STOCK-BASED COMPENSATION:

The fair value of each stock option and SAR award is estimated on the date of grant using a Black-Scholes option pricing model. The Company’s expected volatilities are based on historical volatility of the Company’s common stock. To the extent that volatility of the Company’s common stock price increases in the future, the estimates of the fair value of stock options and SARs granted in the future could increase, thereby increasing stock-based compensation expense in future periods. Additionally, the expected dividend yield is considered for each grant on the date of grant. The Company’s uses the simplified method in determining the expected term of stock options and SARs granted, which results in the use of the average midpoint between vesting of the awards and their contractual term for such estimate. The Company utilizes the simplified method primarily because it has experienced several acquisitions and divestitures during the contractual period for the current awards outstanding, resulting in a change in the employee mix and an acceleration of certain stock option and SAR exercise activity. Additionally, the Company has not experienced a full life cycle of exercise activity for employees associated with certain of its acquisitions. Because of the impact of these significant structural changes in the Company’s business operations and the resulting variations in employee exercise activity, the historical patterns of such exercise activity is not believed to be indicative of future behavior. In the future, as information regarding post-vesting termination becomes more accessible, the Company may change the method of deriving the expected term. This change could impact the fair value of stock options and SARs granted in the future. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant.

All outstanding stock awards vested and were settled in 2012 in connection with the ETE Merger on March 26, 2012; therefore, no 2012 amounts have been presented in the following sections.

The following table represents the Black-Scholes estimated ranges under the Company’s plans for stock options and SARs awards granted in the periods presented:



	Years ended December 31,
	2011	2010
Expected volatility	32.83% to 35.60%	32.79% to 34.98%
Expected dividend yield	2.45%	2.45% to 2.47%
Risk-free interest rate	1.58% to 2.41%	1.78% to 2.40%
Expected life	4.75 to 6 years	4.75 to 6 years

Stock Options

The following table provides information on stock options granted, exercised, forfeited, outstanding and exercisable under the Third Amended and Restated 2003 Stock and Incentive Plan (Third Amended 2003 Plan) and the 1992 Long-Term Stock Incentive Plan (1992 Plan) for the periods presented:



	Third Amended 2003 Plan				1992 Plan
	Shares Under Option		Weighted- Average Exercise Price		Shares Under Option		Weighted- Average Exercise Price
Outstanding December 31, 2009	3,014,220		$	20.69	49,019		$	14.65
Granted	684,635		24.90		—		—
Exercised	(91,044	)	19.48		(9,860	)	14.65
Forfeited	(10,940	)	25.60		—		—
Outstanding December 31, 2010	3,596,871		21.51		39,159		$	14.65
Granted	75,271		28.49		—		—
Exercised	(77,386	)	17.22		(29,188	)	14.65
Forfeited	(510	)	24.06		(9,971	)	14.65
Outstanding December 31, 2011	3,594,246		21.75		—		$	—

Exercisable December 31, 2010	1,814,539		$	19.83	39,159		$	14.65
Exercisable December 31, 2011	2,478,000		19.86		—		—

The following table summarizes information about stock options outstanding under the Third Amended 2003 Plan at December 31, 2011.



	Options Outstanding				Options Exercisable
Range of Exercise Prices	Number of Options	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number of Options	Weighted-Average Exercise Price
Third Amended 2003 Plan:
12.55 - 15.00	792,934	6.96 years	$	12.55	792,934	$	12.55
15.01 - 20.00	205,573	4.78 years	16.90		205,573	16.90
20.01 - 25.00	1,726,790	7.00 years	23.28		1,127,284	23.04
25.01 - 28.49	868,949	6.47 years	28.23		352,209	27.85
	3,594,246	6.73 years	$	21.75	2,478,000	$	19.86

Stock Appreciation Rights

The following table provides information on SARs granted, exercised, forfeited, outstanding and exercisable under the Third Amended 2003 Plan for the periods presented.



	Third Amended 2003 Plan
	SARs		Weighted-Average Exercise Price
Outstanding December 31, 2009	1,493,131		$	19.18
Granted	376,795		24.67
Exercised	(47,322	)	12.64
Forfeited	(38,648	)	19.93
Outstanding December 31, 2010	1,783,956		$	20.50
Granted	4,276		28.10
Exercised	(77,477	)	15.33
Forfeited	(47,415	)	25.33
Outstanding December 31, 2011	1,663,340		$	20.63

Exercisable December 31, 2010	900,965		$	20.53
Exercisable December 31, 2011	1,278,950		19.71

The SARs that have been awarded vest in equal installments on the first three anniversaries of the grant date. Each SAR entitles the holder to shares of Southern Union’s common stock equal to the fair market value of Southern Union’s common stock on the applicable exercise date in excess of the grant date price for each SAR.

The following table summarizes information about SARs outstanding under the Third Amended 2003 Plan at December 31, 2011.



	SARs Outstanding				SARs Exercisable
Range of Exercise Prices	Number of SARs	Weighted-Average Remaining Contractual Life	Weighted-Average Exercise Price		Number of SARs	Weighted-Average Exercise Price
12.55 - 17.50	568,685	6.96 years	$	12.55	568,685	$	12.55
17.51 - 25.00	745,401	8.44 years	23.17		365,287	22.68
25.01 - 28.48	349,254	5.71 years	28.35		344,978	28.36
	1,663,340	7.36 years	$	20.63	1,278,950	$	19.71

The weighted-average remaining contractual life of options and SARs outstanding under the Third Amended 2003 Plan at December 31, 2011 was 6.93 years. The weighted-average remaining contractual life of options and SARs exercisable under the Third Amended 2003 Plan at December 31, 2011 was 6.56 years. The aggregate intrinsic value of total options and SARs outstanding and exercisable at December 31, 2011 was $109 million and $84 million, respectively.

The total fair value of options and SARs vested as of December 31, 2011 was $22 million. Compensation expense recognized related to stock options and SARs totaled $7 million and $6 million for the years ended December 31, 2011 and 2010, respectively. Cash received from the exercise of stock options was $2 million for the year ended December 31, 2011.

The intrinsic value of options and SARs exercised during the year ended December 31, 2011 was approximately $2 million. The Company realized an additional tax benefit of less than $1 million for the excess amount of deductions related to stock options and SARs over the historical book compensation expense multiplied by the statutory tax rate in effect, which has been reported as an increase in financing cash flows in the consolidated statement of cash flows.

Restricted Stock Equity and Liability Units

The Company’s Third Amended 2003 Plan also provides for grants of restricted stock equity units, which are settled in shares of the Company’s common stock, and restricted stock liability units, which are settled in cash. The restrictions associated with a grant of restricted stock equity units under the Third Amended 2003 Plan generally expire equally over a period of three years. Restrictions on certain grants made to non-employee directors and senior executives of the Company expire over a shorter time period, in certain cases less than one year, and may be subject to accelerated expiration over a shorter term if certain criteria are met. The restrictions associated with a grant of restricted stock liability units expire equally over a period of three years and are payable in cash at the vesting date.

The following table provides information on restricted stock equity awards granted, released and forfeited for the periods presented.



	Number of Restricted Stock Equity Units Outstanding		Weighted-Average Grant Date Fair Value
Restricted shares at December 31, 2009	378,974		$	19.14
Granted	111,457		23.71
Released	(148,218	)	17.63
Forfeited	(1,000	)	25.15
Restricted shares at December 31, 2010	341,213		$	21.27
Granted	7,000		28.04
Released	(162,362	)	17.96
Forfeited	—		—
Restricted shares at December 31, 2011	185,851		$	24.41

The following table provides information on restricted stock liability awards granted, released and forfeited for the periods presented.



	Number of Restricted Stock Liability Units Outstanding		Weighted-Average Grant Date Fair Value
Restricted units at December 31, 2009	563,650		$	18.38
Granted	175,043		24.67
Released	(237,219	)	18.82
Forfeited	(54,344	)	18.77
Restricted units at December 31, 2010	447,130		$	20.56
Granted	270,835		42.01
Released	(239,714	)	18.53
Forfeited	(17,394	)	18.86
Restricted units at December 31, 2011	460,857		$	34.29

The total fair value of restricted stock equity and liability units that were released during the year ended December 31, 2011 was $13 million. Compensation expense recognized related to restricted stock equity and liability units totaled $14 million and $9 million for the years ended December 31, 2011 and 2010, respectively.

The Company settled the restricted stock liability units released in 2011 and 2010 with cash payments of $10 million and $6 million, respectively.