Southern Union Co. Friday announced that it plans to form a stand-alone master limited partnership (MLP) to house a “portion” of its natural gas gathering and processing assets.

The Houston-based company had considered the option of partnering with an existing MLP, but rejected it because it believes a stand-alone MLP “would best capture value for our shareholders over the long term,” said Eric. D. Herschmann, senior executive vice president, during an analysts’ briefing on the company’s third quarter financial results.

“We have received and evaluated numerous proposals” to partner with existing MLPs. “These proposals represented a significant increase over our purchase price of $1.6 billion just 18 months ago” for midstream assets, he noted.

The company’s gathering and processing business, Southern Union Gas Services (SUGS), posted earnings (before interest and taxes) of $20 million for the third quarter, up from $17 million for the same period in 2006. The assets include 450 MMcf/d of cryogenic processing capacity, 930 MMcf/d of treating capacity and 4,000 miles of gathering lines that run through the heart of the Permian Basin. Southern Union purchased the assets from privately held Sid Richardson Energy Services Co. of Fort Worth in December 2005 for $1.6 billion in cash (see Daily GPI, Dec. 19, 2005).

Herschmann was vague on what percentage of SUGS’ midstream assets would be dropped into the MLP. He also declined to say whether the rest of the midstream assets would be placed in the MLP at a later date, or whether the company planned to create new MLPs for its natural gas pipeline assets.

“I think it’s premature for us to be saying exactly what we’ll be doing with the remainder of the [midstream] assets,” Herschmann said. “It is obvious that we have a significant portfolio of assets that qualify for the MLP structure…I think once we’ve executed successfully on the gathering and processing MLP, then we’ll be able to evaluate” the potential for “another MLP with our pipeline assets or others.”

He noted that Southern Union plans to file an S-1 with the Securities and Exchange Commission (SEC) during the first quarter of 2008. Upon receiving final approval from the SEC, “we anticipate that we will commence the marketing of the units and likely have [the] offering closed within the first half of next year,” Herschmann told analysts.

“We haven’t specifically talked to them [the agencies] about the structure of this MLP,” although Southern Union has informed the SEC of its intention to form one, he noted.

The company opted to create an MLP to head off a possible proxy battle with hedge fund Sandell Asset Management, which filed a complaint against Southern Union last December. Under pressure, Southern Union in January agreed to amend its bylaws to allow the nomination of independent board members (see Daily GPI, Jan. 22). Sandell had suggested that the company create an MLP, as well as take other actions.

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