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Article by DailyStocks_admin    (12-17-08 06:25 AM)

Filed with the SEC from Dec 04 to Dec 10:

Southern Union (SUG)
Castlerigg Master Investments intends to propose four nominees for election to the company's board at the 2009 annual meeting. The nominees are Stephen Beasley, Michael Egan, Keith Gollust and Nick Graziano. Castlerigg plans to solicit proxies seeking to elect its nominees. Castlerigg holds 12,250,714 shares (9.9%).

BUSINESS OVERVIEW

Introduction

Southern Union Company ( Southern Union and, together with its subsidiaries, the Company ) was incorporated under the laws of the State of Delaware in 1932. The Company owns and operates assets in the regulated and unregulated natural gas industry and is primarily engaged in the gathering, processing, transportation, storage and distribution of natural gas in the United States. The Company operates in three reportable segments: Transportation and Storage, Gathering and Processing, and Distribution.

BUSINESS SEGMENTS

Reportable Segments

The Company’s operations, as reported, include three reportable segments:

•

The Transportation and Storage segment, which is primarily engaged in the interstate transportation and storage of natural gas from gas producing areas in Texas, Oklahoma, Colorado, the Gulf of Mexico and the Gulf Coast to markets throughout the Midwest and from the Gulf Coast to Florida, and liquefied natural gas ( LNG ) terminalling and regasification services. Its operations are currently conducted through Panhandle Eastern Pipe Line Company, LP ( PEPL ) and its subsidiaries (collectively Panhandle ) and its 50 percent equity ownership interest in Florida Gas Transmission Company, LLC ( Florida Gas ) through Citrus Corp. ( Citrus );

•

The Gathering and Processing segment, which is primarily engaged in the gathering, treating, processing and redelivery of natural gas and natural gas liquids ( NGLs ) in Texas and New Mexico. Its operations are conducted through Southern Union Gas Services ( SUGS ); and

•

The Distribution segment, which is primarily engaged in the local distribution of natural gas in Missouri and Massachusetts. Its operations are conducted through Missouri Gas Energy and New England Gas Company.

The Company has other operations that support and expand its natural gas and other energy sales, which are not included in its reportable segments. These operations do not meet the quantitative thresholds for determining reportable segments and have been combined for disclosure purposes in the Corporate and Other category. For information about the revenues, operating income, assets and other financial information relating to the Corporate and Other category, see Item 8. Financial Statements and Supplementary Data, Note 21 – Reportable Segments .

The Company also provides various corporate services to support its operating businesses, including executive management, accounting, communications, human resources, information technology, insurance, internal audit, investor relations, environmental, legal, payroll, purchasing, risk management, tax and treasury.

Sales of products or services between segments are billed at regulated rates or at market rates, as applicable. There were no material intersegment revenues during the years ended December 31, 2007, 2006 or 2005.

Transportation and Storage Segment

Services

The Transportation and Storage segment is primarily engaged in the interstate transportation and storage of natural gas to the Midwest and from the Gulf Coast to Florida, and LNG terminalling and regasification services. The Transportation and Storage segment’s operations are conducted through Panhandle and Florida Gas.

For the years ended December 31, 2007, 2006 and 2005, the Transportation and Storage segment’s operating revenues were $658.4 million, $577.2 million and $505.2 million, respectively. Earnings from unconsolidated investments related to Citrus were $98.9 million for the year ended December 31, 2007. For the years ended December 31, 2006 and 2005, Earnings from unconsolidated investments contributed through CCE Holdings,

LLC ( CCE Holdings ) were $141.1 million and $70.4 million, respectively. See discussion below in Citrus and CCE Holdings related to the Company’s increased ownership interest in Florida Gas through Citrus effective December 1, 2006.

For information about operating revenues, earnings before interest and taxes ( EBIT ), earnings from unconsolidated investments, assets and other financial information relating to the Transportation and Storage segment, see Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Results of Operations – Business Segment Results – Transportation and Storage and Item 8. Financial Statements and Supplementary Data, Note 21 – Reportable Segments.

Panhandle. Panhandle owns and operates a large natural gas open-access interstate pipeline network. The pipeline network, consisting of the PEPL transmission system, the Trunkline Gas Company, LLC ( Trunkline ) transmission system and the Sea Robin Pipeline Company, LLC ( Sea Robin ) transmission system, serves customers in the Midwest with a comprehensive array of transportation and storage services. PEPL’s transmission system consists of four large diameter pipelines extending approximately 1,300 miles from producing areas in the Anadarko Basin of Texas, Oklahoma and Kansas through Missouri, Illinois, Indiana, Ohio and into Michigan. Trunkline’s transmission system consists of two large diameter pipelines extending approximately 1,400 miles from the Gulf Coast areas of Texas and Louisiana through Arkansas, Mississippi, Tennessee, Kentucky, Illinois and Indiana to a point on the Indiana-Michigan border. Sea Robin’s transmission system consists of two offshore Louisiana natural gas supply systems extending approximately 81 miles into the Gulf of Mexico. In connection with its gas transmission and storage systems, Panhandle has five gas storage fields located in Illinois, Kansas, Louisiana, Michigan and Oklahoma. Pan Gas Storage, LLC (d.b.a. Southwest Gas Storage ) operates four of these fields and Trunkline operates one. Through Trunkline LNG Company, LLC ( Trunkline LNG ), Panhandle owns and operates an LNG terminal in Lake Charles, Louisiana. The Trunkline LNG terminal is one of the largest operating LNG facilities in North America based on its current sustainable send out capacity of approximately 1.8 billion cubic feet per day ( Bcf/d ).

Panhandle earns most of its revenue by entering into firm transportation and storage contracts, reserving capacity for customers to transport or store natural gas or LNG, in its facilities. Approximately 34 percent of Panhandle’s total operating revenue comes from long-term service agreements with local distribution company customers and their affiliates. Panhandle also provides firm transportation services under contract to gas marketers, producers, other pipelines, electric power generators and a variety of end-users. Panhandle’s pipelines offer both firm and interruptible transportation to customers on a short-term or seasonal basis. Demand for gas transmission on Panhandle’s pipeline systems is seasonal, with the highest throughput and a higher portion of annual total operating revenues and net earnings occurring in the traditional winter heating season in the first and fourth calendar quarters.

Citrus and CCE Holdings. On December 1, 2006, the Company completed a series of transactions that resulted in it increasing its effective ownership interest in Florida Gas from 25 percent to 50 percent and eliminating its effective 50 percent ownership interest in Transwestern Pipeline Company, LLC ( Transwestern ). On September 14, 2006, Energy Transfer Partners, LP. ( Energy Transfer ) entered into a definitive purchase agreement to acquire the 50 percent interest in CCE Holdings, LLC ( CCE Holdings ) held by GE Energy Financial Services and other investors. At the same time, Energy Transfer and CCE Holdings entered into a definitive redemption agreement ( Redemption Agreement ), pursuant to which Energy Transfer’s 50 percent ownership interest in CCE Holdings would be redeemed in exchange for 100 percent of the equity interests in Transwestern. Upon closing of the Redemption Agreement on December 1, 2006, the Company became the sole owner of 100 percent of CCE Holdings, whose principal remaining asset was its 50 percent interest in Citrus which, in turn, owns 100 percent of Florida Gas.

Florida Gas is an open-access interstate pipeline system with a mainline capacity of 2.1 Bcf/d extending approximately 5,000 miles from south Texas through the Gulf Coast region of the United States to south Florida. Florida Gas’ pipeline system primarily receives natural gas from natural gas producing basins along the Louisiana and Texas Gulf Coast, Mobile Bay and offshore Gulf of Mexico. Florida Gas is the principal transporter of natural gas to the Florida energy market, delivering over 70 percent of the natural gas consumed in the state. In addition, Florida Gas’ pipeline system operates and maintains 60 interconnects with major interstate and intrastate natural gas pipelines, which provide Florida Gas’ customers access to diverse natural gas producing regions.

Florida Gas earns the majority of its revenue by entering into firm transportation contracts, providing capacity for customers to transport natural gas in their pipelines. Florida Gas also earns variable revenue from charges assessed on each unit of transportation provided.

Demand for gas transmission service on the Florida Gas pipeline system is somewhat seasonal, with the highest throughput and related net earnings occurring in the summer period due to gas-fired generation loads in the second and third calendar quarters. The Company’s share of net earnings of Florida Gas and, until its transfer on December 1, 2006, Transwestern have been reported in Earnings from unconsolidated investments in the Consolidated Statement of Operations.

Recent System Enhancements – Completed or Under Construction

LNG Terminal Enhancement. The Company has commenced construction of an enhancement at its Trunkline LNG terminal. This infrastructure enhancement project, which was originally expected to cost approximately $250 million, plus capitalized interest, will increase send out flexibility at the terminal and lower fuel costs. Recent cost projections indicate the construction costs will likely be approximately $365 million, plus capitalized interest. The revised costs reflect increases in the quantities and cost of materials required, higher contract labor costs and an allowance for additional contingency funds, if needed. The negotiated rate with the project’s customer, BG LNG Services, will be adjusted based on final capital costs pursuant to a contract-based formula. The project is now expected to be in operation in the second quarter of 2009. In addition, Trunkline LNG and BG LNG Services agreed to extend the existing terminal and pipeline services agreements through 2028, representing a five-year extension. Approximately $178.3 million and $40.8 million of costs are included in the line item Construction work-in-progress at December 31, 2007 and 2006, respectively.

Compression Modernization. The Company has received approval from FERC to modernize and replace various compression facilities on PEPL. Such replacements are ultimately expected to be made at eleven compressor stations, with three stations completed as of December 31, 2007. Three additional stations are in progress and planned to be completed by the end of 2009, with the remaining cost for these stations estimated at approximately $100 million, plus capitalized interest. Planning for the other five compressor stations on which construction has not yet begun is continuing, with the timing and scope of the work on these stations being evaluated on an individual station basis. The Company is also replacing approximately 32 miles of existing pipeline on the east end of the PEPL system at a current estimated cost of approximately $125 million, plus capitalized interest, which will further improve system integrity and reliability. The revised higher cost relates to various construction issues and delays which have resulted in current estimated in-service dates for the related facilities around the end of the first quarter of 2008 or in the second quarter of 2008. Approximately $124.7 million and $57.9 million of costs related to these projects are included in the line item Construction work-in-progress at December 31, 2007 and December 31, 2006, respectively.

Trunkline Field Zone Expansion Project. Trunkline has completed construction on its field zone expansion project. The expansion project included the north Texas expansion and creation of additional capacity on Trunkline’s pipeline system in Texas and Louisiana to increase deliveries to Henry Hub. Trunkline has increased the capacity along existing rights-of-way from Kountze, Texas to Longville, Louisiana by approximately 625 million cubic feet per day ( MMcf/d ) with the construction of approximately 45 miles of 36-inch diameter pipeline. The project included horsepower additions and modifications at existing compressor stations. Trunkline has also created additional capacity to Henry Hub with the construction of a 13.5-mile, 36-inch diameter pipeline loop from Kaplan, Louisiana directly into Henry Hub. The Henry Hub lateral provides capacity of 1 Bcf/d from Kaplan, Louisiana to Henry Hub. The majority of the project was put into service in late December 2007 with the remainder placed in-service in February 2008. The Company currently estimates the final project costs will total approximately $250 million, plus capitalized interest. The estimated costs include a $40 million contribution in aid of construction ( CIAC ) to a subsidiary of Energy Transfer, which was paid in January 2008 and is expected to be amortized over the life of the facilities. Approximately $26.4 million and $12.5 million of costs for this project are included in the line item Construction work-in-progress at December 31, 2007 and 2006, respectively, with $178.3 million closed to Plant in service in December 2007.

CEO BACKGROUND

George L. Lindemann has been Chairman of the Board, Chief Executive Officer and a director since 1990 and has served as the Company’s President since November 2005. He was Chairman of the Board and Chief Executive Officer of Metro Mobile CTS, Inc. from its formation in 1983 until its sale to Bell Atlantic Corp. in April 1992. He has been President and a director of Cellular Dynamics, Inc., the managing general partner of Activated Communications Limited Partnership, a family investment entity, since 1982. Age: 72.

Michal Barzuza has been an Associate Professor of Law at the University of Virginia School of Law, where she has offered courses in corporate governance, corporate law policy and corporations. Prior to joining the University of Virginia in 2005, Ms. Barzuza was the John M. Olin Research Fellow in Law & Economics at the Harvard Law School, Olin Center for Law, Economics and Business. Director since March 2008. Age: 36.

David Brodsky has been a private investor for over five years. He was Chairman of the Board of Directors of Total Research Corporation from July 1998 to November 2001. Mr. Brodsky is currently a member of the board of directors and chairman of the Audit Committee of Harris Interactive Inc. Director since 2002. Age: 70.

Frank W. Denius has been Chairman Emeritus of the Company since 1990 and during such time has been engaged primarily in the private practice of law in Austin, Texas. Prior to 1990, Mr. Denius had been Chairman of the Board and President of the Company. Director since 1976. Age: 83.

Kurt A. Gitter, M.D. has been an ophthalmic surgeon in private practice in New Orleans, Louisiana since 1969. He has also been a Clinical Professor of Ophthalmology at Louisiana State University since 1978, an Assistant Professor of Ophthalmology at Tulane University since 1969 and is a past president of the Macula Society. Dr. Gitter has previously served on the Boards of Escalon Medical Corporation, Metro Mobile CTS, Inc. and Akorn, Inc. Director since 1995. Age: 71.

Herbert H. Jacobi has been Honorary Chairman of the Supervisory Board of HSBC Trinkaus & Burkhardt KGaA, a German private bank, since 2004, after serving as Chairman since 1998. He was Chairman of the Managing Partners of Trinkaus & Burkhardt KGaA from 1981 to 1998. He was a managing partner of Berliner Handels-und Frankfurter Bank from 1977 until 1981 and an Executive Vice President of Chase Manhattan Bank from 1975 to 1977. He is currently a director of DIC Deutsche Investors’ Capital AG. He is Honorary President of German-American Federation Steuben-Schurz e.V. Mr. Jacobi is also a director of the Palm Beach Civic Association. Mr. Jacobi previously served as a director of Gillette Company. Director since 2004. Age: 73.

Adam M. Lindemann has been non-executive Vice Chairman of the Board since February 2008 and a director since 1990. He co-founded and has been a member of the Board of Managers of Mega Communications (“Mega”), a privately-held Spanish radio group serving the east coast of the United States, since 1998. Mr. Lindemann has been managing the operations of Mega since 2002. Mr. Lindemann managed investments for Lindemann Capital Partners, L.P. from 1996 to 2002. Previously, he was employed in different capacities in the investment services industry. Adam M. Lindemann is the son of George L. Lindemann, Chairman of the Board, President and Chief Executive Officer of Southern Union. Age: 45.

Thomas N. McCarter, III has been a private investor and a general partner in W.P. Miles Timber Properties for over five years. Mr. McCarter is the retired chairman of Stillrock Management, Inc. Mr. McCarter is Chairman of Ramapo Land Company, a director of the Institute of Scientific Investment and Governance (Tokyo, Japan) and serves on the advisory boards of Runnymede Capital Management, Inc. and the Whitehead Institute. Director since 2005. Age: 78.

George Rountree, III has been an attorney in private practice in Wilmington, North Carolina since 1962. He has been a senior partner in the law firm of Rountree, Losee & Baldwin, LLP and its predecessors since 1965. Mr. Rountree has served in both the North Carolina State Senate, including as a minority whip, and the State House of Representatives and as legislative counsel to North Carolina Governor James E. Holshouser, Jr. Mr. Rountree currently serves as Lead Independent Director and as chairman of the Compensation Committee of MMC Energy, Inc. and previously served as a director of Metro Mobile CTS, Inc. In June 2004, Mr. Rountree was inducted into the North Carolina Bar Association General Practice Hall of Fame. Director since 1990. Age: 74.

Al l an D. Scherer has been a private investor in both real estate and oil and gas since 1987. From 1978 to 1987, he was Vice President of the Palm Beach Polo & Country Club, a 2,000-acre real estate and equestrian development in West Palm Beach, Florida. He was a consultant to Gulf & Western Corporation in its development of the Casa de Campo resort in the Dominican Republic from 1973 to 1978, and was President and Chief Executive Officer of privately held McGrath-Shank Company, developers of the Belmont Shore and Alamitos Bay properties in Southern California, from 1955 to 1973. Director since 2005. Age: 76.

Vote Required and Board Recommendation

The ten nominees with the greatest number of affirmative votes duly cast at the Annual Meeting will be elected as directors. Shares represented by executed proxies will be voted, if authority to do so is not withheld, for the election of the ten nominees named above. Abstentions and broker non-votes will have no effect on the election of nominees to the Board of Directors.

Each of the nominees named above was recommended by the Corporate Governance Committee for election to the Board by the stockholders.

All nominees named above have indicated their willingness to serve, if elected; however, if at the time of the Annual Meeting, any nominee is unable or unwilling to serve, shares represented by properly executed proxies will be voted at the discretion of the persons named in those proxies for such other person as the Board may designate. Should no substitute be designated, votes will be cast according to the judgment of George L. Lindemann and Herbert H. Jacobi.

MANAGEMENT DISCUSSION FROM LATEST 10K

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying consolidated financial statements and notes to help provide an understanding of Southern Union’s financial condition, changes in financial condition and results of operations. The following section includes an overview of the Company’s business as well as recent developments that the Company believes are important in understanding its results of operations, and to anticipate future trends in those operations. Subsequent sections include an analysis of the Company’s results of operations on a consolidated basis and on a segment basis for each reportable segment, and information relating to the Company’s liquidity and capital resources, quantitative and qualitative disclosures about market risk and other matters.

The Company’s business purpose is to provide gathering, processing, transportation, storage and distribution of natural gas and NGLs in a safe, efficient and dependable manner. The Company’s reportable business segments are determined based on the way internal managerial reporting presents the results of the Company’s various businesses to its executive management for use in determining the performance of the businesses and in allocating resources to the businesses as well as based on similarities in economic characteristics, products and services, types of customers, methods of distribution and regulatory environment. The Company operates in three reportable segments.

BUSINESS STRATEGY

The Company’s strategy is focused on achieving profitable growth and enhancing stockholder value. The Company seeks to balance its entrepreneurial focus with respect to maximizing cash and capital appreciation return to shareholders with preservation of its investment grade credit ratings. The key elements of its strategy include the following:

•

Expanding through development of the Company’s existing businesses. The Company will continue to pursue growth opportunities through the expansion of its existing asset base, while maintaining its focus on providing safe and reliable service to its customers. In each of its business segments, the Company identifies opportunities for organic growth through incremental volumes and system enhancements to generate operating efficiencies. In its interstate transmission and distribution businesses, the Company seeks rate increases and/or improved rate design as appropriate to achieve a fair return on its investment. See Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations – Liquidity and Capital Resources – Investing Activities for information related to the Company’s principal capital expenditure projects. See Item 8. Financial Statements and Supplementary Data, Note 16 – Regulation and Rates for information related to ratemaking activities.

•

New initiatives. The Company regularly assesses strategies to enhance stockholder value, including diversification of earning sources through strategic acquisitions or joint ventures in the diversified natural gas industry.

•

Disciplined capital expenditures and cost containment programs. The Company will continue to focus on system optimization and cost savings while making prudent capital expenditures across its base of energy infrastructure assets.

RESULTS OF OPERATIONS

Overview

The Company believes that its completed and ongoing expansion of Panhandle’s asset base, its acquisition of Sid Richardson Energy Services on March 1, 2006, its investment in CCE Holdings on November 17, 2004 and the related CCE Holdings redemption transaction with Energy Transfer more fully described below, and the sale of the assets of its PG Energy natural gas distribution division and the Rhode Island operations of its New England Gas Company natural gas distribution division represent significant steps undertaken by the Company in its transformation into a higher return business with significant growth opportunities.

The Company evaluates operational and financial segment performance using several factors, of which the primary financial measure is EBIT, which is a non-GAAP measure. The Company defines EBIT as Net earnings available for common stockholders , adjusted for the following:



•

items that do not impact net earnings from continuing operations, such as extraordinary items, discontinued operations and the impact of changes in accounting principles;


•

income taxes;


•

interest; and


•

dividends on preferred stock.

EBIT may not be comparable to measures used by other companies and should be considered in conjunction with net earnings and other performance measures such as operating income or operating cash flow.

Year ended December 31, 2007 versus the year ended December 31, 2006. The Company’s $164.6 million increase in Net earnings available for common stockholders was primarily due to:



•

Impact of the $153 million loss from discontinued operations in the 2006 period associated with the August 2006 sales of the assets of the Company’s PG Energy natural gas distribution division and the Rhode Island operations of its New England Gas Company natural gas distribution division;


•

Higher EBIT contributions of $28.7 million from the Distribution segment primarily due to higher net operating revenue resulting from the Missouri Gas Energy rate increase effective April 3, 2007 eliminating the impact of weather and conservation for residential margin revenues;


•

Lower interest expense of $6.9 million primarily due to the retirement of debt in 2006 associated with the bridge loan facility entered into to finance the acquisition of the Sid Richardson Energy Services business, partially offset by increased interest expense related to the $600 million Junior Subordinated Notes issued in October 2006 and higher interest expense on Panhandle debt primarily due to higher debt balances; and


•

Lower income tax expense from continuing operations of $14 million primarily due to the lower federal and state effective income tax rate ( EITR ) of 29 percent in the 2007 period versus 33 percent in the 2006 period primarily due to the tax benefit associated with the increase in the dividends received deduction as a result of increased dividends from the Company’s unconsolidated investment in Citrus.

These earnings improvements were partially offset by:



•

Lower EBIT contributions of $26.5 million from the Transportation and Storage segment largely due to the gain on CCE Holdings’ exchange of Transwestern in 2006, partially offset by higher LNG terminalling revenue associated with the Trunkline LNG Phase I and Phase II expansions completed in April 2006 and July 2006, respectively, higher pipeline reservation revenues driven by higher average rates on contracts, higher parking revenues and higher equity earnings from Citrus resulting from the Company’s increased equity ownership in Citrus from 25 percent to 50 percent effective December 1, 2006; and


•

Impact of the pre-acquisition pre-tax mark-to-market gain of $37.2 million in the 2006 period on the put options associated with the acquisition of the Sid Richardson Energy Services business, partially offset by $12.8 million of executive bonus compensation awarded and paid in 2006.

Year ended December 31, 2006 versus the year ended December 31, 2005. The Company’s $43.4 million increase in earnings was primarily attributable to improved earnings from Panhandle largely due to higher LNG terminalling revenue resulting from the LNG terminal enhancement construction projects completed during 2006, the earnings contribution from SUGS, which was acquired on March 1, 2006, and increased equity earnings primarily due to the gain on CCE Holdings’ exchange of Transwestern, partially offset by higher interest expense, most of which was related to debt and debt issuance costs associated with the SUGS acquisition, and losses and taxes associated with the sales of the assets of the Company’s PG Energy natural gas distribution division and the Rhode Island operations of its New England Gas Company natural gas distribution division.

Business Segment Results

Transportation and Storage Segment. The Transportation and Storage segment is primarily engaged in the interstate transportation and storage of natural gas in the Midwest and from the Gulf Coast to Florida, and LNG terminalling and regasification services. Prior to the completion of the Redemption Agreement on December 1, 2006, the Transportation and Storage segment also provided service to the Southwest region through its interests in Transwestern. The Transportation and Storage segment’s operations, now conducted through Panhandle and Florida Gas, are regulated as to rates and other matters by FERC. Demand for gas transmission on Panhandle’s pipeline systems is seasonal, with the highest throughput and a higher portion of annual total operating revenues and EBIT occurring in the traditional winter heating season in the first and fourth calendar quarters. Florida Gas’ pipeline system experiences the highest throughput in the summer period due to gas-fired generation loads in the second and third calendar quarters.

Historically, much of the Transportation and Storage segment’s business was conducted through long-term contracts with customers. Over the past decade, some customers within the segment have shifted to shorter term transportation services contracts. This overall shift, which can increase the volatility of revenues, is primarily due to changes in market conditions and competition with other pipelines, changing supply sources and volatility in natural gas prices. Average reservation revenue rates realized by the Company are dependent on certain factors, including but not limited to rate regulation, customer demand for reserved capacity, capacity sold levels for a given period and, in some cases, utilization of capacity. Commodity revenues, which are more short-term sensitive in nature, are dependent upon a number of variable factors including weather, storage levels, and customer demand for firm, interruptible and parking services. The majority of the Transportation and Storage segment revenues are related to firm capacity reservation charges. For additional information related to Transportation and Storage segment risk factors and the weighted average remaining lives of firm transportation and storage contracts, see Item 1A. Risk Factors – Risks that Relate to the Company’s Transportation and
Storage Segment , and Item 1. Business – Business Segments – Transportation and Storage Segment , respectively.

The Company’s regulated transportation and storage businesses periodically file for changes in their rates, which are subject to approval by FERC. Changes in rates and other tariff provisions resulting from these regulatory proceedings have the potential to negatively impact the Company’s results of operations and financial condition. For information related to the status of current rate filings, see Item 1. Business – Business Segments – Transportation and Storage Segment.

Year ended December 31, 2007 versus the year ended December 31, 2006. The $26.5 million EBIT reduction in the year ended December 31, 2007 versus the same period in 2006 was primarily due to lower equity earnings from unconsolidated investments of $42.1 million, now primarily consisting of the Company’s investment in Citrus, offset by improved contributions from Panhandle totaling $15.6 million.

MANAGEMENT DISCUSSION FOR LATEST QUARTER

This Management’s Discussion and Analysis of Financial Condition and Results of Operations is provided as a supplement to the accompanying unaudited interim condensed consolidated financial statements and notes to help provide an understanding of Southern Union’s financial condition, changes in financial condition and results of operations. The following section includes an overview of the Company’s business as well as recent developments that management of the Company believes are important in understanding its results of operations, and to anticipate future trends in those operations. Subsequent sections include an analysis of the Company’s results of operations on a consolidated basis and on a segment basis for each reportable segment, and information relating to the Company’s liquidity and capital resources, quantitative and qualitative disclosures about market risk and other matters.

OVERVIEW

The Company’s business purpose is to provide gathering, processing, transportation, storage and distribution of natural gas and NGL in a safe, efficient and dependable manner. The Company’s reportable business segments are determined based on the way internal managerial reporting presents the results of the Company’s various businesses to its executive management for use in determining the performance of the businesses and in allocating resources to the businesses as well as based on similarities in economic characteristics, products and services, types of customers, methods of distribution and regulatory environment. The Company operates in three reportable segments: Transportation and Storage, Gathering and Processing, and Distribution.

RESULTS OF OPERATIONS

Overview

The Company evaluates operational and financial segment performance using several factors, of which the primary financial measure is EBIT, which is a non-GAAP measure. The Company defines EBIT as Net earnings available for common stockholders , adjusted for the following:

•

items that do not impact net earnings, such as extraordinary items, discontinued operations and the impact of changes in accounting principles;
•

income taxes;
•

interest;
•

dividends on preferred stock; and
•

loss on extinguishment of preferred stock.

EBIT may not be comparable to measures used by other companies and should be considered in conjunction with net earnings and other performance measures such as operating income or net cash flows provided by operating activities.

Three-month period ended September 30, 2008 versus the three-month period ended September 30, 2007. The Company’s $1.5 million increase in Net earnings available for common stockholders in the three-month period ended September 30, 2008 versus the same period in 2007 was primarily due to:

•

Higher EBIT contributions of $6.9 million from the Gathering and Processing segment primarily due to higher market-driven realized average natural gas and NGL prices in 2008 and the impact of $1.5 million of net hedging gains in 2008 versus 2007, partially offset by reduced natural gas and NGL sales in September 2008 when the Company was forced to shut in its natural gas processing plants and attendant production because of damage by Hurricane Ike to the Company’s third-party NGL fractionator, the establishment of a $2.7 million bad debt reserve for receivables associated with a company that filed for bankruptcy protection and a $1.4 million charge related to settlement of the GP II Energy litigation;
•

Lower income tax expense of $4.2 million primarily due to the EITR of 30 percent in the 2008 period versus 35 percent in the 2007 period primarily due to the impact of state income tax rate changes resulting in higher state income tax rates in the 2007 period, partially offset by a decrease in the tax benefit associated with the dividends received deduction as a result of lower estimated dividends from the Company’s unconsolidated investment in Citrus;
•

Lower EBIT contributions of $5.6 million from the Distribution segment primarily due to $2.7 million of higher operating expenses primarily attributable to higher injuries and damage litigation claims and higher provisions for uncollectible customer accounts and lower net revenues of $1.8 million primarily due to lower market-driven pipeline capacity release and off-system sales in the 2008 period versus the 2007 period;
•

Higher interest expense of $2.5 million primarily due to higher outstanding long-term debt balances in the 2008 period versus the 2007 period, partially offset by lower interest expense resulting from the effect of lower LIBOR-based interest rates on the Company’s variable interest rate debt and lower outstanding balances associated with the Company’s credit facilities in the 2008 period versus the 2007 period; and
•

Lower EBIT contributions of $1 million from the Transportation and Storage segment primarily due to a $2.1 million decrease in equity earnings from the Company’s unconsolidated investment in Citrus primarily due to its higher operating expenses, partially offset by a higher EBIT contribution of $1.1 million from Panhandle primarily attributable to higher transportation reservation revenues, partially offset by higher operating expenses.

Nine-month period ended September 30, 2008 versus the nine-month period ended September 30, 2007. The Company’s $3.4 million decrease in Net earnings available for common stockholders in the nine-month period ended September 30, 2008 versus the same period in 2007 was primarily due to:

•

Lower EBIT contributions of $12.4 million from the Distribution segment primarily due to higher operating expenses of $9.9 million primarily attributable to higher environmental remediation and benefit costs and higher provisions for uncollectible customer accounts and lower net revenues of $2 million primarily due to lower market-driven pipeline capacity release and off-system sales in the 2008 period versus the 2007 period;
•

Lower EBIT contributions of $8.1 million from the Transportation and Storage segment primarily due to lower equity earnings of $20.8 million primarily resulting from $18.7 million of nonrecurring gains in the 2007 period resulting from the sale of bankruptcy-related receivables and from the settlement of litigation, partially offset by higher EBIT contributions of $12.7 million in 2008 from Panhandle primarily attributable to higher transportation reservation revenues, partially offset by higher operating expenses;
•

Higher income tax expense of $6.5 million primarily due to the EITR of 30 percent in the 2008 period versus 28 percent in the 2007 period resulting from the decrease in the tax benefit associated with the reduction in the dividends received deduction as a result of lower estimated dividends from the Company’s unconsolidated investment in Citrus, partially offset by higher state income tax expense in 2007 attributable to an increase in state income tax rates; and
•

Higher EBIT contributions of $26.1 million from the Gathering and Processing segment primarily due to higher market-driven realized average natural gas and NGL prices in 2008 and lower fuel, flare and unaccounted for natural gas volumes in the 2008 period versus the 2007 period, partially offset by the impact of $24.5 million of higher net hedging losses in the 2008 period versus the 2007 period, reduced natural gas and NGL sales in September 2008 when the Company was forced to shut in its natural gas processing plants and attendant production because of damage by Hurricane Ike to the Company’s third-party NGL fractionator, the establishment of a $2.7 million bad debt reserve for receivables associated with a company that filed for bankruptcy protection and a $1.4 million charge related to settlement of the GP II Energy litigation.

Business Segment Results

Transportation and Storage Segment. The Transportation and Storage segment is primarily engaged in the interstate transportation and storage of natural gas in the Midwest and from the Gulf Coast to Florida, and LNG terminalling and regasification services. The Transportation and Storage segment’s operations, conducted through Panhandle and Florida Gas, are regulated as to rates and other matters by FERC. Demand for gas transmission on Panhandle’s pipeline systems is seasonal, with the highest throughput and a higher portion of annual total operating revenues and EBIT occurring in the traditional winter heating season in the first and fourth calendar quarters. Florida Gas’ pipeline system experiences the highest throughput in the summer period due to gas-fired generation loads in the second and third calendar quarters.

Historically, much of the Transportation and Storage segment’s business was conducted through long-term contracts with customers. Over the past several years, some customers within the segment have shifted to shorter term transportation services contracts. This shift, which can increase the volatility of revenues, is primarily due to changes in market conditions and competition with other pipelines, new supply sources, changing supply sources and volatility in natural gas prices. Average reservation revenue rates realized by the Transportation and Storage segment are dependent on certain factors, including but not limited to rate regulation, customer demand for reserved capacity, capacity sold levels for a given period and, in some cases, utilization of capacity. Commodity revenues are also dependent upon a number of variable factors including weather, storage levels, and customer demand for firm, interruptible and parking services. The majority of the Transportation and Storage segment revenues are related to firm capacity reservation charges.

The Company’s regulated transportation and storage businesses periodically file for changes in their rates, which are subject to approval by FERC. Changes in rates and other tariff provisions resulting from these regulatory proceedings have the potential to impact negatively the Company’s results of operations and financial condition.

Three-month period ended September 30, 2008 versus the three-month period ended September 30, 2007. The $1 million EBIT reduction in the three-month period ended September 30, 2008 versus the same period in 2007 was primarily due to lower 2008 equity earnings of $2.1 million offset by a higher 2008 EBIT contribution from Panhandle totaling $1.1 million.

Nine-month period ended September 30, 2008 versus the nine-month period ended September 30, 2007. The $8.1 million EBIT reduction in the nine-month period ended September 30, 2008 versus the same period in 2007 was primarily due to lower 2008 equity earnings of $20.8 million offset by a higher 2008 EBIT contribution from Panhandle totaling $12.7 million.

CONF CALL

John F. Walsh - Director of Investor Relations

Thank you, operator and welcome to Southern Union's third quarter 2008 earnings call and webcast. Presenting on today's call will be George Lindemann, Chairman and CEO; Eric Herschmann, President and COO; Rick Marshall, Senior Vice-President and CFO; Rob Bond, Senior Vice President of our pipeline operations, and Roger Farrell, Senior Vice President of our midstream operations.

A replay of this call will be available for one week by dialing 888-286-8010 and entering passcode 97925208. A replay of the webcast will be accessible through our website at www.sug.com.

Today, we will be discussing results for the third quarter of 2008, significant events and outlook. This morning we issued a press release announcing our third quarter results which is available on our website. Following our presentation, we will be happy to address your questions. If you have any further questions at the end of the call, please contact me directly at 212-659-3208.

Before beginning, I would like to remind everyone that the information discussed on today's call pertains to the financial result of Southern Union Company. Certain amounts and variance explanations for the transportation and storage segment may vary compared to Panhandle Eastern Pipeline Company's standalone financial statements due to consolidating adjustments.

I would also like to caution you that many of the statements contained in our call may be based on management's current expectations, estimates and projections about the industry in which the company operates. These statements are not guarantees of future performance and involve risks. The company undertakes no obligation to update publicly any forward-looking statements as a result of new information, future events or otherwise. Such statements are intended to be covered by the Safe Harbor provisions of the Securities Act of 1933 and the Securities Exchange Act of 1934.

I would also refer you to the cautionary statement regarding forward-looking information in our earnings release.

I'll now like to turn the call over to Mr. George Lindemann. Mr. Lindemann?

George L. Lindemann - Chairman and Chief Executive Officer

Good morning. I'm pleased to report adjusted earnings for the third quarter of $0.29 per share. This amount reflects the negative impact of hurricanes Gustav and Ike which is approximately $0.11 per share.

Adjusted earnings per share before the impact of the hurricanes would have been $0.40 per share. Prior to the hurricanes, we were on track to exceed our previously stated adjusted earnings guidance of $1.80 to $1.90 per share. We now expect to come in at the low end of our range.

In addition to the hurricanes, the past several months have witnessed great volatility in the financial and commodity markets. The credit market, which our industry has been dependent on for many years, has also seen major turmoil.

As it relates to the overall liquidity of our company, I would like to emphasize that we do not have any significant short-term capital requirements and believe we have ample liquidity available to cover our near-term needs. Rick Marshall will discuss liquidity in greater detail in a few minutes.

Finally, I would like to welcome Roger Farrell to his first investment call as our new Senior Vice President of Midstream Operations. When we have completed our prepared remarks, we will address your questions.

I would like to turn the call over and out to Eric Herschmann to comment on the quarter. Eric?

Eric D. Herschmann - President and Chief Operating Officer

Thank you, George and good morning. We are pleased that in today's volatile markets, over 80% of our consolidated EBITDA comes from stable regulated businesses with minimal direct exposure to commodity prices. These businesses primarily include interstate pipelines, storage and LNG terminalling with long-term contracts.

The stability in earnings and cash flows helps our company maintain a relatively low risk profile while at the same time providing ample growth opportunities, including our Florida Gas transmission Phase VIII expansion which is on schedule and on budget.

Even though we're experiencing extreme volatility in today's markets, we believe that the fundamentals of the natural gas industry remain sound. As natural gas continues to be the fuel of choice for America, we believe our company is well positioned to create... to grow and create long-term value for our shareholders.

With that, I would now like to turn the call over to Rick Marshall, our CFO to give an overview of our results. Rick?

Richard N. Marshall - Senior Vice President and Chief Financial Officer

Thank you, Eric and good morning. For the quarter ended September 30, 2008, Southern Union reported adjusted EBIT of $106 million compared with EBIT of $120 million in the prior year. The decrease is due to the impacts of hurricanes Gustav and Ike during September. We estimate that the hurricanes negatively impacted EBIT by approximately $22 million during the quarter.

References to adjusted EBIT exclude the impact of select items. Select items for the third quarter of 2008 include a non-cash $14 million gain related to mark-to-market accounting on open commodity derivatives.

For the nine months ended September 30th, adjusted EBIT was $408 million compared with adjusted EBIT of $385 million in the prior year. Again, we estimate that the hurricanes negatively impacted EBIT by approximately $22 million during the year-to-date period.

Select items in the current period include a mark-to-market loss on open commodity derivatives of $5 million. Select items in the prior period include a $14 million gain related to the settlement of litigations at Citrus Corp.

For the quarter, adjusted net earnings were $36 million or $0.29 per share. This compares to net earnings of $41 million or $0.34 per share in 2007. For the nine months period, adjusted net earnings were $166 million or $1.34 per share compared with adjusted net earnings of $152 million or $1.26 per share in the prior period.

As George mentioned earlier, we estimate that the hurricanes impacted both the quarter and nine months periods by approximately $0.11 per share. Our earnings release issued this morning sets forth the selected items used in calculating adjusted net earnings. In accordance with Reg G, the release also contains a reconciliation of EBIT to adjusted EBIT as well as EBIT to net earnings.

In terms of segment results, transportation and storage, including our investment in Citrus, had EBIT of $89 million for the quarter compared with EBIT of $90 million during the same quarter last year. The current quarter's results include expenses of $10 million for the expected cost to repair damages to our offshore systems as a result of the hurricanes. The results also include approximately $1 million of lower revenues as a result of reduced volumes following the hurricanes.

Panhandle's operating revenue increase by $14 million in the quarter, largely due to the inclusion of the Trunkline Field Zone which went into service earlier this year. Operating expenses, including expenses associated with the hurricanes, were up $9 million in the quarter.

Depreciation expense increased $4 million in the quarter due to an increase in property, plant and equipment.

Our gathering and processing segment generated $13 million in adjusted EBIT for the quarter compared with EBIT of $20 million in the same period last year. The decrease was driven by the unavailability of third-party fractionation capacity at Mont Belvieu following hurricane Ike.

We estimate the hurricane negatively impacted gross margin by approximately $11 million in the quarter. Unusual items during the quarter also included a $3 million bad debt reserve for a customer that filed bankruptcy, plus a $1 million provision for the settlement of litigation.

Our distribution business generated EBIT of $4 million for the quarter compared with $9 million in the prior year. The $5 million decrease is primarily a result of increased operating expenses and lower net operating revenue. Notwithstanding the year-over-year results, this segment continues to remain on budget, and we expect it to meet its full year targets.

During the quarter, we invested approximately $112 million in our operations; growth capital accounted for $70 million and maintenance capital was $42 million. Broken down by segment, our transportation and storage segment invested $75 million, $52 million for growth and $23 million for maintenance.

Our gathering and processing segment invested $19 million, $10 million for growth and $9 million for maintenance. At our distribution segment, we invested a total of $12 million, $2 million for growth and $10 million for maintenance. Our corporate and other segment invested $6 million for growth capital.

Southern Union does not have any refinancing obligations due until the third quarter of 2009. From a liquidity standpoint, we have approximately $160 million available under our $400 million revolving credit facility, which is a fully committed facility that matures in May of 2010. Based upon our currently anticipated cash needs, we expect borrowings under this facility to be relatively flat through the remainder of 2008 and to decrease slightly during the first six months of 2009.

During the third quarter of 2009 or earlier, if market conditions provide a favorable opportunity, the company will refinance or repay the obligations coming due in 2009 with cash flows from operations, borrowings under our revolving credit facility or proceeds from bank or debt capital market transactions.

Specifically, obligations coming due in 2009 include $61 million of debt maturing at Panhandle Eastern Pipeline Company and a $150 million short-term bank loan at Southern Union.

As we work towards finalizing our 2009 budget, you can be assured that our focus will be on managing both operating expenses and capital projects so they fit within our cash flow generation capability.

Citrus Corp., our joint venture with El Paso and the owner of Florida Gas Transmission will need to access the debt capital markets sometime during the second half of 2009 to fund the ongoing Phase VIII expansion. The exact timing and amount of the offering is yet to be determined and will be based on cash flow needs as the project progresses.

Since the project is secured by 25 year contracts with high quality counterparties, we are confident in our ability to finance the project.

We will closely monitor the markets throughout next year and may opportunistically pre-fund part of the capital, if market conditions provide a favorable opportunity.

I'll now turn the call over to Rob Bond who will discuss our transportation and storage segment.

Robert O. Bond - Senior Vice President, Pipeline Operations and President & Chief Operating Officer-Panhandle Energy & CrossCountry Energy

Thank you, Rick and good morning. Following the impacts of the hurricanes which Rick just described, the third quarter was a solid quarter for our transportation and storage businesses, both operationally and financially.

At this point, I'd like to spend a few minutes, updating you on the key growth projects that are currently underway.

At Trunkline LNG, our infrastructure enhancement project continues to progress with the second quarter of 2009 in-service date. Because of the delays associated with the two hurricanes, we now expect the project to come online towards the end of the second quarter. The estimated cost of this project, which is fully contracted to BG LNG Services for 20 years, is now approximately $400 million, excluding capitalized interest.

The increase in costs compared with our prior estimate of $365 million, is due to higher labor costs, including the reduced productivity as a result of the hurricanes, as well as generally higher material costs. Because of our negotiated rate is based on the formula of capital invested, we now expect the project to generate EBIT of $55 million to $60 million and EBITDA of $65 million to $70 million on an annual basis.

Our other major project underway is the Florida Gas Transmission Phase VIII project. As you know, we have a 50% interest in service operator of Florida Gas Transmission through our investment in Citrus Corp. The Phase VIII project is designed to add approximately 820 million cubic feet of incremental delivery capacity into Florida through the addition of 500 miles of pipe and over 200,000 horsepower of compression.

We remain currently contracted for approximately 90% of the capacity under 25 year agreement. We estimate the project will cost approximately $2.4 billion and generate operating income of $240 million to $260 million and EBITDA of $290 million to $310 million when fully contracted.

At this point, we've locked in the cost of our pipes, ordered our compression, begun procuring valves, regulators and other necessary equipment, and lastly, have finalized the commercial terms with our pipeline contractors.

With that, I'd like to turn the call over to Roger. Roger?

Roger A. Farrell - Senior Vice President, Midstream Operations and President and Chief Operating Officer, Southern Union Gas Services

Thank you, Rob and good morning everyone. Up until hurricane Ike hit on September 11, the third quarter was shaping up as a very good quarter for us. The hurricane did not damage our system. However, it did cause damage and power outages in Mont Belvieu, Texas where we fractionate our natural gas liquids. Because much of the gas in our system is higher BTU gas and must be processed to meet pipeline quality standards, we ended up being shut in for approximately one week and then operated only 30% capacity through the end of the month. As Rick Mentioned earlier, we believe this cost us approximately $11 million of gross margin during the quarter.

As of October 1, we were back to pre-hurricane production levels. On October 10, our third-party fractionator went down from a previously scheduled 30-day turnaround. During this turnaround, we have been fractionating approximately one-third of our NGL production at another facility while storing the remaining two-thirds at Mont Belvieu.

The NGLs in storage will begin to be fractionated and sold once the turnaround is completed in the next week or so. At this point, we do expect that there will be some level of NGLs in storage at year end which will not be sold until the first quarter of 2009.

Prior to the hurricane on September 11, our equity volumes for the first two months of the quarter averaged approximately 43,000 MMBtu per day of natural gas liquids and 6,000 MMBtu per day of residue gas. As you will recall, our equity volume guidance for 2008 was for 40,000 to 45,000 MMBtu per day of natural gas liquids.

As it relates to our hedging program for the last quarter of 2008, we continue to be hedged on 30,000 MMBtu per day at a realized price of $15.02. We achieved this price through a combination of put options and swap contracts on natural gas and processing spreads. Also for the balance of 2008, we have entered into additional processing spread swaps on 10,000 MMBtu per day at $7.10.

To calculate the impact from our gross margin related to the additional 10,000 MMBtu per day swap, you have to remember to add in the then current natural gas price to the $7.10 processing spread swap to arrive the total value we are realizing from the sale of our product.

For 2009, we are hedged on 20,000 MMBtu per day at a realized price of $16.40. Again, this was done through a combination of swap contracts of natural gas and processing spreads.

We've also entered into an additional processing spread hedge on 10,000 MMBtu per day at $8.37. Again, you need to add in the then current natural gas price to arrive at our total net price.

I'd now like to turn the call back over to George.

George L. Lindemann - Chairman and Chief Executive Officer

Thank you, Roger. At this point, we would like to open the meeting up to questions.

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