Enterprise Products LP and El Paso Corp.’s GulfTerra Energy Partners LP agreed to a merger on Monday, which will form the second largest publicly traded energy partnership in the United States. The new partnership will be worth about $13 billion, with the jointly owned affiliates of Enterprise Products Co. and El Paso each owning a 50% stake.

The combined partnership, which will retain the name Enterprise Products Partners LP, will serve the largest producing basins of natural gas, crude oil and natural gas liquids (NGLs) in the country, including the Gulf of Mexico (GOM), Rocky Mountains, San Juan Basin, Permian Basin, South Texas, East Texas, Midcontinent, Louisiana Gulf Coast and, through connections with third-party pipelines, Canada’s Western Sedimentary Basin. The partnership also will serve the largest consuming regions for natural gas, crude oil and NGLs on the U.S. Gulf Coast.

The assets of the combined partnership will include more than 30,000 miles of pipelines comprised of more than 17,000 miles of natural gas pipelines, 13,000 miles of NGL pipelines and 340 miles of large capacity crude oil pipelines in the GOM. The combined partnership’s other logistical assets will include ownership interests in 164 million bbl of NGL storage capacity and 23 Bcf of natural gas storage capacity, 6 offshore GOM hub platforms and import and export terminals on the Houston Ship Channel.

The combined partnership will also own interests in 19 fractionation plants with a net capacity of approximately 650 thousand bbl/d and 24 natural gas processing plants with a net capacity of 6.0 Bcf/d.

Dub Andras, Enterprise’s CEO, called the assets of the two partnerships “very complementary. We believe the scale and business opportunities for the combined partnership will provide us with a number of avenues to create value for our partners and our producing and consuming customers.” Andras said the “vast drivers” include “incremental organic growth and commercial opportunities, cost saving synergies, the elimination of the 50% incentive distribution right associated with GulfTerra’s general partner interest and a contribution from Enterprise’s general partner to Enterprise.”

El Paso’s CEO Doug Foshee added that the $1 billion in net proceeds from the transaction would accelerate his company’s debt reduction program.

The definitive agreements include three transactions. In the initial transaction, which was to be completed and funded on Monday, an affiliate of Enterprise’s operating partnership will acquire a 50%, limited voting interest in GulfTerra’s general partner, GulfTerra, for $425 million in cash. Before the transaction closes, El Paso will reacquire the 9.9% ownership interest in GulfTerra’s general partner held by Goldman Sachs & Co. As a result of this initial step, GulfTerra’s general partner will be owned 50% by an affiliate of El Paso and 50% by an affiliate of Enterprise’s operating partnership. An affiliate of El Paso will continue to serve as the managing member of GulfTerra’s general partner, and the Enterprise affiliate member’s rights will be limited to protective consent rights on certain transactions affecting GulfTerra or its General Partner.

In the second transaction, which will occur immediately before the merger, El Paso will contribute its 50% ownership interest in the GulfTerra general partner to Enterprise Products GP LLC, the general partner of Enterprise. In exchange, El Paso will receive a 50% interest in Enterprise’s general partner. The remaining 50% of the Enterprise general partner will continue to be owned by affiliates of Enterprise Products Co. The Enterprise general partner will then contribute this 50% ownership interest in the GulfTerra general partner to Enterprise for no consideration. In addition, Enterprise will pay El Paso $500 million in cash for approximately 13.8 million units, which include 2.9 million GulfTerra common units and all of its GulfTerra Series C units.

In the final transaction, GulfTerra will merge with a subsidiary of Enterprise, with GulfTerra surviving the merger as a subsidiary of Enterprise. Under the terms of the merger agreement, GulfTerra’s unitholders will receive 1.81 Enterprise common units for each GulfTerra common unit, which represents a premium of approximately 2.2% based on the closing prices of their respective common units on December 12, 2003. The remaining approximately 7.5 million GulfTerra common units owned by El Paso will be exchanged for Enterprise common units based on the 1.81 exchange ratio. The GulfTerra common units acquired for cash will be cancelled and will no longer be outstanding after completion of the merger transaction.

Andras said he expects the merger to increase the cash distribution rate for the new partnership to $1.58 per unit on an annual basis when the merger is completed.

Before it’s completed, the merger has to be approved by both partnership’s unitholders, along with other regulatory approvals. The merger is expected to be completed in the second half of 2004.

Concurrent with the closing, Enterprise will acquire nine natural gas processing plants from El Paso for $150 million in cash. These plants, located in South Texas, have historically been associated with and are “integral” to GulfTerra’s Texas intrastate natural gas pipeline and NGL fractionation and pipeline systems.

Under the merger agreement, Enterprise’s new board will consist of 10 directors, with five each designated by Enterprise and El Paso. Three of the directors designated by each company will be independent directors, with Enterprise’s current chairman, Dan L. Duncan, remaining, as well as Andras. The two directors designated by El Paso will be Robert G. Phillips, the current CEO of GulfTerra’s general partner, and D. Dwight Scott, CFO for El Paso. Duncan will serve as chairman following the merger, with Andras as CEO and Phillips as COO.

Enterprise financed the $425 million payment to El Paso in the initial transaction from borrowings under its existing credit facilities and a $225 million acquisition credit facility. Enterprise also plans to raise $100 million of equity this month by issuing Class B partnership units in a private placement with an affiliate of Enterprise Products Co.

Financial advisers for this transaction were Lehman Brothers for Enterprise, UBS Investment Bank for GulfTerra and Credit Suisse First Boston LLC for El Paso.

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