Energy Transfer to Buy Southern Union for $4.2B

HOUSTON (Dow Jones Newswires), June 16, 2011

Energy Transfer Equity (ETE) agreed to buy Southern Union (SUG) for $4.2 billion in a deal that will create the largest natural gas pipeline company in the U.S.

The two companies hope that combining Energy Transfer's position in prolific natural gas production areas with Southern's access to markets will make them better able to transport natural gas through what is becoming an increasingly congested system. The glut has been brought about by new drilling technology, which in the past decade has unlocked an unprecedented natural gas bounty from shale formations across the U.S.

"Energy Transfer has great interstate pipelines and access to key shale plays, but not as much market access as Southern brings to the Midwest and Florida," said Avi Feinberg, an equities analyst with Morningstar Inc.

The combined company will have capacity to move more than 30 billion cubic feet a day of natural gas along nearly 45,000 miles of pipeline. That's nearly half of the natural gas produced in the U.S.

As part of the deal, Energy Transfer Equity will assume $3.7 billion of Southern Union's debt. The new, larger company will have the heft to invest in adding new pipeline capacity, executives said.

The "mind-boggling" levels of natural gas liquids production coming out of the Permian Basin and Eagle Ford Shale areas of Texas has already tied up pipeline systems in the region, Energy Transfer Chief Executive Kelcy Warren said during a conference call with investors.

"I personally see a train wreck if someone doesn't build takeaway capacity in that region very soon," Warren said. "We're committed to doing that."

Energy Transfer plans an additional $1.7 billion in expansion projects, Warren said. After completion of the merger with Southern--expected in the first quarter of 2012--the new company will have access to more shale production areas than any other U.S. pipeline company, Warren said.

Natural gas is trading far below its prices in mid-2008 when the financial crisis crippled industrial demand even as unconventional gas flowed in great quantities from new shale production. Though the price of the commodity is expected to remain low for the foreseeable future, demand is expected to rise significantly. Oil giants, including ExxonMobil and Chevron, have made huge bets on the sector over the past year through acquisitions.

Energy Transfer said it has identified about $100 million in commercial and operational synergies as well as an additional $25 million in one-time savings.

Under the deal, Energy Transfer will issue new Series B units with an implied value of $33 a Southern Union share, a 17% premium to the former's Wednesday closing price.

Southern Union shares surged 17% to $33.11 in early trading. They last traded above the offer price in the middle of 2007, though they have risen 17% so far this year.

Energy Transfer shares rose 6%, to $45.09. The company reported in February its fourth-quarter earnings fell 13% on a surprise drop in revenue because of weakness in its natural-gas operations.

Southern Union reported last month its first-quarter earnings rose 7.4%, beating analysts' estimates, as increased revenue from distribution and the transportation and storage segments helped offset lower margins.

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