Fitch Rates TEPPCO Partners, L.P. IDR 'BBB-'

Business Wire, Oct 26, 2007

CHICAGO -- Fitch Ratings has initiated coverage and assigned a 'BBB-' Issuer Default Rating (IDR) to TEPPCO Partners, L.P. (TPP) and TE Products Pipeline Company, LLC. The Rating Outlook is Stable.

Additionally, Fitch has assigned the following ratings:

TEPPCO Partners L.P.:

--Senior Unsecured Notes 'BBB-';

--Junior Subordinated Notes 'BB '.

TE Products Pipeline Company LLC

--Senior Unsecured Notes 'BBB-'.

These ratings affect approximately $1.6 billion of debt.

TEPPCO's and TE Products' ('TPP' collectively) ratings are based on the stability and predictability of cash flows from its pipeline, transportation, gathering and storage operations and the high quality of its underlying assets. Credit metrics are comparable to its peer group and further enhanced by the diversity of its underlying businesses, high percentage of asset-based revenues and disciplined approach to selecting and funding capital investments in those assets.

The Stable Outlook is based on Fitch's expectation that TPP's credit metrics, which may weaken slightly over the next two years as the company completes construction of its Motiva refined products terminal, will remain within parameters for its current rating category. The capital spending program is designed to increase the scope and scale of existing operations with a focus on small add-on projects designed to connect facilities to key refining areas and take advantage of transportation and storage opportunities.

Fitch projects 2008-2009 consolidated FFO-to-Total Interest Expense of 4.0 times (x), and FFO-to-Adjusted Debt of 19% to 20%, after applying 75% equity treatment to TPP's junior subordinated notes.

With a balanced portfolio of upstream, midstream and downstream assets, TPP can partially mitigate the seasonality and cyclicality within any one commodity segment. Within its downstream segment, TPP participates in both refined products and propane through the same facilities. As such, revenue stability is enhanced by TPP's ability to shift capacity among a variety of products if needed. Additionally, over 90% of TPP's gross margin is derived from more stable, asset-based fee revenue. Marketing activities are concentrated in the upstream segment which includes a small and profitable lube oil marketing business.

Ratings Strengths

TPP owns and operates the only pipeline capable of delivering propane and butane originating from the world's largest fractionation complex at Mont Belvieu, Texas to the Northeast. TPP's downstream pipelines are capable of transporting refined products (gasoline, diesel, and jet fuel) and propane, which enhances cash flow stability due to the countercyclical nature of the underlying product demand. Additionally, TPP's interest in the Centennial pipeline helps to alleviate congestion and increase capacity on TPP's refined products line. TPP can offload non-peak demand products to Centennial, allowing the refined products line to increase capacity for peak demand products.

TEPPCO's midstream assets include its interest in the Jonah gas fields. The Jonah and Pinedale systems are ranked #6 and #2, respectively, based on proven domestic reserves and are characterized by high drilling success and low producer finding costs. The addition of new compressor units will enhance production and gathering, as well as increase gathering fees as rates are tied to wellhead pressure. The Phase V expansion project with EPD will significantly increase capacity and cash flow from the Jonah JV.

In its upstream segment, cash flows are enhanced by TPP's large storage capability at Cushing and its Texas City operation and interest in Seaway, which bring crude imports from the Gulf to Houston refineries and to Cushing through the Freeport to Cushing line. While favorable contango market conditions were a key driver in recent upstream financial performance, by linking the purchase and sale of crude oil to a predetermined price index and collecting a transportation fee, TEPPCO attempts to minimize its exposure to commodity price volatility.

Most of TPP's capital projects are short-duration organic growth projects that expand the scope and scale of existing operations. With a strong presence in Gulf Coast refining areas, TPP takes advantage of its unique footprint to expand operations with Houston area refiners. These short-term projects significantly enhance cash flows while providing relatively little risk to the company's credit profile. Its more long-dated projects involve expansion of Jonah and the build-out of facilities to support Motiva's Port Arthur, Texas refinery expansion. These projects are backed by existing capacity and supply agreements and, in the case of Motiva, a 15-year throughput and dedication of volume agreement.

Ratings Concerns

As an MLP, TPP distributes the majority of available cash to unit holders quarterly. While the structure is common among its peers it poses some concern from a credit perspective. TPP must access the capital markets to fund growth spending. An inability to access those markets would pose significant risk and could hinder future growth. With TPP's recent reduction of GP incentive distribution rights, it has improved its financial flexibility and overall cost of equity capital, making issuing equity a more viable alternative.