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Activist Hedge Fund Pressures Southern Union to Amend Bylaws

Under pressure from its largest independent shareholder, hedge fund Sandell Asset Management, Southern Union (SUG) has amended its bylaws to allow shareholders to nominate independent board members. Sandell affiliate Castlerigg Master Investments filed a complaint against the midstream operator late last year, claiming the energy company stripped shareholders of their rights.

Sandell, which filed a complaint in early December in the Delaware Court of Chancery, has agreed to dismiss the litigation. Under the amended bylaws, Sandell will be allowed to nominate three independent candidates to SUG's nine-member board at the annual shareholder meeting this year.

"While we certainly would have preferred not to have to go to court to preserve and enforce our rights as stockholders, we could not be more pleased with the result," said hedge fund founder and CEO Thomas Sandell. "We view this as an important victory for stockholders against a company with poor corporate governance. We look forward to presenting our slate of highly qualified independent nominees to Southern Union's stockholders at the 2007 annual meeting."

SUG filed an amended 13D with the Securities and Exchange Commission (SEC) in December, disclosing Sandell's 9.8% stake (11.75 million shares) in the company, up from the 10.87 million shares it held three months earlier. Sandell apparently began buying stock in the company last May through a series of privately negotiated transactions. SUG stated in the filing that Sandell had asked the company to "put forth concrete steps to enhance stockholder value and close the valuation gap between the stock price and what the firm believes to be the issuer's intrinsic value."

In a letter to SUG CEO George Lindemann, Sandell CEO Thomas Sandell said the company's stock price reflected "a large and unwarranted discount to the intrinsic value of the company that also does not recognize the strategic transformation of SUG from a regional gas utility to a natural gas-focused midstream and pipeline powerhouse."

To "unlock this intrinsic value," Sandell suggested SUG create a master limited partnership (MLP), continue to sell its remaining local gas distribution utilities, and raise its annual dividend by $1/share to bring the company's dividend policy more in line with SUG's peers. Sandell also said the board should consider putting the company up for sale.

"We believe the current intrinsic value of SUG to conservatively be $35 per share based on a variety of valuation metrics," Sandell wrote. "While an increase in dividends will not meaningfully change the fundamental value of the company, it will be an important catalyst in helping to narrow the currently large discount to fair value. Moreover, an MLP will provide greater value to stockholders given the tax-efficient nature of the structure, and we estimate the adoption of an MLP is likely to boost SUG's stock to $36-$41 per share."

Standard & Poor's Ratings Services said Friday that SUG's decision to amend its bylaws because of "shareholder activism" would not immediately impact the company's rating. However, analysts plan to continue to monitor the company's actions, "as the current rating does not leave any room for leveraging transactions. Any efforts to appease Sandell's discontent to the detriment of bondholders could trigger an adverse rating action."

Thomas Sandell is a former senior managing director for Bear Stearns' Risk Arbitrage unit. The Sandell fund oversees more than $7 billion in investments, including stakes in several other energy companies: Mirant Corp., NRG Energy, Equitable Resources Inc., CMS Energy, Petrohawk Energy, Sierra Pacific Resources, Range Resources, Helix Energy Solutions and Frontier Oil.

In early December, the SEC formally notified Sandell that it is investigating some sales the fund made in shares of Hibernia before it was acquired by Capital One in 2005. The SEC is apparently investigating whether improper sales were made when Hurricane Katrina struck. The SEC is said to believe Sandell sought to profit from Wall Street speculation that Katrina's devastation would force Capital One to cut the price of its planned acquisition of Hibernia, which it later did.

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