Fitch Places Southern Union On Watch Negative; PEPL Rating Watch To Positive.

Business Editors

NEW YORK--(BUSINESS WIRE)--Dec. 24, 2002

Southern Union Co.'s (SUG) outstanding 'BBB' senior unsecured notes, 'BBB-' trust originated preferred securities and 'BBB+' first mortgage bonds have been placed on Rating Watch Negative by Fitch Ratings. At the same time, Fitch has changed the Rating Watch status on the 'BB' senior unsecured rating of CMS Panhandle Eastern Pipeline Company (PEPL) to Positive from Evolving.

The rating action follows today's announcement that SUG, in partnership with AIG Highstar Capital, L.P., has entered into a definitive agreement to acquire the CMS Panhandle Companies from CMS Energy Corp. in a transaction valued at approximately $1.8 billion, including the assumption of $1.16 billion of outstanding debt. Under the terms of the purchase agreement, SUG and AIG Highstar will establish a new joint venture, Southern Union Panhandle Corp. (Panhandle), to execute the purchase. The ownership structure of Panhandle is expected to be split approximately 75% SUG and 25% AIG Highstar. SUG expects to fund its pro rata share of the $662 million cash portion with a combination of proceeds generated from the pending sale of its Texas operating division to ONEOK, Inc. for $420 million in cash (expected to close early January 2003) and borrowings under existing credit facilities. SUG's permanent financing strategy contemplates the issuance of new common equity and/or equity-like securities in the near-term and the potential divestiture of non-core Panhandle assets.

The Rating Watch Negative status for SUG reflects the potential for higher initial leverage to complete the acquisition and the structural subordination of the cash flow SUG will derive from PEPL upstream dividends. As a result of initial borrowings and the assumption of existing PEPL debt, SUG's consolidated debt leverage and credit measures are likely to moderately weaken in the near-term. Although expected cash dividends from the PEPL assets will largely offset reduced earnings and cash flow at the SUG corporate level resulting from the divestiture of the Texas gas utility division, Fitch notes that such dividends will be subordinated to PEPL's $1.16 billion of direct debt obligations. Moreover, PEPL's existing credit agreements include various dividend restriction covenants that could limit SUG's ability to receive upstream cash distributions in a downside scenario.

The Rating Watch Positive status applied to PEPL's current 'BB' rating reflects the higher rating of SUG as compared with that of current 100% owner CMS Energy (CMS, senior unsecured rated 'B+', Rating Watch Negative by Fitch). It also incorporates Fitch's understanding that SUG and AIG Highstar do not intend to leverage the joint venture company that will be formed for the acquisition. On a standalone basis, PEPL has historically demonstrated a stable financial profile and a solid market position. In particular, PEPL continues to benefit from consistent cash flows derived from its gas transmission, favorable FERC regulation, significant storage capacity and access to diverse natural gas supplies.

From a strategic standpoint, the proposed acquisition is consistent with SUG's intention to re-deploy proceeds from the Texas division sale into other regulated energy businesses. Primary assets subject to the purchase agreement include two FERC regulated interstate gas pipeline systems, PEPL and CMS Trunkline Gas Co. (Trunkline), as well as the Trunkline LNG terminal complex located in Lake Charles, LA. PEPL and Trunkline collectively operate close to 11,000 miles of FERC regulated interstate gas pipelines connecting U.S. Mid-Continent and Gulf of Mexico producing regions to end user markets in the Midwest.

The transaction, which remains subject to Hart-Scott-Rodino review and approval by certain state regulators, is expected to close by March 31, 2002. Fitch expects to meet with management in the near-term to further discuss SUG's proposed financing structure and overall strategy for integrating the Panhandle operations into SUG. However, based on a preliminary review of the acquisition, Fitch does not anticipate lowering SUG's senior unsecured debt rating to below investment grade.