El Paso selling controlling interest in GulfTerra; Enterprise and GulfTerra merging
By OGJ editors
HOUSTON Dec. 15 -- Enterprise Products Partners LP, GulfTerra Energy Partners LP, and El Paso Corp. agreed to merge Enterprise and GulfTerra to form the second largest US publicly traded master limited partnership after Kinder Morgan Energy Partners LP. All these companies are based in Houston.
After a complicated, three-step series of transactions between the two partnerships and El Paso, GulfTerra will become an Enterprise subsidiary. The overall merger is expected to close by the second half of 2004.
Affiliates of Enterprise Products Co., a private company, and El Paso each will own 50% interest of the new combined partnership's general partner. The combined partnership will be named Enterprise Products Partners and will have a $13 billion enterprise value.
O.S. 'Dub' Andras, Enterprise president and CEO, called the transaction a "merger of equals to form one of the premier midstream energy companies."
Robert Phillips, GulfTerra Energy Partners chairman and CEO, said the merger will benefit both GulfTerra and Enterprise unitholders.
Following completion of the merger, the management of the general partner of Enterprise will be Dan L. Duncan, chairman; Andras, vice-chairman and CEO; and Phillips, president and chief operating officer.
El Paso's role
El Paso is selling its controlling interest in GulfTerra, a gathering system, to Enterprise. Previously, GulfTerra was known as El Paso Energy Partners LP (OGJ Online, May 7, 2003).
Doug Foshee, El Paso president and CEO, said, "Through our ownership of 50% of the Enterprise general partner and 14 million common units, El Paso's shareholders will participate in significant onshore and offshore opportunities. In addition, the $1 billion of net proceeds from this transaction will accelerate El Paso's debt reduction program."
The new resulting partnership's assets will include more than 30,000 miles of pipelines including more than 17,000 miles of natural gas pipelines, 13,000 miles of natural gas liquid pipelines, and 340 miles of large capacity crude oil pipelines in the Gulf of Mexico.
Other assets will include ownership interests in 164 million bbl of NGL storage capacity and 23 bcf of natural gas storage capacity, as well as offshore Gulf of Mexico hub platforms, and import and export terminals on the Houston Ship Channel. The combined partnership also will own interests in 19 fractionation plants with a net capacity of 650,000 b/d and 24 natural gas processing plants with a net capacity of 6 bcfd.
Concurrent with the merger's closing, Enterprise will acquire nine South Texas natural gas processing plants from El Paso for $150 million. These plants are integral to GulfTerra's Texas intrastate natural gas pipeline and NGL fractionation and pipeline systems.
Analyst's reactions
Standard & Poor's Rating Service in New York lowered its credit rating on El Paso to B from B+, noting that the company's outlook remains negative because El Paso has almost $24 billion in outstanding debt and other long-term financing obligations.
S&P affirmed its BB+ rating on GulfTerra and kept the company on credit watch status with negative implications.
"The proposed merger of GulfTerra and Enterprise would be complementary in several ways, including the fit of the operations and the improved corporate governance and management of the new company," said S&P analyst Todd Shipman of New York.
"The ultimate ratings on the merged entity will depend on a complete analysis of the operations, integration, diversity, sector fundamentals, and financial measures when the merger is closer to completion," he said.
Three transactions
The definitive agreements include three transactions. An affiliate of Enterprise's operating partnership will acquire a 50%, limited voting interest in GulfTerra's general partner, GulfTerra Energy Co. LLC, for $425 million.
Before the initial transaction closes, El Paso will reacquire the 9.9% ownership interest in GulfTerra's general partner held by Goldman Sachs & Co. This will result in an affiliate of El Paso and an affiliate of Enterprise each owning 50% of the general partner.
An El Paso affiliate 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.
In a second transaction 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 then will contribute this 50% ownership interest in the GulfTerra general partner to Enterprise for no consideration. In addition, Enterprise will pay El Paso $500 million for 13.8 million units, which include 2.9 million GulfTerra common units and all of the GulfTerra Series C units that it owns.
In the final transaction, GulfTerra will merge with a wholly owned subsidiary of Enterprise, with GulfTerra surviving the merger as a wholly owned subsidiary of Enterprise.
Terms of the merger agreement call for GulfTerra's unitholders to receive 1.81 Enterprise common units for each GulfTerra common unit, which represents a premium of 2.2% based on the closing prices of their respective common units on Dec. 12.
The remaining 7.5 million GulfTerra common units owned by El Paso will be exchanged for Enterprise common units based on a 1.81 exchange ratio. The GulfTerra common units acquired for cash will be cancelled after completion of the merger transaction.
