Southern Union Company (SUG) reported first quarter 2011 adjusted earnings of 51 cents per share, a penny ahead of the Zacks Consensus Estimate. Results also surpassed the adjusted earnings of 44 cents per share in the year-ago period. On a reported basis, Southern Union reported earnings of 48 cents a share compared with 43 cents a share in the prior-year quarter.
Operating Statistics
Revenue in the quarter totaled $746.8 million, down 1.6% from $758.9 million in the prior-year period. However, results surpassed the Zacks Consensus Estimate of $561 million.
In the quarter under review, total processed volumes were 374,188 Million Metric British Thermal Units (MMBtu) compared with 405,953 MMBtu in the year-ago period.
Adjusted net earnings were $64 million compared with $55 million in the prior-year quarter.
Segment Update
Transportation and Storage: In the reported period, segment operating income was $122.1 million, compared with $102.4 million in the prior-year period driven by the LNG terminal infrastructure project placed in service in March 2010. Higher equity earnings from Southern’s unconsolidated investment in Citrus also boosted segment income.
Gathering and Processing: The segment incurred an operating loss of $7.0 million versus an operating profit of $1.3 million in the first quarter of 2010 primarily due to reduced throughput volumes from processing plant outages and producer well freeze-offs that resulted from unusually cold weather in early 2011. Higher operating, maintenance and general expenses during the quarter also perpetrated the loss.
Distribution: In the reported period, the segment generated operating income of $23.6 million versus an operating income of $28.8 million in the year-ago period due to higher operating, maintenance and general expenses and lower net operating revenues.
Financial Update
In first quarter 2011, cash flow provided by operating activities was $200.3 million, up from $167.2 million in first quarter of 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. It expects total processed volumes to increase year over year.
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. It is also well positioned in the Permian Basin to focus on further natural gas midstream expansion programs. In April 2011, the company has placed the Florida Gas Transmission Company Phase VIII Expansion Project into service. The $2.48 billion project is expected to create long-term value for the company’s shareholders through enhanced earnings and cash flows.
However, valuation continues to be restricted by the company’s dependence on outside funds to pursue its expansion programs, as well as seasonality in its pipeline business and re-contracting uncertainty for its percent of proceed (POP) contracts. Thus, in the absence of additional positive triggers, the company presently retains a short-term Zacks #3 Rank (Hold) that corresponds with our long-term Neutral recommendation on the stock. This is in line with its peers Atlas Pipeline Partners LP (APL) and DCP Midstream Partners LP (DPM).
Houston-based Southern Union is engaged primarily in the transportation, storage, gathering, processing and distribution of natural gas. We maintain our Neutral recommendation on Southern Union.
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