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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- - ---
SECURITIES EXCHANGE ACT OF 1934
OR
X TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- - ---
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1994
Commission File No. 1-6407
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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) 477-5981
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
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Common Stock, par American Stock Exchange
value $1 per share
Securities Registered Pursuant to Section 12(g) of the Act: None
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
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Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K is not contained herein,
and will not be contained, to the best of registrant's knowledge,
in definitive proxy or information statements incorporated by
reference in Part III of this Form 10-K or any amendments by this
Form 10-K. X
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The aggregate market value of the voting stock held by non-
affiliates of the registrant on September 16, 1994, was
approximately $123,197,968. The number of shares of the
registrant's Common Stock outstanding on September 16, 1994 was
11,501,794.
DOCUMENTS INCORPORATED BY REFERENCE
None.
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PART I
ITEM 1. Business.
Introduction
Southern Union Company ("Southern Union" and together with its
subsidiaries, the "Company") was incorporated under the laws of
the State of Delaware in 1932. The Company's principal line of
business is the distribution of natural gas as a public utility
through Southern Union Gas Company ("Southern Union Gas") and
Missouri Gas Energy, each of which is a division of the Company.
Southern Union Gas serves approximately 484,000 residential,
commercial, industrial, agricultural and other customers in the
States of Texas (including the cities of Austin, Brownsville, El
Paso, Galveston and Port Arthur) and Oklahoma. Missouri Gas
Energy, acquired on January 31, 1994, serves approximately
463,000 customers in central and western Missouri (including the
cities of Kansas City, St. Joseph, Joplin and Monett). See
"Missouri Acquisition."
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, sell natural gas as a vehicular fuel, convert
vehicles to operate on natural gas, operate intrastate and
interstate natural gas pipeline systems, 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' particular energy needs, which encompass
substantially all of the natural gas distribution and sales
businesses from natural gas sales to specialized energy
consulting services. A subsidiary also holds investments in real
estate which are used primarily in the Company's utility
business. See "Company Operations."
The Company is a sales and market-driven energy company whose
management is committed to achieving profitable growth of its
natural gas energy businesses in an increasingly competitive
business environment. Management's strategies for achieving
these objectives principally consist of: (i) promoting new sales
opportunities and markets for natural gas; (ii) enhancing
financial and operating performance; and (iii) expanding the
Company through developing existing systems and selectively
acquiring new systems. Management develops and continually
evaluates these strategies and the Company's implementation of
them by applying their experience and expertise in analyzing the
energy industry, technological advances, market opportunities and
general business trends. Each of these strategies, as
implemented throughout the Company's businesses, reflects the
Company's commitment to its core natural gas utility business.
Central to all of the Company's businesses and strategies is the
sale and transportation of natural gas.
The Company has a goal of selected growth and expansion,
primarily in the natural gas industry. To that extent, the
Company intends to consider, when appropriate, and if financially
practicable to pursue, the acquisition of other natural gas
distribution or transmission businesses. The nature and location
of any such properties, the structure of any such acquisitions,
and the method of financing any such expansion or growth will be
determined by management and the Southern Union Board of
Directors.
Missouri Acquisition
On July 9, 1993, Southern Union entered into an Agreement for the
Purchase of Assets (the "Missouri Asset Purchase Agreement") with
Western Resources, Inc. ("Western Resources"), pursuant to which
Southern Union purchased certain Missouri natural gas
distribution operations (the "Missouri Acquisition") which
Southern Union operates as Missouri Gas Energy. The acquisition
closed on January 31, 1994 and has been accounted for as a
purchase. Earnings from operations of Missouri Gas Energy have
been included in the Company's statement of consolidated
operations since February 1, 1994.
At closing, Southern Union paid approximately $400,300,000 in
cash for the Missouri Acquisition. The final determination of
the purchase price and all prorations and adjustments between
Southern Union and Western Resources have not been resolved to-
date. Pursuant to the terms of the Missouri Asset Purchase
Agreement, Southern Union is seeking arbitration with respect to
approximately $19,100,000 of adjustments in dispute.
Accordingly, Southern Union is seeking a refund of approximately
$12,000,000 while Western Resources is demanding an additional
payment of approximately $7,100,000. There can be no assurance
that the Company will be successful in resolving any or all of such
adjustments in its favor. See "Contingencies" in the Notes to
the Consolidated Financial Statements for the year ended June 30,
1994. The Missouri Acquisition, among other things, was financed
through the sale on January 31, 1994 of $475,000,000 of 7.60%
Senior Notes due 2024 (the "Senior Debt Securities") and net
proceeds from the sale of a $50,000,000 Subscription Rights
Offering of Common Stock (the "Rights Offering") completed on
December 31, 1993. See "Management's Discussion and Analysis of
Financial Conditions and Results of Operations ("MD&A") -
Liquidity and Capital Resources" and "Long-Term Debt" in the
Notes to the Consolidated Financial Statements for the year ended
June 30, 1994.
As a result of the Missouri Acquisition, the Company nearly
doubled the number of customers served by its natural gas
distribution system and became one of the top 15 gas utilities in
the United States, as measured by number of customers. In
addition, the Missouri Acquisition lessens the sensitivity of the
Company's operations to weather risk and local economic
conditions by diversifying operations into a different geographic
area. Missouri Gas Energy, a division of Southern Union, is
headquartered in Kansas City, Missouri.
The approval of the Missouri Acquisition by the Missouri Public
Service Commission ("MPSC") was subject to the terms of a
stipulation and settlement agreement (the "MPSC Stipulation")
among Southern Union, Western Resources, the MPSC staff and all
intervenors in the MPSC proceeding. Among other things, the MPSC
Stipulation: (i) provides that the Company attain a total debt
to total capital ratio that does not exceed Standard and Poor's
Corporation's Utility Financial Benchmark ratio for the lowest
investment grade investor-owned natural gas distribution company
(which, at December 31, 1993, the most recent date available, was
approximately 58%) in order for Missouri Gas Energy to implement
any general rate increase; (ii) prohibits Missouri Gas Energy
from implementing a general rate increase in Missouri before
January 31, 1997 except in certain unusual events; (iii) required
Western Resources to contribute an additional $9,000,000 to
Missouri Gas Energy's employees' and retirees' qualified defined
benefit plans transferred to the Company; (iv) requires the
Company to contribute an additional $3,000,000 to the Company's
qualified defined benefit plan applicable to Missouri Gas
Energy's employees and retirees; and (v) requires Missouri Gas
Energy to reduce rate base by $30,000,000 (to be amortized over a
ten-year period on a straight-line basis) to compensate rate
payers for rate base reductions that were eliminated as a result
of the Missouri Acquisition.
Southern Union assumed certain liabilities of Western Resources
with respect to Missouri Gas Energy, including certain
liabilities arising from certain specified contracts assigned to
Southern Union at closing, including gas supply and
transportation contracts, office equipment leases and real estate
leases, liabilities arising from certain contracts entered into
by Western Resources in the ordinary course of business, certain
liabilities that have arisen or may arise from the operation of
Missouri Gas Energy, and liabilities for certain accounts payable
of Western Resources pertaining to Missouri Gas Energy.
Southern Union and Western Resources also entered into an
Environmental Liability Agreement. Subject to the accuracy of
certain representations made by Western Resources in the Missouri
Asset Purchase Agreement, the 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. The agreement contemplates Southern Union
first seeking reimbursement from other potentially responsible
parties, or recovery of such costs under insurance or through
rates charged to customers. To the extent certain environmental
liabilities are discovered by Southern Union prior to January 31,
1996, and are not so reimbursed or recovered, Southern Union will
be responsible for the first $3,000,000, if any, of out-of-pocket
costs and expenses incurred to respond to and remediate any such
environmental claim. Thereafter, Western Resources would share
one-half of the next $15,000,000 of any such costs and expenses,
and Southern Union would be solely liable for any such costs and
expenses in excess of $18,000,000. The Company believes that it
will be able to obtain substantial reimbursement or recovery for
any such environmental liabilities from other potentially
responsible third parties, under insurance or through rates
charged to customers.
Pursuant to the terms of an Employee Agreement with Western
Resources entered into on July 9, 1993, after the closing of the
Missouri Acquisition, Southern Union employed certain employees
of Western Resources involved in the operation of Missouri Gas
Energy ("Continuing Employees"). Under the terms of the Employee
Agreement, the assets and liabilities under Western Resources'
qualified defined benefit plans attributable to Continuing
Employees and certain retired employees of Missouri Gas Energy
("Retired Employees") were transferred to a qualified defined
benefit plan of Southern Union that will provide benefits to
Continuing Employees and Retired Employees substantially similar
to those provided for under Western Resources' defined benefit
plans. Southern Union amended its qualified defined benefit plan
to cover the Continuing Employees and Retired Employees and
provide Continuing Employees and Retired Employees with certain
welfare, separation and other benefits and arrangements.
Other Acquisitions and Divestiture
In September 1993, the Company acquired the Rio Grande Valley Gas
Company ("Rio Grande") for approximately $30,500,000 (the "Rio
Grande Acquisition"). Rio Grande serves approximately 74,000
customers in the south Texas counties of Willacy, Cameron and
Hidalgo which includes 32 towns and cities along the Mexico
border, including Harlingen, McAllen and Brownsville (the
southernmost city in the U.S.). The Company initially funded the
purchase with borrowings from its revolving credit facility,
which was subsequently paid down out of the net proceeds from the
sale of the Senior Debt Securities and the Rights Offering. See
MD&A - "Liquidity and Capital Resources."
In July 1993, the Company acquired the natural gas distribution
facilities serving the city of Eagle Pass, Texas (the "Eagle Pass
Acquisition"), for approximately $2,000,000. In May 1993, the
Company acquired the natural gas distribution facilities of Berry
Gas Company (the "Berry Gas Acquisition") which serves the Texas
cities and towns of Nome, Raywood, Hull and Devers for
approximately $274,000. Combined, these operations serve
approximately 4,400 customers.
In February 1993, Southern Union Exploration Company ("SX"), a
wholly owned subsidiary of Southern Union, entered into a
purchase and sale agreement pursuant to which it sold
substantially all of its oil and gas leasehold interests and
associated production for approximately $22,000,000, effective
January 1, 1993. The Company recorded a book loss on the sale of
approximately $4,400,000 as of December 31, 1992. In connection
with the sale, the Company recorded an income tax liability of
approximately $6,960,000 resulting from the recognition of a tax
basis gain of approximately $18,800,000.
During 1992, the Company acquired the natural gas distribution
facilities of Nixon, Texas (the "Nixon Acquisition"). Also in
1992, the Company added approximately 12 miles of pipeline which
transports gas to the community of Sabine Pass, Texas.
Changes in Capital Structure
The incurrence of additional debt and issuance of new equity in
connection with the Missouri Acquisition also significantly
changed the Company's capital structure. The net proceeds from
the sale of the Senior Debt Securities, together with the net
proceeds from the Rights Offering and working capital from
operations, were used to: (i) fund the Missouri Acquisition;
(ii) repay approximately $59,300,000 of borrowings under the
Company's $100,000,000 revolving credit facility, used to fund
the Rio Grande Acquisition and repurchase all outstanding
preferred stock; (iii) refinance, on January 31, 1994,
$10,000,000 aggregate principal amount of 9.45% Senior Notes due
January 31, 2004, and $25,000,000 aggregate principal amount of
10% Senior Notes due January 31, 2012 and the related premium of
approximately $10,400,000 resulting from the early extinguishment
of such notes; (iv) refinance, on March 2, 1994, $50,000,000
aggregate principal amount of 10.5% Sinking Fund Debentures due
May 15, 2017 and the related premium of approximately $3,300,000
resulting from the early extinguishment of such debentures; and
(v) refinance, on May 16, 1994, $20,000,000 aggregate principal
amount of 10 1/8% Notes. See "Business - Other Acquisitions and
Divestiture" and "MD&A - Liquidity and Capital Resources." In
addition, see "Acquisitions and Divestiture - Missouri Gas
Energy" in the Notes to the Consolidated Financial Statements for
the year ended June 30, 1994.
Company Operations
The Company's principal line of business is the distribution of
natural gas through its Southern Union Gas and Missouri Gas
Energy divisions. Southern Union Gas provides service to a
number of communities and rural areas in Texas, including the
municipalities of Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur, as well as several
communities in the Oklahoma panhandle. Missouri Gas Energy
provides service to various cities and communities in central and
western Missouri including Kansas City, St. Joseph, Joplin and
Monett. The Company's gas utility operations are generally
seasonal in nature, with a significant percentage of its annual
revenues and earnings occurring in the traditional heating-load
months.
Western Gas Interstate Company ("WGI"), a wholly owned subsidiary
of Southern Union, operates interstate pipeline systems
principally serving the Company's gas distribution properties in
the El Paso, Texas area and in the Texas and Oklahoma panhandles.
During 1993, WGI received approval in its restructuring and rate
case dockets from the Federal Energy Regulatory Commission
("FERC") which allowed WGI to implement services pursuant to FERC
Order No. 636. WGI is now providing unbundled transportation
service for those gas volumes entering the pipeline's
transportation system. WGI also transported approximately 8,500
million cubic feet (MMcf) to the city of Juarez, Mexico and the
Samalayuca Power Plant in north Mexico in fiscal 1994.
Southern Transmission Company ("Southern"), a wholly owned
subsidiary of Southern Union, owns and operates approximately 123
miles of intrastate pipeline. Southern's system connects the
cities of Lockhart, Luling, Cuero, Shiner, Yoakum, and Gonzales,
Texas, as well as an industrial customer in Port Arthur, Texas.
Southern also owns a transmission line which supplies gas to the
community of Sabine Pass, Texas.
Mercado Gas Services Inc. ("Mercado"), a wholly owned subsidiary
of Southern Union, markets natural gas to large volume customers.
Mercado's sales and purchasing activities are made through short-
term contracts. These contracts and business activities are not
subject to direct rate regulation.
Southern Union Econofuel Company ("Econofuel"), a wholly owned
subsidiary of Southern Union, markets and sells natural gas for
natural gas vehicles ("NGVs") as an alternative fuel to gasoline.
Econofuel owns fuel dispensing equipment in Austin, El Paso, Port
Arthur, and Galveston, Texas, located at independent retail fuel
stations for NGVs. These stations primarily serve fleet and
governmental vehicles which have been manufactured or converted
to operate on natural gas. In 1991, Econofuel and Natural Gas
Development Company, Inc. of California formed a joint venture
that, in 1992, opened the Natural Gas Vehicle Technology Centers,
L.L.P. (the "Tech Center") in Austin, Texas. The Tech Center
converts gasoline-driven vehicles to operate using natural gas.
Southern Union Energy Products and Services Company ("SUEPASCO"),
a wholly owned subsidiary of Southern Union, markets and sells
commercial gas air conditioning, irrigation pumps and other gas-
fired engine-driven applications and related services.
Southern Union Energy International, Inc. ("International"), a
wholly owned subsidiary of Southern Union, seeks to participate
in energy related projects internationally.
In addition, the Company holds investments in commercially
developed real estate as well as undeveloped tracts of land
through Southern Union's wholly owned subsidiary, Lavaca Realty
Company ("Lavaca Realty").
Competition
Southern Union Gas and Missouri Gas Energy are not currently in
significant direct competition with any other distributors of
natural gas to residential and small commercial customers within
their service areas. In recent years, certain large volume
customers, primarily industrial and significant commercial
customers, have had opportunities to access alternative natural
gas supplies and, in some instances, delivery service from
pipeline systems. The Company has offered transportation
arrangements to customers who secure their own gas supplies.
These transportation arrangements, coupled with the efforts of
Southern Union's unregulated marketing subsidiary, Mercado,
enable the Company to provide competitively priced gas service to
these large volume customers. In addition, the Company has
successfully used flexible rate provisions, when needed, to
retain customers who may have access to alternative energy
sources.
As energy providers, Southern Union Gas and Missouri Gas Energy
have historically competed with alternative energy sources,
particularly electricity and also propane, coal, natural gas
liquids and other refined products available in the Company's
service areas. At present rates, the cost of electricity to
residential and commercial customers in the Company's service
areas generally is higher than the effective cost of its natural
gas service. There can be no assurances, however, that future
fluctuations in gas and electric costs will not reduce the cost
advantage of natural gas service.
The following operating cost analysis provides a comparison of
annual gas and electric costs for four typical residential energy
applications in the three largest cities (which represent
approximately 70% of the present customers) served by Southern
Union Gas and Missouri Gas Energy:
Kansas City, MO Austin, Texas El Paso, Texas
--------------- -------------- --------------
Elec- Elec- Elec-
Application Gas(a) tric(b) Gas(a) tric(b) Gas(a) tric(b)
- - ----------- ------ ------- ------ ------- ------ -------
Water Heater(c). . $124 $335 $108 $412 $ 73 $529
Furnace
Gas. . . . . . . $344 -- $160 -- $155 --
Electric
Heat Pump . . . -- $503 -- $206 -- $343
Electric
Resistance. . . -- $656 -- $454 -- $756
- - ----------------------------
(a) Gas prices contain the cost of service rates effective
since October 15, 1993 for Kansas City, Missouri; since
July 1993 for Austin, Texas; and since November 1993 for El
Paso, Texas. The cost of gas rates are based on average
area prices for the year ended June 1994. The combined
service and gas rates amount to $.538 per hundred cubic
feet (Ccf) of gas in Kansas City, Missouri; $.434 per Ccf
of gas in Austin, Texas; and $.294 per Ccf of gas in El
Paso, Texas.
(b) Annual average electric rates were used to calculate
electric water heater costs. Winter average electric rates
were used to calculate furnace costs. The Kansas City
annual average electric rate was $.050 per kilowatt hour
(kwh), and the winter average rate was $.045 per kwh. The
Austin annual average electric rate was $.078 per kwh, and
the winter average rate was $.072 per kwh. The El Paso
annual average electric rate was $.101 per kwh, and the
winter average rate was $.096 per kwh.
(c) Based on Department of Energy first hour rating test
procedure, an average family uses 64.3 gallons of hot water
per day.
The Company believes that similar gas price advantages exist for
commercial and industrial applications. In addition, the cost of
expansion for peak load requirements of electricity in some of
Southern Union Gas' service areas has historically provided
opportunities to allow energy switching to natural gas pursuant
to integrated resource planning techniques. Electric competition
has responded by offering equipment rebates and incentive rates.
Competition between the use of fuel oil and natural gas,
particularly by industrial, electric generation and agricultural
customers, has increased as oil prices have decreased. While
competition between such fuels is generally more intense outside
the Company's service areas, this competition affects the
nationwide market for natural gas. Additionally, the general
economic conditions in its service areas continue to affect
certain customers and market areas, thus impacting the results of
the Company's operations.
Gas Supply
The low cost for natural gas service is attributable to efficient
operations and the Company's ability to contract for natural gas
using favorable mixes of long-term and short-term supply
arrangements and favorable transportation contracts. The Company
has been directly acquiring its gas supplies since the mid-1980s
when interstate pipeline systems opened their systems for
transportation service. The Company has the organization,
personnel and equipment necessary to dispatch and monitor gas
volumes on a daily and even hourly basis to ensure reliable
service to customers.
This experience will be of major significance in the post-FERC
Order 636 procurement environment. FERC Order 636 promotes the
"unbundling" of services offered by interstate pipeline
companies. As a result, gas purchasing and transportation
decisions and associated risks now shift from the pipeline
companies to the gas distributors. The increased demands on
distributors to effectively manage their gas supply in an
environment of volatile gas prices provides an advantage to
distribution companies such as Southern Union that have
demonstrated a history of contracting favorable and efficient gas
supply arrangements in an open market system.
The majority of Southern Union Gas' 1994 gas requirements for
utility operations were delivered under long-term transportation
contracts through five major pipeline companies. All of Missouri
Gas Energy's 1994 gas requirements were delivered under short-
and long-term transportation contracts through three pipeline
companies. These contracts have various expiration dates ranging
from 1995 through 2013. Southern Union Gas also purchases
significant volumes of gas under long-term and short-term
arrangements with suppliers. The amounts of such short-term
purchases are contingent upon price. Southern Union Gas and
Missouri Gas Energy both have firm supply commitments for all
areas that are supplied with gas purchased under short-term
arrangements.
Gas sales and/or transportation contracts with interruption
provisions, whereby large volume users purchase gas with the
understanding that they may be forced to shut down or switch to
alternate sources of energy at times when the gas is needed for
higher priority customers, have been utilized for load management
by Southern Union and the gas industry as a whole for many years.
In addition, during times of special supply problems,
curtailments of deliveries to customers with firm contracts may
be made in accordance with guidelines established by appropriate
federal and state regulatory agencies. There have been no
supply-related curtailments of deliveries to Southern Union Gas
or Missouri Gas Energy utility sales customers during the last
ten years. Missouri Gas Energy also holds contract rights to
over sixteen billion cubic feet ("Bcf") of storage capacity to
assist in meeting peak day demands.
The following table shows, for each of the Company's principal
utility service areas, the percentage of gas utility revenues and
sales volume for the year ended June 30, 1994, the average cost
per Mcf of gas in 1994, and the primary source of supply:
Year Ended June 30, 1994
------------------------
Percent
Percent of Gas
of Gas Utility Average
Utility Sales Cost
Service Area Revenues Volume Per Mcf Primary Source of Supply
- - ------------ -------- ------ ------- ------------------------
Southern Union
Gas
Austin and
South Texas. . 19 17 $ 2.64 Valero Transmission
Company
El Paso and
West Texas . . 19 23 2.48 El Paso Natural Gas
Company
Galveston and
Port Arthur. . 6 5 2.77 Various
Panhandle and
North Texas. . 6 6 3.02 Various
Rio Grande
Valley . . . . 7 4 4.27 Valero Transmission
Company
--- ---
57 55
Missouri Gas
Energy . . . . . 43 45 3.14 Amoco Energy Trading
Corp.
--- ---
100 100
=== ===
The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 1994, the
Company has purchase commitments for nominal quantities of gas at
fixed prices. These fixed price commitments have an annual value
of approximately $2,500,000 for Southern Union Gas and
approximately $18,000,000 for Missouri Gas Energy. At June 30,
1994, the Company also has purchase commitments for certain
quantities of gas at variable, market-based prices. These
market-based priced commitments have an annual value of
approximately $55,000,000 for Southern Union Gas and $97,000,000
for Missouri Gas Energy. The Company's purchase commitments may
extend over a period of several years depending upon when the
required quantity is purchased. The Company has in place
purchase gas tariffs on file in all jurisdictions that provide
for full recovery of its purchase costs.
Utility Regulation and Rates
The Company's rates and operations are subject to regulation by
federal, state and local authorities. In Texas, municipalities
have primary jurisdiction over rates within their respective
incorporated areas. Rates in adjacent environs areas and
appellate matters are the responsibility of the Railroad
Commission of Texas. Rates in Oklahoma are regulated by the
Oklahoma Corporation Commission. In Missouri, rates are
established by the MPSC on a system-wide basis. The FERC and the
Railroad Commission of Texas have jurisdiction over rates,
facilities and services of WGI and Southern, respectively. Each
of these jurisdictions allows the Company varying rates of return
on the Company's assets; however, the Company is not allowed a
return on the additional purchase cost assigned to utility plant
of approximately $167,370,000, as of June 30, 1994, and the
approximately $30,000,000 rate base reduction, described above.
See "Business - Missouri Acquisition" and "Summary of Significant
Accounting Policies - Property, Plant and Equipment" in the Notes
to the Consolidated Financial Statements for the year ended
June 30, 1994.
The Company holds non-exclusive franchises with varying
expiration dates in all incorporated communities where it is
necessary to do so to carry on its business as it is now being
conducted. In the five largest cities in which the Company's
utility customers are located, such franchises expire as follows:
Kansas City, Missouri in 1997; El Paso, Texas in 2000; Austin,
Texas in 2006; and Port Arthur, Texas in 2013. The franchise in
St. Joseph, Missouri is perpetual.
Gas service rates are established by regulatory authorities to
collectively permit utilities to recover operating,
administrative and finance costs, and to earn a return on equity.
Gas costs are billed to customers through purchase gas adjustment
clauses which permit the Company to adjust its sales price as the
cost of purchased gas changes. The appropriate regulatory
authority must receive notice of such adjustments prior to
billing implementation. This is important because the cost of
natural gas accounts for a significant portion of the Company's
total expenses.
The Company must support any service rate changes to its
regulators using a historic test year of operating results
adjusted to normal conditions and for any known and measurable
revenue or expense changes. Because the rate regulatory process
has certain inherent time delays, rate orders may not reflect the
operating costs at the time new rates are put into effect.
The monthly customer bill contains a fixed service charge, a
usage charge for service to deliver gas, and a charge for the
amount of natural gas used. While the monthly fixed charge
provides an even revenue stream, the usage charge increases the
Company's annual revenue and earnings in the traditional heating
load months when usage of natural gas increases. The majority of
the Company's rate increases in Texas and Oklahoma in recent
years have been reflected in increased monthly fixed charges
which help stabilize earnings. Weather normalization clauses,
now in place in Austin and three other service areas in Texas,
also help stabilize earnings.
On February 10, 1993, the Company's South Texas service area
received an annualized rate increase of $777,000. On July 1,
1993, rates for Austin were changed to provide: (i) an
approximate $1,700,000 base revenue increase; (ii) new and
increased fees that add approximately $250,000 annually; and
(iii) weather normalization clause revisions. On October 15,
1993, Missouri Gas Energy's rates increased by $9,750,000
annually. See "Business - Missouri Acquisition." On November 1,
1993, El Paso rates changed to provide an approximate revenue
increase of $463,000.
The following table summarizes annualized rate increases that
have been recently granted:
1993 1992
-------- --------
(thousands of dollars)
Southern Union Gas
Austin, Texas. . . . . . . . . . . . $ 1,950 --
El Paso, Texas . . . . . . . . . . . 463 $ 1,741
All other 981 1,001
------- -------
3,394 2,742
Missouri Gas Energy 9,750 7,300
------- -------
$13,144 $10,042
======= =======
During the six-month period ended June 30, 1994, the Company did
not file for any rate increases in any of its service areas other
than several annual cost of service adjustments. In addition to
the regulation of its utility and pipeline businesses, the
Company is affected by numerous other regulatory controls,
including, among others, pipeline safety requirements of the
U. S. Department of Transportation, safety regulations under the
Occupational Safety and Health Act, and various state and federal
environmental statutes and regulations. The Company believes
that its operations are in compliance with applicable safety and
environmental statutes and regulations.
Statistics of Gas Utility and Related Operations
The following table provides by division and region the number of
gas utility customers served as of:
June 30, December 31
-------------------
1994* 1993 1992
-------- -------- --------
Southern Union Gas:
Austin and South Texas. . . . 153,757 153,096 149,896
El Paso and West Texas. . . . 168,350 168,361 165,937
Galveston and Port Arthur . . 52,329 52,953 52,127
Panhandle and North Texas . . 31,652 32,821 32,874
Rio Grande Valley
(including Eagle Pass). . . 77,832 79,616 --
------- ------- -------
483,920 486,847 400,834
------- ------- -------
Missouri Gas Energy:
Kansas City, Missouri
Metropolitan Area . . . . . 362,147 -- --
St. Joseph, Joplin, Monett
and others 100,732 -- --
------- ------- -------
462,879 -- --
------- ------- -------
Total 946,799 486,847 400,834
======= ======= =======
- - ----------------------------
* Customer levels are generally lower outside the traditional
heating season period.
Southern Union Gas, Mercado, WGI, and Southern. The following
- - ----------------------------------------------
table shows certain operating statistics of the gas distribution,
marketing and transmission operations in Texas and Oklahoma:
Year Ended
----------------------------
June 30, December 31,
------------------
1994 1993 1992
-------- -------- --------
Average number of gas
sales customers served (a):
Residential. . . . . . . . . . . 432,474 391,154 365,187
Commercial . . . . . . . . . . . 28,593 26,814 25,853
Industrial and irrigation. . . . 722 774 796
Public authorities and other . . 2,522 2,309 2,206
Pipeline and marketing . . . . . 273 182 157
------- ------- -------
Total average customers
served. . . . . . . . . . . . 464,584 421,233 394,199
======= ======= =======
Gas sales in millions of
cubic feet (MMcf):
Residential. . . . . . . . . . . 23,852 22,171 21,356
Commercial . . . . . . . . . . . 10,173 9,545 9,059
Industrial and irrigation. . . . 2,216 2,615 2,881
Public authorities and other . . 2,959 2,938 3,002
Pipeline and marketing . . . . . 7,482 6,934 14,849
------- ------- -------
Gas sales billed . . . . . . . 46,682 44,203 51,147
Net change in unbilled gas
sales. . . . . . . . . . . . . . (18) 656 (43)
------- ------- -------
Total gas sales. . . . . . . . 46,664 44,859 51,104
======= ======= =======
Gas sales revenues
(thousands of dollars):
Residential. . . . . . . . . . . $137,135 $117,954 $102,028
Commercial . . . . . . . . . . . 47,020 41,219 34,261
Industrial and irrigation. . . . 8,848 9,206 8,655
Public authorities and other . . 10,943 10,592 9,437
Pipeline and marketing . . . . . 17,759 16,247 28,793
-------- -------- --------
Gas revenues billed. . . . . . 221,705 195,218 183,174
Net change in unbilled gas
sales revenues . . . . . . . . . (2,018) 4,141 214
-------- -------- --------
Total gas sales revenues . . . $219,687 $199,359 $183,388
======== ======== ========
Gas sales margin
(thousands of dollars) (b):. . . . $ 95,136 $ 88,975 $ 80,470
======== ======== ========
Gas sales revenue per thousand
cubic feet (Mcf) billed (c):
Residential. . . . . . . . . . . $ 5.750 $ 5.320 $ 4.777
Commercial . . . . . . . . . . . 4.622 4.318 3.782
Industrial and irrigation. . . . 3.992 3.520 3.004
Public authorities and other . . 3.698 3.605 3.144
Pipeline and marketing . . . . . 2.374 2.343 1.939
Weather effect:
Degree days (d). . . . . . . . . 1,716 1,954 2,020
Percent of normal, based on
30 year average (e). . . . . . . 90% 89% 91%
Gas transported in millions of
cubic feet (MMcf). . . . . . . . . 24,461 22,750 25,438
Gas transportation revenues
(thousands of dollars) . . . . . . $ 7,393 $ 6,485 $ 5,943
- - --------------------------
(a) Increase in the average customers served in 1994 is due to
the Rio Grande and Eagle Pass Acquisitions of approximately
78,000 customers.
(b) Gas sales revenues less purchased gas costs is equal to gas
sales margin.
(c) Fluctuations in gas price billed between each period reflect
changes in the average cost of purchased gas and the effect
of rate increases.
(d) "Degree days" are a measure of the coldness of the weather
experienced. A Degree day is equivalent to each degree that
the daily mean temperature for a day falls below 65 degrees
Fahrenheit. The decrease in 1994 average degree days was
impacted by the temperate climate of Rio Grande acquired in
September 1993.
(e) Information with respect to weather conditions is provided
by the National Oceanic and Atmospheric Administration.
Percentages of normal are computed based on the weighted
average number of customers.
Missouri Gas Energy. The following table shows certain operating
- - -------------------
statistics of the gas distribution operations in Missouri:
Five
Months
Ended Year Ended
----------------------------
June 30, June 30, December 31,
------------------
1994(a) 1994(a) 1993 1992
-------- -------- -------- --------
Average number of gas
sales customers served:
Residential. . . . . . 410,934 400,222 396,755 399,421
Commercial . . . . . . 58,830 57,300 57,330 57,615
Industrial . . . . . . 254 257 260 249
-------- -------- -------- --------
Total average
customers served . . 470,018 457,779 454,345 457,285
Gas sales in millions
of cubic feet (MMcf):
Residential. . . . . . 21,569 45,407 47,244 39,839
Commercial . . . . . . 10,023 21,363 22,669 19,450
Industrial . . . . . . 26 143 309 1,254
-------- -------- -------- --------
Gas sales billed . . 31,618 66,913 70,222 60,543
Net change in unbilled
gas sales. . . . . . . (6,059) (104) (58) 1,043
-------- -------- -------- --------
Total gas sales. . . 25,559 66,809 70,164 61,586
======== ======== ======== ========
Gas sales revenues
(thousands of dollars):
Residential. . . . . . $108,871 $234,360 $215,806 $195,073
Commercial . . . . . . 47,257 102,036 95,520 84,995
Industrial . . . . . . 458 1,480 2,015 4,406
-------- -------- -------- --------
Gas revenues billed. 156,586 337,876 313,341 284,474
Net change in unbilled
gas sales revenues . . (28,564) (1,210) 3,818 3,618
-------- -------- -------- --------
Total gas sales
revenues . . . . . . $128,022 $336,666 $317,159 $288,092
======== ======== ======== ========
Gas sales margin
(thousands of
dollars) (b) . . . . . . $ 41,445 $103,191 $107,687 $105,091
======== ======== ======== ========
Gas sales revenue per
thousand cubic feet
(Mcf) billed:
Residential. . . . . . $ 5.048 $ 5.161 $ 4.568 $ 4.897
Commercial . . . . . . 4.715 4.776 4.214 4.369
Industrial . . . . . . 17.615 10.350 6.521 3.514
Weather effect:
Degree days (c). . . . 1,938 5,248 5,721 4,852
Percent of normal,
based on 30-year
average. . . . . . . . 94% 99% 106% 90%
Gas transported in
millions of cubic
feet (MMcf). . . . . . . 11,673 29,498 28,064 26,381
Gas transportation
revenues (thousands
of dollars). . . . . . . $ 2,568 $ 6,614 $ 6,676 $ 7,888
- - ----------------------------
(a) Missouri Gas Energy was acquired by the Company on
January 31, 1994 and therefore is consolidated with the
Company as of that date. The Company included Missouri Gas
Energy in its results of operations beginning February 1,
1994. The increase in the average number of customers for
the five months ended June 30, 1994 is due to the
seasonality of the Company's business.
(b) Gas sales revenues less purchased gas costs is equal to gas
sales margin.
(c) "Degree days" are a measure of the coldness of the weather
experienced. A Degree day is equivalent to each degree that
the daily mean temperature for a day falls below 65 degrees
Fahrenheit.
Investments in Real Estate
In February 1993, Southern Union entered into a settlement
agreement with the Resolution Trust Corporation ("RTC") with
respect to Southern Union's former subsidiary, First Bankers
Trust & Savings Association. As part of the settlement, in
return for payment by the Company of $4,792,000, the RTC
dismissed a $6,174,000 judgment for specific performance of a
contract to purchase real estate; canceled notes in the principal
amount of $1,600,000; permitted the Company to terminate a
$2,000,000 letter of credit; deeded the Company a 21-acre tract
in Austin, Texas; and released certain other claims asserted in
the settled litigation. This settlement had no impact on
earnings since the Company had previously recorded a reserve for
the related loss contingency. In December 1993, Lavaca Realty
sold this land for approximately $794,000, resulting in an after
tax gain of approximately $321,000. See "Real Estate" in the
Notes to the Consolidated Financial Statements.
Lavaca Realty owns a commercially developed tract of land in the
central business district of Austin, Texas, containing a combined
11-story office building, parking garage, drive-through bank
and mini-bank facility ("Lavaca Plaza"). Approximately 49% of
the office space at Lavaca Plaza is used in the Company's
business while 51% is leased to non-affiliated entities. Lavaca
Realty also owns a commercially developed tract of land in
Austin, Texas that is used exclusively in the Company's business.
Other real estate investments held at June 30, 1994 include 12
acres of undeveloped land in Dallas, Texas, 42 acres of
undeveloped land in Denton, Texas and eight acres of undeveloped
land in San Antonio, Texas. The Company is attempting to sell
all undeveloped real estate.
Employees
As of August 31, 1994, the Company has 1,811 employees, of whom
1,392 are paid on an hourly basis, 404 are paid on a salary basis
and 15 are paid on a commission basis. Of the 1,392 hourly paid
employees, approximately 56% are represented by unions. Of those
employees represented by unions, 79% are employed by Missouri Gas
Energy.
In May 1994, the Company announced an early retirement program
for certain employees of Missouri Gas Energy with an election
period from May 20 to June 23, 1994. Of an eligible 133
employees, 81 accepted the 1994 early retirement program. In
January 1993, the Company provided an early retirement program to
certain of the Company's employees with an election period from
January to March 1993. Of an eligible 109 employees, 75 accepted
the 1993 early retirement program.
From time to time the Company may be subject to labor disputes;
however, such disputes have not previously disrupted its
business. The Company believes that its relations with its
employees are good.
ITEM 2. Properties.
See Item 1, "Business," for information concerning the general
location and characteristics of the important physical properties
and assets of the Company.
Southern Union Gas' system consists of 8,504 miles of mains,
3,639 miles of service lines and 307 miles of transmission lines.
Missouri Gas Energy's system consists of 7,017 miles of mains,
3,459 miles of service lines and 71 miles of transmission lines.
WGI's system consists of 219 miles of transmission lines and 50
miles of gathering lines. Southern's system consists of 123
miles of transmission lines. The Company considers the systems
to be in good condition and to be well-maintained, and it has
continuing replacement programs based on historical performance
and system surveillance.
Prior to the Missouri Acquisition, Western Resources was required
pursuant to a 1989 MPSC order to undertake a major gas safety
program in the service territories served by Missouri Gas Energy.
Such activities included 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 (the "Missouri Safety
Program"). In recognition of the significant capital
expenditures associated with this safety program the MPSC issued
Western Resources Accounting Authority Orders ("AAO") providing
for the deferral, and subsequent recovery through rates, of those
costs and expenditures, including depreciation expense, property
taxes and associated carrying costs, related to the Missouri
Safety Program.
Missouri Gas Energy is required to continue the Missouri Safety
Program and has requested approval from the MPSC of an AAO to
defer depreciation expense, property taxes and carrying costs
associated with Missouri Gas Energy's investment in the Missouri
Safety Program. On May 31, 1994 the MPSC staff recommended
approval of the AAO; therefore, in anticipation of the MPSC's
approval of the requested AAO, the Company has deferred
approximately $600,000 related to depreciation, property taxes
and associated carrying costs on its investment in this program
for the five months ended June 30, 1994.
ITEM 3. Legal Proceedings.
See "Commitments and Contingencies" and "Acquisitions and
Divestiture - Missouri Gas Energy" in the Notes to Consolidated
Financial Statements for discussions of the Company's legal
proceedings.
ITEM 4. Submission of Matters to a Vote of Security Holders.
Southern Union held its Annual Meeting of Stockholders on May 25,
1994. The following matters were submitted for a vote and
approved by Southern Union's security holders: (i) election of
Class I directors; (ii) approval of a proposal to amend the
Restated Certificate of Incorporation (the "Certificate") and
Bylaws to increase the maximum size of Southern Union's Board of
Directors to twelve directors; (iii) approval of a proposal to
amend the Certificate and Bylaws to eliminate Article Twelfth of
the Certificate and certain 80% supermajority voting provisions
contained in the Certificate and Bylaws; (iv) adoption of the
Southern Union Company Supplemental Deferred Compensation Plan;
and (v) adoption of the Southern Union Company Directors'
Deferred Compensation Plan.
The number of votes cast in favor, against or withheld for each
nominee for director, and for each proposal voted on at the
Annual Meeting of Stockholders, were:
For Against Withheld
---------- ------- --------
Election of the following
nominees as Class I Directors:
John E. Brennan 10,470,082 -- 45,255
Frank W. Denius 10,475,644 -- 39,693
Roger J. Pearson 10,476,081 -- 39,256
Proposal to increase the
maximum size of the Board
of Directors to twelve
directors. 10,399,257 20,195 8,592
Proposal to amend the
Certificate and Bylaws
of the Company to
eliminate Article
Twelfth and other 80%
supermajority voting
provisions contained
therein. 9,528,095 16,588 21,798
Proposal to adopt the
Southern Union Company
Supplemental Deferred
Compensation Plan. 10,233,585 78,824 20,577
Proposal to adopt the
Southern Union Company
Directors' Deferred
Compensation Plan. 10,231,485 76,144 25,357
Southern Union expects to hold its next annual meeting of
stockholders in November 1995.
PART II
ITEM 5. Market for the Registrant's Common Stock and Related
Stockholder Matters.
Market Information
Southern Union's common stock is traded on the American Stock
Exchange under the symbol "SUG". On May 25, 1994 the Company's
Board of Directors declared a 5% stock dividend, payable on
June 30, 1994 to stockholders of record on June 14, 1994. The 5%
stock dividend is consistent with the Board of Directors'
approval in February 1994 of the commencement of regular stock
dividends of approximately 5% annually. In addition, on
February 11, 1994 the Company's Board of Directors declared a
three-for-two stock split distributed in the form of a 50% stock
dividend on March 9, 1994 to stockholders of record on
February 23, 1994.
The high and low sales prices (adjusted for the June 30 and
March 9, 1994 distributions) for shares of Southern Union common
stock since January 1, 1992 are set forth below:
$/Share
-----------------
High Low
------ -------
July 1 to September 16, 1994. . . . . . . 18 3/8 16 5/8
(Quarter Ended)
June 30, 1994 . . . . . . . . . . . . . . 19 16 1/4
March 31, 1994. . . . . . . . . . . . . . 23 3/8 16 1/2
(Quarter Ended)
December 31, 1993 . . . . . . . . . . . . 20 1/8 12 5/8
September 30, 1993. . . . . . . . . . . . 14 1/8 11 7/8
June 30, 1993 . . . . . . . . . . . . . . 12 7/8 10 1/2
March 31, 1993. . . . . . . . . . . . . . 13 1/4 9
(Quarter Ended)
December 31, 1992 . . . . . . . . . . . . 10 3/8 9
September 30, 1992. . . . . . . . . . . . 10 3/8 8 5/8
June 30, 1992 . . . . . . . . . . . . . . 9 5/8 8 5/8
March 31, 1992. . . . . . . . . . . . . . 10 1/8 9
Holders
As of September 16, 1994, there were 278 holders of record of
Southern Union's common stock. This number does not include
persons whose shares are held of record by a bank, brokerage
house or clearing agency, but does include any such bank,
brokerage house or clearing agency.
There were 11,501,794 shares of Southern Union's common stock
outstanding on September 16, 1994 of which 6,892,194 shares were
held by non-affiliates.
Dividends
Southern Union paid no cash dividends on its common stock in
fiscal 1994, 1993 or 1992. Provisions in certain of Southern
Union's long-term notes and its bank revolving credit facility
limit the payment of cash or asset dividends on capital stock.
Under the most restrictive provisions in effect, as a result of
the January 1994 sale of Senior Debt Securities, Southern Union
may not declare or pay any cash or asset dividends on its common
stock (other than dividends and distributions payable solely in
shares of its common stock or in rights to acquire its common
stock) or acquire or retire any of Southern Union's common stock,
unless no event of default exists and the Company meets certain
financial ratio requirements.
The specific declaration, record and distribution dates for each
stock dividend will be determined by the Board and announced at a
date no later than the annual stockholders meeting each year.
Southern Union's next annual meeting is expected to be held in
November 1995. On May 25, 1994 the Board declared a 5% stock
dividend distributed on June 30, 1994 to stockholders of record
on June 14, 1994. A portion of the 5% stock dividend was
characterized as a distribution of capital due to the level of
the Company's retained earnings available for distribution as of
the date of declaration.
ITEM 6. Selected Financial Data.
Year
Ended
June Years Ended December 31,
------------------------------------
1994 1993 1992 1991 1990
(a)(b) (b)(c) (c) (c) (c)
-------- -------- -------- -------- ---------
(thousands of dollars, except per share amounts)
Total operating
revenues. . . . . $374,516 $209,005 $192,445 $200,261 $199,865
Earnings from
continuing
operations. . . . 8,378 7,733 6,391 4,673 387
Earnings (loss)
from continuing
operations per
share of common
stock (d) . . . . .85 .83 .47 .26 (.26)
Total assets (e). 890,950 416,207 377,167 369,783 379,856
Long-term debt. . 479,937 109,574 109,924 111,618 104,922
Redeemable
preferred stock . -- -- 24,900 25,000 25,000
- - ---------------------------------
(a) On July 9, 1993, Southern Union entered into an Agreement
with Western Resources pursuant to which Southern Union
purchased from Western Resources certain Missouri natural
gas distribution operations which Southern Union operates as
Missouri Gas Energy, a division of Southern Union
headquartered in Kansas City, Missouri. The acquisition was
consummated on January 31, 1994 and has been accounted for
as a purchase. The assets of Missouri Gas Energy were
included in the consolidated balance sheet at January 31,
1994 and its results of operations are included in the
consolidated results of operations beginning February 1,
1994. For these reasons, the consolidated results of
operations of the Company for the period subsequent to the
acquisition are not comparable to prior periods.
(b) During 1994, the Company changed its fiscal year-end from
December 31 to June 30. The Company believes the new fiscal
year more closely conforms its financial condition and
results of operations to its natural business cycle. In
order to present more meaningful comparative annual
financial data, current year information is presented for
the twelve months ended June 30, 1994. Therefore, the
comparison of consolidated results of operations for the
year ended June 30, 1994 and the year ended December 31,
1993 include the effects of the following which occurred in
the two quarters in common during the six-month period
ended December 31, 1993: (i) a non-recurring adjustment of
approximately $2,489,000 to reverse a tax reserve upon the
final settlement of prior period federal income tax audits;
(ii) a pre-tax gain of approximately $494,000 on the sale of
undeveloped real estate; and (iii) the write-off of
approximately $357,000 of acquisition-related costs as a
result of the termination of negotiations for various
acquisitions.
(c) The Company completed the Berry Gas, Eagle Pass and Rio
Grande Acquisitions during 1993 and the Nixon Acquisition in
1992. In addition, during 1991 the Company completed the
South Texas, Brazos River and Andrews acquisitions and also
completed the Arizona Sale. In February 1990, the Company
merged with S. U. Acquisition, Inc. (the "Merger"). For
these reasons the results of operations of the Company for
the periods subsequent to the Merger are not comparable to
those periods prior to the Merger nor are the 1993, 1992 and
1991 results of operations comparable between periods.
(d) Earnings per share in 1994, 1993, 1992, 1991 and 1990 were
computed based on the weighted average number of shares of
common stock outstanding during the year adjusted for the
5% stock dividend distributed on June 30, 1994 and the
three-for- two stock split effected as a 50% stock dividend
which was distributed on March 9, 1994. Losses per share
prior to 1991 were calculated as though the common shares
outstanding after the Merger were outstanding during the
period presented.
(e) Certain reclassifications have been made to prior years'
amounts to conform with the current year presentation.
ITEM 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations.
Introduction
The Company's principal line of business is the distribution of
natural gas as a public utility through Southern Union Gas and,
subsequent to January 31, 1994, Missouri Gas Energy, each of
which is a division of the Company. Missouri Gas Energy was
acquired on January 31, 1994. Accordingly, the operating results
of Missouri Gas Energy have been included in the consolidated
results of operations subsequent to the date of acquisition. In
addition, during 1993 the Company completed the Rio Grande, Berry
Gas and Eagle Pass Acquisitions. In 1992 the Company completed
the Nixon Acquisition. All of these acquisitions were accounted
for as purchases. See "Acquisitions and Divestiture" in the
Notes to Consolidated Financial Statements for the year ended
June 30, 1994. For these reasons, the results of operations of
the Company for the periods subsequent to those acquisitions are
not comparable to those periods prior to the acquisitions nor are
the 1994 results of operations comparable with previous periods.
Southern Union Gas, which accounted for approximately 57% of the
Company's total revenues for the year ended June 30, 1994, serves
approximately 484,000 residential, commercial, industrial,
agricultural and other customers in the States of Texas
(including the cities of Austin, Brownsville, El Paso, Galveston
and Port Arthur) and Oklahoma. Missouri Gas Energy, which
accounted for approximately 38% of the Company's total revenues
for the year ended June 30, 1994, serves approximately 463,000
customers in 147 communities in central and western Missouri,
including Kansas City, St. Joseph, Joplin and Monett. In
addition, the Company operates interstate and intrastate natural
gas pipeline systems, markets natural gas to end users and
markets and sells natural gas for natural gas vehicles. The
Company also holds investments in real estate.
On May 25, 1994, Southern Union's Board of Directors declared a
5% stock dividend distributed on June 30, 1994 to stockholders of
record on June 14, 1994. A portion of the 5% stock dividend was
characterized as a distribution of capital due to the level of
the Company's retained earnings available for distribution as of
the date of declaration. The 5% stock dividend is consistent
with the Board of Directors approval in February 1994 of the
commencement of regular stock dividends of approximately 5%
annually. In addition, on February 11, 1994, the Company's Board
of Directors declared a three-for-two stock split distributed in
the form of a 50% stock dividend on March 9, 1994 to stockholders
of record on February 23, 1994. Unless otherwise stated, all per
share data included in the accompanying consolidated financial
statements and notes to the consolidated financial statements
have been restated to give effect to the stock split and stock
dividend.
Also, on May 25, 1994, the Board of Directors approved a change
in the Company's fiscal year-end from December 31 to June 30.
The Company believes the new fiscal year more closely conforms
reporting of its financial condition and results of operations to
its natural business cycle. In order to present more meaningful
comparative annual financial data, current year information is
presented for the twelve months ended June 30, 1994. Therefore,
the comparison of consolidated results or operations for the year
ended June 30, 1994 and the year ended December 31, 1993 include
the effects of the following items that occurred in the two
quarters in common during the six-month period ended December 31,
1993: (i) a non-recurring adjustment of approximately $2,489,000
to reverse a tax reserve upon the final settlement of prior
period federal income tax audits; (ii) a pre-tax gain of
approximately $494,000 on the sale of undeveloped real estate;
and (iii) the write-off of approximately $357,000 of acquisition-
related costs as a result of the termination of negotiations for
various acquisitions. All references herein to years 1994, 1993
and 1992 reflect the fiscal years ended June 30, 1994,
December 31, 1993 and December 31, 1992.
Several of the Company's 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 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.
The Company's revenues and earnings are primarily dependent upon
gas sales volumes and gas service rates. Gas purchase costs
generally do not affect the Company's earnings because such costs
usually are passed through to customers pursuant to purchase gas
adjustment clauses. Accordingly, while changes in the cost of
gas may cause the Company's operating revenues to fluctuate,
operating margin (defined as operating revenues less gas purchase
costs) is generally not affected by gas purchase cost increases
or decreases.
Gas sales volumes fluctuate as a function of seasonal weather
impact and the size of the Company's customer base, which is
affected by competitive factors in the industry as well as
economic development and residential growth in its service areas.
The primary factors that affect the distribution and sale of
natural gas are the seasonal nature of gas use, adequate and
timely rate relief from regulatory authorities, competition from
alternative fuels, competition within the gas business for
industrial customers and volatility in the supply and price of
natural gas. Gas service rates, which consist of a monthly fixed
charge and a gas usage charge, are established by regulatory
authorities and are intended to permit utilities to recover
operating, administrative and financing costs and to earn a
return on equity. The monthly fixed charge provides a base
revenue stream while the usage charge increases the Company's
revenues and earnings in colder weather when natural gas usage
increases.
In recent years weather variances experienced during the
traditional heating load months have significantly impacted the
Company's results of operations. The average temperatures in
Southern Union Gas' service areas during the past several winter
seasons have been much warmer than normal. To mitigate the
impact of these seasonal variances, Southern Union Gas has
requested and received approval for weather normalization clauses
in Austin, Galveston and in two other service areas in Texas.
These clauses allow for rate adjustments that help stabilize
customers' monthly bills and the Company's earnings from the
varying effects of weather.
Results of Operations
Net Earnings Available for Common Stock
The Company recorded net earnings available for common stock of
$8,378,000 for the year ended June 30, 1994 compared to
$6,890,000 for the year ended December 31, 1993, an increase of
$1,488,000 or 22%. Net earnings per common share, based on
weighted average shares outstanding were $.85 in 1994 compared to
$.83 in 1993. Net earnings available for common stock for the
year ended December 31, 1992 were $1,445,000 or $.18 per share
based on weighted average shares outstanding.
Net earnings for the year ended June 30, 1994 were positively
impacted by the Company's recent acquisition of Missouri Gas
Energy and Rio Grande and by the receipt of several rate
increases effected during the year ended December 31, 1993. The
acquisitions collectively contributed approximately $880,000 or
11% to 1994 net earnings after deductions for allocated corporate
expenses, interest and income taxes. Rate increases effected
during the past year included: a $777,000 annualized increase in
the Company's South Texas service area effective February 10,
1993; a $1,950,000 annualized increase in Austin effective
July 1, 1993; and a $463,000 annualized increase in El Paso
effective November 1, 1993.
The Company's net earnings for the year ended June 30, 1994 were
also positively impacted by the elimination of preferred
dividends due to the retirement of Southern Union's Series A 10%
Cumulative Preferred Stock begun in March and completed in June
1993.
As previously noted, Missouri Gas Energy's results of operations
were included in the consolidated operating results of the
Company subsequent to January 31, 1994. Accordingly, the
Company's results of operations do not include Missouri Gas
Energy's operations for December 1993 or January 1994, two of the
coldest months of Missouri's winter heating season. In addition,
Missouri Gas Energy's rate structure collects a greater
percentage of its margin during the winter heating season months
than does Southern Union Gas. This results in a significant
timing difference occurring between the collection of revenues in
the winter months to recover annual costs and the actual
incurrence of these costs throughout the year. Thus, Missouri
Gas Energy's contribution to the Company's results of operations
for the year ended June 30, 1994 were not significant. Missouri
Gas Energy's results of operations in future periods will reflect
a complete cycle of revenue collection and cost incurrence.
Accordingly, Missouri Gas Energy's contribution to the Company's
results of operations in future periods is expected to increase.
Operating Revenues
Total operating revenues in 1994, 1993 and 1992 were
$374,516,000, $209,005,000 and $192,445,000, respectively.
Revenues are affected by the level of sales volumes, customer
base and by the pass-through of increases or decreases in the
Company's gas purchase costs through its purchase gas adjustment
clauses. Operating revenues increased $165,511,000, or
approximately 79%, for the year ended June 30, 1994, primarily
due to an increase in over a half a million customers resulting
from the Missouri, Rio Grande, Berry Gas and Eagle Pass
Acquisitions. Revenues from these acquisitions were
approximately $167,692,000 in 1994. The average customer base
served in 1994, 1993 and 1992 was approximately 660,000, 421,000
and 394,000, respectively. Operating revenues also increased due
to receipt of rate increases in 1993, described above, and by an
8% increase in the average cost of gas from $2.50 per Mcf in 1993
to $2.70 per Mcf in 1994.
Operating revenues increased $16,560,000, or approximately 9%,
for the year ended December 31, 1993, primarily from an increase
in the customer base resulting from the Rio Grande, Berry Gas and
Eagle Pass Acquisitions as well as the receipt of rate increases
in 1993, also described above. These acquisitions increased
revenues by approximately $8,085,000 in 1993. Operating revenues
also increased due to a 24% increase in the average cost of gas
from $2.01 per Mcf in 1992 to $2.50 per Mcf in 1993, which was
partially offset by a 12% decrease in gas sales volumes from
51,104 MMcf in 1992 to 44,859 MMcf in 1993. The decline in gas
sales volumes reflected a decrease of 7,831 MMcf in gas sales by
Mercado, the Company's marketing subsidiary, resulting from the
Company's decision in early 1993 to reduce sales to off-system
markets.
Gas Sales and Transportation Volumes
Gas sales volumes billed in 1994, 1993 and 1992 totaled 78,300
MMcf, 44,203 MMcf and 51,147 MMcf, respectively, at an average
Mcf sales price of $4.83, $4.42 and $3.58, respectively. Gas
sales volumes fluctuate as a function of weather and customer
base. The increase in gas sales volumes is due principally to
the increase in gas sales subsequent to the Missouri Acquisition
and Rio Grande Acquisition. Gas sales volumes billed by these
acquired operations were 34,512 MMcf in 1994. Gas sales volumes
are also directly impacted by the weather patterns in the
Company's service areas which averaged 10% warmer than normal in
1994 and 11% warmer than normal in 1993. The average sales price
per Mcf varied between periods as a result of variations in
contracted gas prices as well as the average spot market price of
natural gas.
Gas transportation volumes in 1994, 1993 and 1992 totaled 36,134
MMcf, 22,750 MMcf and 25,438 MMcf, respectively, at an average
transportation rate per Mcf of $.28, $.29 and $.23, respectively.
Transportation volumes increased in 1994 as compared to 1993 as a
result of the Missouri Acquisition.
Gas Purchase Costs
Gas purchase costs in 1994, 1993 and 1992 were $211,127,000,
$110,384,000 and $102,918,000, respectively. The increase in gas
purchase costs in 1994 was due to the Missouri Acquisition which
increased gas purchase costs by $86,577,000 or 78%. In addition,
the average customer base increased due to the acquisition of gas
distribution systems, previously discussed. These increases were
partially offset by a decrease in the average spot market price
of natural gas from $1.96 per million British thermal units
("MMBtu") in 1993 to $1.94 per MMBtu in 1994. The average gas
purchase cost incurred by the Company was $2.70 per Mcf in 1994,
$2.50 per Mcf in 1993 and $2.01 per Mcf in 1992. The increase in
gas purchase costs in 1993 as compared to 1992 was due to a 16%
increase in the average spot market price of natural gas from
$1.69 per MMBtu in 1992 to $1.96 per MMBtu in 1993 and also by an
increase in the average customer base resulting from the
acquisition of gas distribution systems, previously discussed.
Operating, Maintenance and General Expenses
Operating, maintenance and general expenses were $79,667,000,
$50,076,000 and $46,313,000 in 1994, 1993 and 1992,
respectively. During 1994 operating, maintenance and general
expenses increased $29,591,000 or 59% due principally to
increased operating costs of approximately $32,400,000 associated
with the acquisitions previously discussed. The operating,
maintenance and general expenses of Southern Union Gas, excluding
Rio Grande, decreased approximately $1,444,000 in 1994 reflecting
the reduction in payroll expenses as a result of the Company's
1993 early retirement program finalized in April 1993.
Taxes
Federal and state income tax expense in 1994, 1993 and 1992 was
$5,185,000, $3,855,000 and $4,440,000, respectively. The
increase in income taxes in 1994 is primarily a result of an
increase in pre-tax income attributable to the Company's recent
acquisitions. Likewise, income taxes in 1994 and 1993 were both
impacted by reductions related to amended prior year federal
income tax returns and non-taxable income items included with
"other income" related to the reversal of a tax reserve recorded
in September 1993, as discussed below. In July 1993 the Company
paid the Internal Revenue Service ("IRS") approximately
$1,266,000 in settlement for federal income taxes and interest
related to the tax years 1984 through 1989. The Company had
previously estimated and accrued an amount for the tax
deficiencies and related interest and, as a result of the
settlement with the IRS for a lesser amount, a non-recurring
adjustment was recorded to reverse the tax reserve in excess of
the payment made. The reversal of the reserve had no impact on
liquidity or cash flows due to the non-cash impact of this
adjustment. See "Taxes on Income" in the Notes to Consolidated
Financial Statements for the year ended June 30, 1994.
Taxes other than income taxes reflect various state and local
business and payroll related taxes. The state and local business
taxes are generally based on gross receipts and investments in
property, plant and equipment and fluctuate accordingly.
Depreciation and Amortization Expense
Depreciation and amortization expense in 1994, 1993 and 1992 was
$21,919,000, $14,416,000 and $12,737,000, respectively. The
increase in depreciation expense of $7,503,000 in 1994 compared
to 1993 was primarily attributable to the acquisition of gas
distribution systems, previously discussed.
Effective January 1, 1994, the Company revised its estimate of
the amortization period of additional purchase cost assigned to
utility plant to its standard policy of forty years. As a result
of this change, amortization expense for the year ended June 30,
1994 was reduced by approximately $478,000, with a corresponding
increase to net earnings, or $.05 per average common share. See
"Change in Accounting Estimate" in the Notes to Consolidated
Financial Statements for the year ended June 30, 1994.
Other Income and Expenses, Net
Other income and expenses, net in 1994, 1993 and 1992 were
$18,470,000, $8,176,000 and $6,531,000, respectively. The
increase in other expenses of approximately $9,511,000 in 1994 is
due principally to an increase in interest expense on long-term
debt of approximately $12,033,000. The Company's outstanding
long-term debt increased as a result of the issuance of the
Senior Debt Securities which were used, in part, to fund the
Missouri Acquisition and to repay and refinance certain
outstanding debt of the Company. See "Long-Term Debt" in the
Notes to Consolidated Financial Statements for the year ended
June 30, 1994.
Other income increased in 1994 over 1993 by approximately
$1,400,000. Rental income earned by Lavaca Realty increased by
approximately $450,000 during the fiscal year ended June 30, 1994
as compared to the year ended December 31, 1993. In addition,
Missouri Gas Energy recorded other income of approximately
$276,000 related to the deferral of interest expense associated
with a service line replacement program. See "Utility Regulation
and Rates" in the Notes to the Consolidated Financial Statements
for the year ended June 30, 1994. Other income also increased by
approximately $500,000 as a result of gas appliance merchandising
related to the acquisition of the gas distribution systems,
previously discussed.
As a result of the change in the Company's year-end to June 30,
both the 1994 and 1993 results of operations were impacted by the
recording of a non-recurring adjustment of approximately
$2,489,000 to reverse a tax reserve upon the final settlement of
prior period federal income tax audits as previously discussed.
The reversal of the reserve had no impact on liquidity or cash
flows due to the non-cash impact of this adjustment. Other
income and expense items recorded during the period in common in
1994 and 1993 included the recognition of a pre-tax gain of
approximately $494,000 on the sale of undeveloped real estate and
the write-off of approximately $357,000 of acquisition-related
costs as a result of the termination of negotiations for various
acquisitions.
Other income items recorded in 1993 also included interest income
on notes receivable of approximately $830,000; rental income from
Lavaca Realty of approximately $1,835,000; and a pre-tax gain of
approximately $494,000 on the sale of undeveloped real estate.
Other income in 1992 included a $2,200,000 reversal of certain
contingency reserves recorded at the time of the 1990 merger that
were subsequently resolved or settled and a $950,000 gain
resulting from a litigation settlement, each previously
discussed.
Interest expense on short-term debt was $1,412,000, $1,836,000
and $384,000 in 1994, 1993 and 1992, respectively. Average
short-term debt outstanding during 1994, 1993 and 1992 of
$26,369,000, $33,021,000 and $5,912,000 was at an average
interest rate of 5.1%, 5.3% and 6.3%, respectively. The variance
in the average amounts outstanding coupled with a general
reduction in interest rates resulted in the change in other
interest expense in each of the years.
Discontinued Operation
The loss from discontinued operation of $2,446,000 for the year
ended December 31, 1992 includes net earnings from oil and gas
operations of $1,954,000 which were offset by the estimated loss
on disposal of $4,400,000. Increased production volumes in 1992
contributed to an increase in net earnings from operations. See
"Acquisitions and Divestiture - Other Acquisitions and
Divestiture" in the Notes to Consolidated Financial Statements
for the year ended June 30, 1994.
Liquidity and Capital Resources
The Company's liquidity is impacted by its ability to generate
funds from operations and to access capital markets. The gas
utility operations are seasonal in nature with a significant
percentage of the Company's 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 its revolving loan and credit facilities and
internally-generated funds to provide funding for its seasonal
working capital, continuing construction and maintenance programs
and operational requirements.
Financing Activities
On January 31, 1994, the Company completed the sale of
$475,000,000 of Senior Debt Securities. In addition, on
December 31, 1993 Southern Union completed the Rights Offering to
its existing stockholders to subscribe for and purchase 2,000,000
pre-split and pre-dividend shares of the Company's common stock,
par value $1.00 per share, at a pre-split and pre-dividend price
of $25.00 per share for net proceeds of $49,351,000. The net
proceeds from the sale of the Senior Debt Securities, together
with the net proceeds from the Rights Offering and working
capital from operations, were used to: (i) fund the Missouri
Acquisition; (ii) repay approximately $59,300,000 of borrowings
under the $100,000,000 revolving credit facility, used to fund
the Rio Grande Acquisition and repurchase all outstanding
preferred stock; (iii) refinance, on January 31, 1994,
$10,000,000 aggregate principal amount of 9.45% Senior Notes due
January 31, 2004, and $25,000,000 aggregate principal amount of
10% Senior Notes due January 31, 2012 and the related premium of
approximately $10,400,000 resulting from the early extinguishment
of such notes; (iv) refinance, on March 2, 1994, $50,000,000
aggregate principal amount of 10.5% Sinking Fund Debentures due
May 15, 2017 and the related premium of approximately $3,300,000
resulting from the early extinguishment of such debentures; and
(v) refinance, on May 16, 1994, $20,000,000 aggregate principal
amount of 10 1/8% Notes.
The Company's effective rate under the new debt structure is
approximately 7.8% (including interest and the amortization of
debt issuance costs and redemption premiums on refinanced debt)
after the retirement of certain higher-cost debt in May 1994.
On September 30, 1993, Southern Union entered into a new
revolving credit facility with a three-year term (the "Revolving
Credit Facility") initially underwritten by Texas Commerce Bank,
N.A. for $80,000,000. On November 15, 1993, the Revolving Credit
Facility was syndicated to five additional banks and the
aggregate amount available to be borrowed was increased to
$100,000,000. Borrowings under the Revolving Credit Facility are
available for Southern Union's working capital and letter of
credit requirements. The Revolving Credit Facility can also be
used in part, but not to exceed $40,000,000, to fund acquisitions
and capital expenditures and it provided the funds to complete
the Rio Grande Acquisition. The Revolving Credit Facility
contains certain financial covenants that, among other things,
restrict cash or asset dividends, share repurchases, certain
investments and additional debt. The Revolving Credit Facility
is currently uncollaterized. Under certain conditions involving
the issuance of collateralized debt of Southern Union, the
Revolving Credit Facility automatically would become
collateralized by a first priority security interest on
substantially all of the accounts receivable, inventory and
certain related contract rights of the Company. The facility, as
amended on August 31, 1994, expires on December 31, 1997 but may
be extended annually for periods of one year beginning on
September 30, 1994 with the consent of each of the banks. The
revolving credit facility, as amended on August 31, 1994, is
subject to a commitment fee of an annualized .1875% on the unused
balance. At December 31, 1993, the outstanding balance on the
Revolving Credit Facility was approximately $20,100,000 which was
subsequently liquidated with the net proceeds from the sale of
$475,000,000 of 7.60% Senior Notes. The amount outstanding under
the Revolving Credit Facility at June 30, 1994 was zero and at
September 15, 1994 was approximately $32,500,000.
During March 1993, Southern Union retired 68,000 shares of the
Series A 10% Cumulative Preferred Stock ("Preferred Stock") at
$103 per share for $7,004,000. In April 1993, Southern Union
retired 77,000 shares of Preferred Stock at $102 per share for
$7,854,000. In June 1993, Southern Union retired 4,000 shares of
Preferred Stock at $103.50 per share for $414,000 and the
remaining outstanding 100,000 shares at par for $10,000,000.
In February 1992, Southern Union repurchased 51,625 shares of
common stock at the then-prevailing market rate, from a company
whose Chairman, Chief Executive Officer and President, at that
time, were also executive officers, directors, and stockholders
of Southern Union.
Investing Activities
As previously discussed, Southern Union acquired Missouri Gas
Energy on January 31, 1994. On the date of closing, Southern
Union paid approximately $400,300,000 in cash for Missouri Gas
Energy. The final determination of the purchase price and all
prorations and adjustments between the Company and Western
Resources have not been resolved to-date. Pursuant to the terms
of the Missouri Asset Purchase Agreement, Southern Union is
seeking arbitration with respect to approximately $19,100,000 of
adjustments in dispute. Accordingly, Southern Union is seeking a
refund of approximately $12,000,000 while Western Resources is
demanding an additional payment of approximately $7,100,000.
There can be no assurance that the Company will be successful in
resolving any or all of such adjustments in its favor. See
"Contingencies" in the Notes to the Consolidated Financial
Statements for the year ended June 30, 1994. The purchase price
was financed through the sale of the $475,000,000 Senior Debt
Securities and the proceeds from the sale of the $50,000,000
Rights Offering on December 31, 1993.
The additional purchase cost assigned to Missouri Gas Energy's
utility plant of approximately $76,490,000 consists of
approximately $44,200,000 of the excess of the purchase price
over the historical book carrying value of the utility plant
purchased and approximately $32,290,000 of accruals for certain
liabilities assumed and preacquisition contingencies which have
been incurred or estimates of amounts that will be incurred in
the future. The accruals reflect actual or estimated amounts
for: (i) employee severance and other costs associated with the
1994 early retirement program for employees of Missouri Gas
Energy of approximately $11,200,000; (ii) a $3,000,000
contribution to the Company's employees' qualified defined
benefits plan applicable to Missouri Gas Energy's employees and
retirees in excess of the minimum required contribution under the
Internal Revenue Code Section 412, as determined by the plans'
actuary, pursuant to the MPSC Stipulation; (iii) underwriting,
legal and accounting fees associated with the Missouri
Acquisition; and (iv) other preacquisition contingencies.
Amortization of the additional purchase cost assigned to utility
plant is provided on a straight-line basis over forty years. The
Company expects to finalize the determination of the purchase
price, including all prorations and adjustments in dispute, and
to finalize its estimate of all preacquisition contingencies
within one year of the date the Missouri Acquisition was
consummated.
The Company has used its revolving loan and credit facilities,
internally generated funds and long-term debt to provide funding
for its seasonal working capital, continuing construction
programs, operational requirements, preferred dividend
requirements and acquisitions. During the years ended June 30,
1994 and December 31, 1993 and 1992, the Company spent
approximately $512,000,000 on capital projects including
acquisitions. Of that total, $70,000,000 was incurred on normal
expansion of its distribution system as well as relocation and
replacement. For the year ended June 30, 1994, the Company spent
approximately $41,300,000 for capital expenditures, exclusive of
the acquisitions of natural gas distribution properties, which
was used for normal distribution system replacement and
expansion. During the years ended June 30, 1994 and December 31,
1993 and 1992 approximately $441,000,000 was incurred by the
Company for the acquisition of distribution properties.
On September 30, 1993, the Company completed the Rio Grande
Acquisition for approximately $30,500,000. Rio Grande presently
serves approximately 78,000 customers in the south Texas counties
of Willacy, Cameron and Hidalgo, including the cities of
Harlingen, McAllen and Brownsville (the southernmost city in the
U.S.). The Company initially funded the purchase with borrowings
from its Revolving Credit Facility. The Rio Grande Acquisition
was accounted for as a purchase.
In July 1993, the Company completed the Eagle Pass Acquisition
for approximately $2,000,000. During May 1993, the Company
completed the Berry Gas Acquisition which system serves the Texas
cities and towns of Nome, Raywood, Hull and Devers for
approximately $274,000. Combined, these operations collectively
serve approximately 4,400 customers. These acquisitions were
also accounted for as purchases. In addition, in October 1992,
the Company completed the Nixon Acquisition for approximately
$415,000. This system serves approximately 550 customers.
In March 1993, Southern Union Exploration Company ("SX"),
pursuant to a purchase and sale agreement entered into in
February 1993, sold substantially all of its oil and gas
leasehold interests and associated production, for $22,000,000
effective January 1, 1993. The Company recorded a book loss on
the sale of approximately $4,400,000 as of December 31, 1992.
Other Matters
Contingencies
The Company has been named as a potentially responsible party in
a special notice letter from the United States Environmental
Protection Agency for costs associated with removing hazardous
substances from the site of a former coal gasification plant in
Vermont. The Company also assumed responsibility for certain
environmental matters in connection with the Missouri
Acquisition. See "Commitments and Contingencies" in the Notes to
Consolidated Financial Statements for the year ended June 30,
1994.
Regulatory
The Company is continuing to pursue certain changes to rates and
rate structures that are intended to reduce the sensitivity of
earnings to weather including weather normalization clauses and
higher minimum monthly service charges.
On February 10, 1993, the Company's South Texas service area
received an annualized rate increase of $777,000. On July 1,
1993, rates for Austin were changed to provide: (i) an
approximate $1,700,000 base revenue increase; (ii) new and
increased fees that will add approximately $250,000 annually; and
(iii) weather normalization clause revisions. On November 1,
1993, El Paso rates changed to provide an approximate revenue
increase of $463,000. These rate increases contributed
significantly to Southern Union Gas' earnings in 1994. In
addition, on October 5, 1993, the MPSC issued a rate order
increasing Missouri Gas Energy's natural gas rates by $9,750,000
annually effective October 15, 1993. Southern Union Gas also
received several annual cost of service adjustments in fiscal
1994.
During 1992, the Company's rate cases continued to focus on the
receipt of timely and adequate revenue increases and on various
measures designed to stabilize earnings. Rate cases resolved in
El Paso, South Texas, Dell City, Port Arthur, Borger, Galveston,
Pecos and Monahans, Texas, resulted in revenue increases of
$2,742,000. The Galveston rate case also provided for an
increase in the minimum residential monthly service charge from
$7.50 to $10 and the implementation of a weather normalization
clause.
Prior to the Company's acquisition of Missouri Gas Energy,
Western Resources was required pursuant to a 1989 MPSC order to
undertake the Missouri Safety Program in the service territories
of Missouri Gas Energy. In recognition of the significant
capital expenditures associated with this safety program, the
MPSC issued Western Resources Accounting Authority Orders (AAO)
providing for the deferral, and subsequent recovery through
rates, of those costs and expenditures, including depreciation
expense, property taxes and associated carrying costs, related to
the Missouri Safety Program.
Missouri Gas Energy is required to continue the Missouri Safety
Program and has requested approval from the MPSC of an AAO to
defer depreciation expense, property taxes and carrying costs
associated with Missouri Gas Energy's investment in the Missouri
Safety Program. On May 31, 1994 the MPSC staff recommended
approval of the AAO; therefore, in anticipation of the MPSC's
approval of the requested AAO, the Company has deferred
approximately $600,000 related to depreciation, property taxes
and associated carrying costs on its investment in this program
during the five-month period subsequent to the Missouri
Acquisition.
Accounting Pronouncements
The Company adopted the provisions of Statement of Financial
Accounting Standards ("SFAS") No. 112, Employers Accounting for
Postemployment Benefits, as of January 1, 1994. This statement
requires that the cost of benefits, such as disability and health
care continuation coverage provided to former or inactive
employees after employment but before retirement, be accrued if
attributable to an employee's previously rendered service. The
Company had previously recognized such post-employment benefit
costs when paid and was allowed recovery in rates as payments
were incurred. Consequently, the Company has recorded a
regulatory asset to the extent it intends to file rate
applications to include such costs in rates and such costs are
considered probable of recovery. The adoption of SFAS No. 112
has resulted in the recognition of a regulatory asset and related
liability of approximately $1,100,000 as of June 30, 1994.
The Company adopted the provisions of SFAS No. 109, "Accounting
for Income Taxes," effective as of January 1, 1993. SFAS No. 109
provides for the replacement of the "deferred method" of
interperiod income tax allocation with the "liability method"
which bases the amounts of current and future tax assets and
liabilities on events recognized in the financial statements and
on income tax laws and rates existing at the balance sheet date.
The impact of adoption of SFAS No. 109 in 1993 was insignificant.
The Company also adopted the provisions of SFAS No. 106,
"Employers' Accounting for Postretirement Benefits Other Than
Pensions," effective as of January 1, 1993. SFAS No. 106
requires an accrual of postretirement medical and other benefit
liabilities on an actuarial basis during the years an employee
provides services as compared to the pay-as-you-go method. The
Company, excluding Missouri Gas Energy, records a regulatory
asset for the difference between the postretirement costs
currently included in rates and SFAS No. 106 expense to the
extent the Company files, or intends to file, a rate application
to include SFAS No. 106 expense in rates. The Company believes
that it is probable that the relevant regulatory authorities will
allow such expenses in future rates. The Company's adoption,
except for Missouri Gas Energy, of the provisions of SFAS No. 106
resulted in a transition obligation of approximately $9,328,000
which was subsequently reduced to a balance of $4,084,000 at
June 30, 1994, primarily as a result of certain plan amendments
in 1993. The Company amortizes the transition obligation over
the allowed 20-year period. Consequently, earnings were not
adversely impacted by the adoption of this statement.
Western Resources also adopted the provisions of SFAS No. 106 as
of January 1, 1993. To mitigate the impact of SFAS No. 106
expense, Western Resources filed an application with the MPSC for
an order permitting the deferral of SFAS No. 106 expense and
proposed inclusion in the future computation of cost of service
the actual SFAS No. 106 expense and an income stream generated
from Western Resources' corporate-owned life insurance ("COLI").
To the extent SFAS No. 106 expense exceeds income from the COLI
program, this excess would be deferred (as allowed by the FASB
Emerging Issues Task Force Issue No. 92-12) and offset by income
generated through the deferral period by the COLI program. The
MPSC has issued an order approving the Western Resources
application. Subsequent to the Missouri Acquisition, the Company
filed an application with the MPSC for an order to permit the
deferral of SFAS No. 106 expense and also proposes the inclusion
in the future computation of cost of service the actual SFAS No.
106 expense and income stream generated from a Company-owned
COLI. In anticipation of the MPSC's approval of the application,
the Company has recorded a regulatory asset and a related
liability of approximately $38,300,000 representing the
accumulated benefit obligation at June 30, 1994. Additionally,
the State of Missouri recently passed legislation which provides
for prospective recognition by the MPSC of postretirement medical
and benefit costs on an accrual basis. Thus, to the extent that
Missouri Gas Energy's COLI does not offset its SFAS 106 liability
then such expenses should be recoverable in future rates.
ITEM 8. Financial Statements and Supplementary Data.
Reference is made to the Consolidated Financial Statements of
Southern Union and its consolidated subsidiaries listed on page
F-1.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of Registrant.
The Board of Directors of Southern Union is divided into three
classes, each of which serves a staggered three-year term of
office. The Class I, II and III directors serve until the 1997,
1996 and 1995 Annual Meeting of Stockholders, respectively.
Information as to the directors of Southern Union as of
September 16, 1994 is provided below:
Class I - Term expires in 1997
John E. Brennan has been Vice Chairman of the Board of Southern
Union since February 1990. Mr. Brennan devotes only a small part
of his business time to the Company. Mr. Brennan has been
primarily engaged in private investments since April 1992. Prior
to April 1992, Mr. Brennan had been President and Chief Operating
Officer of Metro Mobile CTS, Inc. ("Metro Mobile"). Age: 48.
Frank W. Denius has been a director of Southern Union since 1976
and previously served as a director from 1955 to 1975. Since
February 1990, Mr. Denius has been Chairman Emeritus. Mr. Denius
was Chairman of the Board and President from 1986 until February
1990 and Chief Executive Officer from 1985 until February 1990.
Since February 1990, Mr. Denius has been engaged primarily in the
private practice of law in Austin, Texas. Mr. Denius is also a
director of TCC Industries. Age: 69.
Roger J. Pearson is an attorney in private practice in Stamford,
Connecticut where he is of counsel in the firm of Neville,
Shaver, Kelly & McLean. Mr. Pearson was First-Selectman (Mayor)
of Greenwich, Connecticut from 1983 to 1985. Mr. Pearson has
been a Director of Southern Union since January 1992. Age: 48.
Class II - Term expires in 1995
Aaron I. Fleischman has been Senior Partner of Fleischman and
Walsh, a Washington, D.C. law firm specializing in regulatory,
corporate - securities and litigation matters for
telecommunications and regulated utility companies since 1976.
Mr. Fleischman is also a director of Citizens Utilities Company.
Age: 55.
Adam M. Lindemann is currently associated with Perry Partners, a
New York money management firm. Since April 1992 he has been
engaged in private investments. Prior to April 1992, he had been
Vice President - Corporate Development of Metro Mobile and
President of Vision Energy Resources, Inc., a wholly owned
subsidiary of Metro Mobile primarily engaged in the distribution
of propane. Adam M. Lindemann is the son of George L. Lindemann,
Chairman of the Board and Chief Executive Officer of Southern
Union. Age: 33.
George Rountree, III is an attorney in private practice in
Wilmington, North Carolina where he has been a senior partner in
the firm of Rountree & Seagle since its formation in 1977. Age:
61.
Class III - Term expires in 1996
George L. Lindemann has been Chairman of the Board and Chief
Executive Officer of Southern Union since February 1990. He has
been Chairman of the Executive Committee of the Board of
Directors since March 1990. Mr. Lindemann does not devote his
full business time to the Company. He was Chairman of the Board
and Chief Executive Officer of Metro Mobile from its formation in
1983 until April 1992. He has been President and a director of
Cellular Dynamics, Inc., the managing general partner of
Activated Communications Limited Partnership, since May 1982.
Age: 58.
Peter H. Kelley has been President and Chief Operating Officer of
Southern Union since February 1990, President and Chief Operating
Officer of Southern Union Gas since October 1990, and President
and Chief Executive Officer of Missouri Gas Energy since December
1993. Prior to joining the Company, he had been an officer of
Metro Mobile since 1986. Age: 47.
Dan K. Wassong has been the President, Chief Executive Officer
and a director of Del Laboratories, Inc., a manufacturer of
cosmetics, toiletries and pharmaceuticals, for more than the past
five years. Age: 64.
With the exception of Messrs. Denius and Pearson as described
above, each of the above-named directors first became a director
of Southern Union in February 1990.
EXECUTIVE OFFICERS WHO ARE NOT DIRECTORS
Officers of the Company are elected by the Southern Union Board
to serve at the pleasure of the Board or until their successors
are elected and qualified. Generally, officers are reelected
annually by the Board. The following executive officers of the
Company are not directors.
Eugene N. Dubay was named Executive Vice President and Chief
Operating Officer of Missouri Gas Energy in December 1993, and
prior to that served as Senior Vice President - Mergers and
Acquisitions, Chief Information Officer and Assistant Secretary
of Southern Union since March 1990. Previously, Mr. Dubay held
other positions with the Company, primarily of a financial
nature. Age: 45.
Ronald J. Endres has been Senior Vice President - Finance and
Administration since October 1990 and Chief Financial Officer
since October 1989. He has been a Senior Vice President since
April 1987. Previously, Mr. Endres held other financial and
operating positions with the Company since June 1969. Mr. Endres
was President of Southern Union Gas from January 1986 until
October 1990. Age: 50.
David J. Kvapil has been Vice President - Controller since July
1993 and Controller since August 1992. Prior to joining the
Company, Mr. Kvapil was with Coopers & Lybrand. Age: 39.
Dennis K. Morgan has been Vice President - Legal and Secretary
since April 1991 and a Vice President since January 1991.
Previously, he held various legal positions with Southern Union
Exploration Company. Age: 46.
Donald A. Scovil became Senior Vice President - Planning in
October 1990. He was Vice President - Controller of Southern
Union Gas from 1984 until October 1990. Previously, Mr. Scovil
held other financial positions with the Company since 1978. Age:
45.
ITEM 11. Executive Compensation.
The table below sets forth all compensation paid and awarded by
the Company in each year indicated to the Chief Executive Officer
of Southern Union and each of the four most highly-compensated
executive officers for the fiscal year ended June 30, 1994 other
than the Chief Executive Officer.
Securities
Underlying All Other
Name and Principal Options/ Compensa-
Position Year* Salary Bonus SARs(1) tion(2)
- - ------------------- ----- -------- ------- ---------- ----------
George L. Lindemann
Chairman of the 1994 $115,787 -- 39,375 $ 2,127
Board and Chief 1993 110,024 -- -- --
Executive Officer 1992 108,086 $ 55 67,725(3) --
Peter H. Kelley
President and 1994 274,928 70 39,375 6,713
Chief Operating 1993 261,450 70 -- 3,865
Officer 1992 244,861 13,805 39,375 2,182
Eugene N. Dubay
Executive Vice 1994 168,524 76,717 15,570 48,366(4)
President and 1993 153,680 9,568 -- 4,636
Chief Operating 1992 145,787 4,401 23,626 1,309
Officer -
Missouri Gas
Energy
Ronald J. Endres
Senior Vice 1994 183,967 80,989 23,625 9,073
President - 1993 175,812 1,920 -- 4,805
Finance and 1992 167,028 27,265 23,626 2,182
Administration
and Chief
Finance Officer
Dennis K. Morgan
Vice President - 1994 108,412 55,757 7,875 6,411
Legal and 1993 104,260 1,043 -- 3,873
Secretary 1992 102,915 3,170 7,875 1,589
- - -------------------------------
* Compensation in 1994 reflects the twelve months ended June 30
while compensation awarded in previous periods reflects the
years ended December 31, 1993 and 1992.
(1) Securities underlying options to purchase shares of Southern
Union common stock for all years presented have been adjusted
to reflect the 5% stock dividend distributed on June 30, 1994
to stockholders of record on June 14, 1994 and the three-for-
two stock split distributed as a 50% stock dividend on
March 9, 1994 to stockholders of record on February 23, 1994.
No stock appreciation rights were granted in 1994, 1993 and
1992.
(2) Company matching provided through the Southern Union
(401(k)) Savings Plan and the Southern Union Company
Supplemental Deferred Compensation Plan.
(3) Includes 27,000 non-qualified options to purchase shares of
Southern Union common stock granted to Mr. Lindemann in
exchange for the cancellation of 27,000 incentive stock
options. Such non-qualified stock options have the same
exercise price as the incentive stock options cancelled.
(4) Includes moving expenses for relocation from Texas to
Missouri.
PENSION PLAN TABLE
The following table reflects the combined benefits available from
Plans A and B, described below and the non-qualified plan.
PENSION PLAN TABLE
Years of Service
------------------------------------------------
Remuneration 15 20 25 30 35
- - ------------ -- -- -- -- --
$125,000 $ 40,751 $ 54,335 $ 54,335 $ 54,897 $ 64,047
150,000 50,126 66,835 66,835 66,897 78,047
175,000 59,501 79,335 79,335 79,335 92,047
200,000 68,876 91,835 91,835 91,835 106,047
225,000 78,251 104,335 104,335 104,335 108,108
250,000 87,626 108,108 108,108 108,108 108,108
300,000 106,376 108,108 108,108 108,108 108,108
400,000 108,108 108,108 108,108 108,108 108,108
450,000 108,108 108,108 108,108 108,108 108,108
500,000 108,108 108,108 108,108 108,108 108,108
The Company sponsors two retirement Income Plans. "Plan B"
covers all employees of Missouri Gas Energy and "Plan A" covers
all employees other than employees of Missouri Gas Energy. In
both plans, benefits are based upon average annual basic earnings
for the five highest consecutive years in the applicable period.
All officers, except for Mr. Dubay, are presently covered by Plan
A. Mr. Dubay was previously covered by Plan A, but is presently
covered by Plan B. However, after application of the non-
qualified supplemental plan, Mr. Dubay's combined benefits are on
the same basis as the other officers. Basic earnings, as defined
by Plan A, was redefined in December of 1989 to include W-2
earnings minus certain defined exclusions. Effective
December 31, 1989, the Plan A formula was modified to conform
with the requirements of the Tax Reform Act of 1986, as amended,
and the plan no longer integrates with Social Security. In order
to retain the previous benefit levels for selected highly
compensated employees, a separate Non-Qualified Plan was
established.
As of June 30, 1994, Messrs. Lindemann, Kelley, Dubay, Endres and
Morgan were credited with 4, 4, 12, 25 and 13 years of service,
respectively. Benefits are computed on the basis of a lifetime
annuity with a ten-year certain payment period commencing at age
65. With respect to the Non-Qualified Plan benefits, certain
offsets are included in the formula for estimated Social Security
benefits. Those offsets have been reflected in the amounts
presented in the table. Beginning in 1994, the maximum
compensation considered in the Qualified Plan is $150,000 rather
than the $235,840 limit applicable to 1993.
AGGREGATED OPTION/SAR EXERCISES IN THE LAST FISCAL YEAR AND
FISCAL YEAR-END OPTION/SAR VALUES
The Board of Directors of Southern Union does not have a separate
compensation committee. Except with respect to the 1992 Plan,
which is administered by the Board's Long-Term Stock Incentive
Plan Committee, all decisions regarding management compensation
are made by the full Board of Directors. Directors Brennan,
George Lindemann and Kelley, who are also executive officers of
the Company, participated in deliberations of the Board of
Directors concerning compensation for members of management other
than themselves.
Director Fleischman is Senior Partner of Fleischman and Walsh,
which provides legal services to the Company and certain of its
subsidiaries. (See "Item 13. Certain Relationships and Related
Transactions.")
OPTIONS/SAR GRANTED IN LAST FISCAL YEAR
The following table sets forth information with respect to all
options granted to each of the named executive officers during
the year ended June 30, 1994.
% of
Number Total
of Options/ Potential
Secur- SARs Realizable
ities Granted Value at
Under- to Em- Assumed Annual
lying ployees Rates of
Options/ in Exer- Expira- Appreciation
SARs Fiscal cise tion of Stock Price
-------------------
Name Granted Year Price Date 5% 10%
- - ----------- ------- ------- ------ ------ -------- ----------
George L.
Lindemann 39,375 18% $17.63 4/4/04 $436,669 $1,106,438
Peter H.
Kelley 39,375 18% 17.63 4/4/04 436,669 1,106,438
Eugene N.
Dubay 15,750 7% 17.63 4/4/04 174,668 442,575
Ronald J.
Endres 23,625 11% 17.63 4/4/04 262,001 663,863
Dennis K.
Morgan 7,875 4% 17.63 4/4/04 87,334 221,288
*No stock appreciation rights were granted in 1993.
All options except as noted vest at a rate of 20% per annum
commencing on the first anniversary of the date of grant.
The following table provides information regarding the exercise
of stock options by each of the named executive officers and the
value of unexercised "in-the-money" options as of June 30, 1994.
The securities underlying unexercised options have been adjusted
to reflect the 5% stock dividend distributed on June 30, 1994 to
stockholders of record on June 14, 1994 and the three-for-two
stock split distributed as a 50% stock dividend on March 9, 1994
to stockholders of record on February 23, 1994.
Number
of Securities Value of
Underlying Unexercised
Shares Unexercised In-the-Money
Acquired Options At Options At
on Fiscal Year End Fiscal Year End
--------------- -------------------
Exer- Value Exer- Unexer- Exer- Unexer-
Name cise Realized cisable cisable cisable cisable
- - ------------ ------ -------- ------- ------- -------- ----------
George L.
Lindemann * * 48,195 109,305 $430,961 $1,348,002
Peter H.
Kelley * * 49,928 78,435 411,094 1,066,190
Eugene N.
Dubay 10,000 $220,000 28,350 50,400 231,194 591,350
Ronald J.
Endres * * 37,800 64,575 304,526 779,074
Dennis K.
Morgan * * 1,575 14,175 15,955 202,655
The following table provides information regarding the repricing
of stock options for each of the named executive officers.
Ten-Year Option/SAR Repricings
Length
Number of
of Market Original
Secur- Price Exer- Option
ities of cise Term
Under- Stock Price Begin-
lying at Time at Time ning
Options/ of Re- of Re- at
SARs pricing pricing New Date
Name and Repriced or or Exer- of
Principal or Amend- Amend- cise Amend-
Position Date Amended ment ment Price ment*
- - ------------- -------- ------- ------ ------- ------ -------
George L.
Lindemann
Chairman April 4,
of the 1994 39,375 $17.63 $21.90 $17.63 approxi-
Board and mately
Chief 9 years,
Executive 10 months
Officer
Peter H.
Kelley
President April 4,
and Chief 1994 39,375 17.63 21.90 17.63 approxi-
Operating mately
Officer 9 years,
10 months
Eugene N.
Dubay
Executive April 4,
Vice 1994 15,750 17.63 21.90 17.63 approxi-
President mately
and Chief 9 years,
Operating 10 months
Officer -
Missouri
Gas Energy
Ronald J.
Endres
Senior April 4,
Vice 1994 23,625 17.63 21.90 17.63 approxi-
President - mately
Finance 9 years,
and Admin- 10 months
istration
and Chief
Financial
Officer
Dennis K.
Morgan
Vice April 4,
President - 1994 7,875 17.63 21.90 17.63 approxi-
Legal and mately
Secretary 9 years,
10 months
- - -------------------------------
* Vesting was restarted at the date of repricing.
The Long-Term Stock Incentive Plan Committee (the "Committee") of
the Board of Directors of the Company authorized the repricing of
all options granted on February 10, 1994 to officers and
employees.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
The following table shows as of September 6, 1994, unless
otherwise indicated, the number of all shares of Southern Union's
common stock beneficially held by each director, by each
executive officer named in the management compensation tables
(see "Management Compensation"), by each person known by the
Company to beneficially own 5% or more of Southern Union's
outstanding shares of common stock, and by all directors and
executive officers as a group. Except as otherwise indicated,
each owner has sole voting and investment power over his shares.
Number of Percent of
Name of Beneficial Owner Shares Held Class
- - ------------------------ ----------- ----------
George L. Lindemann 1,550,120(1) 13.14
Adam M. Lindemann 959,553(2) 8.13
George Lindemann, Jr. 959,553(2) 8.13
950 Maidstone Drive
Wellington, Florida 33414
Sloan N. Lindemann 959,553(2) 8.13
800 Fifth Avenue
New York, New York 10022
John E. Brennan 147,425(3) 1.25
Frank W. Denius 5,672(4) *
Aaron I. Fleischman 143,914(5) 1.22
Peter H. Kelley 47,236(6) *
Roger J. Pearson 8,543(7) *
George Rountree, III 18,834(8) *
Dan K. Wassong 6,690 *
Eugene N. Dubay 30,926(9) *
Ronald J. Endres 49,083(10) *
Dennis K. Morgan 4,601(11) *
Lee M. Bass 604,208(12)(13) 5.12
201 Main Street
Fort Worth, Texas 76102
Sid R. Bass Management Trust(14) 604,208(12)(15) 5.12
201 Main Street
Fort Worth, Texas 76102
Snyder Capital Management, Inc.(16) 636,574(16) 5.40
350 California Street, Suite 1460
San Francisco, California 94104
All Directors and Executive Officers
as a group (17 in group) 2,952,583(17) 25.02
- - --------------------------------
(1) Of these shares: 638,750 are owned by Mr. Lindemann
including: approximately 204 shares held by the Southern
Union Savings (401(k)) Plan and 157 shares held through the
Southern Union Company Supplemental Deferred Compensation
Plan; 845,220 shares owned by his wife,
Dr. F. B. Lindemann; and 66,150 shares of common stock
Mr. Lindemann is entitled to purchase upon the exercise of
presently exercisable stock options pursuant to the
Company's 1982 Stock Option Plan (the "1982 Plan") and the
Company's 1992 Long-Term Stock Incentive Plan (the "1992
Plan"). Such number excludes options to acquire shares of
common stock that are not exercisable within sixty days of
June 30, 1994. See "Management Compensation - Stock
Options." A total of 1,435,761 shares held by
Mr. and Mrs. Lindemann and their three children have been
pledged to Activated Communications Limited Partnership.
Activated Communications Limited Partnership, which is
owned and managed by or for the benefit of the Lindemanns,
provided the funds used to purchase such shares.
Mr. Lindemann is the Chairman of the Board and President,
and Mrs. Lindemann is a director of the sole general
partner of Activated.
(2) This information, including the numbers of shares set forth
in the table, was obtained from and is reported herein in
reliance upon a Schedule 13D (as amended through March 24,
1994) filed by Adam M. Lindemann, Dr. F.B. Lindemann,
George L. Lindemann, George Lindemann, Jr. and
Sloan N. Lindemann. Except as described in Note (1), each
member of the Lindemann family disclaims beneficial
ownership of any shares owned by any other member of the
Lindemann family. Accordingly, except as described in Note
(1), the numbers of shares set forth in the table reflect
only such individual's direct ownership.
(3) Of these shares, 1,757 shares are owned by his wife, 78,246
are held in two separate trusts for the benefit of members
of his family and 45,675 represent shares that Mr. Brennan
is entitled to purchase upon the exercise of presently
exercisable stock options granted to him pursuant to the
1982 Plan and the 1992 Plan. Such number excludes options
to acquire shares of common stock that are not exercisable
within sixty days of June 30, 1994. See "Management
Compensation - Stock Options."
(4) Includes approximately 392 vested shares allocated to
Mr. Denius pursuant to the Southern Union Company
Directors' Deferred Compensation Plan.
(5) Includes: 39,375 shares that Fleischman and Walsh, in
which Mr. Fleischman is Senior Partner, is entitled to
purchase upon exercise of a warrant; approximately 783
vested shares allocated to Mr. Fleischman pursuant to the
Southern Union Company Directors' Deferred Compensation
Plan; and 39,309 shares owned by the Fleischman and Walsh
401(k) Profit Sharing Plan ("F&W Plan") for which
Mr. Fleischman is a trustee and a beneficiary.
Mr. Fleischman disclaims beneficial ownership of those
shares held by the F&W Plan in which he does not have a
pecuniary interest.
(6) Includes 36,650 shares that Mr. Kelley is entitled to
purchase upon the exercise of presently exercisable stock
options granted pursuant to the 1982 Plan and the 1992
Plan. Such number excludes options to acquire shares of
common stock that are not exercisable within sixty days of
the date hereof. See "Management Compensation - Stock
Options." Such number also includes: approximately 3,559
vested shares held by the Southern Union Savings (401(k)) Plan;
259 vested shares held through the Southern Union Stock
Purchase Plan; and 376 vested shares held through the
Supplemental Plan.
(7) Includes 6,737 shares owned jointly by Mr. Pearson and his
father.
(8) Includes: 542 shares owned by his wife; and approximately
904 vested shares allocated to Mr. Rountree pursuant to the
Directors' Deferred Compensation Plan.
(9) Includes 26,775 shares Mr. Dubay is entitled to purchase
upon the exercise of presently exercisable stock options
pursuant to the 1982 Plan and the 1992 Plan. Such number
excludes options to acquire shares of common stock that are
not exercisable within sixty days of the date hereof. See
"Management Compensation - Stock Options." Such number
also includes: approximately 1,249 vested shares held
through the Southern Union (401(k)) Savings Plan; and 1,164
vested shares held through the Supplemental Plan.
(10) Includes 42,525 shares Mr. Endres is entitled to purchase
upon the exercise of presently exercisable stock options
pursuant to the 1982 Plan and the 1992 Plan. Such number
excludes options to acquire shares of common stock that are
not exercisable within sixty days of the date hereof. See
"Management Compensation - Stock Options." Such number
also includes: approximately 2,633 vested shares held
through the Southern Union (401(k)) Savings Plan; and 665
vested shares held through the Supplemental Plan.
(11) Includes 3,150 shares Mr. Morgan is entitled to purchase
upon the exercise of presently exercisable stock options
pursuant to the 1992 Plan. Such number excludes options to
acquire shares of common stock that are not exercisable
within sixty days of the date hereof. See "Management
Compensation - Stock Options." Such number also includes:
approximately 1,082 vested shares held through the Southern
Union (401(k)) Savings Plan; and approximately 369 vested
shares held through the Supplemental Plan.
(12) Does not include 51,975 (representing less than 1% of the
common stock outstanding) owned by BEPCO International,
Inc., which is owned in equal parts by Lee M. Bass,
Sid R. Bass and two other persons. Neither Lee M. Bass nor
Sid R. Bass is a director or officer of BEPCO
International, Inc. This information, the information set
forth in note (14) and the number of shares owned by
Lee M. Bass and Sid R. Bass Management Trust set forth in
the table were obtained from and is reported herein in
reliance upon a Schedule 13D filed by Sid R. Bass,
Lee M. Bass, Sid R. Bass Management Trust and BEPCO
International, Inc. as adjusted for the stock dividend and
split since the date of such reports.
(13) Does not include shares reported to be held by Sid R. Bass
Management Trust. See notes (12), (14) and (15).
(14) Sid R. Bass Management Trust is a Revocable Trust under
Texas law for which Sid R. Bass, Lee M. Bass and one other
person are trustees. See note (12).
(15) Does not include shares reported to be held by Lee M. Bass.
See notes (12) and (13).
(16) This information was obtained from and is reported herein
in reliance upon a Schedule 13G dated February 10, 1994
filed by Snyder Capital Management, Inc. as adjusted for
the stock dividend and split since the date of such
reports.
(17) Excludes options granted pursuant to the 1982 Plan and the
1992 Plan to acquire shares of common stock that are not
presently exercisable or do not become exercisable within
sixty days of the date hereof. Includes approximately
15,984 vested shares held through certain Company benefit
and deferred savings plans for which certain executive
officers and directors may be deemed beneficial owners, but
excludes shares which have not vested under the terms of
such plans.
* Indicates less than one percent (1%).
ITEM 13. Certain Relationships and Related Transactions.
In April 1992, Southern Union advanced $375,980 to
Peter H. Kelley, President, Chief Operating Officer and a
director of Southern Union, to enable him to repay certain funds
borrowed by him from his previous employer in connection with his
departure from his previous employer to become an executive
officer of the Company. The advance is evidenced by a note,
payable on demand, bearing an annual percentage interest rate
equal to the prime rate announced by Texas Commerce Bank National
Association on the date the advance was made, plus one-half
percent (1/2%). As of June 30, 1994, Mr. Kelley's outstanding
principal and accrued but unpaid interest balance was
approximately $350,600.
On October 4, 1993, Southern Union's Board of Directors approved
and ratified payments by the Company to Activated Communications,
Inc. ("Activated") for use by the Company of Activated's office
space in New York City. Activated is controlled and operated by
Southern Union Chairman George L. Lindemann and Vice Chairman
John E. Brennan, who, along with Director Adam M. Lindemann, did
not participate in such Board action. Monthly rental payments
commenced effective as of August 1992 for approximately half of
Activated's base lease payments before certain adjustments.
Total payments to Activated in 1994, 1993 and 1992 were
approximately $125,000, $187,000 and $104,000, respectively.
Director Fleischman is Senior Partner of Fleischman and Walsh,
which provides legal services to the Company and certain of its
subsidiaries. For the fiscal year ended June 30, 1994, the total
amount paid by the Company to Fleischman and Walsh for legal
services was approximately $1,224,000. On February 10, 1994, the
Company granted to Fleischman and Walsh a warrant, which was
subsequently repriced on April 4, 1994 at the same time and to
the same price as the Company repriced options granted to Company
employees on February 10, 1994. The warrant currently entitles
the holder to purchase 39,375 shares of common stock at an
exercise price of $17.63 and expires on February 10, 2004.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports
on Form 8-K.
(a)(1) Financial Statements. Reference is made to the Index on
page F-1 for a list of all financial statements filed as
part of this Report.
(a)(2) Financial Statement Schedules. Reference is made to the
Index on page F-1 for a list of all financial statement
schedules filed as a part of this Report.
(a)(3) Exhibits. Reference is made to the Exhibit Index on
pages E-1 and E-2 for a list of all exhibits filed as a
part of this Report.
(b) Reports on Form 8-K.
A current report was filed on June 7, 1994 with respect
to the change of the Company's fiscal year-end from
December 31st to June 30th for financial reporting
purposes.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, Southern Union has duly caused
this report to be signed by the undersigned, thereunto duly
authorized, on September 20, 1994.
SOUTHERN UNION COMPANY
By PETER H. KELLEY
---------------------
Peter H. Kelley
President and Chief
Operating Officer
Pursuant to the requirements of the Securities Exchange Act of
1934, this report has been signed by the following persons on
behalf of Southern Union and in the capacities indicated as of
September 20, 1994.
Signature/Name Title
- - -------------- -----
GEORGE L. LINDEMANN* Chairman of the Board,
Chief Executive Officer
and Director
JOHN E. BRENNAN* Director
FRANK W. DENIUS* Director
AARON I. FLEISCHMAN* Director
PETER H. KELLEY Director
---------------
Peter H. Kelley
ADAM M. LINDEMANN* Director
ROGER J. PEARSON* Director
GEORGE ROUNTREE, III* Director
DAN K. WASSONG* Director
RONALD J. ENDRES Senior Vice President of
----------------
Ronald J. Endres Administration,
and Chief Financial Officer
DAVID J. KVAPIL Vice President and Controller
---------------
David J. Kvapil (Principal Accounting Officer)
*By PETER H. KELLEY
----------------
Peter H. Kelley
Attorney-in-fact