Business Context and Reporting Period
This Form 8-K, dated June 15, 2011, reports that Energy Transfer Equity, L.P. (the "Partnership") entered into a definitive Merger Agreement with Southern Union Company ("SUG"). Under the agreement, a wholly-owned subsidiary of the Partnership will merge with SUG, resulting in SUG becoming a wholly-owned subsidiary of the Partnership. The transaction was unanimously approved by the boards of both entities and a special committee of SUG's independent directors.
Key Financial Metrics and Transaction Terms
The filing details the financial structure of the merger consideration and associated agreements rather than historical operating results.
- Merger Consideration: Each outstanding share of SUG common stock will be converted into one Series B Unit of the Partnership.
- Series B Unit Terms:
- Liquidation Value: $33.00 per unit.
- Distributions: 8.25% annualized (2.0625% quarterly) for the first three years. Thereafter, the greater of 8.25% or 3-month LIBOR plus 750 basis points.
- Priority: Distributions on Series B Units are senior to Common Units; Common Unit distributions cannot resume until Series B arrearages are paid.
- Conversion: Convertible into Common Units at a ratio of approximately 0.770 Common Units per Series B Unit (based on a $42.857 conversion price) beginning one year after issuance.
- Equity Award Treatment: Unexercised stock options with an exercise price below $33.00 will be cashed out at the difference between $33.00 and the exercise price. Unvested restricted stock units (RSUs) will vest and be paid in cash at $33.00 per share.
- Executive Compensation: SUG executives George L. Lindemann and Eric D. Herschmann will receive $3.0 million annually in consulting fees and $7.0 million annually in non-competition fees for five years post-closing.
- Termination Fees: Depending on the circumstances, termination fees range from $92.5 million to $135 million. Reimbursement of costs and expenses is capped at $12.5 million.
Material Changes and Conditions
The filing does not report changes in historical revenue or profit. The material change is the pending acquisition of SUG. Closing is subject to several conditions, including:
- Approval by SUG stockholders.
- Expiration of the Hart-Scott-Rodino antitrust waiting period.
- Regulatory approvals from the Federal Energy Regulatory Commission (FERC), Massachusetts Department of Public Utilities, Missouri Public Service Commission, and Federal Communications Commission (FCC).
- Effectiveness of a Form S-4 registration statement and NYSE listing approval for the Series B Units.
- Absence of legal prohibitions against the merger.
Outlook, Risks, and Contingencies
Outlook and Management Commentary: The Partnership and SUG intend to operate in the ordinary course until closing. A Support Agreement has been signed by SUG's Chairman and CEO and their family, representing approximately 13.43% of voting shares, to vote in favor of the merger unless the board recommendation changes.
Risks and Contingencies:
- Termination Deadline: The agreement must be completed by June 30, 2012, extendable to December 31, 2012 under certain circumstances.
- Forward-Looking Statements: The filing warns that anticipated benefits may not be realized due to risks beyond management's control, including failure to meet closing conditions.
- Regulatory Risk: The transaction is contingent on multiple federal and state regulatory approvals.
Investor Verification Checklist
- Verify the final approval status of the merger by SUG stockholders.
- Confirm receipt of all required regulatory approvals (FERC, FCC, state commissions).
- Review the definitive joint proxy statement/prospectus for detailed risk factors and financial projections.
- Monitor the trading status and conversion mechanics of the newly issued Series B Units on the NYSE.
- Assess the impact of the $10 million annual executive compensation packages on future cash flows.