Southern Union owns and operates assets in the natural gas industry and is primarily engaged in the gathering, processing, transportation, storage and distribution of natural gas in the United States. It has three main segments: Transportation and Storage, Gathering and Processing, and Distribution.
The first segment is in the interstate transportation and storage of natural gas and also provides LNG terminalling and regasification services. Its operations are conducted through Panhandle and its 50 percent equity ownership interest in Florida Gas through Citrus. The Gathering and Processing segment is in the gathering, treating, processing and redelivery of natural gas and NGL in Texas and New Mexico. And the Distribution segment is the local of distribution of natural gas in Missouri and Massachusetts. Its operations are conducted through the Company’s operating divisions: Missouri Gas Energy and New England Gas Company. For these 03 segments, the segment of transportation and storage contributes the more than 80% the total operating earnings for SUG.
In terms of customers, Transportation and Storage got very concentrated on customers with long-term contracts with both Florida Gas and Panhandle. The contracts with those significant customers are at least 10 years or above, with the concentration for two customers of Panhandle and two customers of Florida Gas 42% and 53% respectively.
Over time, the firm has improved its profitability extremely well. Gross margin fluctuated widely from 2001 to 2004 then stay at 40-50% during the last six years. Operating margin has increased then fluctuated at 15-18%, and the net margin on the rising trend, staying at 8-9% currently, whereas the return on equity is fluctuating quite a lot, and hovering around 8-11% for the past 04 years, mainly due to the impact of the change in net margin and the level of financial leverage.
With the industry in which the company is operating — transportation, storage and distribution of gas — we can expect the company to spend quite a lot of money for operating and maintenance. That is why SUG has to keep growing the amount of money for that purpose, reducing the level of free cash flow to its share holders.
|Operating Cash Flow||-135||274||56||341||219||459||470||487||579||425|
|Free Cash Flow||-259||180||-24||115||-61||111||-146||-102||160||132|
The good thing here is the operating cash flow is positive for the last nine years. The negative operating cash flow is mainly due to the high increase in account receivables, deferred gas purchase costs and the inventories. The free cash flow is normally negative due to the capital spending for maintenance, and if there are any hurricanes, the offshore transportation facilities including platforms and pipelines would be damaged and has to be replaced. For financial health, the firm is quite leveraged, with ratio of Debt/Assets at 68%, whereas the long-term debt is already nearly 38%. However, with the stable in operating cash flow, the level of leverage right now does not seem to be overstretched for SUG’s operation.
Recently, Williams (NYSE:WMB) has affirmed its keen interest in SUG by offering $44/share on cash basis to SUG’s shareholders. That represents premium of 4% over the implied value of the agreement with Energy Transfer Equity, and seemed to be more advantageous as Energy Transfer Equity’s offer is the cash and stock basis. With the P/CF of 9.8 (industry at 10.1), the price can be considered generally compatible with the market averages. The acquisition, if completed would pump up the level of earnings and cash flows for Williams, and it be considered the strategic for WMB with the long term contracts that SUG currently owns. That further promotes the level of cash flow’s stability for the company.
This is the subjective viewpoint of the author, and it is not the recommendation to buy, hold or sell the stocks mentioned in this analysis. Anyone who wishes to buy, hold or sell the stocks has to do his/her own analysis at his/her own risks.