SOUTHERN UNION COMPANY
ONE PEI CENTER
WILKES-BARRE, PA 18711
May 20, 2002
In reply to: File No. S7-08-02
Jonathan G. Katz
Securities and Exchange Commission
450 Fifth Street, NW
Washington, DC 20549
Dear Jonathan G. Katz,
This letter is prepared in comment to the Securities and Exchange Commission's proposing release concerning acceleration of periodic report filing dates and disclosure concerning website access to reports (File No. S7-08-02).
On behalf of Southern Union Company, the following are my responses to the questions solicited by the Commission in Section II. A. 2 of the proposing release:
Question: To what extent would shortening the due dates for quarterly, annual and transition reports improve the flow of information to investors and the markets?
Response: Shortening the due date for quarterly, annual and transition reports and thereby reducing the amount of time to prepare these reports is likely to reduce the accuracy of the information being reported. Moreover, due to the current business environment, additional complex accounting disclosures are required to provide accurate, responsive and fulsome disclosure regarding activities in the reporting period. These disclosures require additional time to prepare by Company accountants and often require the assistance of external consultants. Such disclosures increase audit or review attention by independent accountants who will experience similar increases from many, if not all, of their public clients. Similarly, we would expect such disclosure to require additional scrutiny by the Company's Audit Committee or Board of Directors. Accordingly, contrary to the goals of current corporate governance interests, shortening the due date for quarterly, annual and transition reports may jeopardize both the accuracy of those reports and the ability of the Audit Committee or the Board of Directors to exercise thorough oversight. Additionally, shortening the due dates for the above referenced reports in order to provide investors with more timely and complete disclosure may have the paradoxical effect of reducing the disclosure in those reports to a minimal level of mere adherence to mandatory disclosure requirements in order to focus on, and meet, the shortened deadlines.
Question: Should the proposed filing periods be longer or shorter than proposed? What factors should we consider in making these filing periods longer or shorter?
Response: If the proposed filing periods are reduced at all, a more appropriate filing period for quarterly reports would be 40 days and a more appropriate filing period for annual and transition reports would be 75 days. Despite repeated mention throughout the proposing release that technology has significantly increased the flow of information, these gains have been offset by additional reporting and compliance requirements for reporting companies. Added requirements include additional disclosures in the footnotes to the financial statements and Management's Discussion and Analysis as required by the Securities and Exchange Commission and/or Financial Accounting Standards Board, complex calculations required for some of these additional disclosures, review of the reports before filing with the Securities and Exchange Commission by the Company's Audit Committee and quarterly reviews by independent auditors.
Past earnings release dates and past filing dates of Securities and Exchange Commission reports by companies should also be considered when the Commission considers changing the filing periods. Over the last few years Southern Union Company has made its quarterly and annual earnings releases in 25.5 and 37.5 calendar days, respectively, and its quarterly and annual Securities and Exchange Commission filings in 42.5 and 85.5 calendar days, respectively. The Commission should also consider whether and what percentage of public companies prepare reports using in-house personnel as opposed to outside consultants. Southern Union Company prepares over 95% of their quarterly and annual reports by in-house personnel who also have additional responsibilities. Shortening the filing period would require the Company to delay other projects or hire additional resources, resulting in added costs so as to satisfy these proposed reporting requirements.
Question: Should we require companies to file their reports by the earlier of the existing deadlines or some earlier time after their first release of earnings information for that period? What timeframe would be appropriate? For example, would a 15 or 30 day period after the earnings announcement provide enough time for a company to finalize the corresponding periodic report? Would such a requirement delay earnings announcements?
Response: Southern Union releases earnings when the basic financial statements are determined to be in conformity with generally accepted accounting principles as well as achieving its goal of informing the public and shareholders of the results of operations as timely as possible. A procedure that allows companies to file within a certain number of days following their earnings release would be ideal and should maintain the accuracy of current reporting. However, such a procedure may be confusing to investors who are accustomed to having quarterly and annual reports of public companies available by certain recurring due dates. This concern could be addressed by establishing a periodic report filing date at a set number of days after filing the release of earnings. For example, from our experience regarding historical earnings releases and filing dates discussed earlier, we would recommend a filing deadline after an earnings release of 15 days for quarterly reports and 35 to 40 days for annual reports. As a result, a requirement that allowed or required the filing of reports within a set amount of days after earnings announcements should not delay such earnings announcement.
Question: Are there ways other than our proposal to get important information out to investors sooner? Would our proposals cause a delay in the release of earnings announcements? Should we only require that certain information, such as the audited or reviewed financial statements and management's discussion and analysis, be filed on an accelerated basis?
Response: An alternative to the proposal could be to require companies to file unaudited condensed financial information in a Form 8-K on the same date as they release earnings. As mentioned previously, Southern Union releases earnings when the basic financial statements are determined to be in conformity with generally accepted accounting principles. By providing the unaudited condensed financial information in a Form 8-K, investors would be able to receive additional information that is typically not issued in earnings releases. Assuming that the current filing deadlines of 45 days for quarterly reports and 90 days for the annual and transition reports remain unchanged, the time period from the release of earnings to filing of the report would be available to facilitate an accurate and complete review of complete financial statements and information including Management's Discussion and Analysis and the financial footnotes. Of course, the Commission would need to consider if such Form 8-K would require prior review by independent auditors or the Audit Committee, or what impact such a condensed filing may have on the subsequent review of the actual periodic report.
Question: Do the proposed Form 10-Q and 10-K due dates provide affected companies with enough time to prepare their reports? Do affected companies anticipate any significant problems in complying with the accelerated deadlines? If so, what types of problems?
Response: The proposed Forms 10-Q and 10-K due dates do not provide affected companies enough time to accurately prepare their reports. Southern Union Company has historically filed its quarterly and annual reports upon completion and review by internal management, review or audit by independent auditors, review by external legal counsel, review by the Audit Committee and, in the case of the Form 10-K, review by the Board of Directors. Based on the historical filing dates of Southern Union as previously provided, additional costs would be incurred by the Company to adhere to the proposed filing deadlines. While we have estimated the dollar cost below, such costs may also be found in abbreviated reviews and reduced opportunity for discussion or change prior to filing. While difficult to quantify, such costs are ultimately likely to be more expensive to the Company, our shareholders and the public interest. Because the penalty for failing to meet this filing deadlines is severe, namely forfeiting short-form registration for at least one year from the date of the late filing, the Company would have little choice but to incur these additional costs.
Question: Would the proposal impose any significant costs on these companies? If so, what type and amount of costs? Are these short-term or one-time costs to adjust a company's reporting procedures, or long-term, ongoing costs?
Response: The proposal would impose additional costs on the Company that we would consider significant. As previously mentioned, Southern Union prepares over 95% of their quarterly and annual filings by in-house personnel who also have additional responsibilities. These responsibilities include annual proxy preparation, annual report preparation, external auditor support, general ledger maintenance and various budget procedures. To meet the proposed filing deadlines, approximately 40 additional hours per quarterly filing and 500 hours for the annual filing would need to be covered. If an outside contractor were hired to assist in this process, the estimated additional costs would be $60,200, and if outside advisors were used, the estimated additional costs would be $155,000. These costs would be long-term, ongoing costs. As a regulated public utility, Southern Union's ability to recover these costs is limited. Recovering these additional costs would require the Company to prepare rate filings in the various states in which we operate. In some of our jurisdictions such rate filings are not expected for several years.
Question: Would auditors, Audit Committees and Boards of Directors have sufficient time to perform their review functions?
Response: Before the quarterly and annual filings are sent to the Audit Committee and the Board of Directors, they have been reviewed and/or audited by our independent auditors. The Audit Committee review process and the Board of Directors review process currently take 3 and 5 days, respectively. Based on proposed Forms 10-Q and 10-K due dates, this time frame would have to be reduced in order to comply with the recommended filing dates. The review process by both the Audit Committee and the Board of Directors and, hence their ability to raise questions and effect changes in the financial statements, would be quite limited under the new proposed filing deadlines.
Question: It is our understanding that a company's audit (or review in the case of interim financial statements) is complete or substantially complete by the time the company issues its earnings announcement. Is our understanding accurate? How often do these earnings numbers change between their announcement and the filing of the corresponding periodic report? What steps are involved, and how much time does it take, to prepare the necessary disclosures for the corresponding periodic report after the earnings announcement or the completion of the audit (or review)?
Response: For Southern Union, the audit of the basic financial statements (or review in the case of interim financial statements) is substantially complete by the time the company issues its earnings announcement. As mentioned previously, Southern Union Company has made their quarterly and annual earnings release in 25.5 and 37.5 calendar days, respectively, and their quarterly and annual Securities and Exchange Commission filings in 42.5 and 85.5 calendar days, respectively. The earnings numbers rarely change between their announcement and the filing of the corresponding periodic report.
Additional time is usually required by the company and external auditor after the earnings announcement to prepare, review and agree on the numerous footnote disclosures and Management's Discussion and Analysis. These procedures usually take 10 days for quarterly reports and up to 30 days for annual reports. Additionally, the Audit Committee and/or Board of Directors review of the quarterly and annual reports typically take 3 and 5 days, respectively. The Company also prepares its own EDGAR filing which usually takes 1 day, unless exhibits are involved in which case preparing the EDGAR filing may take longer depending on the number and length of the exhibits.
Question: Would the reliability and accuracy of the reports suffer as a result of shortened due dates?
Response: Yes. With the current ever-changing complex accounting disclosures, additional time is needed to prepare and review the disclosures, and to have such disclosures thoroughly explained to and reviewed by the Company's Audit Committee or Board of Directors. Shortening the due date for quarterly, annual and transition reports may jeopardize the accuracy and reliability of the reports and will restrict Board oversight of management.
On behalf of Southern Union Company, the following are my responses to the questions solicited by the Commission in Section II. A. 3 of the proposing release:
Question: Would our proposed changes affect some companies or industries more than others (such as those with complex transactions or accounting or those that regularly access the debt markets instead of equity markets, and therefore may not have a public float)? Should we make exceptions to the proposed due dates for certain companies or industries? If so, which ones and why?
Response: The proposed changes would affect some companies or industries more than others. Companies that have grown through acquisition or consolidation, or that have more de-centralized operations and accounting functions through divisions and sudsidiaries, may not have the technology in place to consolidate and analyze results as quickly as more established or centralized companies. In such instances, disparate accounting and bookkeeping systems may be in place that require spreadsheet consolidation. Additionally, companies completing complex or extra-corporate transactions in a given reporting period would most likely require more time to complete their disclosures than companies that have not.
Question: While we have proposed to use the public float test, we are seriously considering alternative thresholds and request comment on such alternatives. For example, should all reporting companies be subject to shortened filing deadlines, except for companies below a certain revenue or asset threshold (for example, $5 million)? Should we accelerate the filing dates only for companies whose equity securities are listed or actively traded on an exchange or Nasdaq? How would we define "actively traded?" Are there other alternatives that will balance the need for timely, high quality disclosure with the ability of companies to prepare the disclosure without undue burden?
Response: The Commission should also consider traded float when addressing thresholds for accelerated reporting. Companies may meet the public float test but may have a very small daily traded float because the majority of shares are closely held. Closely held public companies may not have the need to get report numbers to the public in 10 days like most large-cap stocks and, as a result, current staffing may not be available to meet the accelerated filing deadlines without additional investment.
Jon A. Graf
Southern Union Company