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Energy Transfer Chief: Southern Union Deal Expands Access

The chairman of Energy Transfer Equity LP (ETE) said Thursday the merger with natural gas pipeline giant Southern Union Co. (SUG) will give the combined company more customer market access in U.S. shale gas plays and alleviate some growing takeaway issues.

ETE agreed to buy SUG for $4.2 billion and assume $3.7 billion in debt, which when completed would create one of the largest natural gas pipeline systems in the country, with more than 44,000 miles of domestic natural gas pipelines and 30.7 Bcf/d of transportation capacity. El Paso Corp., now considered to be the largest gas pipeline operator, has about 42,000 miles of gas pipe with 26 Bcf/d of capacity and 19 Bcf/d of throughput.

The combination, which could be completed early next year, would help ETE grow in constrained gas production areas where SUG's wide access to markets would give it an advantage, ETE Chairman Kelcy Warren told energy analysts during a conference call Thursday.

"The margin paid to move gas from one point to another has contracted dramatically," Warren explained. "One reason for that is that we've built pipelines from supply-long areas to other areas, and over time those [other] areas have become congested as well. We've gone from one supply-glutted area to another supply-glutted area.

"The complement of these assets is very important. Energy Transfer has more access to shale plays than any other in the U.S.; not yet in the Marcellus but we will be there over time. In the Barnett, Haynesville, Eagle Ford [shales], Permian [basin], Bossier...We take more volumes out of those shale plays than any other pipeline. The Southern Union assets go from those supply hubs to many market-consuming hubs. That's a big thing.

"What's happened to us is that we've been very vulnerable...to basis contractions; this reduces our vulnerability."

ETE has "sold a great deal of capacity of the Barnett [shale] to Perryville [hub in Louisiana], and nobody is burning gas at Perryville," Warren noted. "What happened, is that we moved the gas glut to that point. The capacity we did not sell, that we sell as interruptible, there's just no basis...It's been painful for several quarters now." What the SUG merger means is "better access to markets, where we can actually provide more services for our producers...primarily our producers of natural gas. Now we are shifting to a nice mix...where customers are market hubs as well as supply hubs. We can offer more services and profit from providing that service."

A big concern now on the radar is capacity constraints in the Permian Basin, where producers are rapidly producing natural gas liquids (NGL). SUG's gas infrastructure would provide ETE assistance again with "contracted basis" issues.

"We believe West Texas is perilously close to problems with takeaway NGL capacity," Warren said. The SUG infrastructure there would alleviate some problems and give the combined company a more integrated system.

"What's going on right now in the Permian Basin and in southwestern New Mexico is pretty mind boggling. There's been a huge decoupling in the price of crude and NGLs...the value of natural gas will be depressed for a period of time, and I personally believe it will be low compared to NGLs...Consequently, the rig counts have increased dramatically and therefore, more NGLs are produced with no takeaway capacity..."

ETE owns the general partner and 100% of the incentive distribution rights of midstream operators Energy Transfer Partners LP (ETP) and Regency Energy Partners LP (RGNC). In turn ETP (70%) and RGNC (30%) are joint venture partners in Lone Star NGL LLC, which owns and operates NGL storage, fractionation and transportation assets in Texas, Louisiana and Mississippi.

"Lone Star is near capacity" in West Texas, said Warren. "We can add a little bit relatively efficiently by adding pumps...Other takeaway capacity is full or near capacity now. I personally see a train wreck coming. We need more capacity soon or it's going to be a problem. We're committed to doing that...Competitors are kind of announcing pipelines, which is humorous to me. They may be successful," but Warren doesn't see an impact on ETE's projects.

ETE's gas operations today include more than 17,500 miles of pipe and related facilities in Texas, New Mexico, Arizona, Louisiana, Arkansas, Mississippi, Colorado, Utah and West Virginia. Intrastate operations include 7,700 miles of gas pipe and three storage facilities in Texas; interstate pipeline systems Transwestern and Tiger that total 2,875 miles and a half-stake in the 185-mile Fayetteville Express Pipeline joint venture; and 7,000 miles of gathering pipes, three processing plants, 17 gas treating facilities and 10 gas conditioning plants.

The merger would give ETE about 15,000 miles of SUG gas pipelines and gas systems in the Southeast, Midwest and Great Lakes region that include:

SUG's Southern Union Gas Services unit also provides 5,500 miles of gas gathering, transmission, treating, processing and redelivery and NGLs in Texas and New Mexico. Through its local distribution companies Missouri Gas Energy and New England Gas Co., SUG also serves more than a million gas end-user customers in Missouri and Massachusetts.

Warren was asked whether the Trunkline LNG facility as a "wildcard for LNG export potential" was considered when the transaction was put together.

"Was there value given there?" about one day being able to export excess shale gas supplies. "Absolutely," he said. "When you look at the value chain of an asset, you look first of all at the demand fees, the guaranteed throughput volumes, the more sensitive cash flows, then the projects, which you never give as much value to as those in the food chain. However, we liked the [Trunkline LNG] project and we did give it some value, yes."

The $7.9 billion total purchase price represents an 11.6x multiple to SUG's trailing 12-month GAAP EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) of $682 million.

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