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Deal with Investor Ends Southern Union MLP, LDC Sale Plans

Southern Union Co. and hedge fund Sandell Asset Management Corp. last week struck an agreement that tables the sale of local distribution company (LDC) assets by Southern Union as well as the formation of a master limited partnership (MLP). Sandell, through affiliates, owns 8.6% of Southern Union and had been pressuring the company to bolster shareholder returns since late 2006.

"[W]e have always believed it is important for Southern Union to maintain its investment-grade rating. Therefore, in the current economic environment, we do not believe the company should undertake extraordinary transactions, such as the creation of an MLP, sales of LDC assets or payment of a special dividend or increased dividends," said Thomas Sandell.

The deal also will add two Sandell nominees -- Stephen Beasley and Michael Egan -- to the Southern Union board at the company's 2009 and 2010 annual meetings. Beasley is a former El Paso Corp. pipeline executive. Sandell also has agreed to abide by certain standstill provisions.

"This agreement will enable Southern Union's management to focus its efforts on the company's operations and avoid a costly and time-consuming proxy contest," said Southern Union COO Eric. D. Herschmann.

In November 2007 Southern Union said it planned to form an MLP to house a portion of its natural gas gathering and processing assets (see Daily GPI, Nov. 13, 2007). That move was intended to head off a possible proxy battle with Sandell, which filed a complaint against Southern Union in December 2006 (see Daily GPI, Dec. 8, 2006). Under pressure, Southern Union in January agreed to amend its bylaws to allow the nomination of independent board members (see Daily GPI, Jan. 22, 2007). Sandell had suggested that the company create an MLP, as well as take other actions.

The deal "won't make much difference in [the] way [Southern Union] operates," Tudor, Pickering, Holt & Co. said last Friday. Standard & Poor's Ratings Service (S&P) Friday revised its outlook on Southern Union to "stable" from "negative" and affirmed its "BBB-" corporate credit rating.

"It is our opinion that the settlement with Sandell largely removes our concerns that Sandell could implement strategies that we deemed as detrimental to bondholders," said S&P credit analyst Michael Grande.

S&P said Sandell's comment that it does not believe Southern Union should form an MLP, sell LDC companies or pay a special dividend or increased dividends generally removes the risk that such policies could weaken Southern Union's business or financial profile over the intermediate term. While the agreement doesn't mention share repurchases, which could be detrimental to credit, S&P said its stable outlook does not assume that this will happen.

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