-----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, P6/EbAn5kzDXFdx6T/sDWZifZMKa/ZaJDlrO5dy/1EEWZLO7UFXqm1fmGpkdJewE qb9GgahvdP6GkAjYN4tDDQ== 0000203248-99-000022.txt : 19991117 0000203248-99-000022.hdr.sgml : 19991117 ACCESSION NUMBER: 0000203248-99-000022 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990930 FILED AS OF DATE: 19991022 FILER: COMPANY DATA: COMPANY CONFORMED NAME: SOUTHERN UNION CO CENTRAL INDEX KEY: 0000203248 STANDARD INDUSTRIAL CLASSIFICATION: 4924 IRS NUMBER: 750571592 STATE OF INCORPORATION: DE FISCAL YEAR END: 0630 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-06407 FILM NUMBER: 99732023 BUSINESS ADDRESS: STREET 1: 504 LAVACA ST 8TH FL CITY: AUSTIN STATE: TX ZIP: 78701 BUSINESS PHONE: 5124775852 10-Q 1 ================================================================= UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D. C. 20549 ------------------- FORM 10-Q For the quarterly period ended ------------------------------ September 30, 1999 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 October 19, 1999 was 31,239,726. ================================================================= SOUTHERN UNION COMPANY AND SUBSIDIARIES FORM 10-Q September 30, 1999 Index PART I. FINANCIAL INFORMATION Page(s) ------- Item 1. Financial Statements Consolidated statements of operations - three and twelve months ended September 30, 1999 and 1998 Consolidated balance sheet - September 30, 1999 and 1998 and June 30, 1999 Consolidated statement of stockholders' equity - three months ended September 30, 1999 and twelve months ended June 30, 1999 Consolidated statements of cash flows - three and twelve months ended September 30, 1999 and 1998 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 27 -- Financial Data Schedule (b) Reports on Form 8-K. Southern Union's Current Report on Form 8-K dated October 8, 1999 announcing the definitive merger agreement with Fall River Gas Company. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Three Months Ended September 30, ----------------------------- 1999 1998 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues............... $ 84,786 $ 77,455 Gas purchase costs............... 39,277 34,674 ----------- ----------- Operating margin.............. 45,509 42,781 Revenue-related taxes............ 3,964 3,437 ----------- ----------- Net operating margin.......... 41,545 39,344 Operating expenses: Operating, maintenance and general.................... 25,264 26,047 Depreciation and amortization. 10,848 10,418 Taxes, other than on income and revenues............... 3,625 3,506 ----------- ----------- Total operating expenses... 39,737 39,971 ----------- ----------- Net operating revenues..... 1,808 (627) ----------- ----------- Other income (expenses): Interest...................... (8,364) (8,740) Dividends on preferred securities of subsidiary trust...................... (2,370) (2,370) Other, net.................... (1,157) 724 ----------- ----------- Total other expenses, net.. (11,891) (10,386) ----------- ----------- Loss before income tax benefit................. (10,083) (11,013) Federal and state income tax benefit....................... (3,983) (3,965) ----------- ----------- Net loss attributable to common stock........................ $ (6,100) $ (7,048) =========== =========== Net loss per share: Basic......................... $ (.20) $ (.23) =========== =========== Diluted ...................... $ (.20) $ (.23) =========== =========== Weighted average shares outstanding: Basic...................... 30,925,242 31,098,672 =========== =========== Diluted.................... 31,214,696 31,098,672 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF OPERATIONS Twelve Months Ended September 30, ----------------------------- 1999 1998 ------------ ------------ (thousands of dollars, except shares and per share amounts) Operating revenues................ $ 612,562 $ 672,720 Gas purchase costs................ 346,904 407,812 ----------- ----------- Operating margin............... 265,658 264,908 Revenue-related taxes............. 32,561 35,340 ----------- ----------- Net operating margin........... 233,097 229,568 Operating expenses: Operating, maintenance and general..................... 108,910 109,785 Depreciation and amortization.. 42,286 39,257 Taxes, other than on income and revenues................ 14,620 13,890 ----------- ----------- Total operating expenses.... 165,816 162,932 ----------- ----------- Net operating revenues...... 67,281 66,636 ----------- ----------- Other income (expenses): Interest ...................... (35,622) (35,174) Dividends on preferred securi- ties of subsidiary trust.... (9,480) (9,480) Write-off of regulatory assets. -- (8,163) Other, net..................... (3,695) 3,027 ----------- ----------- Total other expenses, net... (48,797) (49,790) ----------- ----------- Earnings before income taxes.................... 18,484 16,846 Federal and state income taxes.... 7,091 6,757 ----------- ----------- Net earnings available for common stock................... $ 11,393 $ 10,089 =========== =========== Net earnings per share: Basic.......................... $ .37 $ .33 =========== =========== Diluted........................ $ .35 $ .32 =========== =========== Weighted average shares outstanding: Basic....................... 31,098,547 30,751,737 =========== =========== Diluted..................... 32,631,942 31,987,057 =========== =========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET ASSETS September 30, June 30, ---------------------- 1999 1998 1999 ---------- ---------- ---------- (unaudited) (thousands of dollars) Property, plant and equipment: Plant in service...... $1,112,703 $1,069,645 $1,106,905 Construction work in progress......... 17,331 8,872 13,271 ---------- ---------- ---------- 1,130,034 1,078,517 1,120,176 Less accumulated depreciation and amortization........ (376,440) (364,876) (376,212) ---------- ---------- ---------- 753,594 713,641 743,964 Additional purchase cost assigned to utility plant, net.. 133,275 137,360 134,296 ---------- ---------- ---------- Net property, plant and equipment....... 886,869 851,001 878,260 ---------- ---------- ---------- Current assets: Cash and cash equivalents........... 596 -- -- Accounts receivable, billed and unbilled, net................... 40,809 36,958 50,693 Inventories, principally at average cost....... 40,244 38,551 29,373 Deferred gas purchase costs................. -- 1,269 -- Prepayments and other... 3,023 4,084 4,692 ---------- ---------- ---------- Total current assets.. 84,672 80,862 84,758 ---------- ---------- ---------- Deferred charges.......... 97,425 95,270 96,635 Investment securities..... 13,413 5,000 12,000 Real estate............... 9,352 9,601 9,420 Other..................... 5,899 5,246 6,275 ---------- ---------- ---------- Total................... $1,097,630 $1,046,980 $1,087,348 ========== ========== ========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (Continued) STOCKHOLDERS' EQUITY AND LIABILITIES September 30, June 30, ---------------------- 1999 1998 1999 ---------- ---------- ---------- (unaudited) (thousands of dollars) Common stockholders' equity: Common stock, $1 par value; authorized 50,000,000 shares; issued 31,290,177 shares............... $ 31,290 $ 28,262 $ 31,240 Premium on capital stock................ 277,012 252,568 276,610 Less treasury stock, at cost.............. (794) (794) (794) Less common stock held in trust............. (6,249) -- (5,562) Accumulated other com- prehensive income.... (436) -- (436) Retained earnings (deficit)............ (6,100) 9,690 -- ---------- ---------- ---------- Total common stock- holders' equity...... 294,723 289,726 301,058 Company-obligated manda- torily redeemable pre- ferred securities of subsidiary trust holding solely subordinated notes of Southern Union.. 100,000 100,000 100,000 Long-term debt and capital lease obligation......... 390,413 412,475 390,931 ---------- ---------- ---------- Total capitalization..... 785,136 802,201 791,989 Current liabilities: Long-term debt and capital lease obliga- tion due within one year................... 2,089 2,051 2,066 Notes payable............ 84,103 42,103 21,003 Accounts payable......... 19,697 19,960 37,834 Federal, state and local taxes.................. 8,147 8,559 13,300 Accrued interest......... 5,660 5,633 12,176 Customer deposits........ 17,542 17,650 17,682 Deferred gas purchase costs.................. 10,387 -- 22,955 Other.................... 17,223 15,094 16,612 ---------- ---------- ---------- Total current liabilities.......... 164,848 111,050 143,628 ---------- ---------- ---------- Deferred credits and other. 79,023 73,480 81,493 Accumulated deferred income taxes............. 68,623 60,249 70,238 Commitments and con- tingencies............... -- -- -- ---------- ---------- ---------- Total.................... $1,097,630 $1,046,980 $1,087,348 ========== ========== ========== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY Accumu- lated Common Premium Trea- Other Stock, on sury Compre- Retained $1 on Capital Stock, hensive Earnings Value Stock at Cost Income (Deficit) Total ------- -------- ------- ------ -------- --------- (thousands of dollars) Balance July 1, 1998...... $28,252 $252,638 $ (794) $ -- $16,738 $296,834 Comprehen- sive in- come: Net earn- ings... -- -- -- -- 10,445 10,445 Minimum pension liabil- ity ad- just- ment; net of tax.... -- -- -- (436) -- (436) -------- Compre- hensive income.. 10,009 -------- Common stock held in Trust... -- -- (5,562) -- -- (5,562) 5% stock dividend - de- clared Novem- ber 11, 1998.... 1,411 7,483 -- -- (8,898) (4) 5% stock dividend - de- clared July 13, 1999.... 1,485 16,797 -- -- (18,285) (3) Exercise of stock options. 92 (308) -- -- -- (216) ------- -------- ------ ----- ------- -------- Balance June 30, 1999...... 31,240 276,610 (6,356) (436) -- 301,058 Net loss. -- -- -- -- (6,100) (6,100) Common stock held in Trust... -- -- (687) -- -- (687) Exercise of stock options. 50 402 -- -- -- 452 ------- -------- ------- ----- ------- -------- Balance Septem- ber 30, 1999...... $31,290 $277,012 $(7,043) $(436) $(6,100) $294,723 ======= ======== ======= ===== ======= ======== See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Three Months Ended September 30, ---------------------- 1999 1998 ---------- ---------- (thousands of dollars) Cash flows used in operating activities: Net loss............................... $ (6,100) $ (7,048) Adjustments to reconcile net loss to net cash flows used in operating activities: Depreciation and amortization...... 10,848 10,418 Deferred income taxes.............. (1,615) (2,355) Provision for bad debts............ 520 111 Deferred interest expense.......... 33 (195) Other.............................. 355 372 Changes in assets and liabilities, net of acquisitions and dispositions: Accounts receivable, billed and unbilled................. 9,364 16,690 Accounts payable............... (11,482) (6,324) Taxes and other liabilities.... (11,669) (12,524) Customer deposits.............. (140) (36) Deferred gas purchase costs.... (12,568) (13,527) Inventories.................... (10,871) (12,390) Other.......................... 2,656 646 --------- --------- Net cash flows used in operating activities....................... (30,669) (26,162) --------- --------- Cash flows from (used in) investing activities: Additions to property, plant and equipment.......................... (20,418) (14,235) Increase in customer advances........ 835 1,153 Decrease in deferred charges and credits............................ (4,523) (2,266) Purchase of investment securities.... (1,413) -- Other................................ 458 1,840 --------- --------- Net cash flows used in investing activities....................... (25,061) (13,508) --------- --------- Cash flows from (used in) financing activities: Repayment of debt and capital lease obligation......................... (495) (483) Net borrowings under revolving credit facility.................... 63,100 40,503 Change in cash overdraft............. (6,655) (285) Other................................ 376 (65) --------- --------- Net cash flows from financing activities....................... 56,326 39,670 --------- --------- Increase in cash and cash equivalents.... 596 -- Cash and cash equivalents at beginning of period.............................. -- -- --------- --------- Cash and cash equivalents at end of period................................. $ 596 $ -- ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest........................... $ 17,526 $ 15,272 ========= ========= Income taxes....................... $ 1,300 $ 100 ========= ========= See accompanying notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS Twelve Months Ended September 30, ---------------------- 1999 1998 ---------- ---------- (thousands of dollars) Cash flows from operating activities: Net earnings........................... $ 11,393 $ 10,089 Adjustments to reconcile net earnings to net cash flows from operating activities: Depreciation and amortization...... 42,286 39,257 Deferred income taxes.............. 8,607 5,500 Provision for bad debts............ 3,688 5,222 Write-off of regulatory assets..... -- 8,163 Deferred interest expense.......... 847 (1,589) Other.............................. 987 1,624 Changes in assets and liabilities, net of acquisitions and dispositions: Accounts receivable, billed and unbilled................. (7,538) (1,526) Accounts payable............... 70 (3,337) Taxes and other liabilities.... (385) 648 Customer deposits.............. (108) 666 Deferred gas purchase costs.... 11,657 23,941 Inventories.................... (1,694) (2,344) Other.......................... 2,536 (1,087) --------- --------- Net cash flows from operating activities....................... 72,346 85,227 --------- --------- Cash flows from (used in) investing activities: Additions to property, plant and equipment.......................... (79,330) (74,245) Acquisition of operations, net of cash received...................... -- 7,247 Purchase of investment securities.... (8,413) (5,000) Increase in customer advances........ 1,821 3,659 Increase (decrease) in deferred charges and credits................ (6,343) 563 Other................................ (497) 3,106 --------- --------- Net cash flows used in investing activities....................... (92,762) (64,670) --------- --------- Cash flows from (used in) financing activities: Repayment of debt and capital lease obligation......................... (20,849) (1,567) Net (payments) borrowings under revolving credit facility.......... 42,000 (18,197) Change in cash overdraft............. (337) (341) Other................................ 198 (452) --------- --------- Net cash flows from (used in) financing activities............. 21,012 (20,557) --------- --------- Increase in cash and cash equivalents.... 596 -- Cash and cash equivalents at beginning of period.............................. -- -- --------- --------- Cash and cash equivalents at end of period................................. $ 596 $ -- ========= ========= Supplemental disclosures of cash flow information: Cash paid during the period for: Interest........................... $ 47,293 $ 34,275 ========= ========= Income taxes....................... $ 2,394 $ 2,861 ========= ========= 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, 1999. Certain prior period amounts have been reclassified to conform with the current period presentation. ACQUISITIONS On October 5, 1999, Southern Union and Fall River Gas Company (AMEX: FAL) announced a definitive merger agreement. The agree- ment calls for FAL to merge into Southern Union in a transaction valued at approximately $75 million, including the assumption of debt. If approved, each FAL shareholder will receive Southern Union common stock having a value of $23.50, subject to adjust- ment. The merger will be accounted for using the purchase method. FAL is a natural gas distribution company that serves nearly 48,000 customers in a service area of approximately 50 square miles in southeastern Massachusetts that includes the city of Fall River, and the towns of Somerset, Swansea and Westport. FAL also rents water heaters and conversion burners and sells central heating and air-conditioning systems and water heaters in its service area through a wholly owned subsidiary. Southern Union anticipates having FAL shareholder approval and all regula- tory approvals for the merger in the middle of calendar year 2000. On June 7, 1999, Southern Union and Pennsylvania Enterprises, Inc. (NYSE: PNT) announced a definitive merger agreement. The agreement calls for PNT to merge into Southern Union in a trans- action valued at approximately $500 million, including assumption of debt of approximately $150 million. If approved, each PNT shareholder will receive Southern Union common stock having a value of $32.00, plus $3.00 in cash, subject to adjustment. The merger will be accounted for using the purchase method. PNT is a multifaceted energy company headquartered in Wilkes-Barre, Pennsylvania with natural gas distribution being its primary business. PNT's principal subsidiary, PG Energy, together with Honesdale Gas Company serve more than 152,000 gas customers in northeastern and central Pennsylvania. In addition, PNT markets electricity to more than 20,000 customers through PG Energy Power Plus. Southern Union and PNT both received their respective shareholder approval of the merger on October 19, 1999. The Company has also received all necessary state regulatory approvals for this merger. WRITE-OFF OF REGULATORY ASSETS During 1998, the Company was impacted by pre-tax non-cash write- offs totaling $8,163,000 of previously recorded regulatory assets. Pursuant to a 1989 Missouri Public Service Commission (MPSC) order, Missouri Gas Energy, a division of the Company, is engaged in a major gas safety program. In connection with this program, the MPSC issued an accounting authority order in 1994 which authorized Missouri Gas Energy to defer carrying costs at a rate of 10.54%. The MPSC rate order of January 22, 1997, how- ever, retroactively reduced the 10.54% carrying cost rate used since early 1994 to an Allowance for Funds Used During Construc- tion (AFUDC) rate of approximately 6%. The Company filed an appeal of this portion of the rate order in the Missouri State Court of Appeals, Western District, and on August 18, 1998 was notified that the appeal was denied. This resulted in a one-time non-cash write-off of SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS $5,942,000 by the Company of previously deferred costs in its fiscal year ended June 30, 1998. On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision to grant a rate increase which, among other things, disallowed certain previously recorded deferred costs associated with the rate filing, requiring an additional pre-tax non-cash write-off of $2,221,000. The Company recorded this charge to earnings in its fiscal year ended June 30, 1998. See Utility Regulation and Rates. EARNINGS PER SHARE Average shares outstanding for basic earnings per share were 30,925,242 and 31,098,672 for the three-month period ended September 30, 1999 and 1998, respectively, and 31,098,547 and 30,751,737 for the twelve-month period ended September 30, 1999 and 1998, respectively. Diluted earnings per share includes average shares outstanding as well as common stock equivalents from stock options and warrants. Common stock equivalents were nil for both three-month periods ended September 30, 1999 and 1998, respectively, and 1,460,438 and 1,235,320 for the twelve- month period ended September 30, 1999 and 1998, respectively. At September 30, 1999, 324,264 shares of common stock were held by various rabbi trusts for certain of the Company's benefit plans. PREFERRED SECURITIES OF SUBSIDIARY TRUST On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust Originated Preferred Securities (Pre- ferred Securities). In connection with the Subsidiary Trust's issuance of the Preferred Securities and the related purchase by Southern Union of all of the Subsidiary Trust's common securities (Common Securities), Southern Union issued to the Subsidiary Trust $103,092,800 principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025 (Subordinated Notes). The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest and other payment dates on the Subordinated Notes correspond to the distribution and other payment dates on the Preferred Securities and the Common Securities. Under certain circumstances, the Subordinated Notes may be distributed to holders of the Preferred Securities and holders of the Common Securities in liquidation of the Subsidiary Trust. The Sub ordinated Notes are redeemable at the option of the Company on or after May 17, 2000, at a redemption price of $25 per Subordinated Note plus accrued and unpaid interest. The Preferred Securities and the Common Securities will be redeemed on a pro rata basis to the same extent as the Subordinated Notes are repaid, at $25 per Preferred Security and Common Security plus accumulated and unpaid distributions. Southern Union's obligations under the Subordinated Notes and related agreements, taken together, con- stitute a full and unconditional guarantee by Southern Union of payments due on the Preferred Securities. As of September 30, 1999 and 1998, 4,000,000 shares of Preferred Securities were out- standing. DEBT AND CAPITAL LEASE September 30, June 30, ------------- -------- 1999 1999 ------------- -------- (thousands of dollars) 7.60% Senior notes due 2024.......... $364,515 $364,515 Capital lease and other.............. 27,987 28,482 -------- -------- Total long-term debt and capital lease.............................. $392,502 $392,997 ======== ======== On September 22, 199, the Company filed a $400,000,000 shelf registration to issue senior or subordinated debt securities in the future. See Management's Discussion and Analysis of Finan- cial Condition and Results of Operations -- Financial Condition. Credit Facilities The Company has availability under two - - ----------------- revolving credit facilities (Revolving Credit Facilities) under- written by a syndicate of banks. Of the Revolving Credit Facilities, $40,000,000 is available under a short-term facility which expires June 29, 2000, while $60,000,000 is available under a long-term facility which expires June 30, SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 2002. The Company has additional availability under uncommitted line of credit facilities (Uncommitted Facilities) with various banks. Covenants under the Revolving Credit Facilities allow for up to $35,000,000 of borrowings under Uncommitted Facilities at any one time. Borrowings under the facilities are available for Southern Union's working capital, letter of credit requirements and other general corporate purposes. A balance of $84,103,000 was outstanding under the facilities at September 30, 1999. Capital Lease The Company completed the installation of an - - ------------- Automated Meter Reading (AMR) system at Missouri Gas Energy during the first quarter of fiscal year 1999. The installation of the AMR system involved an investment of approximately $30,000,000 which is accounted for as a capital lease obligation. As of September 30, 1999, the capital lease obligation out- standing was $26,457,000 with a fixed rate of 5.79%. This system has improved meter reading accuracy and provided electronic accessibility to meters in residential customers' basements, thereby assisting in the reduction of the number of estimated bills. UTILITY REGULATION AND RATES On October 18, 1999, Southern Union Gas filed a $1,696,000 rate increase request for the El Paso service area with the City of El Paso. On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision to grant a $13,300,000 annual increase to revenue effective on September 2, 1998, which is primarily earned volu- metrically. The MPSC rate order reflected a 10.93% return on common equity. The rate order, however, disallowed certain previously recorded deferred costs requiring a non-cash write-off of $2,221,000. The Company recorded this charge to earnings in its fiscal year ended June 30, 1998. On December 8, 1998, the MPSC denied rehearing requests made by all parties other than Missouri Gas Energy and granted a portion of Missouri Gas Energy's rehearing request. The MPSC will conduct further pro- ceedings to take additional evidence on those matters for which it granted Missouri Gas Energy a rehearing. If the MPSC adopts Missouri Gas Energy's positions on rehearing, then Missouri Gas Energy would be authorized an additional $2,200,000 of base revenues increasing the $13,300,000 initially authorized in its August 21, 1998 order to $15,500,000. The MPSC's orders are sub- ject to judicial review and although certain parties have argued for a reduction in Missouri Gas Energy's authorized base revenue increase on judicial review, Missouri Gas Energy expects such arguments to be unsuccessful. On April 13, 1998, Southern Union Gas filed a $2,228,000 request for a rate increase from the city of El Paso, a request the city subsequently denied. On April 21, 1998, the city council of El Paso voted to reduce the Company's rates by $1,570,000 annually and to order a one-time cost of gas refund of $475,000. On May 21, 1998, Southern Union Gas filed with the Railroad Commis- sion of Texas (RRC) an appeal of the city of El Paso's actions to reduce the Company's rates and require a one-time cost of gas refund. On December 21, 1998, the RRC issued its order imple- menting an $884,000 one-time cost of gas refund and a $99,000 base rate reduction. The cost of gas refund was completed in February 1999. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS CONTINGENCIES Southern Union and Western Resources entered into an Environmen- tal Liability Agreement (Environmental Liability Agreement) at the closing of the Missouri Acquisition. Subject to the accuracy of certain representations made by Western Resources in the Missouri Asset Purchase Agreement, the Environmental Liability Agreement provides for a tiered approach to the allocation of substantially all liabilities under environmental laws that may exist or arise with respect to Missouri Gas Energy. At the present time and based upon information available to management, the Company believes that the costs of any remediation efforts that may be required for these sites for which it may ultimately have responsibility will not exceed the aggregate amount subject to substantial sharing by Western Resources. In a letter dated May 10, 1999, the Missouri Department of Natural Resources ("MDNR") sent notice of a planned site inspection/removal site evaluation of the Kansas City Coal Gas Former Manufactured Gas Plant ("FMGP") site. This site (com- prised of two FMGP operations previously owned by two separate companies) is located at East First Street and Campbell in Kansas City, Missouri and is owned by Missouri Gas Energy. A 1988 in- vestigation of the site performed by an Environmental Protection Agency ("EPA") contractor determined that further remedial assessment was not required under the Comprehensive Environmental Response, Compensation and Liability Act of 1980 (CERCLA), as amended by the Superfund Amendments and Reauthorization Act of 1986. The MDNR has stated that the reassessment of the Kansas City coal gas site is part of a statewide effort to identify, evaluate, and prioritize the potential hazards posed by all of Missouri's FMGP sites. During July 1999, the Company sent appli- cations to MDNR submitting the two sites to the agency's Volun- tary Cleanup Program ("VCP"). The sites were accepted into the VCP on August 2, 1999. The Company subsequently sent proposed workplans for the environmental assessment of the sites to the MDNR. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In addition to the 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 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. 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 FMGP and MGP sites will have a material adverse effect on the Company's financial position, results of operations or cash flows. On February 1, 1999, Southern Union submitted a proposal to the Board of Directors of Southwest Gas Corporation (Southwest) to acquire all of Southwest's outstanding common stock for $32.00 per share. Southwest then had a pending merger agreement with ONEOK, Inc. (ONEOK) at $28.50 per share. On February 22, 1999, Southern Union and Southwest both publicly announced Southern Union's proposal, after the Southwest Board of Directors deter- mined that Southern Union's proposal was a Superior Proposal (as defined in the Southwest merger agreement with ONEOK). At that time Southern Union entered into a Confidentiality and Standstill Agreement with Southwest at Southwest's insistence. On April 25, 1999, Southwest's Board of Directors rejected Southern Union's $32.00 per share offer and accepted an amended offer of $30.00 per share from ONEOK. On April 27, 1999, Southern Union increased its offer to $33.50 per share and agreed to pay interest which, together with dividends, would provide Southwest shareholders with a 6% annual rate of return on its $33.50 offer, commencing February 15, 2000, until closing. According to public statements by Southwest, Southern Union's revised proposal has also been rejected by Southwest's Board of Directors. There are three lawsuits pending -- in federal district courts in Arizona, Nevada and Oklahoma -- that relate to activities sur- rounding Southern Union's efforts to acquire Southwest. In addi- tion, there is before the U. S. Court of Appeals for the Tenth Circuit, an appeal by Southern Union of a preliminary injunction entered by the Oklahoma federal district court. On October 11, 1999, Southern Union filed its first amended compliant in the Arizona action to include additional individual defendants and to incorporate additional facts required in the discovery process. Southern Union is vigorously pursuing its claims against Southwest, ONEOK, and certain individual defendants, and is vigorously defending itself against the claims by Southwest and ONEOK. The Company believes that the results of the above-noted Southwest Gas litigation will not have a materially adverse effect on the Company's financial condition. SOUTHERN UNION COMPANY AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS In August 1998, a jury in Edinburg, Texas concluded deliberations on the City of Edinburg's franchise fee lawsuit against PG&E Gas Transmission, Texas Corporation (formerly Valero Energy Corpora- tion (Valero)) and a number of its subsidiaries, as well as former Valero subsidiary Rio Grande Valley Gas Company (RGV) and RGV's successor company, Southern Union Company. The case, based upon events that occurred between 1985-1987, centers on specific contractual language in the 1985 franchise agreement between RGV and the City of Edinburg. Southern Union purchased RGV from Valero in October 1993. The jury awarded the plaintiff damages, against all defendants under several largely overlapping but mutually exclusive claims, totaling approximately $13,000,000. The trial judge subsequently reduced the award to approximately $700,000 against Southern Union and $7,800,000 against Valero and Southern Union together. The Company is pursuing reversal on appeal. The Company believes it will ultimately prevail, and that the outcome of this matter will not have a material adverse impact on the Company's results of operations, financial position or cash flows. Furthermore, the Company has not determined what impact, if any, this jury decision may have on other city franchises in Texas. Southern Union and its subsidiaries are parties to other legal proceedings that management considers to be normal actions to which an enterprise of its size and nature might be subject, and not to be material to the Company's overall business or financial condition, results of operations or cash flows. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The Company's core business is the distribution of natural gas as a public utility through three divisions: Southern Union Gas, Missouri Gas Energy (MGE) and Atlantic Utilities doing business as South Florida Natural Gas (SFNG). 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 operate natural gas pipeline systems, market natural gas to end-users and distribute propane. By providing "one-stop shopping," the Com- pany 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 September 30, 1999 and 1998 - - ---------------------------------------------- The Company recorded a net loss attributable to common stock of $6,100,000 for the three-month period ended September 30, 1999 compared to a net loss of $7,048,000 for the three-month period ended September 30, 1998. Net loss per common share, based on weighted average shares outstanding during the period, was $.20 in 1999 compared with a net loss per common share of $.23 in 1998. Due to the seasonal nature of the gas utility business, the three-month period ending September 30 is typically a loss period. Operating revenues were $84,786,000 for the three-month period ended September 30, 1999, compared with operating revenues of $77,455,000 in 1998. Gas purchase costs for the three-month period ended September 30, 1999 were $39,277,000, compared with $34,674,000 in 1998. 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. Despite a 1% decrease in total gas sales volume from 12,151 MMcf in 1998 to 12,027 MMcf in 1999, operating revenues were favorably impacted by the $13,300,000 annual rate increase granted by the Missouri Public Service Commission (MPSC) to MGE effective September 2, 1998. Gas purchase costs increased 13% due to increases in the average cost of gas from $2.81 per Mcf in 1998 to $3.21 per Mcf in 1999. Changes in the average cost of gas result from seasonal impacts on demands for natural gas and the ensuing competitive pricing within the industry. Net operating margin (operating margin less revenue-related taxes) increased $2,201,000 for the three-month period ended September 30, 1999 compared with the same period in 1998. Net operating margin increased principally as a result of the rate increase granted to MGE in September 1998, discussed above. Additionally gas distribution volumes increased 8% from 1998 to 1999 due to slightly colder weather during 1999. Operating expenses, which include operating, maintenance and general expenses, depreciation and amortization, and taxes other than on income and revenues, were $39,737,000 for the three- month period ended September 30, 1999, a decrease of $234,000, compared with $39,971,000 in 1998. Interest expense was $8,364,000 for the three-month period ended September 30, 1999, compared to $8,740,000 in 1998. Interest expense decreased in 1999 primarily due to a decrease in long- erm debt resulting from the June 1999 repurchase of $20,000,000 in Senior Notes. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Other expense for the three-month period ended September 30, 1999 was $1,157,000 compared to other income of $724,000 in 1998. Other expense for the three-month period ended September 30, 1999 primarily consists of $1,200,000 of costs associated with acqui- sition activities. This amount was offset by $222,000 in net rental income from Lavaca Realty Company ("Lavaca Realty"), the Company's real estate subsidiary. Other income for the three- month period ended September 30, 1998 consists of $340,000 in net rental income from Lavaca Realty and $195,000 related to the deferral of interest and other expenses associated with the Missouri Gas Energy Safety Program. For the three-month period ended September 30, 1999, the federal and state income tax benefit increased $18,000 over the same period in 1998 primarily due to a higher effective tax rate of 39.5% in 1999 compared to 36% in 1998. Twelve Months Ended September 30, 1999 and 1998 - - ----------------------------------------------- The Company recorded net earnings available for common stock of $11,393,000 for the twelve-month period ended September 30, 1999 compared with net earnings of $10,089,000 in 1998. Earnings per diluted share were $.35 in 1999 compared with earnings per diluted share of $.32 in 1998. Operating revenues were $612,562,000 for the twelve-month period ended September 30, 1999, a decrease of 9%, compared with oper- ating revenues of $672,720,000 in 1998. Gas purchase costs for the twelve-month period ended September 30, 1999 were $346,904,000, a decrease of 15%, compared with gas purchase costs of $407,812,000 in 1998. Both operating revenues and gas pur- chase costs were primarily impacted by an 8% decrease in gas sales volume from 115,524 MMcf in 1998 to 105,938 MMcf in 1999. The decrease in sales volume was primarily due to significantly warmer weather throughout the Company's service areas during the twelve-month period ended September 30, 1999. Also contributing to the decrease in operating revenues and gas purchase costs was a 7% decrease in the average cost of gas from $3.50 per Mcf in 1998 to $3.25 per Mcf in 1999 as a result of decreases in average spot market gas prices. Operating revenues were also affected by an 8% decrease in revenue-related taxes. Offsetting these nega- tive factors was the $13,300,000 annual rate increase granted to MGE, as previously discussed. Missouri Gas Energy service territories experienced weather which was 86% of a 30-year measure for the twelve-month period ended September 30, 1999 compared with 90% in 1998. Weather for Southern Union Gas service territories for the twelve-month period ended September 30, 1999 was 74% of a 30-year measure compared with 98% in 1998. About half of the customers served by Southern Union Gas are weather normalized. Operating expenses were $165,816,000 for the twelve-month period ended September 30, 1999, an increase of 2%, compared with oper- ating expenses of $162,932,000 in 1998. The increase is pri- marily a result of a $3,029,000 increase in depreciation and amortization as a result of including certain costs into rate base that were previously deferred. Interest expense was $35,622,000 for the twelve-month period ended September 30, 1999 compared to $35,174,000 in 1998. The increase in interest expense is primarily due to increased bor- rowings under the various financing facilities. See "Debt and Capital Lease" in the Notes to the Consolidated Financial State- ments for the period ended September 30, 1999 included herein. During fiscal year 1998, the Company was impacted by pre-tax non- cash write-offs totaling $8,163,000 of previously recorded regu- latory assets. On August 18, 1998, the Missouri Court of Appeals denied the previously disclosed appeal by the Company of the MPSC's January 1997 Rate Order granted to MGE. Because of this decision, the Company recorded a one-time non-cash write-off of $5,942,000 of deferred costs recorded since 1994. On August 21, 1998, the MPSC also granted MGE a rate increase which, among other things, disallowed certain previously recorded deferred costs requiring an additional pre-tax non-cash write-off of $2,221,000. See "Write-Off SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS of Regulatory Assets" and "Contingencies" in the Notes to the Consolidated Financial Statements for the period ended September 30, 1999 included herein. Other expense for the twelve-month period ended September 30, 1999 was $3,695,000 compared to other income of $3,027,000 in 1998. Other expense for the twelve-month period ended September 30, 1999 included: $5,039,000 of costs associated with various acquisition efforts which was partially offset by net rental income of Lavaca Realty of $1,331,000 and $457,000 in deferral of interest and other expenses associated with the MGE Safety Program. Other income for the twelve-month period ended September 30, 1998 included: $1,589,000 in deferral of interest and other expenses associated with the MGE Safety Program and net rental income of Lavaca Realty of $1,193,000. For the twelve-month period ended September 30, 1999, federal and state income taxes increased $334,000 over the same period in 1998 due to an increase in pre-tax earnings as discussed above. The Company's consolidated federal and state effective income tax rate was 38% and 40% for the twelve-month period ended September 30, 1999 and 1998, 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 domestic gas utility operations for the three- and twelve-month periods ended September 30, 1999 and 1998: Three Months Ended Twelve Months Ended September 30, September 30, 1999 1998 1999 1998 -------- -------- -------- -------- Average number of gas sales customers served: Residential......... 897,281 880,018 899,968 885,363 Commercial.......... 87,375 85,953 88,788 88,152 Industrial and irrigation......... 574 578 571 565 Public authorities and other.......... 2,845 2,801 2,860 2,792 Pipeline and marketing.......... 235 229 236 232 -------- -------- -------- -------- Total average customers served. 988,310 969,579 992,423 977,104 ======== ======== ======== ======== Gas sales in millions of cubic feet (MMcf) Residential......... 4,687 4,590 57,215 64,129 Commercial.......... 2,847 2,738 25,649 28,119 Industrial and irrigation......... 326 414 1,370 1,656 Public authorities and other.......... 255 233 2,287 2,740 Pipeline and marketing.......... 3,143 3,960 18,486 18,925 -------- -------- -------- -------- Gas sales billed.. 11,258 11,935 105,007 115,569 Net change in unbilled gas sales. 769 216 931 (45) -------- -------- -------- -------- Total gas sales... 12,027 12,151 105,938 115,524 ======== ======== ======== ======== Gas sales revenues (thousands of dollars): Residential......... $ 44,290 $ 41,577 $369,084 $409,227 Commercial.......... 16,836 15,287 142,417 159,816 Industrial and irrigation......... 1,591 1,687 6,475 7,795 Public authorities and other.......... 1,159 935 8,752 11,139 Pipeline and marketing.......... 8,731 9,427 43,218 46,403 -------- -------- -------- -------- Gas revenues billed........... 72,607 68,913 569,946 634,380 Net change in unbilled gas sales revenues........... 4,571 1,242 5,706 195 -------- -------- -------- -------- Total gas sales revenues......... $ 77,178 $ 70,155 $575,652 $634,576 ======== ======== ======== ======== Gas sales margin (thousands of dollars)............. $ 34,557 $ 32,598 $198,586 $194,731 ======== ======== ======== ======== Gas sales revenue per thousand cubic feet (Mcf) billed: Residential......... $ 9.450 $ 9.058 $ 6.451 $ 6.381 Commercial.......... 5.913 5.580 5.553 5.684 Industrial and irrigation......... 4.875 4.075 4.726 4.707 Public authorities and other.......... 4.554 4.013 3.826 4.065 Pipeline and marketing.......... 2.778 2.381 2.338 2.452 Weather: Degree days: Southern Union Gas service territories........ 3 0 1,580 2,119 Missouri Gas Energy service territories........ 92 8 4,522 4,708 30-year measure: Southern Union Gas service territories........ 5 5 2,134 2,152 Missouri Gas Energy service territories........ 59 59 5,246 5,243 Gas transported in millions of cubic feet (MMcf).......... 12,603 12,374 55,921 55,966 Gas transportation revenues (thousands of dollars).......... $ 4,372 $ 3,776 $ 20,752 $ 19,591 - - ------------------------- The above information does not include the Company's 43% equity ownership in a natural gas distribution company serving 19,500 customers in 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 credit facilities to provide funding for its seasonal working capital, continuing construction and maintenance programs and operational require- ments. The principal source of funds during the three-month period ended September 30, 1999 was $63,100,000 borrowed under the Company's credit facilities. This provided funds for additions to property, plant and equipment of $20,418,000, operating outflows of $30,669,000 and other seasonal working capital needs of the Company. The effective interest rate under the Company's current debt structure is 7.69% (including interest and the amortization of debt issuance costs and redemption premiums on refinanced debt). The Company has availability under two revolving credit facili- ties (Revolving Credit Facilities) underwritten by a syndicate of banks. Of the Revolving Credit Facilities, $40,000,000 is available under a short-term facility which expires June 29, 2000, while $60,000,000 is available under a long-term facility which expires June 30, 2002. The Company has additional avail- ability under uncommitted line of credit facilities (Uncommitted Facilities) with various banks. Covenants under the Revolving Credit Facilities allow for up to $35,000,000 of borrowings under Uncommitted Facilities at any one time. Borrowings under the facilities are available for Southern Union's working capital, letter of credit requirements and other general corporate pur- poses. A balance of $84,103,000 was outstanding under the facilities at September 30, 1999. Concurrent with the closing of the Pennsylvania Enterprises, Inc. (PNT) merger, the Company intends to issue approximately $350,000,000 of Senior Notes which will be used to (i) fund the cash portion of the consideration to be paid to the PNT share- holders; (ii) refinance certain debt of PNT; and (iii) repay outstanding borrowings under the Company's various credit facili- ties. These Senior Notes will be senior unsecured obligations and will rank equally in right of payment with each other and with the Company's other unsecured and unsubordinated obliga- tions, including the 7.60% Senior Notes due 2024. The Company will retain its borrowing availability under its Revolving Credit Facilities, as discussed above. Borrowing under these credit facilities will continue to be used to provide funding for the seasonal working capital needs of the Company. Internally-generated funds from operations will be used princi- pally for the Company's ongoing construction and maintenance programs and operational needs and may also be used periodically to reduce outstanding debt. From time to time, the Company may also repurchase shares of common stock in the open market in order to minimize any adverse effect from potential selling activity that may result from the increase in public float of its common stock subsequent to the PNT merger. SOUTHERN UNION COMPANY AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS YEAR 2000 The Company is currently winding up its efforts to address the Year 2000 problem and, as of September 30, 1999, it announced that its mission-critical systems that provide natural gas ser- vices are ready for the Year 2000. The Year 2000 problem is the inability of computer application software programs to distin- guish between the year 1900 and 2000 due to a commonly-used pro- gramming convention. Unless such programs are modified or replaced prior to 2000, calculations and interpretations based on date-based arithmetic or logical operations performed by such programs may be incorrect. Management's plan addressing the impact of the Year 2000 issue on the Company focuses on the following areas: application systems, process control systems (embedded chips), technology infrastruc- ture, physical infrastructure, and third party business partners and suppliers with which the Company has significant relation- ships. Management's analysis and review of these areas is com- prised primarily of five phases: developing an inventory of hardware, software and embedded chips; assessing the degree to which each area is currently Year 2000 ready; performing renovations and repairs as needed to attain Year 2000 readiness; testing to ensure Year 2000 readiness; and developing a con- tingency plan if repair and renovation efforts are either unsuc- cessful or untimely. Management has completed the inventory, assessment and testing phases regarding application systems, process control systems and technology infrastructure, and is performing renovations and repairs in each of these categories. The Company's renovation and repair efforts are substantially complete. Validation and confirmation testing of affected areas will continue through cal- endar year 1999. The review of critical business partners, gas transporters and suppliers is in the assessment stage and the Company will continue to confirm the readiness of these third parties through calendar year 1999. Costs incurred to date have primarily consisted of labor from the redeployment of existing information technology, legal and operational resources. The Company has incurred costs to date on this project of approxi- mately $2,000,000. The Company expects to spend approximately $4,500,000 for these Year 2000 readiness efforts. Included in this estimate are equipment leasing expenses of approximately $1,500,000 that will be incurred over the life of the equipment. Also included in this estimate are costs associated with contin- gency planning, software licensing and consulting expenses that will be incurred prior to the end of 1999. To the extent that such costs are incurred in Year 2000 readiness efforts, the Com- pany will attempt recovery for such costs through regulatory relief. During the past several years the Company has replaced most of its financial and operating software programs and Year 2000 testing has established that these programs are now Year 2000 ready. These new programs have significantly reduced the costs the Company has incurred to become Year 2000 ready. Addi- tionally, the Company has developed a contingency plan in the event that supplier or internal operational failures do occur and that plan is being implemented throughout the Company. The costs associated with this effort are being evaluated and cannot yet be determined. Although the Company does not presently anticipate a material business interruption as a result of the Year 2000, the worst case scenario if all of the Company's Year 2000 efforts failed, including the failure of third party providers to deliver services, could result in daily lost revenues of approximately $3,200,000. This estimate is based on historical revenues recog- nized in the months of January, February and March. CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION This Management's Discussion and Analysis of Results of Opera- tions and Financial Condition and other sections of this Form 10-Q contain forward-looking statements that are based on current expectations, estimates and projections about the industry in which the Company operates, management's beliefs and assumptions made by management. Words such as "expects," "anticipates," "intends," "plans," "believes," "seeks," "estimates," variations of such words and similar expressions are intended to identify such forward-looking statements. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions, which are difficult to predict and many of which are outside the Company's control. Therefore, actual outcomes and results may differ materially from what is expressed or forecasted in such forward-looking statements. The Company undertakes no obligation to update publicly any forward- looking statements, whether as a result of new information, future events or otherwise. Readers are cautioned not to put undue reliance on such forward-looking statements. Stockholders may review the Company's reports filed in the future with the Securities and Exchange Commission for more current descriptions of developments that could cause actual results to differ materially from such forward-looking statements. Factors that could cause or contribute to actual results dif- fering materially from such forward-looking statements include the following: cost of gas; gas sales volumes; weather condi- tions in the Company's service territories; the achievement of operating efficiencies and the purchases and implementation of new technologies for attaining such efficiencies; impact of rela- tions with labor unions of bargaining-unit employees; the receipt of timely and adequate rate relief; the outcome of pending and future litigation; governmental regulations and proceedings affecting or involving the Company; the impact of any Year 2000 disruption; and the nature and impact of any extraordinary trans- actions such as any acquisition or divestiture of a business unit or any assets. These are representative of the factors that could affect the outcome of the forward-looking statements. In addition, such statements could be affected by general industry and market conditions, and general economic conditions, including interest rate fluctuations, federal, state and local laws and regulations affecting the retail gas industry or the energy industry generally, and other factors. SOUTHERN UNION COMPANY AND SUBSIDIARIES RESULTS OF VOTES OF SECURITY HOLDERS Southern Union held its Annual Meeting of Stockholders on October 19, 1999. The following matters were submitted for a vote and approved by Southern Union's security holders: (i) the re-election of three persons to serve as the Class III directors until the 2002 Annual Meeting of Stockholders or until their successors are duly elected and qualified; (ii) approval of (a) the Agreement of Merger between the Company and Pennsylvania Enterprises, Inc., a Pennsylvania corporation, dated as of June 7, 1999 whereby PNT will merge with and into the Company, with the Company being the surviving corporation and (b) the issuance of shares of Southern Union common stock pursuant to the merger agreement; (iii) approval of the following amendments to the Company's Restated Certificate of Incorporation: (a) to increase the number of authorized shares of Southern Union common stock from 50,000,000 to 200,000,000; (b) to grant the Board the authority to issue 6,000,000 shares of preferred stock in series the Board deems appropriate and to establish from time to time the number of shares to be included in each such series and to fix the designation, powers, preferences and rights of the shares of each such series and the qualifications, limitations or re- strictions thereof; and (c) to repeal the rights, powers privileges and preferences of Southern Union's currently autho- rized cumulative preferred stock; (iv) approval of an amendment to the Company's Restated Certificate of Incorporation to increase the maximum number of directors from 12 to 15; and (v) approval of an additional 3,000,000 shares of common stock to be eligible for grant under the Southern Union 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 ---------- ------- -------- Re-election of nominees as Class III Directors: George L. Lindemann......... 27,515,630 -- 197,643 Peter H. Kelley............. 27,513,277 -- 197,643 Dan K. Wassong.............. 27,515,684 -- 197,643 Proposal to approve PNT merger and common stock issuance..................... 20,464,047 6,140 614,249 Proposal to approve the Com- pany's Restated Certificate of Incorporation to increase authorized shares of Southern Union common stock, to allow ability to issue preferred stock and to repeal rights of currently authorized cumulative preferred stock.............. 20,344,764 11,246 738,427 Proposal to approve an amend- ment to the Company's Restated Certificate of Incorporation to increase the maximum number of directors from 12 to 15...... 21,020,790 13,798 49,847 Proposal to approve additional 3,000,000 shares of common stock to be eligible for grant under the Southern Union 1992 Long-Term Stock Incentive Plan............... 19,601,183 390,740 1,092,514 SOUTHERN UNION COMPANY AND SUBSIDIARIES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SOUTHERN UNION COMPANY ---------------------- (Registrant) Date October 21, 1999 By RONALD J. ENDRES ------------------ Ronald J. Endres Executive Vice President and Chief Financial Officer Date October 21, 1999 By DAVID J. KVAPIL ----------------- David J. Kvapil Senior Vice President and Corporate Controller (Principal Accounting Officer) EXHIBIT 27 FINANCIAL DATA SCHEDULE EX-27 2
UT JUN-30-1999 SEP-30-1999 3-MOS PER-BOOK $ 886,869,000 $ 22,765,000 $ 84,672,000 $ 97,425,000 $ 5,899,000 $ 1,097,630,000 $ 31,290,000 $ 277,012,000 $ (6,100,000) $ 294,723,000 $ 0 $ 100,000,000 $ 390,413,000 $ 84,103,000 $ 0 $ 0 $ 2,089,000 $ 0 $ 0 $ 0 $ 226,302,000 $ 1,097,630,000 $ 84,786,000 $ (3,983,000) $ 25,264,000 $ 39,737,000 $ 1,808,000 $ (1,157,000) $ 2,264,000 $ 8,364,000 $ (6,100,000) $ 0 $ (6,100,000) $ 0 $ 0 $ (30,669,000) $ (.20) $ (.20)
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