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SEC Filings
10-Q
SOUTHERN UNION CO filed this Form 10-Q on 08/08/2013
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7.
TAXES ON INCOME:

The following tables summarize the Company’s income taxes from continuing operations for the periods presented:
 
 
Successor
 
 
Predecessor
 
 
Three Months Ended
June 30, 2013
 
Three Months Ended
June 30, 2012
 
Six Months Ended
June 30, 2013
 
Period from Acquisition (March 26, 2012) to June 30, 2012
 
 
Period from January 1, 2012 to March 25, 2012
Income tax expense (benefit)
 
$
75

 
$
6

 
$
85

 
$
(6
)
 
 
$
12

Effective tax rate
 
71
%
 
60
%
 
65
%
 
14
%
 
 
27
%
The Company’s effective income tax rate for the three and six months ended June 30, 2013 was higher than the federal statutory rate of 35% primarily due to state income taxes resulting from the SUGS Contribution and other internal restructuring activities. The effective income tax rate for the period from March 26, 2012 to June 30, 2012 was lower than the federal statutory rate primarily due to the Company’s pre-tax loss as a result of merger-related expenses coupled with non-deductible executive compensation included in the merger-related expenses. The effective income tax rate for the period from January 1, 2012 to March 25, 2012 was lower than the federal statutory rate primarily due to the dividend received reduction for the anticipated receipt of dividends associated with the earnings from the Company’s prior unconsolidated investment in Citrus.

8.
DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES:
The Company is exposed to certain risks in its ongoing business operations.  The primary risks managed by using derivative instruments are interest rate risk and commodity price risk.  Interest rate swaps are the principal derivative instruments used by the Company to manage interest rate risk associated with its long-term borrowings, although other interest rate derivative contracts may also be used from time to time.  Natural gas price swaps are the principal derivative instruments used by the Company to manage commodity price risk associated with purchases and/or sales of natural gas, although other commodity derivative contracts may also be used from time to time.  The Company recognizes all derivative instruments as assets or liabilities at fair value in the condensed consolidated balance sheets.
Interest Rate Contracts
The Company may enter into interest rate swaps to manage its exposure to changes in interest payments on long-term debt attributable to movements in market interest rates.
Interest Rate Swaps. The Company has outstanding interest rate swap agreements to hedge floating rate notes with an aggregate notional amount of $525 million, of which $450 million are for ten-year periods and $75 million are for five-year periods.  These interest rate swaps became effective on November 1, 2011.  The Company pays interest on the floating rate notes based on three-month LIBOR plus a credit spread of 3.0175% beginning November 1, 2011.  The interest rate swaps effectively fix the floating rate LIBOR-based portion of the interest payments on the swapped notes to a weighted average fixed rate of 3.63%. Prior to the ETE Merger, these interest rate swaps were accounted for as cash flow hedges, with the effective portion of their settled value recorded in accumulated other comprehensive income and reclassified into interest expense in the same periods during which the related interest payments on long-term debt impacted earnings.  In conjunction with the ETE Merger, the Company discontinued hedge accounting treatment on these interest rate swaps.  Therefore, changes in fair value since then have been recognized in earnings.
The Company also had outstanding pay-fixed interest rate swaps with a total notional amount of $455 million to hedge the LNG Holdings $455 million term loan, which was refinanced in February 2012.  These interest rate swaps were accounted for as cash flow hedges, with the effective portion of changes in their fair value recorded in accumulated other comprehensive income and reclassified into interest expense in the same periods during which the related interest payments on long-term debt impacted earnings.  These swaps terminated in the first quarter of 2012.
For the predecessor period in 2012 during which hedge accounting treatment was applied, there was no swap ineffectiveness.
Commodity Contracts – Gathering and Processing Segment
The Company primarily entered into natural gas and NGL price swaps and NGL processing spread swaps to manage its exposure to changes in margin on forecasted sales of natural gas and NGL volumes resulting from movements in market commodity prices.

13

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