Acquisition activity in the U.S. midstream energy master limited partnership (MLP) sector has rebounded sharply this year, following a slow 2003, and that trend is expected to continue in the near term, according to a report highlighting current trends by Standard & Poor’s Ratings Services (S&P).

The 16-page “Industry Report Card: U.S. Energy Master Limited Partnerships,” noted that several large mergers and acquisitions (M&As) have been announced in recent months, including the largest to date, the $6.1 billion merger between Enterprise Products Partners LP and GulfTerra Energy Partners LP, which is nearly completed (see Daily GPI, Oct. 1). There also have been two large refined product pipeline sales by Shell Oil Co. to Buckeye Partners LP for $517 million and Magellan Midstream Partners LP for $530 million.

“Although 2004 volume is heavily skewed by the Enterprise/GulfTerra merger, the significance of that transaction is considerable,” said John Thieroff, an S&P credit analyst. “The combination of GulfTerra’s very high general partner take of distributions, GulfTerra’s former general partner El Paso Corp.’s need to sell assets, and Enterprise’s desire to diversify its business risk drove the merger.”

High general partner distributions and increasingly riskier business profiles are likely to continue to mount through the near term, according to Thieroff.

“The Enterprise/GulfTerra model could become attractive for partnerships facing greater cash flow volatility and attendant distribution coverage concerns and/or an inability to deliver accretive growth to unitholders,” he said.

Another aspect driving the increase in M&A activity is the influx of financial sponsors in the sector, S&P reported. Among the latest transactions are three “significant” transactions that have transpired since mid-2003 in which financial sponsors have acquired material or entire general partner interests in MLPs.

In June 2003, private equity firms Madison Dearborn Partners LLC, Carlyle Riverstone Global Energy and Power Fund II LP acquired a $54.6% overall interest, including general partnership interest, in Williams Energy Partners LP — since renamed Magellan Midstream Partners LP — for $1.09 billion.

In a transaction in May, Carlyle/Riverstone and Power Fund II purchased a general partnership interest in Buckeye for $235 million. And in July 2004, Vulcan Capital and Plains All America Pipeline LP bought limited partnership interests and 44% of the general partner’s interest in Plains All American from Plains Resources Inc. for $460 million.

“Driving this trend is the desire on the part of the new general partner interest holder to grow aggressively,” said Thieroff. He noted that both Magellan and Buckeye have made large acquisitions since financial sponsors bought interests, and “Plains All America has been quite active…”

Some MLPs also appear to be growing in activities that they historically may have participated in but which were not their areas of focus. Those include Kaneb’s move to merchant terminalling, and Kinder Morgan Inc.’s move to strengthen storage and terminalling and carbon dioxide transmission and injection.

“Another area of increasing focus for MLPs has been internal growth projects,” S&P’s report stated. Kinder Morgan, for example, has been able to maintain capital spending levels of $600 million for internal projects because of its cash retention and “willingness to access capital markets funding.” The only other MLP with a similar structure, Enbridge Energy Partners, “also actively pursues organic growth.

S&P’s Thieroff said that “the need for additional North American energy infrastructure, strained by burgeoning demand and years of underinvestment, and the capital markets’ appetite for these projects makes this a likely area of focus through the intermediate term.”

For information on the full report, visit the web site at www.standardandpoors.com.

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