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Enterprise-TEPPCO Merger Creates a Diverse Giant

Enterprise Products Partners and TEPPCO Partners LP last week struck a $3.3 billion all-stock deal to create the largest publicly traded energy partnership with an enterprise value of more than $26 billion.

The combined partnership would own almost 48,000 miles of pipelines composed of more than 22,000 miles of natural gas liquids (NGL), refined product and petrochemical pipelines, more than 20,000 miles of natural gas pipelines and more than 5,000 miles of crude oil pipelines. Assets would include about 200 million bbl of NGL, refined product and crude oil storage capacity; 27 Bcf of natural gas storage capacity; one of the largest NGL import/export terminals in the United States, located on the Houston Ship Channel; 60 NGL, refined product and chemical terminals; and crude oil import terminals on the Texas Gulf Coast. In addition, the combined partnership would have 17 fractionation plants with more than 600,000 b/d of net capacity; 25 natural gas processing plants with a net capacity of approximately 9 Bcf/d; and three butane isomerization facilities with a capacity of 116,000 b/d. The combined partnership would also be one of the largest inland tank barge companies in the United States.

Houston billionaire Dan Duncan's Enterprise GP Holdings LP controls the general partners of both Enterprise and TEPPCO. In 2007 Enterprise GP Holdings gained a minority stake in Energy Transfer Equity LP and TEPPCO Partners through a pair of transactions, which together were worth an estimated $2.8 billion, becoming the first publicly traded partnership to own direct or indirect interests in the general partners of multiple publicly traded partnerships (see NGI, May 14, 2007).

Late last year the credit crunch and unrest in capital markets prompted Enterprise to scrap plans to take a stake in TransCanada Corp.'s proposed Pathfinder Pipeline (see NGI, Jan. 5). At the time the company said Enterprise was poised for acquisitions.

Earlier this year TEPPCO rejected a $2.8 billion bid from Enterprise (see NGI, May 4). The sweetened offer includes an agreement by Duncan to forego about $50 million worth of cash distribution on some of his shares in the combined company.

The acquisition of TEPPCO by Enterprise would yield a combined partnership with greater diversity of service offerings and assets. It also would make for greater revenue stability as more business would be done at fixed fees, reducing exposure to commodity prices. Additionally, executives predicted that the combination would yield about $20 million a year in savings due to a simplified corporate structure.

The deal would make Enterprise the largest pipeline partnership by miles of pipe, enterprise value and equity market capitalization, according to Enterprise CEO Michael Creel.

"Our strategy since our IPO in 1998 has been to build a geographically connected value chain of integrated assets," Enterprise Chief Commercial Officer Jim Teague told financial analysts last Monday. "This business model has fueled our growth and ability to increase distributable cash flow. Enterprise's assets are not isolated in any one region but instead are integrated to provide multiple ways to generate earnings and cash flow from the same hydrocarbons."

Enterprise has primarily been a player in natural gas and NGLs, and the deal would give it exposure to oil and refined chemicals.

The combined partnership, which would retain the name Enterprise Products Partners LP, would access the largest producing basins of natural gas, NGLs and crude oil in the United States and serve some of the largest consuming regions for natural gas, NGLs, refined products, crude oil and petrochemicals, the companies said.

A key component of the combined partnership would be an NGL pipeline serving the emerging Marcellus Shale play. "With the TEPPCO assets we will have the only natural gas liquids pipeline through the Marcellus, a potentially huge natural gas shale play that is very rich in liquids and requires an NGL takeaway solution," Teague said. "This combination enhances our ability to separate ourselves in providing midstream services to the producing community. The majority of earnings from these assets are fee-based with approximately 60% of 2008 pro forma gross operating margin derived from pipeline services. This supports our earnings and growth objectives while balancing our business profile."

Assets will give the combined partnership connectivity to numerous gas-producing basins and regions: Jonah, Pinedale, Piceance, Uinta, San Juan, Permian, the Midcontinent, South Texas, Eagle Ford Shale, Barnett Shale and Gulf of Mexico, Teague noted.

"We believe this combination will provide long-term accretion for Enterprise's unitholders and general partner, driven by our scale, broad geographic and business diversification and the benefits of our integrated midstream energy system," Creel said. "This transaction expands Enterprise's lines of business beyond its strong operating presence in providing services to producers and consumers of natural gas and NGLs into the transportation and storage of refined products and crude oil. We expect the merger to be accretive in 2010 as we begin to generate cash flow from incremental commercial and organic growth opportunities, in addition to at least $20 million of cost savings and overall system optimization. We also believe the size, financial stability and liquidity of the combined company will appeal to our customers and our debt and equity investors."

"The strength of the combined partnership should benefit TEPPCO investors through a lower cost of capital and improved access to the capital markets, both of which should enhance our ability to participate in accretive projects and support our ability to increase distributions to partners in the future," said TEPPCO CEO Jerry E. Thompson.

Under the terms of the agreement, TEPPCO and TEPPCO's general partner, Texas Eastern Products Pipeline Co. LLC (referred to as TEPPCO GP), will become wholly owned subsidiaries of Enterprise. In consideration, TEPPCO unitholders, except for a certain affiliate of EPCO Inc., will receive 1.24 Enterprise common units for each TEPPCO unit, representing: a 14.5% premium to the initial offer made by Enterprise on March 9; an 18.8% premium to the exchange rate based on the last 10-day average closing prices of TEPPCO units and Enterprise common units on March 6, the business day prior to the date on which Enterprise made its initial offer; and a 9.3% premium to the closing price of TEPPCO units June 26.

"We expect the simplified partnership structure will lead to additional commercial opportunities, cost savings and an overall lower cost of capital, which should result in additional distributable cash flow," said Enterprise GP CEO Ralph S. Cunningham. "Initially, we expect the merger will be essentially neutral in terms of the distributions we receive from our existing limited and general partnership interests in Enterprise and TEPPCO and will become accretive as the incremental benefits of the merger are realized."

Following closing, which is expected in the fourth quarter, Enterprise expects that affiliates of EPCO Inc., including Enterprise GP, will own approximately 29.5%of Enterprise's outstanding limited partner units and Enterprise GP will own approximately 3.4% of Enterprise's outstanding limited partner units.

The deal requires the approval of TEPPCO unitholders as well as regulatory approvals. One analyst speculated last Monday that antitrust clearance could be an obstacle under the Obama administration, but that remains to be seen.

The deal also resolves pending litigation. Enterprise, TEPPCO, EPCO and TEPPCO GP have agreed in principle with plaintiffs to the settlement of a consolidated class action lawsuit filed on April 29 on behalf of TEPPCO unitholders challenging the fairness of Enterprise's initial merger proposal, as well as the settlement of a separate pending class and derivative action brought by a TEPPCO unitholder. That action alleges, among other things, that the joint venture to further expand TEPPCO's Jonah system entered into by TEPPCO and Enterprise in August 2006 (see NGI, Feb. 20, 2006) and the sale by TEPPCO of its Pioneer natural gas processing plant and certain gas processing rights to Enterprise in March 2006 were unfair to TEPPCO.

TEPPCO has suspended the opportunity for investors to acquire additional units under its reinvestment plan due to the pending merger. The suspension is expected to remain in place while the transaction is pending, the company said.

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