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Enterprise MLP Duncan Energy Plans IPO in Early 2007

Duncan Energy Partners LP, a master limited partnership (MLP) created by a subsidiary of Houston-based Enterprise Products Partners LP, on Thursday filed a Form S-1 with the Securities and Exchange Commission (SEC) to raise up to $313.95 million for an initial public offering (IPO). The IPO, expected to spin off in early 2007, initially will own some of Enterprise's Gulf Coast midstream assets, including its Mont Belvieu facilities.

Duncan Energy, which will be listed on the New York Stock Exchange under the symbol "DEP," was formed in September by Enterprise. Initially, the MLP will gain 66% equity ownership in several Enterprise subsidiaries, which include the Acadian Gas, Sabine Propylene and Lou-Tex Propylene pipeline systems, the South Texas natural gas liquids (NGL) pipeline asset acquired from ExxonMobil Corp. in August, and the Mont Belvieu, TX, natural gas storage facilities.

The group of assets will include 33 salt dome storage caverns at the Mont Belvieu complex, which have the capacity to store 100 million bbl of NGLs and petrochemicals. Also included are more than 1,000 miles of Louisiana intrastate natural gas pipelines with an aggregate capacity of 1 Bcf/d, a 284-mile petrochemical pipeline system on the Gulf Coast that transports chemical-grade and polymer-grade propylene, and a 290-mile pipeline system that will transport NGLs produced in South Texas to Mont Belvieu.

"We are in a unique period in our country's history where there is significant need for new energy infrastructure projects to transport, store and process natural gas, NGLs and crude oil to meet our nation's growing demand for hydrocarbons," said CEO Robert G. Phillips. "Given Enterprise's strong franchise and broad base of assets serving both producers and consumers of energy, we have developed a large portfolio of organic growth projects to build energy infrastructure, and we see additional opportunities to construct new projects over the next several years.

"We believe the formation and initial public offering of Duncan Energy Partners will enable Enterprise to more efficiently manage its capital resources, large portfolio of assets and organic growth opportunities, which supports our objective to provide our partners with an attractive long-term total return on their investment."

Enterprise's "sponsorship of Duncan Energy Partners is not a new concept, as many companies in the midstream energy sector have benefited from sponsoring publicly traded partnerships," said Phillips. "Historically, this has enabled the sponsors to monetize ownership interests in mature assets and redeploy proceeds in higher returning growth projects while retaining operational control of core assets. The contribution of assets to Duncan Energy Partners will enable Enterprise to maintain the integrity of our value chain while providing Enterprise with another source of long-term growth capital."

Contributing assets to the new partnership "will allow Enterprise to prudently rationalize certain assets in its large portfolio and significantly enhance its financial flexibility," said Phillips. Enterprise will use the cash proceeds to reduce debt and fund several organic growth projects, which include a $40 million expansion of NGL import and export capabilities at its Houston Ship Channel facility and its gas liquids pipeline capacity from the Ship Channel to its Mont Belvieu facilities (see Daily GPI, May 3).

"These new projects, when integrated into our system-wide value chain, are expected to provide greater returns on investment, which will support Enterprise's long-term growth objectives," said Phillips.

The company is named for Dan L. Duncan, who has served as Enterprise's chairman since 1979.

Standard & Poor's Ratings Services analyst Todd Shipman said the new MLP "is, on balance, credit-neutral and will not immediately affect the ratings or outlook on EPD. The new entity...will house some of EPD's more mature, lower-growth assets and should allow the partnership to finance its own growth more efficiently."

John Diaz, a credit analyst with Moody's Investors Service, said Duncan "will be relatively small compared to the overall size of Enterprise," and "will provide an additional source of common equity capital," with "additional flexibility for Enterprise's asset portfolio management." He said the new MLP "creates some degree of added complexity, has additional governance and conflicts issues," and noted the "transfer of assets...is not as clean as an outright sale."

Diaz cautioned that Enterprise's "substantial capital raising requirements represent a source of concern, which is exacerbated by the perception of an aggressive capital structure through the issuance of hybrid securities and the creation of Duncan Energy Partners in order to fund its growth."

In a note to clients, Merrill Lynch energy analyst Gabe Moreen said EPD's organic growth plans and its diverse asset base were strong. "We reiterate our Buy rating and are raising our price objective to $30 (from $29) on strong performance expectations and less equity dilution due to the long-term senior notes issuance," Moreen wrote. With the exception of EPD's Offshore and Pipelines Services segments, which continue to be impacted by the costs of last year's hurricanes in the Gulf of Mexico, EPD's businesses "appear to be firing on all cylinders."

According to the SEC filing, the $313.95 million valuation was estimated by Enterprise to calculate Duncan Energy's registration fee, and the price terms of the IPO may differ from the registration valuation. Enterprise will own 100% of the general partner of Duncan Energy, which will have no incentive distribution rights, and it will retain a limited partnership interest in Duncan Energy, and it will receive proceeds from the offering. Including its directly retained 34% equity interest in the businesses, as well as a general partner interest and common units in Duncan Energy, Enterprise will hold a 58.6% net interest in the Duncan Energy assets, or 47.3%, if an option to purchase additional units of the new MLP is exercised by the underwriters.

The net proceeds of the IPO will be used to distribute $221 million to Enterprise as part of the cash consideration and reimbursement for the costs of the assets Enterprise contributes to the new partnership. Duncan Energy also will use some of the proceeds to provide $20.4 million, which will fund its share of costs to complete planned expansions to the South Texas pipeline after the closing of the IPO and to pay $2 million of estimated net expenses associated with the offering and related formation transactions. In addition, Duncan Energy plans to borrow $200 million under a new credit agreement and distribute all but $2 million to Enterprise in partial consideration for the assets contributed.

Lehman Brothers is listed as the underwriter for the offering. The underwriter has an option to purchase up to an additional 1.95 million common units to cover overallotments.

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