-----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, M9wogAT0OYpJUNVyPE0uI5SgOAsjvKm1iJCbPtEtew7PU5cl2pYn02WCgt/xsA/Z DKFVDIzAtq2YepMgQfJXlA== 0000203248-98-000003.txt : 19980518 0000203248-98-000003.hdr.sgml : 19980518 ACCESSION NUMBER: 0000203248-98-000003 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 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: 98625362 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 ------------------------------ March 31, 1998 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 May 8, 1998 was 18,799,281. ================================================================= SOUTHERN UNION COMPANY AND SUBSIDIARIES FORM 10-Q March 31, 1998 Index PART I. FINANCIAL INFORMATION Page(s) ------- Item 1. Financial Statements Consolidated statements of operations - three, nine and twelve months ended March 31, 1998 and 1997 Consolidated balance sheet - March 31, 1998 and 1997 and June 30, 1997 Consolidated statement of stockholders' equity - nine months ended March 31, 1998 and twelve months ended June 30, 1997 Consolidated statements of cash flows - three, nine and twelve months ended March 31, 1998 and 1997 Notes to consolidated financial statements Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations PART II. OTHER INFORMATION Item 1. Legal Proceedings (See "CONTINGENCIES" under Notes to Consolidated Financial Statements) Item 6. Exhibits and Reports on Form 8-K (a) Exhibit 11 -- Computation of basic and 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 March 31, ---------------------------- 1998 1997 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues................. $ 265,176 $ 316,915 Gas purchase costs................. 170,500 215,994 ----------- ----------- Operating margin................. 94,676 100,921 Revenue-related taxes.............. 15,240 16,975 ----------- ----------- Net operating margin............. 79,436 83,946 Operating expenses: Operating, maintenance and general........................ 29,143 35,086 Depreciation and amortization.... 9,775 8,882 Taxes, other than on income and revenues....................... 3,578 2,979 ----------- ----------- Total operating expenses....... 42,496 46,947 ----------- ----------- Net operating revenues......... 36,940 36,999 ----------- ----------- Other income (expenses): Interest......................... (8,970) (8,368) Dividends on preferred securities of subsidiary trust. (2,370) (2,370) Other, net....................... 1,257 2,960 ----------- ----------- Total other expenses, net...... (10,083) (7,778) ----------- ----------- Earnings before income taxes... 26,857 29,221 Federal and state income taxes..... 10,608 11,543 Net earnings available for common stock............................ $ 16,249 $ 17,678 =========== =========== Net earnings per share: Basic............................ $ .86 $ .99 =========== =========== Diluted.......................... $ .83 $ .95 =========== =========== Weighted average shares outstanding: Basic.......................... 18,791,069 17,933,857 =========== =========== Diluted........................ 19,467,236 18,621,615 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Nine Months Ended March 31, --------------------------- 1998 1997 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues.................. $ 560,377 $ 629,208 Gas purchase costs.................. 346,775 410,354 ----------- ----------- Operating margin.................. 213,602 218,854 Revenue-related taxes............... 29,873 33,726 ----------- ----------- Net operating margin.............. 183,729 185,128 Operating expenses: Operating, maintenance and general......................... 79,602 87,580 Depreciation and amortization..... 28,923 25,765 Taxes, other than on income and revenues........................ 10,331 8,779 ----------- ----------- Total operating expenses........ 118,856 122,124 ----------- ----------- Net operating revenues.......... 64,873 63,004 ----------- ----------- Other income (expenses): Interest.......................... (26,544) (25,397) Dividends on preferred securities of subsidiary trust.. (7,110) (7,110) Other, net........................ 3,619 5,758 ----------- ----------- Total other expenses, net....... (30,035) (26,749) ----------- ----------- Earnings before income taxes.... 34,838 36,255 Federal and state income taxes...... 13,761 14,321 ----------- ----------- Net earnings available for common stock............................. $ 21,077 $ 21,934 =========== =========== Net earnings per share: Basic............................. $ 1.15 $ 1.22 =========== =========== Diluted........................... $ 1.11 $ 1.18 =========== =========== Weighted average shares outstanding: Basic............................. 18,249,970 17,907,431 =========== =========== Diluted........................... 18,950,419 18,611,495 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Twelve Months Ended March 31, ----------------------------- 1998 1997 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues............... $ 648,200 $ 723,404 Gas purchase costs............... 385,609 459,008 ----------- ----------- Operating margin............... 262,591 264,396 Revenue-related taxes............ 35,649 39,126 ----------- ----------- Net operating margin........... 226,942 225,270 Operating expenses: Operating, maintenance and general...................... 101,910 115,562 Depreciation and amortization.. 37,986 33,627 Taxes, other than on income and revenues................. 13,706 12,247 ----------- ----------- Total operating expenses..... 153,602 161,436 ----------- ----------- Net operating revenues....... 73,340 63,834 ----------- ----------- Other income (expenses): Interest....................... (34,613) (33,929) Dividends on preferred securities of subsidiary trust........................ (9,480) (9,480) Other, net..................... 741 12,494 ----------- ----------- Total other expenses, net.... (43,352) (30,915) ----------- ----------- Earnings before income taxes. 29,988 32,919 Federal and state income taxes... 11,814 13,843 Net earnings available for common stock................... $ 18,174 $ 19,076 =========== =========== Net earnings per share: Basic.......................... $ 1.00 $ 1.07 =========== =========== Diluted........................ $ .96 $ 1.03 =========== =========== Weighted average shares outstanding: Basic........................ 18,181,238 17,901,661 =========== =========== Diluted...................... 18,880,879 18,604,567 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS March 31, June 30, ---------------------- ---------- 1998 1997 1997 ---------- ---------- ---------- (unaudited) (thousands of dollars) Property, plant and equipment: Plant in service....... $1,033,862 $ 949,607 $ 963,269 Construction work in progress............. 8,064 7,581 7,970 ---------- ---------- ---------- 1,041,926 957,188 971,239 Less accumulated depreciation and amortization......... (351,084) (328,957) (329,182) ---------- ---------- ---------- 690,842 628,231 642,057 Additional purchase cost assigned to utility plant, net... 136,965 131,823 131,539 ---------- ---------- ---------- Net property, plant and equipment........ 827,807 760,054 773,596 ---------- ---------- ---------- Current assets: Cash and cash equivalents............ 265 899 -- Accounts receivable, billed and unbilled.... 118,828 120,372 58,659 Inventories, principally at average cost........ 17,643 14,051 21,523 Deferred gas purchase costs.................. -- 6,612 -- Investment securities.... -- -- 6,432 Prepayments and other.... 1,613 2,642 9,609 ---------- ---------- ---------- Total current assets... 138,349 144,576 96,223 ---------- ---------- ---------- Deferred charges........... 103,698 109,726 109,512 Investment securities...... 5,000 6,295 -- Real estate................ 9,762 9,098 9,046 Other...................... 5,321 2,397 2,026 ---------- ---------- ---------- Total.................... $1,089,937 $1,032,146 $ 990,403 ========== ========== ========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) STOCKHOLDERS' EQUITY AND LIABILITIES March 31, June 30, ---------------------- ---------- 1998 1997 1997 ---------- ---------- ---------- (unaudited) (thousands of dollars) Common stockholders' equity: Common stock, $1 par value; authorized 50,000,000 shares; issued 18,848,009 shares.................. $ 18,848 $ 17,162 $ 17,171 Premium on capital stock.. 261,995 225,201 225,252 Less treasury stock, at cost................. (794) (794) (794) Retained earnings......... 25,588 28,071 25,169 Unrealized holding gain... -- 553 664 ---------- ---------- ---------- Total common stockholders' equity.................. 305,637 270,193 267,462 Company-obligated mandatorily redeemable preferred securities of subsidiary trust holding solely $103,093,000 principal amount of 9.48% subordinated notes of Southern Union due 2025... 100,000 100,000 100,000 Long-term debt.............. 398,217 385,856 386,157 ---------- ---------- ---------- Total capitalization...... 803,854 756,049 753,619 Current liabilities: Long-term debt due within one year................ 1,367 701 687 Notes payable............. 17,000 20,800 1,600 Accounts payable.......... 61,515 52,316 33,827 Federal, state and local taxes................... 29,890 27,398 13,699 Accrued interest.......... 5,190 5,320 12,840 Customer deposits......... 17,914 17,539 17,214 Deferred gas purchase costs................... 2,191 -- 3,565 Other..................... 21,714 18,631 22,291 ---------- ---------- ---------- Total current liabilities........... 156,781 142,705 105,723 ---------- ---------- ---------- Deferred credits and other.. 71,989 82,823 77,083 Accumulated deferred income taxes.............. 57,313 50,569 53,978 Commitments and contingencies............. -- -- -- ---------- ---------- ---------- Total..................... $1,089,937 $1,032,146 $ 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 -- -- -- 21,077 -- 21,077 5% stock divi- dend..... 856 19,802 -- (20,658) -- -- Issuance of stock for acqui- sition... 755 17,285 -- -- -- 18,040 Change in unrea- lized holding gain or loss..... -- -- -- -- (664) (664) Exercise of stock options.. 66 (344) -- -- -- (278) ------- -------- ----- -------- ------- -------- Balance March 31, 1998..... $18,848 $261,995 $(794) $ 25,588 $ -- $305,637 ======= ======== ===== ======== ======= ======== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended March 31, ---------------------------- 1998 1997 ---------- ---------- (thousands of dollars) Cash flows from operating activities: Net earnings................. $ 16,249 $ 17,678 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization........... 9,775 8,882 Deferred income taxes.... 1,332 2,347 Provision for bad debts.. 2,259 7,142 Deferral of interest and other expenses......... (574) (1,030) Gain on sale of investment securities.. -- (1,786) Other.................... 259 364 Changes in assets and liabilities, net of acquisitions and dispositions: Accounts receivable, billed and unbilled........... 13,411 20,546 Accounts payable..... (10,766) 7,482 Taxes and other liabilities........ 1,812 967 Customer deposits.... 394 324 Deferred gas purchase costs..... 31,155 (46,902) Inventories.......... 20,201 19,771 Other accounts....... 3,090 (30) ---------- ---------- Net cash flow from operating activities... 88,597 35,755 ---------- ---------- Cash flows from (used in) investing activities: Additions to property, plant and equipment.............. (12,653) (11,443) Acquisition of operations, net of cash received....... 7,247 -- Proceeds from sale of investment securities...... -- 9,784 Net change in customer advances................... 567 (158) Net change in deferred charges and credits........ 555 6,502 Other........................ (793) 650 ---------- ---------- Net cash flows from (used in) investing activities. (5,077) 5,335 ---------- ---------- Cash flows used in financing activities: Repayment of debt............ (341) (131) Net payments under financing facilities................. (76,800) (40,400) Decrease in cash overdrafts.. (6,122) -- Other........................ 8 340 ---------- ---------- Net cash flows used in financing activities..... (83,255) (40,191) ---------- ---------- Increase in cash and cash equivalents.................... 265 899 Cash and cash equivalents at beginning of period............ -- -- ---------- ---------- Cash and cash equivalents at end of period.................. $ 265 $ 899 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................. $ 15,744 $ 15,161 ========== ========== Income taxes............. $ 325 $ 101 ========== ========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Nine Months Ended March 31, --------------------------- 1998 1997 ---------- ---------- (thousands of dollars) Cash flows from operating activities: Net earnings.................. $ 21,077 $ 21,934 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization............ 28,923 25,765 Deferred income taxes..... 1,071 6,054 Provision for bad debts... 4,311 9,978 Deferral of interest and other expenses.......... (1,246) (4,281) Gain on sale of investment securities... (1,088) (2,545) Other..................... 759 697 Changes in assets and liabilities, net of acquisitions and dispositions: Accounts receivable, billed and unbilled. (63,787) (79,489) Accounts payable...... 27,739 13,078 Taxes and other liabilities......... 8,511 3,204 Customer deposits..... 429 1,883 Deferred gas purchase costs...... (1,374) (3,961) Inventories........... 4,157 13,134 Other accounts........ 3,177 (57) ---------- ---------- Net cash flow from operating activities.... 32,659 5,394 ---------- ---------- Cash flows used in investing activities: Additions to property, plant and equipment............... (51,828) (42,553) Acquisition of operations, net of cash received........ 6,502 (1,162) Purchase of investment securities.................. (5,000) (5,363) Proceeds from sale of investment securities....... 6,531 10,311 Net change in customer advances.................... 2,823 1,756 Net change in deferred charges and credits......... (3,195) 6,861 Other......................... (1,296) 1,873 ---------- ---------- Net cash flows used in investing activities...... (45,463) (28,277) ---------- ---------- Cash flows from financing activities: Repayment of debt............. (821) (452) Net borrowings under financing facilities........ 15,400 20,800 Decrease in cash overdrafts... (1,567) -- Other......................... 57 547 ---------- ---------- Net cash flows from financing activities...... 13,069 20,895 ---------- ---------- Increase (decrease) in cash and cash equivalents................ 265 (1,988) Cash and cash equivalents at beginning of period............. -- 2,887 ---------- ---------- Cash and cash equivalents at end of period....................... $ 265 $ 899 ========== ========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest.................. $ 33,317 $ 32,103 ========== ========== Income taxes.............. $ 1,825 $ 5,101 ========== ========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Ended March 31, ----------------------------- 1998 1997 ------------ ------------ (thousands of dollars) Cash flows from operating activities: Net earnings................. $ 18,174 $ 19,076 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization........... 37,986 33,627 Deferred income taxes.... 2,359 12,702 Provision for bad debts.. 5,631 11,498 Deferral of interest and other expenses......... (694) (6,283) Gain on sale of investment securities.. (1,088) (2,545) Other.................... 1,139 (209) Changes in assets and liabilities, net of acquisitions and dispositions: Accounts receivable, billed and unbilled........... (6,409) (9,022) Accounts payable..... 7,683 2,528 Taxes and other liabilities........ 2,332 (9,379) Customer deposits.... 104 1,868 Deferred gas purchase costs..... 8,802 (22,778) Inventories.......... (3,286) (8,247) Other accounts....... 2,526 (9) ----------- ----------- Net cash flow from operating activities... 75,259 22,827 ----------- ----------- Cash flows used in investing activities: Additions to property, plant and equipment.............. (73,738) (64,196) Acquisition of operations, net of cash received....... 5,803 (1,162) Purchase of investment securities................. (5,000) (5,363) Proceeds from sale of investment securities...... 9,547 10,311 Litigation settlement proceeds................... -- 4,250 Net change in customer advances................... 3,537 2,843 Net change in deferred charges and credits........ (10,050) 6,146 Proceeds from sale of distribution and transmission properties.... 1,130 14,770 Other........................ (2,430) 2,779 ----------- ----------- Net cash flows used in investing activities..... (71,201) (29,622) Cash flows used in financing activities: Repayment of debt............ (1,009) (52,148) Net borrowings (payments) under financing facilities. (3,800) 20,800 Other........................ 117 606 ----------- ----------- Net cash flows used in financing activities..... (4,692) (30,742) ----------- ----------- Decrease in cash and cash equivalents.................... (634) (37,537) Cash and cash equivalents at beginning of period............ 899 38,436 ----------- ----------- Cash and cash equivalents at end of period.................. $ 265 $ 899 =========== =========== Supplemental disclosures of cash flow information: Cash paid during the period for: Interest................. $ 33,496 $ 33,718 =========== =========== Income taxes............. $ 5,595 $ 6,514 =========== =========== 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, 1997. Certain prior period amounts have been reclassified to conform with the current period presentation. NEW PRONOUNCEMENTS The Financial Accounting Standards Board recently issued Employers' Disclosures about Pensions and Other Postretirement Benefits which revises employers' disclosures about pension and other postretirement benefit plans. The Company is required to adopt the provisions of this standard by June 30, 1999. 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 a basic and diluted earnings per share presentation. 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 March 31, 1998, all securities owned by the Company are accounted for under the cost method. These securities consist of preferred stock in a non-public company. 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, and dividends are recognized as income when received. ACQUISITION On December 31, 1997, the Company issued 755,650 shares to the owners of Atlantic Utilities Corporation and Subsidiaries (Atlantic) in connection 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 were included in the Company's consolidated balance sheet at January 1, 1998 as well as Atlantic's results of operations which have been 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 acquired and liabilities assumed, of approximately $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 is amortized on a straight-line basis over forty years. On July 23, 1997 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 Company purchased a SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 (Preferred Securities). In connection with the Subsidiary Trust's issuance of the Preferred Securities and the related purchase by Southern Union of all of the Subsidiary Trust's common securities (Common Securities), Southern Union issued to the Subsidiary Trust $103,092,800 principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025 (Subordinated Notes). The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest and other payment dates on the Subordinated Notes correspond to the distribution and other payment dates on the Preferred Securities and the Common Securities. Under certain circumstances, the Subordinated Notes may be distributed to holders of the Preferred Securities and holders of the Common Securities in liquidation of the Subsidiary Trust. The Subordinated Notes are redeemable at the option of the Company 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 March 31, 1998 and 1997, 4,000,000 shares of Preferred Securities were outstanding. DEBT March 31, June 30, 1998 1997 --------- --------- (thousands of dollars) 7.60% Senior Notes due 2024.......... $ 384,515 $ 384,515 Other................................ 15,069 2,329 --------- --------- Total debt........................... 399,584 386,844 Less current portion............... 1,367 687 --------- --------- Total long-term debt................. $ 398,217 $ 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 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 March 31, 1998 and May 8, 1998 totalled $17,000,000 and nil, respectively. The Company is installing an Automated Meter Reading (AMR) system at Missouri Gas Energy. The installation of the AMR system will involve an 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 $3,158,000 and $13,061,000 during the three-and nine-month period ended March 31, 1998, respectively. UTILITY REGULATION AND RATES Under the order of the Federal Energy Regulatory Commission, a major transporter of gas to Missouri Gas Energy is allowed recovery of certain unrecovered deferred gas costs with a remaining balance of $6,237,000 at March 31, 1998. Missouri Gas Energy is allowed to recover these costs from its customers through the PGA mechanism which SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 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 March 31, 1998 and 1997. 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. YEAR 2000 The Company has established a committee and project team to coor- dinate the assessment, remediation, testing and implementation of the necessary modifications to its key computer applications (which consist of internally-developed computer applications, third party software, hardware and embedded chip systems) to assure that such systems and related processes will remain functional. The Company has already determined that its critical business computing systems, including both its customer informa- tion and administrative systems, are year 2000 compliant. It is the Company's goal to ensure that all of its other systems and processes which are under its direct control remain functional. However, because certain systems may be interrelated with systems outside the control of the Company, there can be no assurances that all implementations will be successful. Management does not expect the costs to modify its systems or to correct any unsuc- cessful system implementations to have a material adverse impact on the Company's financial position, results of operations or cash flows. CONTINGENCIES On December 30, 1997, Southern Union settled the claims associated 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 Liability Agreement provides for a tiered approach to the alloca- tion 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 manage- ment, 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 in other of its former service territories, principally in Arizona and New Mexico, and present service terri- tories 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 SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS activities. Based upon the health risk evaluation conclusions contained 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 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 appropriate 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. 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-94-234 in 1994 which autho- rized MGE to defer depreciation 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 Company 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 is pursuing 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 Company were $671,000 and $1,592,000 for the three and nine months ended March 31, 1998, 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. The Company believes it will ultimately be successful in litigating this matter and, therefore, will not have a material adverse effect on its financial position, results of operations or cash flows. Southern Union and its subsidiaries are parties to other legal proceedings that its management considers to be the normal kinds of actions to which an enterprise of its size and nature might be subject, and not to be material to the Company's overall business or financial condition, results of operations or cash flows. As a result of the acquisition of Missouri Gas Energy, the Company assumed certain obligations related to a 1990 settlement of a Wyoming Tight Sands anti-trust claim. To secure the refund of the settlement proceeds, the MPSC authorized the establishment of an independently administered trust to collect cash receipts under the Tight Sands settlement and repay credit-facility borrowings used for the lump sum payment. In the event the trust did not receive cash payments from the gas suppliers as provided by the Tight Sands settlement agreements, the Company was com- mitted to pay its applicable portion of the amount owed the lender of the credit-facility borrowings. Due to excess cash payments received from gas suppiers, the Company's allocable portion of the credit-facility obligations have been fulfilled as of March 31, 1998, two years ahead of the original payment schedule. In accordance with the Wyoming Tight Sands agreement, the Company's portion of the onging cash payments received from the gas suppliers will be refunded to Missouri Gas Energy customers as specifically defined in the Company's Purchased Gas Adjustment tariff provisions. 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 three divisions: Southern Union Gas, Missouri Gas Energy and, effective January 1, 1998, Atlantic Utilities. 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 subsidiaries own or hold interests in real estate and other assets, which are primarily used in the Company's utility business. Several of these business activities are subject to regulation by federal, state or local authorities where the Company operates. Thus, the Company's financial condition and results of operations have been and will continue to be dependent upon the receipt of adequate and timely adjustments in rates. In addition, the Company's business is affected by seasonal weather impacts, competitive factors within the energy industry and economic development and residential growth in its service areas. RESULTS OF OPERATIONS Three Months Ended March 31, 1998 and 1997 - ------------------------------------------ The Company recorded net earnings available for common stock of $16,249,000 for the three-month period ended March 31, 1998 com- pared with net earnings of $17,678,000 for the same period in 1997. Earnings per diluted share, based on weighted average com- mon and common share equivalents outstanding during the period were $.83 in 1998 compared with earnings per diluted share of $.95 in 1997. Weighted average common and common share equiva- lents increased 5% during the three-month period ended March 31, 1998 compared with 1997 due to the issuance of 755,650 shares of common stock as of December 31, 1997 in connection with the acquisition of Atlantic Utilities Corporation and Subsidiaries in Florida. Operating revenues were $265,176,000 for the three-month period ended March 31, 1998, compared with operating revenues of $316,915,000 in 1997. Gas purchase costs for the three-month period ended March 31, 1998 were $170,500,000, compared with $215,994,000 in 1997. 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 13% decrease in the average cost of gas from $4.13 per Mcf in 1997 to $3.59 per Mcf in 1998. 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 affected by a 10% decrease in gas sales volume to 46,978 MMcf in 1998 from 52,331 MMcf in 1997. The decrease in sales volumes was primarily due to significantly warmer weather in both the Missouri and Texas service areas during the three-month period ended March 31, 1998. Weather for Missouri Gas Energy's service territories, which include the city of Kansas City, Missouri, was 85% of a 30-year measure for the three-month period ended March 31, 1998, compared with 95% in 1997. Southern Union Gas service territories, which include the cities of Austin and El Paso, experienced weather that was 84% of a 30-year measure in 1998, compared with 89% in 1997. About half of the customers served by Southern Union Gas are weather normalized. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Net operating margin (operating margin less revenue-related taxes) decreased 5% to $79,436,000 for the three-month period ended March 31, 1998 compared with the same period in 1997. Net operating margin decreased primarily from the reduction in gas sales volumes as a result of warmer weather throughout the Com- pany's service territories, as previously discussed. Addi- tionally contributing to the decrease in net operating margin for the three-month period ended March 31, 1998 were decreased revenues of $2,372,000 under a gas supply incentive plan approved by the Missouri Public Service Commission (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. These items were partially offset by the Missouri rate increase, effective as of February 1, 1997, approved by the MPSC. This rate increase was for an $8,847,000 annual increase to revenues. Operating expenses, which include operating, maintenance and general expenses, depreciation and amortization and taxes, other than on income and revenues, were $42,496,000 for the three-month period ended March 31, 1998, a decrease of $4,451,000, compared with $46,947,000 in 1997. The decrease is primarily a result of a $4,883,000 decrease in bad debt expense. The increase in natural gas prices during the three-month period ended March 31, 1997 caused many customers to receive significantly higher winter heating bills and resulted in an increase in delinquent customer accounts. Also contributing to the decrease in operating expenses were decreased media, advertising, travel and call center labor costs to inform customers of the significant price spikes in natural gas which were incurred during the three-month period ended March 31, 1997. These items were partially offset by an increase of $893,000 in depreciation and amortization and a $599,000 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 $8,970,000 for the three-month period ended March 31, 1998, compared with $8,368,000 in 1997. The increase is primarily due to increased borrowings under the Company's various financing facilities during the three-month period ended March 31, 1998 compared to the same period in 1997. See "Debt" in the Notes to the Consolidated Financial Statements included herein. Other income for the three-month period ended March 31, 1998 was $1,257,000, compared with $2,960,000 in 1997. Other income for the three-month period ended March 31, 1998 consisted principally of $526,000 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 $269,000. Other income for 1997 included realized gains on the sale of investment securities of $1,786,000, the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program of $1,030,000 and net rental income from Lavaca Realty of $370,000. For the three-month period ended March 31, 1998, federal and state income taxes decreased $935,000, or 8%, over the same period in 1997 due to lower pre-tax earnings as discussed above. The Company's consolidated federal and state effective income tax rate was 39% for the three months ended March 31, 1998, compared with 40% in 1997. The three-month period ended March 31 is generally the Company's most profitable quarter. Because Missouri Gas Energy's rate structure collects a greater percentage of its margin in the winter heating season months, operating losses are expected during the upcoming quarters ended June 30 and September 30, 1998. Nine Months Ended March 31, 1998 and 1997 - ----------------------------------------- The Company recorded net earnings available for common stock of $21,077,000 for the nine-month period ended March 31, 1998, compared with net earnings of $21,934,000 for the same period in 1997. Earnings per diluted share, based on weighted average common and common share equivalents outstanding during the period, were $1.11 in 1998 compared with earnings per diluted share of $1.18 in 1997. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating revenues were $560,377,000 for the nine-month period ended March 31, 1998, compared with operating revenues of $629,208,000 in 1997. Gas purchase costs for the nine-month period ended March 31, 1998 were $346,775,000 compared with $410,354,000 in 1997. The decrease in both operating revenues and gas purchase costs between periods was primarily the result of a 9% decrease in the average cost of gas from $3.92 in 1997 to $3.55 per Mcf in 1998, due to decreases in average spot market gas prices. Additionally, operating revenues and gas purchase costs were affected by a 7% decrease in gas sales volume to 96,791 MMcf in 1998 from 104,544 MMcf in 1997. The decrease in sales volumes was primarily due to warmer weather in the Missouri service areas during the nine-month period ended March 31, 1998. Missouri Gas Energy's service territories experienced weather which was 91% of a 30-year measure for the nine months ended March 31, 1998 compared with 101% in 1997. Weather for Southern Union Gas service territories for the nine-month period ended March 31, 1998 was 97% of a 30-year measure compared with 89% in 1997. Net operating margin decreased 1% to $183,729,000 for the nine- onth period ended March 31, 1998 compared with the same period in 1997. Net operating margin decreased primarily from the reduc- tion in volumes as a result of warmer weather in the Missouri service territories, which was partially offset by the impact of the Missouri rate increase, both previously discussed. Operating expenses were $118,856,000 for the nine-month period ended March 31, 1998, a decrease of $3,268,000, compared with $122,124,000 in 1997. The decrease is primarily a result of a $5,667,000 decrease in bad debt expense and decreases in certain operating expenses associated with informing customers about natural gas price increases in 1997, both previously discussed. These items were partially offset by an increase of $3,158,000 in depreciation and amortization and a $1,552,000 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 $26,544,000 for the nine-month period ended March 31, 1998, compared with $25,397,000 in 1997. The increase in interest expense is primarily from increased borrowings under the Company's various financing facilities, previsouly discussed. See "Debt" in the Notes to the Consolidated Financial Statements for the quarter ended March 31, 1998. Other income for the nine-month period ended March 31, 1998 was $3,619,000 compared with $5,758,000 in 1997. Other income in 1998 included $1,246,000 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 $1,088,000 and net rental income from Lavaca Realty of $756,000. Other income for 1997 included $4,281,000 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 $2,545,000 and net rental income from Lavaca Realty of $1,068,000. This was partially offset by the write-off of $1,150,000 of acquisition-related costs as a result of termina- tion of various acquisition activities. For the nine-month period ended March 31, 1998, federal and state income taxes decreased $560,000 over the same period in 1997. The Company's consolidated federal and state effective income tax rate was 39% and 40% for the nine months ended March 31, 1998 and 1997, respectively. Twelve Months Ended March 31, 1998 and 1997 - ------------------------------------------- The Company recorded net earnings available for common stock of $18,174,000 for the twelve-month period ended March 31, 1998 compared with net earnings of $19,076,000 in 1997. Earnings per diluted share based on weighted average common and common share equivalents outstanding during the period were $.96 in 1998 compared with earnings per diluted share of $1.03 in 1997. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Operating revenues were $648,200,000 for the twelve-month period ended March 31, 1998, compared with operating revenues of $723,404,000 in 1997. Gas purchase costs for the twelve-month period ended March 31, 1998 were $385,609,000, compared with gas purchase costs of $459,008,000 in 1997. The decrease in both operating revenues and gas purchase costs between periods was primarily the result of a 13% decrease in the average cost of gas from $3.85 in 1997 to $3.35 per Mcf in 1998, due to decreases in average spot market gas prices. Additionally, operating revenues and gas purchase costs were affected by a 4% decrease in gas sales volume to 113,963 MMcf in 1998 from 119,087 MMcf in 1997. The decrease in sales volumes was primarily due to warmer weather in the Missouri service areas during the twelve-month period ended March 31, 1998. Missouri Gas Energy's service territories experienced weather that was 95% of the 30-year measure for the twelve-month period ended March 31, 1998 compared with 102% in 1997. Weather for Southern Union Gas service territories for the twelve-month period ended March 31, 1998 was 103% of a 30-year measure com- pared with 93% in 1997. Net operating margin increased 1% to $226,942,000 for the twelve- month period ended March 31, 1998 compared with the same period in 1997. Net operating margin increased primarily due to colder weather and increased volumes in Texas service territories and the Missouri rate increase, both previously discussed. This was partially offset by a reduction in volumes in Missouri as a result of the warmer winter weather in the Missouri service territories. Operating expenses were $153,602,000 for the twelve-month period ended March 31, 1998, a decrease of $7,834,000, compared with operating expenses of $161,436,000 in 1997. The decrease is primarily a result of a $5,867,000 decrease in bad debt expense and decreases in certain operating expenses associated with informing customers about natural gas price increases in 1997, both previously discussed. These items were partially offset by an increase of $4,359,000 in depreciation and amortization and a $1,459,000 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 $34,613,000 for the twelve-month period ended March 31, 1998, compared with $33,929,000 in 1997. The increase is primarily due to increased borrowings under the various financing facilities during the twelve-month period ended March 31, 1998 compared to the same period in 1997. See "Debt" in the Notes to the Consolidated Financial Statements for the quarter ended March 31, 1998. Other income for the twelve-month period ended March 31, 1998 was $741,000 compared with $12,494,000 in 1997. Other income for the twelve-month period ended March 31, 1998 included $1,088,000 in realized gains on the sale of investment securities, net rental income from Lavaca Realty Company of $1,017,000 and $694,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program. This was partially offset by $2,150,000 for the settlement of certain billing errors at Missouri Gas Energy. Other income for 1997 included $6,283,000 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 $2,545,000, a pre- tax gain of $2,050,000 on the sale of Western Gas Interstate and other operations, a $1,488,000 gain on the repurchase of Senior Notes and net rental income from Lavaca Realty of $1,423,000. This was partially offset by the write-off of $1,150,000 of acquisition-related costs. For the twelve-month period ended March 31, 1998, federal and state income taxes decreased $2,029,000 over the same period in 1997 due to a reduction in pre-tax earnings as discussed above. The Company's consolidated federal and state effective income tax rate was 39% for the twelve-month period ended March 31, 1998 compared with 42% in 1997. 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 March 31, 1998 and 1997: Three Months Twelve Months Ended March 31, Ended March 31, 1998 1997 1998 1997 -------- -------- -------- -------- Average number of gas sales customers served: Residential.......... 892,732 872,757 876,136 861,244 Commercial........... 90,819 88,785 86,858 86,160 Industrial and irrigation......... 560 650 569 618 Pipeline and marketing.......... 226 193 223 232 Public authorities and other.......... 2,841 2,644 2,743 2,689 -------- -------- -------- -------- Total average customers served......... 987,178 965,029 966,529 950,943 ======== ======== ======== ======== Gas sales in millions of cubic feet (Mmcf): Residential.......... 31,351 34,333 64,791 69,103 Commercial........... 12,763 14,411 28,220 31,143 Industrial and irrigation......... 504 586 1,658 2,296 Pipeline and marketing.......... 5,113 6,098 16,707 16,772 Public authorities and other.......... 1,280 1,375 2,714 2,791 -------- -------- -------- -------- Gas sales billed. 51,011 56,803 114,089 122,105 Net change in unbilled gas sales. (4,033) (4,472) (127) (3,018) -------- -------- -------- -------- Total gas sales.. 46,978 52,331 113,963 119,087 ======== ======== ======== ======== Gas sales revenues (thousands of dollars): Residential.......... $181,858 $216,895 $397,670 $450,323 Commercial........... 72,435 89,821 153,509 181,421 Industrial and irrigation......... 2,484 3,455 7,741 10,409 Pipeline and marketing.......... 12,025 18,211 39,484 46,313 Public authorities and other.......... 4,918 6,760 11,160 13,147 -------- -------- -------- -------- Gas sales reve- nues billed.... 273,720 335,142 609,563 701,613 Net change in unbilled gas sales revenues........... (21,417) (31,463) 1,212 (13,406) -------- -------- -------- -------- Total gas sales revenues....... $252,303 $303,679 $610,776 $688,207 ======== ======== ======== ======== Gas sales margin (thousands of dollars). $ 83,571 $ 87,681 $228,337 $229,673 ======== ======== ======== ======== Gas sales revenue per thousand cubic feet (Mcf) billed: Residential.......... $ 5.801 $ 6.317 $ 6.138 $ 6.517 Commercial........... 5.675 6.233 5.440 5.825 Industrial and irrigation......... 4.928 5.896 4.667 4.534 Pipeline and marketing.......... 2.352 2.986 2.363 2.761 Public authorities and other.......... 3.843 4.916 4.113 4.710 Weather effect: Degree days: Southern Union Gas service territories........ 1,055 1,092 2,131 1,919 Missouri Gas Energy service territories........ 2,388 2,661 4,982 5,353 Percent of normal, based on 30-year measure: Southern Union Gas service territories...... 84% 89% 103% 93% Missouri Gas Energy service territories...... 85% 95% 95% 102% Gas transported in millions of cubic feet (Mmcf)................. 15,231 17,310 63,446 62,747 Gas transportation reve- nues (thousands of dollars)............... $ 6,221 $ 6,779 $ 20,066 $ 20,903 - -------------------- 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 REGULATORY MATTERS 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 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. On April 13, 1998 Southern Union Gas filed for a $2,228,000 request for a rate increase from the city of El Paso. In turn, on April 21, 1998, the city council of El Paso voted to reduce the Company's rates by $1,570,000 annually. The Company intends to appeal the council's actions to the Texas Railroad Commission, which has final authorization on natural gas rates in the state. FINANCIAL CONDITION The Company's gas utility operations are seasonal in nature with a significant percentage of the annual revenues and earnings occurring in the traditional heating-load months. This seasonality results in a high level of cash flow needs during the peak winter heating season months, resulting from the required payments to natural gas suppliers in advance of the receipt of cash payments from the Company's customers. The Company has historically used internally generated funds and its 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 March 31, 1998 included $7,247,000 from the acquisition of operations, net of cash received and $88,597,000 in cash flow from operations. These sources provided funds for additions to property, plant and equipment of $12,653,000 and $76,800,000 in net repayments under the Company's financing facilities. The principal sources of funds during the nine-month period ended March 31, 1998 included $32,659,000 in cash flow from operations, $6,531,000 from the sale of investment securities, $6,502,000 from the acquisition of operations, net of cash received and $15,400,000 from the Company's revolving and uncommitted credit facilities. These sources provided funds for additions to property, plant and equipment of $51,828,000, $5,000,000 for the purchase of investment securities and other seasonal working capital needs of the Company. 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 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 March 31, 1998 and May 8, 1998 were $17,000,000 and nil, respectively. 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 May 14, 1998 By: RONALD J. ENDRES -------------- ---------------- Ronald J. Endres Executive Vice President and Chief Financial Officer Date May 14, 1998 By: DAVID J. KVAPIL ------------- --------------- David J. Kvapil Senior Vice President and Corporate Controller (Principal Accounting Officer) EX-11 2 SOUTHERN UNION COMPANY AND SUBSIDIARIES COMPUTATION OF PER SHARE EARNINGS Exhibit 11 Three Months Nine Months Twelve Months Ended Ended Ended 1998 1997 1998 1997 1998 1997 ------- ------- ------- ------- ------- ------- (in thousands, except per share amounts) Net earnings available for common stock.. $16,249 $17,678 $21,077 $21,934 $18,174 $19,076 ======= ======= ======= ======= ======= ======= Basic earnings per share: Average shares out- standing.... 18,791 17,934 18,250 17,907 18,181 17,902 ======= ======= ======= ======= ======= ======= Basic earnings per share..... $ .86 $ .99 $ 1.15 $ 1.22 $ 1.00 $ 1.07 ======= ======= ======= ======= ======= ======= Diluted earn- ings per share: Average shares out- standing.... 18,791 17,934 18,250 17,907 18,181 17,902 Common stock equivalents. 676 688 700 704 700 703 ------- ------- ------- ------- ------- ------- Average shares out- standing.... 19,467 18,622 18,950 18,611 18,881 18,605 ======= ======= ======= ======= ======= ======= Diluted earn- ings per share....... $ .83 $ .95 $ 1.11 $ 1.18 $ .96 $ 1.03 ======= ======= ======= ======= ======= ======= - ------------------ Note: All periods have been adjusted to reflect the five percent stock dividend distributed on December 10, 1997. EX-27 3
UT JUN-30-1997 MAR-31-1998 9-MOS PER-BOOK $ 827,807,000 $ 14,762,000 $ 138,349,000 $ 103,698,000 $ 5,321,000 $1,089,937,000 $ 18,848,000 $ 261,995,000 $ 25,588,000 $ 305,637,000 $ 0 $ 100,000,000 $ 398,217,000 $ 17,000,000 $ 0 $ 0 $ 1,367,000 $ 0 $ 0 $ 0 $ 138,716,000 $1,089,937,000 $ 560,377,000 $ 13,761,000 $ 79,602,000 $ 118,856,000 $ 64,873,000 $ 3,619,000 $ 47,621,000 $ 26,544,000 $ 21,077,000 $ 0 $ 21,077,000 $ 0 $ 0 $ 32,659,000 $ 1.15 $ 1.11
EX-27 4
UT JUN-30-1995 JUN-30-1995 YEAR PER-BOOK $ 748,646,000 $ 10,742,000 $ 126,613,000 $ 114,167,000 $ 2,334,000 $1,002,502,000 $ 11,570,000 $ 198,819,000 $ 16,069,000 $ 225,664,000 $ 0 $ 100,000,000 $ 462,503,000 $ 0 $ 0 $ 0 $ 770,000 $ 0 $ 0 $ 0 $ 213,565,000 $1,002,502,000 $ 480,046,000 $ 10,974,000 $ 104,072,000 $ 176,091,000 $ 62,116,000 $ 5,970,000 $ 55,953,000 $ 39,884,000 $ 16,069,000 $ 1,159,000 $ 16,069,000 $ 0 $ 0 $ 41,642,000 $ .91 $ .89
EX-27 5
UT JUN-30-1996 JUN-30-1996 YEAR PER-BOOK $ 744,454,000 $ 9,513,000 $ 82,353,000 $ 116,286,000 $ 11,854,000 $ 964,460,000 $ 16,275,000 $ 206,047,000 $ 25,631,000 $ 245,915,000 $ 0 $ 100,000,000 $ 385,394,000 $ 0 $ 0 $ 0 $ 615,000 $ 0 $ 0 $ 0 $ 230,498,000 $ 964,460,000 $ 620,391,000 $ 14,979,000 $ 107,521,000 $ 154,162,000 $ 69,804,000 $ 11,326,000 $ 56,671,000 $ 35,832,000 $ 20,839,000 $ 0 $ 20,839,000 $ 0 $ 0 $ 67,465,000 $ 1.17 $ 1.13
EX-27 6
UT JUN-30-1996 SEP-30-1996 3-MOS PER-BOOK $ 750,446,000 $ 9,258,000 $ 92,129,000 $ 116,890,000 $ 22,111,000 $ 990,834,000 $ 16,275,000 $ 206,047,000 $ 20,226,000 $ 243,732,000 $ 0 $ 100,000,000 $ 386,143,000 $ 55,500,000 $ 0 $ 0 $ 680,000 $ 0 $ 0 $ 0 $ 205,963,000 $ 990,834,000 $ 80,830,000 $ (3,078,000) $ 25,315,000 $ 37,066,000 $ 439,000 $ 1,735,000 $ 2,882,000 $ 8,287,000 $ (5,405,000) $ 0 $ (5,405,000) $ 0 $ 0 $ (38,691,000) $ (.30) $ (.30)
EX-27 7
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 $ 311,712,000 $ 2,778,000 $ 52,495,000 $ 75,177,000 $ 25,424,000 $ 3,378,000 $ 21,284,000 $ 17,028,000 $ 4,256,000 $ 0 $ 4,256,000 $ 0 $ 0 $ (35,198,000) $ .24 $ .23
EX-27 8
UT JUN-30-1996 MAR-31-1997 9-MOS PER-BOOK $ 760,054,000 $ 15,393,000 $ 144,576,000 $ 109,726,000 $ 2,397,000 $1,032,146,000 $ 17,162,000 $ 225,201,000 $ 28,071,000 $ 270,193,000 $ 0 $ 100,000,000 $ 385,856,000 $ 20,800,000 $ 0 $ 0 $ 701,000 $ 0 $ 0 $ 0 $ 254,355,000 $1,032,146,000 $ 625,643,000 $ 14,321,000 $ 87,580,000 $ 122,124,000 $ 59,439,000 $ 9,323,000 $ 47,331,000 $ 25,397,000 $ 21,934,000 $ 0 $ 21,934,000 $ 0 $ 0 $ 5,394,000 $ 1.22 $ 1.18
EX-27 9
UT JUN-30-1997 JUN-30-1997 YEAR PER-BOOK $ 773,596,000 $ 9,046,000 $ 96,223,000 $ 109,512,000 $ 2,026,000 $ 990,403,000 $ 17,171,000 $ 225,252,000 $ 25,169,000 $ 267,462,000 $ 0 $ 100,000,000 $ 386,157,000 $ 1,600,000 $ 0 $ 0 $ 687,000 $ 0 $ 0 $ 0 $ 234,367,000 $ 990,403,000 $ 717,031,000 $ 12,373,000 $ 109,888,000 $ 156,871,000 $ 71,470,000 $ 2,880,000 $ 52,497,000 $ 33,465,000 $ 19,032,000 $ 0 $ 19,032,000 $ 0 $ 0 $ 47,994,000 $ 1.06 $ 1.02
EX-27 10
UT JUN-30-1997 SEP-30-1997 3-MOS PER-BOOK $ 787,968,000 $ 9,192,000 $ 102,175,000 $ 107,591,000 $ 1,823,000 $1,008,749,000 $ 17,174,000 $ 225,267,000 $ 20,260,000 $ 261,907,000 $ 0 $ 100,000,000 $ 392,921,000 $ 60,300,000 $ 0 $ 0 $ 797,000 $ 0 $ 0 $ 0 $ 192,701,000 $1,008,749,000 $ 74,039,000 $ (2,737,000) $ 23,789,000 $ 37,208,000 $ 1,405,000 $ 1,769,000 $ 3,541,000 $ 8,450,000 $ (4,909,000) $ 0 $ (4,909,000) $ 0 $ 0 $ (43,132,000) $ (.27) $ (.27)
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