Enterprise to buy Teppco

Enterprise Products Partners (EPD - Analyst Report) and Enterprise GP Holdings L.P. announced a definitive agreement to merge with Teppco Partners (TPP) along with Teppco's general partner. The merger of the master limited partnerships (MLPs) will take place on a unit-for-unit basis to form the largest publicly traded energy partnership with an enterprise value of more than $26 billion.

The combined partnership will operate under the Enterprise name and trade under the 'EPD' ticker symbol. Post merger, Teppco and its general partner – Texas Eastern Products Pipeline Co. LLC – will become wholly owned subsidiaries of Enterprise. The completion of the merger is subject to regulatory approvals and is expected to take place in the fourth quarter of 2009.

We view the transaction as a win-win for unitholders of both the MLPs. In addition to access to the largest producing basins of natural gas, natural gas liquids (NGLs), and crude oil in the U.S., unitholders of both the MLPs get a foundation of more fee-based businesses and added aspect of asset diversification.

The merger will make Enterprise Products the largest pipeline partnership in terms of miles of pipe, enterprise value, and equity market capitalization. It also expands the company's business of providing services to producers and consumers of natural gas and NGLs into the transportation and storage of refined products.

Teppco's investors get improved access to the capital markets with lower cost of capital, which will increase the partnership's ability to participate in accretive projects and enhance cash distributions in the future. The combined partnership will start generating cash flow from incremental commercial and growth opportunities in 2010 as well as at least $20 million in cost savings and overall system optimization.

Under terms of the agreement, Teppco unitholders (except for a certain affiliate of EPCO Inc., a private company controlled by Dan L. Duncan, Enterprise's founder and its current Chairman) will receive 1.24 of Enterprise Products' common units for each Teppco unit, representing a 9.3% premium to the closing price of Teppco on June 26, 2009. This apart, an affiliate of EPCO Inc. will exchange its 11,486,711 Teppco units for 14,243,521 Enterprise Products units.

In exchange for the merger of Teppco GP with a subsidiary of Enterprise, Enterprise GP will receive 1,331,681 Enterprise common units. It will also enjoy an increase in the capital account of Enterprise's general partner, Enterprise Products GP LLC, to maintain the general partner's 2% interest in Enterprise.

The combined partnership will have approximately 48,000 miles of pipelines including about 22,000 miles of NGL, refined product and petrochemical pipeline, nearly 20,000 miles of natural gas pipelines, and more than 5,000 miles of crude oil pipelines. It will also have interests in 17 fractionation plants with over 600,000 barrels per day of net capacity, 25 natural gas processing plants with a net capacity of approximately 9 billion cubic feet per day, and 3 butane isomerization facilities with a capacity of 116,000 barrels per day. The combined partnership would also be one of the largest inland tank barge companies in the U.S. Its logistical assets will include approximately 200 million barrels of NGL, refined product and crude oil storage capacity and 27 billion cubic feet (Bcf) of natural gas storage capacity.

Our continued favorable view of EPD units reflects the partnership's diversified asset base, strong prospects of distribution growth and attractive valuation which will receive a significant boost from its Teppco tie-up.