Back to GetFilings.com
=================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-K
X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---
SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended June 30, 1999
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
- ---
SECURITIES EXCHANGE ACT OF 1934
Commission File No. 1-6407
SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 Lavaca Street, Eighth Floor 78701
Austin, Texas (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code:
(512) 477-5852
Securities Registered Pursuant to Section 12(b) of the Act:
Name of each exchange on which
Title of each class registered
------------------- ------------------------------
Common Stock, par value $1 New York Stock Exchange
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
--- ---
Indicate by check mark if disclosure of delinquent filers pursu-
ant 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 amendment to this
Form 10-K.
---
The aggregate market value of the voting stock held by non-
affiliates of the registrant on August 31, 1999, was $371,256,150.
The number of shares of the registrant's Common Stock outstanding
on August 31, 1999 was 31,235,009.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's Annual Report to Stockholders for
the year ended June 30, 1999, are incorporated by reference in
Parts II and IV.
Portions of the registrant's proxy statement for its annual
meeting of stockholders to be held on October 19, 1999, are
incorporated by reference into Part III.
=================================================================
PART I
ITEM 1. Business.
Introduction
Southern Union Company (Southern Union and together with its sub-
sidiaries, the Company) was incorporated under the laws of the
State of Delaware in 1932. Southern Union is one of the top 15
gas utilities in the United States, as measured by number of cus-
tomers. The Company's principal line of business is the distri-
bution of natural gas as a public utility through Southern Union
Gas, Missouri Gas Energy and Atlantic Utilities, doing business
as South Florida Natural Gas (SFNG), each of which is a division
of Southern Union. Southern Union Gas, headquartered in Austin,
Texas, serves 513,000 customers in Texas (including the cities of
Austin, Brownsville, El Paso, Galveston, Harlingen, McAllen and
Port Arthur). Missouri Gas Energy, headquartered in Kansas City,
Missouri, serves 484,000 customers in central and western
Missouri (including the cities of Kansas City, St. Joseph, Joplin
and Monett). SFNG, headquartered in New Smyrna Beach, Florida,
serves 4,400 customers in central Florida (including the cities
of New Smyrna Beach, Edgewater and areas of Volusia County,
Florida.) The diverse geographic area of the Company's natural
gas distribution systems reduces the sensitivity of Southern
Union's operations to weather risk and local economic conditions.
Subsidiaries of Southern Union have been established to support
and expand natural gas sales and to capitalize on the Company's
gas energy expertise. These subsidiaries market natural gas to
end-users, operate natural gas pipeline systems, distribute pro-
pane and sell commercial gas air conditioning and other gas-fired
engine-driven applications. By providing "one-stop shopping,"
the Company can serve its various customers' specific energy
needs, which encompass substantially all of the natural gas dis-
tribution and sales businesses from natural gas sales to
specialized energy consulting services. The Company distributes
propane to 11,000 and 1,100 customers in Texas and Florida,
respectively. Additionally, certain subsidiaries own or hold
interests in real estate and other assets, which are primarily
used in the Company's utility business. Central to all of the
Company's present businesses and strategies is the sale and
transportation of natural gas. See Company Operations and
Investments.
The Company is a sales and market-driven energy company whose
management is committed to achieving profitable growth of its
utility businesses in an increasingly competitive business
environment. Management's strategies for achieving these objec-
tives principally consist of: (i) promoting new sales oppor-
tunities and markets for natural gas and propane; (ii) enhancing
financial and operating performance; and (iii) expanding the
Company through development of existing utility businesses and
selective acquisition of new utility businesses. Management
develops and continually evaluates these strategies and their
implementation 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 existing
businesses, reflects the Company's commitment to its core gas
utility business.
The Company has a goal of selected growth and expansion, pri-
marily in the utilities industry. To that extent, the Company
intends to consider, when appropriate, and if financially prac-
ticable to pursue, the acquisition of other utility 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 deter-
mined by management and the Southern Union Board of Directors.
See Management's Discussion and Analysis of Results of Operations
and Financial Condition (MD&A) -- Cautionary Statement Regarding
Forward-Looking Information contained in the Company's Annual
Report to Stockholders for the year ended June 30, 1999 (the
Annual Report), portions of which are filed as Exhibit 13 hereto.
Acquisitions
On June 7, 1999, Southern Union and Pennsylvania Enterprises,
Inc. (PEI) announced a definitive merger agreement. The agree-
ment calls for PEI to merge into Southern Union in a transaction
valued at approximately $500 million, including assumption of
debt. If approved, each PEI shareholder will receive Southern
Union common stock having a value of $32.00, plus $3.00 in cash,
subject to adjustment. PEI is a multifaceted energy company
headquartered in Wilkes-Barre, Pennsylvania with natural gas dis-
tribution being its primary business. PEI's principal sub-
sidiary, PG Energy, together with Honesdale Gas Company serve
more than 152,000 gas customers in northeastern and central
Pennsylvania. In addition, PEI markets electricity to more than
20,000 customers through PG Energy Power Plus. Southern Union
anticipates having Southern Union and PEI shareholders approvals
and all regulatory approvals for this merger in the second
quarter of the Company's fiscal year 2000.
Effective December 31, 1997, Southern Union acquired Atlantic
Utilities Corporation and Subsidiaries (Atlantic) for 755,650
pre-split and pre-stock dividend shares of common stock valued at
$18,041,000 and cash of $4,436,000. Atlantic is operated as
SFNG, a natural gas division of Southern Union, and Atlantic Gas
Corporation, a propane subsidiary of the Company. Atlantic cur-
rently serves 4,400 natural gas customers and 1,100 propane cus-
tomers in central Florida.
On July 23, 1997, two subsidiaries of Southern Union acquired an
equity ownership in a natural gas distribution company and other
related operations in Piedras Negras, Mexico for $2,700,000.
Southern Union currently has a 43% equity ownership in this com-
pany. The natural gas distribution company currently serves
19,500 customers and is across the border from the Company's
Eagle Pass, Texas service area. On September 8, 1997, the Com-
pany purchased a 45-mile intrastate pipeline, which augments the
Company's gas supply to the city of Eagle Pass and, subject to
necessary regulatory approvals, ultimately Piedras Negras.
Company Operations and Investments
The Company's principal line of business is the distribution of
natural gas through its Southern Union Gas, Missouri Gas Energy
and SFNG 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. Missouri Gas Energy provides
service to various cities and communities in central and western
Missouri including Kansas City, St. Joseph, Joplin and Monett.
SFNG provides service to various cities and communities in
central Florida including New Smyrna Beach and Edgewater. 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 winter heating season.
Southern Union Energy International, Inc. (SUEI) and Southern
Union International Investments, Inc. (Investments), both wholly-
owned subsidiaries of Southern Union, participate in energy-
related projects internationally. Energia Estrella del Sur, S.
A. de C. V. (Estrella), a wholly-owned Mexican subsidiary of SUEI
and Investments, seeks to participate in energy-related projects
in Mexico. Estrella has a 43% equity ownership in a natural gas
distribution company, along with other related operations, which
currently serves 19,500 customers in Piedras Negras, Mexico,
across the border from Southern Union Gas' Eagle Pass, Texas ser-
vice area.
Mercado Gas Services Inc. (Mercado), a wholly-owned subsidiary of
Southern Union, markets natural gas to approximately 240 commer-
cial and industrial customers. Mercado's sales and purchasing
activities are made through short-term and long-term contracts.
These contracts and business activities are not subject to direct
rate regulation. Mercado had gas sales of 19,304 MMcf and 18,352
MMcf for the year ended June 30, 1999 and 1998, respectively.
Southern Transmission Company (Southern), a wholly-owned sub-
sidiary of Southern Union, owns and operates intrastate pipelines
which connect the cities of Lockhart, Luling, Cuero, Shiner,
Yoakum, and Gonzales, Texas, as well as a line that provides gas
to an industrial customer in Port Arthur, Texas. Southern also
owns a transmission line which supplies gas to the community of
Sabine Pass, Texas. On September 8, 1997, Southern purchased a
45-mile intrastate pipeline which augments gas supply to the
city of Eagle Pass, Texas, and ultimately into Piedras Negras,
Mexico. Southern transported 873 MMcf and 915 MMcf of gas for
the year ended June 30, 1999 and 1998, respectively.
Norteno Pipeline Company (Norteno), 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. Norteno transported a combined 6.3 billion cubic
feet (Bcf) for the city of Juarez, Mexico and the Samalayuca
Power Plant in north Mexico in fiscal 1999. Norteno transported
6,377 MMcf and 11,538 MMcf of gas for the year ended June 30,
1999 and 1998, respectively.
SUPro Energy Company (SUPro), a wholly-owned subsidiary of
Southern Union, provides propane gas services to 11,000 customers
located principally in El Paso and Alpine, Texas and Las Cruces,
New Mexico and surrounding communities. SUPro sold 5,945,000 and
5,125,000 gallons of propane for the year ended June 30, 1999 and
1998, respectively.
Atlantic Gas Corporation, a wholly-owned subsidiary of Southern
Union, provides propane gas services to 1,100 customers located
in and around the communities of New Symrna Beach, Lauderhill and
Dunnellon, Florida. Atlantic Gas Corporation sold 1,348,000
gallons of propane during the twelve months ended June 30, 1999
and 633,000 gallons of propane during the six months ended
June 30, 1998.
Energy WorX, a wholly-owned subsidiary of Southern Union, pro-
vides interactive computer-based training for the natural gas
transmission and distribution industry.
Southern Union Total Energy Systems, Inc., a wholly-owned sub-
sidiary of Southern Union, markets and sells commercial gas air
conditioning, irrigation pumps and other gas-fired engine-driven
applications and related services.
ConTigo, Inc., a wholly-owned subsidiary of Southern Union formed
in January 1996, provides centralized call center services for
the majority of the Texas service areas. Effective July 1, 1999,
ConTigo was dissolved and became part of Southern Union Gas and
will henceforth be operated as Southern Union Gas Customer Ser-
vice.
During fiscal 1998 and 1999, the Company made equity investments
in a leading developer of advanced gas turbine-driven generator
technology and a developer of a mobile workforce management sys-
tem. The Company also holds investments in commercially
developed real estate in Austin, El Paso, Harlingen and Kansas
City through Southern Union's wholly-owned subsidiary, Lavaca
Realty Company (Lavaca Realty).
Competition
The Company's gas distribution divisions are not currently in
significant direct competition with any other distributors of
natural gas to residential and small commercial customers within
their service areas. However, 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 other
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 suc-
cessfully used flexible rate provisions, when needed, to retain
customers who may have access to alternative energy sources.
As energy providers, Southern Union Gas, Missouri Gas Energy and
SFNG 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 natural gas
service. There can be no assurance, however, that future fluctu-
ations in gas and electric costs will not reduce the cost
advantage of natural gas service. The cost of expansion for peak
load requirements of electricity in some of Southern Union Gas'
and Missouri Gas Energy's 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 oils, natural gas and pro-
pane, particularly by industrial, electric generation and
agricultural customers, has also increased due to the volatility
of natural gas prices and increased marketing efforts from
various energy companies. 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 of natural gas service is dependent upon the Com-
pany'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 neces-
sary to dispatch and monitor gas volumes on a daily, hourly and
even a real-time basis to ensure reliable service to customers.
The Federal Energy Regulatory Commission (FERC) required the
"unbundling" of services offered by interstate pipeline companies
beginning in 1992. As a result, gas purchasing and transporta-
tion decisions and associated risks have been shifted from the
pipeline companies to the gas distributors. The increased de-
mands 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 who have demon-
strated a history of contracting favorable and efficient gas
supply arrangements in an open market system.
The majority of Southern Union Gas' 1999 gas requirements for
utility operations were delivered under long-term transportation
contracts through four major pipeline companies. The majority of
Missouri Gas Energy's 1999 gas requirements were delivered under
short- and long-term transportation contracts through four major
pipeline companies. The majority of SFNG's 1999 gas requirements
were delivered under a management supply contract through one
major pipeline company. These contracts have various expiration
dates ranging from calendar year 2000 through 2018. Southern
Union Gas also purchases significant volumes of gas under long-
and short-term arrangements with suppliers. The amounts of such
short-term purchases are contingent upon price. Southern Union
Gas, Missouri Gas Energy and SFNG all have firm supply commit-
ments for all areas that are supplied with gas purchased under
short-term arrangements. Missouri Gas Energy also holds contract
rights to over 16 Bcf of storage capacity to assist in meeting
peak demands.
Gas sales and/or transportation contracts with interruption pro-
visions, whereby large volume users purchase gas with the under-
standing 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. 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, Missouri Gas
Energy or SFNG utility sales customers during the last ten years.
The Company is committed under various agreements to purchase
certain quantities of gas in the future. At June 30, 1999, the
Company has purchase commitments for certain quantities of gas
at variable, market-based prices that have an annual value of
$94,275,000. The Company's purchase commitments may extend over
a period of several years depending upon when the required quan-
tity is purchased. The Company has purchase gas tariffs in
effect for all its utility service areas that provide for
recovery of its purchase gas costs under defined methodologies.
In August 1997, the Missouri Public Service Commission (MPSC)
issued an order authorizing Missouri Gas Energy to begin making
semi-annual purchase gas adjustments (PGA) in November and April,
instead of more frequent adjustments as previously made. Addi-
tionally, the order authorized Missouri Gas Energy to establish
an Experimental Price Stabilization Fund for purposes of pro-
curing natural gas financial instruments to hedge a minimal
portion of its gas purchase costs for the winter heating season.
The cost of purchasing these financial instruments and any gains
derived from such activities are passed on to the Missouri custo-
mers through the PGA. Accordingly, there is no earnings impact
as a result of the use of these financial instruments. These
procedures help stabilize the monthly heating bills for Missouri
customers. The Company believes it bears minimal risk under the
authorized transactions.
The MPSC approved a three year, experimental gas supply incentive
plan for Missouri Gas Energy effective July 1, 1996. Under the
plan, the Company and Missouri Gas Energy's customers share in
certain savings below benchmark levels of gas costs achieved as a
result of the Company's gas procurement activities. Likewise, if
natural gas is acquired above benchmark levels, both the Company
and customers share in such costs. For the years ended June 30,
1999, 1998 and 1997, the incentive plan achieved a reduction of
overall gas costs of $6,900,000, $9,200,000 and $10,200,000,
respectively, resulting in savings to Missouri customers of
$4,000,000, $5,100,000 and $5,600,000, respectively. The Company
recorded revenues of $2,900,000, $4,100,000 and $4,600,000 in
1999, 1998 and 1997, respectively, under this plan. Missouri Gas
Energy is currently working with the MPSC to develop an alternate
plan due to the July 1, 1999 expiration of the experimental gas
supply incentive plan, however, there can be no assurance that
this or any similar plan will be approved by the MPSC for
Missouri Gas Energy.
Utility Regulation and Rates
The Company's rates and operations are subject to regulation by
local, state and federal authorities. In Texas, municipalities
have primary jurisdiction over natural gas rates within their
respective incorporated areas. Rates in adjacent environs and
appellate matters are the responsibility of the Railroad Commis-
sion of Texas (RRC). In Missouri, natural gas rates are estab-
lished by the MPSC on a system-wide basis. In Florida, natural
gas rates are established by the Florida Public Service Commis-
sion on a system-wide basis. The FERC and the RRC have jurisdic-
tion over rates, facilities and services of Norteno and Southern,
respectively.
The Company holds non-exclusive franchises with varying expira-
tion dates in all incorporated communities where it is necessary
to carry on its business as it is now being conducted. Kansas
City, Missouri; El Paso, Texas; Austin, Texas; Port Arthur,
Texas; and St. Joseph, Missouri are the five largest cities in
which the Company's utility customers are located. The Kansas
City, Missouri franchise expired in May 1998. The Company is
currently in franchise renewal negotiations with Kansas City and
expects to obtain renewal of such franchise before the end of
calendar year 1999. The franchises in the following cities
expire as follows: El Paso, Texas in 2000, in which the Company
is currently in discussions; Austin, Texas in 2006; and Port
Arthur, Texas in 2013. The Company fully expects these fran-
chises to be renewed upon their expiration. The franchise in St.
Joseph, Missouri is perpetual.
Gas service rates are established by regulatory authorities to
permit utilities the opportunity to recover operating, adminis-
trative and financing costs, and the opportunity to earn a rea-
sonable 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.
This is important because the cost of natural gas accounts for a
significant portion of the Company's total expenses. The appro-
priate regulatory authority must receive notice of such adjust-
ments prior to billing implementation.
The Company must support any service rate changes to its regula-
tors using a historic test year of operating results adjusted to
normal conditions and for any known and measurable revenue or
expense changes. Because the 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 pro-
vides an even revenue stream, the usage charge increases the Com-
pany's annual revenue and earnings in the traditional heating
load months when usage of natural gas increases. In recent
years, the majority of the Company's rate increases in Texas have
resulted in increased monthly fixed charges which help stabilize
earnings. Weather normalization clauses, in place in the City of
Austin, El Paso environs, Galveston, Port Arthur and two other
service areas in Texas, also help stabilize earnings.
On August 21, 1998, Missouri Gas Energy was notified by the MPSC
of its decision to grant a $13,300,000 annual increase to revenue
effective on September 2, 1998, which is primarily earned volu-
metrically. The MPSC rate order reflected a 10.93% return on
common equity. The rate order, however, disallowed certain
previously recorded deferred costs requiring a non-cash write-off
of $2,221,000. Generally accepted accounting principles required
the Company to immediately record this charge to earnings which
Southern Union did as of June 30, 1998. On December 8, 1998, the
MPSC denied rehearing requests made by all parties other than
Missouri Gas Energy and granted a portion of Missouri Gas
Energy's rehearing request. The MPSC will conduct further pro-
ceedings to take additional evidence on those matters for which
it granted Missouri Gas Energy a rehearing. If the MPSC adopts
Missouri Gas Energy's positions on rehearing, then Missouri Gas
Energy would be authorized an additional $2,200,000 of base
revenues increasing the $13,300,000 initially authorized in its
August 21, 1998 order to $15,500,000. The MPSC's orders may be
subject to judicial review and although certain parties may argue
for a reduction in Missouri Gas Energy's authorized base revenue
increase on judicial review, Missouri Gas Energy expects such
arguments to be unsuccessful.
On April 13, 1998, Southern Union Gas filed a $2,228,000 request
for a rate increase from the city of El Paso, a request the city
subsequently denied. On April 21, 1998, the city council of El
Paso voted to reduce the Company's rates by $1,570,000 annually
and to order a one-time cost of gas refund of $475,000. On
May 21, 1998, Southern Union Gas filed with the RRC an appeal of
the city of El Paso's actions to reduce the Company's rates and
require a one-time cost of gas refund. On December 21, 1998, the
RRC issued its order implementing an $884,000 one-time cost of
gas refund and a $99,000 base rate reduction. The cost of gas
refund was completed in February 1999.
On January 22, 1997, Missouri Gas Energy was notified by the MPSC
of its decision to grant an $8,847,000 annual increase to revenue
effective on February 1, 1997. Pursuant to a 1989 MPSC order,
Missouri Gas Energy is engaged in a major gas safety program in
its service area (Missouri Safety Program). In connection with
this program, the MPSC issued an accounting authority order (AAO)
in Case No. GO-92-234 in 1994 which authorized Missouri Gas
Energy to defer depreciation expenses, property taxes and
carrying costs at a rate of 10.54% on the costs incurred in the
Missouri Safety Program. This AAO was consistent with those
which were issued by the MPSC from 1990 to 1993 to Missouri Gas
Energy's prior owner. The MPSC rate order of January 22, 1997,
however, retroactively reduced the carrying cost rate applied by
the Company on the expenditures incurred on the Missouri Safety
Program since early 1994 to an Allowance for Funds Used During
Construction (AFUDC) rate of approximately 6%. The Company filed
an appeal of that portion of the rate order in the Missouri State
Court of Appeals, Western District. On August 18, 1998, the
Missouri State Court of Appeals denied the Company's appeal
resulting in a one-time non-cash write-off of $5,942,000 of
previously recorded deferred costs which was recorded as of
June 30, 1998. The Company believes that the inconsistent treat-
ment by the MPSC in subsequently changing to the AFUDC rate from
the previously ordered 10.54% rate constitutes retroactive rate-
making. Unfortunately, the decision by the Missouri State Court
of Appeals failed to address certain specific language within the
1994 AAO that the Company believed prevented the MPSC from retro-
actively changing the carrying cost rate. Southern Union
requested transfer to the Missouri Supreme Court, but was denied
that request.
On September 18, 1997, the MPSC approved a global settlement
among the Company, the Missouri Office of Public Counsel (OPC)
and MPSC staff to resolve complaints brought by the OPC and the
MPSC staff regarding billing errors during the 1995/1996 and
1996/1997 winter heating seasons. The settlement called for
credits to gas bills by Missouri Gas Energy totaling $1,575,000
to those customers overbilled and a $550,000 contribution by
Missouri Gas Energy to a social service organization for the
express purpose of assisting needy Missouri Gas Energy customers
in paying their gas bills. These balances were recorded as of
June 30, 1997.
The approval of the January 31, 1994 acquisition of the Missouri
properties by the MPSC was subject to the terms of a stipulation
and settlement agreement, which, among other things, requires
Missouri Gas Energy to reduce rate base by $30,000,000 (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 acquisition.
During the three-year period ended June 30, 1999, the Company did
not file for any other rate increases in any of its major service
areas, although several annual cost of service adjustments were
filed.
In addition to the regulation of its utility and pipeline busi-
nesses, the Company is affected by numerous other regulatory
controls, including, among others, pipeline safety requirements
of the United States Department of Transportation, safety regula-
tions 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.
Environmental
The Company assumed responsibility for certain environmental
matters in connection with the acquisition of Missouri Gas
Energy. Additionally, the Company is investigating the possi-
bility that the Company or predecessor companies may have been
associated with manufactured gas plant sites in other of its
former service territories, principally in Arizona and New
Mexico, and present service territories in Texas. See MD&A --
Cautionary Statement Regarding Forward-Looking Information and
Commitments and Contingencies in the Notes to the Consolidated
Financial Statements contained in the Annual Report.
Investments in Real Estate
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 and drive-through bank
(Lavaca Plaza). Approximately 52% of the office space at Lavaca
Plaza is used in the Company's business while the remainder is
leased to non-affiliated entities. Lavaca Realty also owns a
two-story office building in El Paso, Texas as well as a one-
story office building in Harlingen, Texas. Other significant
real estate investments held at June 30, 1999 include 39,341
square feet of undeveloped land in McAllen, Texas and 25,000
square feet of improved property in Kansas City, Missouri, of
which 40% is occupied by Missouri Gas Energy and the remainder by
a non-affiliated entity.
Employees
As of July 31, 1999, the Company had 1,563 employees, of whom
1,220 are paid on an hourly basis and 343 are paid on a salary
basis. Of the 1,220 hourly paid employees, 45% are represented
by unions. Of those employees represented by unions, 95% are
employed by Missouri Gas Energy. In December 1998, the Company
agreed to five-year contracts with each bargaining-unit repre-
senting Missouri employees, which were effective in May 1999.
On June 4, 1997, Southern Union Gas employees in Austin, Texas
covered by a collective bargaining agreement voted to decertify
their representing union. Additionally, effective May 1, 1998,
employees in Galveston, Texas chose to withdraw their membership
from their representing union.
From time to time the Company may be subject to labor disputes;
however, such disputes have not previously disrupted its busi-
ness. The Company believes that its relations with its employees
are good.
Statistics of Principal Utility and Related Operations
The following table shows certain operating statistics of the
Company's gas distribution divisions with operations in Texas and
Missouri:
Year Ended June 30,
----------------------------
1999 1998 1997
-------- -------- --------
Southern Union Gas:
Average number of gas sales
customers served:
Residential.................. 473,563 465,844 456,972
Commercial................... 30,847 29,828 29,030
Industrial and irrigation.... 258 252 274
Public authorities and other. 2,849 2,755 2,673
------- ------- -------
Total average customers
served................... 507,517 498,679 488,949
======= ======= =======
Gas sales in millions of cubic
feet (MMcf):
Residential.................. 19,553 23,217 23,135
Commercial................... 8,539 9,425 9,759
Industrial and irrigation.... 1,082 1,208 1,562
Public authorities and other. 2,266 2,752 2,756
------- ------- -------
Gas sales billed........... 31,440 36,602 37,212
Net change in unbilled gas
sales...................... 175 (82) (70)
------- ------- -------
Total gas sales............ 31,615 36,520 37,142
======= ======= =======
Weather:
Degree days (a)................ 1,576 2,118 1,962
Percent of 30-year measure (b). 74% 99% 92%
Gas transported in MMcf.......... 16,668 16,535 15,118
Missouri Gas Energy:
Average number of gas sales
customers served:
Residential.................. 418,266 413,703 407,505
Commercial................... 57,247 57,693 56,967
Industrial................... 313 312 312
------- ------- -------
Total average customers
served................... 475,826 471,708 464,784
======= ======= =======
Gas sales in Mmcf:
Residential.................... 36,578 41,104 45,074
Commercial..................... 16,842 18,705 20,893
Industrial..................... 375 400 490
------- ------- -------
Gas sales billed............. 53,795 60,209 66,457
Net change in unbilled gas
sales........................ 204 35 (88)
------- ------- -------
Total gas sales.............. 53,999 60,244 66,369
======= ======= =======
Weather:
Degree days (a)................ 4,438 4,723 5,506
Percent of 30-year measure (b). 85% 90% 105%
Gas transported in MMcf.......... 31,774 30,165 29,638
- -------------------------
(a) "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.
(b) Information with respect to weather conditions is provided
by the National Oceanic and Atmospheric Administration.
Percentages of 30-year measure are computed based on the
weighted average volumes of gas sales billed.
Customers. The following table shows the number of customers
served by the Company, through its divisions, subsidiaries and
affiliates, as of the end of its last three fiscal years.
Gas Utility Customers as of June 30,
------------------------------------
1999 1998 1997
---------- ---------- ----------
Southern Union Gas:
Austin and other central
and south Texas
communities............ 175,596 173,228 163,938
El Paso and other west
Texas communities...... 182,516 178,812 173,825
Galveston and Port
Arthur................. 50,543 50,673 50,856
Panhandle and north
Texas communities...... 24,728 24,900 24,903
Rio Grande Valley com-
munities and Eagle
Pass................... 75,983 76,840 76,704
---------- ---------- ----------
509,366 504,453 490,226
---------- ---------- ----------
Missouri Gas Energy:
Kansas City, Missouri
Metropolitan Area...... 354,189 348,543 346,060
St. Joseph, Joplin,
Monett and others...... 122,883 121,766 122,946
---------- ---------- ----------
477,072 470,309 469,006
---------- ---------- ----------
Other (a).................. 24,947 20,874 3,647
---------- ---------- ----------
Total...................... 1,011,385 995,636 962,879
========== ========== ==========
- ----------------------
(a) Includes Mercado, South Florida Natural Gas, Atlantic Gas
Corporation, SUPro and 43% (the Company's equity ownership)
of the customers of a natural gas distribution company
serving Piedras Negras, Mexico, in each case for the year-
end in which the Company had such operations or investments.
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 has 7,898 miles of mains, 4,305 miles of ser-
vice lines and 218 miles of transmission lines. Southern and
Norteno have 171 miles and 7 miles, respectively, of transmission
lines. Missouri Gas Energy has 7,441 miles of mains, 4,972 miles
of service lines and 47 miles of transmission lines. SFNG has
135 miles of mains and 80 miles of service lines. The Company
considers its systems to be in good condition and well-
maintained, and it has continuing replacement programs based on
historical performance and system surveillance.
ITEM 3. Legal Proceedings.
See Commitments and Contingencies in the Notes to Consolidated
Financial Statements contained in the Annual Report for a discus-
sion of the Company's legal proceedings. See MD&A -- Cautionary
Statement Regarding Forward-Looking Information contained in the
Annual Report.
ITEM 4. Submission of Matters to a Vote of Security Holders.
There were no matters submitted to a vote of security holders of
Southern Union during the quarter ended June 30, 1999.
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 New York Stock
Exchange under the symbol "SUG". The high and low sales prices
(adjusted for any stock dividends and stock splits) for shares of
Southern Union common stock since July 1, 1997 are set forth
below:
$/Share
---------------
High Low
------ ------
July 1 to August 31, 1999................... $21.31 $18.25
(Quarter Ended)
June 30, 1999............................... 21.79 17.62
March 31, 1999.............................. 23.21 16.55
December 31, 1998........................... 23.33 17.63
September 30, 1998.......................... 20.30 14.17
(Quarter Ended)
June 30, 1998............................... 19.73 14.43
March 31, 1998.............................. 14.97 13.84
December 31, 1997........................... 15.61 13.10
September 30, 1997.......................... 14.11 12.53
Holders
As of August 31, 1999, there were 1,142 holders of record of
Southern Union's common stock. This number does not include per-
sons 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 that is a holder of record.
There were 31,235,009 shares of Southern Union's common stock
outstanding on August 31, 1999 of which 17,731,637 shares were held
by non-affiliates (i.e., not beneficially held by directors,
executive officers, their immediate family members, or holders of
10% or more of shares outstanding).
Dividends
Southern Union's policy is to pay an annual stock dividend of
approximately 5% and, therefore, the Company paid no cash divi-
dends on its common stock during the last ten years ended
June 30, 1999. Provisions in certain of Southern Union's long-
term notes and its bank credit facilities limit the payment of
cash or asset dividends on capital stock. Under the most
restrictive provisions in effect, Southern Union may not declare
or pay any cash or asset dividends on 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, which presently are met.
On August 6, 1999, December 9, 1998 and December 10, 1997, the
Company distributed its annual 5% common stock dividend to stock-
holders of record on July 23, 1999, November 23, 1998 and
November 21, 1997, respectively. A portion of the 5% stock
dividend distributed on August 6, 1999 and December 9, 1998 was
characterized as a distribution of capital due to the level of
the Company's retained earnings available for distribution as of
the declaration date. The 5% stock dividends are consistent with
Southern Union's Board of Directors' February 1994 decision to
commence regular stock dividends of approximately 5% annually.
The specific amount and declaration, record and distribution
dates for an annual stock dividend will be determined by the
Board and announced at a date that is not expected to be later
than the annual stockholders meeting each year. Traditionally,
Southern Union has declared its stock dividend so as to coincide
with its annual shareholder meeting in November. In 1999, and in
the future, the Company expects to declare and pay its stock
dividend prior to the distribution of its annual report to share-
holders, so that the Company's year-end reporting will reflect
the effect of the annual stock dividend.
On July 13, 1998, Southern Union effected a 3-for-2 stock split
by distributing a 50% stock dividend to holders of record on
June 30, 1998.
ITEM 6. Selected Financial Data.
Year Ended June 30,
------------------------------------------------
1999(a)(b) 1998(a)(b) 1997(a) 1996(a) 1995
---------- ---------- -------- -------- --------
(dollars in thousands, except per share amounts)
Total operating
revenues....... $ 605,231 $ 669,304 $717,031 $620,391 $479,983
Earnings from
continuing
operations (c). 10,445 12,229 19,032 20,839 16,069
Earnings per
common and com-
mon share
equivalents (d) .32 .39 .62 .68 .54
Total assets.... 1,087,348 1,047,764 990,403 964,460 992,597
Common stock-
holders'
equity......... 301,058 296,834 267,462 245,915 225,664
Short-term debt
and capital
lease obliga-
tion........... 2,066 1,777 687 615 770
Long-term debt
and capital
lease obliga-
tion, exclud-
ing current
portion........ 390,931 406,407 386,157 385,394 462,503
Company-obligated
mandatorily re-
deemable pre-
ferred securi-
ties of sub-
sidiary trust.. 100,000 100,000 100,000 100,000 100,000
Average custo-
mers served.... 998,476 979,186 955,838 952,934 947,691
- ------------------
(a) Certain Texas and Oklahoma Panhandle distribution operations
and Western Gas Interstate, exclusive of the Del Norte
interconnect, were sold on May 1, 1996.
(b) On December 31, 1997, Southern Union acquired Atlantic for
755,650 pre-split and pre-stock dividend shares of common
stock valued at $18,041,000 and cash of $4,436,000.
(c) As of June 30, 1998, Missouri Gas Energy wrote off
$8,163,000 pre-tax in previously recorded regulatory assets
as a result of announced rate orders and court rulings.
(d) Earnings per share for all periods presented were computed
based on the weighted average number of shares of common
stock and common stock equivalents outstanding during the
year adjusted for (i) the 5% stock dividends distributed on
August 6, 1999, December 9, 1998, December 10, 1997,
December 10, 1996 and November 27, 1995, and (ii) the 50%
stock dividend distributed on July 13, 1998, and the 33-1/3%
stock dividend distributed on March 11, 1996.
ITEM 7. Management's Discussion and Analysis of Results of
Operations and Financial Condition.
"Management's Discussion and Analysis of Results of Operations
and Financial Condition" on pages 28 through 38 of the Company's
Annual Report to Stockholders for the year ended June 30, 1999,
is incorporated herein by reference.
ITEM 8. Financial Statements and Supplementary Data.
The following consolidated financial statements of Southern Union
and its consolidated subsidiaries, included in the Company's
Annual Report to Stockholders for the year ended June 30, 1999
are incorporated herein by reference:
Consolidated statement of operations -- years ended June 30,
1999, 1998 and 1997.
Consolidated balance sheet -- June 30, 1999 and 1998.
Consolidated statement of cash flows -- years ended June 30,
1999, 1998 and 1997.
Consolidated statement of common stockholders' equity -- years
ended June 30, 1999, 1998 and 1997.
Notes to consolidated financial statements.
Report of independent accountants.
ITEM 9. Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure.
None.
PART III
ITEM 10. Directors and Executive Officers of Registrant.
There is incorporated in this Item 10 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the captions Board of
Directors -- Board Size and Composition and Executive Officers
and Compensation -- Executive Officers Who Are Not Directors.
ITEM 11. Executive Compensation.
There is incorporated in this Item 11 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the captions Executive
Officers and Compensation -- Executive Compensation and Certain
Relationships.
ITEM 12. Security Ownership of Certain Beneficial Owners and
Management.
There is incorporated in this Item 12 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the caption Security Owner-
ship.
ITEM 13. Certain Relationships and Related Transactions.
There is incorporated in this Item 13 by reference the informa-
tion in the Company's definitive proxy statement for the 1999
Annual Meeting of Stockholders under the caption Certain Rela-
tionships.
PART IV
ITEM 14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.
(a)(1) Financial Statements. The following consolidated finan-
--------------------
cial statements of Southern Union and its consolidated
subsidiaries, included in the Company's Annual Report to
Stockholders for the year ended June 30, 1999, are
incorporated by reference to Part II, Item 8:
Consolidated statement of operations -- years ended
June 30, 1999, 1998 and 1997.
Consolidated balance sheet -- June 30, 1999 and 1998.
Consolidated statement of cash flows -- years ended
June 30, 1999, 1998 and 1997.
Consolidated statement of common stockholders' equity
-- years ended June 30, 1999, 1998 and 1997.
Notes to consolidated financial statements.
Report of independent accountants.
(a)(2) Financial Statement Schedules. All schedules are omitted
-----------------------------
as the required information is not applicable or the
information is presented in the consolidated financial
statements or related notes.
(a)(3) Exhibits.
--------
Exhibit
No. Description
- ------- --------------------------------------------------------
3(a) Restated Certificate of Incorporation of Southern Union
Company. (Filed as Exhibit 3(a) to Southern Union's
Transition Report on Form 10-K for the year ended
June 30, 1994 and incorporated herein by reference.)
3(b) Southern Union Company Bylaws, as amended. (Filed as
Exhibit 3(b) to Southern Union's Transition Report on
Form 10-K for the year ended June 30, 1994 and incorpo-
rated herein by reference.)
4(a) Specimen Common Stock Certificate. (Filed as Exhibit
4(a) to Southern Union's Annual Report on Form 10-K for
the year ended December 31, 1989 and incorporated herein
by reference.)
4(b) Indenture between Chase Manhattan Bank, N.A., as
trustee, and Southern Union Company dated January 31,
1994. (Filed as Exhibit 4.1 to Southern Union's Current
Report on Form 8-K dated February 15, 1994 and incorpo-
rated herein by reference.)
4(c) Officers' Certificate dated January 31, 1994 setting
forth the terms of the 7.60% Senior Debt Securities due
2024. (Filed as Exhibit 4.2 to Southern Union's Current
Report on Form 8-K dated February 15, 1994 and incorpo-
rated herein by reference.)
4(d) Certificate of Trust of Southern Union Financing I.
(Filed as Exhibit 4-A to Southern Union's Registration
Statement on Form S-3 (No. 33-58297) and incorporated
herein by reference.)
4(e) Certificate of Trust of Southern Union Financing II.
(Filed as Exhibit 4-B to Southern Union's Registration
Statement on Form S-3 (No. 33-58297)and incorporated
herein by reference.)
4(f) Certificate of Trust of Southern Union Financing III.
(Filed as Exhibit 4-C to Southern Union's Registration
Statement on Form S-3 (No. 33-58297) and incorporated
herein by reference.)
4(g) Form of Amended and Restated Declaration of Trust of
Southern Union Financing I. (Filed as Exhibit 4-D to
Southern Union's Registration Statement on Form S-3 (No.
33-58297) and incorporated herein by reference.)
4(h) Form of Subordinated Debt Securities Indenture among
Southern Union Company and The Chase Manhattan Bank, N.
A., as Trustee. (Filed as Exhibit 4-G to Southern
Union's Registration Statement on Form S-3 (No. 33-
58297) and incorporated herein by reference.)
4(i) Form of Supplemental Indenture to Subordinated Debt
Securities Indenture with respect to the Subordinated
Debt Securities issued in connection with the Southern
Union Financing I Preferred Securities. (Filed as
Exhibit 4-H to Southern Union's Registration Statement
on Form S-3 (No. 33-58297) and incorporated herein by
reference.)
4(j) Form of Southern Union Financing I Preferred Security
(included in 4(g) above.) (Filed as Exhibit 4-I to
Southern Union's Registration Statement on Form S-3 (No.
33-58297) and incorporated herein by reference.)
4(k) Form of Subordinated Debt Security (included in 4(i)
above.) (Filed as Exhibit 4-J to Southern Union's
Registration Statement on Form S-3 (No. 33-58297) and
incorporated herein by reference.)
4(l) Form of Guarantee with respect to Southern Union
Financing I Preferred Securities. (Filed as Exhibit 4-K
to Southern Union's Registration Statement on Form S-3
(No. 33-58297) and incorporated herein by reference.)
4(m) The Company is a party to other debt instruments, none
of which authorizes the issuance of debt securities in
an amount which exceeds 10% of the total assets of the
Company. The Company hereby agrees to furnish a copy of
any of these instruments to the Commission upon request.
10(a) Revolving Credit Agreement (Long-Term Credit Facility)
between Southern Union Company and the Banks named
therein dated November 10, 1998. (Filed as Exhibit
10(a) to Southern Union's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 and incorporated
herein by reference.)
10(b) Revolving Credit Agreement (Short-Term Credit Facility)
between Southern Union Company and the Banks named
therein dated November 10, 1998. (Filed as Exhibit
10(b) to Southern Union's Quarterly Report on Form 10-Q
for the quarter ended December 31, 1998 and incorporated
herein by reference.)
10(c) Southern Union Company 1982 Incentive Stock Option Plan
and form of related Stock Option Agreement. (Filed as
Exhibits 4.1 and 4.2 to Form S-8, File No. 2-79612 and
incorporated herein by reference.)(*)
10(d) Form of Indemnification Agreement between Southern Union
Company and each of the Directors of Southern Union Com-
pany. (Filed as Exhibit 10(i) to Southern Union's
Annual Report on Form 10-K for the year ended
December 31, 1986 and incorporated herein by reference.)
10(e) Southern Union Company 1992 Long-Term Stock Incentive
Plan, As Amended. (Filed as Exhibit 10(l) to Southern
Union's Annual Report on Form 10-K for the year ended
June 30, 1998 and incorporated herein by reference.)(*)
10(f) Southern Union Company Director's Deferred Compensation
Plan. (Filed as Exhibit 10(g) to Southern Union's
Annual Report on Form 10-K for the year ended
December 31, 1993 and incorporated herein by
reference.)(*)
10(g) Southern Union Company Amended Supplemental Deferred
Compensation Plan with Amendments. (Filed as Exhibit 4
to Southern Union's Form S-8 filed March 27, 1999 and
incorporated herein by reference.)(*)
10(h) Form of warrant granted to Fleischman and Walsh L.L.P.
(Filed as Exhibit 10(j) to Southern Union's Transition
Report on Form 10-K for the year ended June 30, 1994 and
incorporated herein by reference.)
10(i) Renewal Promissory Note Agreement between
Peter H. Kelley and Southern Union Company dated May 31,
1995. (Filed as Exhibit 10(i) to Southern Union's
Annual Report on Form 10-K for the year ended June 30,
1995 and incorporated herein by reference.)
13 Portions of Company's Annual Report to Stockholders.
21 Subsidiaries of the Company.
23 Consent of Independent Accountants.
24 Power of Attorney.
27 Financial Data Schedule.
- -----------------
(*) Indicates a Management Compensation Plan.
(b) Reports on Form 8-K. Southern Union's Current Report on
-------------------
Form 8-K dated June 15, 1999 announcing the definitive
merger agreement with Pennsylvania Enterprises, Inc.
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 10, 1999.
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 10, 1999.
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
KURT A. GITTER, M.D.* 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 Executive Vice President and Chief
- ----------------
Ronald J. Endres Financial Officer
DAVID J. KVAPIL Senior Vice President and Corporate
- ---------------
David J. Kvapil Controller
(Principal Accounting Officer)
*By PETER H. KELLEY
---------------
Peter H. Kelley
Attorney-in-fact
INDEX TO EXHIBITS
Exhibit 13 Portions of Company's Annual Report to Stockholders
Exhibit 21 Subsidiaries of the Company
Exhibit 23 Consent of Independent Accountants
Exhibit 24 Power of Attorney
Exhibit 27 Financial Data Schedule