After rejecting a $2.8 billion takeover proposal from Enterprise Products Partners LP in April, TEPPCO Partners LP said Monday it has agreed to merge with Enterprise to form the largest publicly traded energy partnership with an enterprise value of more than $26 billion. The stock deal is valued at about $3.3 billion and would create a company similar in size to Kinder Morgan.

The companies 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. The merged partnership’s logistical assets will include approximately 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. The combined partnership will own interests in 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 U.S.

“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 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.

Enterprise units closed down 1.3% Friday at $24.96. TEPPCO units soared 4.98% to close at $30.12

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 company will 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 company 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,” said Enterprise CEO Michael A. Creel. “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 last Friday.

Earlier this year Enterprise had offered to acquire all of TEPPCO’s outstanding partnership interests for 1.043 Enterprise common units plus $1.00 in cash for each TEPPCO common unit (see Daily GPI, April 30).

In exchange for the merger of TEPPCO GP with a subsidiary of Enterprise, Enterprise GP will receive 1,331,681 Enterprise common units and an increase in the capital account of Enterprise’s general partner, Enterprise Products GP LLC (referred to as EPD GP), to maintain the general partner’s 2% interest in Enterprise. EPD GP will continue to be wholly owned by Enterprise GP after the merger.

The respective audit, conflicts and governance committees for the general partners of Enterprise and Enterprise GP and the special committee of the audit, conflicts and governance committee of the general partner of TEPPCO each voted unanimously in favor of the merger.

“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 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 Daily GPI, Feb. 21, 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.

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