Enterprise Products Partners LP and GulfTerra Energy Partners LP are awaiting clearance by the Federal Trade Commission and satisfaction of other regulatory conditions to complete their merger, which was approved last week by unitholders for both companies. The merger, which will create the second largest publicly owned energy partnership in the United States, is expected to close in the third quarter.

At the Enterprise unitholder meeting, 99.7% of the total common units that voted were in favor of the merger, which represents 83% of their total outstanding common units. At the GulfTerra unitholder meeting, 98% of the total common units that voted were in favor of the merger, which represents 63% of their total outstanding common units. According to the transaction, GulfTerra common unitholders will receive 1.81 Enterprise common units for each GulfTerra common unit they own. Additionally, Enterprise has committed to increase its quarterly cash distribution by at least 6% to 39.5 cents/unit ($1.58/unit annually) beginning on the first quarterly distribution following the merger.

Last week Enterprise also released its second quarter earnings, announcing that higher sales failed to offset a loss in the natural gas liquids (NGL) marketing business and higher energy costs. The Houston-based company, which Wall Street had forecast would earn 22 cents/unit, instead reported quarterly net income was flat: $33.1 million (11 cents/unit), compared with net income of $33.1 million (14 cents) in 2Q2003.

“Overall, we continued to see a solid recovery in our businesses during the second quarter as a result of the improvement in both the domestic and global economies,” said CEO O.S. “Dub” Andras. “The ethylene industry, which is greatly influenced by general economic conditions, is the largest single consumer of the NGLs ethane and propane. The improvement in the economy was reflected in the production rates for the ethylene industry and its demand for NGLs.”

Andras said ethane demand averaged 747,000 bbl/d in the second quarter, up from 614,000 bbl/d in 2Q2003. Demand for ethane in June of this year was 765,000 bbl/d, a 37% increase over June 2003’s 560,000 bbl/d. “This improvement translated into an overall increase in the NGL volumes transported by our pipelines.”

The CEO noted that quarterly earnings were negatively impacted by a loss in the NGL marketing business and high fuel costs at some facilities. “The loss in our NGL marketing business was due to the ineffectiveness of a strategy that we have traditionally used to manage our NGL production and inventory on a seasonal basis. As a result of the unexpected magnitude in the volatility of crude oil, natural gas and NGL prices during the second quarter, this resulted in a decrease in gross operating margin of approximately $15 million, or 6 cents/unit. With the expectation that this level of volatility will likely continue, we have modified our practices to minimize the risk of such losses in the future.”

Fuel costs at the Enterprise facilities have remained high primarily due to the price of natural gas and natural gas-fired electricity, and the company has taken “additional steps to reduce our consumption of natural gas and natural gas-fired electricity, said Andras. Beginning July 1, Enterprise entered into a five-year contract to purchase 50 MW at a fixed price from an undisclosed coal-fired power facility in Texas that is owned by an affiliate of an electric utility. He said Enterprise also is in the process of converting several pump stations that are powered by NGLs to electric motors.

“Our planned merger with GulfTerra and the natural hedge that we believe will exist between the two partnerships with respect to natural gas should mitigate Enterprise’s fuel cost exposure to natural gas prices going forward,” he said. “The gathering fee that GulfTerra collects on approximately 80% of the gas it gathers in the San Juan basin is based on a percentage of natural gas prices. As a result, GulfTerra effectively has a long natural gas position of approximately 70 MMcf/d up to a certain level of natural gas prices and a long position of 40 MMcf/d thereafter, which economically offsets our net 35 MMcf/d requirement for fuel.”

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