The planned merger by Enterprise Products Partners LP with GulfTerra Energy Partners LP has the potential to reduce exposure to petrochemical industry cycles and to realize cost savings, but the merged company will have to demonstrate its prowess before changes are reflected in the credit rating, a Standard & Poor’s Rating Services (S&P) analyst said Tuesday after dropping Enterprise’s rating to “junk” status.

Enterprise, a master limited partnership with $2.2 billion of debt outstanding as of March, agreed to merge with GulfTerra last December, which would form the second largest publicly traded energy partnership in the United States (see Daily GPI, Dec. 16, 2003). When announced, the partnership was said to be worth about $13 billion.

S&P dropped the ratings on Houston-based Enterprise Products Partners LP and Enterprise Products Operating LP to “BB+” from “BBB-” and removed the ratings from CreditWatch with negative implications. The outlook is “stable.” The ratings were originally placed on CreditWatch last December when the merger was first announced. The rating action is based upon an assessment that the credit rating on Enterprise Products will be “BB+” whether or not the proposed merger with GulfTerra takes place.

“On a stand-alone basis, Enterprise Products’ creditworthiness has deteriorated over the past year,” said S&P credit analyst Peter Otersen. He said S&P expects that the company’s performance has reached a “plateau due to a rebound in demand for natural gas liquids (NGL), but does not expect the company’s performance to materially improve.”

The combined partnership will retain the name Enterprise Products Partners LP and will serve the largest producing basins of natural gas, crude oil and 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 in 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, six offshore GOM hub platforms and import and export terminals on the Houston Ship Channel.

The new Enterprise also will 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.

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