities................... (5,000) -- Proceeds from sale of investment securities........ -- 527 Increase in customer advances. 1,200 510 Increase in deferred charges and credits.................. 865 2,013 Other......................... (812) 490 ----------- ----------- Net cash flows used in investing activities........ (25,914) (14,102) ----------- ----------- Cash flows from financing activities: Repayment of debt............. (255) (135) Net borrowings under financing facilities......... 33,500 5,700 Increase in cash overdrafts... 5,444 4,699 Other, net.................... 31 207 ----------- ----------- Net cash flows from financing activities........ 38,720 10,471 ----------- ----------- Net change in cash and cash equivalents.................... -- -- Cash and cash equivalents at beginning of period............ -- -- ----------- ----------- Cash and cash equivalents at end of period.................. $ -- $ -- =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest.................... $ 2,579 $ 1,935 =========== =========== Income taxes................ $ 101 $ 1,500 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Six Months Ended December 31, ----------------------------- 1997 1996 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings.................... $ 4,829 $ 4,256 Adjustments to reconcile net earnings to net cash flows used in operating activities: Depreciation and amortization. 19,148 16,883 Deferred income taxes......... (261) 3,707 Provision for bad debts....... 2,052 2,836 Deferral of interest and other expenses............... (719) (3,251) Gain on sale of investment securities................... (1,088) (759) Other, net.................... 546 333 Changes in assets and liabilities, net of acquisi- tions and dispositions: Increase in accounts receivable, billed and unbilled................... (77,198) (100,035) Increase in accounts payable.................... 38,505 45,712 Increase in taxes and other liabilities................ 6,699 2,237 Increase in customer deposits................... 35 1,559 Increase in deferred gas purchase costs............. (32,529) (2,012) Increase in inventories..... (16,044) (6,637) Decrease (increase) in other accounts............. 87 (27) ----------- ----------- Net cash flows used in operating activities......... (55,938) (35,198) ----------- ----------- Cash flows used in investing activities: Additions to property, plant and equipment.................. (39,175) (31,110) Acquisition of operations, net of cash received........... (745) (1,162) Purchase of investment securities..................... (5,000) (5,363) Proceeds from sale of investment securities.......... 6,531 527 Increase in customer advances... 2,256 1,914 Deferred charges and credits.... (3,750) 359 Other........................... (503) 1,223 ----------- ----------- Net cash flows used in investing activities.......... (40,386) (33,612) ----------- ----------- Cash flows from financing activities: Repayment of debt............... (480) (321) Net borrowings under financing facilities........... 92,200 61,200 Increase in cash overdrafts..... 4,555 4,837 Other, net...................... 49 207 ----------- ----------- Net cash flows from financing activities.................... 96,324 65,923 ----------- ----------- Decrease in cash and cash equivalents...................... -- (2,887) Cash and cash equivalents at beginning of period.............. -- 2,887 ----------- ----------- Cash and cash equivalents at end of period.................... $ -- $ -- =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest...................... $ 17,573 $ 16,942 =========== =========== Income taxes.................. $ 3,871 $ 2,000 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Ended December 31, -------------------------------- 1997 1996 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings................. $ 19,605 $ 21,947 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization.............. 37,094 32,748 Deferred income taxes...... 3,372 11,803 Provision for bad debts.... 10,514 6,899 Deferral of interest and other expenses............ (1,197) (6,638) Gain on sale of investment securities................ (2,874) (759) Other, net................. 1,290 (253) Changes in assets and lia- bilities, net of acquisi- tions and dispositions: Decrease (increase) in accounts receivable, billed and unbilled..... 726 (43,190) Increase (decrease) in accounts payable........ (14,185) 38,307 Increase (decrease) in taxes and other liabilities............. 1,487 (4,122) Increase in customer deposits................ 35 1,881 Decrease (increase) in deferred gas purchase costs................... (24,302) 6,707 Increase in inventories.. (3,716) (9,147) Increase in other accounts................ (594) (211) ----------- ----------- Net cash flows from operating activities....... 27,255 55,972 ----------- ----------- Cash flows used in investing activities: Additions to property, plant and equipment............... (72,528) (61,774) Acquisition of operations, net of cash received........ (1,444) (1,162) Purchase of investment securities.................. (5,000) (14,663) Proceeds from sale of investment securities....... 19,331 527 Litigation settlement proceeds.................... -- 4,250 Increase in customer advances.................... 2,812 3,606 Decrease in deferred charges and credits................. (4,103) (4,427) Proceeds from sale of dis- tribution and transmission properties.................. 1,130 14,770 Other........................ (987) 2,036 ----------- ----------- Net cash flows used in investing activities....... (60,789) (56,837) ----------- ----------- Cash flows from financing activities: Repayment of debt............ (799) (53,305) Net borrowings under financing facilities........ 32,600 48,200 Increase in cash overdrafts.. 1,284 4,837 Other, net................... 449 313 ----------- ----------- Net cash flows from financing activities....... 33,534 45 ----------- ----------- Decrease in cash and cash equivalents................... -- (820) Cash and cash equivalents at beginning of period........... -- 820 ----------- ----------- Cash and cash equivalents at end of period................. $ -- $ -- =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................... $ 32,913 $ 35,462 =========== =========== Income taxes............... $ 5,371 $ 7,197 =========== =========== 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 and cash flows 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, 1997. Certain prior period amounts have been reclassified to conform with the current period presentation. EARNINGS PER SHARE The Financial Accounting Standards Board recently issued a standard, Earnings Per Share, which replaces the previously reported primary and fully diluted earnings per share with basic and diluted earnings per share. Unlike primary earnings per share, basic earnings per share excludes any dilutive effects of options and warrants. Diluted earnings per share is very similar to the previously reported fully diluted earnings per share. All earnings per share amounts for all periods have been presented, and where necessary, restated to conform to the new standard. INVESTMENT SECURITIES At December 31, 1997, all securities owned by the Company are accounted for under the cost method. These securities consist of preferred stock in a non-public company, and dividends are recog- nized as income when received. 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. ACQUISITION On December 31, 1997, the Company issued 755,650 shares to the owners of Atlantic Utilities Corporation and Subsidiaries (Atlantic) in connnection with the acquisition of Atlantic. As the necessary regulatory approvals had not yet been received at December 31, 1997 the transaction was recorded as a prepayment of $18,041,000. In January 1998 regulatory approval was received and cash of $4,436,000 was also given to the previous owners of Atlantic. The assets of Atlantic will be included in the Com- pany's consolidated balance sheet at January 1, 1998 as well as Atlantic's results of operations which will be included in the Company's statements of consolidated operations and cash flows since January 1, 1998. The acquisition was accounted for using the purchase method. The additional purchase cost to be assigned to utility plant, pending final determination of assets ac- quired and liabilities assumed, of $8,000,000 reflects the excess of the purchase price over the historical book carrying value of the net assets acquired. The additional purchase cost will be amortized on a straight-line basis over forty years. On July 23, 1997 two subsidiaries of Southern Union Company acquired a 42% equity ownership in a natural gas distribution company serving 16,000 customers in Piedras Negras, Mexico for $2,700,000. This system is across the border from the Company's Eagle Pass, Texas service area. On September 8, 1997, the Com- pany purchased a 45-mile intrastate pipeline for $305,000 which will augment the Company's gas supply to the city of Eagle Pass and, subject to necessary regulatory approvals, ultimately Piedras Negras. 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 SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (Sub- ordinated Notes). The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest and other payment dates on the Subordinated Notes correspond to the distribution and other payment dates on the Preferred Securities and the Common Securities. Under certain circumstances, the Subordinated Notes may be distributed to holders of the Preferred Securities and holders of the Common Securities in liquidation of the Subsidiary Trust. The Subordinated Notes are redeemable at the option of the Company on or after May 17, 2000, at a redemption price of $25 per Subordinated Note plus accrued and unpaid interest. The Preferred Securities and the Common Securities will be redeemed on a pro rata basis to the same extent as the Subordinated Notes are repaid, at $25 per Preferred Security and Common Security plus accumulated and unpaid distributions. Southern Union's obligations under the Subordinated Notes and related agreements, taken together, constitute a full and unconditional guarantee by Southern Union of payments due on the Preferred Securities. As of December 31, 1997 and 1996, 4,000,000 shares of Preferred Securities were outstanding. DEBT December 31, June 30, 1997 1997 ------------ ------------ (thousands of dollars) 7.60% Senior Notes due 2024........ $ 384,515 $ 384,515 Other.............................. 12,252 2,329 ----------- ----------- Total debt......................... 396,767 386,844 Less current portion............. 1,316 687 ----------- ----------- Total long-term debt............... $ 395,451 $ 386,157 =========== =========== 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 Uncom- mitted Facilities at any one time. Borrowings under these facil- ities are available for Southern Union's working capital, letter of credit requirements and other general corporate purposes. Amounts outstanding under these facilities at December 31, 1997 and February 6, 1998 totalled $93,800,000 and $71,300,000, respectively. The Company is installing an Automated Meter Reading (AMR) system at Missouri Gas Energy. The installation of the AMR system involves a potential investment of $27,000,000. The Company is accounting for this system as a capital lease obligation and has recorded an increase in plant and long-term debt of $3,304,000 and $9,903,000 during the three- and six-month period ended December 31, 1997. UTILITY REGULATION AND RATES Under the order of the Federal Energy Regulatory Commission, a major transporter of gas to Missouri Gas Energy is allowed re- covery of certain unrecovered deferred gas costs with a remaining balance of $6,600,000 at December 31, 1997. Missouri Gas Energy is allowed to recover these costs from its customers through the PGA mechanism which is filed with and approved by the Missouri Public Service Commission (MPSC). 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 December 31, 1997 and 1996. Missouri Gas Energy filed a $27,800,000 request for a rate increase with the MPSC on October 3, 1997. New rates will become effective on September 2, 1998 unless the case is settled earlier. The increase includes: recovery of the ongoing Missouri Safety Program Costs; investments in customer service, including the first phases of Automated Meter SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Reading technology; and higher bad debt expense. The Company's proposed rates would recover a larger percentage of fixed costs through the monthly customer charge and a smaller percentage through the volumetric charge. STOCK DIVIDEND On December 10, 1997, Southern Union distributed its annual 5% common stock dividend to stockholders of record on November 21, 1997. 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 On December 30, 1997, Southern Union settled the claims associ- ated with the removal of hazardous substances from the site of a former coal gasification plant (Pine Street Canal Site) in Burlington, Vermont. The cost of the settlement did not have a material adverse effect on the Company's financial position, results of operations or cash flows. Southern Union and Western Resources, Inc. entered into an Environmental Liability Agreement (Environmental Liability Agree ment) 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 Lia- bility 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 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 former service territories, principally in Arizona and New Mexico, and present service territories in Texas. At the present time, the Company is aware of certain plant sites in some of these areas and is investigating those and certain other locations. 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 public or the environment." Pending the performance of a risk assessment report, in April 1996 the city closed the park and subsequently permanently relocated the park recreational activi- ties. Based upon the health risk evaluation conclusions con- tained in a risk assessment report completed in November, 1997, the city is proceeding with plans to utilize the property for basketball courts and city parking. Based upon currently avail- able 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 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 COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Pursuant to a 1989 MPSC order, Missouri Gas Energy is engaged in a major gas safety program in its service area. This program in- cludes 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-94-234 in 1994 which authorized MGE to defer de- preciation expenses, property taxes and carrying costs at a specified rate of 10.54% on the costs incurred in the Missouri Safety Program. This AAO was consistent with those which were issued by the MPSC from 1990 through 1993 to the predecessor owner of Missouri Gas Energy. Since February 1, 1994, the Com- pany has followed the specifications of the AAO as provided for 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 which ranged from 4% to 6% from October 1993 to January 1997. The Company has filed an appeal of that portion of the rate order in the Missouri State Court of Appeals, Western District. Absent a reversal of this part of the rate order, the Company will have to record a one- time $5,600,000 pre-tax write-off of the previously deferred carrying costs. Associated carrying costs deferred by the Com- pany were $542,000 and $920,000 for the three and six months ended December 31, 1997, respectively. The Company has not pro- vided 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 ulti- mately will be recovered in the future. The Company believes it will ultimately be successful in litigating this matter and, therefore, will not have a material adverse effect on its finan- cial 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 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, 1997 was $4,263,000. 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 propane and sell commercial gas air conditioning and other gas-fired engine-driven applications. By providing "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 sub- sidiaries 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 December 31, 1997 and 1996 - --------------------------------------------- The Company recorded net earnings available for common stock of $9,738,000 for the three-month period ended December 31, 1997 compared with net earnings of $9,661,000 for the same period in 1996. Earnings per diluted share, based on weighted average common and common share equivalents outstanding during the period, was $.52 in both 1997 and 1996. Operating revenues were $221,162,000 for the three-month period ended December 31, 1997, compared with operating revenues of $231,462,000 in 1996. Gas purchase costs for the three-month period ended December 31, 1997 were $143,834,000, compared with $154,945,000 in 1996. The Company's operating revenues are affected by the level of sales volumes and by the pass-through of increases or decreases in the Company's gas purchase costs through its purchased gas adjustment clauses. Additionally, revenues are affected by increases or decreases in gross receipts taxes (revenue-related taxes) which are levied on sales revenue as collected from customers and remitted to the various taxing authorities. The decrease in both operating revenues and gas purchase costs between periods was primarily the result of a 5% decrease in the average cost of gas from $3.96 per Mcf in 1996 to $3.78 per Mcf in 1997. The decrease in the average cost of gas was due to decreases 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 3% decrease in gas sales volume to 37,860 MMcf in 1997 from 38,955 MMcf in 1996. The decrease in sales volumes was primarily due to warmer weather in the Missouri service areas during the three-month period ended December 31, 1997, which was partially offset by colder weather during the same period in the Texas service areas. Weather for Missouri Gas Energy's service territories, which include the city of Kansas City, Missouri, was 100% of a 30-year measure for the three-month period ended December 31, 1997, com- pared with 110% in 1996. Southern Union Gas service territories, which include the cities of Austin and El Paso, experienced weather that was 117% of a 30-year measure in 1997, compared with 89% in 1996. Almost half of the customers served by Southern Union Gas are weather normalized. Net operating margin (operating margin less revenue-related taxes) increased $2,004,000 for the three-month period ended December 31, 1997 compared with the same period in 1996. The net operating margin increase was due to the Missouri rate increase, effective as of February 1, 1997, approved by the Missouri Public Service Commission (MPSC). SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This rate increase increased annual revenues by $8,847,000. Additionally contributing to the increase in net operating margin for the three-month period ended December 31, 1997 were increased revenues of $1,143,000 under a gas supply incentive plan approved by the MPSC in July 1996. Under the plan, Southern Union and its Missouri customers share in certain savings below benchmark levels of gas costs incurred as a result of the Company's gas procurement activities. Operating expenses, which include operating, maintenance and general expenses, depreciation and amortization, and taxes other than on income and revenues, were $39,151,000 for the three-month period ended December 31, 1997, an increase of $1,039,000, com- pared with $38,112,000 in 1996. The increase is primarily a result of a $1,155,000 increase in depreciation and amortization and a $395,000 increase in taxes, other than on income and revenues as a result of including certain costs into rate base that had been previously deferred. Interest expense was $9,124,000 for the three-month period ended December 31, 1997, compared with $8,741,000 in 1996. The in- crease is primarily due to increased borrowings under the various financing facilities during the three-month period ended Decem- ber 31, 1997 compared to the same period in 1996. See "Debt" in the Notes to the Consolidated Financial Statements included herein. Other income for the three-month period ended December 31, 1997 was $592,000, compared with $1,063,000 in 1996. Other income for the three-month period ended December 31, 1997 consisted principally of $469,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program. Other income for 1996 included $1,694,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program 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 as a result of the termination of various acquisition activities. The effective federal and state income tax rate was 38% in both 1996 and 1997. Six Months Ended December 31, 1997 and 1996 - ------------------------------------------- The Company recorded net earnings available for common stock of $4,829,000 for the six-month period ended December 31, 1997 com- pared with net earnings of $4,256,000 for the same period in 1996. Earnings per diluted share, based on weighted average common and common share equivalents outstanding during the period, were $.26 in 1997 compared with earnings per share of $.23 in 1996. Operating revenues were $295,201,000 for the six-month period ended December 31, 1997, compared with operating revenues of $312,292,000 in 1996. Gas purchase costs for the six-month period ended December 31, 1997 were $176,276,000, compared with $194,360,000 in 1996. The decrease in both operating revenues and gas purchase costs between periods was primarily the result of a 5% decrease in the average cost of gas from $3.70 in 1996 to $3.52 per Mcf in 1997, due to decreases in average spot market gas prices. Additionally, operating revenues and gas purchase costs were effected by a 5% decrease in gas sales volume to 49,813 MMcf in 1997 from 52,213 MMcf in 1996. The decrease in sales volumes was primarily due to warmer weather in the Missouri service areas during the six-month period ended December 31, 1997, which was partially offset by colder weather during the same period in the Texas service areas. Missouri Gas Energy's service territories experienced weather which was 98% of a 30-year measure for the six months ended December 31, 1997 compared with 111% in 1996. Weather for Southern Union Gas service territories for the six-month period ended December 31, 1997 was 116% of a 30-year measure compared with 89% in 1996. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net operating margin increased $3,113,000 for the six-month period ended December 31, 1997 compared with the same period in 1996. Net operating margin increased due to the impact of the Missouri rate increase, as previously discussed. Additionally contributing to the increase in net operating margin for the six- month period ended December 31, 1997 were increased revenues of $1,420,000 under the Missouri gas supply incentive plan, also previously discussed. Operating expenses were $76,360,000 for the six-month period ended December 31, 1997, an increase of $1,183,000, compared with $75,177,000 in 1996. The increase is primarily a result of a $2,265,000 increase in depreciation and amortization and a $954,000 increase in taxes, other than on income and revenues as a result of including certain costs into rate base that were previously deferred. These items were partially offset by a reduction in bad debt expense. Interest expense was $17,574,000 for the six-month period ended December 31, 1997, compared with $17,028,000 in 1996. The in- crease in interest expense is primarily from increased borrowings under the various financing facilities, previously discussed. See "Debt" in the Notes to the Consolidated Financial Statements for the quarter ended December 31, 1997. Other income for the six-month period ended December 31, 1997 was $2,362,000 compared with $2,798,000 in 1996. Other income for the six-month period ended December 31, 1997 included $1,088,000 in realized gains on the sale of investment securi- ties, $720,000 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 $487,000. Other income for 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 equip- ment and software to a Texas university. The Company's consolidated federal and state effective income tax rate was 40% and 39% for the six months ended December 31, 1997 and 1996, respectively. Twelve Months Ended December 31, 1997 and 1996 - ---------------------------------------------- The Company recorded net earnings available for common stock of $19,605,000 for the twelve-month period ended December 31, 1997 compared with net earnings of $21,947,000 in 1996. Earnings per diluted share, based on weighted average common and common share equivalents outstanding during the period, were $1.05 in 1997 compared with earnings per share of $1.18 in 1996. Operating revenues were $699,939,000 for the twelve-month period ended December 31, 1997, compared with operating revenues of $681,516,000 in 1996. Gas purchase costs for the twelve-month period ended December 31, 1997 were $431,103,000, compared with $421,467,000 in 1996. The increase in both operating revenues and gas purchase costs between periods was primarily the result of a 4% increase in the average cost of gas from $3.45 in 1996 to $3.58 per Mcf in 1997, due to increases in average spot market gas prices. Operating revenues were also partially impacted by the $8,847,000 annual increase to rates, and increased revenues of $5,420,000 under the Missouri gas supply incentive plan, both previously discussed. This was partially offset by a 1% decrease in gas sales volume to 120,005 MMcf in 1997 from 121,786 MMcf in 1996. The decrease in sales volumes was primarily due to warmer weather in the Missouri service areas during the twelve-month period ended December 31, 1997, which was partially offset by colder weather during the same period in the Texas service areas. 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 100% of a 30-year measure for the twelve months ended December 31, 1997 compared with 107% in 1996. Weather for Southern Union Gas service territories for the twelve-month period ended December 31, 1997 was 103% of a 30-year measure com- pared with 89% in 1996. Net operating margin increased $9,338,000 for the twelve-month period ended December 31, 1997 compared with the same period in 1996. Net operating margin increased due to the Missouri rate increase and increased revenues under the Missouri gas supply incentive plan, both previously discussed. Operating expenses were $158,053,000 for the twelve-month period ended December 31, 1997, an increase of $5,902,000, compared with $152,151,000 in 1996. The increase is primarily a result of a $4,346,000 increase in depreciation and amortization and $3,615,000 in additional bad debt expense associated with in- creases in delinquent customer accounts, primarily at Missouri Gas Energy. The increase in depreciation and amortization is due to including certain costs in rate base that were previously de- ferred and the increase in bad debt expense is due to higher cus- tomer bills because of significant increases in natural gas prices during the 1996/1997 winter heating season. Other in- creased operating expenses included increased media advertising, travel and call center labor costs as a result of and in response to the significant price spikes in natural gas during the 1996/ 1997 winter heating season; and increased field and call center labor and other costs to improve customer service at Missouri Gas Energy. Partially offsetting these factors was a decrease in medical, dental, pension and injury and damage claims. Interest expense was $34,011,000 for the twelve-month period ended December 31, 1997, compared with $34,557,000 in 1996. The decrease in interest expense is due to the repurchase of Senior Notes from June 1995 through June 1996 which was partially offset by an increase in interest expense from increased borrowings under the various financing facilities. See "Debt" in the Notes to the Consolidated Financial Statements for the quarter ended December 31, 1997. Other income for the twelve-month period ended December 31, 1997 was $2,444,000 compared with $11,755,000 in 1996. Other income for the twelve-month period ended December 31, 1997 included $2,874,000 in realized gains on the sale of investment securi- ties, $1,198,000 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 of $1,118,000. This was partially offset by $2,150,000 for the settlement of certain billing errors at Missouri Gas Energy and the write-off of $600,000 acquisition-related costs from the termination of various acquisition activities. Other income for 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 Western Gas Interstate 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 expense associated with the donation of emissions analysis equipment and software, previously discussed. For the twelve-month period ended December 31, 1997, federal and state income taxes decreased $2,987,000 over the same period in 1996 due to a reduction in pre-tax earnings as discussed above. The Company's consolidated federal and state effective income tax rate was 39% and 42% for the twelve months ended December 31, 1997 and 1996, respectively. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following table sets forth certain information regarding the Company's gas utility operations for the three- and twelve-month periods ended December 31, 1997 and 1996: Three Months Twelve Months Ended Ended December 31, December 31, ----------------- ------------------- 1997 1996 1997 1996 -------- -------- --------- --------- Average number of gas sales customers served: Residential............. 876,877 863,933 871,643 861,328 Commercial.............. 86,539 86,026 86,349 86,364 Industrial and irrigation............. 558 599 591 625 Public authorities and other.............. 2,703 2,701 2,694 2,749 Pipeline and marketing.. 238 185 215 379 -------- -------- -------- -------- Total average custo- mers served.......... 966,915 953,444 961,492 951,445 ======== ======== ======== ======== Gas sales in millions of cubic feet (MMcf) Residential............. 17,276 17,743 68,242 70,401 Commercial.............. 7,397 8,012 30,104 31,780 Industrial and irrigation............. 326 452 1,725 2,391 Public authorities and other.............. 790 734 2,809 2,715 Pipeline and marketing.. 4,583 4,735 17,692 14,800 -------- -------- -------- -------- Gas sales billed....... 30,372 31,676 120,572 122,087 Net change in unbilled gas sales.............. 7,488 7,279 (567) (301) -------- -------- -------- -------- Total gas sales....... 37,860 38,955 120,005 121,786 ======== ======== ======== ======== Gas sales revenues (thousands of dollars): Residential............. $111,944 $113,654 $433,161 $414,491 Commercial.............. 43,374 45,940 170,898 166,452 Industrial and irrigation............. 1,838 2,481 8,709 10,724 Public authorities and other.................. 3,498 3,666 13,002 11,101 Pipeline and marketing.. 11,281 12,188 45,670 37,343 -------- -------- -------- -------- Gas revenues billed.... 171,935 177,929 671,440 640,111 Net change in unbilled gas sales revenues..... 39,171 44,180 (8,834) 12,536 -------- -------- -------- -------- Total gas sales revenues.............. $211,106 $222,109 $662,606 $652,647 ======== ======== ======== ======== Gas sales margin (thousands of dollars) $ 67,953 $ 67,748 $232,901 $231,436 ======== ======== ======== ======== Gas sales revenue per thousand cubic feet (Mcf) billed: Residential............. $ 6.480 $ 6.406 $ 6.347 $ 5.888 Commercial.............. 5.864 5.734 5.677 5.238 Industrial and irrigation............. 5.642 5.489 5.049 4.485 Public authorities and other.................. 4.428 4.995 4.629 4.089 Pipeline and marketing.. 2.461 2.574 2.581 2.523 Weather effect: Degree days: Southern Union Gas service territories.... 972 760 2,176 1,917 Missouri Gas Energy service territories.... 1,945 2,133 5,255 5,630 Percent of normal, based on 30-year measure: Southern Union Gas service territories.... 117% 89% 103% 89% Missouri Gas Energy service territories.... 100% 110% 100% 107% Gas transported in mil- lions of cubic feet (MMcf)................... 16,635 15,825 65,610 62,207 Gas transportation reve- nues (thousands of dollars)................. $ 5,627 $ 6,195 $ 20,623 $ 20,630 - ------------------------- The above information does not include the operations of Atlantic Utilities Corporation and Subsidiaries or the Company's 42% equity ownership in a natural gas distribution company serving Piedras Negras, Mexico. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS FINANCIAL CONDITION The Company's gas utility operations are seasonal in nature with a significant percentage of the annual revenues and earnings occurring in the traditional heating-load months. This 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 source of funds during the three-month period ended December 31, 1997 was $33,500,000 from the Company's financing facilities. These sources provided funds for additions to property, plant and equipment of $22,167,000, purchase of invest- ment securities of $5,000,000 and other seasonal working capital needs of the Company. The principal sources of funds during the six-month period ended December 31, 1997 was $92,200,000 from the Compay's financing facilities and proceeds from the sale of investment securities of $6,531,000. These sources provided funds for additions to property, plant and equipment of $39,175,000, purchases of inven- tory of $16,044,000, purchase of investment securities of $5,000,000 and other seasonal working capital needs of the Com- pany. The effective interest rate under the Company's current debt structure is 8.1% (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 Facili- ties) with various banks. Covenants under the Revolving Credit Facility allow for up to $35,000,000 of borrowings under Uncom- mitted Facilities at any one time. Borrowings under the facili- ties are available for Southern Union's working capital, letter of credit requirements and other general corporate purposes. Amounts outstanding under these facilities at December 31, 1997 and February 6, 1998 were $93,800,000 and $71,300,000, respec- tively. SOUTHERN UNION COMPANY AND SUBSIDIARIES RESULTS OF VOTES OF SECURITY HOLDERS Southern Union held its Annual Meeting of Stockholders on November 11, 1997. 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 I directors until the 2000 Annual Meeting of Stockholders or until their successors are duly elected and qualified; and (ii) approval of an addi- tional 900,000 shares of Southern Union Company Common Stock to be eligible for grant under the Southern Union Company 1992 Long- Term Stock Incentive Plan. 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 I Directors: John E. Brennan............. 15,882,096 -- 111,703 Frank W. Denius............. 15,885,459 -- 108,340 Roger J. Pearson............ 15,869,319 -- 124,480 Proposal to approve an addi- tional 900,000 shares of Southern Union Company Com- mon Stock to be eligible for grant under the Southern Union Company 1992 Long-Term Stock Incentive Plan......... 10,964,384 181,105 867,055 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 17, 1998 By: RONALD J. ENDRES ------------------- ---------------- Ronald J. Endres Executive Vice President and Chief Financial Officer Date February 17, 1998 By: DAVID J. KVAPIL ------------------- --------------- David J. Kvapil Senior Vice President - Corporate 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, 1997 1996 1997 1996 1997 1996 ------- ------- ------- ------- ------- ------- (in thousands of dollars, except per share amounts) Net earnings available for common stock... $ 9,738 $ 9,661 $ 4,829 $ 4,256 $19,605 $21,947 ======= ======= ======= ======= ======= ======= Basic earnings per share: Average shares out- standing..... 17,993 17,903 17,985 17,895 17,970 17,888 ======= ======= ======= ======= ======= ======= Basic earn- ings per share........ $ .54 $ .54 $ .27 $ .24 $ 1.09 $ 1.23 ======= ======= ======= ======= ======= ======= Diluted earnings per share: Average shares outstanding.. 17,993 17,903 17,985 17,895 17,970 17,888 Common stock equivalents.. 733 727 713 712 707 685 ------- ------- ------- ------- ------- ------- Average shares outstanding.. 18,726 18,630 18,698 18,607 18,677 18,573 ======= ======= ======= ======= ======= ======= Diluted earn- ings per share........ $ .52 $ .52 $ .26 $ .23 $ 1.05 $ 1.18 ======= ======= ======= ======= ======= ======= - ------------------ Note: All periods have been adjusted to reflect the five percent common stock dividend distributed on December 10, 1997. EX-27 3
UT JUN-30-1997 DEC-31-1997 6-MOS PER-BOOK $ 805,034,000 $ 9,609,000 $ 219,750,000 $ 104,284,000 $ 5,425,000 $1,149,102,000 $ 18,831,000 $ 262,004,000 $ 9,340,000 $ 289,381,000 $ 0 $ 100,000,000 $ 395,451,000 $ 93,800,000 $ 0 $ 0 $ 1,316,000 $ 0 $ 0 $ 0 $ 144,154,000 $1,149,102,000 $ 295,201,000 $ 3,153,000 $ 50,459,000 $ 76,360,000 $ 27,934,000 $ 2,362,000 $ 22,403,000 $ 17,574,000 $ 4,829,000 $ 0 $ 4,829,000 $ 0 $ 0 $ (55,938,000) $ .27 $ .26
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