================================================================================




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


                                    FORM 10-Q


                         For the quarterly period ended

                                December 31, 2001


                           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.)


          One PEI Center, Second Floor                             18711
           Wilkes-Barre, Pennsylvania                            (Zip Code)
     (Address of principal executive offices)

       Registrant's telephone number, including area code: (570) 820-2400

         504 Lavaca Street, Suite 800                              78701
               Austin, Texas                                  (Former Zip Code)
 (Former address of principal executive offices)


           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  X  No
                                          ---    ---

The number of shares of the registrant's Common Stock outstanding on
February 8, 2002 was 52,209,009.




================================================================================

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES
                                    FORM 10-Q
                                December 31, 2001
                                      Index




PART I.  FINANCIAL INFORMATION                                           Page(s)
                                                                         -------

     Item 1.  Financial Statements

              Consolidated statements of operations - three, six
                and twelve months ended December 31, 2001 and 2000         2-4

              Consolidated balance sheet - December 31, 2001 and
                2000 and June 30, 2001                                     5-6

              Consolidated statement of stockholders' equity - six
                months ended December 31, 2001 and twelve months
                ended June 30, 2001                                         7

              Consolidated statements of cash flows - three, six
                and twelve months ended December 31, 2001 and 2000         8-10

              Notes to consolidated financial statements                  11-21

     Item 2.  Management's Discussion and Analysis of Financial
                Condition and Results of Operations                       22-32

     Item 3.  Quantitative and Qualitative Disclosures about
                Market Risk                                                31

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                           33

     Item 6.  Exhibits and Reports on Form 8-K

                  (a) None


--------------------------------------------------------------------------------

                                        1

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS



                                                 Three Months Ended December 31,
                                                 -------------------------------
                                                      2001             2000
                                                 --------------   --------------
                                                  (thousands of dollars, except
                                                  shares and per share amounts)

Operating revenues............................   $     376,441    $     605,339
Cost of gas and other energy..................        (226,951)        (433,925)
Revenue-related taxes.........................         (13,550)         (23,854)
                                                 -------------    -------------
   Operating margin...........................         135,940          147,560

Operating expenses:
   Operating, maintenance and general.........          54,054           62,151
   Depreciation and amortization..............          17,974           23,738
   Taxes, other than on income and revenues...           7,365            7,950
                                                 -------------    -------------
      Total operating expenses................          79,393           93,839
                                                 -------------    -------------
      Net operating revenues..................          56,547           53,721
                                                 -------------    -------------

Other income (expense):
   Interest ..................................         (21,913)         (30,303)
   Dividends on preferred securities of
      subsidiary trust........................          (2,370)          (2,370)
   Other, net.................................            (409)          14,911
                                                 -------------    -------------
      Total other expenses, net...............         (24,692)         (17,762)
                                                 -------------    -------------

      Earnings before income taxes............          31,855           35,959

Federal and state income taxes.................         12,105           16,641
                                                 -------------    -------------

Net earnings available for common stock........  $      19,750    $      19,318
                                                 =============    =============

Net earnings per share:
   Basic.......................................  $         .39    $         .37
                                                 =============    =============
   Diluted.....................................  $         .3$    $         .35
                                                 =============    =============

Weighted average shares outstanding:
   Basic.......................................     50,772,866       52,425,554
                                                 =============    =============
   Diluted.....................................     53,701,434       55,383,222
                                                 =============    =============













                             See accompanying notes.

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                                        2

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS



                                                   Six Months Ended December 31,
                                                   -----------------------------
                                                       2001             2000
                                                   ------------     ------------
                                                   (thousands of dollars, except
                                                   shares and per share amounts)

Operating revenues.............................    $   550,410      $   749,808
Cost of gas and other energy...................       (319,938)        (518,458)
Revenue-related taxes..........................        (19,582)         (28,933)
                                                   -----------      -----------
   Operating margin............................        210,890          202,417

Operating expenses:
   Operating, maintenance and general..........        107,158           99,169
   Business restructuring charges..............         32,706            --
   Depreciation and amortization...............         39,851           39,704
   Taxes, other than on income and revenues....         15,674           12,810
                                                   -----------      -----------
      Total operating expenses.................        195,389          151,683
                                                   -----------      -----------
      Net operating revenues...................         15,501           50,734
                                                   -----------      -----------

Other income (expense):
   Interest ...................................        (49,072)         (46,609)
   Dividends on preferred securities of
      subsidiary trust.........................         (4,740)          (4,740)
   Other, net..................................         23,187            9,397
                                                   -----------      -----------
      Total other expenses, net................        (30,625)         (41,952)
                                                   -----------      -----------

      Earnings (loss) before income taxes
         (benefit) and change in accounting
         principle.............................        (15,124)           8,782

Federal and state income taxes (benefit).......         (4,471)           4,040
                                                   -----------      -----------

Earnings (loss) before change in accounting
   principle...................................        (10,653)           4,742

Change in accounting principle, net of tax.....           --                602
                                                   -----------      -----------

Net earnings (loss) available for common stock.    $   (10,653)     $     5,344
                                                   ===========      ===========

Net earnings (loss) per share:
   Basic:
      Before change in accounting principle....    $      (.21)     $       .09
      Change in accounting principle, net of
         tax...................................           --                .01
                                                   -----------      -----------
                                                   $      (.21)     $       .10
                                                   ===========      ===========
   Diluted:
      Before change in accounting principle....    $      (.21)     $       .09
      Change in accounting principle, net of
         tax...................................           --                .01
                                                   -----------      -----------
                                                   $      (.21)     $       .10
                                                   ===========      ===========

Weighted average shares outstanding:
   Basic.......................................     51,597,356       51,721,885
                                                   ===========      ===========
   Diluted.....................................     51,597,356       54,479,995
                                                   ===========      ===========







                             See accompanying notes.

--------------------------------------------------------------------------------

                                        3

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF OPERATIONS



                                                Twelve Months Ended December 31,
                                                --------------------------------
                                                     2001              2000
                                                --------------    --------------
                                                 (thousands of dollars, except
                                                 shares and per share amounts)

Operating revenues...........................   $   1,733,415     $   1,257,131
Cost of gas and other energy.................      (1,176,230          (831,767)
Revenue-related taxes........................         (59,450)          (48,608)
                                                -------------     -------------
   Operating margin..........................         497,735           376,756

Operating expenses:
   Operating, maintenance and general........         247,543           176,298
   Business restructuring charges............          32,706             --
   Depreciation and amortization.............          87,132            70,495
   Taxes, other than on income and revenues..          32,724            21,820
                                                -------------     -------------
      Total operating expenses...............         400,105           268,613
                                                -------------     -------------
      Net operating revenues.................          97,630           108,143
                                                -------------     -------------

Other income (expense):
   Interest..................................        (105,982)          (76,438)
   Dividends on preferred securities of
      subsidiary trust.......................          (9,480)           (9,480)
   Other, net................................          90,609             4,183
                                                -------------     -------------
      Total other expenses, net..............         (24,853)          (81,735)
                                                -------------     -------------

      Earnings before income taxes and
         change in accounting principle......          72,777            26,408

Federal and state income taxes...............          31,489            12,853
                                                -------------     -------------

Earnings before change in accounting
   principle.................................          41,288            13,555

Change in accounting principle, net of tax...            --                 602
                                                -------------     -------------

Net earnings available for common stock......   $      41,288     $      14,157
                                                =============     =============

Net earnings per share:
   Basic:
      Before change in accounting principle..   $         .79     $         .26
      Change in accounting principle, net
         of tax..............................            --                 .01
                                                -------------     -------------
                                                $         .79     $         .27
                                                =============     =============

   Diluted:
      Before change in accounting principle..   $         .75     $         .25
      Change in accounting principle, net
         of tax..............................            --                 .01
                                                -------------     -------------
                                                $         .75     $         .26
                                                =============     =============

Weighted average shares outstanding:
   Basic.....................................      52,009,927        51,536,572
                                                =============     =============
   Diluted...................................      55,052,406        53,986,818
                                                =============     =============






                             See accompanying notes.

--------------------------------------------------------------------------------

                                       4

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEET

                                     ASSETS



                                                December 31,          June 30,
                                           ----------------------    -----------
                                              2001        2000          2001
                                           ----------  ----------    -----------
                                                    (thousands of dollars)

Property, plant and equipment:
   Plant in service....................    $2,218,456  $2,162,069    $2,201,975
   Construction work in progress.......        26,092      30,611        25,520
                                           ----------  ----------    ----------
                                            2,244,548   2,192,680     2,227,495
   Less accumulated depreciation and
      amortization.....................      (795,618)   (746,779)     (771,170)
                                           ----------  ----------    ----------
      Net property, plant and
         equipment.....................     1,448,930   1,445,901     1,456,325
                                           ----------  ----------    ----------


Current assets:
   Cash and cash equivalents...........         --          7,840         1,219
   Accounts receivable, billed and
      unbilled, net....................       232,039     410,419       218,912
   Inventories, principally at
      average cost.....................       170,398     118,543       106,505
   Deferred gas purchase costs.........        20,871      32,110        65,171
   Investment securities available
      for sale.........................         7,201     105,587        29,447
   Prepayments and other...............        10,841      14,296        14,778
                                           ----------  ----------    ----------

      Total current assets.............       441,350     688,795       436,032
                                           ----------  ----------    ----------

Goodwill, net..........................       713,389     733,893       724,620

Deferred charges.......................       229,240     209,594       209,644

Investment securities, at cost.........        19,226      20,081        19,081

Real estate............................         2,482       2,599         2,506

Other..................................        46,824      37,815        41,872
                                           ----------  ----------    ----------





   Total...............................    $2,901,441  $3,138,678    $2,890,080
                                           ==========  ==========    ==========











                             See accompanying notes.

--------------------------------------------------------------------------------

                                        5

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                     CONSOLIDATED BALANCE SHEET (Continued)

                      STOCKHOLDERS' EQUITY AND LIABILITIES



                                                December 31,          June 30,
                                           ----------------------    -----------
                                              2001        2000          2001
                                           ----------  ----------    -----------
                                                  (thousands of dollars)

Common stockholders' equity:
   Common stock, $1 par value;
      authorized 200,000,000 shares;
      issued 54,686,048 shares..........   $   54,686  $   51,982    $   54,553
   Premium on capital stock.............      677,486     626,251       676,324
   Less treasury stock, 2,762,392
      shares at cost....................      (51,068)    (15,895)      (15,869)
   Less common stock held in Trust......      (18,194)    (16,990)      (19,196)
   Deferred compensation plans..........        7,499         899         7,499
   Accumulated other comprehensive
      income (loss).....................         (354)     62,983        13,443
   Retained earnings (deficit)..........       (5,550       5,344         5,103
                                           ----------  ----------    ----------

   Total common stockholders' equity....      664,505     714,574       721,857

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...........................      803,096   1,375,760     1,329,631
                                           ----------  ----------    ----------

      Total capitalization..............    1,567,601   2,190,334     2,151,488

Current liabilities:
   Long-term debt and capital lease
      obligation due within one year....      526,642       5,173         5,913
   Notes payable........................      214,950     175,000       190,600
   Accounts payable.....................      119,507     282,110       103,623
   Federal, state and local taxes.......       31,415      27,761        32,342
   Accrued interest.....................       16,131      21,290        16,105
   Accrued dividends on preferred
      securities of subsidiary trust....         --          --           2,370
   Customer deposits....................       19,985      20,952        20,285
   Other................................       58,215      72,187        67,383
                                           ----------  ----------    ----------

      Total current liabilities.........      986,845     604,473       438,621
                                           ----------  ----------    ----------


Deferred credits and other .............      153,380     148,240        96,680
Accumulated deferred income taxes.......      193,615     195,631       203,291
Commitments and contingencies...........         --          --            --
                                           ----------  ----------    ----------

   Total................................   $2,901,441  $3,138,678    $2,890,080
                                           ==========  ==========    ==========




                             See accompanying notes.

--------------------------------------------------------------------------------

                                        6

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                 CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY


                                                   Accumu-
                                         Common     lated
              Common  Premium   Trea-     Stock     Other
              Stock,    on      sury      Held     Compre-   Retained
              $1 Par  Capital   Stock,     in      hensive   Earnings/
              Value    Stock   at Cost    Trust     Income   (Deficit)  Total
              ------- -------- --------  --------  --------  --------- --------
                                     (thousands of dollars)

Balance
 July 1,
 2000........ $50,521 $599,835 $(15,554) $(14,522) $115,175  $  --     $735,455

 Comprehen-
  sive
  income:
   Net
    earnings.     --       --       --        --        --     57,285    57,285
   Unrea-
    lized
    loss in
    invest-
    ment
    securi-
    ties, net
    of tax
    benefit       --       --       --        --    (96,323)    --      (96,323)
   Minimum
    pension
    liabil-
    ity ad-
    justment;
    net of
    tax......     --       --       --        --     (4,324)    --       (4,324)
   Cumulative
    effect of
    change in
    account-
    ing prin-
    ciple,
    net of
    tax......     --       --       --        --        826     --          826
   Unrealized
    loss on
    hedging
    activi-
    ties, net
    of tax
    benefit..     --       --       --        --     (1,911)    --       (1,911)
                                                                       --------
   Comprehen-
    sive in-
    come
   (loss)....                                                           (44,447)
                                                                       --------
 Payment on
  note re-
  ceivable...     --       290      --        --        --      --          290
 Purchase of
  common
  stock held
  in trust...     --       --       --     (4,009)      --      --       (4,009)
 5% stock
  dividend...   2,556   49,626      --        --        --    (52,182)     --
 Benefit plan
  modifica-
  tion.......     --       --       --      6,560       --      --        6,560
 Issuance of
  stock for
  acquisi-
  tion.......   1,371   25,930      --        --        --      --       27,301
 Exercise of
  stock
  options....     105      643     (315)      274       --      --          707
              ------- -------- --------  --------  --------  --------  --------
Balance
 June 30,
 2001........  54,553  676,324  (15,869)  (11,697)   13,443     5,103   721,857

 Comprehen-
  sive
  income:
   Net loss..     --       --       --        --        --    (10,653)  (10,653)
   Unrealized
    loss in
    invest-
    ment
    securi-
    ties, net
    of tax
    benefit..     --       --       --        --    (14,460)    --      (14,460)
   Unrealized
    gain on
    hedging
    activi-
    ties, net
    of tax...     --       --       --        --        663     --          663
                                                                       --------
   Comprehen-
    sive in-
    come
    (loss)...                                                           (24,450)
                                                                       --------
 Purchase of
  treasury
  stock......     --       --   (34,711)      --        --      --      (34,711)
 Stock com-
  pensation
  plans......     --       327      --        680       --      --        1,007
 Exercise of
  stock
  options....     133      835     (488)      322       --      --          802
              ------- -------- --------  --------  --------  --------  --------
Balance
 December 31,
 2001........ $54,686 $677,486 $(51,068) $(10,695) $   (354) $ (5,550) $664,505
              ======= ======== ========  ========  ========  ========  ========
















                             See accompanying notes.

--------------------------------------------------------------------------------

                                        7

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS



                                                           Three Months Ended
                                                              December 31,
                                                          ---------------------
                                                            2001        2000
                                                          --------    ---------
                                                          (thousands of dollars)

Cash flows from (used in) operating activities:
  Net earnings........................................    $ 19,750    $  19,318
  Adjustments to reconcile net earnings to net cash
    flows from (used in) operating activities:
      Depreciation and amortization...................      17,974       23,738
      Deferred income taxes...........................       1,546       (4,235)
      Non-cash compensation expense...................        --          2,038
      Provision for bad debts.........................       3,967        5,231
      Financial derivative trading (gains) losses.....      (1,976)       5,849
      Gain on sale of investment securities...........        --         (8,869)
      Gain on sale of assets..........................        (561)     (13,532)
      Loss on sale of subsidiaries....................       1,500         --
      Other...........................................         636          806
      Changes in operating assets and liabilities,
        net of acquisitions and dispositions:
          Accounts receivable, billed and unbilled....     (99,361)    (288,525)
          Accounts payable............................      30,987      177,660
          Taxes and other liabilities.................      11,850       19,534
          Customer deposits...........................          63         (127)
          Deferred gas purchase costs..................     44,711       (8,261)
          Inventories..................................      2,038          954
          Other........................................     (1,850)      (3,884)
                                                          --------    ---------
    Net cash flows from (used in) operating activities.     31,274      (72,305)
                                                          --------    ---------
Cash flows from (used in) investing activities:
  Additions to property, plant and equipment...........    (32,757)     (39,795)
  Acquisition of operations, net of cash received......       --          1,527
  Purchase of investment securities....................       --        (12,495)
  Proceeds from sale of subsidiaries...................      3,720         --
  Increase (decrease) in customer advances.............         54         (545)
  Increase in deferred charges and credits ............      4,368        8,883
  Proceeds from sale of investment securities..........       --         11,372
  Proceeds from sale of real estate, net of closing
    costs..............................................       --         20,638
  Other................................................        (10)         (63)
                                                          --------    ---------
    Net cash flows from (used in) investing activities.    (16,407)     (10,478)
                                                          --------    ---------
Cash flows from (used in) financing activities:
  Issuance of long-term debt...........................       --         55,000
  Repayment of debt and capital lease obligation.......     (3,597)      (7,174)
  Net borrowings under revolving credit facility.......     21,950       39,547
  Purchase of treasury stock...........................    (33,012)        --
  Other................................................       (208          560
                                                          --------    ---------
    Net cash flows from (used in) financing activities.    (14,867)      87,933
                                                          --------    ---------
Change in cash and cash equivalents....................       --          5,150
Cash and cash equivalents at beginning of period.......       --          2,690
                                                          --------    ---------
Cash and cash equivalents at end of period.............   $   --      $   7,840
                                                          ========    =========

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Interest...........................................   $ 28,716    $  29,627
                                                          ========    =========
    Income taxes ......................................   $   --      $      52
                                                          ========    =========




                             See accompanying notes.

--------------------------------------------------------------------------------

                                        8

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS



                                                            Six Months Ended
                                                              December 31,
                                                          ---------------------
                                                            2001        2000
                                                          --------    ---------
                                                          (thousands of dollars)

Cash flows from (used in) operating activities:
  Net earnings (loss)..................................   $(10,653)   $   5,344
  Adjustments to reconcile net earnings (loss) to net
    cash flows from (used in) operating activities:
      Depreciation and amortization....................     39,851       39,704
      Deferred income taxes............................      3,022       (5,960)
      Business restructuring charges...................     29,400         --
      Loss on sale of subsidiaries.....................      1,500         --
      Gain realized on sale of gas marketing contracts.     (4,653)        --
      Gain on settlement of interest rate swaps........    (17,166)        --
      Non-cash compensation expense....................       --          2,455
      Provision for bad debts..........................      5,474        5,947
      Financial derivative trading (gains) losses......     (2,333)       9,044
      Gain on sale of investment securities............       --         (8,869)
      Gain on sale of assets...........................       (561)     (13,532)
      Cumulative effect of change in accounting
        principle......................................       --           (602)
      Other............................................       (493)       1,037
      Changes in operating assets and liabilities,
        net of acquisitions and dispositions:
          Accounts receivable, billed and unbilled.....    (22,528)    (293,923)
          Accounts payable.............................     17,389      164,448
          Taxes and other liabilities..................     (6,588)      18,478
          Customer deposits............................        (42)        (484)
          Deferred gas purchase costs..................     44,300      (34,815)
          Inventories..................................    (66,070)     (43,588)
          Other........................................        782      (11,604)
                                                          --------    ---------
    Net cash flows from (used in) operating activities.     10,631     (166,920)
                                                          --------    ---------
Cash flows from (used in) investing activities:
  Additions to property, plant and equipment...........    (57,147)     (61,703)
  Acquisition of operations, net of cash received......       --       (405,303)
  Proceeds from sale of subsidiaries...................     33,663         --
  Proceeds from sale of gas marketing contracts........      4,972         --
  Proceeds from settlement of interest rate swaps......     17,166         --
  Purchase of investment securities....................       (145)     (12,495)
  Decrease in customer advances........................       (527)         (16)
  Increase in deferred charges and credits ............      6,327        8,475
  Proceeds from sale of investment securities..........       --         11,372
  Proceeds from sale of real estate, net of closing
    costs..............................................       --         20,638
  Other................................................       --           (285)
                                                          --------    ---------
    Net cash flows from (used in) investing activities.      4,309     (439,317)
                                                          --------    ---------
Cash flows from (used in) financing activities:
  Issuance of long-term debt...........................       --        535,000
  Issuance cost of debt................................       (519)      (2,538)
  Repayment of debt and capital lease obligation.......     (5,805)      (7,709)
  Net borrowings under revolving credit facility.......     24,350      174,997
  Purchase of treasury stock...........................    (34,711)        --
  Payment of merger debt assumed.......................       --       (114,171)
  Other................................................        526          669
                                                          --------    ---------
    Net cash flows from (used in) financing activities.    (16,159)     586,248
                                                          --------    ---------
Change in cash and cash equivalents....................     (1,219)     (19,989)
Cash and cash equivalents at beginning of period.......      1,219       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...........................................   $ 57,027     $ 47,422
                                                          ========     ========
    Income taxes.......................................   $   --       $     52
                                                          ========     ========

                             See accompanying notes.

--------------------------------------------------------------------------------

                                        9

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                      CONSOLIDATED STATEMENT OF CASH FLOWS



                                                          Twewlve Months Ended
                                                              December 31,
                                                          ---------------------
                                                            2001        2000
                                                          --------    ---------
                                                          (thousands of dollars)

Cash flows from (used in) operating activities:
  Net earnings.........................................   $ 41,288    $  14,157
  Adjustments to reconcile net earnings to net cash
    flows from (used in) operating activities:
      Depreciation and amortization....................     87,132       70,495
      Deferred income taxes............................     36,760       (5,294)
      Provision for bad debts..........................     32,233       11,291
      Business restructuring charges...................     29,400         --
      Gain on settlement of interest rate swaps........    (17,166         --
      Gain realized on sale of gas marketing contracts.     (4,653         --
      Loss on sale of subsidiary.......................      1,500         --
      Gain on sale of subsidiary.......................       (707)        --
      Financial derivative trading (gains) losses......     (5,693)      11,280
      Cumulative effect of change in accounting
        principle......................................       --           (602)
      Non-cash compensation expense.(income)...........     (2,455)       2,311
      Gain on sale of investment securities............    (65,713)      (8,869)
      Gain on sale of assets...........................       (561)     (13,532)
      Other............................................      1,979        1,557
      Changes in operating assets and liabilities,
        net of acquisitions and dispositions:
          Accounts receivable, billed and unbilled.....    142,220     (225,009)
          Accounts payable.............................   (162,003)     166,180
          Taxes and other liabilities..................    (31,545)      12,930
          Customer deposits............................       (709)      (4,043)
          Deferred gas purchase costs..................     11,239      (42,398)
          Inventories..................................    (54,027)     (33,443)
          Other........................................      3,855       (9,703)
                                                          --------    ---------
    Net cash flows from (used in) operating activities.     42,374      (52,692)
                                                          --------    ---------
Cash flows from (used in) investing activities:
  Additions to property, plant and equipment...........   (119,220)    (119,327)
  Acquisition of operations, net of cash received......     (9,194)    (407,838)
  Purchase of investment securities....................       (145)     (21,449)
  Increase (decrease) in deferred charges and credits .    (14,070)       6,726
  Proceeds from sale of subsidiaries...................     36,963       12,150
  Proceeds from sale of investment securities..........     74,389       11,372
  Proceeds from sale of real estate, net of closing
    costs..............................................       --         20,638
  Increase in customer advances........................        687          500
  Proceeds from sale of gas marketing contracts........      4,972         --
  Proceeds from settlement of interest rate swaps......     17,166         --
  Other................................................      5,403       (1,259)
                                                          --------    ---------
    Net cash flows used in investing activities........     (3,049     (498,487)
                                                          --------    ---------
Cash flows from (used in) financing activities:
  Issuance of long-term debt...........................       --        535,000
  Issuance cost of debt................................     (1,455)      (3,332)
  Repayment of debt and capital lease obligation.......    (51,195)      (8,592)
  Net borrowings under revolving credit facility.......     39,950      162,097
  Purchase of treasury stock...........................    (34,711)     (13,099)
  Payment of merger debt assumed.......................       --       (114,171)
  Other................................................        246        1,116
                                                          --------    ---------
    Net cash flows from (used in) financing activities.    (47,165)     559,019
                                                          --------    ---------
Change in cash and cash equivalents....................     (7,840)       7,840
Cash and cash equivalents at beginning of period.......      7,840         --
                                                          --------    ---------
Cash and cash equivalents at end of period.............   $   --      $   7,840
                                                          ========    =========

Supplemental disclosures of cash flow information:
  Cash paid during the period for:
    Interest...........................................   $117,475    $  81,940
                                                          ========    =========
    Income taxes.......................................   $ 21,000    $   4,373
                                                          ========    =========

                             See accompanying notes.

--------------------------------------------------------------------------------

                                       10

<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, 2001. All dollar
amounts in the tables herein, except per share amounts, are stated in thousands
unless otherwise indicated. Certain prior period amounts have been reclassified
to conform with the current period presentation.  As of December 31, 2001, the
Company had a cash overdraft of $15,789,000 which is reflected in accounts
payable on the consolidated balance sheet.

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 and Valley Resources, Inc. on September 20, 2000.
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 2002 results of operations comparable with prior periods. Also,
the results of operations for the three- and six-month periods ended
December 31, 2001 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.

ACQUISITIONS AND DIVESTITURES

In December 2001, a subsidiary of the Company sold its 43-mile Carrizo Springs
Pipeline for cash of $1,000,000, resulting in a pre-tax gain of $561,000. Also
in December 2001, the Company sold South Florida Natural Gas, a natural gas
division of Southern Union, and Atlantic Gas Corporation, a Florida propane
subsidiary of the Company (collectively, the Florida Operations), for
$10,000,000, resulting in a pre-tax loss of $1,500,000.

In September 2000, Southern Union completed the acquisitions of Providence
Energy Corporation (ProvEnergy), Fall River Gas Company (Fall River Gas) and
Valley Resources, Inc. (Valley Resources). Collectively, these operations
(hereafter referred to as the Company's New England Operations) were acquired
for approximately $422,000,000 in cash and 1,370,629 shares (before adjustment
for any subsequent stock dividend) of Southern Union common stock, as well as
the assumption of approximately $140,000,000 in long-term debt. The New England
Operations' primary business is the distribution of natural gas through the New
England Gas Company, which serves approximately 292,000 customers throughout
Rhode Island and southeastern Massachusetts.

Subsidiaries of the Company acquired in the ProvEnergy merger include ProvEnergy
Oil Enterprises, Inc. (ProvEnergy Oil), and ProvEnergy Power Company, LLC.
ProvEnergy Oil, sold for $15,776,000 in August 2001, operated a fuel oil
distribution business for 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. 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. Valley
Resources' non-utility subsidiaries acquired in the merger were Valley Propane,
Inc. (Valley Propane), Morris Merchants, Inc. (Morris Merchants), Valley
Appliance Merchandising Company (VAMCO) and Alternate Energy Corporation (AEC).
Valley Propane, sold for $5,301,000 in September 2001, provided liquid propane
to customers in Rhode Island and nearby Massachusetts. Morris Merchants, sold
for $1,586,000 in October 2001, served as a manufacturers' representative agency
for franchised plumbing and heating contract supplies throughout New England.
VAMCO merchandises and rents natural gas burning appliances, offers appliance
service contract programs, sells water filtration systems and provides
construction management services for natural gas-related projects. AEC sells,
installs and designs natural gas

--------------------------------------------------------------------------------

                                       11

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



conversion systems and facilities. No gain or loss was recognized on any of
these New England Operations' sales transactions.

The Company funded the cash portion of the acquisition of the New England
Operations and any related refinancing of assumed debt with a bank note (the
Term Note). See Debt and Capital Lease. The assets of the New England Operations
have been included in the consolidated balance sheet of the Company at
December 31, 2001 and the results of operations have been included in the
statement of consolidated operations since their respective acquisition dates.
The acquisitions were treated as a purchase with related goodwill of
approximately $355,000,000. Effective July 1, 2001, goodwill, which was
previously amortized on a straight-line basis over forty years, is now accounted
for on an impairment-only approach. See Goodwill.

Subsidiaries of the Company acquired in the November 4, 1999 acquisition of
Pennsylvania Enterprises, Inc. included PG Energy Services Inc. (Energy
Services), PEI Power Corporation, Keystone Pipeline Services, Inc. (Keystone, a
wholly-owned subsidiary of Energy Services), and Theta Land Corporation. Through
Energy Services, the Company supplies propane and offers the inspection,
maintenance and servicing of residential and small commercial gas-fired
equipment. In July 2001, the commercial and industrial natural gas marketing
contracts of Energy Services were sold for approximately $4,972,000, resulting
in a pre-tax gain of $4,653,000. Keystone, sold for $3,300,000 in June 2001 for
a pre-tax gain of $707,000, was engaged in the construction, maintenance, and
rehabilitation of natural gas distribution pipelines. 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 also plans to sell or dispose of
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.

Pro Forma Financial Information

The following unaudited pro forma financial information for the six-month
period ended December 31, 2000 is presented as though the following events had
occurred at the beginning of the period presented: (i) acquisition of the New
England Operations; (ii) the issuance of the Term Note; 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, the issuance of the Term Note, or the refinancings
been completed as of the assumed date for the period presented or which may be
obtained in the future.

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

Operating revenues..........................................      $   793,467
Loss before extraordinary item..............................          (16,273)
Net loss available for common stock.........................          (16,273)
Net loss per common stock:
     Basic..................................................             (.30)
     Diluted................................................             (.30)

EARNINGS PER SHARE

Average shares outstanding for basic earnings per share were 50,772,866 and
52,425,554 for the three-month period ended December 31, 2001 and 2000
respectively; 51,597,356 and 51,721,885 for the six-month period ended
December 31, 2001 and 2000, respectively; and 52,009,927 and 51,536,572 for the
twelve-month period ended December 31, 2001 and 2000, respectively. Diluted
earnings per share includes

--------------------------------------------------------------------------------

                                       12

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



average shares outstanding as well as common stock equivalents from stock
options and warrants. Common stock equivalents were 1,725,441 and 1,897,872 for
the three-month period ended December 31, 2001 and 2000, respectively; nil and
1,714,635 for the six-month period ended December 31, 2001 and 2000,
respectively; and 1,900,798 and 1,457,695 for the twelve-month period ended
December 31, 2001 and 2000, respectively. At December 31, 2001, 1,152,778 shares
of common stock were held by various rabbi trusts for certain of the Company's
benefit plans and 61,264 shares were held in a rabbi trust for certain employees
who deferred receipt of Company shares for stock options exercised.

During September and October of 2001, the Company repurchased 1,696,456 shares
of it's common stock outstanding at prices ranging from $18.75 to $21.51 per
share. The majority of these repurchases occurred in private off-market
transactions.

BUSINESS RESTRUCTURING CHARGES

In August 2001, the Company implemented a corporate reorganization and
restructuring which was initially announced in July 2001 as part of a Cash Flow
Improvement Plan designed to increase annualized pre-tax cash flow from
operations by at least $50 million by the end of fiscal year 2002. Actions taken
included (i) the offering of voluntary Early Retirement Programs ("ERPs") in
certain of its operating divisions and (ii) a limited reduction in force ("RIF")
within its corporate offices. ERPs, providing for increased benefits for those
electing retirement, were offered to approximately 400 eligible employees across
the Company's operating divisions, with approximately 60% of such eligible
employees accepting. The RIF was limited solely to certain corporate employees
in the Company's Austin and Kansas City offices with forty-eight employees being
offered severance packages.

In connection with the corporate reorganization and restructuring efforts, the
Company recorded a one-time charge of $32,706,000 during the quarter ended
September 30, 2001. The charge included:  $17.7 million of voluntary and
accepted ERP's, primarily through enhanced benefit plan obligations, and other
employee benefit plan obligations; $8.5 million of RIF within the corporate
offices and related employee separation benefits; and $6.2 million connected
with various business realignment and restructuring initiatives. The Company
expects that most of the restructuring actions will be completed by the end of
fiscal year 2002.

During the quarter ended December 31, 2001, the Company paid approximately $2.8
million and nil in employee separation and other restructuring costs,
respectively. Since implementation of the plan, the Company has paid
approximately $3.1 million and $3 million in employee separation and other
restructuring costs, respectively. The balance sheet carries a remaining reserve
of approximately $8.9 million in estimated reorganization and restructuring
expenditures as of December 31, 2001.

GOODWILL

Effective July 1, 2001, the Company adopted Goodwill and Other Intangible Assets
which was issued by the FASB in June 2001. In accordance with this Statement,
the Company has ceased amortization of goodwill. Goodwill, which was previously
classified on the consolidated balance sheet as additional purchase cost
assigned to utility plant and amortized on a straight-line basis over forty
years, is now subject to at least an annual assessment for impairment by
applying a fair-value based test.

--------------------------------------------------------------------------------

                                       13

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The following table reflects the Company's comparative net loss before the
change in accounting principle and goodwill amortization under Goodwill and
Other Intangible Assets:

                                      Three Months Ended      Six Months Ended
                                         December 31,            December 31,
                                      ------------------    --------------------
                                        2001      2000         2001       2000
                                      --------  --------    ----------  --------

Reported income (loss) before
   change in accounting
   principle.....................     $ 19,750  $ 19,318    $ (10,653)  $  4,742
Goodwill amortization, net of
   taxes.........................         --       4,589         --        7,194
                                      --------  --------    ---------   --------
Adjusted net income (loss)
   before change in accounting
   principle.....................     $ 19,750  $  23,907   $ (10,653)  $ 11,936
                                      ========  =========   ==========  ========

Basic earnings (loss) per share:
   Reported income (loss) before
      change in accounting
      principle..................     $    .39  $     .37    $   (.21)  $    .09
   Goodwill amortization, net of
      taxes......................         --          .09        --          .14
                                      --------  ---------    --------   --------
   Adjusted net income (loss)
      before change in
      accounting principle.......     $    .39  $     .45    $   (.21)  $    .23
                                      ========  =========    ========   ========

Diluted earnings (loss) per share:
   Reported income (loss) before
      change in accounting
      principle..................     $    .37  $     .35    $   (.21)  $    .09
   Goodwill amortization, net of
      taxes......................         --          .08        --          .13
                                      --------  ---------    --------   --------
   Adjusted net income (loss)
      before change in
      accounting principle.......     $    .37  $     .43   .$   (.21)  $    .22
                                      ========  =========    ========   ========

The following displays changes in the carrying amount of goodwill for the
six-month period ended December 31, 2001:

                                                                         Total
                                                                       ---------

Balance as of July 1, 2001.......................................      $724,620
Impairment losses................................................        (3,358)
Sale of subsidiaries and other operations........................        (7,873)
                                                                       --------
Balance as of December 31, 2001..................................      $713,389
                                                                       ========

In connection with the Company's Cash Flow Improvement Plan announced in July
2001, the Company began the divestiture of certain non-core assets. As a result
of prices of comparable businesses for various non-core properties, a goodwill
impairment loss of $3,358,000 was recognized in depreciation and amortization on
the consolidated statement of operations for the quarter ended September 30,
2001. As a result of the sale of the Carrizo Springs Pipeline and the Florida
Operations, goodwill of $7,873,000 was eliminated during the quarter ended
December 31, 2001. See Acquisitions and Divestitures in the Notes to the
Consolidated Financial Statements included herein.

INVESTMENT SECURITIES

At December 31, 2001, the Company held securities of Capstone Turbine
Corporation (Capstone). This investment is classified as "available for sale"
under the Financial Accounting Standards Board Standard Accounting for Certain
Investments in Debt and Equity Securities. As of December 31, 2001, the
Company's investment in Capstone had a fair value of $7,201,000 and unrealized
gains, net of tax, related to this investment were $4,392,000. The

--------------------------------------------------------------------------------

                                       14

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Company has classified this investment as current, as it plans to monetize its
investment in the near future and use the proceeds 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 primarily of
preferred stock in non-public companies whose value is not readily determinable.

OTHER INCOME

During the quarter ended September 30, 2001, the Company negotiated three
interest rate swaps that were not designated as hedges and did not meet the
criteria for hedge accounting. The first swap, effective July 5, 2001, carried a
notional amount of $100,000,000 and termination of June 30, 2005. The remaining
swaps, effective July 23, 2001 and August 1, 2001, carried notional amounts of
$300,000,000 and $200,000,000, respectively, with terminations of November 15,
2004 and February 1, 2005, respectively. On September 19, 2001, these interest
rate swaps were settled, resulting in a pre-tax gain and cash flow of
$17,166,000.

DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES

Derivative Instruments and Hedging Activities The Company utilizes derivative
instruments on a limited basis to manage certain business risks. 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.

In accordance with adoption of the FASB Standard, Accounting for Derivative
Instruments and Hedging Activities on July 1, 2000, 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 PG Energy Services Inc., a wholly-owned
subsidiary, that were 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.

Cash Flow Hedges The Company manages exposure against volatility in interest
payments on variable rate debt through interest rate swaps. As of December 31,
2001, $954,000 in after-tax comprehensive income generated through the
expiration of two interest rate swaps was partially offset by the fair value of
the Company's remaining obligation under one interest rate swap which resulted
in $291,000 of unrealized losses, net of tax. During the six-month period ended
December 31, 2001, the Company recorded net settlement payments of $1,061,000 on
these derivatives through interest expense. The Company expects to reclassify as
interest expense $398,000 in derivative losses, net of taxes, from accumulated
other comprehensive income as the settlement of swap payments occur over the
next twelve months. The maximum term over which the Company is hedging exposures
to the variability of cash flows is 22 months.

Trading Contracts In March 2001, the Company discovered unauthorized financial
derivative energy trading activity by a non-regulated, wholly-owned subsidiary.
All unauthorized trading activity was subsequently closed in March and April of
2001 resulting in a cumulative cash expense of $191,000, net of taxes. During
the six-month period ended December 31, 2001, the Company recorded expiration of
contracts resulting from this trading activity through other income, generating
pre-tax earnings of $2,333,000. The majority of the remaining deferred liability
of $5,243,000 at December 31, 2001 related to these derivative instruments will
be recognized as income in the Consolidated Statement of Operations over the
next four years based on the related contracts.

Beginning in May 2001, the Company acquired natural gas commodity swap
derivatives and collar transactions in order to mitigate price volatility of
natural gas passed through to utility customers. The cost of the derivative
products and the settlement of the respective obligations are recorded through
the gas purchase adjustment clause as

--------------------------------------------------------------------------------

                                       15

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



authorized by the applicable regulatory authority and therefore do not impact
earnings. As of December 31, 2001, the fair value of the contracts, which expire
at various times through May 2002, are included in the consolidated financial
statements as a liability and a matching adjustment to deferred cost of gas of
$2,313,000.

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 on or after
May 17, 2000, 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, 2001 and 2000, 4,000,000 shares of Preferred Securities were
outstanding.

DEBT AND CAPITAL LEASE

                                                    December 31,       June 30,
                                                        2001             2001
                                                    ------------     -----------

7.60% Senior Notes due 2024.....................    $    364,515     $   364,515
8.25% Senior Notes due 2029.....................         300,000         300,000
Term Note, due 2002.............................         485,000         485,000
5.62% to 10.25% First Mortgage Bonds, due 2002
   to 2029......................................         147,976         150,815
7.70% Debentures, due 2027......................           6,801           6,806
Capital lease and other.........................          25,446          28,408
                                                    ------------     -----------
Total debt and capital lease....................       1,329,738       1,335,544
    Less current portion........................         526,642           5,913
                                                    ------------     -----------
Total long-term debt and capital lease..........    $    803,096     $ 1,329,631
                                                    ============     ===========

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, 2001, the capital lease obligation outstanding was
$22,204,000 with a fixed rate of 5.79%.

--------------------------------------------------------------------------------

                                       16

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Credit Facilities On May 29, 2001, the Company restated and amended its
short-term and long-term credit facilities (together referred to as "Revolving
Credit Facilities"). The Company has available $150,000,000 under the short-
term facility, which expires May 28, 2002, and $225,000,000 under the long-term
facility, which expires on May 29, 2004. 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 $214,950,000 was outstanding under the facilities at December 31,
2001.

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. The Term Note, which initially expired on August 27, 2001,
has been extended through August 26, 2002 for a fee. No additional draws can be
made on the Term Note. In fiscal year 2002, the Company will refinance some
portion or all of the Term Note. Sources of future or alternative financing that
the Company may consider include commercial and investment banks, institutional
lenders, institutional investors and public securities markets. The availability
and terms of any such financing sources will depend upon various factors and
conditions such as the Company's combined cash flow and earnings, the Company's
resulting capital structure, and conditions in financial markets at the time of
such offerings.

UTILITY REGULATION AND RATES

Missouri On July 5, 2001, the Missouri Public Service Commission (MPSC) issued
an order approving a unanimous settlement of Missouri Gas Energy's rate request.
The settlement provides for an annual $9,892,000 base rate increase, as well as
$1,081,000 in added revenue from new and revised service charges. The majority
of the rate increase will be recovered through increased monthly fixed charges
to gas sales service customers. New rates became effective August 6, 2001, two
months before the statutory deadline for resolving the case. The approved
settlement resulted in the dismissal of all pending judicial reviews of prior
rate cases. The settlement provides for the development of a two-year
experimental low-income program that will help certain customers in the Joplin
area pay their natural gas bills.

New England Gas Company On November 1, 2001, the New England Gas Company of
Southern Union Company submitted a comprehensive filing with the Rhode Island
Public Utilities Commission (RIPUC) to implement a "One State; One Rate"
simplified and uniform rate structure. Such filing reflects the consolidated
operations of the various gas distribution operations in Rhode Island and
fulfills the terms of a settlement agreement associated with the merger of the
Companies in Docket Nos. D-00-2 and D-00-3.

The filing includes: merger-related savings; technology investments over a
five-year period; a commitment to developing Service Quality Standards in
collaboration with state regulators; a "community reinvestment program"; and
expansion of eligibility in the Business Choice program. The proposed rates
would increase annual operating revenues by $7.2 million or 3%, with individual
customer impacts varying as a result of the rate schedule consolidation and
restructuring. Other changes incorporated in the filing include: separation of
distribution charges from cost of gas charges; switching from billing on the
basis of the volumetric measure Ccf (hundred cubic feet) to energy consumption
(therms); customer- and company-sharing of any incremental merger-related
savings; and introduction of a weather adjustment to customer bills.



--------------------------------------------------------------------------------

                                       17

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



The New England Gas Company had requested that the new rate schedules take
effect on December 1, 2001. However, no rate change will take effect until the
RIPUC has conducted a full investigation on the proposed rate restructuring and
increase and actual implementation of changes is not expected until July 1,
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 provided 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.

North Texas Southern Union Gas received annual rate increases in Jacksboro,
Weatherford and Mineral Wells, Texas in May 2000, September 2000 and May 2001,
respectively, totaling $600,000. In addition, the Company received approval of
an improved rate design that collects a greater portion of the Company's revenue
stream from the monthly customers' charge and implementation of a Weather
Normalization Adjustment Clause.

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, 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. 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
Manufactured Gas Plant 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 (MGE). 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 MGE
subsequently performed environmental assessments at the sites and submitted
assessment results to MDNR on March 6, 2000. In a letter dated June 21, 2000,
MDNR responded to the Station

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                                       18

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                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



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. MGE performed additional assessment
work in accordance with MDNR's request. In a letter dated May 7, 2001, MDNR
responded to the Station B environmental report. That letter suggested that some
soils would need to be remediated, but that certain areas on Station B require
further investigation to determine whether significant contamination exists.

North of the Kansas City, Missouri Station A and B MGP sites, the City of Kansas
City Port Authority ("Port Authority") is developing a parcel of land adjacent
to the Missouri River and known as the "Riverfront Development." In the course
of developing this property, the Port Authority entered the Riverfront
Development into the Missouri Voluntary Cleanup Program. In a letter dated April
23, 2001, MDNR invited representatives of MGE, the Port Authority and Honeywell
International Inc. (the alleged successor to Barrett Manufacturing Company, a
tar manufacturer formerly located on a portion of the Riverfront Development) to
a technical meeting to discuss the investigation, cleanup, closure and
redevelopment of the Riverfront Development and MGE's properties. That meeting
was held on May 16, 2001. On July 18, 2001, representatives of MGE and the Port
Authority met to discuss MGE's proposal for a limited assessment and remediation
of a portion of the Port Authority property allegedly impacted by the historic
MGP. That proposal was set forth in a letter from MGE to the Port Authority
dated July 31, 2001. In a letter dated July 27, 2001, Honeywell International
Inc. proposed to the Port Authority that Honeywell perform a similar assessment
on the portion of the Riverfront Development formerly occupied by Barrett
Manufacturing Company. In a letter addressed to MGE and dated August 3, 2001,
the Port Authority set forth its demand that MGE assume responsibility for the
remediation of soil and groundwater at the Riverfront Development, and in a
letter dated August 15, 2001, the Port Authority granted a conditional
acceptance of MGE's proposal for MGE's limited assessment of the Riverfront
Development. In September and October 2001, Honeywell and MGE each performed
assessments of its proposed portion of the Port Authority property. Results of
these assessments were provided to the Port Authority in November of 2001.

Providence, Rhode Island Sites During 1995, Providence Gas began an
environmental evaluation of its primary gas distribution facility located at 642
Allens Avenue in Providence, Rhode Island. Environmental studies were completed
and a subsequent remediation work plan was developed at an approximate cost of
$4.5 million. Providence Gas began a soil remediation project on a 4.2 acre
portion of the site ("Phase 1") in July 1999 under the terms of a remedial
action work plan established in 1999 ("1999 RAWP"). Work under the 1999 RAWP was
suspended in March 2001 pending the negotiation of modifications to the 1999
RAWP with the Rhode Island Department of Environmental Management ("RIDEM"). As
of December 31, 2001, approximately $8,900,000 had been expended on soil
remediation at the site. Based on the results of the environmental studies and
the site information learned during the performance of work under the
remediation work plan, the Company submitted a revised remedial action work plan
("Revised RAWP") for the site to RIDEM on July 24, 2001. RIDEM did not accept
the Revised RAWP, and in a letter dated December 13, 2001, the agency directed
the Company to complete Phase 1 under the terms of the 1999 RAWP within a
six-month period during 2002. RIDEM indicated a willingness to consider certain
specific modifications to the 1999 RAWP ("RAWP Modifications") which were
submitted by the Company on January 15, 2002. Work on Phase 1 of the site
remediation is scheduled to resume on March 15, 2002, and $5.8 million has been
reserved for completion of this phase.

In November 1998, Providence Gas received a letter of responsibility from the
RIDEM 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 had been created and approved
by RIDEM. An investigation was then begun to determine the extent of
contamination, as well as the extent of the Company's responsi bility.
Providence Gas entered into a cost-sharing agreement with the current operator
of the property, under which Providence Gas was responsible for approximately
twenty percent (20%) of the costs related to the investigation.

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                                       19

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                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Costs of testing at this site as of December 31, 2001 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 was a defendant in a civil
action seeking to recover anticipated remediation costs associated with
contamination found at property owned by the plaintiffs. This claim was based on
alleged dumping of material by Fall River Gas Company trucks at the site in the
1930s and 1940s. In an agreement effective December 3, 2001, the Company agreed
to perform all assessment, remediation and monitoring activities at the site
sufficient to obtain a final letter of compliance from the Rhode Island
Department of Environmental Management.

Valley Gas Company Sites Valley Gas Company 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 Gas Company 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 Gas Company's 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 it was soliciting comments on the
Decision. While the public comment period has now closed, the EPA has yet to
reissue its decision. While this suit has been stayed, Valley Gas Company and
Blackstone (merged with Narragansett Electric Company in May 2000) have received
letters of responsibility from the RIDEM with respect to releases from two MGP
sites in Rhode Island. RIDEM issued letters of responsibility to Valley Gas
Company 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 Gas Company entered into an agreement with Blackstone (now
Narragansett) in which Valley Gas Company and Blackstone agreed to share equally
the expenses for the costs associated with the Tidewater site subject to
reallocation upon final determination 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 shall provide any appropriate accruals and seek recovery for such
remediation costs through all appropriate means, including recovery of claims
against other potentially responsible parties, insurance and regulatory relief.
In the second quarter of fiscal year 2002, the Company entered into agreements
with several of its historical insurance carriers in settlement of certain
environmental claims. Of these settlement proceeds, $2,016,000 was recorded to
income as it represented reimbursement for amounts previously expensed by the
Company. The $5.8 million balance of the settlement proceeds is deferred pending
future environmental assessments and remediation efforts as well as any future
rate filing.

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 that 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 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.

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                                       20

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS



Although significant charges to earnings could be required prior to rate
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 at that time had a pending merger agreement with ONEOK, Inc. (ONEOK)
at $28.50 per share, executed on December 14, 1998. 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. Southern Union intends to
vigorously pursue its claims against Southwest, ONEOK, and certain individual
defendants. The Company believes that the results of the above-noted Southwest
Gas litigation will not have a materially adverse effect on the Company's
financial condition, results of operations or cash flows.

Regulatory In August 1998, the City of Edinburg obtained a jury verdict totaling
approximately $13,000,000 jointly and severally 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 for the
alleged underpayment of franchise fees. (Southern Union purchased RGV from
Valero in 1993.) The trial court reduced the jury award. Subsequently, the Texas
(13th District) Court of Appeals further reduced the award to $4,085,000. The
Court of Appeals also remanded a portion of the case to the trial court with
instructions to retry certain issues. The Company continues to pursue reversal
on appeal. The Company believes that the outcome of the matter 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.



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                                       21

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



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

Several of these 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 and Divestitures In December 2001, a subsidiary of the Company sold
their 43-mile Carrizo Springs Pipeline for $1,000,000, resulting in a pre-tax
gain of $561,000. Also in December 2001, the Company sold South Florida Natural
Gas, a natural gas division of Southern Union, and Atlantic Gas Corporation, a
Florida propane subsidiary of the Company, for $10,000,000, resulting in a
pre-tax loss of $1,500,000.

On September 28, 2000, Southern Union completed the acquisitions of Providence
Energy Corporation (ProvEnergy) and Fall River Gas Company (Fall River Gas), and
on September 20, 2000, Southern Union completed the acquisition of Valley
Resources, Inc. (Valley Resources). Collectively, these operations (hereafter
referred to as the Company's New England Operations) were acquired for
approximately $422,000,000 in cash and 1,370,629 shares (before adjustment for
any subsequent stock dividend) of Southern Union common stock, as well as the
assumption of approximately $140,000,000 in long-term debt. The New England
Operations' primary business is the distribution of natural gas through the New
England Gas Company, which serves approximately 292,000 customers throughout
Rhode Island and southeastern Massachusetts.

Subsidiaries of the Company acquired in the ProvEnergy merger include ProvEnergy
Oil Enterprises, Inc. (ProvEnergy Oil) and ProvEnergy Power Company, LLC.
ProvEnergy Oil, sold for $15,776,000 in August 2001, operated a fuel oil
distribution business for 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. 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. Valley
Resources' non-utility subsidiaries acquired in the merger were Valley Propane,
Inc. (Valley Propane), Morris Merchants, Inc. (Morris Merchants), Valley
Appliance Merchandising Company (VAMCO) and Alternate Energy Corporation (AEC).
Valley Propane, sold for $5,301,000 in September 2001, provided liquid propane
to customers in Rhode Island and nearby Massachusetts. Morris Merchants, sold
for $1,586,000 in October 2001, served as a manufacturers' representative agency
for franchised plumbing and heating contract supplies throughout New England.
VAMCO merchandises and rents natural gas burning appliances, offers appliance
service contract programs, sells water filtration systems and provides
construction management services for natural gas-related projects. AEC sells,
installs and designs natural gas conversion systems and facilities. No gain or
loss was recognized on any of these New England Operations' sales transactions.

Subsidiaries of the Company acquired in the November 4, 1999 acquisition of
Pennsylvania Enterprises, Inc. included PG Energy Services Inc. (Energy
Services), PEI Power Corporation, Keystone Pipeline Services, Inc. (Keystone, a
wholly-owned subsidiary of Energy Services), and Theta Land Corporation.
Through Energy Services, the Company supplies propane and offers the inspection,
maintenance and servicing of residential and small commercial gas-fired
equipment.  In July 2001, the commercial and industrial natural gas marketing
contracts of

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                                       22

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



Energy Services were sold for approximately $4,972,000, resulting in a pre-tax
gain of $4,653,000. Keystone, sold for $3,300,000 in June 2001 for a pre-tax
gain of $707,000, was engaged in the construction, maintenance, and
rehabilitation of natural gas distribution pipelines. 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 also plans to sell or dispose of
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 operating activities of the acquired operations are consolidated with the
Company beginning on their respective acquisition dates. As a result of this and
the divestiture of non-core business assets, the results of operations for the
three-, six- and twelve-month periods ended December 31, 2001 are not indicative
of results that would necessarily be achieved for a full year. Additionally, the
majority of the Company's operating margin is earned during the winter heating
season.

RESULTS OF OPERATIONS

Three Months Ended December 31, 2001 and 2000

The Company recorded net earnings available for common stock of $19,750,000 for
the three-month period ended December 31, 2001 compared with net earnings of
$19,318,000 for the same period in 2000. Earnings per diluted share were $.37 in
2001, compared to $.35 in 2000. Weighted average diluted shares outstanding
decreased 3% in 2001 due to the repurchase of 1,696,456 shares of the Company's
common stock in September and October 2001.

Operating revenues were $376,441,000 for the three-month period ended December
31, 2001, compared with $605,339,000 in 2000. Gas purchase and other energy
costs for the three-month period ended December 31, 2001 were $226,951,000,
compared with $433,925,000 in 2000. 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 decrease in both operating revenues and gas purchase costs
between periods was primarily due to a 30% decrease in gas sales volume to
44,190 MMcf in 2001 from 63,031 MMcf in 2000 and by an 18% decrease in the
average cost of gas from $6.23 per Mcf in 2000 to $5.11 per Mcf in 2001. Changes
in the average cost of gas resulted from seasonal impacts on demands for natural
gas and the ensuing competitive pricing within the industry. The decrease in gas
sales volumes is primarily due to the warmer-than-normal weather in 2001 as
compared to 2000 in all of the Company's service territories.

Weather in Southern Union Gas service territories was 89% of a 30-year measure
for the three-month period ended December 31, 2001, compared with 131% in 2000.
About half of the customers served by Southern Union Gas are weather normalized.
MGE's service territories experienced weather that was 76% of a 30-year measure
in 2001, compared with 123% in 2000. Weather for the PG Energy service
territories was 83% of a 30-year measure for the three-month period ended
December 31, 2001, compared with 113% in 2000. The New England Gas Company
service territories experienced weather that was 85% of a 30-year measure in
2001, compared with 110% in 2000.

Operating margin (operating revenues less gas purchase and other energy costs
and revenue-related taxes) decreased $11,620,000 for the three-month period
ended December 31, 2001 compared with the same period in 2000. Operating margin
decreased principally as a result of the warmer-than-normal weather, previously
discussed. This decrease was partially offset by the timing of a $10,973,000
annual revenue increase granted to MGE effective August 6, 2001 and a
$10,800,000 annual revenue increase granted to PG Energy effective on January 1,
2001.

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                                       23

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



Operating expenses, which include operating, maintenance and general expenses,
depreciation and amortization, and taxes other than on income and revenues, were
$79,393,000 for the three-month period ended December 31, 2001, a decrease of
$14,446,000, compared with $93,839,000 in 2000. Operating expenses decreased due
to the elimination of goodwill amortization resulting from the Company's
adoption of Goodwill and Other Intangible Assets effective July 1, 2001. In
accordance with this Standard, the Company has ceased the amortization of
goodwill, which generated $4,848,000 of expense during the quarter ending
December 31, 2000, and currently accounts for goodwill on an impairment-only
approach. See Goodwill in the Notes to the Consolidated Financial Statements
included herein. Additionally, in connection with the Company's Cash Flow
Improvement Plan announced in July 2001 and discussed below, the Company
realized savings of approximately $2,500,000 during the three-month period
ended December 31, 2001 primarily due to the acceptance of voluntary Early
Retirement Programs ("ERPs") in certain of its operating divisions and a limited
reduction in force ("RIF") within its corporate offices. During the three-month
period ended December 31, 2001, Southern Union began to recover certain amounts
from various insurance carriers for past and future environmental expenditures.
To the extent that such related past expenditures had been expensed by the
Company, a portion of these recoveries are recorded as a reduction to operating
expense. During the quarter ended December 31, 2001, the Company recognized a
reduction in operating expense of $2,016,000 for past environmental
expenditures. The three-month period ended December 31, 2000 was impacted by
$2,038,000 in non-cash compensation expense associated with shares of common
stock held in a trust for one of the Company's benefit plans. The Company
amended this plan during the third quarter of fiscal year 2001 which eliminated
any future expense, or income volatility, associated with the accounting
treatment for such benefit plan. See Commitments and Contingencies in the Notes
to the Consolidated Financial Statements included herein.

Interest expense was $21,913,000 for the three-month period ended December 31,
2001, compared to $30,303,000 in 2000. Interest expense decreased primarily due
to both a reduction in principal and the variable interest rate from 2000 to
2001 on the bank note (the Term Note) entered into by the Company on August 28,
2000 for the acquisition of the New England 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. See Debt and Capital Lease in the Notes to
the Consolidated Financial Statements included herein.

Other expense for the three-month period ended December 31, 2001 was $409,000
compared to other income of $14,911,000 in 2000. Other expense for the
three-month period ended December 31, 2001, includes $3,300,000 of legal costs
associated with ongoing litigation from the unsuccessful acquisition of
Southwest Gas Corporation (Southwest) and a $1,500,000 loss on the sale of South
Florida Natural Gas, a natural gas division of Southern Union, and Atlantic Gas
Corporation, a Florida propane subsidiary of the Company (collectively, the
Florida Operations). These items were partially offset by the recognition of
$1,976,000 in previously recorded deferred income related to financial
derivative energy trading activity of a wholly-owned subsidiary, $1,298,000 of
interest and dividend income, and a $561,000 gain on the sale of a 43-mile
pipeline also by a subsidiary of the Company. Other income for the three-month
period ended December 31, 2000 primarily consisted of a $13,532,000 gain on the
sale of non-core real estate, realized gains on the sale of a portion of
Southern Union's holdings in Capstone Turbine Corporation of $8,869,000 and
$1,652,000 of interest and dividend income. This was partially offset by
$5,849,000 of non-cash trading losses and $2,857,000 of costs associated with
the aforementioned unsuccessful acquisition and related litigation.

The effective federal and state income tax rate is 38% and 46% for the three
months ended December 31, 2001 and 2000, respectively. The decline in the
effective tax rate is due to the Company's adoption of Goodwill and Other
Intangible Assets, previously discussed, which eliminates the amortization of
goodwill, in which the majority was non-tax deductible.



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                                       24

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



Six Months Ended December 31, 2001 and 2000

The Company recorded a net loss attributable to common stock of $10,653,000 for
the six-month period ended December 31, 2001 compared with net earnings of
$5,344,000 in 2000. Net loss per common share, based on weighted average shares
outstanding during the period, was $.21 in 2001 compared with net earnings per
diluted share of $.10 in 2000. The six-month period ended December 31, 2001 net
loss was principally impacted by a pre-tax charge for business restructuring of
$32,706,000 ($.39 per share).

Operating revenues were $550,410,000 for the six-month period ended December 31,
2001, compared with $749,808,000 in 2000. Gas purchase and other energy costs
for the six-month period ended December 31, 2001 were $319,938,000, compared
with $518,458,000 in 2000. The decrease in both operating revenues and gas
purchase costs between periods was primarily due to a 23% decrease in sales
volume from 76,762 MMcf in 2000 to 59,454 MMcf in 2001 and by an 10% decrease in
the average cost of gas from $5.93 per Mcf in 2000 to $5.31 per Mcf in 2001.
Changes in the average cost of gas resulted from seasonal impacts on demands for
natural gas and the ensuing competitive pricing within the industry.
Warmer-than-normal weather in 2001 as compared with 2000 in the Texas, Missouri
and Pennsylvania service territories resulted in a net gas sales volume decrease
of 17,438 MMcf.

Weather in Southern Union Gas service territories was 89% of a 30-year measure
for the six-month period ended December 31, 2001, compared with 131% in 2000.
About half of the customers served by Southern Union Gas are weather normalized.
MGE's service territories experienced weather that was 77% of a 30-year measure
in 2001, compared with 123% in 2000. Weather for the PG Energy service
territories was 85% of a 30-year measure for the six-month period ended December
31, 2001, compared with 119% in 2000. The New England Gas Company service
territories experienced weather that was 87% of a 30-year measure in 2001,
compared with 110% for the three-month period ended December 31, 2000.

Operating margin increased $8,473,000 for the six-month period ended December
31, 2001 compared with the same period in 2000. Operating margin increased
principally as a result of the acquisition of the New England Operations which
contributed a net increase of $12,294,000 for the six-month period ended
December 31, 2001. The timing of a $10,973,000 annual revenue increase granted
to MGE effective August 6, 2001 and the $10,800,000 annual revenue increase
granted to PG Energy effective on January 1, 2001 also impacted operating
margin. These items were partially offset by reduced gas sales volume in the
Texas, Missouri and Pennsylvania service territories due to the
warmer-than-normal weather, previously discussed.

Operating expenses, excluding business restructuring charges, were $162,683,000
for the six-month period ended December 31, 2001, an increase of $11,000,000,
compared with $151,683,000 in 2000. Operating expenses increased primarily as a
result of the acquisition of the New England Operations, which generated a net
increase of $22,381,000. This was partially offset by the elimination of
goodwill amortization resulting from the Company's adoption of Goodwill and
Other Intangible Assets, previously discussed, which generated $7,583,000 of
expense during the six-month period ending December 31, 2000. Additionally, in
connection with the previously mentioned Cash Flow Improvement Plan, the Company
began the divestiture of certain non-core subsidiaries and assets. As a result
of prices of comparable businesses for various non-core properties, a goodwill
impairment loss of $3,358,000 was recognized in depreciation and amortization on
the consolidated statement of operations during the six-month period ended
December 31, 2001. See Goodwill in the Notes to the Consolidated Financial
Statements included herein. Operating expenses for the six-month period ended
December 31, 2001 were also impacted by realized savings of approximately
[$3,000,000] from the previously mentioned Cash Flow Improvement Plan and
$2,016,000 of environmental insurance recoveries, also previously discussed. The
six-month period ended December 31, 2000

--------------------------------------------------------------------------------

                                       25

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



was impacted by $2,455,000 of non-cash compensation expense from one of the
Company's benefit plans, previously mentioned.

Business reorganization and restructuring initiatives were commenced in August
2001 as part of a previously announced Cash Flow Improvement Plan designed to
increase annualized pre-tax cash flow from operations by at least $50 million by
the end of fiscal year 2002. Actions taken by the Company included (i) the
offering of voluntary Early Retirement Programs ("ERPs") in certain of its
operating divisions and (ii) a limited reduction in force ("RIF") within its
corporate offices. ERPs, providing for increased benefits for those electing
retirement, were offered to approximately 400 eligible employees across the
Company's operating divisions, with approximately 60% of such eligible employees
accepting. The RIF was limited solely to certain corporate employees in the
Company's Austin and Kansas City offices with forty-eight employees being
offered severance packages. As a result of actions associated with the business
reorganization and restructuring, the Company expects an annual cost savings in
a range of $30 million to $35 million.  In connection with the corporate
reorganization and restructuring efforts, the Company recorded a one-time charge
of $32,706,000 during the quarter ended September 30, 2001. The charge included:
$17.7 million of voluntary and accepted ERP's, primarily through enhanced
benefit plan obligations, and other employee benefit plan obligations; $8.5
million of RIF within the corporate offices and related employee separation
benefits; and $6.2 million connected with various business realignment and
restructuring initiatives. The Company expects that most of the restructuring
actions will be completed by the end of fiscal year 2002.  See Business
Restructuring Charges in the Notes to the Consolidated Financial Statements
included herein.

Interest expense was $49,072,000 for the six-month period ended December 31,
2001, compared to $46,609,000 in 2000. Interest expense increased primarily due
to the previously mentioned Term Note entered into by the Company on August 28,
2000 for the acquisition of the New England Operations, as well as the
assumption by the Company of $113,321,000 in long-term debt of the New England
Operations which was not refinanced or extinguished with the Term Note. See Debt
and Capital Lease in the Notes to the Consolidated Financial Statements included
herein.

Other income for the six-month period ended December 31, 2001 was $23,187,000
compared to $9,397,000 in 2000. Other income for the six-month period ended
December 31, 2001, includes gains of $17,166,000 generated through the
settlement of several interest rate swaps, a gain of $4,653,000 realized through
the sale of marketing contracts held by PG Energy Services Inc., $3,203,000 in
interest and dividend income, the recognition of $2,333,000 in previously
recorded deferred income related to financial derivative energy trading activity
of a wholly-owned subsidiary, and a $561,000 gain on the sale of a 43-mile
pipeline also by a subsidiary of the Company. This was partially offset by
$4,906,000 of legal costs associated with Southwest and a $1,500,000 loss on the
sale of the Florida Operations, both previously discussed. Other income for the
six-month period ended December 31, 2000 primarily consisted of 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 $9,044,000 of non-cash trading losses and
$4,898,000 of costs associated with Southwest.

The effective federal and state income tax rate is 30% and 46% for the six
months ended December 31, 2001 and 2000, respectively. The decline in the
effective tax rate is due to the Company's adoption of Goodwill and Other
Intangible Assets, previously discussed.

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.



--------------------------------------------------------------------------------

                                       26

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



Twelve Months Ended December 31, 2001 and 2000

The Company recorded net earnings available for common stock of $41,288,000 for
the twelve-month period ended December 31, 2001 compared with net earnings of
$14,157,000 in 2000. Earnings per diluted share were $.75 in 2001 compared with
earnings per diluted share of $.26 in 2000.

Operating revenues were $1,733,415,000 for the twelve-month period ended
December 31, 2001, compared with operating revenues of $1,257,131,000 in 2000.
Gas purchase and other energy costs for the twelve-month period ended
December 31, 2001 were $1,176,230,000, compared with $831,767,000 in 2000. Both
operating revenues and gas purchase costs were primarily impacted by a 7%
increase in gas sales volume from 148,418 MMcf in 2000 to 159,348 MMcf in 2001
and by a 40% increase in the average cost of gas from $4.89 per Mcf in 2000 to
$6.86 per Mcf in 2001 due to increases in average spot market gas prices. The
New England Operations generated a net increase of $278,205,000 in operating
revenues, $159,809,000 in gas purchase and other energy costs and 21,242 MMcf of
the increase in gas sales volume. The increase in both operating revenues and
gas purchase and other energy costs between periods was partially offset by
warmer-than-normal weather in 2001 as compared with 2000 in the Missouri and
Pennsylvania service territories, which resulted in a net gas sales volume
decrease of 6,759 MMcf.

Weather in Southern Union Gas service territories was 96% of a 30-year measure
for the twelve-month period ended December 31, 2001, compared with 88% in 2000.
About half of the customers served by Southern Union Gas are weather normalized.
MGE's service territories experienced weather that was 89% of a 30-year measure
in 2001, compared with 96% in 2000. Weather for the PG Energy service
territories was 94% of a 30-year measure for the twelve-month period ended
December 31, 2001, compared with 103% in 2000. The New England Gas Company
service territories experienced weather that was 94% of a 30-year measure in
2001.

Operating margin increased $120,979,000 for the twelve-month period ended
December 31, 2001 compared with the same period in 2000. Operating margin
increased principally as a result of the acquisition of the New England
Operations which contributed a net increase of $112,355,000 for the twelve-month
period ended December 31, 2001. The timing of a $10,973,000 annual revenue
increase granted to MGE effective August 6, 2001 and the $10,800,000 annual
revenue increase granted to PG Energy effective on January 1, 2001 also impacted
operating margin. These items were partially offset by reduced gas sales volume
in the Missouri and Pennsylvania service territories, previously discussed.

Operating expenses, excluding business restructuring charges, which was
previously discussed, were $367,399,000 for the twelve-month period ended
December 31, 2001, compared with operating expenses of $268,613,000 in 2000. An
increase of $89,854,000 was the result of the timing of the acquisition of the
New England Operations. An increase in bad debt expense in the Texas, Missouri
and Pennsylvania service territories of $16,190,000 resulted from an increase in
delinquent customer receivables as a result of higher gas prices and colder
weather. Also impacting operating expenses for the twelve-month period ended
December 31, 2001 was a goodwill impairment loss of $3,358,000, previously
discussed. This was partially offset by the elimination of goodwill amortization
resulting from the Company's adoption of Goodwill and Other Intangible Assets,
also previously discussed, which generated a net increase in expense of
$2,971,000 during the twelve-month period ending December 31, 2000 as compared
to the same period in 2001. See Goodwill in the Notes to the Consolidated
Financial Statements included herein. The increase in operating expense between
periods was also partially offset by savings of $3,000,000 realized through
the Cash Flow Improvement Plan and $2,016,000 of environmental insurance
recoveries, both previously mentioned. The twelve-month period ended
December 31, 2000 was impacted by $2,311,000 of non-cash compensation expense
from one of the Company's benefit plans, also previously discussed.



--------------------------------------------------------------------------------

                                       27

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



Interest expense was $105,982,000 for the twelve-month period ended December 31,
2001 compared to $76,438,000 in 2000. Interest expense increased primarily due
to the previously mentioned Term Note entered into by the Company for the
acquisition of the New England Operations, as well as the assumption by the
Company of long-term debt of the New England Operations, also 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, 2001 was $90,609,000
compared to $4,183,000 in 2000. Other income for the twelve-month period ended
December 31, 2001, includes realized gains on the sale of investment securities
of $65,713,000, gains of $17,166,000 generated through the settlement of several
interest rate swaps, $8,829,000 in interest and dividend income, the recognition
of $5,693,000 related to financial derivative energy trading activity of a
wholly-owned subsidiary, a gain of $4,653,000 realized through the sale of
marketing contracts held by PG Energy Services Inc., and a $561,000 gain on the
sale of a 43-mile pipeline also by a subsidiary of the Company. This was
partially offset by $12,863,000 of legal costs associated with Southwest and a
$1,500,000 loss on the sale of the Florida Operations, both previously
discussed. Other income for the twelve-month period ended December 31, 2000
primarily consisted of 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 $11,280,000 of non-cash trading losses and $11,261,000 of
costs associated with Southwest.

The Company's consolidated federal and state effective income tax rate was 43%
and 49% for the twelve-month period ended December 31, 2001 and 2000,
respectively. The decline in the effective tax rate is due to the Company's
adoption of Goodwill and Other Intangible Assets, previously discussed.


--------------------------------------------------------------------------------

                                       28

<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,
2001 and 2000:

                                     Three Months             Twelve Months
                                  Ended December 31,        Ended December 31,
                                   2001        2000          2001        2000
                                ----------  ----------    ----------  ----------

Average number of gas sales
   customers served:
      Residential............    1,331,980   1,328,725     1,329,169   1,125,688
      Commercial.............      127,823     127,758       128,496     111,069
      Industrial and
         irrigation..........        4,221       4,282         4,295       1,651
      Public authorities
         and other...........        3,180       3,129         3,175       3,161
      Pipeline and marketing.          346         367           351         298
                                ----------  ----------    ----------  ----------
         Total average
            customers served.        1,467   1,464,261     1,465,486   1,241,867
                                ==========  ==========    ==========  ==========

Gas sales in millions of
   cubic feet (MMcf)
      Residential............       18,124      27,250       100,342      82,273
      Commercial.............        7,552      10,908        40,968      34,311
      Industrial and
         irrigation..........          927       1,372         4,995       2,827
      Public authorities
         and other...........          645         957         2,889       2,863
      Pipeline and marketing.        3,886       4,394        15,418      17,143
                                ----------  ----------    ----------  ----------
         Gas sales billed....       31,134      44,881       164,612     139,417
      Net change in unbilled
         gas sales...........       13,056      18,150        (5,264)      9,001
                                ----------  ----------    ----------  ----------
         Total gas sales.....       44,190      63,031       159,348     148,418
                                ==========  ==========    ==========  ==========

Gas sales revenues
   (thousands of dollars):
      Residential............   $  189,541  $  252,896    $1,091,729  $  639,076
      Commercial.............       66,455      93,476       402,399     238,108
      Industrial and
         irrigation..........        7,776      10,760        43,212      19,291
      Public authorities
         and other...........        3,784       7,031        23,100      16,618
      Pipeline and marketing.       11,010      17,750        69,909      58,957
                                ----------  ----------    ----------  ----------
         Gas revenues billed.      278,566     381,913     1,630,349     972,050
      Net change in unbilled
         gas sales revenues..       80,312     140,152       (55,034)     95,230
                                ----------  ----------    ----------  ----------
         Total gas sales
            revenues.........   $  358,878  $  522,065    $1,575,315  $1,067,280
                                ==========  ==========    ==========  ==========

Gas sales revenue per
   thousand cubic feet
   (Mcf) billed:
      Residential............   $    10.46  $     9.28    $    10.88  $     7.77
      Commercial.............         8.80        8.57          9.82        6.94
      Industrial and
         irrigation..........         8.39        7.84          8.65        6.82
      Public authorities
         and other...........         5.86        7.35          8.00        5.80
      Pipeline and marketing.         2.83        4.04          4.53        3.44

Weather:
   Degree days:
      Southern Union Gas
         service territories.          733       1,087         2,022       1,891
      Missouri Gas Energy
         service territories.        1,504       2,405         4,645       5,045
      PG Energy service
         territories.........        1,800       2,508         5,848       6,460
      New England Gas Company
         service territories.        1,695       2,194         5,519       2,194
   Percent of normal based
      on 30-year measure:
         Southern Union Gas
            service
            territories......          89%        131%           96%         88%
         Missouri Gas Energy
            service
            territories......          76%        123%           89%         96%
         PG Energy service
            territories......          83%        113%           94%        103%
         New England Gas
            Company service
            territories......          85%        110%           94%        110%

Gas transported in millions
   of cubic feet (MMcf)......       24,095      28,354        90,011      90,180
Gas transportation revenues
   (thousands of dollars)....   $   12,883  $   14,612    $   44,677  $   42,193

--------------------

The above information does not include the Company's 43% equity ownership in a
natural gas distribution company serving 25,000 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 of weather 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.

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                                       29

<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 29, 2001, the Company renewed and amended its short-term and long-term
credit facilities (together referred to as "Revolving Credit Facilities"). The
Company has available $150,000,000 under the short-term facility, which expires
May 28, 2002, and $225,000,000 under the long-term facility, which expires on
May 29, 2004. 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 $214,950,000 was
outstanding under the Revolving Credit Facilities at December 31, 2001 and
$147,600,000 at February 13, 2002.

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, 2001, a balance of $485,000,000 was outstanding on
this Term Note. No additional draws can be made on the Term Note. In fiscal year
2002, the Company plans to refinance some portion or all of the Term Note.
Sources of future or alternative financing that the Company may consider include
commercial and investment banks, institutional lenders, institutional investors
and public securities markets. The availability and terms of any such financing
sources will depend upon various factors and conditions such as the Company's
combined cash flow and earnings, the Company's resulting capital structure, and
conditions in financial markets at the time of such offerings.

The principal sources of funds during the three-month period ended December 31,
2001 were $31,274,000 from operations, $21,950,000 borrowed under the Company's
Revolving Credit Facilities and proceeds from the sale of various subsidiaries
of $12,586,000. The principal uses of funds during this period included
$33,012,000 for the repurchase of Company common stock and $32,757,000 for
on-going property, plant and equipment additions.

The principal sources of funds during the six-month period ended December 31,
2001 were proceeds from the sale of various subsidiaries of $33,663,000,
$24,350,000 borrowed under the Company's Revolving Credit Facilities, proceeds
of $17,166,000 generated from the settlement of interest rate swaps and
$10,631,000 from operations. This provided funds of $57,147,000 for on-going
property, plant and equipment additions and $34,711,000 for the repurchase of
Company common stock.

The effective interest rate under the Company's current debt structure is 6.24%
(including interest and the amortization of debt issuance costs and redemption
premiums on refinanced debt).

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.



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                                       30

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



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,
2001.

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, 2001, 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.

ACCOUNTING PRONOUNCEMENTS

In June 2001, the FASB issued Accounting for Asset Retirement Obligations, which
addresses financial accounting and reporting for obligations and the related
costs associated with the retirement of tangible long-lived assets. Accounting
for Asset Retirement Obligations is effective for all fiscal years beginning
after June 15, 2002. The Statement's purpose is to develop consistent financial
treatment of asset retirement obligations and the associated costs, improve
disclosure regarding the impact of retirement obligations on future cash
outflows, leverage and liquidity, and provide more information related to gross
investment in long-lived assets. The Company is currently evaluating the effect
this Statement will have on the earnings and financial condition of the Company.

In August 2001, the FASB issued Accounting for the Impairment or Disposal of
Long-Lived Assets, which addresses financial accounting and reporting for the
impairment or disposal of long-lived assets and broadens the presentation of
discontinued operations to include more disposal transactions. Accounting for
the Impairment or Disposal of Long-Lived Assets is effective for all fiscal
years beginning after December 15, 2001. The Statement's purpose is to develop a
single accounting model for long-lived assets to be disposed of by sale and
enhance disclosure regarding the effects of a disposal transaction on ongoing
operations. The Company is currently evaluating the effect this Statement will
have on the earnings and financial condition of the Company.

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 may 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; 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

--------------------------------------------------------------------------------

                                       31

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES

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



involving the Company; unanticipated environmental liabilities; changes in
business strategy; the risk that the businesses acquired and any other
businesses or investments that Southern Union has acquired or may acquire may
not be successfully integrated with the businesses of Southern Union; 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.

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                                       32

<PAGE>



                     SOUTHERN UNION COMPANY AND SUBSIDIARIES



RESULTS OF VOTES OF SECURITY HOLDERS

Southern Union held its Annual Meeting of Stockholders on November 14, 2001. The
following matter was submitted for a vote by Southern Union's security holders:
the election of four persons to serve as the Class II directors until the 2004
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 at the Annual Meeting of Stockholders, were:

                                           For          Abstaining      Withheld
                                       -----------      ----------      --------

Election of nominees as Class II
   Directors:
      Aaron I. Fleischman               43,692,340          --           441,275
      Kurt A. Gitter, M. D.             43,705,915          --           427,700
      Adam M. Lindemann                 43,681,943          --           451,672
      George Rountree, III              43,708,183          --           425,432





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                                       33
<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, 2002                 By DAVID J. KVAPIL
     ---------------------                  ------------------------------------
                                            David J. Kvapil
                                            Executive Vice President and Chief
                                               Financial Officer


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<PAGE>