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.

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.

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.

The following table provides a reconciliation of EBIT (by segment) to Net earnings available for common stockholders.

                                                   Three Months Ended
                                                        March 31,
                                                      2009          2008
                                                     (In thousands)
EBIT:
Transportation and storage segment (1)           $  93,222     $ 114,100
Gathering and processing segment                   (11,433 )      28,556
Distribution segment (1)                            31,638        28,482
Corporate and other (1)                                815          (516 )
Total EBIT                                         114,242       170,622
Interest                                            48,370        50,701
Earnings before income taxes                        65,872       119,921
Federal and state income tax expense                19,615        37,013
Net earnings                                        46,257        82,908
Preferred stock dividends                            2,171         4,341

Net earnings available for common stockholders   $  44,086     $  78,567

For comparability between reporting periods purposes, the 2008 period has been recast as indicated below to (i) exclude the management and royalty fee charged to the Transportation and Storage segment and (ii) include the corporate administrative services allocation to the Distribution segment.

                                                                    Three Months Ended March 31, 2008
                                                                              Recast Adjustments
Segment                                              EBIT as Reported        Increase (Decrease)       Recast EBIT
                                                                                (In thousands)

Transportation and Storage                            $        109,381        $             4,719      $    114,100
Distribution                                                    30,301                     (1,819 )          28,482
Corporate and Other                                              2,384                     (2,900 )            (516 )

· Lower EBIT contributions of $40 million from the Gathering and Processing segment primarily due to lower operating revenues of $233.4 million, largely attributable to lower market driven realized average natural gas and NGL prices and the impact of $13.9 million of higher net hedging losses, partially offset by lower market driven natural gas and NGL purchase costs of $206.8 million in the 2009 period versus the 2008 period;

· Lower EBIT contributions of $20.9 million from the Transportation and Storage segment primarily due to higher operating expenses of $22.2 million attributable to a net increase in the provision for repair and abandonment costs of $16.1 million in 2009 related to offshore assets damaged by Hurricane Ike, higher contract storage costs of $2 million, a $1.3 million charge for a lower of cost or market system gas inventory adjustment in 2009 and a $1.2 million increase in LNG power costs resulting from actual costs recovered in rates through the power reimbursement mechanism, and higher depreciation and amortization expense of $2.8 million primarily due to increases in plant, property, and equipment, partially offset by higher operating revenues of $5.2 million attributable to higher transportation and storage revenues of $3.7 million and higher LNG terminalling revenues of $2.2 million;

These reductions to earnings were partially offset by:

· Impact of $3.5 million and $1.9 million of income in 2009 recorded in the Distribution and Corporate and other segments, respectively, related to a settlement agreement with an insurance company that released it from certain potential future environmental claim obligations;

· Lower interest expense of $2.3 million primarily attributable to lower interest expense of $3.6 million due to lower LIBOR interest rates associated with the Company's variable rate debt, partially offset by higher net interest expense of $1.5 million due to higher net debt balances outstanding on fixed-rate debt obligations;

· Lower preferred stock dividends of $2.2 million due to the Company's repurchase in 2008 of 459,999 shares of its 7.55% Noncumulative Preferred Stock, Series A shares; and

· Lower federal and state income tax expense of $17.4 million primarily due to lower pre-tax earnings of $54 million and the impact of the reduced EITR attributable to a lower state income tax expense (net of the federal income tax benefit) of $1.7 million and an increase in the tax benefit (relative to pre-tax earnings) associated with the dividends received deduction from the Company's unconsolidated investment in Citrus.

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 natural 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.

The Company's business within the Transportation and Storage segment is conducted through both short- and long-term contracts with customers. Shorter-term contracts, which can increase the volatility of revenues, are driven by changes in market conditions and competition with other pipelines, changing supply sources and volatility in natural gas prices. Since the majority of the revenues within the Transportation and Storage segment are related to firm capacity reservation charges, changes in commodity prices and volumes transported do not have as significant an impact on revenues over the short-term. However, longer-term demand for capacity may be affected by changes in commodity prices and volumes transported. Over the past several years, the weighted average life of contracts has actually trended somewhat higher as customers have exhibited an increased focus in securing longer-term supply and related transport capacity from the supply and market areas served by the Company.

The Company's regulated transportation and storage businesses periodically file (or can be required to 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.

                                                           Three Months Ended
                                                                March 31,
Transportation and Storage Segment                         2009          2008
                                                             (In thousands)

Operating revenues                                       $ 192,295     $ 187,051

Operating expenses                                          78,194        55,973
Depreciation and amortization                               27,863        25,061
Taxes other than on income and revenues                      8,925         8,649
Total operating income                                      77,313        97,368
Earnings from unconsolidated investments                    15,784        16,242
Other income, net                                              125           490
EBIT                                                     $  93,222     $ 114,100

Operating information:
Panhandle natural gas volumes transported (TBtu)               427           401
Florida Gas natural gas volumes transported (TBtu) (1)         187           173

Three-month period ended March 31, 2009 versus the three-month period ended March 31, 2008. The $20.9 million EBIT reduction in the three-month period ended March 31, 2009 versus the same period in 2008 was primarily due to a lower EBIT contribution from Panhandle totaling $20.4 million and lower equity earnings of $500,000, principally from the Company's unconsolidated investment in Citrus.

Panhandle's $20.4 million EBIT reduction was primarily due to:

· Higher operating revenues of $5.2 million primarily attributable to:

o Higher parking revenues of $5 million resulting from customer demand for parking services and market conditions;

o Higher transportation reservation revenues of $2.2 million primarily due to an increase of approximately $4.4 million attributable to the completion of the primary portion of the Trunkline Field Zone Expansion project during the period December 2007 to February 2008 and a smaller second phase completed in November 2008, partially offset by the impact of approximately $1.2 million of additional revenues in the 2008 period attributable to the extra day in the 2008 leap year;

o Lower transportation commodity revenues of $3.4 million primarily due to reduced volumes flowing after Hurricane Ike; and

o A $2.2 million increase in LNG terminalling revenue primarily due to $1.2 million associated with a change in the reimbursement mechanism in the fourth quarter of 2008 that allows the Company to recover actual monthly LNG power costs from the customer and approximately $1 million of higher reservation revenues attributable to a one-time annual rate increase associated with certain capacity effective January 1, 2009.

· Higher operating expenses of $22.2 million primarily attributable to:

o A net increase in the provision for repair and abandonment costs of $16.1 million in 2009 for damages to offshore assets resulting from Hurricane Ike, which is generally expected to be recovered in the future through insurance recoveries and new rate proceedings;

o A $2 million increase in contract storage costs resulting from an increase in leased storage capacity;

o A charge of $1.3 million in 2009 to record a lower of cost or market adjustment for system gas owned by the Company; and

o A $1.2 million increase in LNG power costs resulting from actual costs recovered in rates through the power reimbursement mechanism; and

· Increased depreciation and amortization expense of $2.8 million due to a $222 million increase in property, plant and equipment placed in service after March 31, 2008. Depreciation and amortization expense is expected to continue to increase primarily due to higher capital spending, primarily from the LNG terminal infrastructure enhancement construction project.

See Part I. Item 1. Financial Statements (Unaudited), Note 10 - Commitments and Contingencies - Other Commitments and Contingencies - 2008 Hurricane Damage for additional information related to the 2009 increases in the repair and abandonment provisions and insurance recovery resulting from hurricane damage.

Equity earnings, primarily attributable to the Company's unconsolidated investment in Citrus, were lower by $500,000 in 2009 versus 2008 primarily due to the following items, adjusted where applicable to reflect the Company's proportional equity share:

· Higher debt interest cost of $2.9 million primarily due to interest on a $500 million construction and term loan agreement issued in February 2008, partially offset by lower average outstanding revolver debt balances;

· Higher depreciation expense of $600,000 primarily due to increased plant, property, and equipment placed in service;

· Higher operating expenses of $600,000 primarily due to higher overall costs experienced in 2009 applicable to employee labor and benefits, legal services costs, and other operating costs;

· Lower operating revenues of $400,000 primarily attributable to the extra day in the 2008 leap year, partially offset by increased capacity from prior expansions; and

· Higher other income of $4.1 million primarily due to higher AFUDC resulting from Florida Gas' Phase VIII Expansion project.

See Part I. Item I. Financial Statements (Unaudited), Note 6 - Unconsolidated Investments - Citrus for additional information related to Florida Gas.

Gathering and Processing Segment. The Gathering and Processing segment is primarily engaged in connecting wells of natural gas producers to its gathering system, treating natural gas to remove impurities to meet pipeline quality specifications, processing natural gas for the removal of NGL, and redelivering natural gas and NGL to a variety of markets.

                                                      Three Months Ended
                                                           March 31,
Gathering and Processing Segment                    2009              2008
                                                        (In thousands)

Operating revenues, excluding impact of
commodity derivative instruments                $     178,377     $     411,788
Realized and unrealized commodity derivatives         (10,072 )           3,874
Operating revenues                                    168,305           415,662
Cost of gas and other energy                         (143,129 )        (348,200 )
Gross margin (1)                                       25,176            67,462
Operating expenses                                     19,662            22,949
Depreciation and amortization                          16,413            15,470
Taxes other than on income and revenues                 1,340               801
Total operating income                                (12,239 )          28,242
Earnings from unconsolidated investments                  528               318
Other expense, net                                        278                (4 )
EBIT                                            $     (11,433 )   $      28,556


Operating information:
Volumes
Avg natural gas processed (MMBtu/d)                   420,904           408,082
Avg NGL produced (gallons/d)                        1,370,712         1,336,032
Avg natural gas wellhead (MMBtu/d)                    578,558           623,149
Natural gas sales (MMBtu)                          21,557,171        24,159,245
NGL sales (gallons) (2)                           166,091,347       154,660,401

Average Pricing
Realized natural gas ($/MMBtu) (3)              $        3.50     $        7.79
Realized NGL ($/gallon) (3)                              0.60              1.42
Natural Gas Daily WAHA ($/MMBtu)                         3.42              8.00
Natural Gas Daily El Paso ($/MMBtu)                      3.31              7.92
Estimated plant processing spread ($/gallon)             0.29              0.69


________________

(2) Volumes processed by SUGS include volumes sold under various buy-sell arrangements. For the three-month periods ended March 31, 2009 and 2008, the Company's operating revenues and related volumes attributable to its buy-sell arrangements for natural gas totaled $11.7 million and $28.9 million, and 3.3 million MMBtus and 3.6 million MMBtus, respectively. The Company's operating revenues and related volumes for the three-month periods ended March 31, 2009 and 2008 attributable to its buy-sell arrangements for NGL totaled $11.9 million and $47.5 million, and 20.8 million gallons and 34.5 million gallons, respectively.

(3) Excludes impact of realized and unrealized commodity derivative gains and losses detailed in the above EBIT presentation.

· Lower gross margin of $42.3 million primarily as the result of:

o Lower operating revenues of $233.4 million largely attributable to lower market-driven realized average natural gas and NGL prices (unadjusted for the impact of realized and unrealized commodity derivative gains and losses) of $3.50 per MMBtu and $0.60 per gallon in the 2009 period versus $7.79 per MMBtu and $1.42 per gallon in the 2008 period, respectively;

o Impact of lower market driven natural gas and NGL purchase costs of $206.8 million in the 2009 period versus the 2008 period; and

o Impact of $13.9 million of net hedging losses in the 2009 period versus the 2008 period (which includes the impact of $15.2 million of unrealized losses recorded in 2009);

· Higher depreciation and amortization expense of $900,000 primarily attributable to a $49 million increase in property, plant and equipment placed in service after March 31, 2008; and

· Lower operating expenses of $3.3 million primarily due to:

o A $1.1 million decrease in maintenance and contract services costs largely attributable to a 2009 cost reduction initiative primarily related to the Company's variable and discretionary costs;

o A $500,000 decrease in chemical and lubricants costs, which generally track with the price of oil;

o A $400,000 decrease in utilities costs primarily due to lower compressor fuel costs attributable to the associated declining costs of natural gas in 2009 versus 2008; and

o Lower corporate services costs of $300,000.

Distribution Segment. The Distribution segment is primarily engaged in the local distribution of natural gas in Missouri and Massachusetts through its Missouri Gas Energy and New England Gas Company divisions, respectively. The Distribution segment's operations are regulated as to rates and other matters by the regulatory commissions of the states in which each operates. The Distribution segment's operations have historically been sensitive to weather and seasonal in nature, with a significant percentage of annual operating revenues and EBIT occurring in the traditional winter heating season in the first and fourth calendar quarters. However, the MPSC approved distribution rates effective April 3, 2007 for Missouri Gas Energy's residential customers (which comprise approximately 87 percent of its total natural gas sales customers and approximately 67 percent of its gross natural gas sales revenues) that eliminate the impact of weather and conservation for residential margin revenues and related earnings in Missouri.

The following table illustrates the results of operations applicable to the Company's Distribution segment for the periods presented:

                                                  Three Months Ended
                                                       March 31,
Distribution Segment                               2009          2008
                                                    (In thousands)

Net operating revenues  (1)                     $   68,188     $ 68,111

Operating expenses                                  29,229       28,880
Depreciation and amortization                        7,671        7,572
Taxes other than on income
  and revenues                                       3,092        2,989
Total operating income                              28,196       28,670
Other income (expenses), net                         3,442         (188 )
EBIT                                            $   31,638     $ 28,482

Operating Information:
Gas sales volumes (MMcf)                            29,640       33,135
  Gas transported volumes (MMcf)                     8,349        9,634

Weather - Degree Days:  (2)
 Missouri Gas Energy service territories             2,494        2,921
 New England Gas Company service territories         2,970        2,654

(2) "Degree days" are a measure of the coldness of the weather experienced. A degree day is equivalent to each degree that the daily mean temperature for a day falls below 65 degrees Fahrenheit.

· Higher Other Income, net, of $3.6 million primarily due to a settlement of $3.5 million with an insurance company that released it from certain potential future environmental claim obligations;

· Net operating revenues were flat primarily due to a higher contribution of $2.3 million from New England Gas Company largely attributable to the impact of new rates associated with the $3.7 million annual rate case increase effective February 3, 2009 and colder weather, offset by $2.2 million of lower net operating revenues at Missouri Gas Energy primarily due to the impact of warmer weather for its non-residential customers; and

· Higher operating expenses of $300,000 primarily attributable to:

o Higher injuries and damage claims of $2.2 million primarily due to the impact of an insurance reimbursement of $900,000 received in 2008 and higher ongoing litigation costs;

o Higher provisions for uncollectible customer accounts of approximately $900,000 primarily resulting from the impact of the current depressed economic conditions on some of the Company's customers; and

o Lower environmental remediation costs of $2.6 million primarily attributable to the establishment in 2008 of a $2.4 million reserve related to completed site investigation evaluations.

Corporate and Other

Three-month period ended March 31, 2009 versus the three-month period ended March 31, 2008. The EBIT improvement of $1.3 million was primarily due to:

· A settlement of $1.9 million in March 2009 with an insurance company that released it from certain potential future environmental claim obligations; and

· Lower contributions of $800,000 from PEI Power Corporation primarily due to a . . .