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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549
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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 DECEMBER 31, 1993
OR
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
COMMISSION FILE NO. 1-6407
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SOUTHERN UNION COMPANY
(Exact name of registrant as specified in its charter)
Delaware 75-0571592
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
504 LAVACA STREET, EIGHTH FLOOR 78701
AUSTIN, TEXAS (Zip Code)
(Address of principal executive
offices)
Registrant's telephone number, including area code: (512) 477-5981
Securities Registered Pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE IN WHICH
TITLE OF EACH CLASS REGISTERED
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Common Stock, par value $1 per share American Stock Exchange
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 pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendments by
this Form 10-K. Yes _X_
The aggregate market value of the voting stock held by non-affiliates of the
registrant on March 21, 1994, was approximately $150,238,000. The number of
shares of the registrant's Common Stock outstanding on March 21, 1994 was
10,900,586.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's proxy statement for its annual meeting of
stockholders to be held on May 25, 1994 are incorporated by reference into Part
III hereof, to the extent indicated herein.
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PART I
ITEM 1. BUSINESS.
INTRODUCTION
Southern Union Company ("Southern Union" and, together with its
subsidiaries, the "Company") was incorporated under the laws of the State of
Delaware in 1932. The Company's principal line of business is the distribution
of natural gas as a public utility through Southern Union Gas Company ("Southern
Union Gas") and Missouri Gas Energy, each of which is a division of the Company.
Southern Union Gas serves approximately 483,000 residential, commercial,
industrial, agricultural and other customers in the States of Texas (including
the cities of Austin, Brownsville, El Paso, Galveston and Port Arthur) and
Oklahoma. Missouri Gas Energy, acquired on January 31, 1994, serves
approximately 472,000 customers in central and western Missouri (including the
cities of Kansas City, St. Joseph, Joplin and Monett). See "Missouri
Acquisition."
Subsidiaries of Southern Union have been established to support and expand
natural gas sales and to capitalize on the Company's gas energy expertise. These
subsidiaries market natural gas to end-users, sell natural gas as a vehicular
fuel, convert vehicles to operate on natural gas, operate intrastate and
interstate natural gas pipeline systems, and sell commercial gas air
conditioning and other gas-fired engine-driven applications. By providing
"one-stop shopping," the Company can serve its various customers' particular
energy needs, which encompass substantially all of the natural gas distribution
and sales businesses from natural gas sales to specialized energy consulting
services. A subsidiary also holds investments in real estate which are used
primarily in the Company's utility business. See "Company Operations."
The Company is a sales and market-driven energy company whose management is
committed to achieving profitable growth of its natural gas energy businesses in
an increasingly competitive business environment. Management's strategies for
achieving these objectives principally consist of: (i) promoting new sales
opportunities and markets for natural gas; (ii) enhancing financial and
operating performance; and (iii) expanding the Company through developing
existing systems and selectively acquiring new systems. Management developed and
continually evaluates these strategies and the Company's implementation of them
by applying their experience and expertise in analyzing the energy industry,
technological advances, market opportunities and general business trends. Each
of these strategies, as implemented throughout the Company's businesses,
reflects the Company's commitment to its core natural gas utility business.
Central to all of the Company's businesses and strategies is the sale and
transportation of natural gas.
The Company has a goal of selected growth and expansion, primarily in the
natural gas industry. To that extent, the Company intends to consider, when
appropriate, and if financially practicable to pursue, the acquisition of other
natural gas distribution or transmission businesses. The nature and location of
any such properties, the structure for any such acquisitions, and the method of
financing any such expansion or growth will be determined by management and the
Southern Union Board of Directors.
MISSOURI ACQUISITION
On July 9, 1993, Southern Union entered into an Agreement for the Purchase
of Assets (the "Missouri Asset Purchase Agreement") with Western Resources, Inc.
("Western Resources"), pursuant to which Southern Union purchased from Western
Resources (the "Missouri Acquisition") certain Missouri natural gas distribution
operations (the "Missouri Business"). The purchase was consummated on January
31, 1994. Southern Union paid Western Resources approximately $400,300,000 in
cash for the Missouri Business. The final determination of the purchase price
and all prorations and adjustments is expected to be finalized by May 30, 1994.
Southern Union operates the Missouri Business as Missouri Gas Energy, which
is headquartered in Kansas City, Missouri. As a result of the Missouri
Acquisition, the Company nearly doubled the number of customers served by its
natural gas distribution system and became one of the top 15 gas
1
utilities in the United States, as measured by number of customers. In addition,
the Missouri Acquisition lessens the sensitivity of the Company's operations to
weather risk and local economic conditions by diversifying operations into a
different geographic area. The incurrence of additional debt and issuance of new
equity in connection with the Missouri Acquisition also significantly changed
the Company's capital structure. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations ("MD&A") -- Investing Activities"
and "Subsequent Events" in the Notes to the Consolidated Financial Statements
for the year ended December 31, 1993.
The approval of the Missouri Acquisition by the Missouri Public Service
Commission ("MPSC") was subject to the terms of a stipulation and settlement
agreement (the "MPSC Stipulation") among Southern Union, Western Resources, the
MPSC staff and all intervenors in the MPSC proceeding. Among other things, the
MPSC Stipulation: (i) provides that the Company attain a total debt to total
capital ratio that does not exceed Standard and Poor's Corporation's Utility
Financial Benchmark ratio for the lowest investment grade investor-owned natural
gas distribution company (which, at January 31, 1994, would be approximately
58%) in order to implement any general rate increase with respect to the
Missouri Business; (ii) prohibits Southern Union from implementing a general
rate increase in Missouri before January 31, 1997 except in certain unusual
events; (iii) required Western Resources to contribute an additional $9,000,000
to the Missouri Business' employees' and retirees' qualified defined benefit
plan assets transferred to the Company; and (iv) requires the Company to
contribute an additional $3,000,000 to the Company's qualified defined benefit
plan applicable to the Missouri Business' employees and retirees; and (v)
requires the Company to reduce rate base by $30,000,000 (to be amortized over a
ten year period) to compensate rate payers for rate base reductions that were
eliminated as a result of the acquisition.
The Missouri Acquisition was funded through a $50,000,000 subscription
rights offering of Common Stock (the "Rights Offering") completed in December
1993 and the sale of $475,000,000 of 7.60% Senior Notes due 2024 (the "Senior
Debt Securities") in January 1994. The net proceeds from the Rights Offering,
together with the net proceeds from the sale of the Senior Debt Securities and
working capital from operations, have been or will be used to: (i) fund the
Missouri Acquisition; (ii) refinance $20,000,000 aggregate principal amount of
10 1/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of
borrowings under the Company's $100,000,000 revolving credit facility, used to
fund the acquisition of the Rio Grande Valley Gas Company and to repurchase all
of Southern Union's outstanding preferred stock; (iv) refinance $10,000,000
aggregate principal amount of 9.45% Senior Notes due January 31, 2004 and
$25,000,000 aggregate principal amount of 10% Senior Notes due January 31, 2012,
and the related premium of $10,400,000 resulting from the early extinguishment
of the 9.45% and 10% Senior Notes; and (v) refinance $50,000,000 aggregate
principal amount of 10.5% Sinking Fund Debentures due May 15, 2017, and the
premium of $3,300,000 resulting from the early extinguishment of such
debentures. See Business -- "Other Acquisitions and Divestitures" and "MD&A --
Liquidity and Capital Resources."
Southern Union assumed certain liabilities of Western Resources with respect
to the Missouri Business, including liabilities arising from certain specified
contracts assigned to Southern Union at closing, including gas supply and
transportation contracts, office equipment leases and real estate leases,
liabilities arising from certain contracts entered into by Western Resources in
the ordinary course of business, certain liabilities that have arisen or may
arise from the operation of the Missouri Business, and liabilities for certain
accounts payable of Western Resources pertaining to the Missouri Business.
Southern Union and Western Resources also entered into an Environmental
Liability Agreement at closing. Subject to the accuracy of certain
representations made by Western Resources in the Missouri Asset Purchase
Agreement, the agreement provides for a tiered approach to the allocation of
substantially all liabilities under environmental laws that may exist or arise
with respect to the Missouri Business. The agreement contemplates Southern Union
first seeking reimbursement from other potentially responsible parties, or
recovery of such costs under insurance or through rates charged to customers. To
the extent certain environmental liabilities are discovered by Southern
2
Union prior to July 9, 1995, and are not so reimbursed or recovered, Southern
Union will be responsible for the first $3,000,000, if any, of out of pocket
costs and expenses incurred to respond to and remediate any such environmental
claim. Thereafter, Western Resources would share one-half of the next
$15,000,000 of any such costs and expenses, and Southern Union would be solely
liable for any such costs and expenses in excess of $18,000,000. The Company
believes that it will be able to obtain substantial reimbursement or recovery
for any such environmental liabilities from other potentially responsible third
parties, under insurance or through rates charged to customers.
Pursuant to the terms of an Employee Agreement with Western Resources
entered into on July 9, 1993, after the closing of the Missouri Acquisition,
Southern Union employed certain employees of Western Resources involved in the
operation of the Missouri Business ("Continuing Employees"). Under the terms of
the Employee Agreement, the assets and liabilities attributable to Continuing
Employees and retired employees who had been necessary to the operation of the
Missouri Business ("Retired Employees") under Western Resources' qualified
defined benefit plans were transferred to a qualified defined benefit plan of
Southern Union that will provide benefits to Continuing Employees and Retired
Employees substantially similar to those provided for under Western Resources'
defined benefit plans. Southern Union amended its defined benefit plan to cover
the Continuing Employees and Retired Employees and provide Continuing Employees
and Retired Employees with certain welfare, separation and other benefits and
arrangements.
OTHER ACQUISITIONS AND DIVESTITURES
In September 1993, the Company acquired the Rio Grande Valley Gas Company
("Rio Grande"), a subsidiary of Valero Energy Corporation, for approximately
$30,500,000 (the "Rio Grande Acquisition"). Rio Grande serves approximately
76,000 customers in the south Texas counties of Willacy, Cameron and Hidalgo
which includes 32 towns and cities along the Mexico border, including Harlingen,
McAllen and Brownsville (the southernmost city in the U.S.). The Company
initially funded the purchase with borrowings from its revolving credit
facility, which was subsequently paid down out of the net proceeds from the
Rights Offering and the sale of the Senior Debt Securities. See MD&A --
"Liquidity and Capital Resources."
During May 1993, the Company acquired the natural gas distribution
facilities of Berry Gas Company (the "Berry Gas Acquisition") which serves the
Texas cities and towns of Nome, Raywood, Hull and Devers for approximately
$274,000. In July 1993, the Company acquired the natural gas distribution
facilities serving the city of Eagle Pass, Texas (the "Eagle Pass Acquisition"),
for approximately $2,000,000. Combined, these operations collectively serve
approximately 4,600 customers.
In February 1993, Southern Union Exploration Company ("SX"), a wholly owned
subsidiary of Southern Union, entered into a purchase and sale agreement
pursuant to which it sold substantially all of its oil and gas leasehold
interests and associated production for approximately $22,000,000, effective
January 1, 1993. The Company estimated and recorded a book loss on the sale of
approximately $4,400,000 as of December 31, 1992. In connection with the sale,
the Company recorded an income tax liability of approximately $6,960,000
resulting from the recognition of a tax basis gain of approximately $18,800,000.
During 1992, the Company acquired the natural gas distribution facilities of
Nixon, Texas (the "Nixon Acquisition"). Also, the Company added approximately 12
miles of pipeline which transports gas to the community of Sabine Pass, Texas.
During 1991, the Company acquired the natural gas distribution and transmission
facilities serving an area in south Texas that includes the cities of Luling,
Lockhart, Cuero, Yoakum, Shiner and Gonzales (the "South Texas Acquisition") and
the natural gas distribution facilities serving the city of Andrews, Texas (the
"Andrews Acquisition"). Also in 1991, Southern Union acquired Brazos River Gas
Company (the "Brazos River Acquisition"), a natural gas distribution company
serving the north Texas cities of Mineral Wells, Weatherford, Graham,
Breckenridge, Millsap, Jacksboro and surrounding communities. These distribution
operations collectively serve approximately 35,000 customers.
3
In November 1991, the Company sold the assets of its Arizona gas utility
operations for approximately $46,000,000, including cash of $40,400,000 and
assumed liabilities of $5,600,000 (the "Arizona Sale"). Cash proceeds after
taxes approximated $32,800,000. The Arizona gas operations served approximately
62,000 customers.
COMPANY OPERATIONS
The Company's principal line of business is the distribution of natural gas
through its Southern Union Gas and Missouri Gas Energy divisions. Southern Union
Gas provides service to a number of communities and rural areas in Texas,
including the municipalities of Austin, Brownsville, El Paso, Galveston,
Harlingen, McAllen and Port Arthur, as well as several communities in the
Oklahoma panhandle. Missouri Gas Energy provides service to various cities and
communities in central and western Missouri including Kansas City, St. Joseph,
Joplin and Monett. The Company's gas utility operations are generally seasonal
in nature, with a significant percentage of its annual revenues and earnings
occurring in the traditional heating-load months.
Western Gas Interstate Company ("WGI"), a wholly owned subsidiary of
Southern Union, operates interstate pipeline systems principally serving the
Company's gas distribution properties in the El Paso, Texas area and in the
Texas and Oklahoma panhandles. During 1993 WGI received approval in its
restructuring and rate case dockets from the Federal Energy Regulatory
Commission (FERC) which allowed WGI to implement services pursuant to FERC Order
No. 636. WGI is now providing unbundled transportation service for those gas
volumes entering the pipeline's transportation system. WGI also completed its
second year of exports to Mexico, transporting approximately 8,500 million cubic
feet (MMcf) to the city of Juarez and the Samalayuca Power Plant.
Southern Transmission Company ("Southern"), a wholly owned subsidiary of
Southern Union, owns and operates approximately 123 miles of intrastate
pipeline. Southern's system connects the cities of Lockhart, Luling, Cuero,
Shiner, Yoakum, and Gonzales, Texas, as well as an industrial customer in Port
Arthur, Texas. Southern also owns a transmission line which supplies gas to the
community of Sabine Pass, Texas.
Mercado Gas Services Inc. ("Mercado"), a wholly owned subsidiary of Southern
Union, markets natural gas to various large volume customers. Mercado's sales
and purchase activities are made through short-term contracts. These contracts
and business activities are not subject to direct rate regulation.
Southern Union Econofuel Company ("Econofuel"), a wholly owned subsidiary of
Southern Union, was formed in 1990 to market and sell natural gas for natural
gas vehicles ("NGVs") as an alternative fuel to gasoline. Econofuel owns fuel
dispensing equipment in Austin, El Paso, Port Arthur, and Galveston, Texas
located at independent retail fuel stations for NGVs. These stations serve fleet
and other public vehicles which have been manufactured or converted to operate
on natural gas. In 1991, Econofuel and Natural Gas Development Company, Inc. of
California, formed a joint venture that, in 1992 opened the Natural Gas Vehicle
Technology Centers, L.L.P. (the "Tech Center") in Austin, Texas. The Tech Center
converts gasoline-driven vehicles to operate using natural gas. Since its
opening, the Tech Center has converted about 1,200 fleet vehicles and buses to
operate on natural gas.
Southern Union Energy Products and Services Company ("SUEPASCO"), a wholly
owned subsidiary of the Company, was formed during 1992 to market and sell
commercial gas air conditioning, irrigation pumps and other gas-fired engine
driven applications and related services.
Southern Union Energy International, Inc. ("International"), a wholly owned
subsidiary of the Company, was also formed during 1992 to participate in energy
related projects internationally.
In addition, the Company holds investments in commercially developed real
estate as well as undeveloped tracts of land through its wholly owned
subsidiary, Lavaca Realty Company ("Lavaca Realty").
4
COMPETITION
Southern Union Gas and Missouri Gas Energy are not currently in significant
direct competition with any other distributors of natural gas to residential and
small commercial customers within their service areas. In recent years, certain
large volume customers, primarily industrial and significant commercial
customers, have had opportunities to access alternative natural gas supplies
and, in some instances, delivery service from pipeline systems. The Company has
offered transportation arrangements to customers who secure their own gas
supplies. These transportation arrangements, coupled with the efforts of the
Company's marketing subsidiary, Mercado, enable the Company to provide
competitively priced gas service to these large volume customers. In addition,
the Company has successfully used flexible rate provisions, when needed, to
prevent by-pass of the Company's distribution system.
As energy providers, Southern Union Gas and Missouri Gas Energy have
historically competed with alternative energy sources, particularly electricity
and also propane, coal, natural gas liquids and other refined products available
in the Company's service areas. At present rates, the cost of electricity to
residential and commercial customers in the Company's service areas generally is
higher than the effective cost of its natural gas service. There can be no
assurances, however, that future fluctuations in gas and electric costs will not
reduce the cost advantage of natural gas service.
The following operating cost analysis provides a comparison of annual gas
and electric costs for three typical residential energy applications in the
three largest cities (which represent approximately 72% of the present
customers) served by Southern Union Gas and Missouri Gas Energy:
KANSAS CITY,
MISSOURI AUSTIN, TEXAS EL PASO, TEXAS
------------------- ------------------- -------------------
APPLICATION GAS(A) ELECTRIC(B) GAS(A) ELECTRIC(B) GAS(A) ELECTRIC(B)
- --------------------------------------------------- ------ ----------- ------ ----------- ------ -----------
Water Heater(c).................................... $ 128 $ 325 $ 118 $ 490 $ 86 $ 529
Furnace
Gas.............................................. $ 383 -- $ 141 -- $ 173 --
Electric Heat Pump............................... -- $ 484 -- $ 196 -- $ 361
Electric Resistance.............................. -- $ 806 -- $ 587 -- $ 870
- ------------------------
(a) Gas prices contain the cost of service rates effective since October 15,
1993 for Kansas City, Missouri; since July 1993 for Austin, Texas; and
since November 1993 for El Paso, Texas. The cost of gas rates are based on
average area prices for the year ended January 1994. The combined service
and gas rates amount to $.457 per hundred cubic feet (CCF) of gas in
Kansas City, Missouri; $.423 per CCF of gas in Austin, Texas; and $.308
per CCF of gas in El Paso, Texas.
(b) Annual average electric rates were used to calculate electric water heater
costs. Winter average electric rates were used to calculate furnace costs.
The Kansas City annual average electric rate was $.093 per Kilowatt hour
(KWH), and the winter average rate was $.062 per KWH. The Austin annual
average electric rate was $.093 per KWH, and the winter average rate was
$.083 per KWH. The El Paso annual average electric rate was $.101 per KWH,
and the winter average rate was $.096 per KWH.
(c) Based on Department of Energy first hour rating test procedure, an average
family uses 64.3 gallons of hot water per day.
The Company believes that similar gas price advantages exist for commercial
and industrial applications. In addition, the cost of expansion for peak load
requirements of electricity in some of Southern Union Gas' service areas has
historically provided opportunities to allow energy switching to natural gas
pursuant to integrated resource planning techniques. Electric competition has
responded by offering equipment rebates and incentive rates.
Competition between the use of fuel oil and natural gas, particularly by
industrial, electric generation and agricultural customers, has increased as oil
prices have decreased. While competition between such fuels is generally more
intense outside the Company's service areas, this competition
5
affects the nationwide market for natural gas. Additionally, the general
economic conditions in its service areas continue to affect certain customers
and market areas, thus impacting the results of the Company's operations.
GAS SUPPLY
The low cost for natural gas service is attributable to efficient operations
and the Company's ability to contract for natural gas using favorable mixes of
long-term and short-term supply arrangements and favorable transportation
contracts. The Company has been directly acquiring its gas supplies since the
mid 1980s when interstate pipeline systems opened their systems for
transportation service. The Company has the organization, personnel and
equipment necessary to dispatch and monitor gas volumes on a daily and even
hourly basis to ensure reliable service to customers.
This experience will be of major significance in the post FERC Order 636
procurement environment. FERC Order 636 promotes the "unbundling" of services
offered by interstate pipeline companies. As a result, gas purchasing and
transportation decisions and associated risks now shift from the pipeline
companies to the gas distributors. The increased demands on distributors to
effectively manage their gas supply in an environment of volatile gas prices
will provide an advantage to distribution companies such as Southern Union that
have demonstrated a history of contracting favorable and efficient gas supply
arrangements in an open market system.
The majority of Southern Union Gas' 1993 gas requirements for utility
operations were delivered under long-term transportation contracts through five
major pipeline companies. These contracts have various expiration dates ranging
from 1995 through 2011. Southern Union Gas also purchases significant volumes of
gas under long-term and short-term arrangements with suppliers. The amounts of
such short-term purchases are contingent upon price. Southern Union Gas and
Missouri Gas Energy both have firm supply commitments for all areas that are
supplied with gas purchased under short-term arrangements.
Gas sales and/or transportation contracts with interruption provisions,
whereby large volume users purchase gas with the understanding that they may be
forced to shut down or switch to alternate sources of energy at times when the
gas is needed for higher priority customers, have been utilized for load
management by Southern Union and the gas industry as a whole for many years. In
addition, during times of special supply problems, curtailments of deliveries to
customers with firm contracts may be made in accordance with guidelines
established by appropriate federal and state regulatory agencies. There have
been no supply-related curtailments of deliveries to Southern Union Gas or
Missouri Gas Energy utility sales customers during the last ten years.
The following table shows, for each of Southern Union Gas' principal service
areas, the percentage of gas utility revenues and sales volume for 1993, the
average cost per Mcf of gas in 1993, and the primary delivery systems:
PERCENT OF
GAS UTILITY PERCENT OF GAS
REVENUES IN UTILITY SALES 1993 AVERAGE
SERVICE AREA 1993 VOLUME IN 1993 COST PER MCF PRIMARY SOURCE OF SUPPLY
- ----------------------------------- ------------- --------------- ------------- --------------------------------------
El Paso............................ 32 34 $ 2.66 El Paso Natural Gas Company
Austin............................. 29 25 2.48 Valero Transmission Company
Port Arthur........................ 6 5 2.64 Midcon Texas Pipeline Company
Galveston.......................... 4 3 2.53 Houston Pipeline Company
Rio Grande Valley.................. 4 2 4.69 Valero Transmission Company
Pipeline and marketing............. 8 16 2.11 Various
Panhandle.......................... 11 11 2.63 Various
West Texas......................... 3 2 2.38 Various
South Texas........................ 3 2 3.73 Valero Transmission Company
--- ---
100 100
--- ---
--- ---
6
Missouri Gas Energy provides gas service to Kansas City, St. Joseph, Joplin,
Monett and surrounding communities in central and western Missouri. The average
cost per Mcf of gas supplied to Missouri Gas Energy in 1993 was $3.04. The
primary source of supply to Missouri Gas Energy's service areas is Williams
Natural Gas Company.
UTILITY REGULATION AND RATES
The Company's rates and operations are subject to regulation by federal,
state and local authorities. In Texas, municipalities have primary jurisdiction
over rates within their respective incorporated areas. Rates in adjacent
environs areas and appellate matters are the responsibility of the Railroad
Commission of Texas. Rates in Oklahoma are subject to regulation by the Oklahoma
Corporation Commission. In Missouri, rates are established by the MPSC on a
system wide basis. The FERC and the Railroad Commission of Texas have
jurisdiction over rates, facilities and services of WGI and Southern,
respectively.
The Company holds non-exclusive franchises with varying expiration dates in
all incorporated communities where it is necessary to do so to carry on its
business as it is now being conducted. In the five largest cities in which the
Company's utility customers are located, such franchises expire as follows:
Kansas City, Missouri in 1997; El Paso, Texas in 2000; Austin, Texas in 2006;
and Port Arthur, Texas in 2013. The franchise in St. Joseph, Missouri is
perpetual.
Gas service rates are established by regulatory authorities to collectively
permit utilities to recover operating, administrative and finance costs, and to
earn a return on equity. Gas costs are billed to customers through purchase gas
adjustment clauses which permit the Company to adjust its sales price as the
cost of purchased gas changes. The appropriate regulatory authority must receive
notice of such adjustments prior to billing implementation. This is important
because the cost of natural gas accounts for a significant portion of the
Company's total expenses.
The Company must support any service rate changes to its regulators using an
historic test year of operating results adjusted to normal conditions and for
any known and measurable revenue or expense changes. Because the rate regulatory
process has certain inherent time delays, rate orders may not reflect the
operating costs at the time new rates are put into effect.
The monthly customer bill contains a fixed service charge, a usage charge
for service to deliver gas, and a charge for the amount of natural gas used.
While the monthly fixed charge provides an even revenue stream, the usage charge
increases the Company's annual revenue and earnings in the traditional heating
load months when usage of natural gas increases. The majority of the Company's
rate increases in Texas and Oklahoma in recent years have been reflected in
increased monthly fixed charges which help stabilize earnings. Weather
normalization clauses, now in place in Austin and three other service areas in
Texas, also help stabilize earnings.
On February 10, 1993, the Company's South Texas service area received an
annualized rate increase of $777,000. On June 10, 1993, the Austin City Council
approved an ordinance reflecting (i) an approximate $1,700,000 base revenue
increase, (ii) new and increased fees that will add approximately $250,000
annually, and (iii) weather normalization clause revisions. The Austin rate
increase became effective as of July 1, 1993. On October 5, 1993, the MPSC
approved an order reflecting a $9,750,000 revenue increase to Missouri Gas
Energy. The Missouri rate increase became effective October 15, 1993. On October
12, 1993, the El Paso City Council approved an ordinance reflecting an
approximate revenue increase of $463,000. The El Paso rate increase became
effective November 1, 1993. These rate increases should contribute significantly
to the Company's earnings in 1994.
7
The following table summarizes the rate increases that have been granted
over the last three years:
1993 1992 1991
--------- --------- ---------
(THOUSANDS OF DOLLARS)
Southern Union Gas
Austin, Texas....................................................... $ 1,950 -- $ 3,311
El Paso, Texas...................................................... 463 $ 1,741 --
All other........................................................... 981 1,001 244
--------- --------- ---------
$ 3,394 $ 2,742 $ 3,555
Missouri Gas Energy................................................... 9,750 7,300 --
--------- --------- ---------
$ 13,144 $ 10,042 $ 3,555
--------- --------- ---------
--------- --------- ---------
In addition to the regulation of its utility and pipeline businesses, the
Company is affected by numerous other regulatory controls, including, among
others, pipeline safety requirements of the Department of Transportation, safety
regulations under the Occupational Safety and Health Act, and various state and
federal environmental statutes and regulations. The Company believes that its
operations are in compliance with applicable safety and environmental statutes
and regulations.
STATISTICS OF GAS UTILITY AND RELATED OPERATIONS
The following table provides by division and/or region the number of gas
utility customers served:
DECEMBER 31
FEBRUARY 1, --------------------
1994 1993 1992
----------- --------- ---------
Southern Union Gas:
El Paso and West Texas............................................ 169,019 168,361 165,937
Austin and Central Texas.......................................... 153,627 153,096 149,896
Rio Grande Valley................................................. 76,625 75,770 --
Gulf Coast........................................................ 53,087 52,953 52,127
Panhandle......................................................... 32,859 32,821 32,874
----------- --------- ---------
485,217 483,001 400,834
----------- --------- ---------
----------- --------- ---------
Missouri Gas Energy:
Kansas City, Missouri Metropolitan Area........................... 369,659 -- --
St. Joseph, Joplin, Monett and others............................. 102,704 -- --
----------- --------- ---------
472,363 -- --
----------- --------- ---------
957,580 483,001 400,834
----------- --------- ---------
----------- --------- ---------
8
STATISTICS OF GAS UTILITY AND RELATED OPERATIONS. The following table shows
certain operating statistics of Southern Union Gas' utility business for the
periods indicated:
YEARS ENDED DECEMBER 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Average number of gas sales customers served:
Residential.............................................................. 391,154 365,187 394,508
Commercial............................................................... 26,814 25,853 30,132
Industrial and irrigation................................................ 774 796 861
Public authorities and other............................................. 2,309 2,206 2,521
Pipeline and marketing................................................... 182 157 55
----------- ----------- -----------
Total average customers served......................................... 421,233 394,199 428,077
----------- ----------- -----------
----------- ----------- -----------
Gas sales in millions of cubic feet (MMcf):
Residential.............................................................. 22,171 21,356 23,102
Commercial............................................................... 9,545 9,059 10,466
Industrial and irrigation................................................ 2,615 2,881 2,880
Public authorities and other............................................. 2,938 3,002 3,545
Pipeline and marketing................................................... 6,934 14,849 4,949
----------- ----------- -----------
Gas sales billed....................................................... 44,203 51,147 44,942
Net change in unbilled gas sales......................................... 656 (43) (1,263)
----------- ----------- -----------
Total gas sales........................................................ 44,859 51,104 43,679
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenues (thousands of dollars):
Residential.............................................................. $ 117,954 $ 102,028 $ 119,604
Commercial............................................................... 41,219 34,261 44,011
Industrial and irrigation................................................ 9,206 8,655 9,519
Public authorities and other............................................. 10,592 9,437 12,409
Pipeline and marketing................................................... 16,247 28,793 11,817
----------- ----------- -----------
Gas revenues billed.................................................... 195,218 183,174 197,360
Net change in unbilled gas sales revenues................................ 4,141 214 (7,499)
----------- ----------- -----------
Total gas sales revenues............................................... $ 199,359 $ 183,388 $ 189,861
----------- ----------- -----------
----------- ----------- -----------
Gas sales margin (thousands of dollars): (a)............................... $ 88,975 $ 80,470 $ 80,623
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenue per thousand cubic feet (Mcf) billed (b):
Residential.............................................................. $ 5.320 $ 4.777 $ 5.177
Commercial............................................................... 4.318 3.782 4.205
Industrial and irrigation................................................ 3.520 3.004 3.305
Public authorities and other............................................. 3.605 3.144 3.500
Pipeline and marketing................................................... 2.343 1.939 2.388
Weather effect:
Degree days (c).......................................................... 1,954 2,020 2,439
Percent of normal, based on 30 year average (d).......................... 89% 91% 95%
Gas transported in millions of cubic feet (MMcf)........................... 22,750 25,438 8,608
Gas transportation revenues (thousands of dollars)......................... $ 6,485 $ 5,943 $ 5,686
- ------------------------
(a) Gas sales revenues less purchased gas costs is equal to gas sales margin.
(b) Fluctuations in gas price billed between 1993, 1992 and 1991 reflect
changes in the average cost of purchased gas.
(c) "Degree days" are a measure of the coldness of the weather experienced. A
Degree day is equivalent to each degree that the daily mean temperature
for a day falls below 65 degrees Fahrenheit.
(d) Information with respect to weather conditions is provided by the National
Oceanic and Atmospheric Administration. Percentages of normal are computed
based on the weighted average number of customers.
9
The following table shows certain operating statistics of Missouri Gas
Energy for the periods indicated:
YEARS ENDED DECEMBER 31, (A)
-------------------------------------
1993 1992 1991
----------- ----------- -----------
Average number of gas sales customers served:
Residential.............................................................. 396,755 399,421 397,447
Commercial............................................................... 57,330 57,615 50,609
Industrial............................................................... 260 249 238
----------- ----------- -----------
Total average customers served......................................... 454,345 457,285 448,294
----------- ----------- -----------
----------- ----------- -----------
Gas sales in millions of cubic feet (MMcf):
Residential.............................................................. 47,244 39,839 43,506
Commercial............................................................... 22,669 19,450 20,962
Industrial............................................................... 309 1,254 1,062
----------- ----------- -----------
Gas sales billed....................................................... 70,222 60,543 65,530
Net change in unbilled gas sales......................................... (58) 1,043 (1,688)
----------- ----------- -----------
Total gas sales........................................................ 70,164 61,586 63,842
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenues (thousands of dollars):
Residential.............................................................. $ 215,806 $ 195,073 $ 207,448
Commercial............................................................... 95,520 84,995 88,267
Industrial............................................................... 2,015 4,406 4,479
----------- ----------- -----------
Gas revenues billed.................................................... 313,341 284,474 300,194
Net change in unbilled gas sales revenues................................ 3,818 3,618 (5,668)
----------- ----------- -----------
Total gas sales revenues............................................... $ 317,159 $ 288,092 $ 294,526
----------- ----------- -----------
----------- ----------- -----------
Gas sales margin (thousands of dollars) (b)................................ $ 107,687 $ 105,091 $ 101,016
----------- ----------- -----------
----------- ----------- -----------
Gas sales revenue per thousand cubic feet (Mcf) billed:
Residential.............................................................. $ 4.568 $ 4.897 $ 4.768
Commercial............................................................... 4.214 4.369 4.211
Industrial............................................................... 6.521 3.514 4.218
Weather effect:
Degree days (c).......................................................... 5,721 4,852 5,017
Percent of normal, based on 30 year average.............................. 106% 90% 95%
Gas transported in millions of cubic feet (MMcf)........................... 28,064 26,381 27,720
Gas transportation revenues (thousands of dollars)......................... $ 6,676 $ 7,888 $ 11,063
- ------------------------
(a) Missouri Gas Energy was acquired by the Company on January 31, 1994 and
therefore is not consolidated with the Company as of December 31, 1993.
The Company will include Missouri Gas Energy in its results of operations
subsequent to January 31, 1994.
(b) Gas sales revenues less purchased gas costs is equal to gas sales margin.
(c) "Degree days" are a measure of the coldness of the weather experienced. A
Degree day is equivalent to each degree that the daily mean temperature
for a day falls below 65 degrees Fahrenheit.
INVESTMENTS IN REAL ESTATE
In February 1993, Southern Union entered into a settlement agreement with
the Resolution Trust Corporation ("RTC") with respect to Southern Union's former
subsidiary, First Bankers Trust & Savings Association. As part of the
settlement, in return for payment by the Company of $4,792,000, the RTC
dismissed a $6,174,000 judgment for specific performance of a contract to
10
purchase real estate; canceled notes in the principal amount of $1,600,000;
permitted the Company to terminate a $2,000,000 letter of credit; deeded the
Company a 21-acre tract in Austin, Texas; and released certain other claims
asserted in the settled litigation. This settlement had no impact on earnings
since the Company had previously recorded a reserve for the related loss
contingency. In December 1993, Lavaca Realty sold this land for approximately
$794,000, resulting in an after tax gain of approximately $321,000. See "Real
Estate" in the Notes to the Consolidated Financial Statements for the year ended
December 31, 1993.
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, a drive-through bank and a mini-bank facility ("Lavaca
Plaza"). Approximately 49% of the office space at Lavaca Plaza is used in the
Company's business while 51% is leased, or under option to lease, to
non-affiliated entities. Lavaca Realty also owns a commercially developed tract
of land in Austin, Texas that is used exclusively in the Company's business.
Other real estate investments held at December 31, 1993 include 12 acres of
undeveloped land in Dallas, Texas and 42 acres of undeveloped land in Denton,
Texas. The Company is attempting to sell all undeveloped real estate.
BUSINESS HELD FOR SALE
In February 1993, SX entered into a purchase and sales agreement with
certain limited partnerships affiliated with a Dallas-based company to sell all
of its oil and gas leasehold interests and associated production for
approximately $22,000,000, effective as of January 1, 1993. SX, which was
engaged in the development and production of oil and gas, held varying interests
in producing oil and gas wells located primarily in New Mexico and Texas.
The Company accounted for SX as a business held for sale wherein adjustments
were made to reflect the valuation of this business to an estimated net
realizable value. At December 31, 1992 and 1991, the Company estimated and
recorded a book loss on future disposal of $4,400,000 and $2,250,000,
respectively. In addition, at the time of the sale the Company incurred a tax
liability of approximately $6,960,000 resulting from the recognition of a tax
basis gain of approximately $18,800,000. The sale closed on March 31, 1993.
EMPLOYEES
As of February 28, 1994, the Company had 1,923 employees, of whom 1,488 were
paid on an hourly basis, 419 were paid on a salary basis and 16 were paid on a
commission basis. Of the 1,488 hourly paid employees, approximately 57% were
represented by unions. Of those employees represented by unions, 78% are
employed by Missouri Gas Energy.
In December 1992, the Company announced an early retirement program
available to certain of the Company's employees with an election period from
January to March 1993. Approximately 75 of an eligible 109 employees accepted
the early retirement program.
From time to time the Company may be subject to labor disputes; however,
such disputes have not previously disrupted its business. The Company believes
that its relations with its employees are good.
ITEM 2. PROPERTIES.
See Item 1, "Business," for information concerning the general location and
characteristics of the important physical properties and assets of the Company.
Southern Union Gas' system consists of 8,452 miles of mains, 3,601 miles of
service lines and 307 miles of transmission lines. Missouri Gas Energy's system
consists of 6,930 miles of mains, 3,333 miles of service lines and 71 miles of
transmission lines. WGI's system consists of 219 miles of transmission lines and
50 miles of gathering lines and Southern's system consists of 123 miles of
transmission lines. The Company considers the systems to be in good condition
and to be well maintained, and it has a continuing replacement program based on
historical performance and system surveillance.
Missouri Gas Energy is required, pursuant to an MPSC order, to replace
certain service and main lines. This has amounted to an annual capital
expenditure of approximately $20,000,000. In addition,
11
the MPSC has issued accounting orders in the past to allow the deferral for
future recovery in rates of related financing costs, depreciation and property
taxes incurred in the periods between rate filings. The Company believes the
MPSC will allow Missouri Gas Energy to continue such deferral and recovery.
ITEM 3. LEGAL PROCEEDINGS.
See "Commitments and Contingencies" and "Subsequent Events -- Missouri
Acquisition" in the Notes to Consolidated Financial Statements for the year
ended December 31, 1993 for discussions of the Company's legal proceedings.
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 December 31, 1993.
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
MATTERS.
MARKET INFORMATION
Southern Union's common stock is traded on the American Stock Exchange under
the symbol "SUG". On February 11, 1994 the Company's Board of Directors declared
a three for two stock split distributed in the form of a 50% stock dividend on
March 9, 1994 to stockholders of record on February 23, 1994. The high and low
sales prices (adjusted for the March 9, 1994 distribution) for shares of
Southern Union common stock for the period January 1, 1994 through March 21,
1994 and for each quarter in 1993 and 1992 are set forth below:
$/SHARE
------------------
HIGH LOW
------- -------
1994:
January 1 to March 21............................................................................ 24 1/2 17 3/8
1993:
Fourth Quarter................................................................................... 21 1/8 13 1/4
Third Quarter.................................................................................... 14 7/8 12 1/2
Second Quarter................................................................................... 13 1/2 11 1/8
First Quarter.................................................................................... 13 7/8 9 3/8
1992:
Fourth Quarter................................................................................... 10 7/8 9 3/8
Third Quarter.................................................................................... 10 7/8 9 1/8
Second Quarter................................................................................... 10 1/8 9 1/8
First Quarter.................................................................................... 10 5/8 9 3/8
HOLDERS
As of March 21, 1994, there were 272 holders of record of the registrants'
common stock. This number does not include persons whose shares are held of
record by a bank, brokerage house, or clearing agency, but does include any such
bank, brokerage house or clearing agency.
There were 10,900,586 shares of the registrants' common stock outstanding on
March 21, 1994 of which 6,496,772 shares were held by non-affiliates.
DIVIDENDS
Southern Union paid no dividends on its common stock in 1993, 1992 or 1991.
Provisions in certain of Southern Union's long-term notes and its bank revolving
credit facility limit the payment of cash or asset dividends on capital stock.
Under the most restrictive provisions in effect, as a result of the January 1994
sale of Senior Debt Securities, Southern Union may not declare or pay any cash
or asset dividend on its common stock (other than dividends and distributions
payable solely in shares of
12
its common stock or in rights to acquire its common stock) or acquire or retire
any of Southern Union's common stock, unless no event of default exists and the
Company meets certain financial ratio requirements.
On February 11, 1994, Southern Union's Board of Directors also approved the
commencement of regular stock dividends of approximately 5% annually. The first
such dividend is expected to be a 5% stock dividend to be declared in connection
with the Company's annual meeting of stockholders to be held on May 25, 1994.
The specific declaration, record and distribution dates for each stock dividend
will be determined by the Board and announced at a date no later than the annual
stockholders meeting each year. A portion of the 5% stock dividend expected to
be distributed in 1994 may be characterized as a distribution of capital
depending upon the level of the Company's retained earnings available as of the
record date of that distribution.
ITEM 6. SELECTED FINANCIAL DATA.
YEARS ENDED DECEMBER 31,
---------------------------------------------------------------
1993(A) 1992(A) 1991(A) 1990(A) 1989
----------- ----------- ----------- ----------- -----------
(THOUSANDS OF DOLLARS, EXCEPT PER SHARE AMOUNTS)
Total operating revenues........................ $ 209,005 $ 192,445 $ 200,261 $ 199,865 $ 197,460
Earnings from continuing operations............. 7,733 6,391 4,673 387 851
Earnings (loss) from continuing operations per
share of common stock (b)...................... .87 .49 .27 (.27) (.21)
Total assets (c)................................ 416,207 377,167 369,783 379,856 316,186
Long-term debt.................................. 109,574 109,924 111,618 104,922 106,061
Redeemable preferred stock...................... -- 24,900 25,000 25,000 25,000
Cash dividends paid per share of common stock
(b)............................................ -- -- -- -- .10
- ------------------------
(a) The Company completed the Berry Gas, Eagle Pass and Rio Grande
acquisitions during 1993 and the Nixon acquisition in 1992. In addition,
during 1991 the Company completed the South Texas, Brazos River and
Andrews acquisitions and also completed the Arizona Sale. In February
1990, the Company merged with Metro Mobile CTS, Inc. (the "Merger"). For
these reasons the results of operations of the Company for the periods
subsequent to the Merger are not comparable to those periods prior to the
Merger nor are the 1993, 1992 and 1991 results of operations comparable
between periods.
(b) Earnings per share in 1993, 1992 and 1991 were computed based on the
weighted average number of shares of common stock outstanding during the
year adjusted for the three for two stock split effected as a 50% stock
dividend which was distributed on March 9, 1994. Losses per share prior to
1991 were calculated as though the common shares outstanding after the
Merger were outstanding during each period presented. Cash dividends paid
per common share prior to the Merger were not restated for the stock
split.
(c) Certain reclassifications have been made to prior years' amounts to
conform with the current year presentation.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.
INTRODUCTION
The Company's principal line of business is the distribution of natural gas
as a public utility through Southern Union Gas and, subsequent to January 31,
1994, Missouri Gas Energy, each of which is a division of the Company. Missouri
Gas Energy was acquired in a transaction accounted for as a purchase on January
31, 1994 and, therefore, its results of operations are not consolidated with
those of the Company until after that date. Accordingly, the following
discussion of results of operations does not include Missouri Gas Energy. See
"Item I: Business -- Missouri Acquisition."
13
In 1993 the Company completed the Rio Grande, Eagle Pass and Berry Gas
Acquisitions. In 1992 the Company completed the Nixon Acquisition and in 1991
the Company completed the South Texas, Brazos River and Andrews Acquisitions and
the Arizona Sale. See "Acquisitions and Divestitures" in the Notes to
Consolidated Financial Statements for the year ended December 31, 1993. For
these reasons, the results of operations of the Company for the periods
presented are not comparable.
On February 11, 1994, the Company's Board of Directors declared a three for
two stock split distributed in the form of a 50% stock dividend on March 9, 1994
to stockholders of record on February 23, 1994. Effective March 9, 1994 the
Company gave retroactive recognition to the equivalent change in capital
structure for all periods presented. Consequently, earnings per share for 1993,
1992 and 1991 have been recomputed based on the weighted average number of
shares outstanding during each year, adjusted for the stock split.
Southern Union Gas, which accounted for approximately 86% of the Company's
total revenues for the year ended December 31, 1993, serves approximately
483,000 residential, commercial, industrial, agricultural and other customers in
the States of Texas (including the cities of Austin, Brownsville, El Paso,
Galveston and Port Arthur) and Oklahoma. In addition, the Company operates
interstate and intrastate natural gas pipeline systems, markets natural gas to
end users and markets and sells natural gas for natural gas vehicles. The
Company also holds investments in real estate.
Several of the Company's business activities are subject to regulation by
federal, state or local authorities where the Company operates. Thus, the
Company's financial condition and results of operations have been dependent upon
the receipt of adequate and timely adjustments in rates. In addition, the
Company's business is affected by seasonal weather impacts, competitive factors
within the energy industry and economic development and residential growth in
its service areas.
The Company's revenues and earnings are primarily dependent upon gas sales
volumes and gas service rates. Gas purchase costs generally do not affect the
Company's earnings because such costs are passed through to customers pursuant
to purchase gas adjustment clauses. Accordingly, while changes in the cost of
gas may cause the Company's operating revenues to fluctuate, operating margin
(defined as operating revenues less gas purchase costs) is generally not
affected by gas purchase cost increases or decreases.
Gas sales volumes fluctuate as a function of seasonal weather impact and the
size of the Company's customer base, which is affected by competitive factors in
the industry as well as economic development and residential growth in its
service areas. The primary factors that affect the distribution and sale of
natural gas are the seasonal nature of gas use, adequate and timely rate relief
from regulatory authorities, competition from alternative fuels, competition
within the gas business for industrial customers and volatility in the supply
and price of natural gas. Gas service rates, which consist of a monthly fixed
charge and a gas usage charge, are established by regulatory authorities and are
intended to permit utilities to recover operating, administrative and financing
costs and to earn a return on equity. The monthly fixed charge provides a base
revenue stream while the usage charge increases the Company's revenues and
earnings in colder weather when natural gas usage increases.
In recent years weather variances experienced during the traditional heating
load months have significantly impacted the Company's results of operations. The
average temperatures in Southern Union Gas' service areas during the past
several winter seasons have been much warmer than the 30 year normal
temperature. To mitigate the impact of these seasonal variances, Southern Union
Gas has requested and received approval for weather normalization clauses in
Austin and Galveston and in two other service areas in Texas. These clauses
allow for rate adjustments that help stabilize the utility's customers' monthly
bills and the Company's earnings from the varying effects of weather.
Over the last three years, an average of 59% of the Company's revenues came
from sales to Southern Union Gas' residential customers. Revenues from
residential customers have grown as a
14
result of the Company's acquisitions. The growth of its residential base
combined with marketing efforts aimed at large volume users have provided
overall gains in sales volumes in recent years. The Company plans to continue
these marketing efforts.
RESULTS OF OPERATIONS
NET EARNINGS AVAILABLE FOR COMMON STOCK
The Company recorded net earnings available for common stock of $6,890,000
for the year ended December 31, 1993 compared to net earnings of $1,445,000 for
the year ended December 31, 1992, an increase of $5,445,000. Net earnings per
common share, based on weighted average shares outstanding were $.87 in 1993
compared to $.18 in 1992 and $.12 in 1991. (Prior to the March 1994 stock split,
discussed above, earnings per share in 1993, 1992 and 1991 were $1.31, $.27 and
$.19, respectively.) Earnings from continuing operations available for common
stock, net of preferred dividends, were $6,890,000 for the year ended December
31, 1993 compared to $3,891,000 for the year ended December 31, 1992, an
increase of $2,999,000. Earnings from continuing operations per common share for
the year ended December 31, 1993 were $.87 compared to $.49 in 1992 and $.27 in
1991.
Net earnings for the year ended December 31, 1993 were positively impacted
by the receipt of several rate increases during the past year including: a
$777,000 annualized increase in the Company's South Texas service area effective
February 10, 1993; a $1,950,000 annualized increase in Austin effective July 1,
1993; and a $463,000 annualized increase in El Paso effective November 1, 1993.
The Company also recorded a non-recurring accounting adjustment of approximately
$2,345,000 to reverse a tax reserve upon the final settlement of prior period
federal income tax audits and the filing of amended federal income tax returns.
Other factors which positively impacted net earnings for the year ended
December 31, 1993 included the reduction in payroll expenses of approximately
$1,525,000 resulting from the Company's 1993 early retirement program which was
finalized during the second quarter of 1993 and the reduction of approximately
$1,657,000 of preferred dividends due to the retirement of the Company's Series
A 10% Cumulative Preferred Stock in March and June 1993. Net earnings for the
year ended December 31, 1993 were negatively impacted by warmer than normal
weather during 1993, which was 89% of normal, and by an increase in operating
maintenance and general expense associated with severance costs of approximately
$1,298,000 resulting from the early retirement program.
The Company's net earnings available for common stock for the year ended
December 31, 1992 were $1,445,000 compared to $987,000 in 1991. The increase in
1992 net earnings available for common stock was primarily due to reductions in
operating costs, which significantly impacted net operating revenues. Other
positive factors affecting net earnings in 1992 included increases in rates and
changes in rate designs effected during 1992 and subsequent to the winter
heating season of 1991, the reversal of certain contingency accruals of
$2,200,000 recorded in 1990 related to the February 1990 cash merger between the
Company and Metro Mobile CTS, Inc., and the recognition of a gain of
approximately $950,000 resulting from a litigation settlement. These increases
in earnings were partially offset by warmer weather in 1992, approximately 4%
warmer than 1991 and 9% warmer than normal. In addition, the Company recorded a
loss on the disposal of a discontinued operation of $4,400,000. The assets of
the discontinued operation were sold effective January 1, 1993. See "Business
Held For Sale" in the Notes to the Consolidated Financial Statements for the
year ended December 31, 1993.
OPERATING REVENUES
Total operating revenues in 1993, 1992 and 1991 were $209,005,000,
$192,445,000 and $200,261,000, respectively. Revenues are affected by the level
of sales volumes and by the pass-through of increases or decreases in the
Company's gas purchase costs through its purchase gas adjustment clauses.
Operating revenues increased $16,560,000, or approximately 9%, for the year
ended December 31, 1993, primarily from an increase in the customer base
resulting from the Rio Grande Valley, Berry Gas and Eagle Pass Acquisitions as
well as the receipt of rate increases in 1993,
15
described above. These acquisitions increased revenues by approximately
$8,085,000 in 1993. Operating revenues also increased due to a 24% increase in
the average cost of gas from $2.01 per Mcf in 1992 to $2.50 in 1993, which was
partially offset by a 12% decrease in gas sales volumes from 51,104 MMcf in 1992
to 44,859 MMcf in 1993. The decline in gas sales volumes reflected a decrease of
7,831 MMcf in gas sales by Mercado, the Company's marketing subsidiary,
resulting from the Company's decision in early 1993 to reduce sales to off
system markets.
Operating revenues decreased in 1992 compared to 1991 due to the Arizona
Sale in November 1991, warmer than normal weather in 1992, and a 19% decrease in
gas costs billed to residential customers. These factors were partially offset
by an increase in sales of approximately $16,400,000 due to Mercado's expanding
markets, an increase in rates, described above, and the first full year of
operations provided by the Brazos River and Andrews Acquisitions which increased
revenues by approximately $6,400,000. The Arizona Sale decreased operating
revenues by approximately $29,000,000 in 1992 as compared to 1991. Weather
during 1992 was 91% of normal with one of the warmest winter seasons in the
Company's history.
GAS SALES AND TRANSPORTATION VOLUMES
Gas sales volumes billed in 1993, 1992 and 1991 totaled 44,203 MMcf, 51,147
MMcf and 44,942 MMcf, respectively, at an average Mcf sales price of $4.42,
$3.58 and $4.39, respectively. Gas sales volumes fluctuate as a function of
weather and customer base. The decrease in gas sales volumes is due to the
weather patterns in the Company's service areas which averaged 11% warmer than
normal in 1993 and 9% warmer than normal in 1992. Gas sales volumes also
decreased due to a substantial reduction in gas sales for resale by Mercado, as
previously discussed. The average customer bases served in 1993, 1992 and 1991
were approximately 421,000, 394,000 and 428,000, respectively. The average sales
price per Mcf varied between periods as a result of variations in the average
spot market price of natural gas.
Gas transportation volumes in 1993, 1992, and 1991 totaled 22,750 MMcf,
25,438 MMcf and 8,608 MMcf, respectively, at an average transportation rate per
Mcf of $.29, $.23 and $.66, respectively. Transportation volumes decreased in
1993 as compared to 1992 as a result of a 6,500 MMcf reduction in volume
transported into Mexico by WGI which was partially offset by an increase in
transport volumes to several new customers. In addition, the average
transportation rate per Mcf increased in 1993 as compared to 1992.
Transportation volumes increased in 1992 as compared to 1991 as a result of
WGI's transported volumes into Mexico of approximately 15,000 MMcf during 1992.
GAS PURCHASE COSTS
Gas purchase costs in 1993, 1992 and 1991 were $110,384,000, $102,918,000
and $109,238,000, respectively. The increase in costs in 1993 was due to a 16%
increase in the average spot market price of natural gas from $1.69 per MMbtu in
1992 to $1.96 per MMbtu in 1993 and an increase in the average customer base
resulting from acquisitions of gas distribution systems, previously discussed.
These factors were partially offset by a substantial reduction in gas sales for
resale by Mercado, also previously discussed. The average gas purchase cost
incurred by the Company was $2.50 per Mcf in 1993, $2.01 in 1992 and $2.43 in
1991. The decrease in gas purchase costs in 1992 was due to a decrease in the
average spot market price of natural gas and a decrease in the average customer
base resulting from the Arizona Sale in November 1991. The impact of the
decrease in 1992 and 1991 gas prices was partially offset by an increase in
volumes.
OPERATING, MAINTENANCE AND GENERAL EXPENSES
Operating, maintenance and general expenses were $50,076,000, $46,313,000
and $49,022,000 in 1993, 1992 and 1991, respectively. During 1993 these expenses
increased $3,763,000 or 8% due principally to increased operating costs of
approximately $1,800,000 associated with acquisitions as well as severance costs
of approximately $1,298,000 resulting from the early retirement program, each
previously discussed. Partially offsetting the overall increase was a reduction
in payroll expenses of $1,525,000 as a result of the Company's early retirement
program. During 1992 operating, maintenance and general expenses decreased
$2,709,000 compared to 1991 due to the cost containment
16
efforts implemented by the Company throughout 1992 as well as the reductions
resulting from the Arizona Sale in November 1991. These factors were partially
offset by increases in medical and hospitalization expenses.
TAXES
Federal and state income tax expense in 1993, 1992 and 1991 was $3,855,000,
$4,440,000, and $6,635,000, respectively. The decrease in taxes in 1993 as
compared to 1992 is due principally to reductions related to amended prior year
federal income tax returns and non-taxable income items included with "other
income" related to the reversal of a tax reserve as discussed below. In July
1993 the Company paid the Internal Revenue Service ("IRS") approximately
$1,266,000 in settlement for federal income taxes and interest related to the
tax years 1984 through 1989. The Company had previously estimated and accrued an
amount for the tax deficiencies and related interest and, as a result of the
settlement with the IRS for a lesser amount, a non-recurring adjustment was
recorded to reverse the tax reserve in excess of the payment made. The reversal
of the reserve had no impact on liquidity or cash flows due to the non-cash
impact of this adjustment. See "Taxes on Income" in the Notes to Consolidated
Financial Statements for the year ended December 31, 1993 for further analysis
of the Company's federal and state income tax expense.
Taxes other than income taxes reflect various state and local business and
payroll related taxes. The state and local business taxes are generally based on
gross receipts and investments in property, plant and equipment and fluctuate
accordingly.
DEPRECIATION AND AMORTIZATION EXPENSE
Depreciation and amortization expense in 1993, 1992 and 1991 was
$14,416,000, $12,737,000 and $13,317,000, respectively. The increase in
depreciation and amortization expense of $1,679,000 in 1993 compared to 1992 was
primarily attributable to acquisitions of gas distribution systems, previously
discussed. The decrease in depreciation expense of $580,000 in 1992 compared to
1991 was principally due to the Arizona Sale in November 1991 and was partially
offset by a full year of depreciation on the acquired gas distribution systems.
The Company has requested recovery of the amortization of additional purchase
cost assigned to utility plant in recent rate filings. At this time, recovery
has not been included in gas distribution rates in the Company's major rate
jurisdictions. However, during 1993 the Federal Energy Regulatory Commission
issued a rate order approving the recovery of additional purchase costs assigned
to utility plant associated with WGI, which amount is not material to the
consolidated financial statements.
OTHER INCOME AND EXPENSES, NET
Other income and expenses, net in 1993, 1992 and 1991 were $8,176,000,
$6,531,000 and $2,536,000, respectively. During 1993 the Company recorded a
non-recurring adjustment of approximately $2,345,000 to reverse a tax reserve
upon the final settlement of prior period federal income tax audits as
previously discussed. The reversal of the reserve had no impact on liquidity or
cash flows due to the non-cash impact of this adjustment. Other income items
recorded in 1993 also included interest income on notes receivable of
approximately $830,000; rental income from Lavaca Realty, Southern Union's real
estate subsidiary, of approximately $1,835,000; and a pre-tax gain of
approximately $494,000 on the sale of undeveloped real estate.
Other income in 1992 included a $2,200,000 reversal of certain contingency
reserves recorded at the time of the 1990 merger that were subsequently resolved
or settled and a $950,000 gain resulting from a litigation settlement, each
previously discussed. The reversal of these reserves had no impact on liquidity
or cash flows due to the non-cash impact of the adjustment. Other income in 1991
also included the recognition of a gain on the Arizona Sale of $4,782,000, to
the extent of tax expense incurred, interest income on notes receivable of
approximately $528,000 and the recognition of gains on litigation settlements of
approximately $1,792,000.
Interest expense on short-term debt was $1,836,000, $384,000 and $697,000 in
1993, 1992 and 1991, respectively. Average short-term debt outstanding during
1993, 1992 and 1991 of $33,021,000,
17
$5,912,000 and $9,184,000 was at an average interest rate of 5.3%, 6.3% and
8.1%, respectively. The variance in the average amounts outstanding coupled with
a general reduction in interest rates resulted in the change in other interest
expense in each of the years.
BUSINESS HELD FOR SALE
The loss from discontinued operation of $2,446,000 for the year ended
December 31, 1992 includes net earnings from oil and gas operations of
$1,954,000 which were offset by the estimated loss on disposal of $4,400,000.
Similarly, the 1991 loss from discontinued operation of $1,186,000 included net
earnings from operations of $1,064,000 and a valuation adjustment of $2,250,000.
Increased production volumes in 1992 contributed to an increase in net earnings
from operations. See "Business Held for Sale" in the Notes to Consolidated
Financial Statements for the year ended December 31, 1993.
LIQUIDITY AND CAPITAL RESOURCES
The Company's liquidity is impacted by its ability to generate funds from
operations and to access capital markets. The gas utility operations are
seasonal in nature with a significant percentage of the Company's annual
revenues and earnings occurring in the traditional heating-load months. This
seasonality results in a high level of cash flow needs during the peak winter
heating-load months, resulting from the required payments to natural gas
suppliers in advance of the receipt of cash payments from the Company's
customers.
FINANCING ACTIVITIES
On December 31, 1993 Southern Union completed a $50,000,000 Rights Offering
(the "Rights Offering") to its existing stockholders to subscribe for and
purchase 3,000,000 shares of the Company's common stock, par value $1.00 per
share, at $16.67 per share, as adjusted for the three for two stock split, for
net proceeds of $49,351,000. In addition, on January 31, 1994, the Company
completed the sale of $475,000,000 of 7.60% Senior Notes due 2024 (the "Senior
Debt Securities"). The net proceeds from the sale of the Senior Debt Securities,
together with the net proceeds from the Rights Offering and working capital from
operations, have been or will be used to: (i) fund the purchase price of the
Missouri Acquisition; (ii) refinance the $20,000,000 aggregate principal amount
of the 10 1/8% Notes due May 15, 1994; (iii) repay approximately $59,300,000 of
borrowings under the $100,000,000 revolving credit facility, which borrowings
were used to fund the Rio Grande Acquisition and repurchase all of the
outstanding preferred stock; (iv) refinance the $10,000,000 aggregate principal
amount of 9.45% Senior Notes due January 31, 2004, and $25,000,000 aggregate
principal amount of 10% Senior Notes due January 31, 2012 and the related
premium of $10,400,000 resulting from the early extinguishment of such notes;
and (v) refinance $50,000,000 aggregate principal amount of the 10.5% Sinking
Fund Debentures due May 15, 2017 and the premium of $3,300,000 resulting from
the early extinguishment of such debentures.
On September 30, 1993, Southern Union entered into a new revolving credit
facility with a three year term (the "Revolving Credit Facility") initially
underwritten by Texas Commerce Bank, N.A. for $80,000,000. On November 15, 1993,
the Revolving Credit Facility was syndicated to five additional banks and the
aggregate amount available to be borrowed was increased to $100,000,000.
Borrowings under the Revolving Credit Facility are available for Southern
Union's working capital and letter of credit requirements. The Revolving Credit
Facility can also be used in part, but not to exceed $40,000,000, to fund
acquisitions and capital expenditures and it provided the funds to complete the
Rio Grande Acquisition. The Revolving Credit Facility contains certain financial
covenants that, among other things, restrict cash or asset dividends, share
repurchases, certain investments and additional debt. The Revolving Credit
Facility is currently uncollaterized. Under certain conditions involving the
issuance of collateralized debt of Southern Union, the Revolving Credit Facility
automatically would become collateralized by a first priority security interest
on substantially all of the accounts receivable, inventory and certain related
contract rights of the Company. The amount outstanding under the Revolving
Credit Facility at March 21, 1994 was zero.
18
During March 1993 the Company retired 68,000 shares of the Series A 10%
Cumulative Preferred Stock ("Preferred Stock") at $103 per share for $7,004,000.
In April 1993, the Company retired 77,000 shares of Preferred Stock at $102 per
share for $7,854,000. In June 1993, the Company retired 4,000 shares of
Preferred Stock at $103.50 per share for $414,000 and the remaining outstanding
100,000 shares at par for $10,000,000.
In February 1992 the Company repurchased 77,438 shares of common stock at
$10.25, as adjusted for the stock split.
INVESTING ACTIVITIES
The Company has used its revolving loan and credit facilities, internally
generated funds and long-term debt to provide funding for its seasonal working
capital, continuing construction programs, operational requirements, preferred
dividend requirements and acquisitions. During the three years ended December
31, 1993, Southern Union spent approximately $112,000,000 on capital projects.
Of that total, $58,000,000 was incurred on normal expansion of its distribution
system as well as relocation and replacement, and $54,000,000 was incurred for
the acquisition of distribution properties. In addition, during the last three
years, approximately $6,500,000 was incurred for the purchase of real estate.
For the year ended December 31, 1993, the Company spent approximately
$19,000,000 for capital expenditures, exclusive of the acquisitions of natural
gas distribution properties, which was used for normal distribution system
replacement and expansion.
On July 9, 1993, the Company entered into the Missouri Asset Purchase
Agreement pursuant to which the Company on January 31, 1994 purchased certain
natural gas distribution operations in central and western Missouri. The
estimated purchase price paid at closing was $400,300,000 in cash. The Missouri
Acquisition was accounted for as a purchase, as previously discussed. Pursuant
to the MPSC Stipulation, the additional purchase cost assigned to utility plant
may not be included in rate base nor amortized in cost of service. See
"Subsequent Events -- Missouri Acquisition" in the Notes to the Consolidated
Financial Statements for the year ended December 31, 1993.
On September 30, 1993, the Company completed the Rio Grande Acquisition for
approximately $30,500,000. Rio Grande presently serves approximately 76,000
customers in the south Texas counties of Willacy, Cameron and Hidalgo, including
the cities of Harlingen, McAllen and Brownsville (the southernmost city in the
U.S.). The Company initially funded the purchase with borrowings from its
Revolving Credit Facility. The Rio Grande Acquisition was accounted for as a
purchase.
In July 1993, the Company completed the Eagle Pass Acquisition for
approximately $2,000,000. During May 1993, the Company completed the Berry Gas
Acquisition which system serves the Texas cities and towns of Nome, Raywood,
Hull and Devers for approximately $274,000. Combined, these operations
collectively serve approximately 4,600 customers. These acquisitions were also
accounted for as purchases.
In October 1992, the Company completed the Nixon Acquisition for
approximately $415,000. This system serves approximately 650 customers. In
January 1991 the Company completed the South Texas Acquisition consisting of the
natural gas distribution and transmission facilities that serve approximately
12,000 customers in several communities. The purchase price for these facilities
was approximately $10,200,000. In August 1991, the Company completed the Andrews
Acquisition for $1,000,000. This system serves approximately 3,000 customers. In
September 1991 the Company completed the Brazos River Acquisition which provides
distribution services to approximately 18,000 customers in several communities
in north-central Texas. The purchase price for these facilities approximated
$7,000,000 of cash and assumption of $3,500,000 of mortgage bond debt. Also in
September 1991 the Company purchased a commercially developed tract of land in
the central business district of Austin, Texas containing a combined 11-story
office building, parking garage, a drive-through bank and a mini-bank facility
for $5,300,000. In December 1991, the Company also
19
purchased a commercially developed tract of land in Austin, Texas for
$1,100,000. Each of these acquisitions and purchases was initially funded under
the Company's revolving loan or credit facilities.
In March 1993, Southern Union Exploration Company ("SX"), pursuant to a
purchase and sale agreement entered into in February 1993, sold substantially
all of its oil and gas leasehold interests and associated production, for
$22,000,000 effective January 1, 1993. The Company recorded a book loss on the
sale of approximately $4,400,000 as of December 31, 1992.
In November 1991, the Company completed the Arizona Sale for approximately
$46,000,000, representing cash of $40,400,000 and assumed liabilities of
$5,600,000. The cash proceeds were used to retire the short-term debt which
funded the 1991 acquisitions described above. In addition, during 1991 the
Company sold a three acre office park project in Dallas, Texas for $1,600,000
and a 120 unit apartment project in Nacogdoches, Texas for cash of $500,000 and
a note receivable for $600,000. As a result of these sales, the Company has
divested itself of all developed real estate not otherwise used at least
partially in the Company's business.
OTHER MATTERS
CONTINGENCIES
The Company has been named as a potentially responsible party in a special
notice letter from the United States Environmental Protection Agency for costs
associated with removing hazardous substances from the site of a former coal
gasification plant in Vermont. The Company also assumed responsibility for
certain environmental matters in connection with the Missouri Acquisition. See
"Commitments and Contingencies" and "Subsequent Events -- Missouri Acquisition"
in the Notes to Consolidated Financial Statements for the year ended December
31, 1993.
In 1993 the Internal Revenue Service completed its audit of the Company's
federal income tax return for 1984 through 1989. The Internal Revenue Service
proposed and the Company agreed to deficiencies and related interest of
approximately $1,266,000. The Company had fully accrued for such tax
deficiencies and related interest.
REGULATORY
The Company is continuing to pursue certain changes to rates and rate
structures that are intended to reduce the sensitivity of earnings to weather
including weather normalization clauses and higher minimum monthly service
charges.
On February 10, 1993, the Company's South Texas service area received an
annualized rate increase of $777,000. On June 10, 1993, the Austin City Council
approved an ordinance reflecting (i) an approximate $1,700,000 base revenue
increase, (ii) new and increased fees that will add approximately $250,000
annually and (iii) weather normalization clause revisions. The Austin rate
increase became effective as of July 1, 1993. On October 12, 1993, the El Paso
City Council approved an ordinance reflecting an approximate revenue increase of
$463,000. The El Paso rate increase became effective November 1, 1993. These
rate increases should contribute significantly to Southern Union Gas' earnings
in 1994.
During 1992, the Company's rate cases continued to focus upon the receipt of
timely and adequate revenue increases and on various measures designed to
stabilize earnings. Rate cases resolved in El Paso, South Texas, Dell City, Port
Arthur, Borger, Galveston, Pecos and Monahans resulted in revenue increases of
$2,742,000. The Galveston rate case also provided for an increase in the minimum
residential monthly service charge from $7.50 to $10 and the implementation of a
weather normalization clause.
ACCOUNTING PRONOUNCEMENTS
The Company adopted the provisions of Financial Accounting Standards Board's
Statement of Financial Accounting Standards ("SFAS") No. 109, "Accounting for
Income Taxes," effective as of January 1, 1993. SFAS No. 109 provides for the
replacement of the "deferred method" of interperiod
20
income tax allocation with the "liability method" which bases the amounts of
current and future tax assets and liabilities on events recognized in the
financial statements and on income tax laws and rates existing at the balance
sheet date. The adoption of SFAS No. 109 resulted in the recording of an
insignificant amount in 1993.
The Company also adopted the provisions of SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions," effective as of
January 1, 1993. SFAS No. 106 requires an accrual of postretirement medical and
other benefit liabilities on an actuarial basis during the years an employee
provides services as compared to the current pay-as-you-go method. The Company
records a regulatory asset for the difference between the postretirement costs
currently included in rates and SFAS No. 106 expense to the extent the Company
files, or intends to file, a rate application to include SFAS No. 106 expense in
rates. It is probable that the regulator will allow such expense in future
rates. Consequently, earnings were not adversely impacted by the adoption of
this statement. The Company's adoption of the provisions of SFAS No. 106
resulted in a transition obligation of approximately $9,328,000 which was
subsequently reduced in 1993 to $4,257,000 primarily as a result of certain plan
amendments. The Company will amortize the remaining transition obligation over
the allowed 20-year period.
SFAS No. 112, "Employees Accounting for Postemployment Benefits," is
required to be adopted effective for fiscal years beginning after December 15,
1993. SFAS No. 112 provides standards for employers who grant benefits to
employees after employment but before retirement. The Company anticipates the
recovery of the periodic expense through rates and the recording of the future
benefits to be paid as a regulatory asset. The Company plans to adopt the
provisions of SFAS No.112 effective as of January 1, 1994. The impact of the
adoption of SFAS No. 112 is not expected to be material to the financial
condition or results of operations of the Company.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Reference is made to the Consolidated Financial Statements of Southern Union
and its consolidated subsidiaries listed on page F-1.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF REGISTRANT.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
ITEM 11. EXECUTIVE COMPENSATION.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
The information required is incorporated herein by reference from Southern
Union's definitive Proxy Statement for the annual meeting of stockholders to be
held on May 25, 1994, which will be filed on or before April 4, 1994.
21
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a)(1) FINANCIAL STATEMENTS. Reference is made to the Index on page F-1
for a list of all financial statements filed as part of this Report.
(a)(2) FINANCIAL STATEMENT SCHEDULES. Reference is made to the Index on
page F-1 for a list of all financial statement schedules filed as a part of this
Report.
(a)(3) EXHIBITS. Reference is made to the Exhibit Index on pages E-1 and
E-2 for a list of all exhibits filed as a part of this Report.
(b) REPORTS ON FORM 8-K. A Current Report on Form 8-K was filed on October
13, 1993. Events reported included: (i) the Corpus Christi, Texas, City Council
voted not to hold a referendum on selling the city's gas system to the Company;
(ii) the Company entered into a new Revolving Credit Agreement with Texas
Commerce Bank, N.A., as agent, for an $80,000,000 Revolving Credit Facility, as
amended on November 15 to increase the facility to $100,000,000; and (iii) the
Company entered into a Purchase Agreement pursuant to which it simultaneously
purchased Rio Grande Valley Gas Company for approximately $30,500,000.
22
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 March 28, 1994.
SOUTHERN UNION COMPANY
By /s/ 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 March 28, 1994.
SIGNATURE/NAME TITLE
- ------------------------------------------------------ ---------------------------------------------------------
GEORGE L. LINDEMANN*
------------------------------------------- Chairman of the Board, Chief Executive Officer and
George L. Lindemann Director
JOHN E. BRENNAN*
------------------------------------------- Director
John E. Brennan
FRANK W. DENIUS*
------------------------------------------- Director
Frank W. Denius
AARON I. FLEISCHMAN*
------------------------------------------- Director
Aaron I. Fleischman
/s/ PETER H. KELLEY
------------------------------------------- Director
Peter H. Kelley
ADAM M. LINDEMANN*
------------------------------------------- Director
Adam M. Lindemann
ROGER J. PEARSON*
------------------------------------------- Director
Roger J. Pearson
GEORGE ROUNTREE, III*
------------------------------------------- Director
George Rountree, III
DAN K. WASSONG*
------------------------------------------- Director
Dan K. Wassong
/s/ RONALD J. ENDRES
------------------------------------------- Senior Vice President of Administration, and Chief
Ronald J. Endres Financial Officer
/s/ DAVID J. KVAPIL
------------------------------------------- Vice President and Controller (Principal Accounting
David J. Kvapil Officer)
By /s/ PETER H. KELLEY
-------------------------------------------
Peter H. Kelley
ATTORNEY-IN-FACT
23
SOUTHERN UNION COMPANY
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
AND FINANCIAL STATEMENT SCHEDULES
Page(s)
-------------
Consolidated financial statements:
Report of independent accountants................................................................ F-2
Statement of consolidated operations -- years ended December 31, 1993, 1992 and 1991............. F-3
Consolidated balance sheet -- December 31, 1993 and 1992......................................... F-4
Statement of consolidated cash flows -- years ended December 31, 1993, 1992 and 1991............. F-5
Notes to consolidated financial statements....................................................... F-6 to F-23
Financial statement schedules:
V -- Property, plant and equipment........................................... S-1
VI -- Accumulated depreciation and amortization of property, plant and
equipment.............................................................. S-2
IX -- Short-term borrowings................................................... S-3
X -- Supplementary statement of operations information....................... S-4
All other schedules are omitted as the required information is not
applicable or the information is presented in the consolidated financial
statements, related notes or other schedules.
F-1
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and
Board of Directors of
Southern Union Company:
We have audited the consolidated financial statements and financial
statement schedules of Southern Union Company and Subsidiaries listed in the
index on page F-1 of this Form 10-K. These financial statements and financial
statement schedules are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and
financial statement schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Southern Union
Company and Subsidiaries as of December 31, 1993 and 1992, and the consolidated
results of their operations and their cash flows for each of the three years in
the period ended December 31, 1993 in conformity with generally accepted
accounting principles. In addition, in our opinion, the financial statement
schedules referred to above, when considered in relation to the basic financial
statements taken as a whole, present fairly, in all material respects, the
information required to be included therein.
As discussed in the Summary of Significant Accounting Policies note to the
consolidated financial statements, effective January 1, 1993 the Company changed
its method of accounting for income taxes and postretirement benefits other than
pensions.
COOPERS & LYBRAND
Austin, Texas
March 11, 1994
F-2
SOUTHERN UNION COMPANY AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED OPERATIONS
Years Ended December 31,
-------------------------------------
1993 1992 1991
----------- ----------- -----------
(Thousands of dollars, except shares
and per share amounts)
Operating revenues....................................................... $ 209,005 $ 192,445 $ 200,261
Gas purchase costs....................................................... 110,384 102,918 109,238
----------- ----------- -----------
Operating margin....................................................... 98,621 89,527 91,023
----------- ----------- -----------
Operating expenses:
Operating, maintenance and general..................................... 50,076 46,313 49,022
Taxes, other than on income............................................ 14,365 13,115 14,840
Depreciation and amortization.......................................... 14,416 12,737 13,317
----------- ----------- -----------
Total operating expenses............................................. 78,857 72,165 77,179
----------- ----------- -----------
Net operating revenues............................................... 19,764 17,362 13,844
----------- ----------- -----------
Other income (expenses):
Interest on long-term debt............................................. (11,535) (11,496) (11,179)
Other interest......................................................... (2,212) (963) (1,402)
Gain on Arizona Sale................................................... -- -- 4,782
Other, net............................................................. 5,571 5,928 5,263
----------- ----------- -----------
Total other expenses, net............................................ (8,176) (6,531) (2,536)
----------- ----------- -----------
Income before taxes and discontinued operation....................... 11,588 10,831 11,308
----------- ----------- -----------
Federal and state income taxes........................................... 3,855 4,440 6,635
----------- ----------- -----------
Earnings from continuing operations...................................... 7,733 6,391 4,673
----------- ----------- -----------
Discontinued operation:
Earnings from operations, net of tax................................... -- 1,954 1,064
Estimated loss on disposal............................................. -- (4,400) (2,250)
----------- ----------- -----------
Loss from discontinued operation..................................... -- (2,446) (1,186)
----------- ----------- -----------
Earnings before preferred dividends...................................... 7,733 3,945 3,487
Preferred dividends...................................................... (843) (2,500) (2,500)
----------- ----------- -----------
Net earnings available for common stock.................................. $ 6,890 $ 1,445 $ 987
----------- ----------- -----------
----------- ----------- -----------
Earnings (loss) per common share:
Continuing operations.................................................. $ .87 $ .49 $ .27
Discontinued operation:
Earnings from operations, net of tax................................. -- .25 .13
Estimated loss on disposal........................................... -- (.56) (.28)
----------- ----------- -----------
Net earnings......................................................... $ .87 $ .18 $ .12
----------- ----------- -----------
Weighted average shares outstanding...................................... 7,891,917 7,888,971 7,929,858
----------- ----------- -----------
----------- ----------- -----------
See accompanying notes to the consolidated financial statements.
F-3
SOUTHERN UNION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
ASSETS
DECEMBER 31,
------------------------
1993 1992
----------- -----------
(THOUSANDS OF DOLLARS)
Property, plant and equipment:
Plant in service..................................................................... $ 374,963 $ 312,812
Construction work in progress...................................................... 2,080 4,307
----------- -----------
377,043 317,119
Less accumulated depreciation and amortization....................................... (144,491) (114,210)
----------- -----------
232,552 202,909
Additional purchase cost assigned to utility plant, net of accumulated amortization
of $10,530,000 and $7,357,000, respectively......................................... 92,991 82,596
----------- -----------
Net property, plant and equipment.................................................. 325,543 285,505
----------- -----------
Current assets:
Cash................................................................................. 2,918 89
Accounts receivable, billed and unbilled............................................. 46,292 40,818
Inventories, principally at average cost............................................. 2,950 3,127
Prepayments and other................................................................ 2,077 1,147
----------- -----------
Total current assets............................................................... 54,237 45,181
----------- --