SUG Southern Union Company Common Stock

Southern Union Company (SUG) reported fourth quarter and fiscal 2011 results. In the fourth quarter, adjusted earnings were 57 cents per share versus the prior-year figure of 53 cents. Earnings were a penny above our expectation.

Some mark-to-market gains, partially offset by merger related expenses, resulted in a net gain of approximately 3 cents per share in the quarter under review. Including this GAAP EPS was 61 cents compared with 45 cents in the year-ago period.

In the fiscal year, adjusted earnings were $1.91 per share versus $1.79 in fiscal 2010 and a penny above the Zacks Consensus Estimate.

Mark-to-market gains and favorable litigation settlements, partially offset by merger related expenses, resulted in a special gain of 11 cents per share in fiscal 2011. Including this GAAP EPS was $2.02 compared with $1.73 a year ago.

Operating Statistics

Revenue in the quarter totaled $670.3 million, flat year over year. The top-line figure was above the Zacks Consensus Estimate of $550 million.

In the fiscal year, the company reported revenue of $2,666 million compared with $2,490 million in fiscal 2010. Total revenue well exceeded our expectation of $2,168 million.

In fiscal 2011, total processed volumes were 417,398 Million Metric British Thermal Units (MMBtu) compared with 430,683 MMBtu in the year-ago period.

In the quarter, adjusted net earnings were $71.8 million compared with $65.9 million in the prior-year quarter.

Fiscal 2011 Segment Update

Transportation and Storage: In the reported period, segment operating income was $473.5 million, compared with $446.1 million in the prior-year period. The results were driven by higher revenue mainly due to Liquefied natural gas terminal infrastructure enhancement project placed in service in March 2010 and customer contract buyout revenues received by PEPL Holdings, LLC in the fourth quarter of 2011.

Gathering and Processing: The segment generated an operating profit of $22.5 million versus $26.0 million in the fourth quarter of 2010. The downside reflects higher operating, maintenance and general expenses, lower realized average natural gas prices and reduced throughput volumes, partially offset by higher gross margin largely due to higher market-driven realized average NGL prices.

Distribution: In the reported period, the segment posted an operating income of $55.8 million versus an operating income of $63.7 million in the year-ago period. The results reflect higher operating, maintenance and general expenses, including higher legal, injuries and damage claims due to ongoing litigation, higher vehicle fuel costs attributable to higher gasoline prices and the impact of a 2010 settlement for a previous environmental cost reimbursement claim made by the company.

Financial Update

At the end of 2011, long-term debt was $3,160.4 million compared with $3,520.9 million at the end of fiscal 2010. In fiscal 2011, cash flow from operating activities was $531 million, up from $424.7 million in fiscal 2010.

Merger Update

In July 2011, Southern Union entered into an amended and restated merger agreement with Energy Transfer Equity, L.P. (ETE) 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.

Only this month, Energy Transfer Equity, L.P. and Southern Union Company filed a Stipulation Agreement with the Missouri Public Service Commission. Per the agreement, the parties recommend that the Commission should issue an order that the merger is not detrimental to the public interest. Moreover, the parties also mailed merger consideration election forms to Southern Union shareholders of record as of February 10, 2012. They announced that the election deadline for Southern Union stockholders to make merger consideration elections is March 19, 2012 or such other date later to which is agreeable for both ETE and Southern Union.

Both the parties expect the closing of the merger to occur prior to the end of the first quarter of 2012.

Our Take

Southern Union currently owns one of the largest interstate pipeline networks in the U.S. and LNG import terminals in North America. Moreover, the company is developing and installing liquefaction facilities at the Lake Charles terminal. Going forward, the company expects earnings growth to be driven by growth projects in its midstream business. We also believe that the company is well positioned in the Permian Basin to focus on further natural gas midstream expansion programs.

However, we are cautious about the pending approvals for its merger deal, dependence on outside funds for expansion programs, and seasonality in its pipeline business. The company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our 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 U.S. The company owns and operates one of the largest natural gas pipeline systems, in the U.S., with more than 20,000 miles of gathering and transportation pipelines 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.

 
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