Standard & Poor’s (S&P) Rating Services placed the credit rating of Southern Union Co. on CreditWatch with “negative implications” Monday after the distribution company announced that it and AIG HighStar Capital LP had reached a definitive deal to buy CMS Energy’s Panhandle natural gas pipelines and liquefied natural gas (LNG) facilities for an estimated $1.83 billion.

At the same time, S&P affirmed its ‘BB’ corporate credit ratings for CMS Energy and subsidiary Consumers Energy Co. to reflect their “dramatically improved liquidity position” as a result of the proposed transaction. The sale will enable CMS Energy to meet about $1.3 billion of debt and bank facility maturities in 2003, the rating agency said.

The deal calls for Southern Union Panhandle, a joint venture partnership between Southern Union and AIG Highstar, to pay $662 million in cash and assume $1.2 billion in CMS Energy debt. Wilkes-Barre, PA-based Southern Union is the majority partner, with a 75% ownership stake. Upon completion of the sale, Dearborn, MI-based CMS Energy will exit the interstate gas pipeline and LNG business, said company spokesman John Barnett. CMS Energy still owns one-third interests in the new Guardian gas pipeline in Wisconsin and Illinois, and the Centennial refined petroleum liquids pipeline, but it eventually plans to sell those assets as well.

The CMS Panhandle companies included in the transaction are the 6,300-mile CMS Panhandle Eastern Pipe Line, with the capacity to deliver 2.7 Bcf/d of gas; the 4,100-mile CMS Trunkline Gas pipeline, with a capacity to deliver 1.7 Bcf/d; CMS Trunkline LNG Co., which has the largest North American LNG terminal located in Lake Charles, LA, with storage capacity of 6.3 Bcf and sendout capacity of 0.63 Bcf/d; and the 440-mile CMS Sea Robin Pipeline in the Gulf of Mexico, which has the capacity to transport 1 Bcf/d. The recent FERC-approved expansion of the Trunkline LNG facilities will continue “on track,” and will be “one of the primary points of our analysis” in coming weeks, Southern Union said.

All told, the CMS pipeline assets include 10,900 miles of facilities that extend from the Gulf to the Midwest and Canada, and have a combined peak-day deliverability of 5.4 Bcf. They also consist of 85 Bcf of underground storage with a peak-day deliverability of 1.2 Bcf.

“The impact of the acquisition on Southern Union’s credit profile will be reviewed in January,” said S&P, which maintained a corporate credit rating of ‘BBB+’ for the company, an ‘A’ rating for its senior secured debt, and a ‘BBB+’ rating for senior unsecured debt. Moody’s Investors Service confirmed its ratings (Baa3 senior unsecured debt and senior implied debt) for Southern Union Monday, but it said it planned to “closely monitor” the transaction.

The purchase would mark Southern Union’s first ownership of interstate gas pipeline facilities. While it may lack experience, President and COO Thomas F. Karam said “we will be a superior operator,” providing benefits to both customers and shareholders. Southern Union has been mostly a distributor of energy, and will continue to provide LDC services in Missouri, Northeast Pennsylvania, Massachusetts and Rhode Island. AIG Highstar Capital is a private equity fund sponsored by American International Group Inc. to make structured equity investments in infrastructure-related projects and operating companies.

Southern Union also recently entered into an arrangement to manage AIG’s re-named Southern Star Central Pipeline, which AIG purchased from Williams Cos. The 6,000-mile interstate gas pipeline criss-crosses seven states and serves the Kansas and Missouri areas.

Embattled CMS Energy, plagued by the market downturn and several federal agency investigations into its trading activities, first announced its intention to sell the CMS Panhandle assets last August (See Daily GPI, Aug. 8 ).

The sale was approved by the boards of directors of each company over the weekend and is subject to the customary closing conditions, including the approval of the Federal Trade Commission and Missouri and Massachusetts regulators. The deal is expected to be completed during the first quarter of next year, assuming all regulatory clearances are received.

In a conference call Monday with analysts and reporters, Southern Union’s Karam said the company had anticipated “cautious reactions” from the rating agencies to the pending acquisition. But at the conclusion of the transaction, he noted Southern Union believes it will be able to convince the rating agencies that its “balance sheet will be stronger than it is today.”

Karam said he expects the CMS Panhandle assets to be accretive to cash flow and earnings in a “significant manner” in the first year, and projected they would add about $1 to $1.10. He dismissed the possibility that Southern Union could be inheriting assets whose past financial performances have not been re-audited or restated by CMS Energy. “[We are] comfortable we know what the restatements are,” Karam noted.

Many were asking how a company the size of Southern Union could afford to buy the CMS Panhandle assets. Karam said the company plans to use the $420 million it receives from the sale of its Southern Union Gas. Co. Texas division to Oneok Inc. to purchase the CMS properties, and also intends to offer additional equity to the market in the future. The deal with Oneok is expected to close Jan. 2, he noted.

The announcement gave a slight nudge to both Southern Union and CMS Energy stock late Monday, with Southern Union up 55 cents to $15.95 cents/share and CMS up 23 cents at $8.84. CMS Energy stock had been as high as $25 a year ago.

Southern Union Panhandle plans to “retain virtually all of those [present CMS Panhandle] employees,” said Southern Union spokesman Rick Marshall. CMS Panhandle currently has slightly more than 1,150 employees, with most management located in Houston, TX, he noted. Karam called the existing CMS Panhandle management “knowledgeable and dedicated,” and noted that “in many respects, they already share our culture.”

CMS Energy said it will use the proceeds from the CMS Panhandle sale to reduce its $7 billion debt load. It reported it has lowered its debt by $860 million during 2002, including paying down $239 million in bank debt since July.

The company has sold or announced $3.6 billion in asset sales during the year, according to CMS Energy. “Clearly, we are executing our asset sales plan, despite difficult market conditions,” said Chairman and CEO Ken Whipple. “We will continue to pursue strategies that support our back-to-basics approach and focus on improving our balance sheet, reducing risk and strengthening our liquidity.”

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