Southern Union CompanySUG

Morningstar Rating

Stock Research and Analysis

by Avi Feinberg

For a company that has refocused its business strategy and shuffled its asset base repeatedly over its 80-year existence, Southern Union appears to be concentrating growth efforts shrewdly of late. We think a relative increase in spending in the high-margin Read more

Bulls Say

With a larger ownership in Florida Gas and plans to expand further via large-scale internal growth projects, Southern Union is poised to capture potentially huge natural gas demand growth in Florida.

With a number of assets that could eventually be spun off into an MLP, the company could raise significant capital over time, control the development of the assets, and be paid incentive distribution rights on any income.

If a natural gas supply glut emerges from unconventional shale plays in the central United States, Southern Union could capitalize on bringing this gas both directly and indirectly to market in Florida and the Northeast.

Southern Union's long-term contracts and FERC-protected assets promote stable cash flows over the long run.

As domestic natural gas supplies decline over the long term and foreign exporters bring additional liquefaction facilities on line, Trunkline LNG should benefit from a boost in utilization. Read more

Bears Say

As a C corporation rather than an MLP, Southern Union faces the major competitive disadvantage of paying income taxes. This makes the company less competitive when bidding for natural gas volume or acquisitions, as MLP peers can bid for the same assets with a significantly lower effective cost of capital.

Already highly leveraged, Southern Union has little room to raise growth capital if it cannot meet the need with free cash flow--especially with tight credit markets.

With the Permian basin in decline, the sustainability of SUGS' gathering and processing volume is in question. Southern Union's gathering and processing business add commodity price risk and face the reality of declining production in the Permian basin, which could make future earnings less stable.

Given the challenging market, it's unclear what types of growth projects Southern Union will be able to take on in the future, and persistently poor market conditions have precluded any hopes for a SUGS MLP spin-off for now.

With a mishmash of gathering and processing assets, storage facilities, and distribution companies--plus a history of identity makeovers--Southern Union may lack the focus it needs to maximize profitability. Read more

Strategy

Southern Union continues to bet on growing natural gas demand in Florida with huge internal growth plans--a smart move, in our opinion. The company plans to spin off some of its gathering and processing Read more

Management

George Lindemann heads Southern Union as CEO and chairman of the board, though we'd prefer he held only one of the positions. While Lindemann's salary falls within industry norms, we'd like to see more use of restricted stock and fewer option grants Read more

Profile

Southern Union operates an array of regulated and unregulated assets divided into the transportation and storage, gathering and processing, and distribution segments. The Read more

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