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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
FORM 10-Q
FOR THE QUARTERLY PERIOD ENDED
MARCH 31, 2004
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.)
ONE PEI CENTER, SECOND FLOOR 18711
WILKES-BARRE, PENNSYLVANIA (Zip Code)
(Address of principal executive offices)
Registrant's telephone number, including area code: (570) 820-2400
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange in which registered
------------------- -----------------------------------------
COMMON STOCK, PAR VALUE $1 PER SHARE NEW YORK STOCK EXCHANGE
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 whether the registrant is an accelerated filer
(as defined in Exchange Act Rule 12b-2).
Yes |X| No
----- -----
The number of shares of the registrant's Common Stock outstanding on May 7, 2004
was 73,221,049.
- --------------------------------------------------------------------------------
SOUTHERN UNION COMPANY AND SUBSIDIARIES
FORM 10-Q
MARCH 31, 2004
INDEX
PART I. FINANCIAL INFORMATION Page(s)
-------
Item 1. Financial Statements:
Consolidated statements of operations - three and
nine months ended March 31, 2004 and 2003 2-3
Consolidated balance sheet - March 31, 2004 and June 30, 2003 4-5
Consolidated statement of stockholders' equity - nine months
ended March 31, 2004 and twelve months ended June 30, 2003 6
Consolidated statements of cash flows - three and nine months ended
March 31, 2004 and 2003 7-8
Notes to consolidated financial statements 9-26
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations 27-39
Item 3. Quantitative and Qualitative Disclosures about Market Risk 36
Item 4. Controls and Procedures 38
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
(See "COMMITMENTS AND CONTINGENCIES" in Notes
to Consolidated Financial Statements) 19-24
Item 6. Exhibits and Reports on Form 8-K 40
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
(THOUSANDS OF DOLLARS, EXCEPT
SHARES AND PER SHARE AMOUNTS)
Operating revenues.................................................................. $ 774,579 $ 535,663
Cost of gas and other energy........................................................ (454,736) (356,393)
Revenue-related taxes............................................................... (21,951) (17,870)
--------------- --------------
Operating margin............................................................... 297,892 161,400
Operating expenses:
Operating, maintenance and general............................................. 106,809 48,203
Depreciation and amortization.................................................. 26,419 14,621
Taxes, other than on income and revenues....................................... 14,299 6,434
--------------- --------------
Total operating expenses................................................... 147,527 69,258
--------------- --------------
Net operating revenues..................................................... 150,365 92,142
--------------- --------------
Other income (expense):
Interest ...................................................................... (31,055) (19,840)
Dividends on preferred securities of subsidiary trust.......................... -- (2,370)
Other, net..................................................................... 1,451 5,223
--------------- --------------
Total other expenses, net.................................................. (29,604) (16,987)
--------------- --------------
Earnings from continuing operations before income taxes............................. 120,761 75,155
Federal and state income taxes...................................................... 45,394 28,921
--------------- --------------
Net earnings from continuing operations............................................. 75,367 46,234
--------------- --------------
Discontinued operations:
Earnings from discontinued operations before income taxes...................... -- 62,992
Federal and state income taxes................................................. -- 45,327
--------------- --------------
Net earnings from discontinued operations........................................... -- 17,665
--------------- --------------
Net earnings........................................................................ 75,367 63,899
Preferred stock dividends........................................................... (4,341) --
--------------- --------------
Net earnings available for common shareholders ..................................... $ 71,026 $ 63,899
=============== ==============
Netearnings available for common shareholders from continuing operations per
share:
Basic.......................................................................... $ 0.99 $ .81
=============== ==============
Diluted........................................................................ $ 0.96 $ .79
=============== ==============
Net earnings available for common shareholders per share:
Basic.......................................................................... $ 0.99 $ 1.12
=============== ==============
Diluted........................................................................ $ 0.96 $ 1.09
=============== ==============
Weighted average shares outstanding:
Basic.......................................................................... 71,900,914 57,042,570
=============== ==============
Diluted........................................................................ 74,124,531 58,849,853
=============== ==============
See accompanying notes.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
NINE MONTHS ENDED MARCH 31,
---------------------------
2004 2003
---- ----
(THOUSANDS OF DOLLARS, EXCEPT
SHARES AND PER SHARE AMOUNTS)
Operating revenues.................................................................. $ 1,513,086 $ 981,477
Cost of gas and other energy........................................................ (766,376) (613,958)
Revenue-related taxes............................................................... (39,412) (33,624)
--------------- --------------
Operating margin............................................................... 707,298 333,895
Operating expenses:
Operating, maintenance and general............................................. 308,777 131,823
Depreciation and amortization.................................................. 89,450 43,072
Taxes, other than on income and revenues....................................... 39,350 19,145
--------------- --------------
Total operating expenses................................................... 437,577 194,040
--------------- --------------
Net operating revenues..................................................... 269,721 139,855
--------------- --------------
Other income (expense):
Interest ...................................................................... (97,655) (61,583)
Dividends on preferred securities of subsidiary trust.......................... -- (7,110)
Other, net..................................................................... 5,772 18,949
--------------- --------------
Total other expenses, net.................................................. (91,883) (49,744)
--------------- --------------
Earnings from continuing operations before income taxes............................. 177,838 90,111
Federal and state income taxes...................................................... 67,756 34,544
--------------- --------------
Net earnings from continuing operations............................................. 110,082 55,567
--------------- --------------
Discontinued operations:
Earnings from discontinued operations before income taxes...................... -- 84,773
Federal and state income taxes................................................. -- 53,517
--------------- --------------
Net earnings from discontinued operations........................................... -- 31,256
--------------- --------------
Net earnings........................................................................ 110,082 86,823
Preferred stock dividends........................................................... (8,345) --
--------------- --------------
Net earnings available for common shareholders...................................... $ 101,737 $ 86,823
=============== ==============
Net earnings available for common shareholders from continuing operations per
share:
Basic.......................................................................... $ 1.42 $ .98
================ ==============
Diluted........................................................................ $ 1.38 $ .95
================ ==============
Net earnings available for common shareholders per share:
Basic.......................................................................... $ 1.42 $ 1.53
================ ==============
Diluted........................................................................ $ 1.38 $ 1.48
================ ==============
Weighted average shares outstanding:
Basic.......................................................................... 71,798,748 56,821,666
=============== ==============
Diluted........................................................................ 73,904,350 58,730,594
=============== ==============
See accompanying notes.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
MARCH 31, JUNE 30,
2004 2003
---- ----
(THOUSANDS OF DOLLARS)
Property, plant and equipment:
Plant in service .......................................................... $ 3,768,894 $ 3,710,541
Construction work in progress ............................................. 141,696 75,484
----------- -----------
3,910,590 3,786,025
Less accumulated depreciation and amortization ............................ (722,019) (641,225)
----------- -----------
Net property, plant and equipment .................................... 3,188,571 3,144,800
----------- -----------
Current assets:
Cash and cash equivalents ................................................. 71,584 86,997
Accounts receivable, billed and unbilled, net ............................. 335,299 192,402
Federal and state taxes receivable ........................................ 25,382 6,787
Inventories ............................................................... 96,979 173,757
Deferred gas purchase costs ............................................... 9,209 24,603
Gas imbalances - receivable ............................................... 17,174 34,911
Prepayments and other ..................................................... 27,916 18,971
----------- -----------
Total current assets ................................................. 583,543 538,428
----------- -----------
Goodwill, net .................................................................. 642,921 642,921
Deferred charges ............................................................... 185,910 188,261
Investment securities, at cost ................................................. 8,038 9,641
Other .......................................................................... 65,012 73,674
----------- -----------
Total assets............................................................... $ 4,673,995 $ 4,597,725
============= =============
See accompanying notes.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET (CONTINUED)
STOCKHOLDERS' EQUITY AND LIABILITIES
MARCH 31, JUNE 30,
2004 2003
---- ----
(THOUSANDS OF DOLLARS)
Stockholders' equity:
Common stock, $1 par value; authorized 200,000,000 shares;
issued 73,387,859 shares .................................................... $ 73,388 $ 73,074
Preferred stock, no par value; authorized 6,000,000 shares;
issued 920,000 shares ........................................................... 230,000 --
Premium on capital stock ............................................................ 903,972 909,191
Less treasury stock, 282,333 shares at cost ......................................... (10,467) (10,467)
Less common stock held in trust ..................................................... (17,286) (15,617)
Deferred compensation plans ......................................................... 11,629 9,960
Accumulated other comprehensive income (loss) ....................................... (63,891) (62,579)
Retained earnings ................................................................... 118,593 16,856
----------- -----------
Total stockholders' equity .......................................................... 1,245,938 920,418
Company-obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely subordinated notes of Southern Union ........................... -- 100,000
Long-term debt and capital lease obligation .............................................. 2,188,820 1,611,653
----------- -----------
Total capitalization ............................................................ 3,434,758 2,632,071
Current liabilities:
Long-term debt and capital lease obligation due within one year ..................... 99,501 734,752
Notes payable ....................................................................... 75,500 251,500
Accounts payable .................................................................... 138,956 112,840
Federal, state and local taxes ...................................................... 36,845 13,530
Accrued interest .................................................................... 25,448 40,871
Customer deposits ................................................................... 12,589 12,585
Gas imbalances - payable ............................................................ 40,872 64,519
Other ............................................................................... 128,462 130,196
----------- -----------
Total current liabilities ....................................................... 558,173 1,360,793
----------- -----------
Deferred credits and other ............................................................... 310,647 322,154
Accumulated deferred income taxes ........................................................ 370,417 282,707
----------- -----------
Total stockholders' equity and liabilities .......................................... $ 4,673,995 $ 4,597,725
=========== ===========
See accompanying notes.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
COMMON PREMIUM PREFERRED TREASURY
STOCK, $1 ON CAPITAL STOCK, NO STOCK,AT
PAR VALUE STOCK PAR VALUE COST
--------- ----- --------- ----
(THOUSANDS OF DOLLARS)
Balance July 1, 2002 ......................................... $ 58,055 $ 707,912 $ -- $ (57,673)
Comprehensive income (loss):
Net earnings ............................................. -- -- -- --
Unrealized loss in investment
securities, net of tax benefit .................. -- -- -- --
Minimum pension liability
adjustment, net of tax benefit .................. -- -- -- --
Unrealized loss on hedging
activities, net of tax benefit .................. -- -- -- --
Comprehensive income......................................
Payment on note receivable ................................. -- 305 -- --
Purchase of treasury stock ................................. -- -- -- (2,181)
5% stock dividend .......................................... 3,468 55,832 -- --
Stock compensation plan .................................... -- 480 -- --
Issuance of stock for acquisition .......................... -- -- -- 48,900
Issuance of common stock ................................... 10,925 157,757 -- --
Issuance costs of equity units ............................. -- (3,443) -- --
Contract adjustment payment ................................ -- (11,713) -- --
Sale of common stock held in trust ......................... -- (243) -- --
Exercise of stock options .................................. 626 2,304 -- 487
-------- -------- -------- ---------
Balance June 30, 2003 ........................................ 73,074 909,191 -- (10,467)
Comprehensive income (loss):
Net earnings ............................................. -- -- -- --
Preferred stock dividends ................................ -- -- -- --
Unrealized loss in investment
securities, net of tax benefit ......................... -- -- -- --
Unrealized loss on hedging
activities, net of tax benefit ........................ -- -- -- --
Comprehensive income
Issuance of preferred stock ................................ -- (6,790) 230,000 --
Exercise of stock options .................................. 314 1,571 -- --
-------- --------- --------- ---------
Balance March 31, 2004 ....................................... $ 73,388 $ 903,972 $ 230,000 $(10,467)
========= ========= ========= =========
ACCUMULATED
COMMON OTHER
STOCK COMPREHEN-
HELD IN SIVE INCOME RETAINED
TRUST (LOSS) EARNINGS TOTAL
----- ------ -------- -----
(THOUSANDS OF DOLLARS)
Balance July 1, 2002 ......................................... $ (8,448) $ (14,500) -- $ 685,346
Comprehensive income (loss):
Net earnings ............................................. -- -- 76,189 76,189
Unrealized loss in investment
securities, net of tax benefit.......................... -- (581) -- (581)
Minimum pension liability
adjustment, net of tax benefit.......................... -- (41,930) -- (41,930)
Unrealized loss on hedging
activities, net of tax benefit.......................... -- (5,568) -- (5,568)
---------
Comprehensive income...................................... 28,110
---------
Payment on note receivable ................................. -- -- -- 305
Purchase of treasury stock ................................. -- -- -- (2,181)
5% stock dividend .......................................... -- -- (59,333) (33)
Stock compensation plan .................................... 737 -- -- 1,217
Issuance of stock for acquisition .......................... -- -- -- 48,900
Issuance of common stock ................................... -- -- -- 168,682
Issuance costs of equity units...... ....................... -- -- -- (3,443)
Contract adjustment payment ................................ -- -- -- (11,713)
Sale of common stock held in trust...... ................... 2,424 -- -- 2,181
Exercise of stock options .................................. (370) -- -- 3,047
--------- --------- --------- ---------
Balance June 30, 2003 ........................................ (5,657) (62,579) 16,856 920,418
Comprehensive income (loss):
Net earnings ............................................ -- -- 110,082 110,082
Preferred stock dividends ............................... -- -- (8,345) (8,345)
Unrealized loss in investment
securities, net of tax benefit......................... -- (21) -- (21)
Unrealized loss on hedging
activities, net of tax benefit......................... -- (1,291) -- (1,291)
---------
Comprehensive income...................................... 100,425
---------
Issuance of preferred stock ................................ -- -- -- 223,210
Exercise of stock options .................................. -- -- -- 1,885
--------- ---------- --------- ---------
Balance March 31, 2004 ....................................... $ (5,657) $ (63,891) $ 118,593 $ 1,245,938
========== =========== ========== ============
The Company's common stock is $1 par value. Therefore, the change in Common
Stock, $1 Par Value is equivalent to the change in the number of shares of
common stock outstanding.
See accompanying notes.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
THREE MONTHS ENDED MARCH 31,
----------------------------
2004 2003
---- ----
(THOUSANDS OF DOLLARS)
Cash flows from (used in) operating activities:
Net earnings available for common shareholders .................................................. $ 71,026 $ 63,899
Adjustments to reconcile net earnings to net cash flows from
operating activities:
Depreciation and amortization ............................................................... 26,419 14,621
Amortization of debt premium ................................................................ (2,693) --
Deferred income taxes ....................................................................... 54,309 68,521
Provision for bad debts ..................................................................... 5,844 2,634
Gain on sale of assets ...................................................................... -- (62,992)
Other ....................................................................................... 27 842
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, billed and unbilled ................................................ (31,185) (61,861)
Gas imbalance receivable ................................................................ 17,274 --
Accounts payable ........................................................................ (4,841) 3,760
Gas imbalance payable ................................................................... (34,015) --
Customer deposits ....................................................................... (245) (90)
Deferred gas purchase costs ............................................................. 17,236 (3,257)
Inventories ............................................................................. 134,895 82,403
Deferred charges and credits ............................................................ 12,499 (15,621)
Prepaids and other current assets ....................................................... 4,448 (1,544)
Dividends payable on preferred stock .................................................... 289 --
Federal and state taxes receivable ...................................................... (2,914) --
Federal, state and local taxes payable .................................................. 450 3,245
Other liabilities ....................................................................... (29,553) 11,750
--------- ---------
Net cash flows from operating activities ...................................................... 239,270 106,310
--------- ---------
Cash flows from (used in) investing activities:
Additions to property, plant and equipment ...................................................... (43,331) (11,512)
Proceeds from sale of assets .................................................................... -- 420,000
Notes receivable ................................................................................ (1,000) --
Customer advances ............................................................................... (245) 59
Other ........................................................................................... (4,287) --
--------- ---------
Net cash flows (used in) from investing activities ............................................ (48,863) 408,547
--------- ---------
Cash flows from (used in) financing activities:
Issuance of long-term debt ...................................................................... 200,000 --
Issuance costs of preferred stock ............................................................... (377) --
Issuance cost of debt ........................................................................... (862) (260)
Repayment of debt ............................................................................... (162,691) (26,229)
Net payments under revolving credit facilities .................................................. (176,500) (80,200)
Proceeds from exercise of stock options ......................................................... 797 604
--------- ---------
Net cash flows used in financing activities ................................................... (139,633) (106,085)
--------- ---------
Change in cash and cash equivalents ................................................................ 50,774 408,772
Cash and cash equivalents at beginning of period ................................................... 20,810 --
--------- ---------
Cash and cash equivalents at end of period ......................................................... $ 71,584 $ 408,772
========= =========
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Interest ...................................................................................... $ 47,936 $ 21,940
========= =========
Income taxes .................................................................................. $ 52 $ 2,126
========= =========
See accompanying notes.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
NINE MONTHS ENDED MARCH 31,
2004 2003
---- ----
(THOUSANDS OF DOLLARS)
Cash flows from (used in) operating activities:
Net earnings available for common shareholders .................................................. $ 101,737 $ 86,823
Adjustments to reconcile net earnings to net cash flows from (used in)
operating activities:
Depreciation and amortization ............................................................... 89,450 43,072
Amortization of debt premium ................................................................ (9,694) --
Deferred income taxes ....................................................................... 80,028 67,401
Provision for bad debts ..................................................................... 13,831 9,031
Provision for impairment of other assets .................................................... 2,753 --
Gain on extinguishment of debt .............................................................. (6,123) --
Gain on sale of assets ...................................................................... (32) (62,992)
Net cash used in assets held for sale ....................................................... -- (23,698)
Other ....................................................................................... 534 2,663
Changes in operating assets and liabilities, net of acquisitions and dispositions:
Accounts receivable, billed and unbilled ................................................ (152,170) (190,027)
Gas imbalance receivable ................................................................ 25,211 --
Accounts payable ........................................................................ 26,116 61,207
Gas imbalance payable ................................................................... (32,485) --
Customer deposits ....................................................................... 4 (768)
Deferred gas purchase costs ............................................................. 15,394 (12,444)
Inventories ............................................................................. 77,493 76,140
Deferred charges and credits ............................................................ 11,105 (11,422)
Prepaids and other current assets ....................................................... 11,013 2,640
Dividends payable on preferred stock .................................................... 4,293 --
Federal and state taxes receivable ...................................................... 18,121 --
Federal, state and local taxes payable .................................................. 10,505 23,294
Other liabilities ....................................................................... (56,594) 17,394
--------- ---------
Net cash flows from operating activities ...................................................... 230,490 88,314
--------- ---------
Cash flows from (used in) investing activities:
Additions to property, plant and equipment ...................................................... (154,422) (49,618)
Changes in assets and liabilities held for sale ................................................. -- (13,410)
Notes receivable ................................................................................ (2,000) (6,750)
Proceeds from sale of assets .................................................................... -- 420,000
Customer advances ............................................................................... (3,054) 677
Other ........................................................................................... (820) (1,664)
--------- ---------
Net cash flows (used in) from investing activities ............................................ (160,296) 349,235
--------- ---------
Cash flows from (used in) financing activities:
Issuance of long-term debt ...................................................................... 750,000 311,087
Issuance of preferred stock ..................................................................... 230,000 --
Issuance cost of debt ........................................................................... (4,858) (1,627)
Issuance costs of preferred stock ............................................................... (6,790) --
Repayment of debt and capital lease obligation .................................................. (879,844) (419,283)
Net (payments) borrowings under revolving credit facilities ..................................... (176,000) 78,000
Proceeds from exercise of stock options ......................................................... 1,885 3,046
--------- ---------
Net cash flows used in financing activities ................................................... (85,607) (28,777)
--------- ---------
Change in cash and cash equivalents ................................................................ (15,413) 408,772
Cash and cash equivalents at beginning of period ................................................... 86,997 --
--------- ---------
Cash and cash equivalents at end of period ......................................................... $ 71,584 $ 408,772
========= =========
Supplemental disclosures of cash flow information:
Cash paid (refunded) during the period for:
Interest ...................................................................................... $ 121,623 $ 70,101
========= =========
Income taxes .................................................................................. $ (6) $ 2,003
========= =========
See accompanying notes.
SOUTHERN UNION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FINANCIAL STATEMENTS
These interim financial statements should be read in conjunction with the
financial statements and notes thereto contained in Southern Union Company's
(Southern Union and together with its subsidiaries, the Company) Annual Report
on Form 10-K for the fiscal year ended June 30, 2003. All dollar amounts in the
tables herein, except per share amounts, are stated in thousands unless
otherwise indicated. Certain prior period amounts have been reclassified to
conform with the current period presentation.
These interim financial statements are unaudited but, in the opinion of
management, reflect all adjustments (including both normal recurring as well as
any non-recurring) necessary for a fair presentation of the results of
operations for such periods. Because of the seasonal nature of the Company's
operations, as well as the timing of significant acquisitions and sales of
operations (see Acquisitions and Sales, below), the results of operations and
cash flows for any interim period are not necessarily indicative of results for
the full year.
SIGNIFICANT ACCOUNTING POLICIES
Effective July 1, 2002, the Company adopted the Financial Accounting Standards
Board (FASB) standard, Accounting for Asset Retirement Obligations (ARO). The
Statement requires legal obligations associated with the retirement of
long-lived assets to be recognized at their fair value at the time the
obligations are incurred. Upon initial recognition of a liability, costs should
be capitalized as part of the related long-lived asset and allocated to expense
over the useful life of the asset. Over time, the liability is accreted to its
present value each period, and the capitalized cost is depreciated over the
useful life of the related long-lived asset. In certain rate jurisdictions, the
Company is permitted to include annual charges for cost of removal in its
regulated cost of service rates charged to customers. The adoption of the
Statement did not have a material impact on the Company's financial position,
results of operations or cash flows for all periods presented.
Panhandle Eastern Pipe Line Company, LLC (Panhandle Eastern Pipe Line and
together with its subsidiaries, Panhandle Energy) has an ARO liability relating
to the retirement of certain of its offshore lateral lines with an aggregate
carrying amount of approximately $7,629,000 and $6,757,000 as of March 31, 2004
and June 30, 2003, respectively. During the nine-month period ended March 31,
2004, changes in the carrying amount of the ARO liability were attributable to
$358,000 of additional liabilities incurred and $514,000 of accretion expense.
Liabilities settled and cash flow revisions were nil for the current period.
In April 2003, the FASB issued Amendment of Statement 133 on Derivative
Instruments and Hedging Activities. The Statement is effective for contracts
entered into or modified after June 30, 2003 and for hedging relationships
designated after June 30, 2003. The Statement (i) clarifies under what
circumstances a contract with an initial net investment meets the
characteristics of a derivative, (ii) clarifies when a derivative contains a
financing component, (iii) amends the definition of an underlying to conform it
to language used in FASB Interpretation Guarantor's Accounting and Disclosure
Requirement for Guarantees, Including Indirect Guarantees of Indebtedness of
Others, and (iv) amends certain other existing pronouncements. The Statement is
not expected to materially change the methods the Company uses to account for
and report its derivatives and hedging activities.
Effective July 1, 2003, the Company adopted the FASB standard, Accounting for
Certain Financial Instruments with Characteristics of both Liabilities and
Equity. The Statement establishes guidelines on how an issuer classifies and
measures certain financial instruments with characteristics of both liabilities
and equity. The Statement further defines and requires that certain instruments
within its scope be classified as liabilities on the financial statements. The
adoption of the Statement did not have a material impact on the Company's
financial position, results of operations or cash flows for all periods
presented.
In December 2003, the FASB issued Employers' Disclosures about Pensions and
Other Postretirement Benefits - an amendment of FASB Statements No. 87, 88, and
106. The Statement revises employers' disclosures about pension plans and other
postretirement benefit plans. It retains the disclosure requirements contained
in FASB Statement No. 132, Employers' Disclosures about Pensions and Other
Postretirement Benefits, which it replaces, and requires additional disclosure
about the assets, obligations, cash flows and net periodic benefit cost of
defined benefit pension plans and other defined benefit postretirement plans.
The Statement does not change the measurement or recognition of those plans
required by FASB Statements No. 87, Employers' Accounting for Pensions, No. 88,
Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits, and No. 106, Employers' Accounting
for Postretirement Benefits Other Than Pensions. The Statement is effective for
fiscal years ending after December 15, 2003. The interim-period disclosures
required by the Statement are effective for interim periods beginning after
December 15, 2003.
In December 2003, the FASB issued Consolidation of Variable Interest Entities.
The Interpretation introduced a new consolidation model, which determines
control and consolidation based on potential variability in gains and losses of
the entity being evaluated for consolidation. The Interpretation requires a
company to consolidate a variable interest entity if the company is allocated a
majority of the entity's gains and/or losses, including fees paid by the entity.
The Interpretation is effective for companies that have an interest in variable
interest entities or potential variable interest entities commonly referred to
as special-purpose entities for periods ending after December 15, 2003.
Application by companies for all other types of entities is required in
financial statements for periods ending after March 15, 2004. The Company has
not identified any material variable interest entities or interests in variable
interest entities for which the provisions of this Interpretation would require
a change in the Company's current accounting for such interests.
In March 2004, the Emerging Issues Task Force (EITF) reached final consensuses
on Issue 03-6, Participating Securities and the Two-Class Method under FASB 128,
Earnings per Share. The Issue addresses the computation of earnings per share by
companies that have issued securities other than common stock that contractually
entitle the holder to participate in dividends and earnings of the company when,
and if, it declares dividends on its common stock. The Issue is effective for
interim periods beginning after March 31, 2004. The Company continues to assess
this Issue but does not anticipate that it will materially impact the methods
the Company uses to calculate its earning per share.
ACQUISITIONS AND SALES
On June 11, 2003, Southern Union acquired Panhandle Energy from CMS Energy
Corporation for approximately $581,729,000 in cash and 3,000,000 shares of
Southern Union common stock (before adjustment for subsequent stock dividends)
valued at approximately $48,900,000 based on market prices at closing of the
Panhandle Energy acquisition and in connection therewith incurred transaction
costs of approximately $30,448,000. Southern Union also incurred additional
deferred state income tax liabilities estimated at $10,597,000 as a result of
the transaction. At the time of the acquisition, Panhandle Energy had
approximately $1,157,228,000 of debt principal outstanding that it retained. The
Company funded the cash portion of the acquisition with approximately
$437,000,000 in cash proceeds it received for the January 1, 2003 sale of its
Texas operations, approximately $121,250,000 of the net proceeds it received
from concurrent common stock and equity unit offerings and with working capital
available to the Company. The Company structured the Panhandle Energy
acquisition and the sale of its Texas operations to qualify as a like-kind
exchange of property under Section 1031 of the Internal Revenue Code of 1986, as
amended. The acquisition was accounted for using the purchase method of
accounting in accordance with accounting principles generally accepted in the
United States of America by allocating the purchase price and acquisition costs
incurred by the Company to Panhandle Energy's net assets as of the acquisition
date. The Panhandle Energy assets acquired and liabilities assumed have been
recorded at their estimated fair value as of the acquisition date based on the
results of outside appraisals. Items which are still under review are the
valuation of certain contingent liabilities as of the acquisition date.
Panhandle Energy's results of operations have been included in the Consolidated
Statement of Operations since June 11, 2003. Thus, the Consolidated Statement of
Operations for the periods subsequent to the acquisition is not comparable to
the same periods in prior years.
Panhandle Energy is primarily engaged in the interstate transportation and
storage of natural gas and also provides liquefied natural gas (LNG)
terminalling and regasification services and is subject to the rules and
regulations of the Federal Energy Regulatory Commission (FERC). The Panhandle
Energy entities include Panhandle Eastern Pipe Line Company, LLC (Panhandle
Eastern Pipe Line), Trunkline Gas Company, LLC (Trunkline) a wholly-owned
subsidiary of Panhandle Eastern Pipe Line, Sea Robin Pipeline Company (Sea
Robin), a Louisiana unincorporated joint venture and an indirect wholly-owned
subsidiary of Panhandle Eastern Pipe Line, Trunkline LNG Company, LLC (Trunkline
LNG) which is a wholly-owned subsidiary of Trunkline LNG Holdings, LLC (LNG
Holdings) an indirect wholly-owned subsidiary of Panhandle Eastern Pipe Line and
Pan Gas Storage, LLC (d.b.a. Southwest Gas Storage) a wholly-owned subsidiary of
Panhandle Eastern Pipe Line. Collectively, the pipeline assets include more than
10,000 miles of interstate pipelines that transport natural gas from the Gulf of
Mexico, South Texas and the Panhandle regions of Texas and Oklahoma to major
U.S. markets in the Midwest and Great Lakes region. The pipelines have a
combined peak day delivery capacity of 5.4 billion cubic feet (Bcf) per day and
72 Bcf of owned underground storage capacity. Trunkline LNG, located on
Louisiana's Gulf Coast, operates one of the largest LNG import terminals in
North America and has 6.3 Bcf of above ground LNG storage capacity.
The following table summarizes the estimated fair values of the Panhandle Energy
assets acquired and liabilities assumed at the date of acquisition.
At June 11, 2003
------------------
Property, plant and equipment (excluding intangibles) ........ $ 1,913,535
Intangibles .................................................. 21,293
Current assets (1) ........................................... 217,647
Other non-current assets ..................................... 29,800
-----------
Total assets acquired ................................... 2,182,275
-----------
Long-term debt ............................................... (1,207,617)
Current liabilities .......................................... (170,193)
Other non-current liabilities ................................ (132,791)
-----------
Total liabilities assumed ............................... (1,510,601)
-----------
Net assets acquired ................................. $ 671,674
===========
(1) Includes cash and cash equivalents of approximately $59 million.
Effective January 1, 2003, the Company completed the sale of its Southern Union
Gas natural gas operating division and related assets to ONEOK, Inc. (ONEOK) for
approximately $437,000,000 in cash resulting in a pre-tax gain of $62,992,000.
In accordance with accounting principles generally accepted in the United States
of America, the results of operations and gain on sale of the Texas operations
have been segregated and reported as "discontinued operations" in the
Consolidated Statement of Operations and as "assets held for sale" in the
Consolidated Statement of Cash Flows for the respective periods.
PRO FORMA FINANCIAL INFORMATION
The following unaudited pro forma financial information for the three- and
nine-month periods ended March 31, 2003 is presented as though the following
events had occurred at the beginning of the periods presented: (i) acquisition
of Panhandle Energy; and (ii) the issuance of the common stock and equity units
in June 2003. The pro forma financial information is not necessarily indicative
of the results which would have actually been obtained had the acquisition of
Panhandle Energy or the issuance of the common stock and equity units been
completed as of the assumed date for the periods presented or which may be
obtained in the future.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2003 2003
---- ----
Operating revenues.................................................... $ 672,300 $ 1,367,084
Net earnings from continuing operations............................... 73,304 126,774
Net earnings per share from continuing operations:
Basic.............................................................. 1.02 1.77
Diluted............................................................ 1.00 1.73
OTHER INCOME
On August 6, 2002, Southwest Gas Corporation (Southwest) agreed to pay Southern
Union $17,500,000 to settle the Company's claims of fraud and bad faith breach
of contract related to Southern Union's attempts to purchase Southwest.
Effective January 1, 2003, ONEOK agreed to pay Southern Union $5,000,000 to
settle the Company's claims related to ONEOK's blocked acquisition of Southwest.
The settlements resulted in a pre-tax gain and cash flow of $5,000,000 and
$22,500,000, respectively, for the three-month and nine-month periods ended
March 31, 2003.
EARNINGS PER SHARE
The following table summarizes the Company's basic and diluted earnings per
share calculations for the three- and nine-month periods ended March 31, 2004
and 2003:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------- ---------
2004 2003 2004 2003
---- ---- ---- ----
Net earnings available for common shareholders
from continuing operations (1).......................... $ 71,026 $ 46,234 $ 101,737 $ 55,567
Net earnings from discontinued operations.................. -- 17,665 -- 31,256
------------ ------------ ----------- -----------
Net earnings available for common shareholders............. $ 71,026 $ 63,899 $ 101,737 $ 86,823
============ ============ =========== ===========
Weighted average shares outstanding - basic................ 71,900,914 57,042,570 71,798,748 56,821,666
============ ============ =========== ===========
Weighted average shares outstanding - diluted.............. 74,124,531 58,849,853 73,904,350 58,730,594
============ ============ =========== ===========
Basic earnings per share:
Net earnings available for common shareholders
from continuing operations (1)........................ $ 0.99 $ 0.81 $ 1.42 $ 0.98
Net earnings from discontinued operations............... -- 0.31 -- 0.55
------------ ----------- ------------ -----------
Net earnings available for common shareholders.......... $ 0.99 $ 1.12 $ 1.42 $ 1.53
============ =========== ============ ===========
Diluted earnings per share:
Net earnings available for common shareholders
from continuing operations (1)........................ $ 0.96 $ 0.79 $ 1.38 $ 0.95
Net earnings from discontinued operations............... -- 0.30 -- 0.53
------------ ----------- ------------ ------------
Net earnings available for common shareholders.......... $ 0.96 $ 1.09 $ 1.38 $ 1.48
============ =========== ============ ============
(1) Includes $4,341,000 and $8,345,000 of preferred stock dividends for the
three- and nine-month periods ended March 31, 2004.
Diluted earnings per share includes average shares outstanding as well as common
stock equivalents from stock options, warrants and mandatory convertible equity
units. Common stock equivalents were 1,092,331 and 569,088 for the three-month
periods ended March 31, 2004 and 2003, respectively, and 996,128 and 665,772 for
the nine-month periods ended March 31, 2004 and 2003, respectively.
Stock options to purchase 138,900 shares of common stock were outstanding during
the nine-month period ended March 31, 2004, and stock options to purchase
2,263,905 shares of common stock were outstanding during the three- and
nine-month periods ended March 31, 2003, but were not included in the
computation of diluted earnings per share because the options' exercise price
was greater than the average market price of the common shares during the
respective period. There were no "anti-dilutive" options outstanding for the
three-month period ended March 31, 2004. At March 31, 2004, 1,146,868 shares of
common stock were held by various rabbi trusts for certain of the Company's
benefit plans and 105,710 shares were held in a rabbi trust for certain
employees who deferred receipt of Company shares for stock options exercised.
From time to time, the Company's benefit plans may purchase shares of Southern
Union common stock subject to regular restrictions.
On June 11, 2003, the Company issued 2,500,000 mandatory convertible equity
units at a public offering price of $50.00 per share. Each equity unit consists
of a $50.00 principal amount of the Company's 2.75% Senior Notes due 2006 (see
Debt and Capital Lease) and a forward stock purchase contract that obligates the
holder to purchase Company common stock on August 16, 2006, at a price based on
the preceding 20-day average closing price (subject to a minimum and maximum
conversion price per share of $15.24 and $18.59, respectively, which are subject
to adjustments for future stock splits or stock dividends). The Company will
issue between 6,723,873 shares and 8,203,125 shares of its common stock (also
subject to adjustments for future stock splits or stock dividends) upon the
consummation of the forward purchase contract. Until the conversion date, the
equity units will have a dilutive effect on earnings per share if the Company's
average common stock price for the period exceeds the maximum conversion price.
For the three- and nine-month periods ended March 31, 2004, diluted earnings per
share included common stock equivalents from mandatory convertible equity units
of 29,214 and nil, respectively.
GOODWILL AND INTANGIBLES
There was no change in the carrying amount of goodwill for the nine-month period
ended March 31, 2004. As of March 31, 2004, the Company has goodwill of
$642,921,000 from its Distribution segment. The Distribution segment is tested
annually for impairment in the fourth quarter, after the annual forecasting
process.
On June 11, 2003, the Company completed its acquisition of Panhandle Energy.
Based on the purchase price allocations, which rely on estimates and outside
appraisals, the acquisition resulted in no recognition of goodwill as of the
acquisition date. In addition, based on the purchase price allocations the
acquisition resulted in the recognition of intangible assets relating to
customer contracts and relationships of approximately $21,293,000 as of the
acquisition date. These intangibles are currently being amortized over a period
of twenty years, the remaining life of the contract for which the value is
associated. As of March 31, 2004, the carrying amount of these intangibles was
approximately $20,027,000 and is included in Property, Plant and Equipment on
the Consolidated Balance Sheet.
DEFERRED CHARGES AND CREDITS
MARCH 31, JUNE 30,
2004 2004
---- ----
Deferred Charges
Pensions......................................................................... $ 39,128 $ 39,088
Unamortized debt expense......................................................... 38,083 34,209
Income taxes..................................................................... 31,441 30,514
Retirement costs other than pensions............................................. 26,741 29,028
Environmental.................................................................... 17,569 14,304
Service Line Replacement program................................................. 17,483 18,974
Other............................................................................ 15,465 22,144
------------- --------------
Total Deferred Charges........................................................ $ 185,910 $ 188,261
============= ==============
As of March 31, 2004 and June 30, 2003, the Company's deferred charges include
regulatory assets relating to Distribution segment operations in the aggregate
amount of $107,256,000 and $109,160,000, respectively, of which $70,196,000 and
$75,381,000, respectively, is being recovered through current rates. As of March
31, 2004 and June 30, 2003, the remaining recovery period associated with these
assets ranges from 1 to 208 months and from 6 months to 147 months,
respectively. None of these regulatory assets, which primarily relate to
pensions, retirement costs other than pensions, income taxes, Year 2000 costs,
Missouri Gas Energy's Service Line Replacement program and environmental
remediation costs, are included in rate base. The Company records regulatory
assets in accordance with the FASB standard, Accounting for the Effects of
Certain Types of Regulation.
MARCH 31, JUNE 30,
2004 2003
---- ----
Deferred Credits
Pensions........................................................................ $ 96,076 $ 88,016
Retirement costs other than pensions............................................ 62,679 65,144
Environmental................................................................... 29,569 32,322
Cost of Removal................................................................. 28,110 27,286
Derivative liability............................................................ 14,859 26,151
Customer advances for construction.............................................. 12,530 12,008
Self-insurance.................................................................. 11,787 12,000
Investment tax credit........................................................... 5,346 5,661
Other........................................................................... 49,691 53,566
------------- --------------
Total Deferred Credits........................................................ $ 310,647 $ 322,154
============= ==============
The Company's deferred credits include regulatory liabilities relating to
Distribution segment operations in the aggregate amount of $10,883,000 and
$10,084,000, respectively, at March 31, 2004, and June 30, 2003. These
regulatory liabilities primarily relate to retirement benefits other than
pensions, environmental insurance recoveries and income taxes. The Company
records regulatory liabilities in accordance with the FASB standard, Accounting
for the Effects of Certain Types of Regulation.
INVESTMENT SECURITIES
As of March 31, 2004, all securities owned by Southern Union are accounted for
under the cost method. The Company's investments in securities consist of common
and preferred stock in non-public companies whose value is not readily
determinable. Various Southern Union executive management personnel, Board of
Directors and employees also have an equity ownership in one of these
investments.
The Company reviews its portfolio of investment securities on a quarterly basis
to determine whether a decline in value is other than temporary. Factors that
are considered in assessing whether a decline in value is other than temporary
include, but are not limited to: earnings trends and asset quality; near term
prospects and financial condition of the issuer, including the availability and
terms of any additional financing requirements; financial condition and
prospects of the issuer's region and industry, customers and markets and
Southern Union's intent and ability to retain the investment. If Southern Union
determines that the decline in value of an investment security is other than
temporary, the Company will record a charge on its Consolidated Statement of
Operations to reduce the carrying value of the security to its estimated fair
value.
In September 2003, Southern Union determined that the decline in value of its
investment in PointServe was other than temporary. Accordingly, the Company
recorded a non-cash charge of $1,603,000 to reduce the carrying value of this
investment to its estimated fair value. The Company recognized this valuation
adjustment to reflect lower private equity valuation metrics and changes in the
business outlook of PointServe. PointServe is a closely held, privately owned
company and, as such, has no published market value. The Company's remaining
investment of $2,603,000 at March 31, 2004 is carried at its estimated fair
value and may be subject to future market value risk. The Company will continue
to monitor the value of its investment and periodically assess the impact, if
any, on reported earnings in future periods.
STOCKHOLDERS' EQUITY
The Company accounts for its incentive plans under the Accounting Principles
Board Opinion, Accounting for Stock Issued to Employees and related
authoritative interpretations. The Company recorded no compensation expense for
the three- and nine-month periods ended March 31, 2004 and 2003. During 1997,
the Company adopted the FASB Standard, Accounting for Stock-Based Compensation,
for footnote disclosure purposes only. Had compensation cost for these incentive
plans been determined consistent with this Statement, the Company's net earnings
available for common shareholders from continuing operations and diluted
earnings per share would have been $70,541,000 and $.95, and $45,967,000 and
$.78, respectively, for the three-month periods ended March 31, 2004 and 2003,
and $100,516,000 and $1.36, and $54,508,000 and $.93, respectively, for the
nine-month periods ended March 31, 2004 and 2003. Had compensation cost for
these incentive plans been determined consistent with this Statement, the
Company's net earnings available for common shareholders and diluted earnings
per share would have been $70,541,000 and $.95, and $63,632,000 and $1.08,
respectively, for the three-month periods ended March 31, 2004 and 2003, and
$100,516,000 and $1.36, and $85,764,000 and $1.46, respectively, for the
nine-month periods ended March 31, 2004 and 2003.
COMPREHENSIVE INCOME
The table below gives an overview of comprehensive income for the periods
indicated.
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
2004 2003 2004 2003
---- ---- ---- ----
Net earnings available for common shareholders ......................... $ 71,026 $ 63,899 $ 101,737 $ 86,823
Other comprehensive income (loss):
Unrealized loss in investment securities, net of tax benefit ........ -- (82) (21) (428)
Unrealized loss on hedging activities, net of tax benefit ........... (2,011) (1,943) (1,291) (1,814)
Minimum pension liability adjustment, net of tax .................... -- 4,178 -- 4,178
--------- --------- --------- ---------
Other comprehensive (loss) income ...................................... (2,011) 2,153 (1,312) 1,936
--------- --------- --------- ---------
Comprehensive income ................................................... $ 69,015 $ 66,052 $ 100,425 $ 88,759
========= ========= ========= =========
Accumulated other comprehensive income reflected in the Consolidated Balance
Sheet at March 31, 2004, includes unrealized gains and losses on hedging
activities and minimum pension liability adjustments.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES
The Company utilizes derivative instruments on a limited basis to manage certain
business risks. Interest rate swaps and treasury rate locks are employed to
manage the Company's exposure to interest rate risk.
CASH FLOW HEDGES. As a result of the acquisition of Panhandle Energy, the
Company is party to interest rate swap agreements with an aggregate notional
amount of $199,963,000 as of March 31, 2004 that fix the interest rate
applicable to floating rate long-term debt and which qualify for hedge
accounting. For the nine-month period ended March 31, 2004, the amount of swap
ineffectiveness was not significant. As of March 31, 2004, floating rate London
InterBank Offered Rate (LIBOR) based interest payments were exchanged for
weighted fixed rate interest payments of 5.88%, which does not include the
spread on the underlying variable debt rate of 1.625%. As such, payments or
receipts on interest rate swap agreements, in excess of the liability recorded,
are recognized as adjustments to interest expense. As of March 31, 2004 and June
30, 2003, the fair value liability position of the swaps was $21,221,000 and
$26,850,000, respectively. As of March 31, 2004 and since the acquisition date,
an unrealized loss of $1,472,000 ($881,000, net of tax), was included in
accumulated other comprehensive income related to these swaps, of which
approximately $314,000, net of tax, is expected to be reclassified to interest
expense during the next twelve months, as the hedged interest payments occur.
Current market pricing models were used to estimate fair values of interest rate
swap agreements.
The Company was also party to an interest rate swap agreement with a notional
amount of $8,199,000 at June 30, 2003 that fixed the interest rate applicable to
floating rate long-term debt and which qualified for hedge accounting. The fair
value liability position of the swap was $93,000 at June 30, 2003. In October
2003, the swap expired and $15,000 of unrealized after-tax losses included in
accumulated other comprehensive income relating to this swap was reclassified to
interest expense during the quarter ended December 31, 2003.
In March and April 2003, the Company entered into a series of treasury rate
locks with an aggregate notional amount of $250,000,000 to manage its exposure
against changes in future interest payments attributable to changes in the
benchmark interest rate prior to the anticipated issuance of fixed-rate debt.
These treasury rate locks expired on June 30, 2003, resulting in a $6,862,000
after-tax loss that was recorded in accumulated other comprehensive income and
will be amortized into interest expense over the lives of the associated debt
instruments. As of March 31, 2004, approximately $846,000 of net after-tax
losses in accumulated other comprehensive income will be amortized into interest
expense during the next twelve months.
The notional amounts of the interest rate swaps are not exchanged and do not
represent exposure to credit loss. In the event of default by a counterparty,
the risk in these transactions is the cost of replacing the agreements at
current market rates.
FAIR VALUE HEDGES. In March 2004, Panhandle Energy entered into an interest rate
swap to hedge the risk associated with the fair value of its $200,000,000 2.75%
Senior Notes. These swaps are designated as fair value hedges and qualify for
the short cut method under FASB standard, Accounting for Derivative Instruments
and Hedging Activities, as amended. Under the swap agreement Panhandle Energy
will receive fixed interest payments at a rate of 2.75% and will make floating
interest payments based on the six-month LIBOR. No ineffectiveness is assumed in
the hedging relationship between the debt instrument and the interest rate swap.
TRADING AND NON-HEDGING ACTIVITIES. During fiscal 2004, the Company acquired
natural gas commodity swap derivatives and collar transactions in order to
mitigate price volatility of natural gas passed through to utility customers.
The cost of the derivative products and the settlement of the respective
obligations are recorded through the gas purchase adjustment clause as
authorized by the applicable regulatory authority and therefore do not impact
earnings. The fair value of the contracts is recorded as an adjustment to a
regulatory asset/ liability in the Consolidated Balance Sheet. As of March 31,
2004, the fair values of the contracts, which expire at various times through
October 2004, are included in the Consolidated Balance Sheet as an asset and a
matching adjustment to deferred cost of gas of $1,238,000.
PREFERRED SECURITIES
On May 17, 1995, Southern Union Financing I (Subsidiary Trust), a consolidated
wholly-owned subsidiary of Southern Union, issued $100,000,000 of 9.48% Trust
Originated Preferred Securities (Preferred Securities). In connection with the
Subsidiary Trust's issuance of the Preferred Securities and the related purchase
by Southern Union of all of the Subsidiary Trust's common securities (Common
Securities), Southern Union issued to the Subsidiary Trust $103,092,800
principal amount of its 9.48% Subordinated Deferrable Interest Notes, due 2025
(Subordinated Notes). The sole assets of the Subsidiary Trust are the
Subordinated Notes. On October 1, 2003, the Company called the Subordinated
Notes for redemption, and the Subordinated Notes and the Preferred Securities
were redeemed on October 31, 2003. The Company financed the redemption with
borrowings under its revolving credit facilities, which were paid down with the
net proceeds of a $230,000,000 offering of preferred stock by the Company on
October 8, 2003, as further described below.
On October 8, 2003, the Company issued 920,000 shares of its 7.55% Noncumulative
Preferred Stock, Series A (Liquidation Preference $250 Per Share) to the public
through the issuance of 9,200,000 Depositary Shares, each representing a
one-tenth interest in a 7.55% Noncumulative Preferred Stock, Series A share at
the public offering price of $25.00 per share, or $230,000,000 in the aggregate.
The total net proceeds were used to repay debt under the Company's revolving
credit facilities.
DEBT AND CAPITAL LEASE
MARCH 31, JUNE 30,
2004 2003
---- ----
SOUTHERN UNION COMPANY
7.60% Senior Notes, due 2024 ............................................ $ 359,765 $ 359,765
8.25% Senior Notes, due 2029 ............................................ 300,000 300,000
2.75% Senior Notes, due 2006 ............................................ 125,000 125,000
Term Note, due 2005 ..................................................... 136,087 211,087
6.50% to 10.25% First Mortgage Bonds, due 2008 to 2029 .................. 113,439 115,884
7.70% Debentures, due 2027 .............................................. -- 6,756
Capital lease and other due 2004 to 2007 ................................ 315 9,179
---------- ---------
1,034,606 1,127,671
PANHANDLE ENERGY
2.75% Senior Notes due 2007 ............................................. 200,000 --
4.80% Senior Notes due 2008 ............................................. 300,000 --
6.05% Senior Notes due 2013 ............................................. 250,000 --
6.125% Senior Notes due 2004 ............................................ -- 292,500
7.875% Senior Notes due 2004 ............................................ 52,455 100,000
6.50% Senior Notes due 2009 ............................................. 60,623 158,980
8.25% Senior Notes due 2010 ............................................. 40,500 60,000
7.00% Senior Notes due 2029 ............................................. 66,305 135,890
Term Loan due 2007 ...................................................... 266,614 275,358
7.95% Debentures due 2023 ............................................... -- 76,500
7.20% Debentures due 2024 ............................................... -- 58,000
Net premiums on long-term debt .......................................... 17,218 61,506
---------- ---------
1,253,715 1,218,734
Total consolidated debt and capital lease ............................... 2,288,321 2,346,405
Less current portion ................................................ 99,501 734,752
---------- ----------
Total consolidated long-term debt and capital lease ..................... $2,188,820 $1,611,653
========== ==========
Each note, debenture or bond is an obligation of Southern Union Company or a
unit of Panhandle Energy, as noted above. The Panhandle Energy Term Loan due
2007 is debt related to Panhandle's Trunkline LNG Holdings subsidiary, and is
non-recourse to other units of Panhandle Energy or Southern Union Company. The
remainder of Panhandle Energy's debt is non-recourse to Southern Union. All
debts that are listed as debt of Southern Union Company are direct obligations
of Southern Union Company, and no debt is cross-collateralized.
The Company is not party to any lending agreement that would accelerate the
maturity date of any obligation due to a failure to maintain any specific credit
rating. Certain covenants exist in certain of the Company's debt agreements that
require the Company to maintain a certain level of net worth, to meet certain
debt to total capitalization ratios, and to meet certain ratios of earnings
before depreciation, interest and taxes to cash interest expense. A failure by
the Company to satisfy any such covenant would be considered an event of default
under the associated debt, which could become immediately due and payable if the
Company did not cure such default within any permitted cure period or if the
Company did not obtain amendments, consents or waivers from its lenders with
respect to such covenants.
CAPITAL LEASE. The Company completed the installation of an Automated Meter
Reading (AMR) system at Missouri Gas Energy during the first quarter of fiscal
year 1999. The installation of the AMR system involved an investment of
approximately $30,000,000 which is accounted for as a capital lease obligation.
The final lease payment was made on October 1, 2003, and the Company has no
further obligations with respect to the capital lease.
CREDIT FACILITIES. On April 3, 2003, the Company entered into a short-term
credit facility in the amount of $140,000,000 (the Short Term Facility), that
matured April 1, 2004. The Short-Term Facility was increased to $150,000,000 as
of September 25, 2003. Also on April 3, 2003, the Company amended the terms and
conditions of its $225,000,000 long-term credit facility (the Long-Term
Facility), which expires on May 29, 2004. The Company has additional
availability under uncommitted line of credit facilities (Uncommitted
Facilities) with various banks. Borrowings under the facilities are available
for Southern Union's working capital, letter of credit requirements and other
general corporate purposes. The Short-Term Facility and the Long-Term Facility
(together, the Facilities) are subject to a commitment fee based on the rating
of the Senior Notes. The Company is in the process of entering a new five-year
credit facility that will replace the Short Term Facility and the Long Term
Facility. The Company expects that the new facility will contain substantially
similar terms and conditions as the existing facilities. As of March 31, 2004,
the commitment fees were an annualized 0.15% on the Facilities. The interest
rate on borrowings on the Facilities is calculated based upon a formula using
the LIBOR or prime interest rates. A balance of $75,500,000 was outstanding
under the Facilities at March 31, 2004, at an effective weighted average
interest rate of 1.92%.
TERM NOTE. On August 28, 2000 the Company entered into the Term Note to fund (i)
the cash portion of the consideration to be paid to the Fall River Gas'
stockholders; (ii) the all cash consideration to be paid to the ProvEnergy and
Valley Resources stockholders, (iii) repayment of approximately $50,000,000 of
long- and short-term debt assumed in the mergers, and (iv) all related
acquisition costs. The Term Note, which initially expired on August 27, 2001,
was extended through August 26, 2002. On July 16, 2002, the Company repaid the
Term Note with the proceeds from the issuance of a $311,087,000 Term Note dated
July 15, 2002 (the 2002 Term Note) and borrowings under the Company's lines of
credit. The 2002 Term Note is held by a syndicate of sixteen banks, led by
JPMorgan Chase Bank, as Agent. Eleven of the sixteen banks were also among the
lenders of the Term Note, and they are also lenders under at least one of the
Facilities. The 2002 Term Note carries a variable interest rate that is tied to
either the LIBOR or prime interest rates at the Company's option. The interest
rate spread over the LIBOR rate varies with the credit rating of the Senior
Notes by S&P and Moody's, and is currently LIBOR plus 105 basis points. As of
March 31, 2004, a balance of $136,087,000 was outstanding under this 2002 Term
Note at an effective interest rate of 2.16%. The 2002 Term Note requires
principal payments of $35,000,000 on February 15, 2005, $35,000,000 on August
15, 2005 and $66,087,000 on August 26, 2005. The Company made an additional
voluntary prepayment under the 2002 Term Note of $25,000,000 on April 30, 2004,
which will reduce the required principal payments on a pro rata basis. No
additional draws can be made on the 2002 Term Note.
PANHANDLE REFINANCING. In July 2003, Panhandle Energy announced a tender offer
for any and all of the $747,370,000 outstanding principal amount of five of its
series of senior notes outstanding at that point in time (the Panhandle Tender
Offer) and also called for redemption all of the outstanding $134,500,000
principal amount of its two series of debentures that were outstanding (the
Panhandle Calls). Panhandle Energy repurchased approximately $378,257,000 of the
principal amount of its outstanding debt through the Panhandle Tender Offer for
total consideration of approximately $396,445,000 plus accrued interest through
the purchase date. Panhandle Energy also redeemed approximately $134,500,000 of
debentures through the Panhandle Calls for total consideration of $139,411,000,
plus accrued interest through the redemption dates. As a result of the Panhandle
Tender Offer, the Company has recorded a pre-tax gain on the extinguishment of
debt of $6,123,000 in August 2003, which has been classified as other income,
net, in the Consolidated Statement of Operations. In August 2003, Panhandle
Energy issued $300,000,000 of its 4.80% Senior Notes due 2008 and $250,000,000
of its 6.05% Senior Notes due 2013 principally to refinance the repurchased
notes and redeemed debentures. Also in August and September 2003, Panhandle
Energy repurchased $3,150,000 principal amount of its senior notes on the open
market through two transactions for total consideration of $3,398,000, plus
accrued interest through the repurchase date.
On March 12, 2004, Panhandle Energy issued $200,000,000 of its 2.75% Senior
Notes due 2007, the proceeds of which were used to fund the redemption of the
remaining $146,080,000 principal amount of its 6.125% Senior Notes due 2004 that
matured on March 15, 2004 and to provide working capital to the Company, pending
the repayment of the $52,455,000 principal amount of Panhandle Energy's 7.875%
Senior Notes due 2004 that mature on August 15, 2004.
EMPLOYEE BENEFITS
COMPONENTS OF NET PERIODIC BENEFIT COST
Net periodic benefit cost for the three-months ended March 31, 2004 and 2003
includes the following components:
PENSION BENEFITS POST-RETIREMENT BENEFITS
2004 2003 2004 2003
----------- ----------- ---------- ----------
Service cost......................................... $ 1,738 $ 1,414 $ 913 $ 294
Interest cost........................................ 5,586 5,725 1,975 1,395
Expected return on plan assets....................... (5,244) (6,187) (419) (434)
Amortization of prior service cost................... 263 198 19 (16)
Recognized actuarial gain (loss)..................... 1,906 608 144 (59)
Settlement recognition............................... (119) (140) -- --
----------- ----------- ---------- ----------
Net periodic pension cost............................ $ 4,130 $ 1,618 $ 2,632 $ 1,180
=========== =========== ========== ==========
Net periodic benefit cost for the nine-months ended March 31, 2004 and 2003
includes the following components:
PENSION BENEFITS POST-RETIREMENT BENEFITS
2004 2003 2004 2003
----------- ----------- ---------- ----------
Service cost......................................... $ 5,213 $ 4,241 $ 2,738 $ 883
Interest cost........................................ 16,758 17,174 5,925 4,184
Expected return on plan assets....................... (15,731) (18,562) (1,256) (1,301)
Amortization of prior service cost................... 787 593 56 (49)
Recognized actuarial gain (loss)..................... 5,719 1,825 431 (176)
Settlement recognition............................... (356) (419) -- --
----------- ----------- ---------- ----------
Net periodic pension cost............................ $ 12,390 $ 4,852 $ 7,894 $ 3,541
=========== =========== ========== ==========
EMPLOYER CONTRIBUTIONS
As of March 31, 2004, $1,509,000 and $8,857,000 of contributions have been made
to the Company's pension plans and post-retirement plans, respectively. The
Company presently anticipates contributing an additional $3,750,000 to fund its
pension plan in fiscal 2004 for a total of $5,259,000, and $4,335,000 to fund
its post-retirement plan in fiscal 2004 for a total of $13,192,000.
REGULATION AND RATES
MISSOURI GAS ENERGY. On November 4, 2003, Missouri Gas Energy filed a request
with the Missouri Public Service Commission (MPSC) to increase base rates by
$44,800,000 and to implement a weather mitigation rate design that would
significantly reduce the impact of weather-related fluctuations on customer
bills. On January 30, 2004, Missouri Gas Energy filed an updated claim which
raised the amount of the base rate increase request to $54,200,000. Statutes
require that the MPSC reach a decision in the case within an eleven-month period
from the original filing date. It is not presently possible to determine what
action the MPSC will ultimately take with respect to this rate increase request.
NEW ENGLAND GAS COMPANY. On October 30, 2003, the Rhode Island Public Utilities
Commission (RIPUC) approved the Company's gas cost filing and allowed full
recovery of the deferred fuel balance effective November 1, 2003. At the same
open meeting, the RIPUC ordered the Company to begin to refund, through the
Distribution Adjustment Clause, the Division of Public Utilities and Carriers
position on the Company's over earnings, which were substantially accrued for by
the Company at June 30, 2003, pending a final decision by the RIPUC. On April
15, 2004, RIPUC ruled on its final decision and approved total over earnings for
fiscal 2003 to be $799,000, which was accrued for by the Company at March 31,
2004.
On May 22, 2003, the RIPUC approved a Settlement Offer filed by New England Gas
Company related to the final calculation of earnings sharing for the 21-month
period covered by the Energize Rhode Island Extension settlement agreement. This
calculation generated excess revenues of $5,227,000. The net result of the
excess revenues and the Energize Rhode Island weather mitigation and non-firm
margin sharing provisions is the crediting to customers of $949,000 over a
twelve-month period starting July 1, 2003.
PANHANDLE ENERGY. In December 2002, FERC approved a Trunkline LNG certificate
application to expand the Lake Charles facility to approximately 1.2 Bcf per day
of sustainable sendout capacity versus the current sustainable capacity of .63
Bcf per day and increase terminal storage capacity to 9 Bcf from the current 6.3
Bcf. BG LNG Services has contract rights for the .57 Bcf per day of additional
capacity. Construction on the Trunkline LNG expansion project (Phase I)
commenced in September 2003 and is expected to be completed with an estimated
cost totaling $137 million by the end of calendar 2005. In February 2004,
Trunkline LNG filed a further incremental LNG expansion project (Phase II) with
the FERC and is awaiting Commission approval. Phase II is estimated to cost
approximately $77 million, plus capitalized interest, and would increase the LNG
terminal sustainable sendout capacity to 1.8 Bcf per day. Phase II has an
expected in-service date of mid-2006. BG LNG Services has contracted for all the
proposed additional capacity subject to Trunkline LNG achieving certain
construction milestones at this facility.
In February 2004, Trunkline filed an application with the FERC to request
approval of a 30-inch diameter, 23-mile natural gas pipeline loop from the LNG
terminal. The estimated cost of this pipeline expansion project is $40 million.
The pipeline creates additional transport capacity in association with the
Trunkline LNG expansion and also includes new and expanded delivery points with
major interstate pipelines.
COMMITMENTS AND CONTINGENCIES
ENVIRONMENTAL
The Company is subject to federal, state and local laws and regulations relating
to the protection of the environment. These evolving laws and regulations may
require expenditures over a long period of time to control environmental
impacts. The Company has established procedures for the on-going evaluation of
its operations to identify potential environmental exposures and assure
compliance with regulatory policies and procedures.
The Company follows the provisions of an American Institute of Certified Public
Accountants Statement of Position, Environmental Remediation Liabilities, for
recognition, measurement, display and disclosure of environmental remediation
liabilities.
In certain of the Company's jurisdictions the Company is allowed to recover
environmental remediation expenditures through rates. Although significant
charges to earnings could be required prior to rate recovery for jurisdictions
that do not have rate recovery mechanisms, management does not believe that
environmental expenditures will have a material adverse effect on the Company's
financial position, results of operations or cash flows.
LOCAL DISTRIBUTION COMPANY ENVIRONMENTAL MATTERS -- The Company is investigating
the possibility that the Company or predecessor companies may have been
associated with Manufactured Gas Plant (MGP) sites in its former gas
distribution service territories, principally in Texas, Arizona and New Mexico,
and present gas distribution service territories in Missouri, Pennsylvania,
Massachusetts and Rhode Island. At the present time, the Company is aware of
certain MGP sites in these areas and is investigating those and certain other
locations. While the Company's evaluation of these Texas, Missouri, Arizona, New
Mexico, Pennsylvania, Massachusetts and Rhode Island MGP sites is in its
preliminary stages, it is likely that some compliance costs may be identified
and become subject to reasonable quantification. Within the Company's gas
distribution service territories certain MGP sites are currently the subject of
governmental actions. These sites are as follows:
MISSOURI SITES. In a letter dated May 10, 1999, the Missouri Department of
Natural Resources (MDNR) sent notice of a planned Site Inspection/Removal Site
Evaluation of the Kansas City Coal Gas Former MGP site. This site (comprised of
two adjacent MGP operations previously owned by two separate companies and
hereafter referred to as Station A and Station B) is located at East 1st Street
and Campbell in Kansas City, Missouri and is owned by Missouri Gas Energy (MGE).
During July 1999, the Company submitted the two sites to MDNR's Voluntary
Cleanup Program (VCP) and, subsequently, performed environmental assessments of
the sites. Following the submission of these assessments to MDNR, MGE was
required by MDNR to initiate remediation of Station A. Following the selection
of a qualified contractor in a competitive bidding process, the Company began
remediation of Station A in the first calendar quarter of 2003. The project was
completed in July 2003, at an approximate cost of $4 million. The remediation of
Station B has not been required by MDNR.
Following a failed tank tightness test, MGE removed an underground storage tank
system in December, 2002 from a former MGP site in St. Joseph, Missouri. An
underground storage tank closure report was filed with MDNR on August 12, 2003.
In a letter dated September 26, 2003, MDNR indicated that its review of the
analytical data submitted for this site indicated that contamination existed at
the site above the action levels specified in Missouri guidance documents. In a
letter dated January 28, 2004, MDNR indicated that the Department would provide
MGE a final version of the Missouri Risk-Based Corrective Action (MRBCA) process
as soon as it becomes available, and indicated that it would expect MGE to
submit a work plan outlining site characterization activities for this site
following MGE's receipt of the MRBCA.
RHODE ISLAND AND MASSACHUSETTS SITES. Prior to its acquisition by the Company,
Providence Gas performed environmental studies and initiated an environmental
remediation project at Providence Gas' primary gas distribution facility located
at 642 Allens Avenue in Providence, Rhode Island. Providence Gas spent more than
$13 million on environmental assessment and remediation at this MGP site under
the supervision of the Rhode Island Department of Environmental Management
(RIDEM). Following the acquisition, environmental remediation at the site was
temporarily suspended. During this suspension, the Company requested certain
modifications to the 1999 Remedial Action Work Plan from RIDEM. After receiving
approval to some of the requested modifications to the 1999 Remedial Action Work
Plan, environmental work was reinitiated on April 17, 2002, by a qualified
contractor selected in a competitive bidding process. Remediation was completed
on October 10, 2002, and a Closure Report was filed with RIDEM in December 2002.
The approximate cost of the environmental work conducted after environmental
work resumed was $4 million. Remediation of the remaining 37.5 acres of the site
(known as the "Phase 2" remediation project) is not scheduled at this time.
In November 1998, Providence Gas received a letter of responsibility from RIDEM
relating to possible contamination at a site that operated as a MGP in the early
1900's in Providence, Rhode Island. Subsequent to its use as a MGP, this site
was operated for over eighty years as a bulk fuel oil storage yard by a
succession of companies including Cargill, Inc. (Cargill). Cargill has also
received a letter of responsibility from RIDEM for the site. An investigation
has begun to determine the extent of contamination, as well as the extent of the
Company's responsibility. Providence Gas entered into a cost-sharing agreement
with Cargill, under which Providence Gas is responsible for approximately twenty
percent (20%) of the costs related to the investigation. To date, approximately
$300,000 has been spent on environmental assessment work at this site. Until
RIDEM provides its final response to the investigation, and the Company knows
its ultimate responsibility respective to other potentially responsible parties
with respect to the site, the Company cannot offer any conclusions as to its
ultimate financial responsibility with respect to the site.
Fall River Gas Company was a defendant in a civil action seeking to recover
anticipated remediation costs associated with contamination found at property
owned by the plaintiffs (the Cory Lane Site) in Tiverton, Rhode Island. This
claim was based on alleged dumping of material by Fall River Gas Company trucks
at the site in the 1930s and 1940s. In a settlement agreement effective December
3, 2001, the Company agreed to perform all assessment, remediation and
monitoring activities at the Cory Lane Site sufficient to obtain a final letter
of compliance from the RIDEM.
In a letter dated March 17, 2003, RIDEM sent the New England Gas Company
division of Southern Union (NEGC) a letter of responsibility pertaining to
alleged historical MGP impacted soils in a residential neighborhood along Bay
Street, Judson Street, Canonicus Street, Hooper Street, Hilton Street, Chase
Street and Foote Street (collectively the Bay Street Area) in Tiverton, Rhode
Island. The letter requested that NEGC prepare a draft Site Investigation Work
Plan (Work Plan) for submittal to RIDEM by April 10, 2003, and subsequently
perform a Site Investigation of the Bay Street Area. Without admitting
responsibility or accepting liability, NEGC responded to RIDEM in a letter dated
March 19, 2003, and agreed to perform the activities requested by the State
within the period specified by RIDEM. After receiving approval from RIDEM on a
Work Plan and upon obtaining access agreements from a number of property owners,
NEGC began assessment work on June 2, 2003. On August 20, 2003, two former
residents of the area filed a tort action against NEGC alleging personal injury
to the plaintiffs. This litigation has not been served on the Company. An
assessment report was filed with RIDEM on October 31, 2003, and RIDEM provided
NEGC comments to the assessment report in a letter dated January 27, 2004. The
January 27, 2004 RIDEM letter included the comment that additional assessment
work was necessary in the Bay Street Area. On April 13, 2004, NEGC submitted
Supplemental Site Investigation Work Plans for 11 properties located within the
Bay Street Suspected Fill Area. These work plans were prepared in consultation
with area residents by an environmental consulting firm, Woodard & Curran.
Representatives of Woodard & Curran, working on behalf of the residents of the
Bay Street Area, continue to meet with area residents to develop additional work
plans for submission to RIDEM. NEGC has agreed to pay