Southern Union Company (SUG) reported third quarter 2011 adjusted earnings of 42 cents per share, falling short of the Zacks Consensus Estimate of 44 cents. Results however improved from the prior-year earnings of 40 cents. Including one time-items of 4 cents, the company reported a GAAP EPS of 46 cents in the quarter compared with 29 cents in third quarter 2010.
Earlier 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. The merger is expected to close in the first quarter of 2012.
Operating Statistics
Revenue in the quarter totaled $617.2 million, beating the Zacks Consensus Estimate of $503 million as well the prior-year top line of $487.5 million. The company reported net earnings of $58.0 million versus $36.6 million in the prior-year period.
Segment Update
Transportation and Storage: In the reported period, segment operating income was $113.9 million, compared with $112.1 million in the prior year period. The increase was primarily attributable to higher revenue. Revenue rose mainly due to increased supply-area capacity sold on Trunkline Gas Company and higher short-term capacity sold on Panhandle Eastern Pipe Line Company.
Gathering and Processing: The segment generated an operating profit of $9.3 million, compared with $10.2 million in the prior-year period. The decrease was primarily due to higher operating, maintenance and general expenses. This was partially offset by higher gross margin largely attributable to higher market-driven realized average natural gas and NGL prices. Total processed volumes were 442,983 MMBtu/d in the reported period compared with 444,316 MMBtu/d in the year-ago period.
Distribution: In the reported period, the segment posted an operating income of $5.5 million compared to $6.3 million in the prior-year period. This decrease was primarily due to higher operating, maintenance and general expenses, including higher labor costs and higher vehicle fuel costs attributable to higher gasoline prices.
Financial Update
In the first nine months of 2011, cash flow provided by operating activities was $450.9 million, up from $360.4 million in third quarter 2010. Long-term debt at the end of the reported period was $2.7 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, merger-related expenses and litigation settlements, the company expects earnings in a band of $1.87–$2.07 per share.
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. Also, the company expects significant growth opportunities from Bone Spring and Avalon Shale plays over the next several years.
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 #3 Rank (Hold). 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.
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