Southern Union Beats, Upholds View

Zacks

Southern Union Company (NYSE:SUG - News) reported second quarter 2011 adjusted earnings of 41 cents per share, a penny ahead of the Zacks Consensus Estimate as well as the prior-year figure. Including one time-items of 6 cents, the company reported a GAAP EPS of 47 cents in the quarter compared with 55 cents in second quarter 2010.

Operating Statistics

Revenue in the quarter totaled $631.6 million, up from the Zacks Consensus Estimate of $554 million as well the prior-year top-line figure of $573.1 million. In the quarter under review, total processed volumes were 431,453 Million Metric British Thermal Units (MMBtu) compared with 436,178 MMBtu in the year-ago period.

Adjusted net earnings were $52.1 million compared with $53 million in the prior-year quarter.

Segment Update

Transportation and Storage: In the reported period, segment operating income was $109.1 million, compared with $111.2 million in the prior-year period. The downside reflects higher depreciation expenses due to increased plant, property and equipment placed into service after June 30, 2010 and the absence of the impact of repair and abandonment cost provision for hurricanes Ike and Gustav that were available in second quarter 2010. However, these negatives were partially offset by higher operating revenue due to an increase in sales of short-term capacity.

Gathering and Processing: The segment generated an operating profit of $14.2 million versus $9.1 million in the second quarter of 2010 driven by higher market-driven realized average natural gas and NGL prices.

Distribution: In the reported period, the segment posted an operating income of $3.6 million versus an operating income of $6.9 million in the year-ago period; the decline resulted from higher operating, maintenance and general expenses. This includes the impact of higher costs related to the tornadoes in Joplin, Missouri in the reported quarter. The results also reflect the impact of a settlement for a previous environmental claim in the year-earlier period.

Financial Update

In second quarter 2011, cash flow provided by operating activities was $350.9 million, up from $242.5 million in second quarter 2010. Long-term debt at the end of the quarter was $3 billion, down from $3.5 billion at the end of fiscal 2010.

Guidance

Southern Union maintained its adjusted earnings guidance for 2011 in the range of $1.75–$1.95 per share. Including the mark-to-market impact of open economic hedges of processing spreads, the company expects earnings in a band of $1.87–$2.07 per share. The company expects significant growth opportunities to arise from Bone Spring and Avalon Shale plays over the next several years.

Merger Update

Recently, in July 2011, Southern Union entered into an amended and restated merger agreement with Energy Transfer Equity, L.P. (NYSE:ETE - News) under which the latter will acquire Southern Union for $9.4 billion, including $5.7 billion in cash and Energy Transfer common units.

Under the terms of the revised agreement, shareholders of Southern Union can elect to exchange their common shares for $44.25 of cash or 1.000 x Energy Transfer common units. The maximum cash component is 60% of the aggregate consideration and the common unit component can fluctuate in the range of 40% to 50%. Elections in excess of either the cash or common unit limits will be subject to proration. The merger is expected to close in the first quarter of 2012, subject to stockholder approval and certain other regulatory approvals.

Our Take

Southern Union Company owns one of the largest interstate pipeline networks in the U.S. and one of the largest LNG import terminals in North America. Going forward, management’s focus on the regulated asset base will provide the company with low-risk growth.

However, valuation continues to be restricted by the company’s dependence on outside funds to follow its expansion programs, as well as seasonality in its pipeline business. Thus, in the absence of further positive triggers, we feel the company is adequately valued, leaving little room for upside in the near term. The company presently retains a short-term Zacks #2 Rank (Buy). We have a long-term Neutral recommendation on the stock.

Houston based Southern Union Company is engaged in the gathering, processing, transportation, storage and distribution of natural gas in the U.S. The company owns and operates one of the nation’s largest natural gas pipeline systems and one of North America’s largest liquefied natural gas import terminals. Southern Union operates in both the regulated and unregulated space in the natural gas business. Some of its main competitors are Atlas Pipeline Partners LP (NYSE:APL - News) and Laclede Group Inc. (NYSE:LG - News).

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