STOCK-BASED COMPENSATION

Stock Award Plans. The Third Amended 2003 Plan adopted by the stockholders of Southern Union Company allows for awards in the form of stock options (either incentive stock options or non-qualified options), SARs, stock bonus awards, restricted stock, performance units or other equity-based rights. The persons eligible to receive awards under the Third Amended 2003 Plan include all of the employees, directors, officers and agents of, and other service providers to, Southern Union Company and its affiliates and subsidiaries. Under the Third Amended 2003 Plan: (i) no participant may receive any calendar year awards covering more than 500,000 shares; (ii) the exercise price for a stock option may not be less than 100% of the fair market value of the common stock on the date of grant; and (iii) no award may be granted after September 28, 2013.

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 Southern Union Company’s common stock. To the extent that volatility of Southern Union 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 Southern Union 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, Southern Union 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 Southern Union’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 for periods in which awards were granted.



		Year ended December 31, 2010
Expected volatility		32.79% to 32.82%
Expected dividend yield		2.47%
Risk-free interest rate		2.28% to 2.40%
Expected life		6 years

Stock Options. The following table provides information on stock options granted, exercised, forfeited, outstanding and exercisable for the periods presented.



	Shares Under Option		Weighted- Average Exercise Price
Outstanding December 31, 2009	263,059		$	20.42
Exercised	(59,156	)	20.92
Outstanding December 31, 2010	203,903		$	20.27
Exercised	(38,596	)	17.56
Outstanding December 31, 2011	165,307		$	20.90

Exercisable December 31, 2010	203,903		$	20.27
Exercisable December 31, 2011	165,307		20.90

SARS. The following table provides information on SARs granted, exercised, forfeited, outstanding and exercisable for the periods presented.



	SARs		Weighted-Average Exercise Price
Outstanding December 31, 2009	556,803		$	19.08
Granted	138,181		24.54
Exercised	(49,366	)	12.55
Forfeited	(28,815	)	19.35
Outstanding December 31, 2010	616,803		$	20.71
Exercised	(27,389	)	15.87
Forfeited	(30,512	)	27.41
Outstanding December 31, 2011	558,902		$	20.58

Exercisable December 31, 2010	308,799		$	20.90
Exercisable December 31, 2011	423,815		19.61

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 total fair value of options and SARs vested as of December 31, 2011 was $4 million. Compensation expense recognized related to stock options and SARs was approximately $1 million for the years ended December 31, 2011 and 2010. The aggregate intrinsic value of total options and SARs outstanding and exercisable at December 31, 2011 was $16 million and $13 million, respectively. The intrinsic value of options and SARs exercised during the year ended December 31, 2011 was approximately $1 million.

Restricted Stock Equity and Liability Units. The Third Amended 2003 Plan also provides for grants of restricted stock equity units, which are settled in shares of Southern Union Company 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 restricted stock liability units expire at the end of the applicable period, which is also the requisite service period.

There were no restricted stock equity awards granted during the years ended December 31, 2011 and 2010.

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 shares at December 31, 2009	206,120		$	18.53
Granted	70,110		24.57
Released	(101,420	)	19.27
Forfeited	(8,940	)	18.49
Restricted shares at December 31, 2010	165,870		$	20.68
Granted	51,611		42.08
Released	(87,509	)	18.47
Forfeited	(4,918	)	18.97
Restricted shares at December 31, 2011	125,054		$	31.15

The total fair value of restricted stock liability units that were released during the year ended December 31, 2011 was $4 million. Compensation expense recognized related to restricted stock equity and liability units totaled $4 million and $2 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 $4 million and $2 million, respectively.