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Announcement:

Moody's comments on Energy Transfer's revised bid for Southern Union

08 Jul 2011

New York, July 08, 2011 -- Moody's Investors Service commented that Energy Transfer Equity, L.P.'s (ETE) revised $8.9 billion purchase price for Southern Union Company (SUG) has not affected the negative outlook for ETP's Baa3 senior unsecured note rating or the Baa3 long-term debt ratings of SUG and its subsidiary Panhandle Eastern Pipeline (PEPL), each having a stable outlook. ETE has increased its offer for SUG to a total of $8.9 billion, up from $7.9 billion, but also simplified the financing structure by offering $5.1 billion to SUG shareholders in a combination of cash and ETE common units. ETE will also assume $3.8 billion of SUG's long-term debt. The revised acquisition terms, financing plans and execution risks will be factored into our current review for downgrade of ETE's Ba1 Corporate Family Rating and Ba2 long-term debt rating.

RATINGS RATIONALE

Moody's notes that although the revised offer increases the purchase price of SUG by $1 billion, the combination of $2.1 billion of ETE common units issued up front and borrowings under a $3.3 billion bridge facility will result in leverage similar to the original structure, which included $4.1 billion of 8.25% Series B units viewed as 75% debt. In addition, ETE has entered into a binding agreement to drop down SUG's 50% interest in Citrus Corporation to ETP, providing some $1.9 billion in proceeds for ETE to de-lever. In addition, ETE's bridge facility is likely to be lower cost than the originally proposed Series B units.

However, the review for downgrade of ETE's Ba1 rating reflects the already strained leverage for the ETE consolidated group, as well as the execution and integration risks in absorbing operations of SUG's scale, uncertainties over the ultimate configuration of ETE's operations as its seeks to optimize its larger portfolio of assets, and the ETE family's increased structural complexity.

Moody's is maintaining a stable outlook for SUG's and PEPL's Baa3 long-term debt ratings based on their sizeable stable regulated pipeline revenues and the expectation that SUG will be substantially de-levered primarily via proceeds from dropdown transactions or asset sales. SUG's leverage was already elevated prior to the buyout offer, and its proforma Debt/EBITDA will be about 5.25x following the Citrus dropdown to ETP. With the Citrus proceeds dedicated to ETE's own debt reduction, ETE will have to undertake other large dropdowns to its MLPs, most likely the SUGS gathering and processing operations, to reduce SUG's leverage. The stable outlooks is based on the expectation that this will occur in a reasonable time frame following the closing of the acquisition, which is expected to occur in early 2012.

Regarding ETP, the dropdown of the 50% stake in Citrus Corporation for $1.9 billion reflects a high acquisition multiple estimated in the area of 12x EBITDA, including some $1.4 billion of the prorata debt of Citrus and Florida Gas Transmission. ETP's negative rating outlook incorporates its already-elevated leverage prior to SUGS at 4.8x EBITDA, uncertainty over other possible dropdowns at high multiples (mainly the SUGS gathering and processing assets), and its large roster of growth projects with execution and cash flow ramp-up risk. In addition, ETP, as the largest contributor to ETE's distribution stream, is affected by ETE's elevated leverage profile with growing debt service and distribution needs.

Moody's will monitor Citrus and the impact of other dropdowns for ETP over the next year. Moody's notes that Citrus has not been paying distributions to its owners, but is expected to start generating distributions following the recent completion of Florida Gas Transmission's large Phase VIII expansion. To maintain its Baa3 rating, ETP will need to issue substantial amounts of equity to support Citrus and future dropdowns, as well as a roster of large growth projects. The rating could be lowered if major projects and cash flows are delayed, if its business risk profile materially weakens, or if high dropdown multiples prevent ETP from achieving leverage in the area of 4.5x Debt/EBITDA on a sustained basis.

Please see ratings tab on issuer/entity page on Moodys.com for the last rating action and the rating history.

The principal methodology used in rating Energy Transfer Equity (ETE) was the Global Midstream Energy Industry Methodology, published December 2010 and Natural Gas Pipeline Industry Methodology, published December 2009. Other methodologies used include Loss Given Default for Speculative-Grade Non-Financial Companies in the U.S., Canada and EMEA, published June 2009.

REGULATORY DISCLOSURES

Information sources used to prepare the credit rating are the following: parties involved in the ratings, public information, and confidential and proprietary Moody's Investors Service information.

Moody's Investors Service considers the quality of information available on the issuer or obligation satisfactory for the purposes of maintaining a credit rating

New York
Thomas S. Coleman
Senior Vice President
Corporate Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

New York
Steven Wood
MD - Corporate Finance
Corporate Finance Group
Moody's Investors Service, Inc.
JOURNALISTS: 212-553-0376
SUBSCRIBERS: 212-553-1653

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Moody's comments on Energy Transfer's revised bid for Southern Union
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