UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D. C. 20549

                                    FORM 10-Q

                         For the quarterly period ended

                                December 31, 2000


                           Commission File No. 1-6407




                             SOUTHERN UNION COMPANY
             (Exact name of registrant as specified in its charter)



         Delaware                                             75-0571592
(State or other jurisdiction of                           (I.R.S. Employer
 incorporation or organization)                            Identification No.)


    504 Lavaca Street, Eighth Floor                                 78701
            Austin, Texas                                         (Zip Code)
(Address of principal executive offices)


       Registrant's telephone number, including area code: (512) 477-5852


           Securities Registered Pursuant to Section 12(b) of the Act:


     Title of each class              Name of each exchange in which registered
     -------------------              -----------------------------------------
Common Stock, par value $1 per share          New York Stock Exchange



Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes T No

The number of shares of the registrant's Common Stock outstanding on February 8,
2001 was 50,972,091.








<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                                    FORM 10-Q
                                December 31, 2000
                                      Index




PART I.  FINANCIAL INFORMATION                                          Page(s)
                                                                        -------
  Item 1.  Financial Statements

    Consolidated statements of operations - three, six and twelve months
       ended December 31, 2000 and 1999                                     2-4

    Consolidated balance sheet - December 31, 2000 and 1999 and
       June 30, 2000                                                        5-6

    Consolidated statement of stockholders' equity - six months
       ended December 31, 2000 and twelve months ended June 30, 1999         7

    Consolidated statements of cash flows - three, six and twelve months
       ended December 31, 2000 and 1999                                     8-10

    Notes to consolidated financial statements                             11-21

Item 2.  Management's Discussion and Analysis of Financial Condition
            and Results of Operations                                      22-30


Item 3.  Quantitative and Qualitative Disclosures about Market Risk         30

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

         (See "COMMITMENTS AND CONTINGENCIES" in Notes to Consolidated
          Financial Statements)                                            18-21

Item 4.  Result of Votes of Security Holders                                 31

Item 6.  Exhibits and Reports on Form 8-K

          (a) Exhibit 10 -- Amendment to Southern Union Savings Plan effective
              July 1, 2000                                                   E-1

          (b) Reports  on  Form  8-K  --   Announcement   of   completed
              acquisitions  of Valley  Resources on September  20, 2000,
              Providence  Energy  Corporation  on September 28, 2000 and
              Fall River Gas Company on September 28, 2000
              (Filed on October 5, 2000)




<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>

                                                                 Three Months Ended December 31,
                                                                    2000           1999
                                                                ------------    ------------
                                                              (thousands of dollars, except shares
                                                                     and per share amounts)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Operating revenues ...........................................  $    605,339    $    239,595
Cost of gas and other energy .................................       433,925         145,113
                                                                ------------    ------------
     Operating margin ........................................       171,414          94,482
Revenue-related taxes ........................................        23,854          11,256
                                                                ------------    ------------
     Net operating margin ....................................       147,560          83,226
                                                                ------------    ------------
Operating expenses:
     Operating, maintenance and general ......................        62,151          34,194
     Depreciation and amortization ...........................        23,738          13,500
     Taxes, other than on income and revenues ................         7,950           4,634
                                                                ------------    ------------
          Total operating expenses ...........................        93,839          52,328
                                                                ------------    ------------
          Net operating revenues .............................        53,721          30,898
                                                                ------------    ------------

Other income (expense):
     Interest ................................................       (30,303)        (13,299)
     Dividends on preferred securities of subsidiary trust ...        (2,370)         (2,370)
     Other, net ..............................................        20,760          (3,336)
                                                                ------------    ------------
          Total other expenses, net ..........................       (11,913)        (19,005)
                                                                ------------    ------------

          Earnings before income taxes .......................        41,808          11,893

Federal and state income taxes ...............................        19,332           4,761
                                                                ------------    ------------

Net earnings available for common stock ......................  $     22,476    $      7,132
                                                                ============    ============

Net earnings per share:
     Basic ...................................................  $        .45    $        .16
                                                                ============    ============
     Diluted .................................................  $        .43    $        .16
                                                                ============    ============

Weighted average shares outstanding:
     Basic ...................................................    49,924,123      43,421,029
                                                                ============    ============
     Diluted .................................................    52,749,286      45,383,264
                                                                ============    ============



                             See accompanying notes.
</TABLE>


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>


                                                                                Six Months Ended December 31,
                                                                                    2000             1999
                                                                                ------------    -------------

                                                                               (thousands of dollars, except
                                                                                shares and per share amounts)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Operating revenues ..........................................................   $    749,808    $    324,381
Cost of gas and other energy ................................................        518,458         184,390
                                                                                ------------    ------------
     Operating margin .......................................................        231,350         139,991
Revenue-related taxes .......................................................         28,933          15,220
                                                                                ------------    ------------
     Net operating margin ...................................................        202,417         124,771
                                                                                ------------    ------------
Operating expenses:
     Operating, maintenance and general .....................................         99,169          59,458
     Depreciation and amortization ..........................................         39,704          24,348
     Taxes, other than on income and revenues ...............................         12,810           8,259
                                                                                ------------    ------------
          Total operating expenses ..........................................        151,683          92,065
                                                                                ------------    ------------
          Net operating revenues ............................................         50,734          32,706
                                                                                ------------    ------------

Other income (expense):
     Interest ...............................................................        (46,609)        (21,663)
     Dividends on preferred securities of subsidiary trust ..................         (4,740)         (4,740)
     Other, net .............................................................         18,441          (4,493)
                                                                                ------------    ------------
          Total other expenses, net .........................................        (32,908)        (30,896)
                                                                                ------------    ------------

          Earnings before income taxes and cumulative effect of
              change in accounting principle .................................         17,826           1,810

Federal and state income taxes ...............................................          8,200             778
                                                                                 ------------    ------------

Earnings before cumulative effect of change in accounting principle ..........          9,626           1,032

Cumulative effect of change in accounting principle, net of tax ..............            602              --
                                                                                 ------------    ------------

Net earnings available for common stock ......................................   $     10,228    $      1,032
                                                                                 ============    ============

Net earnings per share:
     Basic
          Before cumulative effect of change in accounting principle .........   $        .20    $        .03
          Cumulative effect of change in accounting principle, net of tax ....            .01              --
                                                                                 ------------    ------------
                                                                                 $        .21    $        .03
                                                                                 ============    ============
     Diluted
          Before cumulative effect of change in accounting principle .........   $        .19    $        .03
          Cumulative effect of change in accounting principle, net of tax ....            .01              --
                                                                                 ------------    ------------
                                                                                 $        .20    $        .03
                                                                                 ============    ============

Weighted average shares outstanding:
     Basic ...................................................................     49,255,805      37,944,658
                                                                                 ============    ============
     Diluted .................................................................     51,889,835      39,831,493
                                                                                 ============    ============


                             See accompanying notes.
</TABLE>


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS

<TABLE>
<CAPTION>


                                                                             Twelve Months Ended December 31,
                                                                                 2000            1999
                                                                              ----------    ------------
                                                                              (thousands of dollars, except
                                                                               shares and per share amounts)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Operating revenues ......................................................    $ 1,257,131    $    677,933
Cost of gas and other energy ............................................        831,767         388,078
                                                                             -----------    ------------
     Operating margin ...................................................        425,364         289,855
Revenue-related taxes ...................................................         48,608          34,573
                                                                             -----------    ------------
     Net operating margin ...............................................        376,756         255,282
                                                                             -----------    ------------
Operating expenses:
     Operating, maintenance and general .................................        176,298         116,030
     Depreciation and amortization ......................................         70,495          45,291
     Taxes, other than on income and revenues ...........................         21,820          15,768
                                                                             ------------   ------------
          Total operating expenses ......................................        268,613         177,089
                                                                             ------------   ------------
          Net operating revenues ........................................        108,143          78,193
                                                                             ------------   ------------

Other income (expense):
     Interest ...........................................................        (76,438)        (39,779)
     Dividends on preferred securities of subsidiary trust ..............         (9,480)         (9,480)
     Other, net .........................................................         15,463          (6,870)
                                                                             ------------   ------------
          Total other expenses, net .....................................        (70,455)        (56,129)
                                                                             ------------   ------------

          Earnings before income taxes and cumulative effect of
              change in accounting principle ............................         37,688          22,064

Federal and state income taxes ..........................................         18,041           8,913
                                                                             ------------   ------------


Earnings before cumulative effect of change in accounting principle .....         19,647          13,151

Cumulative effect of change in accounting principle, net of tax .........            602            --
                                                                             ------------   ------------

Net earnings available for common stock .................................    $    20,249    $     13,151
                                                                             ============   ============

Net earnings per share:
     Basic
          Before cumulative effect of change in accounting principle ....    $       .40    $       .37
          Cumulative effect of change in accounting principle, net of tax            .01             --
                                                                             ------------   ------------
                                                                             $       .41    $       .37
                                                                             ============   ============


     Diluted
          Before cumulative effect of change in accounting principle ....    $       .38    $       .35
          Cumulative effect of change in accounting principle, net of tax            .01             --
                                                                             ------------   ------------
                                                                             $       .39    $       .35
                                                                             ============   ============


Weighted average shares outstanding:
     Basic ..............................................................     49,080,587      35,359,486
                                                                            ============    ============
     Diluted ............................................................     51,417,448      37,071,537
                                                                            ============    ============


                             See accompanying notes.

</TABLE>

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                     ASSETS

<TABLE>
<CAPTION>

                                                                                  December 31,            June 30,
                                                                           -------------------------
                                                                             2000           1999           2000
                                                                          -----------   ------------   ------------
                                                                                         (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Property, plant and equipment:
     Plant in service .................................................   $ 2,162,069    $ 1,529,005   $ 1,580,077
     Construction work in progress ....................................        30,611         33,414        30,192
                                                                          -----------    -----------   -----------
                                                                            2,192,680      1,562,419     1,610,269
     Less accumulated depreciation and amortization ...................      (746,779)      (489,223)     (509,947)
                                                                          -----------    -----------   -----------
                                                                            1,445,901      1,073,196     1,100,322
     Additional purchase cost assigned  to utility plant, net .........       733,893        388,472       386,839
                                                                          -----------    -----------   -----------

     Net property, plant and equipment ................................     2,179,794      1,461,668     1,487,161
                                                                          -----------    -----------   -----------



Current assets:
     Cash and cash equivalents ........................................         7,840           --          27,829
     Accounts receivable, billed and unbilled, net ....................       410,419        149,233        74,959
     Inventories, principally at average cost .........................       118,543         70,405        60,259
     Deferred gas purchase costs ......................................        32,110           --            --
     Investment securities available for sale .........................       105,587           --         187,817
     Prepayments and other ............................................        14,296          7,141           877
                                                                          -----------    -----------   -----------

          Total current assets ........................................       688,795        226,779       351,741
                                                                          -----------    -----------   -----------
Deferred charges ......................................................       209,594        133,022       145,006

Investment securities, at cost ........................................        20,081         12,160        10,489

Real estate ...........................................................         2,599         12,520         9,461

Other .................................................................        37,815         15,021        17,602
                                                                          -----------    -----------   -----------






     Total assets ......................................................  $ 3,138,678    $ 1,861,170   $ 2,021,460
                                                                          ===========    ===========   ===========


                             See accompanying notes.
</TABLE>


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEET (Continued)

                      STOCKHOLDERS' EQUITY AND LIABILITIES
<TABLE>
<CAPTION>



                                                                             December 31,              June 30,
                                                                     -------------------------
                                                                         2000           1999            2000
                                                                     ------------   ------------   ------------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                                 (thousands of dollars)

Common stockholders' equity:
     Common stock, $1 par value; authorized 200,000,000
         shares; issued 51,982,168 shares ........................   $    51,982    $    48,049    $    50,521
     Premium on capital stock ....................................       627,458        592,097        601,042
     Less treasury stock, 1,010,077 shares at cost ...............       (15,895)        (2,120)       (15,554)
     Less common stock held in trust .............................       (16,990)       (10,019)       (15,330)
     Directors deferred compensation .............................           899            712            808
     Accumulated other comprehensive income (loss) ...............        62,983           (436)       115,175
     Retained earnings ...........................................        10,228          1,032             --
                                                                     -----------    -----------    -----------

     Total common stockholders' equity ...........................       720,665        629,315        736,662

Company-obligated mandatorily redeemable preferred
     securities of subsidiary trust holding solely subordinated
     notes of Southern Union .....................................       100,000        100,000        100,000

Long-term debt and capital lease obligation ......................     1,375,760        734,878        733,774
                                                                     -----------    -----------    -----------


     Total capitalization ........................................     2,196,425      1,464,193      1,570,436
                                                                     -----------    -----------    -----------
Current liabilities:
     Long-term debt and capital lease obligation due within
          one year ...............................................         5,173          1,971          2,193
     Notes payable ...............................................       175,000         12,903              3
     Accounts payable ............................................       282,110         75,294         77,488
     Federal, state and local taxes ..............................        27,761         12,467          7,359
     Accrued interest ............................................        21,290         16,278         15,922
     Customer deposits ...........................................        20,952         17,834         17,255
     Deferred gas purchase costs .................................          --           19,292         11,708
     Other .......................................................        60,907         20,231         28,542
                                                                     -----------    -----------    -----------


         Total current liabilities ...............................       593,193        176,270        160,470
                                                                     -----------    -----------    -----------



Deferred credits and other .......................................       148,240         98,131        106,015
Accumulated deferred income taxes ................................       200,820        122,576        184,539
Commitments and contingencies ....................................          --             --               --
                                                                     -----------    -----------    -----------

     Total .......................................................   $ 3,138,678    $ 1,861,170    $ 2,021,460
                                                                     ===========    ===========    ===========

                             See accompanying notes.

</TABLE>

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>


                                                                                 Common     Accumulated
                                            Common     Premium      Treasury      Stock       Other        Retained
                                           Stock, $1  on Capital    Stock, at    Held  in   Comprehen-     Earnings/
                                           Par Value    Stock         Cost         Trust    sive Income    (Deficit)     Total
                                           ---------- ----------    ---------    ---------  -----------  -----------  ----------
                                                                     (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>


Balance July 1, 1999 ...................   $  31,240  $  276,610    $    (794)   $  (4,927) $    (436)   $      --    $  301,693

   Comprehensive income:
     Net earnings ......................        --           --          --           --          --        11,052        11,052
     Unrealized gain in investment
       securities, net of tax ..........        --           --          --           --      115,175          --        115,175
     Minimum pension liability
       adjustment; net of tax ..........        --           --          --           --          436          --            436
                                                                                                                       ---------
     Comprehensive income ..............                                                                                 126,663
                                                                                                                       ---------
   Purchase of common stock
     held in trust .....................        --           --          --         (9,864)       --           --         (9,864)
   5% stock dividend ...................       2,359       8,659         --           --          --       (11,052)          (34)
   Purchase of treasury stock ..........        --          --        (14,425)        --          --           --        (14,425)
   Issuance of stock for acquisition ...      16,714     315,235         --           --          --           --        331,949
   Exercise of stock options ...........         208         538         (335)         269        --           --            680
                                           ---------  ----------    ---------    ---------  ---------    ---------     ---------
Balance June 30, 2000 ..................      50,521     601,042      (15,554)     (14,522)   115,175          --        736,662

   Comprehensive income:
     Net earnings ......................        --          --           --           --         --         10,228        10,228
     Unrealized loss in investment
          securities, net of tax benefit        --          --           --           --      (51,822)         --        (51,822)
     Cumulative effect of change
       in accounting principle .........        --          --           --           --          826          --            826
     Unrealized loss on hedging
          activities ...................        --          --           --           --       (1,196)         --         (1,196)
                                                                                                                      ----------
     Comprehensive income (loss) .......                                                                                 (41,964)
                                                                                                                      ----------
   Payment on note receivable ..........        --           290         --           --          --           --            290
   Purchase of common stock
     held in trust .....................        --          --           --         (1,865)       --           --         (1,865)
   Issuance of stock for acquisition ...       1,371      25,505         --           --          --           --         26,876
   Exercise of stock options ...........          90         621         (341)         296        --           --            666
                                           ---------  ----------    ---------    ---------  ---------    ---------    ----------
Balance December 31, 2000 ..............   $  51,982  $  627,458    $ (15,895)   $ (16,091) $  62,983    $  10,228    $  720,665
                                           =========  ==========    =========    =========  =========    =========    ==========



                             See accompanying notes.
</TABLE>


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>



                                                                               Three Months Ended December 31,
                                                                                     2000          1999
                                                                                   ---------    ----------
                                                                                   (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Cash flows used in operating activities:
   Net earnings ................................................................   $  22,476    $   7,132
   Adjustments to reconcile net earnings to net cash flows used in
     operating activities:
       Depreciation and amortization ...........................................      23,738       13,500
       Deferred income taxes ...................................................      (1,544)       1,385
       Non-cash compensation expense ...........................................       2,038         --
       Provision for bad debts .................................................       5,231         (866)
       Gain on sale of investment securities ...................................      (8,869)        --
       Gain on sale of real estate .............................................     (13,532)        --
       Deferred interest expense ...............................................        (380)          46
       Other ...................................................................       1,186          442
       Changes in assets and liabilities, net of acquisitions:
         Accounts receivable, billed and unbilled ..............................    (288,525)     (82,108)
         Accounts payable ......................................................     177,660       32,352
         Taxes and other liabilities ...........................................      19,534       11,581
         Customer deposits .....................................................        (127)         292
         Deferred gas purchase costs ...........................................      (8,261)       5,037
         Inventories ...........................................................         954          817
         Other .................................................................      (3,884)      (2,647)
                                                                                   ---------    ---------
     Net cash flows used in operating activities ...............................     (72,305)     (13,037)
                                                                                   ---------    ---------
Cash flows used in investing activities:
   Additions to property, plant and equipment ..................................     (39,795)     (22,404)
   Acquisition of operations, net of cash received .............................       1,527      (35,831)
   Purchase of investment securities ...........................................     (12,495)     (10,634)
   Notes receivable ............................................................         290       (4,000)
   Decrease in customer advances ...............................................        (545)          (1)
   Increase in deferred charges and credits ....................................       8,883        2,615
   Proceeds from sale of investment securities .................................      11,372         --
   Proceeds from sale of real estate, net of closing costs .....................      20,638         --
   Other .......................................................................        (353)         (37)
                                                                                   ---------    ---------
     Net cash flows used in investing activities ...............................     (10,478)     (70,292)
                                                                                   ---------    ---------
Cash flows from (used in) financing activities:
   Issuance of long-term debt ..................................................      55,000      300,000
   Issuance cost of debt .......................................................        --         (6,498)
   Repayment of debt and capital lease obligation ..............................      (7,174)    (137,413)
   Premium on early extinguishment of acquired debt ............................        --           (719)
   Net borrowings (payments) under revolving credit facility ...................      39,547      (71,200)
   Purchase of treasury stock ..................................................        --         (1,326)
   Other .......................................................................         560         (111)
                                                                                   ---------    ---------

     Net cash flows from financing activities ..................................      87,933       82,733
                                                                                   ---------    ---------

Increase (decrease) in cash and cash equivalents ...............................       5,150         (596)
Cash and cash equivalents at beginning of period ...............................       2,690          596
                                                                                   ---------    ---------

Cash and cash equivalents at end of period .....................................   $   7,840    $     --
                                                                                   =========    =========

Supplemental  disclosures of cash flow information:
  Cash paid during the periodfor:
     Interest ..................................................................   $  29,627    $   5,763
                                                                                   =========    =========
     Income taxes ..............................................................   $      52    $     --
                                                                                   =========    =========

                             See accompanying notes.
</TABLE>


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>


                                                                                 Six Months Ended December 31,
                                                                                     2000         1999
                                                                                   ---------    ---------
                                                                                   (thousands of dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Cash flows used in operating activities:
   Net earnings ................................................................   $  10,228    $   1,032
   Adjustments to reconcile net earnings to net cash flows used in
     operating activities:
       Depreciation and amortization ...........................................      39,704       24,348
       Deferred income taxes ...................................................      (1,800)        (230)
       Non-cash compensation expense ...........................................       2,455         --
       Provision for bad debts .................................................       5,947         (346)
       Gain on sale of investment securities ...................................      (8,869)        --
       Gain on sale of real estate .............................................     (13,532)        --
       Deferred interest expense ...............................................        (658)          79
       Cumulative effect of change in accounting principle .....................        (602)        --
       Other ...................................................................       1,695          797
       Changes in assets and liabilities, net of acquisitions:
         Accounts receivable, billed and unbilled ..............................    (293,923)     (72,744)
         Accounts payable ......................................................     164,448       20,870
         Taxes and other liabilities ...........................................      18,478          (88)
         Customer deposits .....................................................        (484)         152
         Deferred gas purchase costs ...........................................     (34,815)      (7,531)
         Inventories ...........................................................     (43,588)     (10,054)
         Other .................................................................     (11,604)           9
                                                                                   ---------    ---------

     Net cash flows used in operating activities ...............................    (166,920)     (43,706)
                                                                                   ---------    ---------

Cash flows used in investing activities:
   Additions to property, plant and equipment ..................................     (61,703)     (42,822)
   Acquisition of operations, net of cash received .............................    (405,303)     (35,831)
   Purchase of investment securities ...........................................     (12,495)     (12,047)
   Notes receivable ............................................................         290       (4,000)
   Increase (decrease) in customer advances ....................................         (16)         834
   Increase (decrease) in deferred charges and credits .........................       8,475       (1,908)
   Proceeds from sale of investment securities .................................      11,372         --
   Proceeds from sale of real estate, net of closing costs .....................      20,638         --
   Other .......................................................................        (575)         421
                                                                                   ---------    ---------

     Net cash flows used in investing activities ...............................    (439,317)     (95,353)
                                                                                   ---------    ---------

Cash flows from (used in) financing activities:
   Issuance of long-term debt ..................................................     535,000      300,000
   Issuance cost of debt .......................................................      (2,538)      (6,498)
   Repayment of debt and capital lease obligation ..............................      (7,709)    (137,908)
   Premium on early extinguishment of acquired debt ............................        --           (719)
   Net borrowings (payments) under revolving credit facility ...................     174,997       (8,100)
   Purchase of treasury stock ..................................................        --         (1,326)
   Change in cash overdrafts ...................................................        --         (6,655)
   Payment of merger debt assumed ..............................................    (114,171)        --
   Other .......................................................................         669          265
                                                                                   ---------    ---------

     Net cash flows from financing activities ..................................     586,248      139,059
                                                                                   ---------    ---------

Change in cash and cash equivalents ............................................     (19,989)        --
Cash and cash equivalents at beginning of period ...............................      27,829         --
                                                                                   ---------    ---------
Cash and cash equivalents at end of period .....................................   $   7,840    $    --
                                                                                   =========    =========

Supplemental  disclosures of cash flow information:
  Cash paid during the period for:
     Interest ..................................................................   $  47,422    $  23,217
                                                                                   =========    =========

     Income taxes ..............................................................   $      52    $     --
                                                                                   =========    =========
                             See accompanying notes.
</TABLE>


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>



                                                                                Twelve Months Ended December 31,
                                                                                      2000        1999
                                                                                   ---------    ---------
<S>     <C>    <C>    <C>    <C>    <C>    <C>
                                                                                    (thousands of dollars)
Cash flows from (used in) operating activities:
   Net earnings ................................................................   $  20,249    $  13,151
   Adjustments to reconcile net earnings to net cash flows from (used in)
     operating activities:
       Depreciation and amortization ...........................................      70,495       45,291
       Deferred income taxes ...................................................        (106)       8,896
       Provision for bad debts .................................................      11,291        1,754
       Deferred interest expense ...............................................      (1,049)         334
       Cumulative effect of change in accounting principle .....................        (602)        --
       Non-cash compensation expense ...........................................       2,311         --
       Gain on sale of investment securities ...................................      (8,869)        --
       Gain on sale of real estate .............................................     (13,532)        --
       Other ...................................................................       2,606        1,089
       Changes in assets and liabilities, net of acquisitions:
         Accounts receivable, billed and unbilled ..............................    (225,009)     (23,771)
         Accounts payable ......................................................     166,180        4,159
         Taxes and other liabilities ...........................................      12,930       (1,603)
         Customer deposits .....................................................      (4,043)        (828)
         Deferred gas purchase costs ...........................................     (42,398)      11,011
         Inventories ...........................................................     (33,443)      (2,994)
         Other .................................................................      (9,703)        (132)
                                                                                   ---------    ---------
     Net cash flows from (used in)operating activities .........................     (52,692)      56,357
                                                                                   ---------    ---------
Cash flows used in investing activities:
   Additions to property, plant and equipment ..................................    (119,327)     (81,004)
   Acquisition of operations, net of cash received .............................    (407,838)     (35,831)
   Purchase of investment securities ...........................................     (21,449)     (19,047)
   Notes receivable ............................................................         290       (4,000)
   Increase in customer advances ...............................................         500        1,265
   Increase (decrease) in deferred charges and credits .........................       6,726       (7,089)
   Proceeds from sale of subsidiary ............................................      12,150         --
   Proceeds from sale of investment securities .................................      11,372         --
   Proceeds from sale of real estate, net of closing costs .....................      20,638         --
   Other .......................................................................      (1,549)       (445)
                                                                                   ---------    ---------
     Net cash flows used in investing activities ...............................    (498,487)    (146,151)
                                                                                   ---------    ---------
Cash flows from (used in) financing activities:
   Issuance of long-term debt ..................................................     535,000      300,000
   Issuance cost of debt .......................................................      (3,332)      (6,498)
   Repayment of debt and capital lease obligation ..............................      (8,592)    (157,706)
   Premium on early extinguishment of acquired debt ............................        --           (719)
   Net borrowings (payments) under revolving credit facility ...................     162,097      (37,100)
   Purchase of treasury stock ..................................................     (13,099)      (1,326)
   Change in cash overdrafts ...................................................        --         (6,853)
   Payment of merger debt assumed ..............................................    (114,171)        --
   Other .......................................................................       1,116           (4)
                                                                                   ---------    ---------
     Net cash flows from financing activities ..................................     559,019       89,794
                                                                                   ---------    ---------

Change in cash and cash equivalents ............................................       7,840         --
Cash and cash equivalents at beginning of period ...............................        --           --
                                                                                   ---------    ---------
Cash and cash equivalents at end of period .....................................   $   7,840    $    --
                                                                                   =========    =========

Supplemental  disclosures of cash flow information:
  Cash paid during the period for:
     Interest ..................................................................   $  81,940    $  50,477
                                                                                   =========    =========
     Income taxes ..............................................................   $   4,373    $   2,118
                                                                                   =========    =========


                             See accompanying notes.
</TABLE>


<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



FINANCIAL STATEMENTS

These  interim  financial  statements  should  be read in  conjunction  with the
financial  statements and notes thereto  contained in Southern  Union  Company's
(Southern Union and, together with its wholly-owned  subsidiaries,  the Company)
Annual  Report on Form 10-K for the fiscal  year ended  June 30,  2000.  Certain
prior period amounts have been  reclassified  to conform with the current period
presentation.

The  interim  financial   statements  are  unaudited  but,  in  the  opinion  of
management,  reflect all adjustments (including both normal recurring as well as
any  non-recurring)  necessary  for  a  fair  presentation  of  the  results  of
operations  for such  periods.  Because of the seasonal  nature of the Company's
operations,  the results of operations and cash flows for any interim period are
not  necessarily  indicative of results for the full year. As further  described
below, the Company  acquired  Providence  Energy  Corporation and Fall River Gas
Company on September 28, 2000, Valley Resources,  Inc. on September 20, 2000 and
Pennsylvania Enterprises,  Inc. on November 4, 1999. Accordingly,  the operating
activities  of  the  acquired  operations  are  consolidated  with  the  Company
beginning on the respective  acquisition  dates. Thus, the results of operations
of the Company for the periods subsequent to the acquisitions are not comparable
to those  periods prior to the  acquisitions  nor are the fiscal 2001 results of
operations comparable with prior periods.

ACQUISITIONS

On September 28, 2000,  Southern Union  completed the  acquisition of Providence
Energy Corporation (ProvEnergy) for approximately  $270,000,000 in cash plus the
assumption  of  approximately  $90,000,000  in long-term  debt.  The  ProvEnergy
natural gas distribution  operations are Providence Gas and North Attleboro Gas,
which collectively serve approximately 176,000 natural gas customers. Providence
Gas serves natural gas customers in Providence and Newport, Rhode Island, and 23
other cities and towns in Rhode Island.  North Attleboro Gas serves customers in
North   Attleboro  and   Plainville,   Massachusetts,   towns  adjacent  to  the
northeastern  Rhode Island border.  Subsidiaries of the Company  acquired in the
ProvEnergy merger include ProvEnergy Oil Enterprises,  Inc.  ("ProvEnergy Oil"),
and  ProvEnergy  Power  Company,   LLC.  ProvEnergy  Oil  operates  a  fuel  oil
distribution business through its subsidiary, ProvEnergy Fuels, Inc. (ProvEnergy
Fuels). ProvEnergy Fuels serves over 15,000 residential and commercial customers
in Rhode Island and Massachusetts.  ProvEnergy Power Company owns 50% of Capital
Center Energy Company,  LLC., a joint venture formed between  ProvEnergy and ERI
Services, Inc. to provide retail power.

On September 28, 2000,  Southern Union  completed the  acquisition of Fall River
Gas Company  (Fall  River Gas) for  approximately  1,400,000  shares of Southern
Union common stock and  approximately  $27,000,000  in cash plus  assumption  of
approximately $20,000,000 in long-term debt. Fall River Gas serves approximately
49,000  customers in the city of Fall River and the towns of  Somerset,  Swansea
and Westport,  all located in southeastern  Massachusetts.  Also acquired in the
Fall River Gas merger was Fall River Gas Appliance  Company,  Inc.,  which rents
water heaters and conversion  burners  (primarily for  residential  use) in Fall
River Gas' service area.

On September  20, 2000,  Southern  Union  completed  the  acquisition  of Valley
Resources,  Inc. (Valley Resources) for approximately  $125,000,000 in cash plus
the assumption of approximately  $30,000,000 in long-term debt. Valley Resources
natural  gas  distribution  operations  are Valley Gas  Company  and Bristol and
Warren Gas Company,  which collectively serve  approximately  65,000 natural gas
customers.  Valley  Resources' three  non-utility  subsidiaries  acquired in the
merger rent and sell appliances,  offer service contract  programs,  sell liquid
propane in Rhode Island and nearby Massachusetts, and distribute as a wholesaler
franchised  lines to plumbing  and heating  contractors.  Also,  acquired in the
acquisition was Valley Resources' 90% interest in Alternate Energy  Corporation,
which sells, installs and designs natural gas conversion systems and facilities,
is an authorized representative of the ONSI Corporation fuel cell, holds patents
for a natural  gas/diesel  co-firing system and for a device to control the flow
of fuel on dual-fuel equipment.


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The Company funded the cash portion of the above described  acquisitions and any
related  refinancings of assumed debt with a bank note (the Term Note). See Debt
and Capital Lease.

The  assets of  ProvEnergy,  Fall  River  Gas and  Valley  Resources  (hereafter
referred to as the Company's "New England Operations") have been included in the
consolidated  balance  sheet of the Company at December 31, 2000 and the results
of  operations  from  the New  England  Operations  have  been  included  in the
statement of consolidated  operations since their respective  acquisition dates.
The New England  Operations' primary business is the distribution of natural gas
through  its public  utility  companies  (collectively  referred  to as the "New
England  Division").  The  acquisitions  were  accounted  for using the purchase
method. The additional  purchase cost assigned to utility plant of approximately
$355,000,000  reflects the excess of the purchase price over the historical book
carrying value of the utility  plant.  Amortization  of the additional  purchase
cost assigned to utility plant is provided on a  straight-line  basis over forty
years. The final allocation of the purchase price of the New England  Operations
acquisition  is expected to be  completed  in the fourth  quarter of fiscal year
2001.  The  Company  plans to sell or  dispose of  certain  non-core  businesses
acquired in the New England Operations.

Prior to the consummation of the acquisition of the New England Operations,  the
Company  purchased  shares of  Providence  Energy  Corporation,  Fall  River Gas
Company and Valley Resources, Inc. common stock for $2,882,000. As all necessary
approvals for the merger had not been obtained when these shares were purchased,
these  purchases  were  treated as  investment  securities  prior to closing the
mergers.

On  November  4, 1999,  the  Company  acquired  Pennsylvania  Enterprises,  Inc.
(hereafter referred to as the "Pennsylvania Operations") in a transaction valued
at  approximately  $500,000,000,  including  assumption  of  long-term  debt  of
approximately  $115,000,000.  The Company issued approximately 16,700,000 shares
(before  adjustment for any subsequent  stock dividend) of common stock and paid
approximately  $36,000,000  in cash to  complete  the  transaction.  The Company
funded the cash portion of the  acquisition of the  Pennsylvania  Operations and
related  refinancings  with the sale of  $300,000,000  of 8.25% Senior Notes due
2029  completed on November 3, 1999 (8.25% Senior  Notes).  See Debt and Capital
Lease.

The Pennsylvania Operations are headquartered in Wilkes-Barre, Pennsylvania with
natural gas distribution  being its primary  business.  The principal  operating
division of the Pennsylvania Operations is the PG Energy division of the Company
which  serves  more than  156,000  gas  customers  in  northeastern  and central
Pennsylvania.   Subsidiaries  of  the  Company   included  in  the  Pennsylvania
Operations merger included PG Energy Services Inc., (Energy Services),  Keystone
Pipeline  Services,  Inc.  (Keystone,  a  wholly-owned  subsidiary  of PG Energy
Services  Inc.),  PEI Power  Corporation,  and Theta Land  Corporation.  Through
Energy  Services  the  Company  markets a  diversified  range of  energy-related
products and services under the name of PG Energy PowerPlus and supplies propane
under the name of PG Energy Propane.  Keystone provides pipeline and fiber optic
cable construction,  installation, maintenance, and rehabilitation services. PEI
Power  Corporation  operates  a  cogeneration  plant  that  generates  steam and
electricity for resale.  Theta Land  Corporation,  which owned and provided land
management and development services for more than 44,000 acres of land, was sold
for  $12,150,000  in  January  2000.  No  gain or loss  was  recognized  on this
transaction.  The  Company  plans to sell or  dispose of both  Keystone  and the
propane  operations of Energy  Services,  which are not material to the Company.
The Company has not yet sold these operations and there can be no assurance that
a sale on terms satisfactory to the Company will be completed.

The assets of the  Pennsylvania  Operations  are  included  in the  consolidated
balance  sheet of the Company at December 31, 2000 and the results of operations
from  the  Pennsylvania  Operations  have  been  included  in the  statement  of
consolidated  operations  since November 4, 1999. The  acquisition was accounted
for using the purchase method. The additional  purchase cost assigned to utility
plant of  approximately  $261,000,000  reflects the excess of the purchase price
over the historical  book carrying value of the utility plant.  Amortization  of
the  additional  purchase  cost  assigned  to  utility  plant is  provided  on a
straight-line basis over forty years.



<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Prior to the consummation of the acquisition of the Pennsylvania Operations, the
Company  purchased  358,500 shares of Pennsylvania  Enterprises,  Inc. stock for
$11,887,000  during both the first and second  quarters of the Company's  fiscal
year 2000.  As all  necessary  approvals  for the merger had not been  obtained,
these purchases were treated as investment securities.

Pro Forma Financial Information

The  following  unaudited  pro forma  financial  information  for the  six-month
periods  ended  December 31, 2000 and 1999 is presented as though the  following
events had  occurred at the  beginning  of the earliest  period  presented:  (i)
acquisition of the New England Operations and the Pennsylvania Operations;  (ii)
the issuance of the Term Note and the sale of the 8.25% Senior Notes;  and (iii)
the  refinancing  of certain  short-term  and long-term  debt at the time of the
acquisitions.  The pro forma financial information is not necessarily indicative
of the results which would have actually  been obtained had the  acquisition  of
the New England Operations and Pennsylvania Operations, the issuance of the Term
Note,  the sale of senior  notes or the  refinancings  been  completed as of the
assumed date for the periods presented or which may be obtained in the future.

                                                   Six Months Ended December 31,
                                                         2000         1999
                                                     -----------------------

Operating revenues.............................      $  793,467   $  507,195
Income (loss) before extraordinary item........         (11,389)     (29,307)
Net earnings (loss) available for common stock.         (11,389)     (29,307)
Net earnings (loss) per common stock:
     Basic.....................................            (.23)        (.58)
     Diluted...................................            (.23)        (.58)

EARNINGS PER SHARE

Average shares  outstanding,  which excludes  treasury stock, for basic earnings
per share were  49,924,123  and  43,421,029  for the  three-month  period  ended
December  31, 2000 and 1999  respectively;  49,255,805  and  37,944,658  for the
six-month period ended December 31, 2000 and 1999, respectively;  and 49,080,587
and  35,359,486  for the  twelve-month  period ended December 31, 2000 and 1999,
respectively.  Diluted earnings per share includes average shares outstanding as
well as common stock  equivalents from stock options and warrants.  Common stock
equivalents  were  1,813,679  and  1,540,243  for the  three-month  period ended
December  31,  2000 and 1999,  respectively;  1,639,167  and  1,523,318  for the
six-month period ended December 31, 2000 and 1999,  respectively;  and 1,391,032
and  1,528,799  for the  twelve-month  period ended  December 31, 2000 and 1999,
respectively.  At December 31, 2000,  1,000,335 shares of common stock were held
by various rabbi trusts for certain of the  Company's  benefit plans and 193,669
shares were held in a rabbi trust for certain  employees who deferred receipt of
Company shares for stock options exercised.

INVESTMENT SECURITIES

At  December  31,  2000,  the  Company  held  securities  of  Capstone   Turbine
Corporation  (Capstone).  This  investment is classified as "available for sale"
under the Statement of Financial  Accounting  Standards Board (FASB)  Accounting
for  Certain  Investments  in Debt and  Equity  Securities;  accordingly,  these
securities are stated at fair value,  with unrealized  gains and losses recorded
as a separate  component  of common  stockholders'  equity.  Realized  gains and
losses on sales of  investments,  as  determined  on a  specific  identification
basis, are included in the  Consolidated  Statement of Operations when realized.
In  November,  2000,  the Company  sold  approximately  9.5% of its  holdings in
Capstone,  realizing a before-tax  gain of $8,869,000.  As of December 31, 2000,
the Company's remaining  investment in Capstone had a fair value of $105,587,000
and  unrealized  gain, net of tax, of  $63,353,000.  As of February 8, 2001, the
fair value of the Company's investment in Capstone was $129,646,000.  Subject to
market conditions that


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



are not  detrimental to the Company,  and as  opportunities  arise following the
completion  of the  applicable  lock-up  periods  to which it was  subject,  the
Company  expects to monetize  its  investment.  The  Company  intends to use the
proceeds from such sales to reduce outstanding debt.

All other  securities  owned by the  Company  are  accounted  for under the cost
method.  The Company's other investments in securities  consist of common and/or
preferred  stock  in  non-public  companies  whose  stock  is  not  traded  on a
securities exchange. Realized gains and losses on sales of these investments, as
determined on a specific  identification basis, are included in the Consolidated
Statement of Operations  when  incurred,  and dividends are recognized as income
when received.

REAL ESTATE

On December 15, 2000, the Company sold its Austin, Texas headquarters  building,
Lavaca Plaza.  The property,  purchased by the Company in 1991,  netted  pre-tax
cash  proceeds of  $20,638,000,  resulting  in a pre-tax  gain of  approximately
$13,532,000.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Accounting Policies of Derivatives and Hedging Activities The Company recognizes
derivatives on the  consolidated  balance sheet at their fair value. On the date
of the  derivative  contract,  the Company  designates  the derivative as: (i) a
hedge of the fair value of a recognized asset or liability or of an unrecognized
firm commitment ("fair value" hedge);  (ii) a hedge of a forecasted  transaction
or of the  variability  of  cash  flows  to be  received  or paid  related  to a
recognized asset or liability  ("cash flow" hedge),  or (iii) "held for trading"
("trading"  instruments).  Changes  in  the  fair  value  of a  derivative  that
qualifies as a fair-value hedge, along with the gain or loss on the hedged asset
or liability that is attributable to the hedged risk (including  gains or losses
on firm commitments),  are recorded in earnings.  Changes in the fair value of a
derivative   that  qualifies  as  a  cash-flow   hedge  are  recorded  in  other
comprehensive  income,  until  earnings are affected by the  variability of cash
flows.  Lastly,  changes in the fair value of derivative trading instruments are
reported in current-period earnings.

Adoption  of  Accounting   Pronouncement  The  Company  adopted  Accounting  for
Derivative  Instruments  and Hedging  Activities  on July 1, 2000. In accordance
with that Statement, the Company recorded a net-of-tax cumulative-effect gain of
$602,000 in earnings to recognize the fair value of the gas derivative contracts
at Energy Services that are not designated as hedges. The Company also recorded
$826,000 in accumulated other comprehensive income which recognizes the fair
value of two interest rate swap derivatives that were designated as cash flow
hedges.

Derivative  Activities The Company  manages  certain  business risks through the
limited use of derivative instruments. Interest rate swaps are employed to hedge
the effect of changes in interest rates related to certain debt  instruments and
commodity  swaps and options to manage price risk associated with certain energy
contracts,  primarily  heating  oil.  The  Company  was  previously  party to an
interest rate swap designed to reduce exposure to changes in the fair value of a
fixed rate lease commitment. This interest rate swap, designated as a fair value
hedge,  was  terminated in October 2000  resulting in a pre-tax gain of $182,000
which will be amortized  into earnings  through  December 2004. The Company also
continues  to be  obligated  under two  interest  rate  swaps  created  to hedge
exposure to potential  volatility in interest payments on variable rate debt. As
such,  the Company  recorded a net-of-tax  loss as an adjustment to  accumulated
other   comprehensive   income  of  $351,000  for  the  quarter,   and  $622,000
year-to-date  to recognize  the change in fair value of these two interest  rate
derivatives designated as cash flow hedges. The Company initiated a new interest
rate swap during the second quarter to hedge exposure to variability in interest
rate  payments  on a portion  of the  short-term  variable  rate debt  issued in
conjunction with our New England  Operations.  The Company recognized a $691,000
net-of-tax loss as an adjustment to other comprehensive  income to recognize the
fair  value of this swap  derivative.  The  Company  expects  to  reclassify  as
earnings during the next


<PAGE>


                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



twelve months $546,000  net-of-tax in derivative  losses from accumulated  other
comprehensive  income as the settlement of swap payments occur. The maximum term
over which the Company is hedging  exposures to the variability of cash flows is
36 months.

The Company was also  previously  committed  under two gas derivative  contracts
related to certain  non-regulated  operations  acquired in conjunction  with the
acquisition  of the  Pennsylvania  Operations.  These  two  contracts  were  not
designated as hedging instruments and therefore did not qualify to receive hedge
accounting treatment under the Statement.  During the quarter,  these derivative
contracts  expired  and the  Company  recognized  a pre-tax  loss of $526,000 in
recording the expiration of these derivative contracts.  This loss was offset by
a pre-tax  gain of  $494,000  arising  from the  monthly  settlement  of the two
derivative contracts that expired in November 2000.

In  conjunction  with the  acquisition  of Providence  Energy  Corporation,  the
Company also acquired  ProvEnergy  Oil, a distributor  of fuel oil to retail and
commercial customers.  ProvEnergy Oil offers certain retail customers price caps
for winter heating oil and purchases heating oil call options as a hedge against
price  fluctuations  on  the  related  anticipated  commodity  purchases.  As of
December 31, 2000, the Company owned options representing 3.4 million gallons of
fuel  oil at an  average  strike  price  of $.81 a  gallon.  These  options  are
reflected on the balance  sheet as assets at their fair value of  $195,000.  The
instruments  are  designated as cash flow hedges and the change in fair value of
the effective  portion of the hedging options was a net-of-tax gain of $117,000
recorded  in other  comprehensive  income  while the  change in the  ineffective
portion was a pre-tax charge of $288,000 recorded in earnings.  The maximum term
over which the Company is hedging exposures to the variability of cash flows for
forecasted purchases of home heating oil is five months.

Trading  Contracts The Company,  through one of its  non-regulated  Pennsylvania
subsidiaries,  is also a party  to  certain  energy  trading  contracts  for the
purchase and sale of energy  commodities.  These  contracts are accounted for in
accordance  with  Emerging  Issues Task Force  Issue  Accounting  for  Contracts
Involved in Energy Trading and Risk  Management  Activities  which requires that
energy trading contracts be recorded at fair value as of each balance sheet date
with gains and losses  included in  earnings.  During the second  quarter  ended
December 31, 2000,  the Company  received  settlements of $660,000.  At December
31, 2000, the trading asset was $352,000 which represents the fair market value
of the outstanding contracts.

PREFERRED SECURITIES OF SUBSIDIARY TRUST

On May 17, 1995,  Southern Union Financing I (Subsidiary  Trust), a consolidated
wholly-owned  subsidiary of Southern Union,  issued  $100,000,000 of 9.48% Trust
Originated Preferred Securities (Preferred  Securities).  In connection with the
Subsidiary Trust's issuance of the Preferred Securities and the related purchase
by Southern Union of all of the Subsidiary  Trust's  common  securities  (Common
Securities),   Southern  Union  issued  to  the  Subsidiary  Trust  $103,092,800
principal amount of its 9.48% Subordinated  Deferrable  Interest Notes, due 2025
(Subordinated Notes).

The sole assets of the Subsidiary Trust are the Subordinated Notes. The interest
and other payment dates on the Subordinated Notes correspond to the distribution
and other payment dates on the Preferred  Securities and the Common  Securities.
Under  certain  circumstances,  the  Subordinated  Notes may be  distributed  to
holders of the  Preferred  Securities  and holders of the Common  Securities  in
liquidation of the Subsidiary  Trust. The  Subordinated  Notes are redeemable at
the option of the Company at a  redemption  price of $25 per  Subordinated  Note
plus  accrued  and unpaid  interest.  The  Preferred  Securities  and the Common
Securities  will be  redeemed  on a pro rata  basis to the  same  extent  as the
Subordinated Notes are repaid, at $25 per Preferred Security and Common Security
plus accumulated and unpaid  distributions.  Southern Union's  obligations under
the Subordinated Notes and related agreements, taken together, constitute a full
and  unconditional  guarantee by Southern Union of payments due on the Preferred
Securities.  As of December  31, 2000 and 1999,  4,000,000  shares of  Preferred
Securities were outstanding.



<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



DEBT AND CAPITAL LEASE

                                                    December 31,  June 30,
                                                       2000         2000
                                                    ----------   -----------
                                                     (thousands of dollars)

7.60% Senior Notes due 2024 .....................   $  364,515   $  364,515
8.25% Senior Notes due 2029 .....................      300,000      300,000
8.375% First Mortgage Bonds, due 2002 ...........       30,000       30,000
5.62% First Mortgage Bonds, due 2003 ............        4,800         --
10.25% First Mortgage Bonds, due 2008 ...........        1,909         --
6.82% First Mortgage Bonds, due 2018 ............       15,000         --
9.34% First Mortgage Bonds, due 2019 ............       15,000       15,000
9.63% First Mortgage Bonds, due 2020 ............       10,000         --
9.44% First Mortgage Bonds, due 2020 ............        6,500         --
8.09% First Mortgage Bonds, due 2022 ............       12,500         --
8.46% First Mortgage Bonds, due 2022 ............       12,500         --
7.50% First Mortgage Bonds, due 2025 ............       15,000         --
7.99% First Mortgage Bonds, due 2026 ............        7,000         --
7.24% First Mortgage Bonds, due 2027 ............        6,000         --
6.50% First Mortgage Bonds, due 2029 ............       14,531         --
7.70% Debentures, due 2027 ......................        6,839         --
Term Note, due 2002 .............................      529,000         --
Capital lease and other .........................       29,839       26,452
                                                    ----------   ----------
Total debt and capital lease ....................    1,380,933      735,967
    Less current portion ........................        5,173        2,193
                                                    ----------   ----------

Total long-term debt and capital lease ..........   $1,375,760   $  733,774
                                                    ==========   ==========


Senior Notes On November 3, 1999, the Company completed the sale of $300,000,000
of 8.25% Senior Notes (8.25% Notes) due 2029.  The net proceeds from the sale of
these  8.25%  Notes  were  used to:  (i) fund the  acquisition  of  Pennsylvania
Enterprises, Inc.; (ii) repay approximately $109,900,000 of borrowings under the
revolving credit facility,  and (iii) repay approximately  $136,000,000 of long-
and short-term debt assumed in the acquisition.

Assumed Debt In connection with the acquisition of the Pennsylvania  Operations,
the Company assumed $45,000,000 of First Mortgage Bonds bearing interest between
8.375% and 9.34%. In connection with the acquisition of ProvEnergy,  the Company
assumed  $86,916,000 of First Mortgage Bonds bearing  interest between 5.62% and
10.25%.  In  connection  with the  acquisition  of Fall River Gas,  the  Company
assumed  $19,500,000 of First Mortgage Bonds bearing  interest between 7.24% and
9.44%.  In connection  with the  acquisition  of Valley  Resources,  the Company
assumed $6,905,000 of 7.70% Debentures.

Capital  Lease The Company  completed  the  installation  of an Automated  Meter
Reading  (AMR) system at Missouri Gas Energy  during the first quarter of fiscal
year  1999.  The  installation  of the AMR  system  involved  an  investment  of
approximately  $30,000,000 which is accounted for as a capital lease obligation.
As  of  December  31,  2000,  the  capital  lease  obligation   outstanding  was
$24,166,000 with a fixed rate of 5.79%. This system has  significantly  improved
meter reading accuracy and timeliness and provided  electronic  accessibility to
meters in residential  customers' basements,  thereby assisting in the reduction
of the number of estimated bills.

Credit  Facilities  On May 31,  2000,  the  Company  restated  and  amended  its
short-term and long-term credit facilities  (together  referred to as "Revolving
Credit Facilities").  The Company has available $90,000,000 under the short-term
facility,  which  expires May 30, 2001,  and  $135,000,000  under the  long-term
facility, which expires on May 31, 2003. The Company has additional availability
under uncommitted line of credit facilities with various banks. Borrowings


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



under the Revolving Credit Facilities are available for Southern Union's working
capital,  letter of credit requirements and other general corporate purposes.  A
balance of $175,000,000 was outstanding under the Revolving Credit Facilities at
December 31, 2000.

Term Note On August 28, 2000 the Company  entered into the Term Note to fund (i)
the  cash  portion  of the  consideration  to be paid  to the  Fall  River  Gas'
stockholders;  (ii) the all cash  consideration to be paid to the ProvEnergy and
Valley Resources stockholders,  (iii) repayment of approximately  $50,000,000 of
long-  and  short-term  debt  assumed  in the  mergers,  and  (iv)  all  related
acquisition  costs.  As of December  31,  2000,  a balance of  $529,000,000  was
outstanding  under this Term Note. The Term Note expires August 27, 2001 but may
be extended at the  Company's  option  through  August 26, 2002 for a 12.5 basis
point fee. No additional draws can be made on the Term Note.

UTILITY REGULATION AND RATES

Missouri On November 7, 2000,  Missouri Gas Energy filed a  $39,384,000  request
for a rate increase with the Missouri Public Service Commission (MPSC). Statutes
require  that the MPSC  reach a  decision  in the case  within  an  eleven-month
period.

On August 21, 1998, Missouri Gas Energy was notified by the MPSC of its decision
to grant a  $13,300,000  annual  increase to revenue  effective  on September 2,
1998, which is primarily earned volumetrically.  The MPSC rate order reflected a
10.93% return on common  equity.  The rate order,  however,  disallowed  certain
previously recorded deferred costs requiring a non-cash write-off of $2,221,000.
The Company  recorded  this charge to earnings in its fiscal year ended June 30,
1998.  On  December  8, 1998,  the MPSC denied  rehearing  requests  made by all
parties  other than  Missouri  Gas Energy and granted a portion of Missouri  Gas
Energy's rehearing request. On October 10, 2000, the MPSC issued its decision on
rehearing  Missouri Gas Energy's  request which served to reduce the $13,300,000
annual  revenue  increase by $70,000.  The MPSC's orders are subject to judicial
review and although  certain parties have argued for a reduction in Missouri Gas
Energy's  authorized  base  revenue  increase on judicial  review,  Missouri Gas
Energy expects such arguments to be unsuccessful.

Rhode  Island  Effective  October 1, 2000,  the Rhode  Island  Public  Utilities
Commission  (RIPUC) approved a settlement  agreement between Providence Gas, the
Rhode Island  Division of Public  Utilities and Carriers,  the Energy Council of
Rhode Island, and The George Wiley Center. The settlement  agreement  recognizes
the need for an  increase  in  distribution  system  revenues  of $4.5  million,
recovered through an adjustment to the throughput portion of the gas charge, and
provides for a 21-month base rate freeze. In the settlement agreement, the RIPUC
authorized system improvement programs.  Additionally,  higher levels of support
for  low  income  bill  payment   assistance  was  authorized  as  well  as  the
continuation  of  the  utility's  demand  side  management  and   weatherization
assistance programs.

The  settlement  agreement  also  contains  a weather  mitigation  clause  and a
non-firm  margin  incentive  mechanism  (non-firm  margin is margin  earned from
interruptible  customers with the ability to switch to alternative  fuels).  The
weather  mitigation  clause is  designed  to  mitigate  the  impact  of  weather
volatility on customer billings, which will assist customers in paying bills and
stabilize the revenue  stream to Providence  Gas.  Providence Gas will defer the
margin impact of weather that is greater than 2 percent  colder-than-normal  and
will  recover  the  margin  impact of  weather  that is  greater  than 2 percent
warmer-than-normal  by  making  the  corresponding  adjustment  to the  deferred
revenue account (DRA).  The non-firm margin  incentive  mechanism is designed to
encourage  Providence Gas to promote the development of non-firm margins,  which
will reduce the cost of service to all customers.  Providence Gas will retain 25
percent of all non-firm margins earned in excess of $1.2 million.




<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Under the settlement  agreement,  Providence Gas may earn up to 10.7 percent but
not less than 7.0  percent  using the  average  return on equity  for the two 12
month periods of October 2000 through  September 2001 and July 2001 through June
2002.

Pennsylvania  On  April  3,  2000,  PG  Energy  filed  an  application  with the
Pennsylvania  Public Utility  Commission  (PPUC) seeking an increase in its base
rates designed to produce $17,900,000 in additional annual revenues. On December
7, 2000,  the PPUC  approved a  settlement  agreement  that  provides for a rate
increase designed to produce  $10,800,000 of additional annual revenue.  The new
rates became effective on January 1, 2001.

El Paso,  Texas On October 18, 1999,  Southern Union Gas filed a $1,696,000 rate
increase  request  for the El Paso  service  area  with the City of El Paso.  In
February 2000, the City of El Paso approved a $650,000 revenue increase,  and an
improved  rate design that collects a greater  portion of the Company's  revenue
stream  from the  monthly  customer  charge.  Additionally,  the City of El Paso
approved a new 30-year franchise for Southern Union Gas.

COMMITMENTS AND CONTINGENCIES

Environmental  The  Company  is  subject  to  federal,  state and local laws and
regulations  relating to the protection of the environment.  These evolving laws
and regulations may require  expenditures  over a long period of time to control
environmental  impacts. The Company has established  procedures for the on-going
evaluation of its operations to identify potential  environmental  exposures and
assure compliance with regulatory policies and procedures.

The Company is  investigating  the  possibility  that the Company or predecessor
companies may have been  associated with  Manufactured  Gas Plant (MGP) sites in
its former  service  territories,  principally  in Arizona and New  Mexico,  and
present service  territories in Texas,  Missouri and its newly acquired  service
territories  in  Pennsylvania,  Massachusetts  and Rhode Island.  At the present
time,  the  Company  is aware  of  certain  MGP  sites  in  these  areas  and is
investigating those and certain other locations.  While the Company's evaluation
of these Texas, Missouri, Arizona, New Mexico,  Pennsylvania,  Massachusetts and
Rhode  Island MGP sites is in its  preliminary  stages,  it is likely  that some
compliance   costs  may  be   identified   and  become   subject  to  reasonable
quantification.  Within the Company's service  territories certain MGP sites are
currently  the subject of  governmental  actions.  Certain of these sites are as
follows:

Kansas City,  Missouri  MGP Sites In a letter  dated May 10, 1999,  the Missouri
Department  of  Natural   Resources   (MDNR)  sent  notice  of  a  planned  Site
Inspection/Removal  Site Evaluation of the Kansas City Coal Gas Former MGP site.
This site  (comprised  of two adjacent MGP  operations  previously  owned by two
separate  companies  and  hereafter  referred  to as Station A and Station B) is
located at East 1st Street and Campbell in Kansas City, Missouri and is owned by
Missouri  Gas  Energy.  A  1988  investigation  of  the  site  performed  by  an
Environmental   Protection  Agency  (EPA)  contractor  determined  that  further
remedial  assessment  was not  required  under the  Comprehensive  Environmental
Response  Compensation  and  Liability Act of 1980  (CERCLA),  as amended by the
SUPERFUND  Amendments and  Reauthorization Act of 1986. The MDNR has stated that
the  reassessment of the Kansas City Coal Gas site is part of a statewide effort
to identify,  evaluate,  and  prioritize  the potential  hazards posed by all of
Missouri's MGP sites.  During July 1999, the Company sent  applications  to MDNR
submitting the two sites to the agency's  Voluntary  Cleanup Program (VCP).  The
sites  were  accepted  into the VCP on  August  2,  1999  and MDNR  subsequently
approved the Company's  proposed work plans for the environmental  assessment of
the  sites.  The final  environment  reports  were sent to the state on March 6,
2000.  In a  letter  dated  June 21,  2000,  MDNR  responded  to the  Station  A
environmental  report submitted by the Company. In that letter, MDNR stated that
soil  remediation  will be  necessary  at the site  (Station A) but that further
exploration and  delineation of site  contamination  should be performed  before
remedial methods can be determined.  In response to MDNR's request,  the Company
submitted  a work plan for  further  investigation  of the site to the agency on
September 18, 2000. MDNR has not responded to the Station B environmental report
submitted by the Company.



<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Independence, Missouri MGP Site The Company received a letter dated December 16,
1999  from MDNR  notifying  the  Company  of a  Pre-Comprehensive  Environmental
Response  Compensation and Liability Information System (CERCLIS) Site Screening
investigation  of a former MGP located at Pacific Avenue & South River Boulevard
in Independence,  Missouri.  The Company  contacted the MDNR to inform the state
that,  as this  property is not owned by the Company,  it cannot grant access to
the property for MDNR's investigation. MDNR proceeded to investigate the site in
cooperation  with the site's current owner. In a letter dated May 17, 2000, MDNR
reported  that the site is not  recommended  for  CERCLIS  entry and no  further
CERCLA action is  recommended.  However,  due to the presence of  characteristic
waste, the site is eligible for the state's  Registry of Confirmed  Abandoned or
Uncontrollable Hazardous Waste Disposal Sites in Missouri.

Providence,   Rhode  Island  Sites   During  1995,   Providence   Gas  began  an
environmental evaluation at its primary gas distribution facility located at 642
Allens  Avenue  in  Providence,   Rhode  Island.  Environmental  studies  and  a
subsequent  remediation  work plan were completed at an approximate cost of $4.5
million.  Providence Gas also began a soil  remediation  project on a portion of
the site in July 1999. As of December 31, 2000,  approximately  $8.9 million had
been expended on soil remediation  under the remediation work plan. Based on the
results of the  environmental  investigation  and the site  information  learned
during the performance of work under the  remediation  work plan, the Company is
now revising the remediation work plan. Because of the uncertainties  associated
with the revision of the remediation work plan and the development of a remedial
solution for the entire site, the Company cannot offer any conclusions as to the
total future cost of remediation of the property at this time.

In November 1998,  Providence Gas received a letter of  responsibility  from the
Department of Environmental  Management (DEM) relating to possible contamination
on previously  owned  property at 170 Allens Avenue in  Providence.  The current
operator of the property has also  received a letter of  responsibility.  A work
plan has been  created  and  approved  by DEM.  An  investigation  has  begun to
determine  the extent of  contamination,  as well as the extent of the Company's
responsibility.  Providence Gas entered into a  cost-sharing  agreement with the
current operator of the property,  under which Providence Gas is responsible for
approximately  twenty  percent (20%) of the costs related to the  investigation.
Costs of  testing  at this  site as of  December  31,  2000  were  approximately
$300,000.  Until the results of the  investigation are known, the Company cannot
offer any conclusions as to its responsibility.

Tiverton,  Rhode  Island Site Fall River Gas  Company is a defendant  in a civil
action  seeking  to  recover  anticipated   remediation  costs  associated  with
contamination found at property owned by the plaintiffs.  This claim is based on
alleged  dumping of material by Fall River Gas Company trucks at the site in the
1930s and 1940s.

Valley  Resources  Sites  Valley  Resources  is a party  to an  action  in which
Blackstone Valley Electric Company  ("Blackstone") brought suit for contribution
to its expenses of cleanup of a site on Mendon Road in Attleboro, Massachusetts,
to which  coal  manufacturing  waste was  transported  from a former MGP site in
Pawtucket,  Rhode  Island  (the  "Blackstone  Litigation").   Blackstone  Valley
Electric  Company  v.  Stone  &  Webster,  Inc.,  Stone  &  Webster  Engineering
Corporation,  Stone &  Webster  Management  Consultants,  Inc.  and  Valley  Gas
Company,  C. A. No.  94-10178JLT,  United  States  District  Court,  District of
Massachusetts. Valley Resources takes the position in that litigation that it is
indemnified for any cleanup expenses by Blackstone  pursuant to a 1961 agreement
signed at the time of Valley Resources'  creation.  This suit was stayed in 1995
pending the issuance of  rulemaking at the United  States EPA  (Commonwealth  of
Massachusetts v. Blackstone  Valley Electric  Company,  67 F.3d 981 (1995)).  In
January 2001, the EPA issued a Preliminary Administrative Decision on this issue
and  announced  that,  until March 21, 2001,  it is  soliciting  comments on the
Decision.  While this suit has been  stayed,  Valley  Resources  and  Blackstone
(merged with Narragansett Electric Company in May 2000) have received letters of
responsibility  from the Rhode Island DEM with respect to releases  from two MGP
sites in Rhode Island.  DEM issued letters of responsibility to Valley Resources
and  Blackstone in September  1995 for the  Tidewater  MGP in  Pawtucket,  Rhode
Island,  and in February  1997 for the Hamlet  Avenue MGP in  Woonsocket,  Rhode
Island.  Valley  Resources  entered  into  an  agreement  with  Blackstone  (now
Narragansett) in which Valley  Resources and Blackstone  agreed to share equally
the  expenses  for the costs  associated  with the  Tidewater  site  subject  to
reallocation upon final determination


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



of  the  legal  issues  that  exist  between  the  companies   with  respect  to
responsibility  for  expenses  for the  Tidewater  site and  otherwise.  No such
agreement has been reached with respect to the Hamlet site.

To the extent that potential  costs  associated with former MGPs are quantified,
the Company  expects to provide any  appropriate  accruals and seek recovery for
such remediation costs through all appropriate means, including in rates charged
to customers, insurance and regulatory relief. At the time of the closing of the
acquisition of the Company's Missouri service  territories,  the Company entered
into an Environmental  Liability  Agreement that provides that Western Resources
retains financial  responsibility  for certain  liabilities under  environmental
laws that may exist or arise with respect to Missouri  Gas Energy.  In addition,
at the time it was acquired,  Providence Gas had in place a regulatory plan that
created a mechanism for the recovery of  environmental-related  costs. This plan
provided for  recovery of  environmental  investigation  and  remediation  costs
incurred  through  September  30,  1997,  as well as costs  incurred  during the
three-year  term of the plan,  are to be amortized over a 10-year  period,  at a
level authorized under the plan. A new plan,  effective  October 1, 2000 through
June 30, 2002, establishes an environmental fund for the recovery of evaluation,
remedial  and  clean-up  costs  arising  out of the  Company's  MGPs  and  sites
associated with the operation and disposal activities from MGPs.

Although  significant  charges to earnings  could be required  prior to rate and
insurance recovery,  management does not believe that environmental expenditures
for MGP sites will have a material  adverse  effect on the  Company's  financial
position, results of operations or cash flows.

The Company follows the provisions of an American  Institute of Certified Public
Accountants Statement of Position,  Environmental  Remediation Liabilities,  for
recognition,  measurement,  display and disclosure of environmental  remediation
liabilities.

Southwest  Gas  Litigation  On  February  1, 1999,  Southern  Union  submitted a
proposal to the Board of Directors of Southwest Gas  Corporation  (Southwest) to
acquire  all of  Southwest's  outstanding  common  stock for  $32.00  per share.
Southwest then had a pending merger agreement with ONEOK, Inc. (ONEOK) at $28.50
per share.  On February 22, 1999,  Southern  Union and  Southwest  both publicly
announced  Southern  Union's  proposal,  after the Southwest  Board of Directors
determined that Southern Union's proposal was a Superior Proposal (as defined in
the Southwest merger agreement with ONEOK).  At that time Southern Union entered
into a  Confidentiality  and Standstill  Agreement with Southwest at Southwest's
insistence.  On April 25, 1999, Southwest's Board of Directors rejected Southern
Union's $32.00 per share offer and accepted an amended offer of $30.00 per share
from ONEOK. On April 27, 1999,  Southern Union increased its offer to $33.50 per
share and agreed to pay interest which,  together with dividends,  would provide
Southwest  shareholders  with a 6% annual  rate of return on its  $33.50  offer,
commencing  February 15, 2000, until closing.  Southern Union's revised proposal
was rejected by  Southwest's  Board of  Directors.  On January 21,  2000,  ONEOK
announced that it was withdrawing from the Southwest merger agreement.

There  are  several  lawsuits  pending  that  relate to  activities  surrounding
Southern Union's efforts to acquire Southwest. In addition,  there is before the
U. S. Court of Appeals for the Tenth  Circuit,  an appeal by Southern Union of a
preliminary  injunction  entered by the U. S.  District  Court for the  Northern
District of Oklahoma.  Southern  Union intends to  vigorously  pursue its claims
against  Southwest,  ONEOK, and certain  individual  defendants,  and vigorously
defend itself  against the claims by Southwest and ONEOK.  With the exception of
ongoing legal fees associated with the  aforementioned  litigation,  the Company
believes that the results of the above-noted  Southwest litigation will not have
a materially  adverse effect on the Company's  financial  condition,  results of
operations or cash flows.

Regulatory In August 1998, a jury in Edinburg,  Texas concluded deliberations on
the City of  Edinburg's  franchise  fee lawsuit  against PG&E Gas  Transmission,
Texas Corporation  (formerly Valero Energy Corporation (Valero)) and a number of
its  subsidiaries,  as well as former  Valero  subsidiary  Rio Grande Valley Gas
Company (RGV) and RGV's  successor  company,  Southern Union  Company.  Southern
Union  purchased RGV from Valero in October 1993. The jury awarded the plaintiff
damages,  against all defendants under several largely  overlapping but mutually
exclusive


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



claims, totaling approximately $13,000,000. The trial judge subsequently reduced
the award to  approximately  $700,000  against  Southern  Union  and  $7,800,000
against  Valero and Southern  Union  together.  The trial  court's  decision was
appealed to the  Thirteenth  District  of the Texas  Court of Appeals  (Court of
Appeals). In December 2000, the Court of Appeals reversed and modified the trial
court's  judgment of  approximately  $8,500,000 and awarded the City of Edinburg
$585,000,  plus  pre-judgment  interest of  $190,000  against RGV and Valero for
breach of contract. The Court of Appeals upheld the award for attorneys' fees of
approximately  $3,500,000  against Valero,  RGV and Southern Union.  The Company
will  continue  to pursue  reversal  of this  judgment  on appeal.  The  Company
believes it will  ultimately  prevail,  and that the outcome of this matter will
not have a material  adverse  impact on the  Company's  results  of  operations,
financial  position  or  cash  flows.  The  Company  also  has  entered  into  a
preliminary settlement agreement to settle a related class action lawsuit with a
majority  of the  cities  served  by  the  Company  in  Texas.  The  preliminary
settlement will not have a material  adverse impact on the Company's  results of
operations, financial position or cash flows.

Other Southern Union and its subsidiaries are parties to other legal proceedings
that  management  considers to be normal  actions to which an  enterprise of its
size and  nature  might be  subject,  and not to be  material  to the  Company's
overall business or financial condition, results of operations or cash flows.

Commitments  Due to the  operation  of  purchase  gas  adjustment  clauses,  gas
purchase  costs  generally  do not  directly  affect  earnings of our  regulated
utility operations.  However, the Company's unregulated gas marketing operations
are subject to price risk related to fixed-price  sales commitments that are not
matched with  corresponding  fixed-price  purchase  agreements.  At December 31,
2000,  Energy  Services  had  fixed-price  sales  commitments  with  various
customers that provide for the delivery of approximately  468,000  Dekatherms of
natural gas through April 2001 at an average sales price per Dekatherm of $3.13.
The  Company  has  exposure  to the  changes  in natural  gas prices  related to
fluctuating  commodity prices, which can impact the Company's financial position
or  results  of  operations,  either  favorably  or  unfavorably.  The impact of
changing  prices on the Company's  financial  position at a point in time is not
necessarily indicative of the impact of price movements throughout the year.




<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Overview   Southern  Union  Company's  (the  "Company")  core  business  is  the
distribution  of natural gas as a public  utility  through:  Southern Union Gas,
Missouri Gas Energy (MGE);  Atlantic Utilities,  doing business as South Florida
Natural Gas (SFNG); PG Energy, acquired on November 4, 1999; and, effective with
the  September  2000  acquisitions  of  Providence  Energy  Corporation,  Valley
Resources,  Inc.  and Fall  River  Gas  Company,  collectively  its New  England
Division. In addition, subsidiaries of Southern Union support and expand natural
gas  sales  and  capitalize  on  the  Company's  gas  energy  expertise.   These
subsidiaries operate natural gas pipeline systems, generate electricity,  market
natural gas and  electricity to end-users and  distribute  propane and fuel oil.
Certain subsidiaries also own or hold interests in real estate and other assets,
which are primarily used in the Company's utility business.

Most of the Company's business  activities are subject to regulation by federal,
state or local  authorities  where the Company  operates.  Thus,  the  Company's
financial  condition and results of operations have been and will continue to be
dependent  upon the  receipt of adequate  and timely  adjustments  in rates.  In
addition,  the  Company's  business is affected  by  seasonal  weather  impacts,
competitive  factors  within the energy  industry and economic  development  and
residential growth in its service areas.

Acquisitions On September 28, 2000,  Southern Union completed the acquisition of
Providence Energy  Corporation  (ProvEnergy) for  approximately  $270,000,000 in
cash plus the  assumption  of  $90,000,000  in long-term  debt.  The  ProvEnergy
natural gas distribution  operations are Providence Gas and North Attleboro Gas,
which collectively serve approximately 176,000 natural gas customers. Providence
Gas serves natural gas customers in Providence and Newport, Rhode Island, and 23
other cities and towns in Rhode Island.  North Attleboro Gas serves customers in
North   Attleboro  and   Plainville,   Massachusetts,   towns  adjacent  to  the
northeastern  Rhode Island border.  Subsidiaries of the Company  acquired in the
ProvEnergy merger include ProvEnergy Oil Enterprises, Inc. (ProvEnergy Oil), and
ProvEnergy Power Company,  LLC.  ProvEnergy Oil operates a fuel oil distribution
business through its subsidiary,  ProvEnergy  Fuels,  Inc.  (ProvEnergy  Fuels).
ProvEnergy  Fuels serves over 15,000  residential  and  commercial  customers in
Rhode Island and  Massachusetts.  ProvEnergy  Power  Company owns 50% of Capital
Center Energy Company,  LLC., a joint venture formed between  ProvEnergy and ERI
Services, Inc. to provide retail power.

On September 28, 2000,  Southern  Union also  completed the  acquisition of Fall
River  Gas  Company  (Fall  River  Gas) for  approximately  1,400,000  shares of
Southern  Union  common  stock  and  approximately   $27,000,000  in  cash  plus
assumption of $20,000,000 in long-term debt. Fall River Gas serves approximately
49,000  customers in the city of Fall River and the towns of  Somerset,  Swansea
and Westport,  all located in southeastern  Massachusetts.  Also acquired in the
Fall River Gas merger was Fall River Gas  Appliance  Company,  Inc.  which rents
water heaters and conversion burners in Fall River Gas' service area.

On September  20, 2000,  Southern  Union  completed  the  acquisition  of Valley
Resources,  Inc. (Valley Resources) for approximately  $125,000,000 in cash plus
the assumption of $30,000,000 in long-term debt.  Valley  Resources  natural gas
distribution  operations  are  Valley Gas  Company  and  Bristol  and Warren Gas
Company,  which collectively serve  approximately  65,000 natural gas customers.
Valley Resources' three non-utility subsidiaries acquired in the merger rent and
sell appliances,  offer service contract programs,  sell liquid propane in Rhode
Island and nearby Massachusetts, and distribute as a wholesaler franchised lines
to plumbing and heating contractors. Also acquired in the acquisition was Valley
Resources' 90% interest in Alternate Energy Corporation,  which sells,  installs
and designs  natural gas  conversion  systems and  facilities,  is an authorized
representative  of the ONSI  Corporation  fuel cell, holds patents for a natural
gas/diesel  co-firing  system  and for a device to  control  the flow of fuel on
dual-fuel equipment.

Collectively,  the operations from the above-mentioned acquisitions are referred
to as the "New  England  Operations."  The  Company  plans to sell or dispose of
certain non-core businesses acquired in the New England Operations.


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



On  November  4, 1999,  the  Company  acquired  Pennsylvania  Enterprises,  Inc.
(hereafter referred to as the "Pennsylvania Operations") in a transaction valued
at  approximately  $500,000,000,  including  assumption  of  long-term  debt  of
approximately  $115,000,000.  The Company issued approximately 16,700,000 shares
(before  adjustment for any subsequent  stock dividend) of common stock and paid
approximately $36,000,000 in cash to complete the transaction.  The Pennsylvania
Operations are  headquartered  in  Wilkes-Barre,  Pennsylvania  with natural gas
distribution being its primary business. The principal operating division of the
Pennsylvania  Operations  is the PG Energy  division of the Company which serves
more than  156,000 gas  customers  in  northeastern  and  central  Pennsylvania.
Subsidiaries of the Company included in the Pennsylvania  Operations  include PG
Energy  Services Inc.,  (Energy  Services);  Keystone  Pipeline  Services,  Inc.
(Keystone, a wholly-owned  subsidiary of PG Energy Services Inc.); and PEI Power
Corporation.  Through Energy Services the Company markets a diversified range of
energy-related  products and services under the name of PG Energy  PowerPlus and
supplies propane under the name of PG Energy Propane. Keystone provides pipeline
and   fiber   optic   cable   construction,   installation,   maintenance,   and
rehabilitation  services.  PEI Power Corporation  operates a cogeneration  plant
that generates steam and  electricity  for resale.  The Company plans to sell or
dispose of both Keystone and the propane  operations of Energy  Services;  these
operations  are not material to the Company.  The Company has not yet sold these
operations  and there can be no assurance that a sale on terms  satisfactory  to
the Company will be completed.

The operating  activities of the acquired  operations are consolidated  with the
Company beginning on their respective  acquisition  dates.  Thus, the results of
operations for the three-, six- and twelve-month periods ended December 31, 2000
are not indicative of results that would necessarily be achieved for a full year
since the majority of the Company's operating margin is earned during the winter
heating season. For these reasons,  the results of operations of the Company for
the periods  subsequent to the  acquisitions are not comparable to those periods
prior  to the  acquisitions  nor are  the  fiscal  2001  results  of  operations
comparable with prior periods.

RESULTS OF OPERATIONS

Three Months Ended December 31, 2000 and 1999

The Company recorded net earnings  available for common stock of $22,476,000 for
the  three-month  period ended  December 31, 2000  compared with net earnings of
$7,132,000 for the same period in 1999.  Earnings per diluted share were $.43 in
2000,  compared to $.16 in 1999.  Weighted  average  diluted shares  outstanding
increased  16% in 2000 due to the  issuance of 1,370,629  shares and  16,713,731
shares (before  adjustment for any subsequent  stock  dividend) of the Company's
common  stock on  September  28,  2000 and  November 4, 1999,  respectively,  in
connection  with  the  acquisition  of  Fall  River  Gas  and  the  Pennsylvania
Operations, respectively.

Operating  revenues were $605,339,000 for the three-month  period ended December
31, 2000,  compared  with  $239,595,000  in 1999.  Gas purchase and other energy
costs for the  three-month  period ended  December  31, 2000 were  $433,925,000,
compared  with  $145,113,000  in 1999.  The  Company's  operating  revenues  are
affected by the level of sales volumes and by the  pass-through  of increases or
decreases  in the  Company's  gas  purchase  costs  through  its  purchased  gas
adjustment  clauses.  Additionally,   revenues  are  affected  by  increases  or
decreases in gross  receipts taxes  (revenue-related  taxes) which are levied on
sales revenue as collected  from  customers  and remitted to the various  taxing
authorities.  The increase in both  operating  revenues  and gas purchase  costs
between  periods was  primarily  due to a 75%  increase  in gas sales  volume to
63,031  MMcf in 2000  from  36,098  MMcf in 1999  and by a 73%  increase  in the
average cost of gas from $3.61 per Mcf in 1999 to $6.23 per Mcf in 2000. Changes
in the average cost of gas resulted from seasonal impacts on demands for natural
gas. The New England Operations contributed $138,711,000 to the overall increase
in operating  revenues,  $87,737,000  in gas purchase and other energy costs and
10,900 MMcf of the increase in gas sales  volume.  The  Pennsylvania  Operations
generated a net increase of  $45,093,000 in operating  revenues,  $41,122,000 in
gas purchase and other energy costs, and 3,183 MMcf of the increase in gas sales
volume. The remaining increases in both operating revenues and gas purchase


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



and other energy costs was primarily due to the previously mentioned increase in
the average cost of gas as well as a 12,842 MMcf increase in sales volume in the
Texas and Missouri  service  territories  as a result of the  colder-than-normal
weather  in  these  territories  in  2000  as  compared  to the  unusually  mild
temperatures in 1999.

Weather  in MGE's  service  territories  was 123% of a 30-year  measure  for the
three-month period ended December 31, 2000,  compared with 78% in 1999. Southern
Union Gas service  territories  experienced  weather which was 131% of a 30-year
measure in 2000,  compared with 86% in 1999.  About half of the customers served
by Southern Union Gas are weather  normalized.  Additionally,  with the February
2000 revenue increase in El Paso,  Texas, the new rate design collects a greater
portion of the Company's revenue stream from the monthly customer charge instead
of being earned  volumetrically.  Weather for the PG Energy service  territories
was 113% of a 30-year  measure for the  three-month  period  ended  December 31,
2000,  compared  with 89% of a 30-year  measure for the  two-month  period ended
December 31, 1999.  Weather in the New England division service  territories was
110% of a 30-year measure for the three-month period ended December 31, 2000.

Net operating margin  (operating  margin less  revenue-related  taxes) increased
$64,334,000 for the three-month period ended December 31, 2000 compared with the
same period in 1999.  Growth in net  operating  margin is  primarily  due to the
colder-than-normal  weather,  previously  discussed;  the acquisition of the New
England Operations which generated  $47,665,000 in net operating margin; and the
Pennsylvania Operations, which contributed a net increase of $5,237,000.

Operating expenses,  which include operating,  maintenance and general expenses,
depreciation and amortization, and taxes other than on income and revenues, were
$93,839,000 for the  three-month  period ended December 31, 2000, an increase of
$41,511,000,  compared with  $52,328,000 in 1999. An increase of $31,797,000 and
$3,987,000 was the result of the  acquisition of the New England  Operations and
the Pennsylvania Operations, respectively. Also impacting operating expenses was
an increase in bad debt expense in the Texas and Missouri service territories of
$2,800,000 due to an increase in customer  receivables as a result of higher gas
prices as previously discussed.  Additionally, a $7.32 increase in the Company's
common  stock  price  during the  three-month  period  ended  December  31, 2000
resulted in $2,038,000 of non-cash  compensation  expense associated with shares
of common  stock held in a trust for one of the  Company's  benefit  plans.  The
Company  will amend this plan  during the third  quarter of fiscal  year 2001 to
eliminate future expense,  or income volitility,  associated with the accounting
treatment for such benefit plan.

Interest  expense was $30,303,000 for the three-month  period ended December 31,
2000,  compared with $13,299,000 in 1999.  Interest expense increased  primarily
due to a  $535,000,000  bank note (the Term Note) entered into by the Company on
August  28,  2000 for the  acquisition  of the New  England  Operations  and the
issuance of $300,000,000 of 8.25% Senior Notes on November 3, 1999 (8.25% Senior
Notes) for the acquisition of the Pennsylvania  Operations.  The Company entered
into the Term Note to (i) fund the cash  consideration  paid to  stockholders of
Fall River Gas, ProvEnergy and Valley Resources,  (ii) refinance and repay long-
and short-term debt assumed in the New England Operations, and (iii) acquisition
costs of the New England  Operations.  In  addition,  the Company  issued  8.25%
Senior Notes to fund the  acquisition of Pennsylvania  Enterprises,  Inc. and to
extinguish  $136,000,000 in existing debt of the  Pennsylvania  Operations.  The
Company  also  assumed  $158,321,000  in  long-term  debt of the New England and
Pennsylvania  Operations which was not refinanced or extinguished  with the Term
Note or the 8.25% Senior Notes.  As a result of the  previously  discussed  high
cost of gas in  2000,  the  Company  incurred  additional  interest  expense  of
$2,191,000 under its short-term credit facilities during the three-month  period
ended December 31, 2000 compared with the same period in 1999. Southern Union is
required to make  payments to natural gas suppliers in advance of the receipt of
cash payments from the Company's customers.  See "Debt and Capital Lease" in the
Notes to the Consolidated Financial Statements included herein.




<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Other income for the three-month  period ended December 31, 2000 was $20,760,000
compared  with  other  expense  of  $3,336,000  in 1999.  Other  income  for the
three-month  period ended December 31, 2000,  includes a $13,532,000 gain on the
sale  of  non-core  real  estate,  realized  gains  on the  sale  of  investment
securities of $8,869,000  and $1,652,000 of interest and dividend  income.  This
was  partially  offset by  $2,857,000  of legal costs  associated  with  ongoing
litigation  associated  with  the  unsuccessful  acquisition  of  Southwest  Gas
Corporation (Southwest). Other expense for the three-month period ended December
31, 1999 primarily  consisted of $4,000,000 of legal costs  associated  with the
aforementioned  ongoing litigation which was partially offset by $442,000 in net
rental income from Lavaca Realty Company ("Lavaca Realty").

The  effective  federal  and state  income tax rate is 46% and 40% for the three
months  ended  December  31, 2000 and 1999,  respectively.  The  increase in the
effective  federal and state  income tax rate is a result of non-tax  deductible
amortization  of additional  purchase cost recorded at the  acquisitions of both
the New England Operations and Pennsylvania Operations.

Six Months Ended December 31, 2000 and 1999

The Company recorded net earnings  available for common stock of $10,228,000 for
the  six-month  period  ended  December 31, 2000  compared  with net earnings of
$1,032,000 for the same period in 1999. Net earnings per diluted share were $.20
in 2000 compared to $.03 in 1999.  Weighted  average diluted shares  outstanding
increased  30% in 2000 due to the  issuance  of the  Company's  common  stock in
connection  with  the  acquisition  of  Fall  River  Gas  and  the  Pennsylvania
Operations, previously discussed.

Operating revenues were $749,808,000 for the six-month period ended December 31,
2000,  compared with  $324,381,000  in 1999. Gas purchase and other energy costs
for the six-month  period ended  December 31, 2000 were  $518,458,000,  compared
with  $184,390,000  in 1999.  The  increase in both  operating  revenues and gas
purchase costs between  periods was primarily due to a 60% increase in gas sales
volume to 76,762 MMcf in 2000 from 48,125 MMcf in 1999 and by a 69%  increase in
the average  cost of gas from $3.51 per Mcf in 1999 to $5.93 per Mcf in 2000 due
to  increases  in average gas prices.  The New  England  Operations  contributed
$141,179,000 to the overall increase in operating  revenues,  $89,110,000 in gas
purchase  and other  energy  costs and 10,900 MMcf of the  increase in gas sales
volume. The Pennsylvania  Operations  generated a net increase of $82,388,000 in
operating  revenues,  $66,880,000  in gas purchase and other energy  costs,  and
4,749 MMcf of the  increase  in gas sales  volume.  The  remaining  increase  in
operating  revenues,  gas purchase and other energy costs,  and gas sales volume
resulted  principally  from the  colder-than-normal  weather  in the  Texas  and
Missouri  service  territories  in  2000  as  compared  to  the  unusually  mild
temperatures in 1999.

MGE's  service  territories  experienced  weather  which  was 123% of a  30-year
measure for the  six-month  period ended  December 31, 2000 compared with 80% in
1999.  Weather for Southern Union Gas service  territories was 131% of a 30-year
measure in 2000,  compared with 85% in 1999.  About half of the customers served
by Southern Union Gas are weather  normalized.  Additionally,  with the February
2000 revenue increase in El Paso,  Texas, the new rate design collects a greater
portion of the Company's revenue stream from the monthly customer charge instead
of being earned volumetrically. Weather in the PG Energy service territories was
119% of a 30-year  measure for the  six-month  period  ended  December 31, 2000,
compared with 89% of a 30-year  measure for the two-month  period ended December
31, 1999.

Net  operating  margin  increased  $77,646,000  for the  six-month  period ended
December 31, 2000 compared with the same period in 1999. Growth in net operating
margin is primarily due to the acquisition of the New England  Operations  which
generated  $48,713,000 in net operating margin and the  Pennsylvania  Operations
which contributed a net increase of $16,597,000.  The remaining  increase is due
to the colder-than-normal weather in the Missouri and Texas service territories,
previously discussed.


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



Operating expenses were $151,683,000 for the six-month period ended December 31,
2000, an increase of $59,618,000,  compared with $92,065,000 in 1999.  Increases
of $33,118,000  and $17,492,000  were the result of the  acquisitions of the New
England  Operations  and  the  Pennsylvania   Operations,   respectively.   Also
contributing  to the  increase  was an increase in bad debt expense in the Texas
and Missouri  service  territories  of $3,281,000 due to an increase in customer
receivables  as a result  of  higher  gas  prices  and  $2,455,000  in  non-cash
compensation  expense from one of the Company's  benefit plans,  both previously
discussed.

Interest  expense was  $46,609,000  for the six-month  period ended December 31,
2000,  compared with $21,663,000 in 1999.  Interest expense increased  primarily
due to the Term Note entered into by the Company for the  acquisition of the New
England  Operations,  the  8.25%  Senior  Notes  issued by the  Company  for the
acquisition  of the  Pennsylvania  Operations  and the assumption of debt by the
Company  from  the New  England  Operations  and  Pennsylvania  Operations,  all
previously discussed. See "Debt and Capital Lease" in the Notes to the Financial
Statements included herein.

Other income for the six-month  period ended  December 31, 2000 was  $18,441,000
compared  with  other  expense  of  $4,493,000  in 1999.  Other  income  for the
six-month period ended December 31, 2000 includes a $13,532,000 gain on the sale
of non-core real estate,  realized gains on the sale of investment securities of
$8,869,000  and $2,325,000 of interest and dividend  income.  This was partially
offset by $4,898,000 of legal costs associated with ongoing  litigation from the
unsuccessful  acquisition of Southwest.  Other expense for the six-month  period
ended  December  31,  1999  primarily  consisted  of  $5,250,000  of legal costs
associated with the aforementioned ongoing litigation which was partially offset
by $664,000 in rental income from Lavaca Realty.

The Company's  consolidated  federal and state effective income tax rate was 46%
and 43% for the six months ended December 31, 2000 and 1999,  respectively.  The
increase  in the  effective  federal  and state  income  tax rate is a result of
non-tax deductible  amortization of additional purchase cost associated with the
acquisition of the New England Operations and Pennsylvania Operations.

The Company adopted the Statement of Financial Accounting Standards Board (FASB)
Accounting for Derivative Instruments and Hedging Activities on July 1, 2000. In
accordance with the transition provisions of the Statement, the Company recorded
a  net-of-tax  cumulative-effect-type  gain of $602,000 in earnings to recognize
the fair  value of the  derivative  instruments  that do not  qualify  for hedge
accounting treatment under the Statement.

Twelve Months Ended December 31, 2000 and 1999

The Company recorded net earnings  available for common stock of $20,249,000 for
the twelve-month  period ended December 31, 2000,  compared with net earnings of
$13,151,000 in 1999.  Earnings per diluted share were $.39 in 2000 compared with
earnings per diluted  share of $.35 in 1999.  Weighted  average  diluted  shares
outstanding  increased 39% due to the issuance of the Company's  common stock in
connection  with  the  acquisition  of  Fall  River  Gas  and  the  Pennsylvania
Operations, previously discussed.

Operating  revenues  were  $1,257,131,000  for  the  twelve-month  period  ended
December 31, 2000,  compared with  $677,933,000  in 1999. Gas purchase and other
energy  costs  for  the  twelve-month   period  ended  December  31,  2000  were
$831,767,000, compared with $388,078,000 in 1999. The increase in both operating
revenues and gas  purchase  costs  between  periods was  primarily  due to a 34%
increase in gas sales  volume to 148,418  MMcf in 2000 from 110,711 MMcf in 1999
and by a 46%  increase in the average  cost of gas from $3.36 per Mcf in 1999 to
$4.89 per Mcf in 2000 due to increases in average gas prices.  The  Pennsylvania
Operations  generated a net  increase of  $223,901,000  in  operating  revenues,
$159,763,000  in gas  purchase  and other  energy  costs and 18,908  MMcf of the
increase  in  gas  sales  volume.   The  New  England   Operations   contributed
$141,179,000  to the overall  increase in operating  revenues and $89,110,000 in
gas purchase and other energy costs and 10,900 MMcf of the increase in


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



gas sales volume. The remaining  increases in operating  revenues,  gas purchase
and other energy  costs,  and gas sales  volume  resulted  principally  from the
colder weather in the Texas and Missouri service territories in 2000 as compared
to 1999.

 MGE's  service  territories  experienced  weather  which was 96% of the 30-year
measure for the twelve-month period ended December 31, 2000 compared with 84% in
1999.  Weather for Southern Union Gas service  territories  was 88% of a 30-year
measure  compared  with 74% in  1999.  About  half of the  customers  served  by
Southern  Union Gas are weather  normalized.  Weather for the PG Energy  service
territories  was 103% of a 30-year  measure for the  twelve-month  period  ended
December 31, 2000.

Net operating  margin increased  $121,474,000 for the twelve-month  period ended
December 31, 2000 compared with the same period in 1999. Growth in net operating
margin is primarily due to the Pennsylvania  Operations which  contributed a net
increase of $64,443,000  and to the  acquisition  of the New England  Operations
which generated $48,713,000. The remaining increase is due to the colder weather
in the Missouri and Texas service territories, previously discussed.

Operating expenses were $268,613,000 for the twelve-month  period ended December
31,  2000,  an increase of  $91,524,000,  compared  with  $177,089,000  in 1999.
Increases of $48,547,000 and $33,118,000  were the result of the acquisitions of
the Pennsylvania Operations and the New England Operations,  respectively.  Also
impacting operating expenses for the twelve-month period ended December 31, 2000
were  increases in employee  benefit  costs and bad debt  expense and  inventory
write-downs associated with a propane operation.

Interest expense was $76,438,000 for the twelve-month  period ended December 31,
2000,  compared with $39,779,000 in 1999.  Interest expense increased  primarily
due to the Term Note entered into by the Company for the  acquisition of the New
England  Operations,  the  8.25%  Senior  Notes  issued by the  Company  for the
acquisition  of the  Pennsylvania  Operations  and the assumption of debt by the
Company  from  the New  England  Operations  and  Pennsylvania  Operations,  all
previously  discussed.  See  "Debt  and  Capital  Lease"  in  the  Notes  to the
Consolidated Financial Statements included herein.

Other income for the twelve-month period ended December 31, 2000 was $15,463,000
compared  with  other  expense  of  $6,870,000  in 1999.  Other  income  for the
twelve-month  period ended December 31, 2000 includes a $13,532,000  gain on the
sale of  non-core  real  estate  and  realized  gains on the sale of  investment
securities of  $8,869,000.  This was partially  offset by  $11,261,000  of legal
costs associated with ongoing  litigation from the  unsuccessful  acquisition of
Southwest.  Other expense for the  twelve-month  period ended  December 31, 1999
primarily   consisted  of  $9,090,000  of  costs  associated  with  unsuccessful
acquisition  activities  and related  litigation  which was partially  offset by
$1,466,000 in net rental income from Lavaca Realty.

The Company's  consolidated  federal and state effective income tax rate was 48%
and  40%  for  the  twelve-month  period  ended  December  31,  2000  and  1999,
respectively. The increase in the effective federal and state income tax rate is
a  result  of  non-tax  deductible  amortization  of  additional  purchase  cost
associated with the acquisition of the New England  Operations and  Pennsylvania
Operations.



<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The following table sets forth certain  information  regarding the Company's gas
utility  operations for the three- and  twelve-month  periods ended December 31,
2000 and 1999:
<TABLE>
<CAPTION>

                                                                  Three Months              Twelve Months
                                                               Ended December 31,        Ended December 31,
                                                              2000         1999          2000         1999
                                                           ---------     ---------     ---------    ----------
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Average number of gas sales customers served:
     Residential ......................................    1,328,725     1,002,663     1,125,688       926,997
     Commercial .......................................      127,758        98,717       111,069        91,751
     Industrial and irrigation ........................        4,282           686         1,651           604
     Public authorities and other .....................        3,129         3,072         3,161         2,915
     Pipeline and marketing ...........................          367           229           298           235
                                                          ----------    ----------    ----------   -----------
          Total average customers served ..............    1,464,261     1,105,367     1,241,867     1,022,502
                                                          ==========    ==========    ==========   ===========

Gas sales in millions of cubic feet (MMcf)
     Residential ......................................       27,250        15,248        82,273        60,756
     Commercial .......................................       10,908         6,483        34,311        26,871
     Industrial and irrigation ........................        1,372           343         2,827         1,412
     Public authorities and other .....................          957           720         2,863         2,431
     Pipeline and marketing ...........................        4,394         4,334        17,143        17,518
                                                          ----------    ----------    ----------    ----------
          Gas sales billed ............................       44,881        27,128       139,417       108,988
     Net change in unbilled gas sales .................       18,150         8,970         9,001         1,723
                                                          ----------    ----------    ----------    ----------

          Total gas sales .............................       63,031        36,098       148,418       110,711
                                                          ==========    ==========    ==========    ==========


Gas sales revenues (thousands of dollars):
     Residential ......................................   $  252,896    $  107,949    $  639,076    $  397,902
     Commercial .......................................       93,476        38,619       238,108       151,662
     Industrial and irrigation ........................       10,760         1,963        19,291         7,022
     Public authorities and other .....................        7,031         3,315        16,618         9,905
     Pipeline and marketing ...........................       17,750        10,944        58,957        42,778
                                                          ----------    ----------    ----------    ----------

          Gas revenues billed .........................      381,913       162,790       972,050       609,269
     Net change in unbilled gas sales revenues ........      140,152        48,586        95,230        13,082
                                                          ----------    ----------    ----------    ----------

          Total gas sales revenues ....................   $  522,065    $  211,376    $1,067,280    $  622,351
                                                          ==========    ==========    ==========    ==========

Gas sales margin (thousands of dollars) ...............   $  105,968    $   70,087    $  293,475    $  216,435
                                                          ==========    ==========    ==========    ==========


Gas sales revenue per thousand cubic feet (Mcf) billed:
     Residential ......................................   $     9.28    $     7.08    $     7.77    $     6.55
     Commercial .......................................         8.57          5.96          6.94          5.64
     Industrial and irrigation ........................         7.84          5.73          6.82          4.97
     Public authorities and other .....................         7.35          4.61          5.80          4.07
     Pipeline and marketing ...........................         4.04          2.53          3.44          2.44

Weather:
     Degree days:
          Southern Union Gas service territories ......        1,087           714         1,891         1,573
          Missouri Gas Energy service territories .....        2,405         1,510         5,045         4,418
          PG Energy service territories ...............        2,508         1,595         6,460         1,595
          New England service territories .............        2,194          --           2,194          --
     30-year measure:
          Southern Union Gas service territories ......         131%           86%           88%           74%
          Missouri Gas Energy service territories .....         123%           78%           96%           84%
          PG Energy service territories ...............         113%           89%          103%           89%
          New England service territories .............         110%         --             110%         --

Gas transported in millions of cubic feet (MMcf) ......       28,354        19,516        90,180        61,013
Gas transportation revenues (thousands of dollars) ....   $   14,612    $    8,685    $   42,193    $   25,896


</TABLE>

The above  information  does not include the Company's 43% equity ownership in a
natural gas  distribution  company  serving 22,000  customers in Piedras Negras,
Mexico.  Information for Fall River Gas and ProvEnergy,  acquired  September 28,
2000,  and Valley  Resources,  acquired  September 20, 2000,  is included  since
October 1, 2000.  The  30-year  measure  is used above for  consistent  external
reporting purposes.  Measures of normal weather used by the Company's regulatory
authorities  to set rates vary by  jurisdiction.  Periods used to measure normal
weather for regulatory purposes range from 10 years to 30 years.


<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



FINANCIAL CONDITION

The Company's gas utility  operations  are seasonal in nature with a significant
percentage  of the annual  revenues  and earnings  occurring in the  traditional
heating-load months. This seasonality results in a high level of cash flow needs
immediately preceding the peak winter heating season months,  resulting from the
required  payments  to natural gas  suppliers  in advance of the receipt of cash
payments  from the  Company's  customers.  The  Company  has  historically  used
internally  generated funds and its credit facilities to provide funding for its
seasonal working capital,  continuing  construction and maintenance programs and
operational requirements.

On May 31, 2000,  the Company  restated and amended its short-term and long-term
credit facilities (together referred to as "Revolving Credit  Facilities").  The
Company has available  $90,000,000 under the short-term facility,  which expires
May 30, 2001, and $135,000,000  under the long-term  facility,  which expires on
May 31, 2003. The Company has additional  availability under uncommitted line of
credit  facilities  with various banks.  Borrowings  under the Revolving  Credit
Facilities are available for Southern Union's working capital,  letter of credit
requirements and other general corporate purposes. A balance of $175,000,000 was
outstanding under the Revolving Credit Facilities at December 31, 2000.

On August 28, 2000 the Company  entered  into the Term Note to fund (i) the cash
portion of the  consideration  to be paid to the Fall  River Gas'  stockholders;
(ii)  the  all  cash  consideration  to be  paid to the  ProvEnergy  and  Valley
Resources  stockholders,  (iii) repayment of approximately  $50,000,000 of long-
and  short-term  debt  assumed  in the New  England  mergers,  and (iv)  related
acquisition  costs.  As of December  31,  2000,  a balance of  $529,000,000  was
outstanding  on this Term Note. The Term Note expires August 27, 2001 but may be
extended at the Company's  option through August 26, 2002 for a 12.5 basis point
fee. No additional draws can be made on the Term Note.

Concurrent  with the closing of the  Pennsylvania  Enterprises,  Inc.  merger on
November 4, 1999, the Company issued $300,000,000 of 8.25% Senior Notes due 2029
which were used to: (i) fund the cash portion of the consideration to be paid to
the  Pennsylvania  Enterprises,  Inc.  shareholders;  (ii)  refinance  and repay
certain debt of  Pennsylvania  Enterprises,  Inc.,  and (iii) repay  outstanding
borrowings  under the Company's then existing various credit  facilities.  These
senior  notes are  senior  unsecured  obligations  and rank  equally in right of
payment  with  each  other  and  with  the   Company's   other   unsecured   and
unsubordinated obligations, including the 7.60% Senior Notes due 2024.

The principal sources of funds during the three-month  period ended December 31,
2000 were $55,000,000  borrowed under the Term Note,  $39,547,000 borrowed under
the Company's Revolving Credit Facilities, proceeds from the sale of real estate
of  $20,638,000  and  proceeds  from  the  sale  of  investment   securities  of
$11,372,000. The principal uses of funds during this period included $39,795,000
for  on-going  property,  plant and  equipment  additions;  $12,495,000  for the
purchase of investment  securities;  $7,174,000  for the retirement of long-term
debt; as well as seasonal working capital needs of the Company.

The principal  sources of funds during the six-month  period ended  December 31,
2000 were $535,000,000 borrowed under the Term Note, $175,000,000 borrowed under
the Company's Revolving Credit Facilities, proceeds from the sale of real estate
of  $20,638,000  and  proceeds  from  the  sale  of  investment   securities  of
$11,372,000.  This provided funds of  $405,303,000  for  acquisition and related
expenses of the New  England  Operations;  $114,171,000  for the  retirement  of
merger debt assumed from the New England  Operations;  $61,703,000  for on-going
property,  plant and equipment  additions;  as well as seasonal  working capital
needs of the Company.

The effective  interest rate under the Company's current debt structure is 7.92%
(including  interest and the  amortization of debt issuance costs and redemption
premiums on refinanced debt).




<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      MANAGEMENT'S DISCUSSION AND ANALYSIS
                OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS



The Company  retains  its  borrowing  availability  under its  Revolving  Credit
Facilities,  as discussed above.  Borrowings under these credit  facilities will
continue to be used,  as needed,  to provide  funding for the  seasonal  working
capital needs of the Company. Internally-generated funds from operations will be
used principally for the Company's ongoing construction and maintenance programs
and operational  needs and may also be used  periodically to reduce  outstanding
debt.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

There are no material  changes in market  risks faced by the Company  from those
reported in the Company's Annual Report on Form 10-K for the year ended June 30,
2000.

The information  contained in Item 3 updates,  and should be read in conjunction
with, information set forth in Part II, Item 7 in the Company's Annual Report on
Form  10-K  for the year  ended  June  30,  2000,  in  addition  to the  interim
consolidated   financial   statements,   accompanying  notes,  and  Management's
Discussion  and  Analysis  of  Financial  Condition  and  Results of  Operations
presented in Items 1 and 2 of this Quarterly Report on Form 10-Q.

CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION

This Management's  Discussion and Analysis of Financial Condition and Results of
Operations  and  other  sections  of  this  Form  10-Q  contain  forward-looking
statements  that are based on current  expectations,  estimates and  projections
about the  industry  in which the  Company  operates,  management's  beliefs and
assumptions  made  by  management.   Words  such  as  "expects,"  "anticipates,"
"intends," "plans," "believes," "seeks,"  "estimates,"  variations of such words
and  similar   expressions   are  intended  to  identify  such   forward-looking
statements.  These  statements  are not  guarantees  of future  performance  and
involve certain risks,  uncertainties  and  assumptions,  which are difficult to
predict and many of which are outside the Company's control.  Therefore,  actual
outcomes and results may differ  materially from what is expressed or forecasted
in such  forward-looking  statements.  The Company  undertakes  no obligation to
update  publicly  any  forward-looking  statements,  whether  as a result of new
information,  future events or otherwise. Readers are cautioned not to put undue
reliance  on  such  forward-looking  statements.  Stockholders  may  review  the
Company's  reports  filed  in  the  future  with  the  Securities  and  Exchange
Commission for more current descriptions of developments that could cause actual
results to differ materially from such forward-looking statements.

Factors that could cause or contribute to actual  results  differing  materially
from  such  forward-looking  statements  include  the  following:  cost  of gas;
availability  of  cash  flow;  gas  sales  volumes;  weather  conditions  in the
Company's service territories; the achievement of operating efficiencies and the
purchases  and   implementation   of  new   technologies   for  attaining   such
efficiencies;   impact  of  relations  with  labor  unions  of   bargaining-unit
employees;  the  receipt of timely and  adequate  rate  relief;  the  outcome of
pending  and  future  litigation;   governmental   regulations  and  proceedings
affecting  or  involving  the  Company;   and  the  nature  and  impact  of  any
extraordinary  transactions such as any acquisition or divestiture of a business
unit or any assets.  These are  representative  of the factors that could affect
the outcome of the  forward-looking  statements.  In addition,  such  statements
could be  affected  by general  industry  and  market  conditions,  and  general
economic conditions,  including interest rate fluctuations,  federal,  state and
local laws and  regulations  affecting  the retail  gas  industry  or the energy
industry generally, and other factors.

OTHER

On February 10, 2001, James H. Dodge resigned from the Board of Directors of the
Company.



<PAGE>

                     SOUTHERN UNION COMPANY AND SUBSIDIARIES



RESULTS OF VOTES OF SECURITY HOLDERS

Southern Union held an Annual Meeting of  Stockholders on November 14, 2000. The
following matter was submitted for a vote by Southern Union's security  holders:
the  election of four  persons to serve as the Class I directors  until the 2003
Annual Meeting of  Stockholders  or until their  successors are duly elected and
qualified.

The  number of votes cast for,  abstaining  or  withheld  for each  nominee  for
director,  and for any proposal voted on at the Annual Meeting of  Stockholders,
were:

                                                  For          Abstain  Withheld
                                               ----------      -------  --------
Election of nominees as Class I Directors:
     John E. Brennan......................     43,218,694         --     538,260
     Frank W. Denius......................     43,238,170         --     518,784
     Roger J. Pearson.....................     43,430,695         --     326,259
     Ronald W. Simms......................     43,412,176         --     344,778






<PAGE>







                     SOUTHERN UNION COMPANY AND SUBSIDIARIES



Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.




                                           SOUTHERN UNION COMPANY
                               ------------------------------------------------
                                                (Registrant)






Date February 14, 2001        By  RONALD J. ENDRES
     -----------------            --------------------------------------------
                                  Ronald J. Endres
                                  Executive Vice President and Chief
                                  Financial Officer




Date February 14, 2001        By  DAVID J. KVAPIL
     -----------------            --------------------------------------------
                                  David J. Kvapil
                                  Senior Vice President and Corporate Controller
                                  (Principal Accounting Officer)