Energy Transfer to diversify cash flow with Southern Union purchase

By Jennifer Lanning Drey

Savannah, Ga., June 16 - Energy Transfer Equity, LP and Southern Union Co. have agreed to a $7.9 billion merger agreement that will diversify Energy Transfer's distributable cash flow with another investment-grade source, Martin Salinas, Energy Transfer's chief financial officer, said during a Thursday conference call held to discuss the transaction.

Under the terms of the agreement, stockholders of Southern Union will exchange their common shares for newly issued series B units of Energy Transfer with a value of $33 per share, or $4.2 billion. The series B units will be entitled to an annualized distribution yield of not less than 8.25%, payable quarterly. Energy Transfer has the option to redeem the series B units at any time after closing the transaction.

The $7.9 billion transaction value includes $3.7 billion of existing Southern Union debt.

Upon closing the transaction, Energy Transfer will be very focused on enhancing Southern Union's liquidity and credit profile and will work to refinance its maturing debt over the next few years, Salinas said.

Energy Transfer will also remain financially sound, as the transaction is immediately accretive to distributable cash flow at the company, he said.

"Our financial position will remain strong with more stable cash flows, a solid liquidity position, a high-quality base of long-term customers and continued flexibility to raise capital, he said.

Energy Transfer is committed to maintaining investment-grade credit ratings at its master limited partnership subsidiary Energy Transfer Partners, LP and at Southern Union and hopes to achieve them at its other master limited partnership subsidiary, Regency Energy Partners, LP, he said.

Energy Transfer is less concerned with making Energy Transfer Equity investment-grade since it is basically just a holding company, Salinas added during the question-and-answer portion of the call.

Also during the question-and-answer session, Southern Union's chief financial officer Richard Marshall said he does not foresee any issues with the change of control provisions under the Southern Union debt because most have dual triggers that include a change in control and a downgrade by the agencies.

Some of the Southern Union term loans may include an interest step-up in connection with a change of control, but those loans are expected to be taken out before the end of the year, he said.

Strategic rationale

Energy Transfer's acquisition of Southern Union will provide the company with direct ownership of attractive assets that are complementary to the assets owned and operated by its master limited partnership subsidiaries, Energy Transfers Partners, LP and Regency Energy Partners, Salinas also said during the call.

"We will gain increased size, scale and financial resources to enhance our overall geographic diversity while adding to our long list of organic growth opportunities," he said.

The combined footprint of the two companies will include more than 44,000 miles of natural gas pipelines and about 30.7 billion cubic feet per day of natural gas transportation capacity.

The prospect of drop downs and joint ventures with Energy Transfer Partners and Regency will provide further value to the group as a whole, he said.

"The greater operational and geographic diversity from this transaction enhances our cash flow by providing another investment-grade cash flow source to Energy Transfer Equity in addition to what it is already receiving from ETP and Regency," Salinas said.

Energy Transfer has identified about $100 million in commercial and operational synergies expected as a result of the transaction, as well as another $25 million in one-time savings.

Southern Union weighs in

Southern Union's president and chief operating officer said during the call that he also believed the transaction offered attractive options for Southern Union shareholders, as well as benefits to end-use customers.

"We will benefit from becoming part of a much larger, much more diversified platform with a management team that we know and that knows us very well and has a proven track record of increasing unitholder value," he said.

The transaction is expected to close in the first quarter of 2012, subject to Southern Union shareholder approval and regulatory approval. No Energy Transfer unitholder approval is required for closing of the transaction.

Energy Transfer is a Dallas-based oil and gas pipeline company.

Houston-based Southern Union transports, stores, gathers, processes and distributes natural gas.

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