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DALLAS-In a Texas-size swap, a pair of locally based energy giants are exchanging $1.9 billion in cash for a lock, stock and barrel buy of TXU Gas Co. The deal includes hundreds of real estate deeds, the largest assembly being a full city block in Dallas.

A TXU Corp. spokeswoman had to check and then confirmed all commercial real estate will pass to Atmos Energy Corp. The real estate includes four vintage office buildings, totaling 434,363 sf, and a parking garage in the downtown’s southeast quadrant along with scores of service centers, warehouses and pipeline rights of way. “There are hundreds of pieces of real estate,” she says, adding the portfolio’s size and value aren’t readily available.

The portfolio is a mix of leased and owned locations, predominately in the state’s north and central regions. According to SEC filings, TXU Gas property, plant and equipment– net of accumulated depreciation and amortization–is valued at $291 million and $275 million, respectively.

The Dallas block–bordered by Harwood, Jackson, St. Paul and Wood–is the largest contiguous assembly in the portfolio, according to the TXU spokesman. But, it’s not likely that the new owner is going to forego its class A headquarters in Three Lincoln Centre at 5430 LBJ Freeway, where Atmos reigns as the lead tenant with three full floors and part of another for a total pushing 120,000 sf. The vintage quartet sits in an area grappling with an image problem although it’s in the shadows of high-rises and within walking distance of Farmers Market and a third phase of multifamily construction by Houston-based Camden Property Trust, which has roughly $64 million invested into the neighborhood.

TXU’s four buildings range from 70,248 sf to 131,188 sf. They house the headquarters for Lone Star Gas Co., a division of Enserch Corp. which merged a few years ago with TXU, and back office space for the entire gas operation.

“Generally, it (the TXU block) will have future value, but it will be awhile because of how long things take to get rolling,” Randall R. Turner, president of Harvard Cos. Inc., tells GlobeSt.com about a corner of Dallas where he’s been wheeling and dealing to build a critical mass for redevelopment into mostly residential product. Turner recently brokered a deal between Hamilton Properties and TXU Energy for a pair of boarded-up buildings with 849,549 sf and a parking garage. His best guess is Atmos will keep the Lone Star Gas/TXU buildings for back-office use and relocate executives to Three Lincoln Centre.

TXU put the gas subsidiary on the sales block in April and started quietly shifting gears around town. For starters, it terminated a downtown parking garage lease, a signal that the workforce could decrease. A source says the First Presbyterian Church is losing about $200,000 in annual rent payments due to the canceled contract.

The real estate has yet to come up for open discussion, except for Atmos’ execs saying the headquarters stays in Dallas and the pipeline isn’t for sale. An Atmos spokesman tells GlobeSt.com that there’s been no decision as yet about the downtown buildings or the portfolio in general. As for the pipeline, Robert W. Best, Atmos’ chairman, president and CEO, said during yesterday’s conference call that it’s not for sale, “but that’s always an alternative for us.” The pipeline consists of 26,000 miles of distribution main pipeline, 8,000 miles of distribution services and 6,800 miles of transmission pipeline.

The $1.9-billion, all-cash transaction is expected to close in the fourth quarter. The price represents the estimated book value of the assets. The deal requires Hart-Scott-Rodino clearance and limited regulatory approval.

Merrill Lynch & Co. will provide a bridge facility until permanent financing can be worked out. Best says the permanent vehicle will consist of $500 million to $600 million in equity and $1.4 billion of long-term debt. He projects it will take three to five years before Atmos returns to its current level of capitalization. He recognizes the deal could shave a notch off its investment-grade ratings, but says he’d be surprised if it dropped by two. The plan is to maintain the current $1.22 per share dividend.

The transaction creates the nation’s largest pure-play natural gas distribution company and the buyer’s first core market although it has 1.7 million customers in 12 states. The TXU acquisition adds 1.4 million customers.

Lehman Brothers Inc. and Credit Suisse First Boston acted as financial advisers to TXU. JPMorgan Securities Inc. provided the fairness opinion to TXU. Merrill Lynch & Co. was Atmos’ financial adviser and provided the necessary fairness opinion.

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