Southern Union Company (SUG) reported adjusted earnings per share of 44 cents in the first quarter of 2010, compared with 56 cents in the first quarter of 2009. The results of the company fell 8 cents short of the Zacks Consensus expectation of 52 cents per share.
The adjusted net income during the first quarter 2010 was $55.2 million versus the reported net income of $54.3 million. The results differed due to a mark-to-market (MTM) gain of $6.9 million recorded in the prior accounting period, changes in the tax treatment for Medical Part D subsidies of $4.2 million and a MTM loss of $3.6 million on opening hedges.
Total Revenue
Total revenue at Southern Union in the first quarter 2010 was better than the revenue generated in the comparable year-ago quarter. In the first quarter of 2010 total revenue was $758.9 million, versus $683.8 million in the first quarter 2009.
The year-over-year growth in total revenue was mainly driven by the better performance of the Gathering and Processing segment, which was partially offset by lower results from the Transportation and Storage and Distribution segments.
Segmental Revenue
Gathering and Processing segment revenue during the first quarter 2010 was $260.8 million versus $168.3 million in the first quarter of 2009. The year-over-year growth was mainly due to higher realized average natural gas and natural gas liquids (NGL) prices.
The Transportation and Storage segment saw a yearly decline in revenue. Total revenue from the segment was $186.7 million versus $192.3 million in the first quarter of 2009. Revenue dipped at the segment because of lower interruptible parking revenues due to less favorable market conditions.
Distribution segment revenue decreased $13.8 million to $308.2 million in the reported quarter from $322.0 million in the first quarter of 2009.
Finally, revenue from Corporate and Other Activities was $3.2 million versus $1.2 million in the first quarter of 2009.
Operational Update
Total operating expenses of Southern Union in the first quarter 2010 were higher compared with the expenses incurred in the first quarter 2009. Operating expenses shot up because of higher market-driven natural gas and NGL purchase costs.
Earnings before interest and taxes (EBIT) of Southern Union were $137.8 million in the first quarter of 2010 versus $113.4 million in the year-ago quarter. The year-over-year improvement in EBIT was due to the higher contribution from Transportation and Storage as well as Gathering and Processing segments.
Total interest expenses of Southern Union increased by $2.5 million to $50.4 million in the first quarter 2010 from $48.4 million in the first quarter 2009. The increase in interest expenses was due to a higher outstanding debt balance, partially offset by lower interest expenses resulting from the repayment of debts.
The income tax paid by Southern Union during the first quarter 2010 was $11.2 million higher than the tax paid in the year-ago comparable quarter. The increase in tax payment was mainly due to higher income tax earnings and elimination of the Medicare Part D tax subsidy in the Patient Protection and Affordable Care Act signed into law in March 2010.
Financial Condition
Cash and cash equivalents at quarter end was $3.6 million versus $5.5 million at the end of first quarter 2009.
Southern Union ended the quarter with total debts of $3.47 billion compared with $3.56 billion in the first quarter 2009. Southern Union repaid a debt of $100 million in February 2010.
Project Update
During the reported quarter, Southern Union completed the construction of the Trunkline LNG Infrastructure Enhancement Project. The cost of the project was approximately $430 million, excluding the capitalized interest. The project is likely to generate operating income of $55 to $60 million per year.
Guidance
Southern Union reaffirmed its earnings expectation for 2010, despite the shortfall in the first quarter results. Southern Union expects reported earnings per share, in 2010, to be in the range of $1.92 to $2.12 and adjusted earnings per share to be in the range of $1.75 to $1.95.
Southern Union expects the effective income tax rate to be 30% for the remainder of 2010 and average approximately 32% for the 2010 fiscal year.
Our View
We currently hold a Neutral view on the stock, as Southern Union’s performance was below expectations during the reported quarter.
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