Affiliates of TECO Energy, Atmos Energy, Piedmont Natural Gas and AGL Resources are exiting the propane business and selling their interests in Heritage Propane Partners LP, which has agreed to a $980 million merger transaction with Texas natural gas midstream operator Energy Transfer. The propane asset sales are expected to net the utilities a total of $130 million. Each of the sellers said the asset didn’t fit well with their core regulated utility operations.

Meanwhile, Heritage said the merger with Energy Transfer is a strategic move designed in part to capitalize on the relationship between the propane and the midstream businesses. Energy Transfer will contribute substantially all of its assets to the partnership in exchange for $300 million in cash, payment of outstanding debt and a combination of partnership common units and other units. Also, the partnership will acquire the stock of Heritage Holdings Inc., which owns 4.4 million common units of the partnership, for $100 million.

Heritage is the fourth largest retail marketer of propane in the United States, serving more than 650,000 customers from nearly 300 customer service locations in 29 states with concentrations in the West, Upper Midwest, Northeast and Southeast regions. Dallas-based Energy Transfer operates 4,500 miles of gas gathering and transportation pipelines with an aggregate throughput capacity of 2.5 Bcf/d and natural gas treating and processing assets located in Texas, Oklahoma and Louisiana.

“This transaction is a positive strategic development for the [Heritage] partnership as the natural gas midstream business is less dependent on weather and somewhat counter seasonal to the retail propane business,” said Heritage CEO H. Michael Krimbill. “We believe that the transaction will be immediately accretive to the unitholders.

With the closing of the transaction, the partnership will own and operate the Energy Transfer midstream assets including: (1) Oasis Pipeline — a primarily 36 inch diameter, 600 mile, bi-directional natural gas pipeline connecting the Waha and Katy hubs in Texas; (2) Southeast Texas Pipeline System — 2,500 miles of gas gathering pipelines together with a 240 MMcf/d processing facility in southeast Texas that is connected to the Oasis Pipeline; and (3) Elk City Pipeline System — 281 miles of gas gathering pipelines together with a 130 MMcf/d processing facility in Western Oklahoma.

In addition to the assets currently in operation, Energy Transfer is in the process of extending its Southeast Texas Pipeline System. The pipeline extension is expected to be operational in mid-2004 with an initial capacity of 650 MMcf/d expandable to 1 Bcf/d.

“A strong and growing retail propane business, joined with Energy Transfer’s midstream natural gas activities, provides diversity of product and services, reduces seasonality in our revenue profiles, and increases our prospects for growing distributions,” said Energy Transfer CEO Ray Davis.

In February 2000, Atmos Energy, AGL Resources, TECO Energy and Piedmont Natural Gas formed a partnership to combine the propane assets of all four utilities into a single regional company, U.S. Propane LP. In August 2000, U.S. Propane merged with Heritage Propane Partners. Since that time, however, there has been a change among the diversified energy utility companies in the industry away from non-regulated operations and back to the core utility business.

“The arrangement among Atmos Energy and its three utility partners has benefited us by allowing us to leverage our former propane operations and to convert them into assets of the much-larger Heritage Propane,” said Atmos CEO Robert W. Best. “Selling our indirect interest lets us focus on our core business of delivering natural gas.”

Piedmont CEO Thomas E. Skains stated a similar reason for the sale. “Our core business is natural gas distribution and other energy-related ventures in our growing Southeast markets.” He also noted that Piedmont sold its equity interest in the proposed Greenbrier Pipeline joint-venture project to Dominion earlier in the week. Piedmont intends to use the cash proceeds from the two transactions to reduce its need for long-term debt.

TECO Energy said it expects to receive $50 million from the transaction and to record an $18 million pre-tax book gain. Atmos expects to receive $24.7 million and record a $4.4 million pretax book gain. AGL said it’s portion of the proceeds is $29 million, and Piedmont’s said its portion is $26.9 million. Piedmont estimates it will realize a one-time gain on the transaction of $0.03 to $0.05/share in fiscal 2004. Closing is expected by the end of 2003.

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