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. For additional information related to the Company's use of EBIT as its primary financial measure for its reportable segments, see Part I, Item I. Financial Statements (Unaudited), Note 13 - Reportable Segments.

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

                                             Three Months Ended           Nine Months Ended
                                                September 30,               September 30,
                                             2009          2008          2009          2008
                                                             (In thousands)
EBIT:
Transportation and storage segment (1)     $ 101,120     $  93,501     $ 292,264     $ 306,127
Gathering and processing segment               7,734        26,951        (5,222 )      67,641
Distribution segment (1)                       5,103         1,494        36,450        30,904
Corporate and other (1)                        2,916        (2,273 )       3,103        (2,282 )
Total EBIT                                   116,873       119,673       326,595       402,390
Interest                                      50,234        53,232       146,969       154,536
Earnings before income taxes                  66,639        66,441       179,626       247,854
Federal and state income tax expense          19,720        19,665        53,170        75,260
Net earnings                                  46,919        46,776       126,456       172,594
Preferred stock dividends                      2,171         2,264         6,512        10,041
Loss on extinguishment of preferred
stock                                              -         2,036             -         4,031

Net earnings available for common
stockholders                               $  44,748     $  42,476     $ 119,944     $ 158,522

Three-month period ended September 30, 2009 versus the three-month period ended September 30, 2008. The Company's $2.3 million increase in Net earnings available for common stockholders in the three-month period ended September 30, 2009 versus the same period in 2008 was primarily due to:

· Higher EBIT contributions of $7.6 million from the Transportation and Storage segment primarily due to a decrease of operating, maintenance and general expenses of $7.4 million primarily due to $13.3 million of lower net hurricane-related repair and abandonment costs recorded in 2009 as compared to 2008, partially offset by a $5.9 million increase in other operating, maintenance and general expenses, an increase in transportation reservation revenues of $3.4 million primarily due to higher average rates realized on PEPL and higher LNG terminalling revenue of $1.8 million primarily due to higher reservation revenues attributable to a one-time rate increase effective January 1, 2009, partially offset by higher depreciation and amortization expense of $2.2 million primarily attributable to an increase in property, plant and equipment placed in service;

· Higher EBIT contributions of $5.2 million from Corporate and other primarily due to higher legal fees of $3.7 million in the 2008 period and collection by the Company in 2009 of a $1.8 million litigation settlement;

· Higher EBIT contributions of $3.6 million from the Distribution segment associated with higher net operating revenues of $1.7 million primarily due to a higher contribution of $2 million from New England Gas Company and lower operating, maintenance and general expenses of $2.2 million primarily due to lower bad debt expense resulting from improved collectability on aged accounts receivable;

· Lower interest expense of $3 million primarily attributable to lower interest expense of $2 million primarily due to lower LIBOR interest rates associated with the Company's variable rate debt, and the impact of a $1.6 million increase in interest costs capitalized attributable to higher average capital project balances outstanding in 2009 compared to 2008, partially offset by higher net interest expense of $600,000 primarily due to higher net debt balances outstanding on fixed-rate debt obligations and the impact of lower net debt premium amortization;

· Lower EBIT contributions of $19.2 million from the Gathering and Processing segment primarily due to lower operating revenues of $216.3 million, excluding hedging gains and losses, largely attributable to lower market-driven realized average natural gas and NGL prices, partially offset by the impact of $13.6 million of higher net hedging gains and lower market-driven natural gas and NGL purchase costs of $177.7 million in the 2009 period versus the 2008 period; and

· Impact of a $2 million loss recorded in the 2008 period related to the Company's purchase of 248,225 shares of its Preferred Stock and the reduction in related dividends of $100,000 in the 2009 period versus the 2008 period associated with the Company's purchase of 459,999 total shares of Preferred Stock during 2008.

Nine-month period ended September 30, 2009 versus the nine-month period ended September 30, 2008. The Company's $38.6 million decrease in Net earnings available for common stockholders in the nine-month period ended September 30, 2009 versus the same period in 2008 was primarily due to:

· Lower EBIT contributions of $72.9 million from the Gathering and Processing segment primarily due to lower operating revenues of $744.5 million, excluding hedging gains and losses, largely attributable to lower market-driven realized average natural gas and NGL prices, partially offset by the impact of $29.2 million of higher revenues from hedging activities and lower market-driven natural gas and NGL purchase costs of $632.7 million in the 2009 period versus the 2008 period; and

· Lower EBIT contributions of $13.9 million from the Transportation and Storage segment primarily due to higher operating, maintenance and general expenses of $16.4 million attributable to higher environmental costs of $3.8 million, a $3.3 million increase in third-party transportation expense, a $4 million increase in net hurricane-related expenses and $5.3 million of other operating, maintenance and general expenses, and higher depreciation and amortization expense of $7.8 million primarily due to increases in property, plant and equipment placed in service, partially offset by higher operating revenues of $12.2 million primarily attributable to higher transportation reservation revenues primarily due to higher average rates realized on PEPL of $11 million and higher LNG terminalling revenues of $6.5 million, partially offset by lower transportation usage revenues of $8.1 million primarily due to reduced volumes flowing after Hurricane Ike on Sea Robin.

These reductions in earnings were partially offset by:

· Higher EBIT contributions of $5.5 million from the Distribution segment primarily due to the impact of $3.5 million of income in 2009 related to a settlement agreement with an insurance company releasing the insurance company from certain potential future environmental claim obligations and higher net operating revenues of $2.4 million, partially offset by higher property tax assessments of $1 million associated with natural gas inventory stored in the state of Kansas, which became assessable for property tax purposes beginning in 2009;

· Higher EBIT contributions of $5.4 million from Corporate and other primarily due to higher legal fees of $4.9 million in the 2008 period, a settlement of $1.9 million with an insurance company releasing the insurance company from certain potential future environmental claim obligations and collection by the Company of $1.8 million related to a litigation settlement, partially offset by lower contributions of $1.4 million from PEI Power Corporation and lower interest income of $1 million associated with short-term investments held by the Company;

· Lower interest expense of $7.6 million primarily attributable to lower interest expense of $7.9 million due to lower LIBOR interest rates associated with the Company's variable rate debt and the impact of a $4.4 million increase in interest costs capitalized attributable to higher average capital project balances outstanding in 2009 compared to 2008, partially offset by higher net interest expense of $4.9 million primarily due to higher net debt balances outstanding on fixed-rate debt obligations and the impact of lower net debt premium amortization;

· Impact of a $4 million loss recorded in the 2008 period related to the Company's purchase of 440,109 shares of its Preferred Stock and the reduction in related dividends of $3.5 million in the 2009 period versus the 2008 period associated with the Company's purchase of 459,999 total shares of Preferred Stock during 2008; and

· Lower federal and state income tax expense of $22.1 million primarily due to lower pre-tax earnings of $68.2 million.

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 services 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.

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

                                             Three Months Ended           Nine Months Ended
                                                September 30,               September 30,
Transportation and Storage Segment           2009          2008          2009          2008
                                                             (In thousands)

Operating revenues                         $ 176,093     $ 173,400     $ 541,003     $ 528,784

Operating, maintenance and general            61,127        68,485       199,302       182,906
Depreciation and amortization                 28,338        26,133        84,684        76,885
Taxes other than on income and revenues        8,398         8,226        25,636        24,419
Total operating income                        78,230        70,556       231,381       244,574
Earnings from unconsolidated investments      22,715        22,212        60,483        60,026
Other income, net                                175           733           400         1,527
EBIT                                       $ 101,120     $  93,501     $ 292,264     $ 306,127

Operating information:
Panhandle natural gas volumes
transported (TBtu)                               331           356         1,134         1,085
Florida Gas natural gas volumes
transported (TBtu) (1)                           233           226           636           610


________________

Three-month period ended September 30, 2009 versus the three-month period ended September 30, 2008. The $7.6 million EBIT improvement in the three-month period ended September 30, 2009 versus the same period in 2008 was primarily due to a higher EBIT contribution from Panhandle totaling $7.1 million and higher equity earnings of $500,000, principally from the Company's unconsolidated investment in Citrus.

Panhandle's $7.1 million EBIT improvement was primarily due to:

· Higher operating revenues of $2.7 million primarily as the result of:

o Higher transportation reservation revenues of $3.4 million primarily due to higher average rates realized on PEPL;

o A $1.8 million increase in LNG terminalling revenue primarily due to higher reservation revenues attributable to a one-time annual rate increase associated with certain capacity effective January 1, 2009;

o Lower parking revenues of $900,000 primarily due to decreased customer demand for parking services and market conditions; and

o Lower transportation usage revenues of $800,000 primarily due to reduced volumes flowing in 2009;

· Lower operating, maintenance and general expenses of $7.4 million primarily attributable to:

o Lower net hurricane-related repair and abandonment costs of $13.3 million recorded in 2009 as compared to 2008. The majority of such costs are generally expected to be recovered in the future through insurance recoveries and rate proceedings;

o A $2.8 million increase in environmental reserves primarily attributable to estimated costs to remediate PCBs at the Company's facilities;

o A $2.6 million increase in outside services costs primarily attributable to higher pipeline testing costs and legal expenses; and

o A $1.4 million increase in third-party transportation expense primarily due to additional capacity contracted; and

· Increased depreciation and amortization expense of $2.2 million primarily attributable to a $166 million increase in property, plant and equipment placed in service after September 30, 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 12 - 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 higher 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 other income of $7.4 million primarily due to higher equity AFUDC resulting from Florida Gas' Phase VIII Expansion project;

· Higher transportation revenues of $800,000 primarily due to higher reservation revenue attributable to additional phased-in capacity contracted resulting from Florida Gas' Phase VII Expansion project;

· Higher debt interest cost of $6.7 million primarily due to interest on a $500 million construction and term loan agreement funded in October 2008 and on the $600 million 7.90% Senior Notes issued in May 2009, partially offset by lower average outstanding revolver debt balances and lower LIBOR interest rates;

· Higher income tax of $400,000 primarily due to higher pretax earnings; and

· Higher depreciation expense of $400,000 primarily due to increased property, plant and equipment placed in service after September 30, 2008.

Nine-month period ended September 30, 2009 versus the nine-month period ended September 30, 2008. The $13.9 million EBIT reduction in the nine-month period ended September 30, 2009 versus the same period in 2008 was primarily due to a lower EBIT contribution from Panhandle totaling $14.4 million, partially offset by higher equity earnings of $500,000, principally from the Company's unconsolidated investment in Citrus.

Panhandle's $14.4 million EBIT reduction was primarily due to:

· Higher operating revenues of $12.2 million primarily as the result of:

o Higher transportation reservation revenues of $11 million primarily due to higher average rates realized on PEPL and contributions from various expansion projects, partially offset by lower average rates realized on Trunkline, and $1.2 million of additional revenues in the 2008 period attributable to the extra day in the 2008 leap year;

o Higher parking revenues of $4.1 million resulting from customer demand for parking services and market conditions;

o Lower transportation usage revenues of $8.1 million primarily due to reduced volumes flowing after Hurricane Ike on Sea Robin of $5.6 million and lower interruptible volumes on Trunkline and PEPL due to market conditions; and

o A $6.5 million increase in LNG terminalling revenue primarily due to approximately $3.7 million of higher reservation revenues attributable to a one-time annual rate increase associated with certain capacity effective January 1, 2009 and $2.7 million associated with a change in the power reimbursement mechanism in the fourth quarter of 2008 that allows the Company to recover actual monthly LNG electric power costs from the customer.

The increased revenues were offset by:

· Higher operating, maintenance and general expenses of $16.4 million primarily attributable to:

o A $2 million increase in net hurricane-related repair and abandonment costs and a $2 million increase in accretion expense on the additional hurricane-related asset retirement obligations. The majority of such costs are generally expected to be recovered in the future through insurance recoveries and rate proceedings;

o A $3.8 million increase in environmental reserves primarily attributable to estimated costs to remediate PCBs at the Company's facilities;

o A $3.3 million increase in third-party transportation expense primarily due to additional capacity contracted;

o A $2.9 million increase in fuel tracker costs primarily due to a net over-recovery in 2008 versus a net under-recovery in 2009; and

o A $1.9 million increase in LNG electric power expense primarily resulting from actual costs recovered in rates through the power reimbursement mechanism; and

· Increased depreciation and amortization expense of $7.8 million primarily attributable to a $166 million increase in property, plant and equipment placed in service after September 30, 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 12 - 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 higher 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 other income of $17.4 million primarily due to higher equity AFUDC resulting from Florida Gas' Phase VIII Expansion project;

· Higher operating revenues of $1.3 million primarily attributable to:

o Higher reservation revenues of $2.3 million primarily due to increased capacity from prior expansions, partially offset by the impact of additional revenues in the 2008 period attributable to the extra day in the 2008 leap year; and

o Lower commodity revenues of $1.1 million primarily attributable to lower parking revenues largely due to decreased customer demand for parking services and market conditions and lower interruptible transportation revenues due to lower volumes;

· Higher debt interest cost of $14.4 million primarily due to interest on a $500 million construction and term loan agreement funded in October 2008 and on the $600 million 7.90% Senior Notes issued in May 2009, partially offset by lower average outstanding revolver debt balances and lower LIBOR interest rates;

· Higher operating expenses of $1.5 million primarily attributable to:

o Higher outside service costs of $1 million primarily due to outside legal services;

o Higher costs of $1 million experienced in 2009 primarily applicable to employee labor, rents, transportation expense, and other costs; and

o A $600,000 decrease in employee benefits largely associated with terminated cash balance plan expenses;

· Higher depreciation expense of $1.4 million primarily due to increased property, plant and equipment placed in service after September 30, 2008; and

· Higher income tax of $400,000 primarily due to higher pretax earnings.

See Part I, Item I. Financial Statements (Unaudited), Note 5 - 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. Its operations are conducted through SUGS. SUGS' gas supply contracts primarily include fee-based, percent-of-proceeds, conditioning fee and wellhead purchase contracts. These gas supply contracts vary in length from month-to-month to a number of years, with many of the contracts having a term of three to five years. SUGS' primary sales customers include producers, power generating companies, utilities, energy marketers, and industrial end-users located primarily in the Gulf Coast and southwestern United States. SUGS' business is not generally seasonal in nature.

The majority of SUGS' gross margin is derived from the sale of NGL equity volumes and to a lesser extent from the sale of residue natural gas. The prices of NGL and natural gas are subject to fluctuations in response to changes in supply, demand, market uncertainty and a variety of factors beyond the Company's control. The Company monitors these risks and manages the associated commodity price risk using both economic and accounting hedge derivative instruments. For additional information related to the Company's commodity price risk management, see Part I, Item I. Financial Statements (Unaudited), Note 10 - Derivative Instruments and Hedging Activities - Commodity Contracts - Gathering and Processing Segment and Part I, Item 3. Quantitative and Qualitative Disclosures About Market Risk - Commodity Price Risk.

The following table presents the results of operations applicable to the Company's Gathering and Processing segment:

                                                      Three Months Ended                   Nine Months Ended
                                                         September 30,                       September 30,
Gathering and Processing Segment                    2009              2008              2009              2008
                                                                          (In thousands)

Operating revenues, excluding impact of
commodity derivative instruments                $     174,498     $     390,825     $     530,499     $   1,275,044
Realized and unrealized commodity derivatives          15,059             1,503             2,447           (26,731 )
Operating revenues                                    189,557           392,328           532,946         1,248,313
Cost of gas and other energy (1)                     (142,455 )        (320,281 )        (426,853 )      (1,058,820 )
Gross margin (2)                                       47,102            72,047           106,093           189,493
Operating, maintenance and general                     22,736            27,488            60,521            70,626
Depreciation and amortization                          16,733            15,721            49,689            46,537
. . .