AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON AUGUST 12, 2002
REGISTRATION NO. 333-
REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
EL PASO ENERGY MANAGEMENT, L.L.C.
(Exact Name of Registrant as Specified in Its Charter)
<Table>
DELAWARE 68-0514744
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</Table>
1311
(Primary Standard Industrial Classification Code Number)
FORM S-3
EL PASO ENERGY PARTNERS, L.P.
(Exact Name of Registrant as Specified in Its Charter)
<Table>
DELAWARE 76-0396023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
</Table>
EL PASO ENERGY MANAGEMENT, L.L.C.
EL PASO ENERGY PARTNERS, L.P.
EL PASO BUILDING
1001 LOUISIANA STREET, 30TH FLOOR
HOUSTON, TEXAS 77002
(713) 420-2600
(Address, Including Zip Code, and Telephone Number, Including Area Code, of
Registrant's Principal Executive Offices)
PEGGY A. HEEG, ESQ.
EL PASO BUILDING
1001 LOUISIANA STREET, 30TH FLOOR
HOUSTON, TEXAS 77002
(713) 420-2600
(Name, Address, Including Zip Code, and Telephone Number,
Including Area Code, of Agent for Service)
COPIES TO:
<Table>
J. VINCENT KENDRICK DAVID P. OELMAN
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. VINSON & ELKINS L.L.P.
1900 PENNZOIL PLACE, SOUTH TOWER 1001 FANNIN, SUITE 2300
711 LOUISIANA STREET HOUSTON, TEXAS 77002
HOUSTON, TEXAS 77002 (713) 758-2222
(713) 220-5800 (713) 758-2346 (FAX)
(713) 236-0822 (FAX)
</Table>
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ----------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ----------
If this form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ] ----------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<Table>
<Caption>
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
TITLE OF EACH CLASS OF PROPOSED MAXIMUM AMOUNT OF
SECURITIES TO BE REGISTERED AGGREGATE OFFERING PRICE REGISTRATION FEE
- -----------------------------------------------------------------------------------------------------------------------
Shares representing limited liability company
interests(1)............................................... $684,600,000(2) $62,983.20
i-units(3)..................................................
- -----------------------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------------
</Table>
(1) To be issued by El Paso Energy Management, L.L.C. Includes shares to be
purchased by El Paso Corporation and the underwriters' overallotment option.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(o) of the Securities Act of 1933.
(3) To be issued by El Paso Energy Partners, L.P. The i-units are deemed to be
offered and sold by El Paso Energy Partners, L.P. in connection with the
offer and sale of the shares of El Paso Energy Management, L.L.C. pursuant
to Rule 140 under the Securities Act of 1933; thus, no registration fee is
being paid with respect to the deemed offer and sale of the i-units.
THE REGISTRANTS HEREBY AMEND THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANTS SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
EXPLANATORY NOTE
These registration statements contain a prospectus to be used in connection
with the offer and sale of shares of El Paso Energy Management, L.L.C. These
registration statements also register the deemed offer and sale of El Paso
Energy Partners, L.P. i-units to be acquired by El Paso Energy Management,
L.L.C. with substantially all of the net proceeds of the offering of the shares
of El Paso Energy Management, L.L.C., pursuant to Rule 140 of the Securities Act
of 1933.
THE INFORMATION IN THIS PRELIMINARY PROSPECTUS IS NOT COMPLETE AND MAY BE
CHANGED. THESE SECURITIES MAY NOT BE SOLD UNTIL THE REGISTRATION STATEMENT FILED
WITH THE SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PRELIMINARY
PROSPECTUS IS NOT AN OFFER TO SELL NOR DOES IT SEEK AN OFFER TO BUY THESE
SECURITIES IN ANY JURISDICTION WHERE THE OFFER OR SALE IS NOT PERMITTED.
Subject to Completion. Dated August 12, 2002.
20,000,000 Shares
Representing Limited Liability Company Interests
EL PASO ENERGY MANAGEMENT, L.L.C.
----------------------
This is an initial public offering of our shares representing limited
liability company interests, a class of our equity with limited voting rights.
We are offering 20,000,000 of our shares through the underwriters named in this
prospectus, including 5,300,000 shares to be offered to our affiliate, El Paso
Corporation.
Prior to this offering, there has been no public market for our shares. We
expect our shares to be offered at a price within approximately 5% of the
closing price of El Paso Energy Partners, L.P. common units prior to
determination of the offering price of our shares. The closing price of the
common units, which trade on the NYSE under the symbol "EPN," was $34.23 on
August 9, 2002. We intend to apply to list our shares on the NYSE under the
symbol " ."
INVESTING IN OUR SHARES INVOLVES RISK. SEE "RISK FACTORS" BEGINNING ON PAGE
31 TO READ ABOUT CERTAIN FACTORS YOU SHOULD CONSIDER BEFORE BUYING OUR SHARES.
These risks include, but are not limited to, the following:
- An active trading market for our shares may not develop, and even if such
a market does develop, the market price of our shares may be less than
the price you paid for your shares in this offering and less than the
market price of the common units of El Paso Energy Partners, L.P.
- Because our only assets will be i-units in El Paso Energy Partners, L.P.,
our financial condition and results of operations will depend solely upon
the performance of El Paso Energy Partners, L.P.
- The shares you own are not entitled to elect our directors and,
therefore, you will have little or no opportunity to influence or change
our management.
- Your shares are subject to purchase provisions that could result in your
having to sell your shares at a time or price that you do not like.
- Our limited liability company agreement restricts or eliminates a number
of the fiduciary duties that otherwise would be owed by our board of
directors to you.
- El Paso Corporation and its subsidiaries have conflicts of interest with
El Paso Energy Partners, L.P. and, accordingly, with you.
- El Paso Energy Partners, L.P.'s indebtedness could adversely restrict its
ability to operate, affect its financial condition and prevent it from
making distributions to unitholders.
- We may increase the cash reserves and expenditures of El Paso Energy
Partners, L.P., which would decrease cash distributions on its common
units and the value of distributions of additional shares we make to you.
----------------------
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY OTHER REGULATORY
BODY HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL
OFFENSE.
----------------------
<Table>
<Caption>
Per share Total
--------- -----
Initial public offering price............................... $ $
Underwriting discount....................................... $ $ (1)
Proceeds, before expenses, to El Paso Energy Management,
L.L.C. ................................................... $ $ (1)
</Table>
- ---------------
(1) No discount or commission is being paid on the sale of 5,300,000 shares
being purchased by El Paso Corporation. Thus, the total underwriting
discount does not include any discount on these shares, and the proceeds,
before expenses, to El Paso Energy Management, L.L.C. include the full per
share initial public offering price of these shares.
To the extent that the underwriters sell more than 20,000,000 shares
(excluding shares sold to El Paso Corporation), the underwriters have the option
to purchase up to an additional 2,205,000 shares from El Paso Energy Management,
L.L.C. at the initial public offering price less the underwriting discount, and
El Paso Corporation will purchase up to an additional 795,000 shares at the
initial public offering price.
----------------------
The underwriters expect to deliver the shares against payment in New York,
New York on , 2002.
GOLDMAN, SACHS & CO.
----------------------
Prospectus dated , 2002.
[INSIDE COVER ART]
TABLE OF CONTENTS
<Table>
<Caption>
PAGE
----
PROSPECTUS SUMMARY.......................................... 1
El Paso Energy Management................................. 1
El Paso Energy Partners................................... 1
Business Description................................... 1
San Juan Asset Acquisition and Distribution Increase... 2
El Paso Energy Partners' Unique Sponsorship............ 2
Objective and Strategy................................. 3
Business Segments...................................... 4
Key Strengths.......................................... 6
Recent Developments.................................... 6
Offices................................................... 7
Summary of Risk Factors................................... 8
Risks Related to Our Shares, the i-Units and El Paso
Energy Management..................................... 8
Risks Related to El Paso Energy Partners' Business..... 8
Risks Inherent in Our Investment in i-Units............ 10
Risks Related to Conflicts of Interest and Limitations
of Fiduciary Duties................................... 10
Organizational Structure.................................. 11
Prior to the Offering.................................. 11
Following the Offering................................. 12
The Offering.............................................. 13
Our Shares................................................ 14
Summary Financial Information of El Paso Energy
Partners............................................... 22
Summary Pro Forma as Adjusted Financial Data of El Paso
Energy Partners........................................ 26
Summary Pro Forma as Adjusted Financial Data for the
Year Ended December 31, 2001.......................... 28
Summary Pro Forma as Adjusted Financial Data for the
Three Months Ended March 31, 2001..................... 29
El Paso Energy Management Balance Sheet................... 30
RISK FACTORS................................................ 31
Risks Related to Our Shares, the i-Units and El Paso
Energy Management...................................... 31
An active trading market for our shares may not
develop, and even if such a market does develop, the
market price of our shares may be less than the price
you paid for your shares in this offering and less than
the market price of the common units of El Paso Energy
Partners............................................... 31
The value of the additional fractional share that you
will receive per share as a quarterly distribution may
be less than the quarterly distribution of cash that El
Paso Energy Partners' common unitholders will receive
per common unit........................................ 31
El Paso Energy Partners could be treated as a
corporation for U.S. federal income tax purposes, which
would reduce substantially the value of our shares and
would give the owner of our voting shares the right to
merge us into El Paso Energy Partners.................. 31
El Paso Energy Partners may issue additional common or
other classes of units, and we may issue additional
shares, which would dilute your ownership interest..... 32
Because our only assets will be i-units of El Paso
Energy Partners, our financial condition and results of
operations will depend solely upon the performance of
El Paso Energy Partners................................ 32
Your shares are subject to purchase provisions that
could result in your having to sell your shares at a
time or price that you do not like..................... 32
The terms of our shares may be changed in ways you may
not like, because our board of directors will have the
power to change the terms of our shares in ways that
our board determines, in its sole discretion, are not
materially adverse to you.............................. 33
</Table>
<Table>
<Caption>
PAGE
----
If we are not fully reimbursed or indemnified for
obligations and liabilities we incur in managing the
business and affairs of El Paso Energy Partners, we may
be unable to pay those liabilities and the value of our
shares could decline................................... 33
If in the future we cease to manage the business and
affairs of El Paso Energy Partners, we may be deemed to
be an "investment company" for purposes of the
Investment Company Act of 1940......................... 33
If a person or group, other than El Paso Corporation
and its affiliates, owns 20% or more of the aggregate
number of issued and outstanding El Paso Energy
Partners common units and our shares, that person or
group may not vote its shares; as a result, you are
less likely to receive a premium for your shares in a
change of control situation............................ 34
The shares you own are not entitled to vote to elect
our directors, therefore, you will have little or no
opportunity to influence or change our management...... 34
Unless all accretions occurring after September 2010 on
El Paso Energy Partners' then-outstanding Series B
preference units have been paid or the Series B
preference units have been redeemed, beginning in
October 2010, El Paso Energy Partners will not be
permitted to make distributions to holders of its
common units or increase the number of i-units we own
and, therefore, the number of shares then held by you
will not increase...................................... 34
Risks Related to El Paso Energy Partners' Business........ 34
El Paso Energy Partners' indebtedness could adversely
restrict its ability to operate, affect its financial
condition and prevent it from making distributions to
unitholders............................................ 34
El Paso Energy Partners may not be able to fully
execute its growth strategy if it encounters tight
capital markets or increased competition for qualified
assets................................................. 36
El Paso Energy Partners' growth strategy may adversely
affect its results of operations if it does not
successfully integrate the businesses that it acquires
or if it substantially increases its indebtedness and
contingent liabilities to make acquisitions............ 36
El Paso Energy Partners' actual acquisition,
construction and development costs could exceed its
forecast, and its cash flow from these projects may not
be immediate........................................... 37
FERC regulation and a changing regulatory environment
could affect El Paso Energy Partners' assets and cash
flow................................................... 37
Environmental costs and liabilities and changing
environmental regulation could affect El Paso Energy
Partners' assets and cash flow......................... 38
A natural disaster, catastrophe or other interruption
event involving El Paso Energy Partners could result in
severe personal injury, property damage and
environmental damage, which could curtail its
operations and otherwise adversely affect its assets
and cash flow.......................................... 38
The future performance of El Paso Energy Partners'
midstream energy infrastructure operations, and thus
its ability to satisfy its debt requirements and
maintain cash distributions, depends on successful
exploration and development of additional oil and
natural gas reserves by others......................... 39
El Paso Energy Partners' storage businesses depend on
unaffiliated pipelines to transport natural gas........ 39
El Paso Energy Partners faces competition from third
parties to gather, transport, process, fractionate,
store or otherwise handle oil, natural gas and other
petroleum products..................................... 39
Fluctuations in energy commodity prices could adversely
affect El Paso Energy Partners' business............... 40
Fluctuations in interest rates could adversely affect
El Paso Energy Partners' business...................... 41
El Paso Energy Partners' use of derivative financial
instruments could result in financial losses........... 41
El Paso Energy Partners' EPN Texas fractionation
facilities are dedicated to a single customer, the loss
of which could adversely affect us..................... 42
The interruption of distributions to El Paso Energy
Partners from its subsidiaries and joint ventures may
affect its ability to make cash distributions to its
unitholders............................................ 42
El Paso Energy Partners cannot cause its joint ventures
to take or not to take certain actions unless some or
all of its joint venture participants agree............ 42
</Table>
ii
<Table>
<Caption>
PAGE
----
El Paso Energy Partners does not have the same
flexibility as other types of organizations to
accumulate cash and equity to protect against
illiquidity in the future.............................. 43
Changes of control of El Paso Energy Partners' general
partner may adversely affect you....................... 43
El Paso Energy Partners will be materially and
adversely affected if it cannot negotiate an extension
or a replacement on commercially reasonable terms of
approximately 900 miles of rights-of-way underlying the
San Juan gathering system.............................. 44
El Paso Energy Partners will be materially and
adversely affected if it cannot negotiate an extension
or a replacement on commercially reasonable terms of
three material contracts which account for
approximately 70% of the volume attributable to the San
Juan gathering system and which expire between 2006 and
2008................................................... 44
Arthur Andersen LLP, the public accountants that
audited the 2000 financial statements of El Paso Energy
Partners' joint venture Poseidon Oil Pipeline Company,
L.L.C., has been convicted of a felony and has not
consented to our use of their opinion, which may
adversely affect the ability of Arthur Andersen LLP to
satisfy any claims that may arise out of Arthur
Andersen LLP's audit of Poseidon's financial
statements............................................. 43
Risks Inherent in Our Investment in i-Units............... 44
El Paso Energy Partners' general partner has
anti-dilution rights................................... 44
We may not have limited liability in the circumstances
described below, including potentially having liability
for the return of wrongful distributions............... 44
Risks Related to Conflicts of Interest and Limitations of
Fiduciary Duties....................................... 45
El Paso Corporation and its subsidiaries have conflicts
of interest with El Paso Energy Partners and,
accordingly, you....................................... 45
The interests of El Paso Corporation may differ from
our interests, and our interests may differ from the
interests of limited partners of El Paso Energy
Partners............................................... 47
Our limited liability company agreement restricts or
eliminates a number of the fiduciary duties that
otherwise would be owed by our board of directors to
you.................................................... 48
We may increase the cash reserves and expenditures of
El Paso Energy Partners, which would decrease cash
distributions on its common units and the value of
distributions of additional shares we make to you...... 48
El Paso Energy Partners' partnership agreement purports
to limit its general partner's fiduciary duties and
certain other obligations relating to it............... 49
INFORMATION REGARDING FORWARD LOOKING STATEMENTS............ 50
PLANNED ACQUISITION OF THE SAN JUAN ASSETS.................. 51
USE OF PROCEEDS............................................. 53
El Paso Energy Management................................. 53
El Paso Energy Partners................................... 53
DISTRIBUTIONS AND DISTRIBUTION POLICY....................... 54
Our Policy Regarding Share Distributions.................. 54
Price Range of El Paso Energy Partners' Common Units and
Distributions.......................................... 54
El Paso Energy Partners' Distribution Policy.............. 55
Requirement to Distribute Available Cash............... 55
Definition of Available Cash........................... 55
Establishment of Reserves.............................. 55
Cash Distributions and Subdivision of i-Units.......... 55
Two Different Types of Distributions................... 55
General Procedures for Quarterly Distributions......... 56
Distributions of Cash from Operations.................. 57
Illustration of a Distribution of Cash from Operations.... 59
Adjustment of the Minimum Quarterly and Target
Distribution Levels................................... 61
Distributions in Liquidation........................... 61
CAPITALIZATION OF EL PASO ENERGY MANAGEMENT................. 63
CAPITALIZATION OF EL PASO ENERGY PARTNERS................... 64
SELECTED FINANCIAL DATA OF EL PASO ENERGY PARTNERS.......... 66
</Table>
iii
<Table>
<Caption>
PAGE
----
SELECTED PRO FORMA FINANCIAL DATA OF EL PASO ENERGY
PARTNERS.................................................. 70
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................. 74
El Paso Energy Management................................. 74
General................................................ 74
Business............................................... 74
Liquidity and Capital Resources........................ 74
Results of Operations.................................. 75
El Paso Energy Partners................................... 75
Recent Acquisitions, Divestitures and Projects......... 77
Segment Results........................................ 82
Liquidity and Capital Resources........................ 93
Commitments and Contingencies.......................... 97
Critical Accounting Policies........................... 99
New Accounting Pronouncements Not Yet Adopted.......... 101
BUSINESS.................................................... 108
El Paso Energy Management................................. 108
El Paso Energy Partners................................... 108
El Paso Energy Partners' Objective and Strategy........... 110
Recent Developments.................................... 111
Recent Financings...................................... 112
Business Segments...................................... 115
Natural Gas Pipelines and Plants....................... 116
Regulatory Environment................................. 119
Oil and NGL Logistics.................................. 121
Regulatory Environment................................. 123
Maintenance............................................ 124
Platform Services......................................... 124
Natural Gas Storage.................................... 126
Other.................................................. 127
Regulatory Environment................................. 129
Major Encumbrances..................................... 130
Employees.............................................. 130
DESCRIPTION OF OUR SHARES................................... 132
Distributions.......................................... 132
Covenants.............................................. 134
Special Purchase Events................................ 136
Optional Purchase Events............................... 138
Limited Voting Rights.................................. 139
Merger................................................. 142
Tax Indemnity of El Paso Corporation................... 142
Anti-dilution Adjustments.............................. 143
Transfer Agent and Registrar........................... 142
Replacement of Share Certificates...................... 143
Fractional Shares...................................... 143
DESCRIPTION OF THE i-UNITS.................................. 144
Voting Rights.......................................... 144
Distributions and Payments............................. 145
Merger, Consolidation or Sale of Assets................ 145
U.S. Federal Income Tax Characteristics and
Distribution Upon Liquidation of El Paso Energy
Partners.............................................. 145
</Table>
iv
<Table>
<Caption>
PAGE
----
MANAGEMENT OF EL PASO ENERGY MANAGEMENT..................... 147
Directors and Executive Officers....................... 147
Board of Directors and Committees...................... 148
Director Compensation.................................. 148
Executive Compensation................................. 148
COMPARISON OF EL PASO ENERGY PARTNERS' UNITS WITH OUR
SHARES.................................................... 149
LIMITED LIABILITY COMPANY AGREEMENT......................... 153
Formation.............................................. 153
Purpose and Powers..................................... 153
U.S. Federal Income Tax Status as a Corporation........ 153
Power of Attorney...................................... 153
Members................................................ 154
Limited Liability...................................... 154
The Board.............................................. 154
Officers and Employees................................. 155
Capital Structure...................................... 155
Dissolution and Liquidation............................ 155
Merger................................................. 155
Exculpation and Indemnification........................ 155
Amendments............................................. 156
Meetings; Voting....................................... 156
Books and Records; List of Shareholders................ 156
No Removal............................................. 157
Distributions.......................................... 158
Optional and Special Purchase Events................... 158
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS................ 159
Our Relationship With El Paso Corporation and El Paso
Energy Partners....................................... 159
Prior to the Offering.................................. 159
Following the Offering................................. 160
Delegation Agreement................................... 161
Tax Indemnification Agreement and Purchase Agreement... 162
Additional Matters..................................... 162
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........ 163
Conflicts of Interest.................................. 163
Situations in Which a Conflict of Interest Could
Arise................................................. 163
Fiduciary Duties Owed to Our Shareholders and to the
Owners of Units....................................... 168
SHARES ELIGIBLE FOR FUTURE SALE............................. 171
MATERIAL TAX CONSEQUENCES................................... 172
Legal Opinions......................................... 172
Federal Income Tax Considerations Associated With the
Ownership and Disposition of Shares................... 172
ERISA CONSIDERATIONS........................................ 178
UNDERWRITING................................................ 180
LEGAL MATTERS............................................... 182
EXPERTS..................................................... 182
WHERE YOU CAN FIND ADDITIONAL INFORMATION................... 183
INDEX TO FINANCIAL STATEMENTS............................... F-1
</Table>
UNTIL , 2002, ALL DEALERS THAT BUY, SELL OR TRADE OUR SHARES,
WHETHER OR NOT PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A
PROSPECTUS. THIS IS IN ADDITION TO THE DEALERS' OBLIGATIONS TO DELIVER A
PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD
ALLOTMENTS OR SUBSCRIPTIONS.
v
PROSPECTUS SUMMARY
This summary highlights some basic information from this prospectus to help
you understand the shares offered by this prospectus. It likely does not contain
all the information that is important to you. You should carefully read this
prospectus and the documents incorporated by reference to understand fully the
terms of the shares, as well as other considerations that are important to you
in making your investment decision. You should pay special attention to the
"Risk Factors" section beginning on page 31 of this prospectus as well as our
financial statements and the related notes. This prospectus also incorporates by
reference important information about El Paso Energy Partners, L.P., including
information about its businesses and financial and operating data, and financial
information with respect to El Paso Energy Partners Company, the general partner
of El Paso Energy Partners, L.P. You should also read carefully the information,
including the financial statements and the footnotes to those statements,
incorporated by reference in this prospectus.
As used in this prospectus, the term "El Paso Energy Management" and the
terms "we," "our," "us" and similar terms refer to El Paso Energy Management,
L.L.C., unless the context otherwise requires. In addition, we refer to El Paso
Energy Partners, L.P., together with its subsidiaries, as "El Paso Energy
Partners," and we refer to El Paso Energy Partners Company, the general partner
of El Paso Energy Partners and a wholly owned indirect subsidiary of El Paso
Corporation, as "El Paso Energy Partners Company." As used in this prospectus,
the term "common units" means the common units of El Paso Energy Partners, and
the term "units" includes collectively the common units, the i-units and the
Series B preference units of El Paso Energy Partners. The information presented
in this prospectus assumes that the underwriters do not exercise their option to
purchase additional shares from us. As used in this prospectus, the term "our
shares" refers to the class of our shares offered by this prospectus.
EL PASO ENERGY MANAGEMENT
We are a recently formed Delaware limited liability company that will
elect, effective with the closing of this offering, to be treated as a
corporation for U.S. federal income tax purposes. By agreement with El Paso
Energy Partners Company, we will manage the business and affairs of El Paso
Energy Partners. We will use substantially all of the proceeds of this offering
to acquire a new class of limited partner interests, referred to as i-units, in
El Paso Energy Partners, and we will have no assets or operations other than
those related to our equity interest in El Paso Energy Partners. As a result,
our financial condition and results of operations will depend solely upon the
performance of El Paso Energy Partners.
The shares that are being sold in this offering have limited voting rights
and are not entitled to vote to elect our directors. All of our shares that are
entitled to elect our directors are owned by El Paso Energy Partners Company. We
intend to apply to list the shares being sold in this offering on the New York
Stock Exchange under the symbol " ."
EL PASO ENERGY PARTNERS
BUSINESS DESCRIPTION
El Paso Energy Partners, a Delaware limited partnership with common units
traded on the New York Stock Exchange under the symbol "EPN," was formed in
1993. El Paso Energy Partners is one of the largest publicly-traded master
limited partnerships, or MLPs, in terms of market capitalization. El Paso Energy
Partners currently manages a balanced, diversified portfolio of midstream energy
interests and assets that includes:
- offshore oil and natural gas pipelines, platforms and infrastructure in
the Gulf of Mexico, primarily offshore Louisiana and Texas;
- onshore natural gas pipeline assets and processing facilities in Alabama,
Mississippi, New Mexico and Texas;
- onshore natural gas liquids, or NGL, transportation and fractionation
facilities in Texas; and
- onshore natural gas and NGL storage facilities in Mississippi, Louisiana
and Texas.
1
Since El Paso Corporation's 1998 acquisition of an interest in El Paso
Energy Partners, El Paso Energy Partners has diversified its asset base,
stabilized its cash flow and decreased its financial leverage as a percentage of
total capital. El Paso Energy Partners has accomplished this through a series of
acquisitions and development projects.
SAN JUAN ASSET ACQUISITION AND DISTRIBUTION INCREASE
On July 16, 2002, El Paso Energy Partners and El Paso Corporation entered
into a letter of intent regarding the proposed acquisition by El Paso Energy
Partners of a package of midstream energy assets, referred to as the San Juan
assets, from El Paso Corporation for approximately $782 million, subject to
adjustments. The San Juan assets include:
- substantially all of El Paso Corporation's natural gas gathering,
processing and treating assets in the San Juan Basin of New
Mexico--specifically, its 5,300-mile San Juan Basin gathering system,
including the associated compression, processing and treating facilities
and contracts, and the remaining interest in the Chaco cryogenic natural
gas processing plant not already owned by El Paso Energy Partners;
- a 35-mile, 20-inch natural gas pipeline and a 16-mile, 12-inch oil
pipeline originating on the Chevron/BHP "Typhoon" platform in the Green
Canyon area of the Gulf of Mexico; and
- over 570 miles of NGL pipelines and a related fractionation facility in
South Texas.
The acquisition is expected to be consummated simultaneously with the completion
of this offering, and this offering is contingent upon the consummation of the
acquisition. We will use substantially all of the net proceeds of this offering
to purchase i-units from El Paso Energy Partners, and El Paso Energy Partners
will use the proceeds from that purchase of i-units to, among other things,
finance its acquisition of the San Juan assets and fund general business
requirements, including repaying indebtedness under its revolving credit
facility. The San Juan assets generated approximately $114 million of pro forma
earnings before interest, taxes, depreciation and amortization, or EBITDA,
during the year ended December 31, 2001, as adjusted to reflect the San Juan
asset acquisition.
El Paso Energy Partners approved a quarterly distribution of $0.675 ($2.70
annualized) per common unit payable in November 2002. This represented the third
increase to the distribution rate announced this year. During 2002, El Paso
Energy Partners has declared or approved the following quarterly distributions:
<Table>
<Caption>
QUARTERLY INCREASE
PAYMENT DISTRIBUTION OVER PRIOR
DATE AMOUNT QUARTER
------- ------------- ----------
November......................................... $0.6750 $ 0.0250
August 15........................................ $0.6500 --
May 15........................................... $0.6500 $ 0.0250
February 15...................................... $0.6250 $ 0.0125
</Table>
EL PASO ENERGY PARTNERS' UNIQUE SPONSORSHIP
El Paso Energy Partners continues to benefit from the unique corporate
sponsorship it receives from El Paso Corporation, the indirect parent of El Paso
Energy Partners Company, the general partner of El Paso Energy Partners. El Paso
Corporation, a Delaware corporation with its stock traded on the NYSE under the
symbol "EP," is a global energy company with operations that extend from energy
production and extraction to power generation, with total assets of $49 billion
at March 31, 2002. El Paso Corporation's principal operations include:
- natural gas transportation, gathering, processing and storage;
- natural gas and oil exploration, development and production;
- energy and energy-related commodities and products marketing;
- power generation;
- energy infrastructure facility development and operation;
2
- petroleum refining; and
- chemicals production.
El Paso Corporation has designated its investment in El Paso Energy
Partners as its primary vehicle for growth and development of its midstream
energy business. Through its subsidiaries, El Paso Corporation owns
approximately 26.5%, or 11,674,245, of El Paso Energy Partners' common units and
its 1% general partner interest. Additionally, El Paso Corporation, through a
subsidiary, owns all 125,392 of El Paso Energy Partners' outstanding Series B
preference units. As of March 31, 2002, the liquidation value of the Series B
preference units was approximately $146 million. El Paso Corporation will
purchase 5,300,000 shares in this offering (up to 6,095,000 if the underwriters
exercise all or a portion of their over-allotment option).
OBJECTIVE AND STRATEGY
El Paso Energy Partners' objective is to operate as a growth-oriented MLP
with a focus on increasing cash flow, earnings and return to its unitholders by
becoming one of the industry's leading providers of midstream energy services.
Its strategy is to maintain and grow a diversified, balanced base of
strategically located and efficiently operated midstream energy assets with
stable and long-term cash flows. Upon completion of its acquisition of the San
Juan assets, El Paso Energy Partners will be the largest natural gas gatherer,
based on miles of pipeline, in Texas and the San Juan Basin (which covers the
four contiguous corners of New Mexico, Arizona, Colorado and Utah), which
collectively accounted for approximately 35% of domestic natural gas production
in 2001. El Paso Energy Partners is also one of the largest natural gas
gatherers in the Gulf of Mexico, which accounted for approximately 27% of
domestic natural gas production during 2001.
These regions, especially the deeper water regions of the Gulf of
Mexico -- one of the United States' fastest growing natural gas producing
regions -- offer El Paso Energy Partners significant infrastructure growth
potential through the acquisition and construction of pipelines, platforms,
processing and storage facilities and other infrastructure.
El Paso Energy Partners' strategy entails continually enhancing the quality
of its cash flow by emphasizing operations and services for which the fees are
not traditionally linked to commodity prices, like gathering, transportation and
storage; shifting commodity price risks by using contractual arrangements, like
fixed-fee contracts and hedging and tolling arrangements; and exiting the oil
and gas production business by not acquiring additional properties. El Paso
Energy Partners' offshore gathering and transportation arrangements tend to have
longer terms, which often last for the productive life of the producing
property, and its onshore gathering, transportation, processing and
fractionating arrangements tend to have multiple-year terms.
El Paso Energy Partners intends to execute its business strategy by:
- purchasing and constructing onshore pipelines; gathering systems;
storage, processing and fractionation facilities; and other midstream
assets to provide a broad range of more stable, fee-based services to
producers, marketers and users of energy products;
- expanding its existing asset base, supported by the dedication of new
discoveries and long-term commitments, to capitalize on the accelerated
growth of oil and natural gas supplies from the deeper water regions of
the Gulf of Mexico;
- operating at a low cost by achieving economies of scale in select regions
through reinvesting in and expanding its organic growth opportunities, as
well as by acquiring new assets; and
- continuing to strengthen its solid balance sheet by seeking to finance
its growth with 50% equity so as to provide the financial flexibility to
fund future opportunities.
3
BUSINESS SEGMENTS
El Paso Energy Partners' business and operations cover four primary
business segments. This section of the prospectus summary, including the
following chart, depicts El Paso Energy Partners' business segments after
completion of the San Juan assets acquisition.
(CHART)
<Table>
<Caption>
OWNERSHIP
- - EPGT Texas
Intrastate 100.0%
- - Waha Gathering
System and Treating
Plant 100.0%
- - El Paso Intrastate
Alabama 100.0%
- - Carlsbad Gathering
System 100.0%
- - Channel Pipeline
System 50.0%
- - HIOS 100.0%
- - TPC Offshore System 100.0%
- - Viosca Knoll 100.0%
- - East Breaks 100.0%
- - Chaco Plant 100.0%
- - Indian Basin
Processing Plant 42.3%
San Juan Assets:
- - San Juan Gathering
System 100.0%
- - Typhoon Natural Gas
Pipeline 100.0%
- - Coyote Treating
Facility 50.0%
- - Rattlesnake
Treating Facility 100.0%
</Table>
<Table>
<Caption>
OWNERSHIP
- - Shoup Fractionator 100.0%
- - Armstrong
Fractionator 100.0%
- - Delmita
Fractionator 100.0%
- - Thompsonville
Lateral 100.0%
- - Shilling Lateral 100.0%
- - SACC Mainline 100.0%
- - South Texas
Pipeline 100.0%
- - Allegheny Pipeline 100.0%
- - Poseidon Pipeline 36.0%
- - Hattiesburg Propane
Storage 100.0%
- - Anse La Butte
Storage 100.0%
San Juan Assets:
- - Almeda Fractionator 100.0%
- - Typhoon Oil
Pipeline 100.0%
- - Texas NGL
Pipelines 100.0%
</Table>
<Table>
<Caption>
OWNERSHIP
- - East Cameron 373 100.0%
- - Ship Shoal 331 100.0%
- - Viosca Knoll 817 100.0%
- - Ship Shoal 332 50.0%
- - Garden Banks 72 50.0%
</Table>
<Table>
<Caption>
OWNERSHIP
- - Hattiesburg 100.0%
- - Petal 100.0%
- - Wilson(1) 100.0%
</Table>
<Table>
<Caption>
OWNERSHIP
- - Viosca Knoll Block
817 100.0%
- - Garden Banks Block
72 50.0%
- - Garden Banks Block
117 50.0%
- - West Delta Block 35 38.8%
- - Garden Banks Block
73 2.5%(2)
</Table>
- ---------------
(1) El Paso Energy Partners has the exclusive right to use the Wilson natural
gas storage facility under an operating lease that expires in January 2008.
(2) Overriding royalty interest.
4
NATURAL GAS PIPELINES AND PLANTS
El Paso Energy Partners owns interests in natural gas pipeline systems
extending over 16,900 miles with a combined maximum design capacity (net to its
interest) of over 10.3 billion cubic feet per day, or Bcf/d, of natural gas. El
Paso Energy Partners owns or has interests in gathering and transportation
systems onshore in Texas, New Mexico, Alabama and Colorado, including the EPGT
system, the largest intrastate pipeline system in Texas based on miles of pipe,
and the San Juan gathering system, which includes 5,300 miles of pipeline
currently gathering over 1.1 Bcf/d of natural gas. In addition, El Paso Energy
Partners has interests in offshore natural gas pipeline systems, which are
strategically located to serve production activities in some of the most active
drilling and development regions in the Gulf of Mexico, including select
locations offshore of Texas, Louisiana and Mississippi, and to provide
relatively low cost access to long-line transmission pipelines that access
multiple markets in the eastern half of the United States.
El Paso Energy Partners also owns interests in three processing and
treating plants in New Mexico, with a combined maximum capacity of over 1.2
Bcf/d of natural gas and 50 thousand barrels per day, or MBbls/d, of NGLs,
including the Chaco cryogenic natural gas processing plant, the third largest
natural gas processing plant in the United States measured by liquids produced.
OIL AND NGL LOGISTICS
El Paso Energy Partners owns interests in three offshore oil pipeline
systems which extend over 340 miles and have a combined maximum capacity of 580
MBbls/d of oil with the addition of pumps and the use of friction reducers. In
addition to being strategically located in the vicinity of some prolific oil
producing regions of the Gulf of Mexico, these oil pipeline systems are parallel
to, and interconnect with, key segments of some of El Paso Energy Partners'
natural gas pipeline systems and offshore platforms, which contain separation
and handling facilities. This distinguishes El Paso Energy Partners from its
competitors by allowing it to provide some producing properties with a unique
single point of contact through which the producers may access a wide range of
midstream services and assets.
El Paso Energy Partners also owns NGL transportation, fractionation and
storage assets. Its four fractionation plants, located in Texas, have a combined
capacity of approximately 120 MBbls/d. El Paso Energy Partners also owns or has
interests in more than 1,100 miles of intrastate NGL pipelines in Texas and NGL
storage facilities in Louisiana, Texas and Mississippi with combined capacity of
20.1 million barrels, or MMBbls.
PLATFORM SERVICES
El Paso Energy Partners has interests in five multi-purpose offshore hub
platforms in the Gulf of Mexico. These platforms were specifically designed to
be used as deepwater hubs and production handling and pipeline maintenance
facilities. These platforms allow El Paso Energy Partners to provide a variety
of midstream services, such as gas separation and handling, to increase
deliverability and attract new volumes into its offshore pipeline systems.
NATURAL GAS STORAGE
El Paso Energy Partners owns the Petal and Hattiesburg salt dome natural
gas storage facilities located in Mississippi, which are strategically situated
to serve the Northeast, Mid-Atlantic and Southeast natural gas markets. These
facilities have a combined current working capacity of 12.65 Bcf and are capable
of delivering in excess of 1.2 Bcf/d of natural gas into five interstate
pipeline systems: Transcontinental Gas Pipeline Company (Transco), Tennessee Gas
Pipeline, Gulf South Pipeline, Destin Pipeline and Southern Natural Gas
Pipeline. Each of these facilities is capable of making deliveries at the high
rates necessary to satisfy peaking requirements in the electric generation
industry.
5
In April 2002, El Paso Energy Partners acquired a leased interest in the
Wilson natural gas storage facility located in Wharton County, Texas, which has
a working capacity of 7.0 Bcf. This lease expires in January 2008.
OTHER
Currently, El Paso Energy Partners owns interests in five oil and natural
gas properties in waters offshore Louisiana. Production is gathered, transported
and processed through El Paso Energy Partners' pipeline systems and platform
facilities and is sold to various third parties and subsidiaries of El Paso
Corporation. El Paso Energy Partners intends to continue to concentrate on
fee-based operations that traditionally provide more stable cash flow and
de-emphasize its commodity-based activities, including its oil and natural gas
producing operations.
KEY STRENGTHS
STABLE CASH FLOW PRIMARILY DRIVEN BY FEE-BASED REVENUES. Including the San
Juan assets, El Paso Energy Partners' EBITDA is primarily derived from
gathering, transportation, storage and other fee-based services, the fees for
most of which are not directly affected by changes in energy commodity prices.
SUPERIOR PLATFORM FOR CONTINUED EXPANSION. El Paso Energy Partners has an
expansive portfolio of organic development opportunities for onshore and
offshore announced projects totaling over $800 million and the expertise to
continue to execute strategic transactions, as evidenced by the more than $2
billion of construction projects and accretive (in terms of cash flow per unit)
acquisitions announced over the last 12 months.
DIVERSIFIED PORTFOLIO OF ATTRACTIVE, STRATEGICALLY LOCATED ASSETS. El Paso
Energy Partners owns a diversified portfolio of strategically located midstream
assets well positioned to capture growth in some of the largest natural gas
producing basins in the United States.
PROVEN TRACK RECORD OF CASH FLOW DIVERSIFICATION AND LEVERAGE REDUCTION.
Since 1998, El Paso Energy Partners has diversified and balanced its asset base
in terms of services, businesses, customers and geography by making
approximately $3 billion in capital expenditures (including the San Juan assets
acquisition), while reducing its financial leverage and increasing its financial
flexibility.
STEADY GROWTH IN ADJUSTED EBITDA AND QUARTERLY DISTRIBUTIONS. From 1998 to
2001, El Paso Energy Partners' adjusted EBITDA increased at a compound annual
growth rate of 45.6%. As a result, El Paso Energy Partners has increased its
quarterly distribution rate seven times since 1998, including three increases
announced in 2002.
STRONG SPONSORSHIP. El Paso Corporation has designated its investment in
El Paso Energy Partners as its primary vehicle for growth and development of its
midstream energy business.
RECENT DEVELOPMENTS
COMPLETED ACQUISITIONS
In accordance with its business strategy, El Paso Energy Partners has
entered into transactions that have further diversified and grown its midstream
asset base and expanded its sources of cash flow over the past several months.
For example, in April 2002, EPN Holding Company, L.P., a wholly-owned subsidiary
of El Paso Energy Partners, acquired from El Paso Corporation midstream energy
assets located in New Mexico and Texas for net consideration of $735 million.
The acquired assets, which are referred to as the EPN Holding assets, include:
- interests in four intrastate natural gas gathering systems, including the
EPGT Texas intrastate pipeline system, the largest intrastate pipeline
system in Texas based on miles of pipe;
- a non-operating interest in a natural gas processing and treating
facility; and
- a leased interest in a natural gas storage facility.
The EPN Holding assets generated approximately $84.5 million of EBITDA for
the year ended December 31, 2001.
6
PROJECTS UNDER DEVELOPMENT
El Paso Energy Partners also expects to continue to experience organic
growth in 2002 and beyond by constructing and operating strategic midstream
infrastructure assets onshore and offshore, including the following projects:
- a $99 million, 60-mile takeaway pipeline, including a 9,000-horsepower
compression station, connected to the Petal facility with design capacity
of 1.25 Bcf/d (currently FERC-certified to 700 million cubic feet per
day, or MMcf/d), completed in June 2002;
- a $58 million, 5.4 Bcf expansion of the Petal natural gas storage
facility, including a withdrawal facility and a 20,000 horsepower
compression station, located near Hattiesburg, Mississippi, completed in
June 2002;
- the $28 million, 37-mile Medusa natural gas pipeline extension of El Paso
Energy Partners' Viosca Knoll gathering system, expected to be in service
in the first quarter of 2003;
- the $53 million Falcon Nest fixed-leg platform, expected to be in service
during the first quarter of 2003;
- the $206 million Marco Polo tension leg platform, or TLP, expected to be
in service in 2004;
- the $96 million Marco Polo oil and gas pipelines, expected to be in
service in 2004; and
- the $450 million, 380-mile Cameron Highway Oil Pipeline, expected to be
in service by the third quarter of 2004.
RECENT FINANCINGS
During 2002, El Paso Energy Partners has executed several financings
intended to facilitate growth and help achieve its targeted capital structure,
including:
- raising approximately $149 million in net proceeds through the issuance
of 4,083,938 common units in April;
- raising approximately $230 million in net proceeds in a private offering
of long-term debt securities in May;
- entering into the $560 million EPN Holding acquisition and working
capital facility, of which $375 million has been repaid to date; and
- repaying a $95 million limited recourse term loan used to construct its
Prince TLP, which El Paso Energy Partners sold to El Paso Corporation in
connection with its April 2002 EPN Holding acquisition.
OFFICES
Our principal executive offices, and the principal executive offices of El
Paso Energy Partners, are located at the El Paso Building, 1001 Louisiana
Street, Houston, Texas 77002, and the phone number at this address is (713)
420-2600.
7
SUMMARY OF RISK FACTORS
You should be aware that there are various risks relating to an investment
in our shares. For more information about these risks, see "Risk Factors." You
should carefully consider these risk factors together with all of the other
information included in this prospectus before you invest in our shares.
RISKS RELATED TO OUR SHARES, THE I-UNITS AND EL PASO ENERGY MANAGEMENT
- An active trading market for our shares may not develop, and even if such
a market does develop, the market price of our shares may be less than
the price you paid for your shares in the offering and less than the
market price of the common units of El Paso Energy Partners.
- The value of the additional fractional share that you will receive per
share as a quarterly distribution may be less than the quarterly
distribution of cash that El Paso Energy Partners common unitholders will
receive per common unit.
- If El Paso Energy Partners were treated as a corporation for U.S. federal
income tax purposes, the value of our shares would be substantially
reduced, and the owner of our voting shares would have the right to merge
us into El Paso Energy Partners.
- El Paso Energy Partners may issue additional common or other classes of
units, and we may issue additional shares, which would dilute your
ownership interest.
- Because our only assets will be i-units of El Paso Energy Partners, our
financial condition and results of operations will depend upon the
performance of El Paso Energy Partners.
- Your shares are subject to purchase provisions that could result in your
having to sell your shares at a time or price that you do not like.
- The terms of our shares may be changed in ways you may not like, because
our board of directors will have the power to change the terms of our
shares in ways that our board determines, in its sole discretion, are not
materially adverse to you.
- If we are not fully reimbursed or indemnified for obligations and
liabilities we incur in managing the business and affairs of El Paso
Energy Partners, we may be unable to pay those liabilities and the value
of our shares could decline.
- If in the future we cease to manage the business and affairs of El Paso
Energy Partners, we may be deemed to be an "investment company" for
purposes of the Investment Company Act of 1940.
- If a person or group, other than El Paso Corporation and its affiliates,
owns 20% or more of the aggregate number of issued and outstanding El
Paso Energy Partners common units and our shares, that person or group
may not vote its shares; as a result, you are less likely to receive a
premium for your shares in a change of control situation.
- The shares you own are not entitled to vote to elect our directors, and,
therefore, you will have little or no opportunity to influence or change
our management.
- Unless all accretions occurring after September 2010 on El Paso Energy
Partners' then outstanding Series B preference units have been paid or
the Series B preference units have been redeemed, beginning in October
2010, El Paso Energy Partners will not be permitted to make distributions
to holders of its common units or increase the number of i-units we own
and, therefore, the number of shares then held by you will not increase.
RISKS RELATED TO EL PASO ENERGY PARTNERS' BUSINESS
- El Paso Energy Partners' indebtedness could adversely restrict its
ability to operate, affect its financial condition and prevent it from
making distributions to unitholders.
- El Paso Energy Partners may not be able to fully execute its growth
strategy if it encounters tight capital markets or increased competition
for qualified assets.
8
- El Paso Energy Partners' growth strategy may adversely affect its results
of operations if it does not successfully integrate the businesses that
it acquires or if it substantially increases its indebtedness and
contingent liabilities to make acquisitions.
- El Paso Energy Partners' actual acquisition, construction and development
costs could exceed its forecast, and its cash flow from these projects
may not be immediate.
- Federal Energy Regulatory Commission, or FERC, regulation and a changing
regulatory environment could affect El Paso Energy Partners' assets and
cash flow.
- Environmental costs and liabilities and changing environmental regulation
could affect El Paso Energy Partners' assets and cash flow.
- A natural disaster, catastrophe or other interruption event involving El
Paso Energy Partners could result in severe personal injury, property
damage and environmental damage, which could curtail El Paso Energy
Partners' operations and otherwise adversely affect its assets and cash
flow.
- The future performance of El Paso Energy Partners' midstream energy
infrastructure operations, and thus its ability to satisfy its debt
requirements and maintain cash distributions, depends on successful
exploration and development of additional oil and natural gas reserves by
others.
- El Paso Energy Partners' storage businesses depend on unaffiliated
pipelines to transport natural gas.
- El Paso Energy Partners will face competition from third parties to
gather, transport, process, fractionate, store or otherwise handle oil,
natural gas and other petroleum products.
- Fluctuations in energy commodity prices could adversely affect El Paso
Energy Partners' business.
- Fluctuations in interest rates could adversely affect El Paso Energy
Partners' business.
- El Paso Energy Partners' use of derivative financial instruments could
result in financial losses.
- The interruption of distributions to El Paso Energy Partners from its
subsidiaries and joint ventures may affect its ability to make cash
distributions to its unitholders.
- El Paso Energy Partners cannot cause its joint ventures to take or not to
take certain actions unless some or all of its joint venture participants
agree.
- El Paso Energy Partners does not have the same flexibility as other types
of organizations to accumulate cash and equity to protect against
illiquidity in the future.
- Changes of control of El Paso Energy Partners' general partner may
adversely affect you.
- El Paso Energy Partners will be materially and adversely affected if it
cannot negotiate an extension or a replacement on commercially reasonable
terms of approximately 900 miles of rights-of-way underlying the San Juan
gathering system.
- El Paso Energy Partners will be materially and adversely affected if it
cannot negotiate an extension or a replacement on commercially reasonable
terms of three material contracts which account for approximately 70% of
the volume attributable to the San Juan gathering system and which expire
between 2006 and 2008.
- Arthur Andersen LLP, the public accountants that audited the 2000
financial statements of El Paso Energy Partners' 36%-owned joint venture
Poseidon Oil Pipeline Company, L.L.C., has been convicted of a felony and
has not consented to our use of their opinion, which may adversely affect
the ability of Arthur Andersen LLP to satisfy any claims that may arise
out of Arthur Andersen LLP's audit of Poseidon's financial statements.
9
RISKS INHERENT IN OUR INVESTMENT IN I-UNITS
- El Paso Energy Partners' general partner has anti-dilution rights.
- We may not have limited liability in certain circumstances, including
potentially having liability for the return of wrongful distributions.
RISKS RELATED TO CONFLICTS OF INTEREST AND LIMITATIONS OF FIDUCIARY DUTIES
- El Paso Corporation and its subsidiaries have conflicts of interest with
El Paso Energy Partners and, accordingly, you.
- The interests of El Paso Corporation may differ from our interests, your
interests, and the interests of El Paso Energy Partners' unitholders.
- Our limited liability company agreement restricts or eliminates a number
of the fiduciary duties that otherwise would be owed by our board of
directors to you.
- We may increase the cash reserves and expenditures of El Paso Energy
Partners, which would decrease cash distributions on its common units and
the value of distributions of additional shares we make to you.
- El Paso Energy Partners' partnership agreement purports to limit its
general partner's fiduciary duties and certain other obligations relating
to it.
10
ORGANIZATIONAL STRUCTURE
The following charts depict a simplified organizational structure of El
Paso Corporation and El Paso Energy Partners immediately prior to and following
the offering:
PRIOR TO THE OFFERING
(GRAPH)
- ---------------
(1) El Paso Corporation owns its common units and Series B preference units
indirectly, through wholly-owned indirect subsidiaries.
(2) El Paso Energy Partners Company is the sole general partner of El Paso
Energy Partners.
11
FOLLOWING THE OFFERING
[GRAPH]
OWNERSHIP OF EL PASO ENERGY PARTNERS AFTER THE OFFERING(3):
<Table>
i-units (entire class owned by us).......................... 30.9%
Common units owned by the public............................ 50.0%
Common units owned by El Paso Corporation................... 18.1%
General partner interest.................................... 1.0%
-----
Total..................................................... 100.0%
=====
</Table>
- ---------------
(1) El Paso Corporation owns its i-shares and common units indirectly, through
wholly-owned indirect subsidiaries.
(2) El Paso Energy Partners Company is the sole general partner of El Paso
Energy Partners.
(3) This presentation assumes that each i-unit and common unit represents an
equal interest in El Paso Energy Partners and that the Series B preference
units represent no ownership interest in El Paso Energy Partners.
Following this offering, subsidiaries of El Paso Corporation are expected
to own, collectively, 26.5% of El Paso Energy Partners through their ownership
of our shares and general and limited partner interests in El Paso Energy
Partners.
12
THE OFFERING
Shares offered................ 20,000,000 shares representing limited
liability company interests in El Paso Energy
Management; 23,000,000 shares if the
underwriters exercise their over-allotment in
full.
Shares offered to the
public........................ 14,700,000 shares representing limited
liability company interests in El Paso Energy
Management; 16,905,000 shares if the
underwriters exercise their over-allotment in
full.
Shares offered to El Paso
Corporation................. 5,300,000 shares representing limited liability
company interests in El Paso Energy Management;
6,095,000 shares if the underwriters exercise
their over-allotment in full.
Shares outstanding after this
offering...................... - 20,000,000 shares representing limited
liability company interests in us, which
includes 5,300,000 shares to be purchased by
El Paso Corporation; 23,000,000 shares if the
underwriters exercise their over-allotment
option in full, which includes 6,095,000
shares to be purchased by El Paso
Corporation; and
- our sole voting share owned by El Paso Energy
Partners Company.
Use of proceeds............... We will use all of the net proceeds of the
offering of our shares, expected to be
approximately $658 million based on the assumed
public offering price of $34.23 per share,
which was the closing price of the common units
on the NYSE on August 9, 2002, as follows:
- $0.5 million to compensate El Paso
Corporation for its tax indemnity
obligations; and
- the remainder to purchase a number of
i-units, a new class of limited partner
interests, from El Paso Energy Partners that
will equal the number of our shares,
including our voting share, that will be
outstanding immediately following this
offering.
El Paso Energy Partners will use the proceeds
it receives from the sale of i-units to us,
together with borrowings of $391 million under
its revolving credit facility and other sources
of debt financing, to fund its acquisition of
the San Juan assets from subsidiaries of El
Paso Corporation, estimated to cost
approximately $782 million. El Paso Energy
Partners will use the remaining $267 million to
fund general business requirements, including
temporarily repaying indebtedness under its
revolving credit facility.
Exchange listing.............. We intend to apply to list the shares being
sold in this offering on the NYSE under the
symbol " ."
13
OUR SHARES
El Paso Energy Management..... We are a Delaware limited liability company
recently formed to manage the business and
affairs of El Paso Energy Partners. Our shares
represent limited liability company interests
in us. We will own i-units in El Paso Energy
Partners and will, by agreement with El Paso
Energy Partners and its general partner, manage
the business and affairs of El Paso Energy
Partners.
U.S. federal income tax
matters associated with our
shares...................... Because we will be treated as a corporation for
U.S. federal income tax purposes, an owner of
our shares will not report on its U.S. federal
income tax return any of our items of income,
gain, loss and deduction. An owner of our
shares will not receive a Schedule K-1 and will
not be subject to state tax filings in the
various states in which El Paso Energy Partners
conducts business as a result of owning our
shares.
A tax-exempt investor's ownership or sale of
our shares will not generate income derived
from an unrelated trade or business regularly
carried on by the tax-exempt investor, which is
generally referred to as unrelated business
taxable income, or UBTI, unless its ownership
of our shares is debt financed by it.
The ownership or sale of our shares by a
regulated investment company or a mutual fund
will generate qualifying income to it.
Furthermore, the ownership of our shares by a
mutual fund will be treated as a qualifying
asset.
There will not be any withholding taxes imposed
on quarterly or other distributions of
additional shares to non-U.S. persons. In
addition, there generally will be no taxes or
withholding taxes imposed on gain from the sale
of our shares by a non-U.S. person, provided it
has owned no more than 5% of our shares and our
shares continue to be traded on a nationally
recognized securities exchange.
U.S. federal income tax
matters associated with
i-units...................... Although we will be subject to U.S. federal
income taxes on our taxable income, El Paso
Energy Partners will not allocate taxable
income or gain to the i-units we own until such
time as there is a liquidation of El Paso
Energy Partners or after El Paso Corporation
has acquired all of our shares and we have
become a wholly owned subsidiary of El Paso
Corporation. Therefore, until a liquidation of
El Paso Energy Partners, we do not anticipate
that we generally will have taxable income
resulting from our ownership of the i-units. In
the event that we do have taxable income, El
Paso Corporation has agreed to indemnify us to
the extent the related tax liability exceeds
the cash we receive relating to that income.
Distributions................. We will make distributions on our shares only
in additional shares or fractions of shares
except upon our liquidation. The fraction of an
additional share distributed each quarter
14
per share outstanding will be calculated by
dividing the per unit amount of the cash
distribution paid by El Paso Energy Partners on
its common units for that quarter by the
average market price of one of our shares as
determined for a ten-trading day period ending
on the trading day immediately prior to the
ex-dividend date for our shares.
Our covenants................. Our limited liability company agreement
provides that our activities will be limited to
owning i-units and managing the business and
affairs of El Paso Energy Partners. It also
requires that our issuance of classes of
shares, other than the class of shares being
sold in this offering and the class of voting
shares currently owned by El Paso Energy
Partners Company, be approved by the owners of
our outstanding shares and further includes
covenants that prohibit us from:
- borrowing money or issuing debt;
- selling, pledging or otherwise transferring
any i-units;
- issuing options, warrants or other securities
entitling the holder to purchase our shares;
- purchasing any of our shares, including
voting shares; or
- liquidating, merging or recapitalizing.
These provisions can be amended or waived by
the owners of our shares as described under
"-- Voting rights" below.
Covenants of El Paso
Corporation.................. Under our limited liability company agreement,
except as provided below, El Paso Corporation
has agreed that neither it nor any of its
affiliates will take any action that would
result in El Paso Corporation and its
affiliates ceasing to be the beneficial owners
of more than 50% of the total voting power of
the general partner of El Paso Energy Partners,
unless:
- prior to taking such action it has notified
us and El Paso Energy Partners that, upon the
occurrence of such action, El Paso
Corporation will acquire all of our shares as
more fully described under "-- Purchase
events -- Special purchase events" below; or
- following the occurrence of such action
another person will become the beneficial
owner of more than 50% of the total voting
power of the general partner of El Paso
Energy Partners, and such person:
-- is organized under the laws of a state in
the United States;
-- has long term unsecured debt with an
investment grade credit rating, as
determined by Moody's and Standard &
Poor's, immediately prior to the closing
of the transaction; and
-- assumes all of El Paso Corporation's
obligations under the purchase provisions
of our limited liability
15
company agreement and under the tax
indemnity agreement.
El Paso Energy Partners Company has granted a
lien on the general partnership interest to
collateralize El Paso Energy Partners' $600
million revolving credit facility, which
matures in May 2004. Any change in beneficial
ownership resulting from that lien would not be
a violation of such covenant. See "Covenants."
This covenant can be amended or waived by the
owners of our shares as described under
"-- Voting rights" below.
Covenants of El Paso Energy
Partners...................... Upon the closing of this offering, the El Paso
Energy Partners partnership agreement will be
amended to provide that El Paso Energy Partners
will not:
- issue any of its i-units to any person other
than us;
- except in liquidation, make a distribution on
an i-unit other than in additional i-units or
a security that has in all material respects
the same rights and privileges as the
i-units;
- make a distribution on a common unit other
than in cash, additional common units or a
security that has in all material respects
the same rights and privileges as the common
units;
- make a tender offer for common units, unless
the consideration payable in such tender
offer:
-- is exclusively cash; and
-- together with any cash payable in respect
of any tender offer by El Paso Energy
Partners for the common units concluded
within the preceding 360 days and the
aggregate amount of any cash distributions
to all owners of common units made within
the preceding 360-day period is less than
12% of the aggregate average market value
of all classes of units of El Paso Energy
Partners determined on the trading day
immediately preceding the commencement of
the tender offer;
- allow an owner of common units to receive any
consideration other than cash, common units
or a security that has in all material
respects the same rights and privileges as
the common units, or allow us, as the owner
of the i-units, to receive any consideration
other than additional i-units or a security
that has in all material respects the same
rights and privileges as the i-units, in
either case, in a:
-- merger transaction, if the unitholders of
El Paso Energy Partners immediately prior
to the transaction own more than 50% of
the common equity securities of the
survivor immediately after the
transaction; or
-- recapitalization, reorganization or
similar transaction;
16
- be a party to a merger, sell all or
substantially all of its assets to another
person, or enter into similar transactions,
if:
-- the survivor of the merger or the other
person is to be controlled by El Paso
Corporation or its affiliates after the
transaction; and
-- the transaction would result in the
occurrence of a special purchase event
described under "-- Purchase
events -- Special purchase events" below;
or
- take any action that would result in the
occurrence of either of the events described
in (1) or (2) under "-- Purchase
events -- Special purchase events" below:
These covenants can be amended or waived by the
owners of the i-units as described under
"-- Voting rights" below.
Purchase events
Special purchase events..... El Paso Energy Partners has agreed that it will
not take any action that would result in the
occurrence of either of the events described in
(1) or (2) below and El Paso Corporation has
agreed that it will not take any action that
would result in the occurrence of the event
described in (3) below unless prior to the
occurrence of any such event, El Paso
Corporation has notified us and El Paso Energy
Partners that upon the occurrence of such event
El Paso Corporation will purchase all of our
outstanding shares. These events, which we
refer to as "special purchase events," include:
(1) aggregate distributions or other payments
by El Paso Energy Partners on each common
unit, other than in common units or in
securities that have in all material
respects the same rights and privileges as
common units but including pursuant to an
issuer tender offer by El Paso Energy
Partners, during a 360-day period exceeding
50% of the average market price of a common
unit for the ten trading days ending on the
trading day immediately prior to the
beginning of that 360-day period;
(2) the merger of El Paso Energy Partners with
another entity where El Paso Energy
Partners is not the surviving entity, or
the sale of all or substantially all of El
Paso Energy Partners' assets, unless in the
transaction:
- the only consideration that we receive
in exchange for our i-units is a
security that has in all material
respects the same rights and privileges
as the i-units; and
- the only consideration that the owners
of common units receive in exchange for
their common units is a security that
has in all material respects the same
rights and privileges as the common
units and/or
17
cash, and the amount of cash received per
common unit does not exceed 33 1/3% of
the average market price of a common unit
for the ten-trading day period ending on
the trading day immediately prior to the
date of execution of the definitive
agreement for the transaction; and
(3) El Paso Corporation or its affiliates
taking any action that would result in El
Paso Corporation and its affiliates ceasing
to be the beneficial owners of more than
50% of the total voting power of the
general partner of El Paso Energy Partners,
unless, following the occurrence of that
action, another person will become the
beneficial owner of more than 50% of the
total voting power of the general partner
of El Paso Energy Partners, and that
person:
- is organized under the laws of a state
in the United States;
- has long term unsecured debt with an
investment grade credit rating (as
determined by Moody's and Standard &
Poor's) immediately prior to the closing
of the transaction; and
- assumes all of El Paso Corporation's
obligations, and acquires El Paso
Corporation's rights, under the purchase
provisions of our limited liability
company agreement and the tax
indemnification agreement.
If El Paso Corporation elects to purchase our
shares upon the occurrence of a special
purchase event, the purchase price for our
shares will be equal to the higher of the
average market price of the shares and the
common units as determined for a ten-trading
day period ending on the trading day
immediately prior to the date of the applicable
event.
For purposes of the purchase provisions, which
are part of our limited liability company
agreement, El Paso Corporation will be deemed
to include El Paso Corporation, its successors
by merger, and any entity that succeeds to El
Paso Corporation's rights and obligations under
the purchase provisions and the tax indemnity
agreement in connection with an acquisition of
all or substantially all of the assets of El
Paso Corporation.
Optional purchase........... In addition to its right to purchase our shares
upon the occurrence of a special purchase
event, El Paso Corporation has the right, which
it may assign to any of its affiliates, to
purchase all, but not less than all, of our
shares not owned by it or its affiliates in two
circumstances:
(1) when El Paso Corporation and its affiliates
own 80% or more of our shares; and
(2) when El Paso Corporation and its affiliates
own a number of our shares and common units
that equals
18
85% or more of our shares and the common
units on a combined basis; provided,
however, that in this second circumstance,
the general partner of El Paso Energy
Partners must also elect to purchase all of
the common units not owned by El Paso
Corporation or its affiliates.
In these two circumstances, the purchase price
per share is calculated differently. If
circumstance (1) above exists and El Paso
Corporation elects to purchase our shares, the
purchase price per share will equal 110% of the
higher of:
- the average closing price for our shares for
the ten consecutive trading days ending on
the fifth trading day prior to the date on
which the notice of the purchase is given;
and
- the highest price El Paso Corporation or any
of its affiliates paid for our shares during
the 90 days prior to the date on which the
notice of purchase is given.
If circumstance (2) above exists and El Paso
Corporation and its affiliates elect to
purchase both our shares and the common units,
the purchase price per share and the purchase
price per common unit will each equal the
higher of:
- the average closing price for our shares or
common units, whichever is higher, for the 20
consecutive trading days ending on the fifth
trading day prior to the date on which the
notice of purchase is given; and
- the highest price El Paso Corporation or any
of its affiliates paid either for our shares
or common units during the 90 days prior to
the date on which the notice of purchase is
given.
El Paso Corporation and its affiliates
currently own approximately 26.5% of the common
units. Following this offering, El Paso
Corporation and its affiliates are expected to
own 26.5% of our shares and 26.5% of the common
units.
If El Paso Corporation purchases all of our
shares, we will be a wholly owned subsidiary of
El Paso Corporation and the allocations of
income and distributions with respect to the i-
units will change.
Voting rights................. Owners of the class of shares being sold in
this offering will have no right to elect our
directors. El Paso Energy Partners Company owns
all of the shares of the class of shares that
elects our directors, which we refer to as
"voting shares." Owners of the class of shares
issued in this offering, other than El Paso
Energy Partners Company and its affiliates, may
vote on the following matters:
- amendments to our limited liability company
agreement (including the purchase
provisions), the El Paso Corporation tax
indemnification agreement and the delegation
agreement, but only if the amendment would
have a material adverse effect on us or the
owners of our
19
shares, as determined in the sole discretion
of our board of directors, or would reduce
the time for any notice to which the owners
of our shares are entitled;
- an amendment or waiver of El Paso
Corporation's covenant regarding its
continued ownership of more than 50% of the
total voting power of the general partner of
El Paso Energy Partners;
- an amendment or waiver of our covenants that
prohibit us from:
-- borrowing money or issuing debt;
-- selling, pledging or otherwise
transferring any i-units;
-- issuing options, warrants or other
securities entitling the holder to
purchase our shares;
-- purchasing our shares; or
-- liquidating, merging or recapitalizing;
- our issuance of classes of shares other than
shares of the class being sold in this
offering and the class of voting shares
currently owned by El Paso Energy Partners
Company; and
- our dissolution.
In addition, we will submit to a vote of the
owners of our shares, including our voting
shares, any matter submitted to us by El Paso
Energy Partners for a vote of the i-units. We
will vote our i-units in accordance with the
number of affirmative and negative votes cast
by the owners of our shares, including our
voting shares. In general, the i-units vote
together as a single class with the common
units on matters on which the common units
vote. Approval of any of the following matters
will require a separate class vote of the
i-units in addition to any other approvals
which may be required:
- amendments to the El Paso Energy Partners
partnership agreement that, in the sole
discretion of the general partner of El Paso
Energy Partners, would have a material
adverse effect on the i-units in relation to
other classes of units;
- amendments or waivers of the covenants in the
El Paso Energy Partners partnership agreement
described above under "-- Covenants of El
Paso Energy Partners" that are not permitted
to be made by the general partner of El Paso
Energy Partners alone;
- removal of the general partner of El Paso
Energy Partners and the election of a
successor general partner;
- the transfer by the general partner of El
Paso Energy Partners of its general partner
interest to a non-affiliated person and the
admission of that person as a general partner
of El Paso Energy Partners; and
- any proposed action that would cause El Paso
Energy Partners to be treated as a
corporation for U.S. federal income tax
purposes.
20
Except for votes in connection with actions
that would cause El Paso Energy Partners to be
treated as a corporation for U.S. federal
income tax purposes, El Paso Energy Partners
Company and its affiliates are not entitled to
vote any of the shares owned by them, on the
matters described above on which the i-units
vote as a separate class.
If a person or group owns 20% or more of the
aggregate number of issued and outstanding
number of common units and our shares, they
cannot vote the shares (but may vote the common
units) that they own on any matter. This
particular limitation does not apply to El Paso
Corporation and its affiliates. However, as
described above and as further described under
"Description of Our Shares -- Limited Voting
Rights," there are a number of circumstances in
which El Paso Corporation and its affiliates
are not entitled to vote the shares that they
own.
Anti-dilution adjustments..... Through the combined effect of the provisions
in the El Paso Energy Partners partnership
agreement and the provisions of our limited
liability company agreement, the number of our
outstanding shares, including voting shares,
and the number of i-units we own always will be
equal.
21
SUMMARY HISTORICAL FINANCIAL INFORMATION OF EL PASO ENERGY PARTNERS
You should read the following summary historical financial information of
El Paso Energy Partners in connection with the financial statements and related
notes incorporated by reference in this prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations". The financial
information as of and for the years ended December 31, 2001, 2000 and 1999, was
derived from El Paso Energy Partners' Current Report on Form 8-K/A dated July
19, 2002. The financial information as of and for the three months ended March
31, 2002 and 2001 was derived from El Paso Energy Partners' Quarterly Report on
Form 10-Q for the quarterly period ended March 31, 2002. The financial
information for the year ended December 31, 1998, was derived from the records
of El Paso Energy Partners. The historical results of El Paso Energy Partners
are not necessarily indicative of results to be expected in future periods.
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------
2002 2001 2001 2000 1999 1998
------- ------- -------- -------- ------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
OPERATING RESULTS DATA(1):
Operating revenues............. $61,544 $54,502 $193,406 $112,415 $63,659 $48,731
Operating expenses............. 26,598 28,487 84,821 42,621 22,402 27,558
Depreciation, depletion and
amortization................. 12,549 12,223 38,699 27,743 30,630 28,136
------- ------- -------- -------- ------- -------
Operating income (loss)........ 22,397 13,792 69,886 42,051 10,627 (6,963)
Other income................... 4,102 10,888 25,808 25,308 43,275 27,495
Interest and debt expense...... 11,758 10,923 41,542 46,820 35,323 20,242
Minority interest.............. -- 41 100 95 197 15
Income tax benefit............. -- -- -- (305) (435) (471)
------- ------- -------- -------- ------- -------
Income from continuing
operations(2)................ 14,741 13,716 54,052 20,749 18,817 746
Income (loss) from discontinued
operations................... 4,385 (743) 1,097 (252) -- --
------- ------- -------- -------- ------- -------
Net income..................... $19,126 $12,973 $ 55,149 $ 20,497 $18,817 $ 746
======= ======= ======== ======== ======= =======
Basic and diluted earnings
(loss) per unit(3)
Continuing operations........ $ 0.06 $ 0.14 $ 0.35 $ (0.02) $ 0.26 $ 0.02
Discontinued operations...... 0.11 (0.02) 0.03 (0.01) -- --
Cumulative effect of
accounting change......... -- -- -- -- (0.60) --
------- ------- -------- -------- ------- -------
Net income (loss)............ $ 0.17 $ 0.12 $ 0.38 $ (0.03) $ (0.34) $ 0.02
======= ======= ======== ======== ======= =======
Weighted average number of
units outstanding............ 39,941 32,471 34,376 29,077 25,928 24,367
======= ======= ======== ======== ======= =======
Distributions per common
unit......................... $0.6250 $0.5500 $ 2.31 $ 2.15 $ 2.10 $ 2.10
======= ======= ======== ======== ======= =======
Distributions per preference
unit(4)...................... $ -- $ -- $ -- $ 0.825 $ 1.10 $ 1.60
======= ======= ======== ======== ======= =======
</Table>
22
<Table>
<Caption>
AS OF AS OF DECEMBER 31,
MARCH 31, ---------------------
2002 2001 2000
------------ ---------- --------
(UNAUDITED)
(IN THOUSANDS)
FINANCIAL POSITION DATA(1):
Property, plant and equipment, net..................... $ 936,801 $ 917,867 $497,746
Total assets........................................... 1,492,190 1,357,270 869,471
Revolving credit facility.............................. 444,000 300,000 318,000
Limited recourse term loan, less current
maturities(5)........................................ 76,000 76,000 45,000
Long-term debt(6)...................................... 425,000 425,000 175,000
Partner's capital(7)................................... 487,267 500,726 311,071
</Table>
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ---------------------------------------
2002 2001 2001 2000 1999 1998
------- -------- -------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(8)......................... $39,048 $ 36,903 $140,949 $ 95,102 $84,532 $48,668
Adjusted EBITDA(9)................ 48,518 35,227 161,440 107,105 91,305 52,345
Capital expenditures including
investing activities............ 35,110 137,753 608,826 125,832 113,579 66,111
</Table>
- ---------------
(1) El Paso Energy Partners' operating results and financial position reflect
the acquisitions of:
- interest in the titleholder of, and other interests in, the Chaco plant,
and the remaining 50% interest El Paso Energy Partners did not already
own in Deepwater Holdings in October 2001;
- EPN Texas in February 2001;
- the Petal and Hattiesburg natural gas storage facilities in August 2000;
- El Paso Intrastate-Alabama in March 2000; and
- an additional 49% interest in Viosca Knoll in June 1999.
The acquisitions were accounted for as purchases and therefore operating
results of these acquired entities are included in El Paso Energy Partners'
results prospectively from the purchase date. In addition, El Paso Energy
Partners' operating results and financial position reflect the sale of El
Paso Energy Partners' and Deepwater Holdings' interests in several offshore
Gulf of Mexico assets in January and April 2001 as a result of a Federal
Trade Commission, or FTC, order related to El Paso Corporation's merger
with The Coastal Corporation.
(2) Includes, for the year ended December 31, 2001, approximately $25.4 million
related to the make whole payment from El Paso Corporation as additional
consideration related to El Paso Energy Partners' disposition of offshore
Gulf of Mexico assets in accordance with an FTC order related to El Paso
Corporation's merger with The Coastal Corporation.
(3) Net income (loss) per unit allocated to limited partners, net of allocations
made to El Paso Energy Partners' general partner and the Series B preference
units.
(4) Prior to October 2000, El Paso Energy Partners had publicly held preference
units outstanding, which were not of the same class as the Series B
preference units. In October 2000, all publicly held preference units were
converted into common units or redeemed.
(5) Relates to a limited recourse project finance loan to build the Prince TLP.
With the completion of the Prince TLP, El Paso Energy Partners converted the
project finance loan to a limited recourse term loan in December 2001. This
term loan was repaid in connection with El Paso Energy Partners' April 2002
disposition of the Prince TLP.
(6) Reflects the issuance of $250 million of 8 1/2% Senior Subordinated Notes in
May 2001.
23
(7) Reflects the issuance of:
- 5.6 million common units, including 1.5 million common units purchased by
a subsidiary of El Paso Corporation, in October 2001;
- 2.3 million common units in March 2001;
- $170 million Series B preference units to a subsidiary of El Paso
Corporation in August 2000; and
- 4.6 million common units in July 2000.
In addition, El Paso Energy Partners redeemed $50 million in liquidation
value of its Series B preference units in October 2001.
(8) EBITDA is defined for this purpose as net income before (1) depreciation,
depletion, and amortization, (2) asset impairment charges, (3) interest and
other financing costs, net of capitalized interest, and (4) minority
interests and income tax benefit. EBITDA is used as a supplemental financial
measurement in the evaluation of El Paso Energy Partners' business and
should not be considered as an alternative to net income as an indicator of
El Paso Energy Partners' operating performance or as an alternative to cash
flows from operating activities or other cash flow data calculated in
accordance with generally accepted accounting principles or as a measure of
liquidity. EBITDA is not defined under generally accepted accounting
principles and accordingly, it may not be a comparable measurement among
different companies.
(9) Adjusted EBITDA is defined for this purpose as EBITDA, less earnings from
unconsolidated affiliates, plus cash distributions from investments in
unconsolidated affiliates, and, as appropriate, other cash and non-cash
items. Historically, a significant portion of El Paso Energy Partners' cash
flow has come from distributions from unconsolidated joint ventures;
accordingly, El Paso Energy Partners believes Adjusted EBITDA provides
additional information which may be used to better understand El Paso Energy
Partners' operations. Adjusted EBITDA is used as a supplemental financial
measurement in the evaluation of El Paso Energy Partners' business and
should not be considered as an alternative to net income as an indicator of
El Paso Energy Partners' operating performance or as an alternative to cash
flows from operating activities as a measure of liquidity. Adjusted EBITDA
may not be a comparable measurement among different companies. The following
table provides a reconciliation from income before interest income taxes,
and other charges to Adjusted EBITDA.
24
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- ---------------------------------------
2002 2001 2001 2000 1999 1998
------- ------- -------- -------- ------- -------
(IN THOUSANDS)
(UNAUDITED)
ADJUSTED EBITDA
Income before interest,
income taxes and minority
interest................... $26,499 $24,680 $ 95,694 $ 67,359 $53,902 $20,532
Plus: Depreciation, depletion
and amortization........... 12,549 8,302 34,778 27,743 30,630 29,267
Cash distributions from
unconsolidated
affiliates.............. 4,500 6,922 35,062 33,960 46,180 31,171
Net cash payment received
from El Paso
Corporation............. 1,882 1,896 7,404 -- -- --
Discontinued operations of
Prince facilities....... 6,449 (183) 6,556 -- -- --
Insurance proceeds......... -- -- -- 5,000 -- --
Asset impairment........... -- 3,921 3,921 -- -- (1,131)
Loss on sale of Gulf of
Mexico assets........... -- 10,381 11,878 -- -- --
Less: Earnings (loss) from
unconsolidated
affiliates................. 3,361 (4,712) 8,449 22,931 32,814 26,724
Gain on sale of assets..... -- -- -- -- 10,103 311
Litigation resolution...... -- -- -- 2,250 (2,250) --
Non-cash earnings related
to future payments from
El Paso................. -- 25,404 25,404 -- -- --
Hedged items............... -- -- -- 1,619 (1,619) --
Other non-cash items....... -- -- -- 157 359 459
------- ------- -------- -------- ------- -------
Adjusted EBITDA.............. $48,518 $35,227 $161,440 $107,105 $91,305 $52,345
======= ======= ======== ======== ======= =======
</Table>
25
SUMMARY PRO FORMA FINANCIAL DATA OF EL PASO ENERGY PARTNERS
The following tables show summary pro forma financial information for El
Paso Energy Partners for the year ended December 31, 2001 and the three month
period ended March 31, 2002.
- The column labeled Pro Forma After 2001 Transactions gives effect to the
following as of January 1, 2001:
-- the exclusion of (1) the results of operations of Deepwater
Holdings, L.L.C.'s (a joint venture of El Paso Energy Partners)
interests in the Stingray and UTOS systems and the West Cameron
dehydration facility, which were sold in 2001; (2) the results of
operations of El Paso Energy Partners' interests in the Nautilus,
Manta Ray Offshore, Nemo, Green Canyon and Tarpon systems as well
as its interests in two offshore platforms, which were sold in
2001; and (3) losses on the dispositions described in (1) and (2)
above and income of $25.4 million El Paso Energy Partners
recognized from payments by El Paso Corporation as additional
consideration for those dispositions;
-- the $133 million acquisition in February 2001 of the South Texas
NGL transportation and fractionation assets from subsidiaries of
El Paso Corporation;
-- the acquisition in October 2001 of the remaining 50% equity
interest that El Paso Energy Partners did not own in Deepwater
Holdings for approximately $26 million of cash and $55 million of
assumed indebtedness; and
-- the acquisition in October 2001 of interests in the titleholder
of, and other interests in, the Chaco cryogenic natural gas
processing plant for approximately $198.5 million.
- The column labeled Pro Forma After EPN Holding Asset Acquisition gives
further effect to the following as of the beginning of the applicable
period presented or as of the balance sheet date:
-- the acquisition in April 2002 of the EPN Holding assets for net
consideration of $735 million consisting of (1) $420 million of
cash, which was financed through borrowings under the EPN Holding
term loan, (2) $119 million of assumed short-term indebtedness
payable to El Paso Corporation, which was repaid with borrowings
under the EPN Holding term loan, (3) $6 million of El Paso Energy
Partners' common units and (4) $190 million in sold assets,
comprised of El Paso Energy Partners' Prince TLP and its Prince
Field overriding royalty interest;
-- the repayment in April 2002 of the $95 million limited recourse
term loan related to the Prince TLP;
-- the issuance by El Paso Energy Partners of common units in April
2002 and the application of the approximately $149 million of net
proceeds to repay indebtedness outstanding under the EPN Holding
term loan;
-- the capital contribution by El Paso Energy Partners' general
partner of $0.6 million in April 2002 to maintain its 1% capital
account balance as a result of the issuance of additional common
units; and
-- the issuance by El Paso Energy Partners of 8 1/2% senior
subordinated notes in May 2002 and the application of net proceeds
of $225 million to repay a portion of the EPN Holding term loan
and $5 million to repay a portion of its credit facility.
- The column labeled Pro Forma After Proposed San Juan Assets Acquisition
further gives effect, as of the beginning of the applicable period
presented or as of the balance sheet date:
-- the expected acquisition of the San Juan assets for $782 million,
of which $391 million of the cash consideration is expected to be
from proceeds from the
26
sale of its i-units to us and $391 million of the cash consideration is expected
to be from proceeds from long-term debt financing; and
-- the capital contribution by El Paso Energy Partners' general
partner to maintain its 1% capital account balance as a result of
the issuance of additional common units.
- The column labeled Pro Forma as Adjusted further gives effect to:
-- the receipt by El Paso Energy Partners of an additional estimated
$267 million in proceeds from the expected sale of its i-units to
us, which assumes that we sell 20,000,000 shares at $34.23 per
share, net of the underwriting discount, expected expenses and
$0.5 million paid by us to El Paso Corporation for its tax
indemnity obligations, and the use by El Paso Energy Partners of
these additional proceeds to temporarily repay indebtedness under
its revolving credit facility and EPN Holding credit agreement;
and
-- the expected capital contribution by El Paso Energy Partners'
general partner of $2.7 million to maintain its 1% capital account
balance as a result of the expected additional issuance of the
i-units, and the use by El Paso Energy Partners of these
additional proceeds to temporarily repay indebtedness under its
revolving credit facility.
The summary pro forma financial information has been prepared using the
purchase method of accounting. The purchase price allocated in the summary pro
forma financial information is based on El Paso Energy Partners' estimate of the
fair market values of assets acquired and liabilities assumed. The summary pro
forma financial information includes assumptions and adjustments as described in
the notes to the pro forma combined financial statements from our Current Report
on Form 8-K dated August 12, 2002 incorporated by reference into this prospectus
and should be read in conjunction with the historical financial statements and
the related notes of El Paso Energy Partners incorporated by reference into this
prospectus.
The summary pro forma financial information may not be indicative of the
results that would have occurred if the transactions had been consummated as of
the beginning of the periods presented or that will be obtained in the future.
27
EL PASO ENERGY PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<Table>
<Caption>
PRO FORMA
AFTER
PRO FORMA PROPOSED
EL PASO PRO FORMA AFTER SAN JUAN
ENERGY AFTER EPN HOLDING ASSET
PARTNERS, L.P. 2001 ASSET ACQUISITION PRO FORMA
HISTORICAL TRANSACTIONS ACQUISITION TRANSACTIONS AS ADJUSTED
-------------- ------------ ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Operating revenues................... $193,406 $256,954 $601,643 $899,273 $899,273
Operating expenses
Cost of natural gas and oil........ 51,542 51,542 240,124 376,098 376,098
Operation and maintenance, net..... 33,279 55,944 122,559 172,686 172,686
Depreciation, depletion and
amortization..................... 34,778 51,038 81,383 119,948 119,948
Asset impairment charge............ 3,921 3,921 3,921 3,921 3,921
-------- -------- -------- -------- --------
123,520 162,445 447,987 672,653 672,653
-------- -------- -------- -------- --------
Operating income..................... 69,886 94,509 153,656 226,620 226,620
-------- -------- -------- -------- --------
Other income (loss)
Earnings from unconsolidated
affiliates....................... 8,449 18,374 18,374 20,551 20,551
Net loss on sale of assets......... (11,367) -- -- -- --
Other income (loss)................ 28,726 3,290 (1,736) (1,736) (1,736)
-------- -------- -------- -------- --------
25,808 21,664 16,638 18,815 18,815
-------- -------- -------- -------- --------
Income before interest, income taxes
and other charges.................. 95,694 116,173 170,294 245,435 245,435
-------- -------- -------- -------- --------
Interest and debt expense.......... 41,542 55,304 82,479 116,649 105,704
Minority interest.................. 100 100 100 100 100
Income tax benefit................. -- -- (24) (1) (1)
-------- -------- -------- -------- --------
41,642 55,404 82,555 116,748 105,803
-------- -------- -------- -------- --------
Net income from continuing
operations....................... 54,052 60,769 87,739 128,687 139,632
Income from discontinued operations.. 1,097 1,097 -- -- --
-------- -------- -------- -------- --------
Net income........................... $ 55,149 $ 61,866 $ 87,739 $128,687 $139,632
======== ======== ======== ======== ========
Income allocation
Series B unitholders............... $ 17,228 $ 17,228 $ 17,228 $ 17,228 $ 17,228
======== ======== ======== ======== ========
General Partner
Continuing operations............ $ 24,650 $ 24,717 $ 25,628 $ 40,850 $ 46,417
Discontinued operations.......... 11 11 -- -- --
-------- -------- -------- -------- --------
$ 24,661 $ 24,728 $ 25,628 $ 40,850 $ 46,417
======== ======== ======== ======== ========
Limited Partners
Continuing operations............ $ 12,174 $ 18,824 $ 44,883 $ 70,609 $ 75,987
Discontinued operations.......... 1,086 1,086 -- -- --
-------- -------- -------- -------- --------
$ 13,260 $ 19,910 $ 44,883 $ 70,609 $ 75,987
======== ======== ======== ======== ========
Basic and diluted earnings per unit
Continuing operations............ $ 0.35 $ 0.55 $ 1.30 $ 1.40 $ 1.30
Discontinued operations.......... 0.03 0.03 -- -- --
-------- -------- -------- -------- --------
$ 0.38 $ 0.58 $ 1.30 $ 1.40 $ 1.30
======== ======== ======== ======== ========
Weighted average number of units
outstanding........................ 34,376 34,376 34,535 50,523 58,619
======== ======== ======== ======== ========
</Table>
28
EL PASO ENERGY PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED AND COMBINED FINANCIAL DATA
STATEMENT OF OPERATIONS (FOR THE THREE MONTHS ENDED MARCH 31, 2002)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<Table>
<Caption>
PRO FORMA
AFTER
EL PASO PRO FORMA PROPOSED
ENERGY AFTER SAN JUAN
PARTNERS, EPN HOLDING ASSET
L.P. ASSET ACQUISITION PRO FORMA
HISTORICAL ACQUISITION TRANSACTIONS AS ADJUSTED
----------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Operating revenues............................ $ 61,544 $ 133,780 $ 222,541 $ 222,541
Operating expenses
Cost of natural gas and oil................. 12,158 33,624 95,599 95,599
Operation and maintenance, net.............. 14,440 30,087 42,518 42,518
Depreciation, depletion and amortization.... 12,549 18,978 28,992 28,992
---------- ---------- ---------- ----------
39,147 82,689 167,109 167,109
---------- ---------- ---------- ----------
Operating income.............................. 22,397 51,091 55,432 55,432
---------- ---------- ---------- ----------
Other income
Earnings from unconsolidated affiliates..... 3,361 3,361 3,291 3,291
Net gain on sale of assets.................. 315 315 315 315
Other income................................ 426 397 397 397
---------- ---------- ---------- ----------
4,102 4,073 4,003 4,003
---------- ---------- ---------- ----------
Income before interest, income taxes and other
charges..................................... 26,499 55,164 59,435 59,435
---------- ---------- ---------- ----------
Interest and debt expense................... 11,758 18,458 26,884 24,185
Income taxes................................ -- -- 92 92
---------- ---------- ---------- ----------
Income from continuing operations........... 14,741 36,706 32,459 35,158
Income from discontinued operations......... 4,385 -- -- --
---------- ---------- ---------- ----------
Net income.................................. $ 19,126 $ 36,706 $ 32,459 $ 35,158
========== ========== ========== ==========
Income allocation
Series B unitholders...................... $ 3,552 $ 3,552 $ 3,552 $ 3,552
========== ========== ========== ==========
General partner
Continuing operations................... $ 8,691 $ 9,070 $ 13,042 $ 14,309
Discontinued operations................. 44 -- -- --
---------- ---------- ---------- ----------
$ 8,735 $ 9,070 $ 13,042 $ 14,309
========== ========== ========== ==========
Limited partners
Continuing operations................... $ 2,498 $ 24,084 $ 15,865 $ 17,297
Discontinued operations................. 4,341 -- -- --
---------- ---------- ---------- ----------
$ 6,839 $ 24,084 $ 15,865 $ 17,297
========== ========== ========== ==========
Basic and diluted earnings per unit
Income from continuing operations........... $ 0.06 $ 0.60 $ 0.28 $ 0.27
Income from discontinued operations......... 0.11 -- -- --
---------- ---------- ---------- ----------
Net income.................................. $ 0.17 $ 0.60 $ 0.28 $ 0.27
========== ========== ========== ==========
Weighted average number of units outstanding.. 39,941 40,100 56,087 64,183
========== ========== ========== ==========
FINANCIAL POSITION DATA (AT MARCH 31, 2002):
Property, plant and equipment, net............ $ 936,801 $1,703,032 $2,593,927 $2,593,927
Investments in unconsolidated affiliates...... 33,438 33,438 36,385 36,385
Total assets.................................. 1,492,190 2,077,714 2,872,008 2,872,008
Current liabilities........................... 58,777 56,396 60,454 60,454
Long-term indebtedness, less current
maturities.................................. 945,000 1,503,000 1,740,051 1,470,169
Total liabilities........................... 1,004,923 1,584,335 1,833,232 1,563,350
Partners' capital............................. 487,267 493,190 1,038,587 1,308,469
</Table>
29
EL PASO ENERGY MANAGEMENT BALANCE SHEET
You should read the following financial information together with the
balance sheet and related notes appearing elsewhere in this prospectus and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- El Paso Energy Management" appearing elsewhere in this prospectus.
The historical information as of July 31, 2002, was derived from our
audited historical balance sheet and notes thereto included in this prospectus.
The unaudited as adjusted balance sheet information as of July 31, 2002 gives
effect to:
- our receipt of net proceeds from this offering of $658 million, which
assumes that we sell 20,000,000 shares at $34.23 per share, net of the
underwriting discount and expected expenses,
- our use of $0.5 million of the net proceeds of this offering to
compensate El Paso Corporation for its tax indemnity obligation; and
- our use of $658 million of the net proceeds of this offering to purchase
a number of i-units from El Paso Energy Partners equal to the number of
our outstanding shares.
<Table>
<Caption>
{AS OF
JULY 31, 2002
---------------------------------
AS ADJUSTED
HISTORICAL FOR THE OFFERING
---------- ----------------
(IN THOUSANDS)
(UNAUDITED)
ASSETS
Investment in i-units............................. $ -- $657,683
---- --------
Total assets................................. $ -- $657,683
==== ========
LIABILITIES AND EQUITY
Liabilities....................................... $ -- $ --
Equity
Voting shares................................... 1 1
Non-voting shares............................... -- 657,683
Contribution receivable from parent............. (1) (1)
---- --------
Total liabilities and equity................. $ -- $657,683
==== ========
</Table>
30
RISK FACTORS
Any investment in our shares involves a high degree of risk. You should
carefully consider the following risks and all of the information contained in,
or incorporated by reference into, this prospectus before deciding whether to
purchase our shares. If any of the following risks actually occur, the trading
price of our shares could decline, and you may lose all or part of your
investment in our shares.
RISKS RELATED TO OUR SHARES, THE I-UNITS AND EL PASO ENERGY MANAGEMENT
AN ACTIVE TRADING MARKET FOR OUR SHARES MAY NOT DEVELOP, AND EVEN IF SUCH A
MARKET DOES DEVELOP, THE MARKET PRICE OF OUR SHARES MAY BE LESS THAN THE PRICE
YOU PAID FOR YOUR SHARES IN THIS OFFERING AND LESS THAN THE MARKET PRICE OF
THE COMMON UNITS OF EL PASO ENERGY PARTNERS.
Prior to this offering, you could not buy or sell our shares. An active
public trading market for our shares may not develop or continue after this
offering. Even if such a market does develop, the market price of our shares
after this offering may be less than the market price of El Paso Energy
Partners' common units as a result of any of the following factors, some of
which are beyond our control:
- the complexity of the terms of our shares, including the purchase
provisions and the tax indemnity;
- changes to the terms of our shares that our board of directors may make
in its sole discretion;
- liabilities or obligations we may incur in connection with our management
of the business and affairs of El Paso Energy Partners for which it or El
Paso Energy Partners Company are either unwilling or unable to reimburse
or indemnify us; and
- liabilities that we may incur, such as for violations of laws like the
U.S. federal securities laws, or acts we may commit in bad faith, for
which we may not be entitled to indemnification from El Paso Energy
Partners or El Paso Energy Partners Company.
Additionally, the public sale by El Paso Corporation of a significant
portion of the 11,674,245 common units that it currently owns through its
subsidiaries, or of the 5,300,000 shares that it will purchase through
subsidiaries in this offering, could reduce the market price of the common units
and, directly or indirectly, the shares. El Paso Energy Partners' partnership
agreement allows the general partner to cause El Paso Energy Partners to
register for public sale any units held by the general partner or its
affiliates. In addition, El Paso Corporation may sell its common units in
private transactions at any time, which could have a similar effect on the
market price for the outstanding common units and, indirectly, the shares.
THE VALUE OF THE ADDITIONAL FRACTIONAL SHARE THAT YOU WILL RECEIVE PER SHARE
AS A QUARTERLY DISTRIBUTION MAY BE LESS THAN THE QUARTERLY DISTRIBUTION OF
CASH THAT EL PASO ENERGY PARTNERS' COMMON UNITHOLDERS WILL RECEIVE PER COMMON
UNIT.
The additional fraction of a share to be issued per share outstanding each
applicable quarter will be based on the average closing price of our shares for
the ten consecutive trading days preceding the ex-dividend date for our shares.
Because the market price of our shares may vary substantially over time, the
market value on the date of distribution of such additional shares may vary
substantially from the cash distributed on a common unit.
EL PASO ENERGY PARTNERS COULD BE TREATED AS A CORPORATION FOR U.S. FEDERAL
INCOME TAX PURPOSES, WHICH WOULD REDUCE SUBSTANTIALLY THE VALUE OF OUR SHARES
AND WOULD GIVE THE OWNER OF OUR VOTING SHARES THE RIGHT TO MERGE US INTO EL
PASO ENERGY PARTNERS.
The anticipated benefit of an investment in our shares depends largely on
the continued treatment of El Paso Energy Partners as a partnership for U.S.
federal income tax purposes. El Paso Energy Partners has not requested a ruling
from the U.S. Internal Revenue Service on this or any other matter affecting El
Paso Energy Partners. Current law requires El Paso Energy Partners to derive at
least 90% of its annual gross income from specific activities to continue to
31
be treated as a partnership for U.S. federal income tax purposes. El Paso Energy
Partners may not find it possible, regardless of its efforts, to meet this
income requirement or may inadvertently fail to meet this income requirement.
Current law could change so as to cause El Paso Energy Partners to be treated as
a corporation for U.S. federal income tax purposes without regard to its sources
of income or otherwise subject El Paso Energy Partners to entity-level taxation.
If El Paso Energy Partners were to be treated as a corporation for U.S.
federal income tax purposes, it would pay U.S. federal income tax on its income
at the corporate tax rate, which currently is a maximum of 35%, and would pay
state income taxes at varying rates. Because a tax would be imposed upon El Paso
Energy Partners as a corporation, the cash available for distribution to its
common unitholders would be substantially reduced, which would reduce the value
of the i-units we own and the value of your shares.
Under the provisions of our limited liability company agreement and El Paso
Energy Partners' partnership agreement, if El Paso Energy Partners were to be
treated as a corporation for U.S. federal income tax purposes, in order to avoid
the additional costs of administering a separate entity, among other reasons,
the owner of our voting shares has the right to cause us to merge with or into
it or one of its subsidiaries. As a condition to such merger, we must obtain
either an opinion of counsel or a ruling from the IRS that such merger should be
currently non-taxable to holders of our shares, except as to the consideration
received for fractional shares or as to the termination of any rights or
obligations related to the purchase provisions. In such a merger, you would
receive common units or other securities substantially similar to the common
units in exchange for your shares.
EL PASO ENERGY PARTNERS MAY ISSUE ADDITIONAL COMMON OR OTHER CLASSES OF UNITS,
AND WE MAY ISSUE ADDITIONAL SHARES, WHICH WOULD DILUTE YOUR OWNERSHIP
INTEREST.
El Paso Energy Partners can issue additional common units, preference units
and other capital securities representing limited partner interests, including
securities with rights to distributions and allocations or in liquidation equal
or superior to the equity securities held by existing unitholders, for any
amount and on any terms and conditions established by its general partner. We
also can issue additional shares of the class of shares being sold in this
offering and the class of voting shares currently owned by El Paso Energy
Partners Company. If El Paso Energy Partners issues more limited partner
interests or if we issue additional shares as described in the preceding
sentence, it will reduce your proportionate ownership interest. This could cause
the market price of your shares to fall and reduce the amount available for
distributions on each share. Further, El Paso Energy Partners has the ability to
issue partnership interests with voting rights superior to the i-units. If El
Paso Energy Partners were to issue any such securities, it could adversely
affect your voting power.
BECAUSE OUR ONLY ASSETS WILL BE I-UNITS OF EL PASO ENERGY PARTNERS, OUR
FINANCIAL CONDITION AND RESULTS OF OPERATIONS WILL DEPEND SOLELY UPON THE
PERFORMANCE OF EL PASO ENERGY PARTNERS.
After this offering our only assets will be the i-units we own. If El Paso
Energy Partners decreases the cash distributions it pays to common unitholders,
the value of additional shares we distribute to you will decrease as well.
YOUR SHARES ARE SUBJECT TO PURCHASE PROVISIONS THAT COULD RESULT IN YOUR
HAVING TO SELL YOUR SHARES AT A TIME OR PRICE THAT YOU DO NOT LIKE.
If El Paso Corporation exercises any of its rights to purchase our shares,
you will be required to sell your shares at a time or price that may be
undesirable, and you could receive less than you paid for your shares. Any sale
of our shares by you, to El Paso Corporation or otherwise, for cash will be a
taxable transaction to you. Accordingly, you will recognize a gain or loss on
the sale equal to the difference between the cash received and your tax basis in
the shares sold.
32
THE TERMS OF OUR SHARES MAY BE CHANGED IN WAYS YOU MAY NOT LIKE, BECAUSE OUR
BOARD OF DIRECTORS WILL HAVE THE POWER TO CHANGE THE TERMS OF OUR SHARES IN
WAYS THAT OUR BOARD DETERMINES, IN ITS SOLE DISCRETION, ARE NOT MATERIALLY
ADVERSE TO YOU.
As an owner of our shares, you may not like the changes made to the terms
of our shares, if any, and you may disagree with our board of directors'
decision that the changes are not materially adverse to you as a shareholder.
Your recourse if you disagree will be limited because our limited liability
company agreement gives broad latitude and discretion to our board of directors
and eliminates or reduces the fiduciary duties that our board of directors
otherwise would owe to you.
IF WE ARE NOT FULLY REIMBURSED OR INDEMNIFIED FOR OBLIGATIONS AND LIABILITIES
WE INCUR IN MANAGING THE BUSINESS AND AFFAIRS OF EL PASO ENERGY PARTNERS, WE
MAY BE UNABLE TO PAY THOSE LIABILITIES AND THE VALUE OF OUR SHARES COULD
DECLINE.
Under the delegation agreement, we have been delegated management of El
Paso Energy Partners and its operating subsidiaries. We may have unlimited
liability, including with respect to environmental liabilities, for our
obligations to the same extent as a general partner under partnership laws as a
result of our management of El Paso Energy Partners. To the extent we incur
liabilities or other obligations in connection with our performance under the
delegation agreement, we are entitled to be reimbursed or indemnified by El Paso
Energy Partners or El Paso Energy Partners Company. In the event El Paso Energy
Partners and El Paso Energy Partners Company are either unwilling or unable to
reimburse or indemnify us, we likely will be unable to satisfy these liabilities
or obligations. Additionally, our right to reimbursement or indemnification is
limited under certain circumstances, including:
- if we act in bad faith; or
- if we violate laws, like the U.S. federal securities laws, where
indemnification may be against public policy.
For more information about the delegation agreement, please read
"Relationships and Related Party Transactions."
For example, we could become liable to third parties for the obligations of
El Paso Energy Partners and its subsidiaries that are partnerships who transact
business with third parties and who reasonably believe that we are a general
partner. El Paso Energy Partners is not obligated to reimburse us in specified
cases, and may not be able to reimburse or indemnify us as a result of its
insolvency or bankruptcy. The primary adverse impact of that will be the decline
in or elimination of the value of our i-units, which are our primary assets.
Assuming under these circumstances that we have some residual value in our
i-units, a direct claim against us could further reduce our net asset value and
cause us also to declare bankruptcy. Another risk with respect to third party
claims will arise under the circumstances when El Paso Energy Partners is
financially able to pay us but, for some other reason, does not reimburse or
indemnify us.
IF IN THE FUTURE WE CEASE TO MANAGE THE BUSINESS AND AFFAIRS OF EL PASO ENERGY
PARTNERS, WE MAY BE DEEMED TO BE AN "INVESTMENT COMPANY" FOR PURPOSES OF THE
INVESTMENT COMPANY ACT OF 1940.
If in the future we cease to manage the business and affairs of El Paso
Energy Partners, we may be deemed to be an "investment company" for purposes of
the Investment Company Act of 1940. In that event, we would either have to
register as an investment company under the Investment Company Act, obtain
exemptive relief from the SEC, or modify our organizational structure or our
contract rights to fall outside the definition of an investment company under
the Investment Company Act of 1940. Registering as an investment company could,
among other things, materially limit our ability to engage in transactions with
our affiliates, including the purchase and sale of certain securities or other
property to or from our affiliates, restrict our ability to borrow funds or
engage in other transactions involving leverage, and require us to add directors
who are independent of us or our affiliates.
33
IF A PERSON OR GROUP, OTHER THAN EL PASO CORPORATION AND ITS AFFILIATES, OWNS
20% OR MORE OF THE AGGREGATE NUMBER OF ISSUED AND OUTSTANDING EL PASO ENERGY
PARTNERS COMMON UNITS AND OUR SHARES, THAT PERSON OR GROUP MAY NOT VOTE ITS
SHARES; AS A RESULT, YOU ARE LESS LIKELY TO RECEIVE A PREMIUM FOR YOUR SHARES
IN A CHANGE OF CONTROL SITUATION.
If a person or group owns 20% or more of the aggregate number of issued and
outstanding common units and our shares, that person or group may not vote its
shares (but may vote its common units). This limitation does not apply to El
Paso Corporation and its affiliates. This provision may discourage a person or
group from attempting to take over control of us or El Paso Energy Partners and
reduce the price at which our shares will trade under certain circumstances.
THE SHARES YOU OWN ARE NOT ENTITLED TO VOTE TO ELECT OUR DIRECTORS, THEREFORE,
YOU WILL HAVE LITTLE OR NO OPPORTUNITY TO INFLUENCE OR CHANGE OUR MANAGEMENT.
Unlike the holders of common stock in a corporation, you have limited
voting rights on matters affecting our business. El Paso Energy Partners
Company, whose directors you do not elect, owns all of our voting shares
eligible to vote in the election of our directors. For a description of the
limited voting rights you will have as an owner of shares, see "Description of
Our Shares -- Limited Voting Rights." Upon the closing of this offering, El Paso
Energy Partners Company will delegate to us substantially all of its rights and
powers to manage the business and affairs of El Paso Energy Partners, subject to
El Paso Energy Partners Company's right to approve specified actions. For a more
detailed description of these approval rights, please read "Relationships and
Related Party Transactions."
UNLESS ALL ACCRETIONS OCCURRING AFTER SEPTEMBER 2010 ON EL PASO ENERGY
PARTNERS' THEN-OUTSTANDING SERIES B PREFERENCE UNITS HAVE BEEN PAID OR THE
SERIES B PREFERENCE UNITS HAVE BEEN REDEEMED, BEGINNING IN OCTOBER 2010, EL
PASO ENERGY PARTNERS WILL NOT BE PERMITTED TO MAKE DISTRIBUTIONS TO HOLDERS OF
ITS COMMON UNITS OR INCREASE THE NUMBER OF I-UNITS WE OWN AND, THEREFORE, THE
NUMBER OF SHARES THEN HELD BY YOU WILL NOT INCREASE.
El Paso Energy Partners' Series B preference units have rights to income
allocations on a cumulative basis, compounded semi-annually at an annual rate of
10%. El Paso Energy Partners is not obligated to allocate income for tax
purposes, or pay cash distributions on, these Series B preference units until
October 1, 2010, when the rate will increase to 12%. Beginning in October 2010,
preference income allocation will be made on a current basis and cash
distributions will be required to be paid on a current basis; accordingly, El
Paso Energy Partners will not be permitted to make any distributions in respect
of any of its common units or i-units until El Paso Energy Partners has paid
aggregate distributions in respect of each of its Series B preference units
equal to all unpaid accruals occurring after September 2010. As of March 31,
2002, El Paso Energy Partners had 125,392 Series B preference units outstanding
with a liquidation value of approximately $146 million.
RISKS RELATED TO EL PASO ENERGY PARTNERS' BUSINESS
EL PASO ENERGY PARTNERS' INDEBTEDNESS COULD ADVERSELY RESTRICT ITS ABILITY TO
OPERATE, AFFECT ITS FINANCIAL CONDITION AND PREVENT IT FROM MAKING
DISTRIBUTIONS TO UNITHOLDERS.
El Paso Energy Partners has a significant amount of indebtedness and the
ability to incur substantially more indebtedness. In May 2002 and May 2001, it
issued an aggregate of $480 million of 8 1/2% Senior Subordinated Notes due in
2011 and in May 1999, it issued $175 million of 10 3/8% Senior Subordinated
Notes due in 2009. All of its senior subordinated notes are supported by
guarantees of its subsidiaries. El Paso Energy Partners is also party to a $600
million revolving credit facility, which is collateralized by a pledge of the
equity of its subsidiaries and substantially all of its other assets and
supported by guarantees of its subsidiaries other than its unrestricted
subsidiaries. As of July 31, 2002, it had $514 million outstanding under this
revolving credit facility. In addition, EPN Holding, its indirect wholly owned
subsidiary, has an outstanding limited recourse term loan from a group of
commercial lenders,
34
which was entered into in connection with the April 2002 acquisition of the EPN
Holding assets. As of July 31, 2002, EPN Holding had $160 million outstanding
under that loan.
From time to time, El Paso Energy Partners' joint ventures also incur
indebtedness. As of June 30, 2001, its 36%-owned joint venture, Poseidon Oil
Pipeline Company, L.L.C. had a revolving credit facility to provide up to $185
million with $150 million outstanding, which is collateralized by a substantial
portion of Poseidon's assets.
El Paso Energy Partners and all of its subsidiaries except for its
unrestricted subsidiaries must comply with various affirmative and negative
covenants contained in the indentures related to its senior subordinated notes
and its revolving credit facility. EPN Holding, its direct parent entities and
its subsidiaries are El Paso Energy Partners' only unrestricted subsidiaries.
Those entities must comply with various affirmative and negative covenants
related to EPN Holding's limited recourse term loan. Among other things, those
covenants limit EPN Holding's ability to distribute cash to El Paso Energy
Partners.
Among other things, the credit agreements to which El Paso Energy Partners,
EPN Holding and Poseidon are party also limit the ability of the borrower, and,
in the case of each of El Paso Energy Partners and EPN Holding, its
subsidiaries, under those agreements to:
- incur additional indebtedness or liens;
- make payments in respect of or redeem or acquire any debt or equity
issued by us;
- sell assets;
- make loans or investments;
- acquire or be acquired by other companies; and
- amend some of its contracts.
El Paso Energy Partners' indebtedness also requires it to make mandatory
repayments under certain circumstances, including when it sells certain assets,
fails to achieve or maintain certain financial targets or experiences a change
in control. El Paso Energy Partners does not have the right to prepay the
balance outstanding under its senior subordinated notes without incurring
substantial economic penalties.
The restrictions under El Paso Energy Partners' indebtedness may prevent it
from engaging in certain transactions that might otherwise be considered
beneficial to it and could have other important consequences to you. For
example, those restrictions could:
- increase its vulnerability to general adverse economic and industry
conditions;
- limit its ability to make distributions to unitholders, including its
minimum quarterly distribution amounts, to fund future working capital,
capital expenditures and other general partnership requirements, to
engage in future acquisitions, construction or development activities, or
to otherwise fully realize the value of its assets and opportunities
because of the need to dedicate a substantial portion of its cash flow
from operations to payments on its indebtedness or to comply with any
restrictive terms of its indebtedness;
- limit its flexibility in planning for, or reacting to, changes in its
businesses and the industries in which it operates; and
- place it at a competitive disadvantage to its competitors that have less
debt.
El Paso Energy Partners may incur additional public or private indebtedness
in the future, whether under its existing credit agreement, by issuing debt
securities, under new credit agreements, under joint venture credit agreements,
under capital leases or synthetic leases, on a project finance or other basis,
or a combination of any of these. If it incurs additional indebtedness in the
future, it would be under its existing credit agreement or under arrangements
that may have terms and conditions at least as restrictive as those contained in
its existing credit agreement and existing indentures. Failure to comply with
the terms and conditions of any existing or future indebtedness would constitute
an event of default. If an event of default occurs, the lenders will have the
right to accelerate the maturity of that indebtedness and foreclose upon the
collateral, if any, securing that indebtedness, and if an event of default
occurs under its joint
35
ventures' credit facilities, El Paso Energy Partners may be required to repay
amounts previously distributed to it and its subsidiaries. These events could
limit El Paso Energy Partners' ability to fulfill its obligations under its debt
securities and to make cash distributions to unitholders, including its minimum
quarterly distribution amounts, which could adversely affect the market price of
its securities and the shares.
EL PASO ENERGY PARTNERS MAY NOT BE ABLE TO FULLY EXECUTE ITS GROWTH STRATEGY IF
IT ENCOUNTERS TIGHT CAPITAL MARKETS OR INCREASED COMPETITION FOR QUALIFIED
ASSETS.
El Paso Energy Partners' strategy contemplates substantial growth through
the acquisition and development of a wide range of midstream and other energy
infrastructure assets while maintaining a strong balance sheet. This strategy
includes constructing and acquiring additional assets and businesses to enhance
its ability to compete effectively, diversify its asset portfolio and, thereby,
provide more stable cash flow. El Paso Energy Partners regularly considers and
enters into discussions regarding, and is currently contemplating, additional
potential acquisitions, joint ventures and stand alone projects that it believes
will present opportunities to realize synergies, expand its role in the energy
infrastructure business, increase its market position and, ultimately, increase
distributions to unitholders. These acquisitions can be effected quickly, may
occur at any time and may be significant in size relative to its existing
assets. If it consummates any future acquisitions, its capitalization and
results of operations may change significantly and you will not have the
opportunity to evaluate the economic, financial and other relevant information
that it will consider in determining the application of these funds.
El Paso Energy Partners will need new capital to finance the future
acquisition and construction of assets and businesses. Limitations on its access
to capital will impair its ability to execute this strategy. Expensive capital
will limit its ability to acquire or construct accretive assets. Although it
intends to continue to expand its business, this strategy may require
substantial capital, and it may not be able to raise the necessary funds on
satisfactory terms, if at all. In addition, El Paso Energy Partners is
experiencing increased competition for the assets it purchases. Increased
competition for a limited pool of assets could result in El Paso Energy
Partners' not being the successful bidder more often or in its acquiring assets
at a higher relative price than El Paso Energy Partners has paid historically.
Either occurrence would limit its ability to fully execute its growth strategy.
El Paso Energy Partners' ability to execute its growth strategy may impact the
market price of the shares.
EL PASO ENERGY PARTNERS' GROWTH STRATEGY MAY ADVERSELY AFFECT ITS RESULTS OF
OPERATIONS IF IT DOES NOT SUCCESSFULLY INTEGRATE THE BUSINESSES THAT IT
ACQUIRES OR IF IT SUBSTANTIALLY INCREASES ITS INDEBTEDNESS AND CONTINGENT
LIABILITIES TO MAKE ACQUISITIONS.
El Paso Energy Partners may be unable to integrate successfully businesses
it acquires. El Paso Energy Partners may incur substantial expenses, delays or
other problems in connection with its growth strategy that could negatively
impact its results of operations. Moreover, acquisitions and business expansions
involve numerous risks, including:
- difficulties in the assimilation of the operations, technologies,
services and products of the acquired companies or business segments;
- inefficiencies and complexities that can arise because of unfamiliarity
with new assets and the businesses associated with them, including
unfamiliarity with their markets; and
- diversion of the attention of management and other personnel from
day-to-day business, the development or acquisition of new businesses and
other business opportunities.
If consummated, any acquisition or investment would also likely result in
the incurrence of indebtedness and contingent liabilities and an increase in
interest expense and depreciation, depletion and amortization expenses. A
substantial increase in El Paso Energy Partners' indebtedness and contingent
liabilities could have a material adverse effect upon its business, as discussed
above.
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EL PASO ENERGY PARTNERS' ACTUAL ACQUISITION, CONSTRUCTION AND DEVELOPMENT COSTS
COULD EXCEED ITS FORECAST, AND ITS CASH FLOW FROM THESE PROJECTS MAY NOT BE
IMMEDIATE.
El Paso Energy Partners' forecast contemplates significant expenditures for
the purchase, construction or other acquisition of energy infrastructure assets,
including some construction and development projects with significant
technological challenges. For example, underwater operations, particularly those
in water depths in excess of 600 feet, are very expensive and involve much more
uncertainty and risk and, if a problem occurs at such depths, the solution, if
one exists, may be very expensive and time consuming. Accordingly, there is an
increase in the frequency and amount of cost overruns related to underwater
operations, especially in depths in excess of 600 feet. We cannot assure you
that El Paso Energy Partners will be able to complete its projects at the costs
currently estimated. If El Paso Energy Partners experiences material cost
overruns, it will have to finance these overruns using one or more of the
following methods:
- using cash from operations;
- delaying other planned projects; or
- issuing additional debt or equity.
Any or all of these methods may not be available when needed or may
adversely affect El Paso Energy Partners' future results of operations.
El Paso Energy Partners' revenues and cash flow may not increase
immediately upon the expenditure of funds on a particular project. For instance,
if it builds a new pipeline or platform or expands an existing facility, the
design, construction, development and installation may occur over an extended
period of time and El Paso Energy Partners may not receive any material increase
in revenue or cash flow from that project until after it is placed in service
and customers enter into binding arrangements. If El Paso Energy Partners'
revenues and cash flow do not increase at projected levels because of
substantial unanticipated delays, it may not meet its obligations as they become
due and it may have to reduce or eliminate distributions to unitholders.
FERC REGULATION AND A CHANGING REGULATORY ENVIRONMENT COULD AFFECT EL PASO
ENERGY PARTNERS' ASSETS AND CASH FLOW.
The FERC extensively regulates certain of El Paso Energy Partners' energy
infrastructure assets. This regulation extends to such matters as:
- rate structures;
- rates of return on equity;
- recovery of costs;
- the services that its regulated assets are permitted to perform;
- the acquisition, construction and disposition of assets; and
- to an extent, the level of competition in that regulated industry.
In September 2001, the FERC issued a Notice of Proposed Rulemaking, or
NOPR, that proposes to apply the standards of conduct governing the relationship
between interstate pipelines and marketing affiliates to all energy affiliates.
Since its HIOS and Petal natural gas storage facilities are interstate
facilities as defined by the Natural Gas Act, the proposed regulations, if
adopted by FERC, would dictate how HIOS and Petal conduct business and interact
with all energy affiliates of El Paso Corporation and El Paso Energy Partners.
We cannot predict the outcome of the NOPR, but adoption of the regulations in
substantially the form proposed would, at a minimum, place administrative and
operational burdens on El Paso Energy Partners. Further, more fundamental
changes could be required such as a complete organizational separation or sale
of HIOS and Petal.
In August 2002, the FERC issued an order requiring that all arrangements
concerning the cash management or money pool arrangements between a FERC
regulated subsidiary and a non FERC regulated parent must be in writing, and set
forth: the duties and responsibilities of cash management participants and
administrators; the methods of calculating interest and for
37
allocating interest income and expenses; and the restrictions on deposits or
borrowings by money pool members. The NOPR also requires certain specified
documentation for all deposits into, borrowings from, interest income from, and
interest expenses related to, such arrangements. Finally, the NOPR proposes that
as a condition to participating in a cash management or money pool arrangement,
the FERC regulated entity must maintain a minimum proprietary capital balance of
30 percent and that the entity, and its parent must maintain investment grade
credit ratings. Comments on the NOPR are due by Thursday, August 22, 2002.
Given the extent of this regulation, the extensive changes in FERC policy
over the last several years, the evolving nature of regulation and the
possibility for additional changes, we cannot assure you that the current
regulatory regime will remain unchanged or of the effect any changes in that
regime would have on El Paso Energy Partners' financial position, results of
operations or cash flows.
ENVIRONMENTAL COSTS AND LIABILITIES AND CHANGING ENVIRONMENTAL REGULATION COULD
AFFECT EL PASO ENERGY PARTNERS' ASSETS AND CASH FLOW.
El Paso Energy Partners' operations are subject to extensive federal, state
and local regulatory requirements relating to environmental affairs, health and
safety, waste management and chemical and petroleum products. Governmental
authorities have the power to enforce compliance with applicable regulations and
permits and to subject violators to civil and criminal penalties, including
fines, injunctions or both. Third parties may also have the right to pursue
legal actions to enforce compliance. El Paso Energy Partners makes expenditures
in connection with environmental matters as part of its normal capital
expenditure programs. However, future environmental law developments, such as
stricter laws, regulations, permits or enforcement policies, could significantly
increase some costs of its operations, including the handling, manufacture, use,
emission or disposal of substances and wastes. Moreover, as with other companies
engaged in similar or related businesses, its operations always have some risk
of environmental costs and liabilities because it handles petroleum products. We
cannot assure you that El Paso Energy Partners will not incur material
environmental costs and liabilities.
A NATURAL DISASTER, CATASTROPHE OR OTHER INTERRUPTION EVENT INVOLVING EL PASO
ENERGY PARTNERS COULD RESULT IN SEVERE PERSONAL INJURY, PROPERTY DAMAGE AND
ENVIRONMENTAL DAMAGE, WHICH COULD CURTAIL ITS OPERATIONS AND OTHERWISE
ADVERSELY AFFECT ITS ASSETS AND CASH FLOW.
Some of El Paso Energy Partners' operations involve higher risks of severe
personal injury, property damage and environmental damage, which could curtail
its operations and otherwise expose it to liability and adversely affect its
cash flow. For example, El Paso Energy Partners' natural gas facilities operate
at high pressures, sometimes in excess of 1,100 pounds per square inch. El Paso
Energy Partners also operates oil and natural gas facilities located underwater
in the Gulf of Mexico, which can involve complexities, such as extreme water
pressure. Virtually all of its operations are exposed to the elements, including
hurricanes, tornadoes, storms, floods and earthquakes.
If one or more facilities that are owned by El Paso Energy Partners or that
deliver oil, natural gas or other products to it is damaged by severe weather or
any other disaster, accident, catastrophe or event, its operations could be
significantly interrupted. Similar interruptions could result from damage to
production or other facilities that supply its facilities or other stoppages
arising from factors beyond its control. These interruptions might involve
significant damage to people, property or the environment, and repairs might
take from a week or less for a minor incident to six months or more for a major
interruption. Additionally, some of El Paso Energy Partners' storage contracts
obligate it to indemnify its customers for any damage or injury occurring during
the period in which the customers' natural gas is in its possession. Any event
that interrupts the fees generated by its energy infrastructure assets, or which
causes it to make significant expenditures not covered by insurance, could
adversely impact the market price of its debt and equity securities and the
amount of cash available for payment of the debt securities and distribution to
its limited partners. In order to reduce the effects of any such incident, El
Paso
38
Energy Partners maintains insurance coverage that includes some property and
business interruption insurance. El Paso Energy Partners believes that this
insurance coverage is adequate, although it does not cover many types of
interruptions that might occur. We cannot assure you that the proceeds of any
such insurance would be paid in a timely manner or be in an amount sufficient to
meet El Paso Energy Partners' needs if such an event were to occur or that it
can renew it or other desirable insurance on commercially reasonable terms, if
at all.
THE FUTURE PERFORMANCE OF EL PASO ENERGY PARTNERS' MIDSTREAM ENERGY
INFRASTRUCTURE OPERATIONS, AND THUS ITS ABILITY TO SATISFY ITS DEBT
REQUIREMENTS AND MAINTAIN CASH DISTRIBUTIONS, DEPENDS ON SUCCESSFUL EXPLORATION
AND DEVELOPMENT OF ADDITIONAL OIL AND NATURAL GAS RESERVES BY OTHERS.
The oil, natural gas and other products available to El Paso Energy
Partners' energy infrastructure assets are derived from reserves produced from
existing wells, which reserves naturally decline over time. In order to offset
this natural decline, El Paso Energy Partners' energy infrastructure assets must
access additional reserves. Additionally, some of the projects El Paso Energy
Partners has planned or recently completed are dependent on reserves that it
expects to be produced from newly discovered properties that producers are
currently developing.
Finding and developing new oil and natural gas reserves is very expensive,
especially offshore. The deeper water regions especially will require large
capital expenditures by producers for exploration and development drilling,
installing production facilities and constructing pipeline extensions to reach
the new wells. Many economic and business factors out of El Paso Energy
Partners' control can adversely affect the decision by any producer to explore
for and develop new reserves. These factors include relatively low oil and
natural gas prices, cost and availability of equipment, capital budget
limitations or the lack of available capital. We cannot assure you that
additional reserves, if discovered, would be developed in the near future or at
all. For example, because of the level to which hydrocarbon prices declined
during 1998 and the first quarter of 1999, overall oil and natural gas activity
declined in relation to prior years. If hydrocarbon prices decline to those
levels again or if capital spending by the energy industry decreases or remains
at low levels for prolonged periods, its results of operations and cash flow
could suffer.
EL PASO ENERGY PARTNERS' STORAGE BUSINESSES DEPEND ON UNAFFILIATED PIPELINES TO
TRANSPORT NATURAL GAS.
To obtain natural gas, El Paso Energy Partners' storage businesses depend
on the pipelines to which they have access. Any interruption of service on those
pipelines or adverse change in their terms and conditions of service could have
a material adverse effect on its ability, and the ability of its customers, to
transport natural gas to and from its facilities and a corresponding material
adverse effect on its storage revenues. In addition, the rates charged by those
interconnected pipelines for transportation to and from its facilities affect
the utilization and value of El Paso Energy Partners' storage services.
Significant changes in the rates charged by those pipelines or the rates charged
by other pipelines with which the interconnected pipelines compete could also
have a material adverse effect on El Paso Energy Partners' storage revenues.
EL PASO ENERGY PARTNERS FACES COMPETITION FROM THIRD PARTIES TO GATHER,
TRANSPORT, PROCESS, FRACTIONATE, STORE OR OTHERWISE HANDLE OIL, NATURAL GAS AND
OTHER PETROLEUM PRODUCTS.
Even if reserves exist in the areas accessed by El Paso Energy Partners'
facilities and are ultimately produced, we cannot assure you that any of these
reserves will be gathered, transported, processed, fractionated, stored or
otherwise handled by El Paso Energy Partners. El Paso Energy Partners competes
with others, including producers of oil and natural gas, for any such production
on the basis of many factors, including:
- geographic proximity to the production;
- costs of connection;
39
- available capacity;
- rates; and
- access to markets.
FLUCTUATIONS IN ENERGY COMMODITY PRICES COULD ADVERSELY AFFECT EL PASO ENERGY
PARTNERS' BUSINESS.
Oil, natural gas, NGLs and other petroleum products prices are volatile and
fluctuations in these prices could have an adverse effect on a portion of El
Paso Energy Partners' revenues and cash flow. Although El Paso Energy Partners'
strategy involves reducing its exposure to volatility in commodity prices,
primarily by focusing on fee-based services and by hedging some of those fees
with derivative financial instruments, all segments of its operations are
somewhat affected by price reductions and some of its segments are significantly
affected by price reductions. Price reductions can materially reduce the level
of oil and natural gas exploration; production and development operations, which
provide reserves to replace those that are produced over time; and pipeline
volumes. In addition, some of El Paso Energy Partners' operations, like
production, processing and fractionation, are very sensitive to price declines.
PIPELINES AND PLATFORMS -- PRICE DECREASES COULD HAVE AN ADVERSE EFFECT ON
THE DISCOVERY AND DEVELOPMENT OF REPLACEMENT RESERVES AND AN ADVERSE EFFECT
ON REVENUES AND CASH FLOW FROM THOSE ASSETS.
Currently, the primary consequence of commodity price reductions to El Paso
Energy Partners' offshore pipeline and platform operations is the risk that less
replacement reserves will be discovered and produced as a result of a long-term
decline in prices. Substantially all of El Paso Energy Partners' offshore
pipeline and platform operations involve fee-based arrangements for gathering,
transporting and handling reserves that are dedicated to the facilities for the
life of the reserves.
However, El Paso Energy Partners' financial results from some of its
onshore pipelines, including the Alabama-Intrastate, Carlsbad, Waha and San Juan
gathering systems, can be dramatically affected by a reduction in, or the
volatility of, commodity prices. The Alabama-Intrastate gathering system
functions as a merchant operation and, accordingly, purchases and resells the
natural gas it gathers. Several of El Paso Energy Partners' other gathering
systems, while not functioning as merchant operations, have some exposure to
risks related to commodity prices. For example, over 95% of the volumes handled
by the San Juan gathering system are fee-based arrangements, 80% of which the
fees are calculated as a percentage of a regional price index for natural gas.
In addition, the San Juan gathering system provides aggregating and bundling
services -- in which it purchases gas at the wellhead and resells gas in the
open market -- for some smaller producers, which account for less than 5% of the
volumes on that system.
NATURAL GAS STORAGE -- NATURAL GAS PRICE STABILITY COULD HAVE AN ADVERSE
EFFECT ON REVENUES AND CASH FLOW FROM EL PASO ENERGY PARTNERS' STORAGE
ASSETS.
Prices for natural gas have historically been seasonal and volatile, which
has enhanced demand for El Paso Energy Partners' storage services. The storage
business has benefited from large price swings resulting from seasonal price
sensitivity through increased withdrawal charges and demand for non-storage hub
services. However, we cannot assure you that the market for natural gas will
continue to experience volatility and seasonal price sensitivity in the future
at the levels previously seen. If volatility and seasonality in the natural gas
industry decrease, because of increased storage capacity throughout the pipeline
grid, increased production capacity or otherwise, the demand for El Paso Energy
Partners' storage services and, therefore, the prices that it will be able to
charge for those services may decline.
40
PROCESSING AND FRACTIONATION -- THE PROCESSING AND FRACTIONATION BUSINESSES
ARE CYCLICAL AND ARE DEPENDENT IN PART UPON THE SPREADS BETWEEN PRICES FOR
NATURAL GAS, NGLS AND PETROLEUM PRODUCTS.
Prices for natural gas, NGLs and NGL components can fluctuate in response
to changes in supply, market uncertainty and a variety of additional factors
that are beyond El Paso Energy Partners' control. If the spread between prices
for natural gas, NGLs and NGL components do not provide sufficient profits to
natural gas producers, then those producers may decide not to process their
natural gas or fractionate their NGLs, or to process less natural gas or
fractionate less NGLs. This could decrease the volumes to El Paso Energy
Partners' processing and fractionation facilities and, accordingly, negatively
affect its operational results. In many cases, processing and fractionating is
profitable only when the producer can receive more net proceeds by physically
separating the natural gas from the NGLs and separating the NGL components from
the NGLs and selling those products than it would receive by merely selling the
raw natural gas stream. The spread between the prices for natural gas and NGLs
is greatest when the demand for NGLs increases for use in petrochemical and
refinery feedstock. If and when this spread becomes too narrow to justify the
costs, producers have the option to sell the raw natural gas stream rather than
process and fractionate. In such a case, El Paso Energy Partners' processing or
fractionation facilities or both will be underutilized.
Utilization rates in the processing and fractionation industries can
fluctuate dramatically from month to month, depending on the needs of producers.
The average utilization rate for the Chaco processing plant for 2001, 2000 and
1999 was 89%, 91% and 93%. The monthly utilization rate for the EPN Texas
fractionation facilities during the 12 months ended December 31, 2001 was as low
as 41% and as high as 88%. However, its average annual utilization rate for its
fractionation facilities for 2001, 2000 and 1999 were 73%, 89% and 88%.
After its acquisition of the San Juan assets, a substantial portion of El
Paso Energy Partners processing arrangements will expose El Paso Energy Partners
to risks related to changes in commodity prices. More than 80% of our revenues
for natural gas processing services at the Indian Basin plant and, after the San
Juan asset acquisition, the Chaco plant, fluctuate directly with the monthly
price of NGLs. El Paso Energy Partners' has entered into fixed fee-based
fractionation arrangements that limit the direct effects of decreases in
commodity prices on most of its fractionation operations; however those
arrangements also cause it to forego any benefits it would otherwise experience
if commodity prices were to increase.
OIL AND NATURAL GAS PRODUCTION -- PRICE AND VOLUME VOLATILITY IS
SUBSTANTIALLY OUT OF EL PASO ENERGY PARTNERS' CONTROL AND COULD HAVE AN
ADVERSE EFFECT ON REVENUES AND CASH FLOW FROM ITS PRODUCING OIL AND NATURAL
GAS PROPERTIES.
El Paso Energy Partners has exposure to movements in commodity prices
relating to its oil and natural gas production, which it partially hedges from
time to time using financial derivative instruments.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT EL PASO ENERGY PARTNERS'
BUSINESS.
El Paso Energy Partners has exposure to movements in interest rates. The
interest rates on some of El Paso Energy Partners' indebtedness, like its senior
subordinated notes, are fixed and the interest rates on some of its other
indebtedness, like its revolving credit facility and the credit facilities of
its joint ventures, are variable. El Paso Energy Partners partially hedges its
interest rate exposure, from time to time, using financial derivative
instruments. El Paso Energy Partners' results of operations, and its cash flow,
could be materially affected by significant increases in interest rates.
EL PASO ENERGY PARTNERS' USE OF DERIVATIVE FINANCIAL INSTRUMENTS COULD RESULT
IN FINANCIAL LOSSES.
El Paso Energy Partners tries to limit a portion of the adverse effects
resulting from changes in oil and natural gas commodity prices and interest
rates by using financial derivative instruments and other hedging mechanisms
from time to time, although there are times when it
41
does not have any hedging mechanisms in place. To the extent it hedges its
commodity price exposure and interest rate exposure, it foregoes the benefits it
would otherwise experience if commodity prices were to increase or interest
rates were to decrease. In addition, even though its management monitors its
hedging activities, it could experience losses resulting from them. Such losses
could occur under various circumstances, including if its counterparty does not
perform its obligations under the hedge arrangement, its hedge is imperfect, or
its hedging policies and procedures are not followed.
EL PASO ENERGY PARTNERS' EPN TEXAS FRACTIONATION FACILITIES ARE DEDICATED TO A
SINGLE CUSTOMER, THE LOSS OF WHICH COULD ADVERSELY AFFECT US.
In connection with El Paso Energy Partners' acquisition of its EPN Texas
fractionation facilities, it entered into a 20-year fee-based transportation and
fractionation agreement under which it dedicated 100% of the capacity of its EPN
Texas fractionation facilities to a subsidiary of El Paso Corporation. In that
agreement, all of the NGLs derived from processing operations at seven natural
gas processing plants in south Texas owned by subsidiaries of El Paso
Corporation are delivered to El Paso Energy Partners' EPN Texas NGL
transportation and fractionation facilities. Effectively, El Paso Energy
Partners will receive a fixed fee for each barrel of NGLs transported and
fractionated by its facilities. Approximately 25% of its per barrel fee is
escalated annually for increases in inflation. El Paso Corporation's subsidiary
will bear substantially all of the risks and rewards associated with changes in
the commodity prices for NGLs.
El Paso Energy Partners' operations are likely to be materially adversely
affected if these arrangements are terminated or if El Paso Corporation does not
deliver enough NGLs to it to ensure that it can maintain a profitable
utilization rate or does not fully perform its obligations under the agreement.
THE INTERRUPTION OF DISTRIBUTIONS TO EL PASO ENERGY PARTNERS FROM ITS
SUBSIDIARIES AND JOINT VENTURES MAY AFFECT ITS ABILITY TO MAKE CASH
DISTRIBUTIONS TO ITS UNITHOLDERS.
El Paso Energy Partners is a holding company. As such, its primary assets
are the capital stock and other equity interests in its subsidiaries and joint
ventures. Consequently, its ability to fund its commitments and to make cash
distributions depends upon the earnings and cash flow of its subsidiaries and
joint ventures and the distribution of that cash to El Paso Energy Partners.
Distributions from its joint ventures are subject to the discretion of their
respective management committees. In addition, from time to time, its joint
ventures and some of its subsidiaries have separate credit arrangements that
contain various restrictive covenants. Among other things, those covenants limit
or restrict each such company's ability to make distributions under certain
circumstances. Further, each joint venture's charter documents typically vest in
its management committee sole discretion regarding distributions. We cannot
assure you that any of El Paso Energy Partners' joint ventures or any of its
unrestricted subsidiaries will continue to make distributions to it at current
levels or at all.
Moreover, under some of the joint venture and subsidiary credit
arrangements, El Paso Energy Partners has agreed to return a limited amount of
the distributions made to it by the applicable company if certain conditions
exist.
EL PASO ENERGY PARTNERS CANNOT CAUSE ITS JOINT VENTURES TO TAKE OR NOT TO TAKE
CERTAIN ACTIONS UNLESS SOME OR ALL OF ITS JOINT VENTURE PARTICIPANTS AGREE.
Due to the nature of joint ventures, each participant (including El Paso
Energy Partners) in each of El Paso Energy Partners' joint ventures has made
substantial investments (including contributions and other commitments) in that
joint venture and, accordingly, has required that the relevant charter documents
contain certain features designed to provide each participant with the
opportunity to participate in the management of the joint venture and to protect
its investment in that joint venture, as well as any other assets that may be
substantially dependent on or otherwise affected by the activities of that joint
venture. These participation and protective features include a corporate
governance structure that requires at least a majority in interest vote
42
to authorize many basic activities and requires a greater voting interest
(sometimes up to 100 percent) to authorize more significant activities.
Depending on the particular joint venture, these more significant activities
might involve large expenditures or contractual commitments, the construction or
acquisition of assets, borrowing money or otherwise raising capital,
transactions with affiliates of a joint venture participant, litigation and
transactions not in the ordinary course of business, among others. Thus, without
the concurrence of joint venture participants with enough voting interests, El
Paso Energy Partners cannot cause any of its joint ventures to take or not to
take certain actions, even though those actions may be in the best interest of
the particular joint venture or El Paso Energy Partners.
EL PASO ENERGY PARTNERS DOES NOT HAVE THE SAME FLEXIBILITY AS OTHER TYPES OF
ORGANIZATIONS TO ACCUMULATE CASH AND EQUITY TO PROTECT AGAINST ILLIQUIDITY IN
THE FUTURE.
Unlike a corporation, El Paso Energy Partners' partnership agreement
requires it to make quarterly distributions to its common unitholders of all
available cash reduced by any amounts reserved for commitments and
contingencies, including capital and operating costs and debt service
requirements. As a result, El Paso Energy Partners has a limited ability to
accumulate cash to protect against any potential illiquidity in the future. In
addition, the value of El Paso Energy Partners' units and, therefore, our
shares, will decrease in direct correlation with decreases in the amount it
distributes per unit. Accordingly, if El Paso Energy Partners experiences a
liquidity problem in the future, it may not be able to issue more equity to
recapitalize.
CHANGES OF CONTROL OF EL PASO ENERGY PARTNERS' GENERAL PARTNER MAY ADVERSELY
AFFECT YOU.
El Paso Energy Partners' results of operations and, thus, its ability to
make cash distributions could be adversely affected if there is a change of
control of El Paso Energy Partners Company. For example, El Paso Corporation and
its subsidiaries are parties to various credit agreements and other financing
arrangements, the obligations of which may be directly or indirectly
collateralized. El Paso Corporation and its subsidiaries have used, and may use
in the future, their interests, which include its general partner interest,
common units and Series B preference units, as collateral. For example, El Paso
Energy Partners Company has pledged its 1% general partner interest in El Paso
Energy Partners to collateralize its obligations as a guarantor of El Paso
Energy Partners' revolving credit facility. These arrangements may allow these
lenders to foreclose on that collateral in the event of a default. Further, El
Paso Corporation could sell El Paso Energy Partners Company or any of the common
units or other limited partner interests it holds. El Paso Corporation's sale of
El Paso Energy Partners Company would constitute a change of control under El
Paso Energy Partners' existing credit agreement and indentures. In this
circumstance, El Paso Energy Partners' indebtedness for borrowed money would
effectively become due and payable unless its creditors agreed otherwise, and it
might be required to refinance its indebtedness. In addition, El Paso
Corporation could sell control of El Paso Energy Partners Company to another
company with less familiarity and experience with its businesses and with
different business philosophies and objectives. El Paso Energy Partners cannot
assure you that it would be able to refinance its indebtedness or that any such
acquiror would continue its current business strategy, or even a business
strategy economically compatible with its current business strategy.
EL PASO ENERGY PARTNERS WILL BE MATERIALLY AND ADVERSELY AFFECTED IF IT CANNOT
NEGOTIATE AN EXTENSION OR A REPLACEMENT ON COMMERCIALLY REASONABLE TERMS OF
APPROXIMATELY 900 MILES OF RIGHTS-OF-WAYS UNDERLYING THE SAN JUAN GATHERING
SYSTEM.
Approximately 900 miles of the San Juan gathering system benefits from
rights-of-way granted over Native American lands. Those rights-of-way expire in
2005. Although these rights-of-way have been renewed in the past, there is no
assurance that these rights-of-way will continue to be renewed on commercially
reasonable terms, or on any terms. If these rights-of-way are not renewed or if
the fees for these rights-of-way increase substantially, the effect on El Paso
Energy Partners will be adverse and material.
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EL PASO ENERGY PARTNERS WILL BE MATERIALLY AND ADVERSELY AFFECTED IF IT CANNOT
NEGOTIATE AN EXTENSION OR A REPLACEMENT ON COMMERCIALLY REASONABLE TERMS OF
THREE MATERIAL CONTRACTS WHICH ACCOUNT FOR APPROXIMATELY 70% OF THE VOLUME
ATTRIBUTABLE TO THE SAN JUAN GATHERING SYSTEM AND WHICH EXPIRE BETWEEN 2006
AND 2008.
Approximately 70% of the volume attributable to the San Juan gathering
system is derived from three contracts with Burlington Resources, Conoco and BP.
These contracts expire in 2008, 2006 and 2006, respectively. If El Paso Energy
Partners is not able to successfully negotiate replacement contracts, the effect
on El Paso Energy Partners will be adverse and material.
ARTHUR ANDERSEN LLP, THE PUBLIC ACCOUNTANTS THAT AUDITED THE 2000 FINANCIAL
STATEMENTS OF EL PASO ENERGY PARTNERS' JOINT VENTURE POSEIDON OIL PIPELINE
COMPANY, L.L.C., HAS BEEN CONVICTED OF A FELONY AND HAS NOT CONSENTED TO OUR
USE OF THEIR OPINION, WHICH MAY ADVERSELY AFFECT THE ABILITY OF ARTHUR
ANDERSEN LLP TO SATISFY ANY CLAIMS THAT MAY ARISE OUT OF ARTHUR ANDERSEN LLP'S
AUDIT OF POSEIDON'S FINANCIAL STATEMENTS.
Arthur Andersen LLP is the independent public accountant that audited the
financial statements of El Paso Energy Partners' Poseidon joint venture for the
years ended December 31, 1999 and 2000. Arthur Andersen LLP was recently
convicted of obstruction of justice in connection with the U.S. government's
investigation of Enron Corp. Events arising out of this conviction may adversely
affect the ability of Arthur Andersen LLP to satisfy any claims that may arise
out of Arthur Andersen LLP's audits of Poseidon's financial statements.
Additionally, because the personnel responsible for the audit of Poseidon's
financial statements are no longer employed by Arthur Andersen LLP, we have not
received Arthur Andersen LLP's consent with respect to the inclusion of those
financial statements and the related audit report; accordingly, if those
financial statements are inaccurate, your ability to make a claim against Arthur
Andersen LLP may be limited or prohibited.
RISKS INHERENT IN OUR INVESTMENT IN I-UNITS
EL PASO ENERGY PARTNERS' GENERAL PARTNER HAS ANTI-DILUTION RIGHTS.
Whenever El Paso Energy Partners issues equity securities to any person
other than its general partner and its affiliates, and whenever we issue shares
to any person other than El Paso Energy Partners' general partner and its
affiliates, its general partner and its affiliates have the right to purchase an
additional amount of those equity securities on the same terms as they are
issued to the other purchasers. This allows its general partner and its
affiliates to maintain their percentage partnership interest in El Paso Energy
Partners and us. No other unitholder, and no other holder of our shares, has a
similar right. Therefore, only El Paso Energy Partners Company and its
affiliates may protect themselves against dilution of their percentage interests
caused by the issuance of additional equity securities by us or El Paso Energy
Partners.
WE MAY NOT HAVE LIMITED LIABILITY IN THE CIRCUMSTANCES DESCRIBED BELOW,
INCLUDING POTENTIALLY HAVING LIABILITY FOR THE RETURN OF WRONGFUL
DISTRIBUTIONS.
El Paso Energy Partners owns and/or operates businesses in Alabama,
Colorado, Louisiana, Mississippi, New Mexico and Texas and plans to expand into
more states. In some states, the limitations on the liability of limited
partners for the obligations of a limited partnership have not been clearly
established. To the extent El Paso Energy Partners conducts business in one of
those states, we might be held liable for its obligations as if we were a
general partner if:
- a court or government agency determined that El Paso Energy Partners had
not complied with that state's partnership statute; or
- our rights to manage the partnership under the delegation agreement or
our other rights as the owner of i-units were to constitute "control" of
El Paso Energy Partners' business under that state's partnership statute.
In addition, under Delaware law, an assignee who becomes a substitute
limited partner of a limited partnership is liable for the obligations of his or
her assignor to make contributions to the partnership, except the assignee is
not obligated for liabilities that were unknown to him or her at
44
the time he or she became a limited partner and that could not be ascertained
from the partnership agreement.
A unitholder will not be liable for assessments in addition to its initial
capital investment in any of its capital securities representing limited
partnership interests. However, a unitholder may be required to repay its
amounts wrongfully returned or distributed to it under some circumstances. Under
Delaware law, El Paso Energy Partners may not make a distribution to unitholders
if the distribution causes its liabilities, other than liabilities to partners
on account of their partnership interests and nonrecourse liabilities, to exceed
the fair value of its assets. Delaware law provides that a limited partner who
receives such a distribution and knew at the time of the distribution that the
distribution violated the law will be liable to the limited partnership for the
amount of the distribution for three years from the date of the distribution.
RISKS RELATED TO CONFLICTS OF INTEREST AND LIMITATIONS OF FIDUCIARY DUTIES
EL PASO CORPORATION AND ITS SUBSIDIARIES HAVE CONFLICTS OF INTEREST WITH EL
PASO ENERGY PARTNERS AND, ACCORDINGLY, YOU.
El Paso Energy Partners has potential and existing conflicts of interest
with El Paso Corporation and its affiliates in four general areas:
- they often enter into transactions with each other, including some
relating to operating and managing assets, acquiring and selling assets,
and performing services;
- they often share personnel, assets, systems and other resources;
- from time to time, they compete for business and customers; and
- from time to time, they both may have an interest in acquiring the same
asset, business or other business opportunity.
El Paso Energy Partners expects to continue to enter into substantial
transactions and other activities with El Paso Corporation and its subsidiaries
because of the businesses and areas in which it and El Paso Corporation
currently operate, as well as those in which it plans to operate in the future.
Some more recent transactions in which it, on the one hand, and El Paso
Corporation and its subsidiaries, on the other hand, had a conflict of interest
include:
- in July 2002, it agreed to acquire the San Juan assets from El Paso
Corporation for approximately $782 million;
- in April 2002, it acquired the EPN Holding assets from El Paso
Corporation for approximately $750 million of total consideration;
- in October 2001, it acquired interests in the titleholder of, and other
interests in, the Chaco cryogenic natural gas processing plant in New
Mexico from a subsidiary of El Paso Corporation, among others;
- in October 2001, it purchased the remaining 50% equity interest that it
did not already own in Deepwater Holdings, L.L.C. from a subsidiary of El
Paso Corporation;
- in May 2001, it purchased its general partner's 1.01% non-managing
interest owned in twelve of its subsidiaries;
- in February 2001, it purchased fee-based NGL transportation and
fractionation assets located in south Texas from subsidiaries of El Paso
Corporation;
- in January and April 2001, it and Deepwater Holdings sold its interests
in several offshore Gulf of Mexico assets as a result of an FTC order
related to El Paso Corporation's merger with The Coastal Corporation; and
- pursuant to a general and administrative services agreement, subsidiaries
of El Paso Corporation provide it with administrative, operational and
other services.
In addition, El Paso Energy Partners and El Paso Corporation and its
subsidiaries share and, therefore will compete for, the time and effort of El
Paso Corporation personnel who provide services to El Paso Energy Partners,
including directors, officers and other personnel. Officers of the general
partner and its subsidiaries do not, and will not be required to, spend any
specified
45
percentage or amount of time on El Paso Energy Partners' business. Since these
shared officers and directors function as both its representatives and those of
El Paso Corporation and its subsidiaries, conflicts of interest could arise
between El Paso Corporation and its subsidiaries, on the one hand, and El Paso
Energy Partners or its unitholders, on the other. Additionally, some of these
shared officers and directors own and are awarded from time to time financial
shares, or options to purchase shares, of El Paso Corporation; accordingly,
their financial interests may not always be aligned completely with those of El
Paso Energy Partners or its limited partners.
Some other situations in which an actual or potential conflict of interest
arises between El Paso Energy Partners, on the one hand, and El Paso Energy
Partners Company, its general partner, or its affiliates (including El Paso
Corporation), on the other hand, and there is a benefit to its general partner
or its subsidiaries in which none of El Paso Energy Partners, its limited
partners or owners of shares will share include:
- compensation paid to the general partner, which includes incentive
distributions and reimbursements for reasonable general and
administrative expenses;
- payments to the general partner and its subsidiaries for any services
rendered to El Paso Energy Partners or on its behalf;
- the general partner's determination of which direct and indirect costs it
must reimburse; and
- the general partner's determination to establish cash reserves under
certain circumstances and thereby decrease cash available for
distributions to unitholders, which would decrease the value of the
shares to be distributed to holders of shares.
Under the delegation agreement, we will manage El Paso Energy Partners'
day-to-day operations and strategic direction. El Paso Corporation elects all of
the general partner's directors, and the general partner elects all of our
directors. In addition, El Paso Corporation's beneficial ownership interest in
El Paso Energy Partners' outstanding partnership interests could have a
substantial effect on the outcome of some actions requiring partner approval.
Accordingly, subject to certain minimum legal requirements, El Paso Corporation
makes the final determination regarding how any particular conflict of interest
is resolved.
We cannot assure you that El Paso Corporation and its subsidiaries will
always act in your best interest, even though doing so may appear to:
- protect and enhance El Paso Corporation's substantial investment in El
Paso Energy Partners;
- generate substantial cash flows to El Paso Corporation; and
- provide El Paso Corporation with efficiently priced capital for its
planned acquisitions.
El Paso Corporation has designated its investment in El Paso Energy
Partners as its primary vehicle for growth and development of its midstream
energy business, and it expects to receive additional transfers of assets from
El Paso Corporation in the future. These future transfers from El Paso
Corporation and other third-party acquisitions will be selected from time to
time, based on El Paso Energy Partners' cost-of-capital advantage, its ability
to integrate these growth assets into El Paso Corporation's significant North
American midstream business and its investment profile, which requires accretive
transactions based on stable cash flows with growth potential. However, El Paso
Corporation is neither contractually nor legally bound to use El Paso Energy
Partners as its primary vehicle for growth and development of midstream energy
assets, and may reconsider at any time, without notice. Further, El Paso
Corporation is not required to pursue any business strategy that will favor El
Paso Energy Partners' business opportunities over the business opportunities of
El Paso Corporation or any of its affiliates (or any of its other competitors
acquired by El Paso Corporation). In fact, El Paso Corporation may have
financial motives to favor its competitors. El Paso Corporation and its
subsidiaries (many of which are wholly owned) operate in some of the same lines
of business and in some of the same geographic areas in which El Paso Energy
Partners operates.
46
THE INTERESTS OF EL PASO CORPORATION MAY DIFFER FROM OUR INTERESTS, AND OUR
INTERESTS MAY DIFFER FROM THE INTERESTS OF LIMITED PARTNERS OF EL PASO ENERGY
PARTNERS.
El Paso Corporation indirectly owns all of the stock of El Paso Energy
Partners Company, the general partner of El Paso Energy Partners, and elects all
of its directors. El Paso Energy Partners Company owns all of our voting shares
and elects all of our directors. Furthermore, some of our directors and officers
are also directors and officers of El Paso Corporation and El Paso Energy
Partners Company and have fiduciary duties to manage the businesses of El Paso
Corporation and El Paso Energy Partners in a manner that may not be in your best
interest.
Under the delegation agreement, El Paso Energy Partners Company will
delegate to us substantially all of its management of El Paso Energy Partners.
As a result of this delegation, our board of directors could be held to have
fiduciary duties similar to those of the general partner of El Paso Energy
Partners. However, our limited liability company agreement limits the fiduciary
duties of our board of directors to our shareholders and El Paso Energy
Partners' partnership agreement limits the fiduciary duties of its general
partner to El Paso Energy Partners' unitholders, and those agreements also allow
our board of directors and El Paso Energy Partners' general partner to resolve
conflicts of interest by considering the interests of all the parties to the
conflict. These limitations reduce your rights under our limited liability
company agreement and the rights of El Paso Energy Partners' unitholders under
its partnership agreement to sue our board of directors or El Paso Energy
Partners Company should either of them act in a way that, were it not for these
limitations of liability, would be a breach of fiduciary duties. These limited
duties are very different from the more familiar fiduciary duties of a corporate
board of directors, which must always act in the best interests of the
corporation and its stockholders.
Consequently, conflicts of interest could arise from time to time among
you, El Paso Energy Partners' unitholders and El Paso Corporation. Our board of
directors may consider the interests of all parties to a conflict in making
important business decisions and may not make those decisions in the best
interests of you or El Paso Energy Partners' unitholders. The following
situations, among others, could give rise to conflicts of interest:
- We have the sole discretion to determine whether El Paso Energy Partners
will issue additional units or other equity securities or whether it will
purchase outstanding units, and we may decide not to do so even when such
issuance or purchase would be in the best interests of El Paso Energy
Partners and its unitholders.
- We have the sole discretion to determine whether we issue additional
shares, other than in connection with the subdivision of i-units upon a
cash distribution on the common units, and we may decide not to do so
even when such issuance would be in the best interests of our
shareholders and El Paso Energy Partners.
- We control payments to El Paso Corporation for any services rendered for
El Paso Energy Partners' benefit, subject to the limitations described in
"Conflicts of Interest and Fiduciary Responsibilities."
- We determine which costs are reimbursable by El Paso Energy Partners.
- We control the enforcement of obligations owed to El Paso Energy Partners
by us and El Paso Energy Partners Company.
- We decide whether to retain separate counsel, accountants or others to
perform services for El Paso Energy Partners.
In these situations, our shareholders, El Paso Energy Partners' unitholders and
El Paso Corporation may have interests that are adverse to one another, and we
may consider all of these interests in deciding to take a particular course of
action.
47
OUR LIMITED LIABILITY COMPANY AGREEMENT RESTRICTS OR ELIMINATES A NUMBER OF
THE FIDUCIARY DUTIES THAT OTHERWISE WOULD BE OWED BY OUR BOARD OF DIRECTORS TO
YOU.
Modifications of state law standards of fiduciary duties may significantly
limit your ability to successfully challenge the actions of our board of
directors that might otherwise be a breach of their fiduciary duties. Our
limited liability company agreement restricts or eliminates a number of the
fiduciary duties that would otherwise be owed by our board of directors to our
shareholders.
Our limited liability company agreement provides that none of our directors
or officers will be liable to us or any other person for any act or omission
taken or omitted in the reasonable belief that the act or omission is in or is
not contrary to our best interests and is within his scope of authority, so long
as the act or omission does not constitute fraud, willful misconduct, bad faith
or gross negligence.
WE MAY INCREASE THE CASH RESERVES AND EXPENDITURES OF EL PASO ENERGY PARTNERS,
WHICH WOULD DECREASE CASH DISTRIBUTIONS ON ITS COMMON UNITS AND THE VALUE OF
DISTRIBUTIONS OF ADDITIONAL SHARES WE MAKE TO YOU.
Under the delegation agreement that we will enter into with El Paso Energy
Partners Company, we will have broad discretion to make cash expenditures and to
establish and make additions to cash reserves for any proper partnership
purpose, including reserves for the purpose of:
- providing for future operating and capital expenditures;
- providing for debt service;
- providing funds for up to the next four quarterly distributions;
- providing funds to redeem or otherwise repurchase its outstanding debt or
equity;
- stabilizing distributions of cash to capital security holders;
- complying with the terms of any agreement or obligation of ours; and
- providing for a discretionary reserve amount.
If we increase cash reserves, the amount of cash that El Paso Energy Partners
can distribute to its common unitholders will decrease, which would decrease the
number and value of the additional shares we distribute to you. The timing and
amount of additions to discretionary reserves could significantly reduce
potential distributions that certain unitholders could receive or ultimately
affect who gets the distribution. The reduction or elimination of a previously
established reserve in a particular quarter will result in a higher level of
cash available for distribution than would otherwise be available in such
quarter. Depending upon the resulting level of cash available for distribution,
El Paso Energy Partners Company, which owns all of our voting shares and elects
all of our directors, may receive incentive distributions which it would not
have otherwise received. Thus, El Paso Energy Partners Company and us could have
a conflict of interest with you in determining the amount and timing of any
increases or decreases in reserves. El Paso Energy Partners Company receives the
following compensation:
- distributions in respect of its general and limited partner interests in
El Paso Energy Partners;
- incentive distributions to the extent that available cash exceeds
specified target levels that are over $0.325 per unit per quarter; and
- reimbursements for reasonable general and administrative expenses, and
other reasonable expenses, incurred by it and its subsidiaries for or on
El Paso Energy Partners' behalf.
El Paso Energy Partners' partnership agreement was not, and many of the
other agreements, contracts and arrangements between El Paso Energy Partners, on
the one hand, and its general partner and its subsidiaries, on the other hand,
were not and may not be the result of arm's-length negotiations.
In addition, increases to reserves (other than the discretionary reserve
amount provided for in the partnership agreement) will reduce El Paso Energy
Partners' cash from operations, which under certain limited circumstances could
result in certain distributions to be attributable to
48
interim capital transactions rather than to cash from operations. If a cash
distribution was attributable to an interim capital transaction, (1) 99% of the
distribution would be made pro rata in respect of the common units and the
Series B preference units, and (2) the distribution would be deemed a return of
a portion of an investor's investment in his partnership interest and would
reduce each of the general partner's target distribution levels proportionately.
EL PASO ENERGY PARTNERS' PARTNERSHIP AGREEMENT PURPORTS TO LIMIT ITS GENERAL
PARTNER'S FIDUCIARY DUTIES AND CERTAIN OTHER OBLIGATIONS RELATING TO IT.
Because we will manage substantially all of the business and affairs of El
Paso Energy Partners under the delegation agreement with El Paso Energy Partners
Company, we could be held to have fiduciary duties similar to those of the
general partner. These state laws standards include the highest duties of good
faith, fairness and loyalty to the shareholders and to the unitholders, as
applicable. The duty of loyalty generally would prohibit our board of directors
or El Paso Energy Partners Company from taking any action or engaging in any
transaction as to which it has a conflict of interest. Although El Paso Energy
Partners' general partner owes certain fiduciary duties to it and will be liable
for all of El Paso Energy Partners' debts, other than non-recourse debts, to the
extent not paid by El Paso Energy Partners, certain provisions of El Paso Energy
Partners' partnership agreement contain exculpatory language purporting to limit
the liability of its general partner to it and its unitholders. For example, the
partnership agreement provides that:
- borrowings of money by El Paso Energy Partners, or the approval of the
borrowings by its general partner, will not constitute a breach of any
duty of its general partner to it or its unitholders whether or not the
purpose or effect of the borrowing is to permit distributions on its
limited partner interests or to result in or increase incentive
distributions to its general partner;
- any action taken by its general partner consistent with the standards of
reasonable discretion set forth in certain definitions in its partnership
agreement will be deemed not to breach any duty of its general partner to
it or to its unitholders; and
- in the absence of bad faith by its general partner, the resolution of
conflicts of interest by its general partner will not constitute a breach
of the partnership agreement or a breach of any standard of care or duty.
Provisions of the partnership agreement also purport to modify the
fiduciary duty standards to which its general partner would otherwise be subject
under Delaware law, under which a general partner owes its limited partners the
highest duties of good faith, fairness and loyalty. The duty of loyalty would
generally prohibit its general partner from taking any action or engaging in any
transaction as to which it had a conflict of interest. The partnership agreement
permits its general partner to exercise the discretion and authority granted to
it in that agreement in managing it and in conducting its retained operations,
so long as its actions are not inconsistent with its interests. El Paso Energy
Partners' general partner and its officers and directors may not be liable to it
or to its unitholders for certain actions or omissions which might otherwise be
deemed to be a breach of fiduciary duty under Delaware or other applicable state
law. Further, the partnership agreement requires it to indemnify its general
partner to the fullest extent permitted by law, which indemnification, in light
of the exculpatory provisions in the partnership agreement, could result in it
indemnifying its general partner for negligent acts. Neither El Paso Corporation
nor any of its other subsidiaries, other than its general partner, owes
fiduciary duties to us.
49
INFORMATION REGARDING
FORWARD LOOKING STATEMENTS
This prospectus contains or incorporates by reference forward-looking
statements. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and made in good
faith, assumed facts or bases almost always vary from the actual results, and
the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we and El Paso Energy Partners express an expectation or belief as to
future results, such expectation or belief is expressed in good faith and is
believed to have a reasonable basis. We cannot assure you, however, that the
statement of expectation or belief will result or be achieved or accomplished.
These statements relate to analyses and other information which are based on
forecasts of future results and estimates of amounts not yet determinable. These
statements also relate to our and El Paso Energy Partners' future prospects,
developments and business strategies. These forward-looking statements are
identified by their use of terms and phrases such as "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "plan," "predict," "project,"
"will," and similar terms and phrases, including references to assumptions.
These statements are contained in the sections entitled "Summary," "Risk
Factors," "Business" and other sections of this prospectus and in the documents
incorporated by reference. These forward-looking statements involve risks and
uncertainties that may cause our actual future activities and results of
operations to be materially different from those suggested or described in this
prospectus or the documents incorporated by reference. These risks include the
risks that are identified in:
- this prospectus in the "Risk Factors" section;
- the section entitled "Risk Factors and Cautionary Statement for Purposes
of the "Safe Harbor" Provisions of the Private Securities Litigation
Reform Act of 1995" included in El Paso Energy Partners' Annual Report on
Form 10-K for the year ended December 31, 2001; and
- the other documents incorporated by reference.
These risks may also be specifically described in El Paso Energy Partners'
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and other documents
either of them have filed with the Securities and Exchange Commission. We and El
Paso Energy Partners undertake no obligation to publicly update or revise any
forward-looking statements, whether as a result of new information or otherwise.
If one or more of these risks or uncertainties materialize, or if underlying
assumptions prove incorrect, our actual results may vary materially from those
expected, estimated or projected.
50
PLANNED ACQUISITION
OF THE SAN JUAN ASSETS
On July 16, 2002, El Paso Energy Partners and El Paso Corporation entered
into a letter of intent regarding the proposed acquisition by El Paso Energy
Partners of the San Juan assets. The San Juan assets include gathering,
compression and treating assets located in the San Juan Basin of New Mexico,
offshore oil and natural gas pipelines located in the Gulf of Mexico and NGL
assets located in Texas. The following is a description of the San Juan assets:
- The assets located in the San Juan Basin include:
- approximately 5,300 miles of natural gas gathering pipelines, known as
the San Juan gathering system, with capacity of over 1.1 Bcf/d connected
to approximately 9,500 wells producing natural gas from the San Juan
Basin located in northwest New Mexico and southwest Colorado;
- approximately 250,000 horsepower of compression;
- the 58 MMcf/d Rattlesnake CO(2) treating facility;
- a 50% interest in the 250 MMcf/d Coyote Gas CO(2) treating facility; and
- the remaining interests in the Chaco cryogenic natural gas processing
plant not already owned by El Paso Energy Partners and the price risk
management positions related to this facility's operations.
- The offshore pipeline assets include:
- The Typhoon gas pipeline, a 35-mile, 20-inch natural gas pipeline
originating on the Chevron/BHP "Typhoon" platform in the Green Canyon
area of the Gulf of Mexico extending to the ANR Patterson System in
Eugene Island Block 371; and
- The Typhoon oil pipeline, a 16-mile, 12-inch oil pipeline originating on
the Chevron/BHP "Typhoon" platform extending to a platform in Green
Canyon Block 19 with onshore access through various oil pipelines.
- The Texas NGL assets include:
- a 230-mile, 8-inch pipeline with capacity of approximately 35 MBbls/d
extending from Corpus Christi to Pasadena, which is currently out of
service;
- a 162-mile, 4-inch to 6-inch propane pipeline extending from Corpus
Christi to McAllen and the Hidalgo truck terminal facilities;
- the Markham butane shuttle, a 138-mile, 8-inch pipeline with capacity of
approximately 20 MBbls/d running between Corpus Christi and leased
storage facilities at Markham with capacity of approximately 3.8 MMBbls;
- a 49-mile, 6-inch pipeline with capacity of approximately 15 MBbls/d
extending from Almeda to Texas City and the Texas City terminal; and
- the Almeda fractionator, a 24 MBbls/d fractionator consisting of two
trains and related leased storage facilities of approximately 9.8
MMBbls.
The purchase price for the San Juan assets is approximately $782 million,
subject to adjustments for capital expenditures, working capital and other
matters.
Currently, the San Juan gathering system gathers in excess of 1.1 Bcf/d of
natural gas. Major producers such as Burlington Resources, Conoco and BP have
dedicated reserves to the San Juan Basin gathering system, which delivers
approximately 600 MMcf/d of natural gas to El Paso Energy Partners' Chaco
processing plant. The Rattlesnake and Coyote Gas CO(2) treating facilities
extract carbon dioxide from local coal gas seam production.
The Typhoon oil and natural gas transportation pipelines extend to
ChevronTexaco and BHP-Billiton's Typhoon discovery in Green Canyon Block 237, in
the deeper water regions in the Gulf of Mexico. The Typhoon oil pipeline
currently transports approximately 40 MBbls/d to the Shell Boxer platform, a
delivery point into the pipeline owned by El Paso Energy Partners' Poseidon
joint venture. The Typhoon natural gas pipeline currently transports 60 MMcf/d
from
51
the Typhoon Field for redelivery into El Paso Corporation's ANR Patterson
Offshore Pipeline System. El Paso Energy Partners intends to integrate the
Typhoon gas pipeline into the Marco Polo gas gathering systems, to be
constructed by El Paso Energy Partners' Deepwater Gathering joint venture, to
serve Anadarko's Marco Polo Field discovery in the Gulf of Mexico.
The Texas NGL assets acquired in this transaction transport propane and
butane from Corpus Christi to Houston, and within the Houston-Texas City area,
to refineries and petrochemical users and also provide access to the Mont
Belvieu NGL markets. Currently, portions of the Texas NGL assets are shut-in
pending refurbishment and expansion, the costs of which will be borne by El Paso
Energy Partners, and are expected to be completed by the end of the year. The
lease covering the NGL storage facilities expires in 2012
The San Juan assets generated $114 million of pro forma EBITDA during the
year ended December 31, 2001, as adjusted to reflect the San Juan asset
acquisition.
The parties' obligations under the letter of intent are subject to the
satisfaction of specified conditions, including negotiating and executing
definitive agreements, obtaining Hart Scott Rodino and other third-party
approvals and consents, obtaining satisfactory results from ongoing due
diligence, and completion of El Paso Energy Partners' offering of the i-units to
us, which will occur contemporaneously with the completion of our offering of
our shares through this prospectus. El Paso Energy Partners will finance the San
Juan assets acquisition with a portion of the proceeds from its sale of i-units
to us and long-term borrowings.
52
USE OF PROCEEDS
EL PASO ENERGY MANAGEMENT
We expect that we will receive net proceeds of approximately $658 million
from the sale of the 20,000,000 shares we are offering, based on the assumed
initial public offering price of $34.23 per share and after deducting
underwriting discounts and estimated offering expenses payable by us. If the
underwriters exercise their over-allotment option to purchase additional shares
from us in full, we will receive net proceeds of approximately $757 million. We
will use $0.5 million of the net proceeds of this offering to compensate El Paso
Corporation for its tax indemnity obligations and the remainder to purchase a
number of i-units from El Paso Energy Partners equal to the number of shares
outstanding immediately following this offering.
EL PASO ENERGY PARTNERS
El Paso Energy Partners will use $391 million of the proceeds it receives
from the sale of i-units to us, together with $391 million of net proceeds from
its revolving credit facility and other sources of debt financing, to fund its
acquisition of the San Juan assets from subsidiaries of El Paso Corporation,
estimated to cost approximately $782 million. El Paso Energy Partners will use
the remaining $267 million to fund general business requirements, including
temporarily repaying indebtedness under its revolving credit facility.
Over the past 12 months, El Paso Energy Partners used proceeds from its
revolving credit facility for general partnership purposes, including to fund a
portion of its April 2002 EPN Holding acquisition, and the related repayment of
$95 million of indebtedness associated with its Prince TLP (which it disposed of
in the EPN Holding transaction), its October 2001 acquisitions of interests in
the Chaco plant and the 50% indirect interest in HIOS and East Breaks that it
did not already own (including the repayment of $110 million of debt associated
with those systems), as well as for the construction of pipelines, platforms and
related infrastructure facilities.
As of July 31, 2002, the weighted average interest rate of debt outstanding
under El Paso Energy Partners' revolving credit facility was 3.55%. The credit
facility matures in May 2004.
53
DISTRIBUTIONS AND DISTRIBUTION POLICY
OUR POLICY REGARDING SHARE DISTRIBUTIONS
Under the terms of our limited liability company agreement:
- we will only make distributions to owners of shares in additional shares
or fractions of shares, except in connection with our liquidation or
after all of our shares have been acquired by El Paso Corporation;
- we will calculate the fraction of an additional share to be distributed
each quarter per outstanding share by dividing:
- the amount of cash distribution paid by El Paso Energy Partners on each
common unit; by
- the average market price of a share during the ten consecutive trading
days preceding the date on which the shares begin to trade ex-dividend
under the rules of the principal exchange on which they are listed;
- we will make our distributions of shares at the same time as El Paso
Energy Partners makes its quarterly distributions of cash to owners of
common units; and
- we will simultaneously make a distribution of an equivalent fraction of a
voting share on each voting share or fraction of a voting share owned by
the general partner of El Paso Energy Partners.
When El Paso Energy Partners makes its quarterly distribution on its common
units, the number of i-units we own will also automatically increase under the
provisions of the El Paso Energy Partners partnership agreement with the result
that the number of i-units we own will equal the number of our shares and voting
shares that are then outstanding.
PRICE RANGE OF EL PASO ENERGY PARTNERS' COMMON UNITS AND DISTRIBUTIONS
As of July 31, 2002, there were 44,030,314 common units outstanding, held
by approximately 771 holders of record of common units. The common units are
traded on the NYSE under the symbol "EPN." The following table sets forth, for
the periods indicated, the high and low sales prices for the common units, as
reported on the NYSE Composite Transactions Tape, and quarterly declared cash
distributions thereon. The last reported sale price of common units on the NYSE
on August 9, 2002 was $34.23 per unit.
<Table>
<Caption>
PRICE RANGE CASH
------------------ DISTRIBUTIONS PER
HIGH LOW COMMON UNIT
---- --- -----------------
2002
Third Quarter............................ $34.250(1) $20.500(1) $0.6750(2)
Second Quarter........................... 38.680 29.990 0.6500
First Quarter............................ 38.550 31.650 0.6500
2001
Fourth Quarter $42.100 $30.750.. $0.6125
Third Quarter............................ 40.450 30.800 0.5750
Second Quarter........................... 35.500 29.570 0.5750
First Quarter............................ 33.990 25.500 0.5500
2000
Fourth Quarter........................... $27.750 $23.000 $0.5500
Third Quarter............................ 28.000 22.500 0.5375
Second Quarter........................... 26.000 19.500 0.5375
First Quarter............................ 21.375 18.125 0.5250
</Table>
- ---------------
(1) Consisting of the period from July 1 through August 9, 2002.
(2) To be paid on November 15, 2002 to unit holders of record on October 31,
2002.
54
EL PASO ENERGY PARTNERS' DISTRIBUTION POLICY
REQUIREMENT TO DISTRIBUTE AVAILABLE CASH
The partnership agreement of El Paso Energy Partners provides that it will
distribute all of its available cash to its partners on a quarterly basis.
Distributions for a quarter are made within 45 days after the end of the
quarter.
DEFINITION OF AVAILABLE CASH
Available cash generally means, for any calendar quarter, all cash received
by El Paso Energy Partners from all sources, plus net reduction to cash
reserves, less all of its cash disbursements and net additions to cash reserves.
ESTABLISHMENT OF RESERVES
Decisions regarding amounts to be placed in or released from El Paso Energy
Partners' reserves have a direct impact on the amount of available cash for
distribution. This is because increases and decreases in reserves are taken into
account in computing available cash. Each quarter we may, in our reasonable
discretion, determine the amounts to be placed in or released from reserves,
subject to restrictions on the purposes of the reserves and to the approval of
El Paso Energy Partners Company.
CASH DISTRIBUTIONS AND i-UNIT ACCRETION
Typically, the general partner and owners of common units and Series B
preference units will receive distributions in cash. Instead of receiving cash
distributions, the number of i-units we own and the percentage of total units in
El Paso Energy Partners we own will automatically increase. When El Paso Energy
Partners makes cash distributions to the general partner and the owners of
common units and when we make our quarterly distribution of shares as described
above, the number of i-units we own will increase automatically under the
provisions of the El Paso Energy Partners partnership agreement with the result
that the number of i-units we own will equal the number of our shares and voting
shares that are then outstanding. The cash equivalent amount of the additional
i-units that we will own following a distribution of cash to the general partner
and owners of common units will be treated as if it actually had been
distributed for purposes of determining the distributions to the general
partner. El Paso Energy Partners will not distribute the cash related to our
i-units but will instead retain that cash and use the cash in its business.
If El Paso Corporation has acquired all of our shares, allocations and
distributions with respect to the i-units will change. See "Description of the
i-units: Acquisition by El Paso Corporation."
El Paso Energy Partners is not obligated to allocate income for tax
purposes on, or make distributions of cash to owners of, the Series B preference
units until 2010, although it has the right to make discretionary distributions
on the Series B preference units or to redeem Series B preference units at any
time. Prior to 2010, the liquidation preference of El Paso Energy Partners'
Series B preference units will increase at an annual rate of 10%, compounded
semi-annually. El Paso Energy Partners is not obligated to pay cash
distributions on these Series B preference units until October 1, 2010, when the
rate will increase to 12%. After September 2010, this preference income
allocation will be made on a current basis and cash distributions will be
required to be paid on a current basis; accordingly, El Paso Energy Partners
will not be permitted to make any distributions in respect of any of its common
units until El Paso Energy Partners has paid aggregate distributions in respect
of each of its Series B preference units equal to all unpaid accruals occurring
after September 2010.
TWO DIFFERENT TYPES OF DISTRIBUTIONS
Distributions by El Paso Energy Partners will be characterized either as
distributions of cash from operations or as distributions of cash from interim
capital transactions. This distinction affects the distributions of cash to
owners of common units and Series B preference units and to the general partner.
55
CASH FROM OPERATIONS
Cash from operations generally refers to the cash balance of El Paso Energy
Partners on the date it commenced operations, plus all cash generated by the
operations of its business, after deducting related cash expenditures, net
additions to or reductions in reserves, debt service and various other items.
CASH FROM INTERIM CAPITAL TRANSACTIONS
Cash from interim capital transactions will generally result only from
distributions that are funded from borrowings or sales of debt securities (other
than for working capital purposes and other than for goods and services
purchased on open account in the ordinary course of business) and equity
securities and sales or other dispositions of assets for cash, other than
inventory, accounts receivable and other current assets and assets disposed of
in the ordinary course of business.
RULE FOR CHARACTERIZING DISTRIBUTIONS
To avoid the difficulty of trying to determine whether available cash
distributed by El Paso Energy Partners is cash from operations or cash from
interim capital transactions, all available cash distributed by El Paso Energy
Partners from any source will be treated as distributions of cash from
operations until the sum of all available cash distributed equals the cumulative
amount of cash from operations actually generated from the date El Paso Energy
Partners commenced operations through the end of the calendar quarter prior to
that distribution. Any distribution of available cash that, when added to the
sum of all prior distributions, is in excess of the cumulative amount of cash
from operations will be considered a distribution of cash from interim capital
transactions. For purposes of calculating the sum of all distributions of
available cash, the cash equivalent amount of the additional i-units that we
will own following a distribution of cash to the general partner and owners of
common units will be treated as distributions of available cash, even though we
do not receive the cash. El Paso Energy Partners will retain that cash and use
the cash in its business.
GENERAL PROCEDURES FOR QUARTERLY DISTRIBUTIONS
The following illustrates the implementation of the provisions described
above. For each quarter, we will use the following procedures to determine
distributions to our shareholders and the partners of El Paso Energy Partners
and the number of additional i-units we will own.
- First, we will determine the amount of available cash for the quarter.
- Second, we will determine whether the available cash will be
characterized as cash from operations or cash from interim capital
transactions.
- Third, we will calculate the amount of this available cash that will be
distributed to the partners of El Paso Energy Partners, the amount that
will be distributed to the holders of Series B preference units, when
applicable, and the amount that will be retained by El Paso Energy
Partners for use in its business. If the available cash is characterized
as cash from operations, we will cause El Paso Energy Partners to
distribute and, with respect to the i-shares, retain the available cash
as described below under "Distributions of Cash from Operations." If the
available cash is characterized as cash from interim capital
transactions, we will cause El Paso Energy Partners to distribute and,
with respect to the i-shares, retain the available cash as described
below under "Distributions of Cash from Interim Capital Transactions." As
a result of this process, we will determine the amounts of cash to be
distributed to the general partner and owners of common units and the
amount of cash to be retained by El Paso Energy Partners for use in its
business. We will also determine the total cash equivalent amount that
will be used to calculate the number of additional i-units we will own
following the distribution of cash to the general partner and owners of
common units (as described in "fifth" below) and the number of additional
shares we will distribute to our shareholders (as described in "sixth"
below).
56
- Fourth, we will divide the total cash equivalent amount by the average
market price per share, as determined for the 10-trading day period
ending on the trading day immediately prior to the ex-dividend date for
our shares, to determine the number of additional i-units we will own
following the distribution of cash to the general partner and owners of
common units described in "fifth" below.
- Fifth, we will cause El Paso Energy Partners to make the cash
distributions to the general partner and owners of common units and, when
applicable, Series B preference units, and the number of i-units we own
will increase automatically under the provisions of the El Paso Energy
Partners partnership agreement with the result that the number of i-units
we own will equal the number of our shares and voting shares that are
outstanding following the distribution described in "sixth" below.
- Sixth, we will divide the total cash equivalent amount by the average
market price per share, as determined for the 10-trading day period
ending on the trading day immediately prior to the ex-dividend date for
our shares, to determine the number of shares that we will distribute pro
rata to the owners of our shares and then make that distribution.
Beginning October 1, 2010, El Paso Energy Partners must distribute cash
equal to income allocated, including any arrearages from October 1, 2010, on all
outstanding Series B preference units prior to making any distributions with
respect to the common units.
The discussion below indicates the percentages of distributions required to
be made to the limited partners and general partner of El Paso Energy Partners.
All distributions to the general partner and owners of common units and, when
applicable, Series B preference units will be made in cash. Except in
liquidation, i-units will not be entitled to receive cash distributions. Instead
of receiving cash distributions, the number of i-units we own will increase
automatically under the terms of El Paso Energy Partners' partnership agreement
as described above. The cash equivalent amount of the additional i-units that we
will own following a distribution of cash to the general partner and owners of
common units will be treated as if it had actually been distributed for purposes
of determining the distributions to be made to the general partner. El Paso
Energy Partners will not distribute the cash related to our i-units but instead
will retain that cash and use the cash in its business.
DISTRIBUTIONS OF CASH FROM OPERATIONS
Prior to October 1, 2010, El Paso Energy Partners will make the following
distributions of available cash constituting cash from operations for each
quarter:
- first, 99% of any available cash to the owners of Series B preference
units pro rata and 1% to the general partner until the owners of Series B
preference units have received a total amount per unit in cash equal to
the amount, if any, that El Paso Energy Partners in its sole discretion
elects to distribute in respect of the Series B preference units for that
quarter;
- second, 99% of any available cash then remaining to the owners of common
units pro rata and 1% to the general partner until the owners of common
units have received a total of $0.325 per unit in cash for that quarter;
- third, 86% of any available cash then remaining to the owners of common
units pro rata and 14% to the general partner until the owners of common
units have received a total of $0.375 per unit in cash for that quarter;
- fourth, 76% of any available cash then remaining to the owners of common
units pro rata and 24% to the general partner until the owners of common
units have received a total of $0.425 per unit in cash for that quarter;
and
- fifth, 51% of any available cash then remaining to the owners of common
units pro rata, and 49% to the general partner.
El Paso Energy Partners may not make the distributions of available cash
described above unless it also retains in respect of each i-unit then
outstanding an amount of available cash equal
57
to the amount obtained by dividing (i) the cash distribution to be made on a
common unit by (ii) 0.99.
The per-unit thresholds in the above distribution formula will be reduced
in the event of any distributions of cash from interim capital transactions.
After October 1, 2010, El Paso Energy Partners will make the following
distributions of available cash constituting cash from operations for each
quarter:
- first, 99% of any available cash to the owners of Series B preference
units pro rata and 1% to the general partner until the owners of Series B
preference units have received a total amount per unit in cash from
September 2010 to such date equal to the aggregate amount of income, if
any, allocated to the Series B preference units from September 2010;
- second, 99% of any available cash then remaining to the owners of common
units pro rata and 1% to the general partner until the owners of common
units have received a total of $0.325 per unit in cash for that quarter;
- third, 86% of any available cash then remaining to the owners of common
units pro rata and 14% to the general partner until the owners of common
units have received a total of $0.375 per unit in cash for that quarter;
- fourth, 76% of any available cash then remaining to the owners of common
units pro rata and 24% to the general partner until the owners of common
units have received a total of $0.425 per unit in cash for that quarter;
and
- fifth, 51% of any available cash then remaining to the owners of common
units pro rata, and 49% to the general partner.
El Paso Energy Partners may not make the distributions of available cash
described above unless it also retains in respect of each i-unit then
outstanding an amount of available cash equal to the amount obtained by dividing
(i) the cash distribution to be made on a common unit by (ii) 0.99.
The per-unit thresholds in the above distribution formula will be reduced
in the event of any distributions of cash from interim capital transactions.
58
ILLUSTRATION OF A DISTRIBUTION OF CASH FROM OPERATIONS
The following tables depict a hypothetical example of a quarterly
distribution prior to October 1, 2010 of cash from operations to the partners of
El Paso Energy Partners and the related retention of cash from operations and
increase in the number of i-units we own and our distribution of shares to our
shareholders. The example assumes that El Paso Energy Partners has a total of
64,030,315 units outstanding, composed of 44,030,314 common units and 20,000,001
i-units; 20,000,001 shares (including voting shares) are outstanding; no
discretionary distributions are made on the Series B preference units; and no
distributions of cash from interim capital transactions have occurred. The
amounts shown for "cash receipts less cash disbursements for the quarter" and
"reserves" are hypothetical and were selected to produce a quarterly
distribution of exactly $0.675 of cash per common unit of El Paso Energy
Partners.
DETERMINATION OF AVAILABLE CASH
<Table>
Cash receipts less cash disbursements for the quarter....... $70,342,675
Less: reserves.............................................. 10,000,000
-----------
Available cash............................................ $60,342,675
===========
</Table>
ALLOCATION BETWEEN GENERAL PARTNER AND LIMITED PARTNERS
<Table>
<Caption>
SERIES B TOTAL CASH
PREFERENCE COMMON UNIT FOR COMMON
QUARTERLY UNITS LIMITED LIMITED GENERAL AND TOTAL CASH
PER UNIT PARTNERS PARTNERS PARTNER SERIES B FOR GENERAL TOTAL CASH
AMOUNT PERCENTAGE(1) PERCENTAGE PERCENTAGE UNITHOLDERS PARTNER(2) DISTRIBUTIONS
--------- ------------- ----------- ---------- ----------- ----------- -------------
Minimum Quarterly
Distribution....... $0.000-$0.325 0% 99% 1% $14,309,852 $ 144,544 $14,454,396
First Target
Distribution....... $0.325-$0.375 0% 86% 14% 2,201,516 509,549 2,711,065
Second Target
Distribution....... $0.375-$0.425 0% 76% 24% 2,201,516 997,847 3,199,363
Thereafter........... $0.425-$0.675 0% 51% 49% 11,007,579 15,281,791 26,289,370
----------- ----------- -----------
Total $29,720,463 $16,933,731 $46,654,194
=========== =========== ===========
</Table>
PRO RATA ALLOCATION AMONG CLASSES OF LIMITED PARTNERS,
DISTRIBUTIONS TO THE GENERAL PARTNER AND
CASH RETAINED BY EL PASO ENERGY PARTNERS
<Table>
<Caption>
TOTAL
-----------
Cash distributions to all owners of common units............ $29,720,462
Cash distributions to the general partner(2)................ 16,933,731
Cash distributions to all owners of Series B preference
units(1).................................................. 0
-----------
Total cash distributions............................... 46,654,193
-----------
Cash deemed reinvested by all owners of i-units............. 13,500,000
Cash deemed reinvested by the general partner(3)............ 188,482
Cash deemed reinvested by all owners of Series B preference
units(1).................................................. 0
-----------
Total cash reinvestments............................... 13,688,482
-----------
Total Available Cash.............................. $60,342,675
===========
</Table>
- ---------------
(1) Assumes El Paso Energy Partners does not make any discretionary distribution
payments on the Series B preference units during the hypothetical quarter.
59
(2) Includes general partner's (a) incentive distributions attributable to both
common units and i-units and (b) 1% interest attributable only to common
units.
(3) Includes general partner's 1% interest attributable only to i-units, which
amount is reinvested along with the cash equivalent amounts attributable to
the i-units.
DETERMINATION OF ADDITIONAL I-UNITS AND SHARE DISTRIBUTIONS
(ASSUMING $34.23 AVERAGE SHARE PRICE)
<Table>
<Caption>
CASH
EQUIVALENT
PER UNIT OR TOTAL CASH AMOUNT
PER SHARE EQUIVALENT PER UNIT OR
TOTAL PRICE AMOUNT PER SHARE
----- ----------- ---------- -----------
Additional i-units we will own............ 394,391 $34.23 $13,500,000 $0.675
Additional shares distributed to owners of
our outstanding shares.................. 394,391 $34.23 $13,500,000 $0.675
</Table>
DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS
Distributions of cash from interim capital transactions will be made in
cash to the general partner and owners of common units and Series B preference
units. Instead of receiving cash distributions when a distribution of cash from
interim capital transactions is made, the number of i-units we own will increase
automatically under the terms of El Paso Energy Partners' partnership agreement.
Distributions of cash from interim capital transactions will be made as follows:
- 99% to all owners of common units and Series B preference units pro rata;
and
- 1% to the general partner;
until a hypothetical holder of each of the common units and the Series B
preference units has received with respect to such units distributions of
available cash constituting cash from interim capital transactions in an amount
equal to such unit's unrecovered capital (being currently $10.25 for a common
unit and the liquidation value plus accretions for a Series B preference unit);
provided, however, that El Paso Energy Partners may not make any such
distribution unless at the same time it makes that distribution it also retains
in respect of each i-unit then outstanding an amount of cash equal to the amount
obtained by dividing (1) the cash distribution to be made on a common unit by
(2) 0.99.
As cash from interim capital transactions is distributed and unrecovered
capital is reduced, the minimum quarterly and target distribution levels will be
adjusted downward proportionately. With respect to the common units, a
distribution of cash from interim capital transactions will be treated as if it
were a repayment of the initial public offering price of the common units. To
reflect that repayment, the minimum quarterly and target distribution levels
will be adjusted downward proportionately by multiplying each distribution
amount by a fraction, the numerator of which is the unrecovered initial common
unit price immediately after giving effect to that distribution and the
denominator of which is the unrecovered initial common unit price immediately
prior to giving effect to that distribution. The unrecovered initial common unit
price includes the amount by which the initial common unit price exceeds the
aggregate distribution of cash from interim capital transactions per common
unit.
When the unrecovered capital is zero, then each of the minimum quarterly
and target distribution levels will have been reduced to zero. Thereafter all
distributions of available cash from all sources will be treated as if they were
cash from operations and available cash will be distributed 51% to the common
units and, as applicable, Series B preference units pro rata, and 49% to the
general partner; provided, however, that El Paso Energy Partners may not make
any such distribution unless at the same time it makes that distribution it also
retains in respect of each i-unit then outstanding an amount of cash equal to
the amount obtained by dividing (1) the cash distribution to be made on a common
unit by (2) 0.99.
60
ADJUSTMENT OF THE MINIMUM QUARTERLY AND TARGET DISTRIBUTION LEVELS
The minimum quarterly and target distributions will be proportionately
adjusted upward or downward, as appropriate, in the event of any combination or
subdivision of units, whether effected by a distribution payable in any type of
units or otherwise, but not by reason of the additional i-units that we will own
after each quarterly distribution as described above or the issuance of
additional common units, Series B preference units or i-units for cash or
property. For example, in connection with El Paso Energy Partners' 1996 2-for-1
split of the common units and then-outstanding preference units the minimum
quarterly and target distributions were each reduced to 50% of its initial
level.
In addition, if a distribution is made of available cash constituting cash
from interim capital transactions, the minimum quarterly distribution and the
target distribution levels will be adjusted downward proportionately, by
multiplying each distribution level, as the same may have been previously
adjusted, by a fraction, the numerator of which is the unrecovered capital
immediately after giving effect to that distribution and the denominator of
which is the unrecovered capital immediately prior to that distribution. For
example, assuming the unrecovered initial common unit price is $10.25 per common
unit and if cash from the first interim capital transaction of $5.125 per unit
is distributed to owners of common units, then the amount of the minimum
quarterly distribution and the target distribution levels would each be reduced
to 50% of its initial level. If the unrecovered initial common unit price is
zero, the minimum quarterly distribution and the target distribution levels each
will have been reduced to zero, and the general partner's share of distributions
of available cash will increase to 49% of all distributions of available cash.
The minimum quarterly distribution and the target distribution levels may
also be adjusted if legislation is enacted that causes El Paso Energy Partners
to become taxable as a corporation or otherwise subjects it to taxation as an
entity for federal income tax purposes. In that event, minimum quarterly
distribution and the target distribution levels for each quarter thereafter
would be reduced to an amount equal to
- the product of each of the minimum quarterly distribution and the target
distribution levels,
- multiplied by a number which is equal to one, minus the sum of:
- the effective U.S. federal income tax rate to which El Paso Energy
Partners is subject as an entity; plus
- the effective overall state and local income tax rate to which El Paso
Energy Partners is subject as an entity, for the taxable year in which
such quarter occurs.
For example, if El Paso Energy Partners became subject to a highest
effective federal, and effective state and local, income tax rate of 38%, then
the minimum quarterly and target distributions would be reduced to 62% of the
amount immediately prior to that adjustment.
DISTRIBUTIONS IN LIQUIDATION
El Paso Energy Partners may not take any action to cause a liquidation
unless prior to such liquidation El Paso Corporation has agreed to purchase all
of the shares or the holders of the shares shall have voted to approve such
liquidation. In the event of a liquidation of El Paso Energy Partners not
resulting from any action taken by El Paso Corporation or El Paso Energy
Partners or otherwise approved by the shareholders, the following will be
important to you as an owner of our shares.
Upon dissolution of El Paso Energy Partners, unless El Paso Energy Partners
is reconstituted and continued, the authorized liquidator will liquidate El Paso
Energy Partners' assets and apply the proceeds of the liquidation as follows:
- first, towards the payment of all creditors of El Paso Energy Partners
and the creation of a reserve for contingent liabilities; and
- then, to all partners in accordance with the positive balances in their
respective capital accounts.
61
Under some circumstances and subject to various limitations, the liquidator
may defer liquidation or distribution of El Paso Energy Partners' assets for a
reasonable period of time if the liquidator determines that an immediate sale
would be impractical or would cause undue loss to the partners.
The allocations of gain or loss at the time of liquidation are intended to
entitle the holders of outstanding Series B preference units to a preference
over the holders of outstanding common units and i-units upon our liquidation,
to the extent of their liquidation value. However, the allocations of gain or
loss may not be sufficient to achieve this result. Series B preference
unitholders will not be entitled to share with our general partner and
unitholders in our assets in excess of their liquidation value.
If there is a liquidation of El Paso Energy Partners, it is intended that,
to the extent available, we will be allocated income and gain, or deduction and
loss, in an amount necessary to equalize the capital account of a common unit
and an i-unit. However, before such allocations are made, each Series B
preference unit will receive allocations of income and gain in an amount
necessary for its capital account to be equal to its liquidation value.
Thus, generally, any income or gain will be allocated:
- first, to the Series B preference unitholders until the capital account
for each Series B preference unit is equal to its liquidation value;
- second, to owners of the i-units and/or common units, as appropriate, to
equalize the capital account of a common unit and an i-unit; and
- thereafter, between the owners of common units and i-units, as limited
partners, and El Paso Energy Partners Company, as the general partner, in
a manner that approximates their sharing ratios in the various target
distribution levels and equally on a per unit basis between the i-units
and the common units.
Thus, each distribution of cash to other unitholders, including regular
quarterly distributions, will entitle us to an allocation of income or gain, or
deduction or loss, on liquidation to the extent available.
Any deduction or loss generally will be allocated:
- first, 1% to the general partner and 99% to the owners of the common
units and the Series B preference units until all the common unit and
Series B preference unit balances are reduced by the amount of all
previous allocations of income;
- second, 1% to the general partner and 99% to the owners of the i-units
and/or common units, as appropriate, until the capital account of a
common unit and an i-unit are equal;
- third, 1% to the general partner and 99% to the common units and i-units
in proportion to the positive balances in the partners' capital accounts
until all the common unit and i-unit balances are reduced to zero;
- fourth, 1% to the general partner and 99% to the Series B preference
unitholders in proportion to the positive balances in the partners'
capital accounts until all the Series B preference unit balances are
reduced to zero; and
- thereafter, to the general partner.
We will owe U.S. federal income tax, and perhaps state taxes, on any
taxable income or gain that is allocated to the i-units in a liquidation of El
Paso Energy Partners. Our payment of these taxes will reduce the amount of
assets that ultimately will be distributed to the holders of our shares. For
further information about the tax indemnification agreement and the tax
consequences of your investment in our shares, please read "Description of Our
Shares -- Tax Indemnity of El Paso Corporation." and "Material Tax
Consequences."
62
CAPITALIZATION OF EL PASO ENERGY MANAGEMENT
The following table describes our capitalization as of July 31, 2002:
- on an historical basis; and
- on an as adjusted basis to give effect to the receipt of net proceeds of
$658 million, which assumes that we sell 20,000,000 shares at an assumed
initial public offering price of $34.23 per share, after deducting
underwriting discounts and estimated offering expenses, and that we use
$0.5 million of the net proceeds to compensate El Paso Corporation for
its tax indemnity obligations and use the remaining net proceeds to
purchase a number of i-units from El Paso Energy Partners equal to the
number of our outstanding shares.
The as adjusted information in the table excludes 3,000,000 shares issuable
to El Paso Corporation and the underwriters upon the exercise of the
underwriters' over-allotment option to purchase additional shares from us.
You should read this table together with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and our financial
statements and the related notes appearing elsewhere in this prospectus.
<Table>
<Caption>
AS ADJUSTED
JULY 31, FOR THIS
2002 OFFERING
-------- -----------
(IN THOUSANDS)
Voting shares........................................... $ 1 $ 1
Non-voting shares....................................... -- 658,000
Contribution receivable from parent..................... (1) (1)
---- --------
Total capitalization.......................... $ -- $658,000
==== ========
</Table>
63
CAPITALIZATION OF EL PASO ENERGY PARTNERS
The following table sets forth El Paso Energy Partners' historical
consolidated capitalization as of March 31, 2002.
The pro forma financial information as of March 31, 2002 gives effect to:
- the borrowing in April 2002 by EPN Holding of $535 million in connection
with the acquisition of the EPN Holding assets;
- the issuance of 159,000 common units for $6 million in connection with
the acquisition of the EPN Holding assets;
- the borrowing of $95 million under our revolving credit facility for use
in repaying our limited recourse term loan associated with our TLP.
- the issuance of common units by El Paso Energy Partners in April 2002 and
the application of the approximately $149 million of net proceeds to
repay indebtedness outstanding under the EPN Holding term loan;
- the capital contribution by El Paso Energy Partners' general partner of
$0.6 million in April 2002 to maintain its 1% capital account balance as
a result of the issuance of additional common units; and
- the issuance by El Paso Energy Partners of 8 1/2% senior subordinated
notes in May 2002 and the application of net proceeds of $225 million to
repay a portion of the EPN Holding term loan and $5 million to repay a
portion of its credit facility.
The pro forma as adjusted financial information as of March 31, 2002
adjusts the pro forma financial information to reflect:
- the receipt by El Paso Energy Partners of $658 million in proceeds from
the expected sale of its i-units to us, which assumes that we sell
20,000,000 shares at $34.23 per share, net of the underwriting discount,
expected expenses and $0.5 million paid by us to El Paso Corporation for
its tax indemnity obligation;
- the capital contribution by El Paso Energy Partners' general partner of
$6.6 million to maintain its 1% capital account balance as a result of
the issuance of its i-units; and
- the expected issuance of long-term debt resulting in net cash proceeds of
$391 million.
- the use by El Paso Energy Partners of the proceeds it receives from the
sale of i-units as described in "Use of Proceeds."
64
Please read "Use of Proceeds" for a detailed description of the application of
the proceeds from the sale by El Paso Energy Partners of its i-units to us in
connection with this offering.
<Table>
<Caption>
AS OF
MARCH 31, PRO FORMA
2002 PRO FORMA AS ADJUSTED
--------- --------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED)
(IN THOUSANDS)
Long-term debt:
Revolving credit facility..................... $ 444,000 $ 538,000 $ 424,169
Senior subordinated notes due 2009............ 175,000 175,000 175,000
Senior subordinated notes due 2011............ 250,000 480,000 871,000
Argo limited recourse term loan............... 95,000 -- --
EPN Holding term loan......................... -- 160,000 --
---------- ---------- ----------
Total long-term debt....................... 964,000 1,353,000 1,470,169
Partners' capital:
Series B preference unitholders............... 146,448 146,448 146,448
Common unitholders............................ 335,752 491,075 491,523
i-units, 20,000,001 issued and outstanding
after the offering......................... -- -- 658,183
General partner............................... 4,938 5,538 12,186
Accumulated other comprehensive income........ 129 129 129
---------- ---------- ----------
Total partners' capital.................... 487,267 643,190 1,308,469
---------- ---------- ----------
Total capitalization....................... $1,451,267 $1,996,190 $2,778,638
========== ========== ==========
</Table>
The unit numbers do not include:
- the i-units issuable to El Paso Energy Management if the underwriters
exercise their over-allotment option to purchase additional shares from
us;
- the 1,565,000 common units issuable, subject to vesting, upon exercise of
options granted by El Paso Energy Partners and outstanding on August 12,
2002; and
- the 350,000 common units issued upon exercise of options since August 14,
1998.
65
SELECTED FINANCIAL DATA OF
EL PASO ENERGY PARTNERS
You should read the following financial data of El Paso Energy Partners in
connection with the financial statements and related notes incorporated by
reference in this prospectus and "Management's Discussion and Analysis of
Financial Condition and Results of Operations". The financial information as of
and for the years ended December 31, 2001, 2000 and 1999, was derived from El
Paso Energy Partners' Current Report on Form 8-K/A dated July 19, 2002. The
financial information as of and for the three months ended March 31, 2002 and
2001 was derived from El Paso Energy Partners' Quarterly Report on Form 10-Q for
the quarterly period ended March 31, 2002. The financial information for the
year ended December 31, 1998, was derived from the records of El Paso Energy
Partners. The historical results of El Paso Energy Partners are not necessarily
indicative of results to be expected in future periods.
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -------------------------------------------
2002 2001 2001 2000 1999 1998
------- ------- -------- -------- ------- -----------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
OPERATING RESULTS DATA(1):
Operating revenues............. $61,544 $54,502 $193,406 $112,415 $63,659 $48,731
Operating expenses............. 26,598 28,487 84,821 42,621 22,402 27,558
Depreciation, depletion and
amortization................. 12,549 12,223 38,699 27,743 30,630 28,136
------- ------- -------- -------- ------- -------
Operating income (loss)........ 22,397 13,792 69,886 42,051 10,627 (6,963)
Other income................... 4,102 10,888 25,808 25,308 43,275 27,495
Interest and debt expense...... 11,758 10,923 41,542 46,820 35,323 20,242
Minority interest.............. -- 41 100 95 197 15
Income tax benefit............. -- -- -- (305) (435) (471)
------- ------- -------- -------- ------- -------
Income from continuing
operations(2)................ 14,741 13,716 54,052 20,749 18,817 746
Income (loss) from discontinued
operations................... 4,385 (743) 1,097 (252) -- --
------- ------- -------- -------- ------- -------
Net income..................... $19,126 $12,973 $ 55,149 $ 20,497 $18,817 $ 746
======= ======= ======== ======== ======= =======
Basic and diluted earnings
(loss) per unit(3)
Continuing operations........ $ 0.06 $ 0.14 $ 0.35 $ (0.02) $ 0.26 $ 0.02
Discontinued operations...... 0.11 (0.02) 0.03 (0.01) -- --
Cumulative effect of
accounting change......... -- -- -- -- (0.60) --
------- ------- -------- -------- ------- -------
Net income (loss)............ $ 0.17 $ 0.12 $ 0.38 $ (0.03) $ (0.34) $ 0.02
======= ======= ======== ======== ======= =======
Weighted average number of
units outstanding............ 39,941 32,471 34,376 29,077 25,928 24,367
======= ======= ======== ======== ======= =======
Distributions per common
unit......................... $ 0.625 $ 0.55 $ 2.31 $ 2.15 $ 2.10 $ 2.10
======= ======= ======== ======== ======= =======
Distributions per preference
unit(4)...................... $ -- $ -- $ -- $ 0.825 $ 1.10 $ 1.60
======= ======= ======== ======== ======= =======
</Table>
66
<Table>
<Caption>
AS OF DECEMBER 31,
AS OF MARCH 31, ---------------------
2002 2001 2000
--------------- ---------- --------
(UNAUDITED)
(IN THOUSANDS)
FINANCIAL POSITION DATA(1):
Property, plant and equipment, net................... $ 936,801 $ 917,867 $497,746
Total assets......................................... 1,492,190 1,357,270 869,471
Revolving credit facility............................ 444,000 300,000 318,000
Limited recourse term loan, less current
maturities(5)...................................... 76,000 76,000 45,000
Long-term debt(6).................................... 425,000 425,000 175,000
Partner's capital(7)................................. 487,267 500,726 311,071
</Table>
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
------------------ ------------------------------------------
2002 2001 2001 2000 1999 1998
------- -------- -------- ------- ------- -----------
(UNAUDITED)
(IN THOUSANDS)
OTHER FINANCIAL DATA:
EBITDA(8)..................... $39,048 $ 36,903 $140,949 $95,102 $84,532 $48,668
Adjusted EBITDA(9)............ 48,518 35,227 161,440 107,105 91,305 52,345
Capital expenditures including
investing activities........ 35,110 137,753 608,826 125,832 113,579 66,111
</Table>
- ---------------
(1) El Paso Energy Partners' operating results and financial position reflect
the acquisitions of:
- interest in the titleholder of, and other interests in, the Chaco plant,
and the remaining 50% interest El Paso Energy Partners did not already
own in Deepwater Holdings in October 2001;
- EPN Texas in February 2001;
- the Petal and Hattiesburg natural gas storage facilities in August 2000;
- El Paso Intrastate-Alabama in March 2000; and
- an additional 49% interest in Viosca Knoll in June 1999.
The acquisitions were accounted for as purchases and therefore
operating results of these acquired entities are included in El Paso Energy
Partners' results prospectively from the purchase date. In addition, El Paso
Energy Partners' operating results and financial position reflect the sale
of El Paso Energy Partners' and Deepwater Holdings' interests in several
offshore Gulf of Mexico assets in January and April 2001 as a result of a
Federal Trade Commission, or FTC, order related to El Paso Corporation's
merger with the The Coastal Corporation.
(2) Includes, for the year ended December 31, 2001, approximately $25.4 million
related to the make whole payment from El Paso Corporation related to El
Paso Energy Partners' disposition of offshore Gulf of Mexico assets in
accordance with an FTC order related to El Paso Corporation's merger with
The Coastal Corporation.
(3) Net income (loss) per unit allocated to limited partners, net of allocations
made to El Paso Energy Partners' general partner and the Series B Preference
Units.
(4) Prior to October 2000, El Paso Energy Partners had publicly held preference
units, which were not of the same class as the Series B preference units. In
October 2000, all publicly held preference units were converted into common
units or redeemed.
(5) Relates to a limited recourse project finance loan to build the Prince TLP.
With the completion of the Prince TLP, El Paso Energy Partners converted the
project finance loan to a limited
67
recourse term loan in December 2001. This term loan was repaid in connection
with El Paso Energy Partners' April 2002 disposition of the Prince TLP.
(6) Reflects the issuance of $250 million of 8 1/2% Senior Subordinated Notes in
May 2001.
(7) Reflects the issuance of:
- 5.6 million common units, including 1.5 million common units purchased by
a subsidiary of El Paso Corporation, in October 2001;
- 2.3 million common units in March 2001;
- $170 million Series B preference units to a subsidiary of El Paso
Corporation in August 2000; and
- 4.6 million common units in July 2000.
In addition, El Paso Energy Partners redeemed $50 million in liquidation
value of Series B preference units in October 2001.
(8) EBITDA is defined for this purpose as net income before (1) depreciation,
depletion, and amortization, (2) asset impairment charges, (3) interest and
other financing costs, net of capitalized interest, and (4) minority
interests and income tax benefit. EBITDA is used as a supplemental financial
measurement in the evaluation of El Paso Energy Partners' business and
should not be considered as an alternative to net income as an indicator of
El Paso Energy Partners' operating performance or as an alternative to cash
flows from operating activities or other cash flow data calculated in
accordance with generally accepted accounting principles or as a measure of
liquidity. EBITDA is not defined under generally accepted accounting
principles and accordingly, it may not be a comparable measurement among
different companies.
(9) Adjusted EBITDA is defined for this purpose as EBITDA, less earnings from
unconsolidated affiliates, plus cash distributions from investments in
unconsolidated affiliates, and, as appropriate, other cash and non-cash
items. Historically, a significant portion of El Paso Energy Partners' cash
flow has come from distributions from unconsolidated joint ventures;
accordingly, El Paso Energy Partners believes adjusted EBITDA provides
additional information which may be used to better understand El Paso Energy
Partners' operations. Adjusted EBITDA is used as a supplemental financial
measurement in the evaluation of El Paso Energy Partners' business and
should not be considered as an alternative to net income as an indicator of
El Paso Energy Partners' operating performance or as an alternative to cash
flows from operating activities as a measure of liquidity. Adjusted EBITDA
may not be a comparable measurement among different companies. The following
table provides a
68
reconciliation from income before interest income taxes, and other charges to
Adjusted EBITDA.
<Table>
<Caption>
THREE MONTHS
ENDED
MARCH 31, YEAR ENDED DECEMBER 31,
----------------- -----------------------------
2002 2001 2001 2000 1999
------- ------- -------- -------- -------
(IN THOUSANDS)
(UNAUDITED)
ADJUSTED EBITDA
Income before interest, income taxes
and minority interest................ $26,499 $24,680 $ 95,694 $ 67,359 $53,902
Plus: Depreciation, depletion and
amortization......................... 12,549 8,302 34,778 27,743 30,630
Cash distributions from
unconsolidated affiliates......... 4,500 6,922 35,062 33,960 46,180
Net cash payment received from El
Paso Corporation.................. 1,882 1,896 7,404 -- --
Discontinued operations of Prince
facilities........................ 6,449 (183) 6,556 -- --
Insurance proceeds................... -- -- -- 5,000 --
Asset impairment..................... -- 3,921 3,921 -- --
Loss on sale of Gulf of Mexico
assets............................ -- 10,381 11,878 -- --
Less: Earnings (loss) from
unconsolidated affiliates............ 3,361 (4,712) 8,449 22,931 32,814
Gain on sale of assets............... -- -- -- -- 10,103
Litigation resolution................ -- -- -- 2,250 (2,250)
Non-cash earnings related to future
payments from El Paso............. -- 25,404 25,404 -- --
Hedged items......................... -- -- -- 1,619 (1,619)
Other non-cash items................. -- -- -- 157 359
------- ------- -------- -------- -------
Adjusted EBITDA........................ $48,518 $35,227 $161,440 $107,105 $91,305
======= ======= ======== ======== =======
</Table>
69
SELECTED PRO FORMA FINANCIAL DATA OF
EL PASO ENERGY PARTNERS
The following tables show summary pro forma financial information for El
Paso Energy Partners for the year ended December 31, 2001 and the three month
period ended March 31, 2002.
- The column labeled Pro Forma After 2001 Transactions gives effect to the
following as of January 1, 2001:
-- the exclusion of (1) the results of operations of Deepwater
Holdings, L.L.C.'s (a joint venture of El Paso Energy Partners)
interests in the Stingray and UTOS systems and the West Cameron
dehydration facility, which were sold in 2001; (2) the results of
operations of El Paso Energy Partners' interests in the Nautilus,
Manta Ray Offshore, Nemo, Green Canyon and Tarpon systems as well
as its interests in two offshore platforms, which were sold in
2001; and (3) losses on the dispositions described in (1) and (2)
above and income of $25.4 million El Paso Energy Partners
recognized from payments by El Paso Corporation as additional
consideration for those dispositions;
-- the $133 million acquisition in February 2001 of the South Texas
NGL transportation and fractionation assets from subsidiaries of
El Paso Corporation;
-- the acquisition in October 2001 of the remaining 50% equity
interest that El Paso Energy Partners did not own in Deepwater
Holdings for approximately $26 million of cash and $55 million of
assumed indebtedness; and
-- the acquisition in October 2001 of interests in the titleholder
of, and other interests in, the Chaco cryogenic natural gas
processing plant for approximately $198.5 million.
- The column labeled Pro Forma After EPN Holdings Assets Acquisition gives
further effect to the following as of the beginning of the applicable
period presented or as of the balance sheet date:
-- the acquisition in April 2002 of the EPN Holding assets for net
consideration of $735 million consisting of (1) $420 million of
cash, which was financed through borrowings under the EPN Holding
term loan, (2) $119 million of assumed short-term indebtedness
payable to El Paso Corporation, which was repaid with borrowings
under the EPN Holding term loan, (3) $6 million of El Paso Energy
Partners' common units and (4) $190 million in sold assets,
comprised of El Paso Energy Partners' Prince TLP and its Prince
Field overriding royalty interest;
-- the repayment in April 2002 of the $95 million limited recourse
term loan related to the Prince TLP;
-- the issuance by El Paso Energy Partners of common units in April
2002 and the application of the approximately $149 million of net
proceeds to repay indebtedness outstanding under the EPN Holding
term loan;
-- the capital contribution by El Paso Energy Partners' general
partner of $0.6 million in April 2002 to maintain its 1% capital
account balance as a result of the issuance of additional common
units; and
-- the issuance by El Paso Energy Partners of 8 1/2% senior
subordinated notes in May 2002 and the application of net proceeds
of 225 million to repay a portion of the EPN Holding term loan and
$5 million to repay a portion of its credit facility.
70
- The column labeled Pro Forma After Proposed San Juan Assets Acquisition
Transactions further gives effect, as of the beginning of the applicable
period presented or as of the balance sheet date:
-- the expected acquisition of the San Juan assets for $782 million,
of which $391 million of the cash consideration is expected to be
from proceeds from the sale of its i-units to us and $391 million
of the cash consideration is expected to be from proceeds from
long-term debt financing; and
-- the capital contribution by El Paso Energy Partners' general
partner to maintain its 1% capital account balance as a result of
the issuance of additional common units.
- The column labeled Pro Forma as Adjusted further gives effect to:
-- the receipt by El Paso Energy Partners of an additional estimated
$267 million in proceeds from the expected sale of its i-units to
us, which assumes that we sell 20,000,000 shares at $34.23 per
share, net of the underwriting discount, expected expenses and
$0.5 million paid by us to El Paso Corporation for its tax
indemnity obligations, and the use by El Paso Energy Partners of
these additional proceeds to temporarily repay indebtedness under
its revolving credit facility and EPN Holding credit agreement;
and
-- the expected capital contribution by El Paso Energy Partners'
general partner of $2.7 million to maintain its 1% capital account
balance as a result of the expected additional issuance of the
i-units and the use by El Paso Energy Partners of these additional
proceeds to temporarily repay indebtedness under its revolving
credit facility.
The summary pro forma financial information has been prepared using the
purchase method of accounting. The purchase price allocated in the summary pro
forma financial information is based on El Paso Energy Partners' estimate of the
fair market values of assets acquired and liabilities assumed. The summary pro
forma financial information includes assumptions and adjustments as described in
the notes to the pro forma combined financial statements from our Current Report
on Form 8-K dated August 12, 2002 incorporated by reference into this prospectus
and should be read in conjunction with the historical financial statements and
the related notes of El Paso Energy Partners incorporated by reference into this
prospectus.
The summary pro forma financial information may not be indicative of the
results that would have occurred if the transactions had been consummated as of
the beginning of the periods presented or that will be obtained in the future.
71
EL PASO ENERGY PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED AND COMBINED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2001
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<Table>
<Caption>
PRO FORMA
AFTER
PRO FORMA PROPOSED
EL PASO PRO FORMA AFTER SAN JUAN
ENERGY AFTER EPN HOLDING ASSETS
PARTNERS, L.P. 2001 ASSETS ACQUISITION PRO FORMA
HISTORICAL TRANSACTIONS ACQUISITION TRANSACTIONS AS ADJUSTED
-------------- ------------ ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Operating revenues................... $193,406 $256,954 $601,643 $899,273 $ 899,273
Operating expenses
Cost of natural gas and oil........ 51,542 51,542 240,124 376,098 376,098
Operation and maintenance, net..... 33,279 55,944 122,559 172,686 172,686
Depreciation, depletion and
amortization..................... 34,778 51,038 81,383 119,948 119,948
Asset impairment charge............ 3,921 3,921 3,921 3,921 3,921
-------- -------- -------- -------- ---------
123,520 162,445 447,987 672,653 672,653
-------- -------- -------- -------- ---------
Operating income..................... 69,886 94,509 153,656 226,620 226,620
-------- -------- -------- -------- ---------
Other income (loss)
Earnings from unconsolidated
affiliates....................... 8,449 18,374 18,374 20,551 20,551
Net loss on sale of assets......... (11,367) -- -- --
Other income (loss)................ 28,726 3,290 (1,736) (1,736) (1,736)
-------- -------- -------- -------- ---------
25,808 21,664 16,638 18,815 18,815
-------- -------- -------- -------- ---------
Income before interest, income taxes
and other charges.................. 95,694 116,173 170,294 245,435 245,435
-------- -------- -------- -------- ---------
Interest and debt expense.......... 41,542 55,304 82,479 116,649 105,704
Minority interest.................. 100 100 100 100 100
Income tax benefit (expense)....... -- (24) (1) (1)
-------- -------- -------- -------- ---------
41,642 55,404 82,555 116,748 105,803
-------- -------- -------- -------- ---------
Net income from continuing
operations....................... 54,052 60,769 87,739 128,687 139,632
Income from discontinued operations.. 1,097 1,097 -- -- --
-------- -------- -------- -------- ---------
Net income........................... $ 55,149 $ 61,866 $ 87,739 $128,687 $ 139,632
======== ======== ======== ======== =========
Income allocation
Series B unitholders............... $ 17,228 $ 17,228 $ 17,228 $ 17,228 $ 17,228
======== ======== ======== ======== =========
General Partner
Continuing operations............ $ 24,650 $ 24,717 $ 25,628 $ 40,850 $ 46,417
Discontinued operations.......... 11 11 -- -- --
-------- -------- -------- -------- ---------
$ 24,661 $ 24,728 $ 25,628 $ 40,850 $ 46,417
======== ======== ======== ======== =========
Limited Partners
Continuing operations............ $ 12,174 $ 18,824 $ 44,883 $ 70,609 $ 75,987
Discontinued operations.......... 1,086 1,086 -- -- --
-------- -------- -------- -------- ---------
$ 13,260 $ 19,910 $ 44,883 $ 70,609 $ 75,987
======== ======== ======== ======== =========
Basic and diluted earnings per unit
Continuing operations............ $ 0.35 $ 0.55 $ 1.30 $ 1.40 $ 1.30
Discontinued operations.......... 0.03 0.03 -- -- --
-------- -------- -------- -------- ---------
$ 0.38 $ 0.58 $ 1.30 $ 1.40 $ 1.30
======== ======== ======== ======== =========
Weighted average number of units
outstanding........................ 34,376 34,376 34,535 50,523 58,619
======== ======== ======== ======== =========
</Table>
72
EL PASO ENERGY PARTNERS, L.P.
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED AND COMBINED FINANCIAL DATA
STATEMENT OF OPERATIONS
(FOR THE THREE MONTHS ENDED MARCH 31, 2002):
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
<Table>
<Caption>
PRO FORMA
AFTER
PRO FORMA PROPOSED
EL PASO AFTER SAN JUAN
ENERGY EPN HOLDING ASSETS
PARTNERS, L.P. ASSETS ACQUISITION PRO FORMA
HISTORICAL ACQUISITION TRANSACTIONS AS ADJUSTED
-------------- ----------- ------------ -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
Operating revenues........................... $ 61,544 $ 133,780 $ 222,541 $ 222,541
Operating expenses
Cost of natural gas and oil................ 12,158 33,624 95,599 95,599
Operation and maintenance.................. 14,440 30,087 42,518 42,518
Depreciation, depletion and amortization... 12,549 18,978 28,992 28,992
---------- ---------- ---------- ----------
39,147 82,689 167,109 167,109
---------- ---------- ---------- ----------
Operating income............................. 22,397 51,091 55,432 55,432
---------- ---------- ---------- ----------
Other income
Earnings from unconsolidated affiliates.... 3,361 3,361 3,291 3,291
Net gain on sale of assets................. 315 315 315 315
Other income............................... 426 397 397 397
---------- ---------- ---------- ----------
4,102 4,073 4,003 4,003
---------- ---------- ---------- ----------
Income before interest, income taxes and
other charges.............................. 26,499 55,164 59,435 59,435
---------- ---------- ---------- ----------
Interest and debt expense.................. 11,758 18,458 26,884 24,185
Income taxes............................... -- -- 92 92
---------- ---------- ---------- ----------
Income from continuing operations.......... 14,741 36,706 32,459 35,158
Income from discontinued operations........ 4,385 -- -- --
---------- ---------- ---------- ----------
Net income................................. $ 19,126 $ 36,706 $ 32,459 $ 35,158
========== ========== ========== ==========
Income allocation
Series B unitholders..................... $ 3,552 $ 3,552 $ 3,552 $ 3,552
========== ========== ========== ==========
General partner
Continuing operations.................. $ 8,691 $ 9,070 $ 13,042 $ 14,309
Discontinued operations................ 44 -- -- --
---------- ---------- ---------- ----------
$ 8,735 $ 9,070 $ 13,042 $ 14,309
========== ========== ========== ==========
Limited partners
Continuing operations.................. $ 2,498 $ 24,084 $ 15,865 $ 17,297
Discontinued operations................ 4,341 -- -- --
---------- ---------- ---------- ----------
$ 6,839 $ 24,084 $ 15,865 $ 17,297
========== ========== ========== ==========
Basic and diluted earnings per unit
Income from continuing operations.......... $ 0.06 $ 0.60 $ 0.28 $ 0.27
Income from discontinued operations........ 0.11 -- -- --
---------- ---------- ---------- ----------
Net income................................. $ 0.17 $ 0.60 $ 0.28 $ 0.27
========== ========== ========== ==========
Weighted average number of units
outstanding................................ 39,941 40,100 56,087 64,183
========== ========== ========== ==========
FINANCIAL POSITION DATA (AT MARCH 31, 2002):
Property, plant and equipment, net........... $ 936,801 $1,703,032 $2,593,927 $2,593,927
Investments in unconsolidated affiliates..... 33,438 33,438 36,385 36,385
Total assets................................. 1,492,190 2,077,714 2,872,008 2,872,008
Current liabilities.......................... 58,777 56,396 60,454 60,454
Long-term indebtedness, less current
maturities................................. 945,000 1,503,000 1,740,051 1,470,169
Total liabilities.......................... 1,004,923 1,584,335 1,833,232 1,563,350
Partners' capital............................ 487,267 493,190 1,038,587 1,308,469
</Table>
73
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion in conjunction with (1) our
financial statements and the notes thereto beginning on page F-2 of this
prospectus and (2) the information set forth under the heading "Selected
Financial Data of El Paso Energy Partners" and the financial statements and
related notes of El Paso Energy Partners and us appearing elsewhere or
incorporated by reference in this prospectus.
EL PASO ENERGY MANAGEMENT
GENERAL
We are a limited liability company that was formed in Delaware on July 19,
2002. We will elect, effective upon the closing of this offering, to be treated
as a corporation for U.S. federal income tax purposes. All of our voting shares
are owned by El Paso Energy Partners Company, a wholly owned indirect subsidiary
of El Paso Corporation.
BUSINESS
By agreement with El Paso Energy Partners and its general partner, El Paso
Energy Partners Company, we will manage the business and affairs of El Paso
Energy Partners, subject to El Paso Energy Partners Company's right to approve
specified actions.
LIQUIDITY AND CAPITAL RESOURCES
Our authorized capital structure consists of two classes of membership
interests: (1) equity interests with limited voting rights, which are the shares
being issued in this offering, and (2) voting equity interests. At July 31,
2002, our issued capitalization consisted of $1,000 contributed by El Paso
Energy Partners Company in connection with our formation and in exchange for its
voting equity interest.
We will use substantially all of the net proceeds from this offering to
purchase i-units from El Paso Energy Partners and to compensate El Paso
Corporation for its tax indemnity obligation. Under the terms of our limited
liability company agreement:
- we will only make distributions to owners of shares in additional shares
or fractions of shares, except in connection with our liquidation or
after all of our shares have been acquired by El Paso Corporation;
- we will calculate the fraction of an additional share to be distributed
each quarter per outstanding share by dividing:
- the amount of the cash distribution paid by El Paso Energy Partners on
each common unit for that quarter; by
- the average market price of a share during the ten consecutive trading
days preceding the date on which the shares begin to trade ex-dividend
under the rules of the principal exchange on which they are listed;
- we will make our distributions of shares at the same time as El Paso
Energy Partners makes its quarterly distributions of cash to owners of
common units; and
- we will simultaneously make a distribution of an equivalent fraction of a
voting share on each voting share or fraction of a voting share owned by
the general partner of El Paso Energy Partners.
When El Paso Energy Partners makes its quarterly distribution on its common
units, the number of i-units we own will also automatically increase under the
provisions of the El Paso
74
Energy Partners partnership agreement with the result that the number of i-units
we own will equal the number of our shares and voting shares that are then
outstanding.
If we incur liabilities or other obligations in connection with the
performance of our obligations under the delegation agreement, we are entitled
to be reimbursed or indemnified by El Paso Energy Partners or El Paso Energy
Partners Company. Thus, we expect that our expenditures associated with managing
the business and affairs of El Paso Energy Partners and the reimbursement we
receive will be equal. El Paso Energy Partners also will reimburse us for our
general and administrative expenses associated with securities filings, tax
filings and related costs, other than expenses of this and any other offerings
of shares. As stated above, we will not receive quarterly distributions of cash
on the i-units we hold. Therefore, we expect neither to generate nor to require
significant amounts of cash in ongoing operations. We expect that any net cash
proceeds we receive from the sale of additional shares will immediately be used
to purchase additional i-units. Accordingly, we do not anticipate any other
sources or needs for additional liquidity.
We are not permitted to borrow money or incur debt without the approval of
holders, other than El Paso Energy Partners Company and its affiliates, owning
at least a majority of our shares. Please Read "Description of Our
Shares -- Limited Voting Rights."
RESULTS OF OPERATIONS
Prior to this offering of our shares we had no operations. Upon completion
of our initial offering of shares to the public and the purchase of i-units from
El Paso Energy Partners, our results of operations will consist of (1) the
offsetting expenses and revenues associated with managing the business and
affairs of El Paso Energy Partners and (2) our interest in the earnings of El
Paso Energy Partners attributable to the i-units we will own. As shown in the
historical financial statements of El Paso Energy Partners appearing or
incorporated by reference in this prospectus, the limited partners' interest in
El Paso Energy Partners' net income (or loss) was $13.3 million, ($0.75 million)
and ($8.74 million) for the years ended December 31, 2001, 2000 and 1999. These
historical amounts are not necessarily indicative of the level of earnings to be
expected in the future.
When this offering of our shares is completed, we will own approximately
30.9% of all of El Paso Energy Partners' outstanding limited partner interests
(assuming no exercise of the underwriters' option to purchase additional shares
from us). We will use the equity method of accounting for our investment and,
therefore, will record earnings equal to approximately 30.9% of El Paso Energy
Partners' limited partners' net income. Our percentage ownership will change
over time if the number of i-units we own becomes a different percentage of the
total units outstanding due to, among other things, our ownership of additional
i-units and other issuances of additional common units by El Paso Energy
Partners.
EL PASO ENERGY PARTNERS
El Paso Energy Partners' objective is to operate as a growth-oriented MLP
with a focus on increasing its cash flow, earnings and return to its unitholders
by becoming one of the industry's leading providers of midstream energy
services. Its strategy is to maintain and grow a diversified, balanced base of
strategically located and efficiently operated midstream energy assets with
stable and long-term cash flows. After acquiring the San Juan assets, El Paso
Energy Partners will have interests in:
- 16,900 miles of natural gas gathering and transportation pipeline with
capacity of 10.3 Bcf/d;
- over 340 miles of oil pipelines with capacity of 580 MBbls/d;
- 1,100 miles of NGL pipelines with capacity of 166 MBbls/d;
75
- three processing plants with capacity of 1.2 Bcf/d of natural gas and 50
MBbls/d of NGLs;
- four fractionating plants with capacity of 120 MBbls/d of NGLs;
- four NGL storage facilities with aggregate capacity of over 20 MMBbls;
- three natural gas storage facilities with aggregate working gas capacity
of 19.65 Bcf; and
- five offshore platforms.
In accordance with its Gulf of Mexico strategy, El Paso Energy Partners
currently has midstream projects underway with gross estimated capital costs of
approximately $833 million, including 380 miles of oil pipeline, 37 miles of
natural gas pipeline and two platforms.
El Paso Energy Partners' strategy contemplates substantial growth through
the acquisition and development of a wide range of midstream and other energy
infrastructure assets while maintaining a strong balance sheet. This strategy
includes constructing and acquiring additional assets and businesses to enhance
its ability to compete effectively, diversify its asset portfolio and, thereby,
provide more stable cash flow. In addition to potential third-party
acquisitions, El Paso Corporation has midstream assets that may be considered
for sale to El Paso Energy Partners. Including the San Juan assets acquisition,
El Paso Energy Partners has purchased over $2 billion of assets from El Paso
Corporation. El Paso Energy Partners' strategy has been and will continue to be
expanding its operating scope, ability to generate cash flow and investment
opportunities. Consequently, El Paso Energy Partners has expanded its credit
facilities, obtained project financing and issued debt and equity securities to
meet its financial needs over the past three years. El Paso Energy Partners will
need substantial new capital to continue to finance its strategy, including
additional future uses of periodic debt and equity offerings. Significant
milestones in the implementation of its strategy over the past three years
include the following:
<Table>
<Caption>
TRANSACTION
-----------
1999 Increased ownership interest in Viosca Knoll to 99%
Increased ownership interests in HIOS, East Breaks and UTOS
to 50%
Placed the Allegheny oil pipeline system into service
Exchanged El Paso Energy Partners' working interest in the
Prince Field for a 9% overriding royalty interest, with a
conditional option to convert to a 30% working interest
2000 Acquired the natural gas pipeline system of EPIA
Placed the East Breaks joint venture pipeline system in
service
Acquired the salt dome natural gas storage businesses of
Crystal
Increased the ownership interest in Viosca Knoll to 100%
2001 Completed asset redeployment by selling several offshore
Gulf of Mexico assets to third parties
Acquired the NGL transportation and fractionation assets of
EPN Texas
Placed the Prince TLP facility into service
Increased ownership in Deepwater Holdings to 100%. HIOS and
East
Breaks became indirect wholly-owned assets through this
transaction
Acquired interests in the titleholder of and other interests
in the Chaco cryogenic natural gas processing plant
Acquired the Anse La Butte NGL storage facility
</Table>
76
<Table>
<Caption>
TRANSACTION
-----------
2002 Acquired Suburban Propane storage and leaching business
Acquired substantial Texas and New Mexico midstream natural
gas assets through the EPN Holding transaction. As part of
this transaction, El Paso Energy Partners disposed of the
Prince TLP and its interests in the Prince Field
Completed Petal expansion and takeaway pipeline construction
Planned acquisition of San Juan assets
</Table>
We will manage El Paso Energy Partners' day-to-day operations and strategic
direction. Employees of El Paso Corporation perform all of El Paso Energy
Partners' administrative and operational activities under a general and
administrative services agreement or, in some cases, separate operational
agreements. Additionally, El Paso Corporation indirectly elects all of our
directors.
El Paso Energy Partners often enters into transactions with El Paso
Corporation and its subsidiaries to acquire or sell assets, and has instituted
specific procedures for evaluating and valuing these transactions. Before El
Paso Energy Partners considers entering into a transaction with El Paso
Corporation or any of its subsidiaries, it determines that the proposed
transaction (1) would comply with the requirements under its indentures and
credit agreements, (2) would comply with substantive law, and (3) would be fair
to it and its limited partners. In addition, El Paso Energy Partners' general
partner's board of directors utilizes a Special Conflicts Committee comprised
solely of independent directors. This committee:
- evaluates and, where appropriate, negotiates the proposed transaction;
- engages an independent financial advisor and independent legal counsel to
assist with its evaluation of the proposed transaction; and
- determines whether to approve and recommend the proposed transaction.
El Paso Energy Partners will only consummate any proposed transaction with
El Paso Corporation if, following its evaluation of the transaction, the Special
Conflicts Committee approves and recommends the proposed transaction.
RECENT ACQUISITIONS, DIVESTITURES AND PROJECTS
GULF OF MEXICO ASSETS
In accordance with an FTC order related to El Paso Corporation's merger
with The Coastal Corporation, El Paso Energy Partners, along with its Deepwater
Holdings joint venture, agreed to sell several of its offshore Gulf of Mexico
assets to third parties in January 2001. Total consideration received for these
assets was approximately $163 million, consisting of approximately $109 million
for the assets El Paso Energy Partners sold and approximately $54 million for
the assets Deepwater Holdings sold. The offshore assets sold include interests
in the Stingray, UTOS, Nautilus, Manta Ray Offshore, Nemo, Tarpon and the Green
Canyon pipeline assets, as well as interests in two offshore platforms and one
dehydration facility. El Paso Energy Partners recognized net losses from the
asset sales of approximately $12 million, and Deepwater Holdings recognized
losses of approximately $21 million. El Paso Energy Partners' share of Deepwater
Holdings' losses was approximately $14 million, which has been reflected in
earnings from unconsolidated affiliates in the accompanying statements of
income.
As additional consideration for the above transactions, El Paso Corporation
agreed to make payments to El Paso Energy Partners totaling $29 million. These
payments, which began in the first quarter of 2001, will be made in quarterly
installments of $2.25 million through the fourth quarter of 2003 and $2 million
in the first quarter of 2004. From this additional consideration, El Paso Energy
Partners recognized income of approximately $25 million in the first quarter of
77
2001, which has been reflected in "other income" in El Paso Energy Partners'
statements of income.
EPN TEXAS
In February 2001, El Paso Energy Partners purchased the EPN Texas NGL
assets from a subsidiary of El Paso Corporation for approximately $133 million.
These assets include more than 600 miles of NGL gathering and transportation
pipelines, as well as three fractionation plants with a capacity of
approximately 96 MBbls/d. These plants fractionate NGLs into ethane, propane,
and butane products which are used by refineries and petrochemical plants along
the Texas Gulf Coast.
PRINCE TLP
In July 2001, El Paso Energy Partners installed the Prince TLP facility in
the Prince Field. The platform was installed in 1,450 feet of water
approximately 120 miles south of New Orleans, Louisiana. As part of its April
2002 acquisition of the EPN Holding assets, El Paso Energy Partners sold the
Prince TLP to a subsidiary of El Paso Corporation.
DEEPWATER HOLDINGS
In October 2001, El Paso Energy Partners acquired the remaining 50% equity
interest that it did not already own in Deepwater Holdings, from a subsidiary of
El Paso Corporation, for approximately $81 million, including $55 million of
acquired indebtedness. At the acquisition date, El Paso Energy Partners also
repaid Deepwater Holdings' outstanding revolving credit facility balance and
terminated the facility. HIOS and East Breaks became indirect wholly-owned
assets through this transaction.
CHACO PLANT
In October 2001, El Paso Energy Partners acquired interests in the title
holder of, and other interests in, the Chaco cryogenic natural gas processing
plant, the third largest natural gas processing plant in the United States
measured by liquids produced, for approximately $198.5 million. El Paso Energy
Partners will acquire the remainder of El Paso Corporation's interests in the
Chaco Plant as part of the San Juan asset acquisition including El Paso
Corporation's rights under the tolling agreement El Paso Energy Partners entered
into in the October 2001 acquisition, as well as El Paso Corporation's
obligation to repurchase the Chaco Plant from El Paso Energy Partners.
MEDUSA PROJECT
El Paso Energy Partners is constructing the $28 million, 37-mile Medusa
natural gas pipeline extension of El Paso Energy Partners' Viosca Knoll
gathering system with capacity to handle 160 MMcf/d of natural gas (expected to
be in service in the first quarter of 2003), which was designed and located to
gather production from Murphy Exploration and Production Company's Medusa
development in the Gulf of Mexico. Murphy has dedicated 34,560 acres of property
to this pipeline for the life of the reserves. El Paso Energy Partners expects
to fund the project through borrowings on its revolving credit facility.
NGL STORAGE FACILITIES
In December 2001, El Paso Energy Partners acquired Anse La Butte, a 3.2
million barrel NGL multi-product storage facility near Breaux Bridge, Louisiana.
As part of the transaction, El Paso Energy Partners entered into long-term
storage agreements with a third party and a subsidiary of El Paso Corporation
for a significant portion of the storage capacity. In January 2002, El Paso
Energy Partners acquired a 3.3 million barrel propane storage business and
leaching operation
78
located in Hattiesburg, Mississippi from Suburban Propane Partners, L.P. As part
of the transaction, El Paso Energy Partners entered into a long-term propane
storage agreement with Suburban Propane Partners for a portion of the acquired
propane storage capacities. El Paso Energy Partners intends to convert a portion
of these assets to natural gas storage and will integrate them with its adjacent
Petal natural gas storage facility. The purchase price for these assets was
approximately $10 million and was funded through borrowings on El Paso Energy
Partners' revolving credit facility.
DEEPWATER GATEWAY/MARCO POLO PROJECT
In December 2001, El Paso Energy Partners announced an agreement with
Anadarko Petroleum Corporation under which El Paso Energy Partners would
construct, install and own the Marco Polo TLP with capacity to handle 100
MBbls/d of oil and 250 MMcf/d of natural gas (expected to be in service in
2004), which was designed and located to process natural gas from Anadarko
Petroleum Corporation's Marco Polo Field discovery in the Gulf of Mexico.
Anadarko has dedicated 69,120 acres of property to this TLP, including the
acreage underlying their Marco Polo Field discovery, for the life of the
reserves. Anadarko will have firm capacity of 50 MBbls/d of oil and 150 Mcf/d of
gas. The remainder of the platform capacity will be available to Anadarko for
additional production and/or to third parties that have fields developed in the
area. Anadarko will operate the platform. This TLP will be owned by El Paso
Energy Partners' 50%-owned Deepwater Gateway joint venture and operated by
Anadarko. The total cost of the project is estimated to be $206 million, or
approximately $103 million for El Paso Energy Partners' share.
In addition, El Paso Energy Partners will construct and own an oil pipeline
and a natural gas pipeline to support the Marco Polo TLP. The natural gas
pipeline, a 75-mile, 18-inch line, will have a maximum capacity of 400 MMcf/d.
The oil pipeline, a 36-mile, 14-inch line, will have a maximum capacity of 100
MBbls/d. These pipelines, expected to be completed in 2004, are expected to cost
$96 million to construct and place in service. El Paso Energy Partners plans to
seek a partner or partners for up to 50% of the interest in these pipelines.
CAMERON HIGHWAY PROJECT
In February 2002, El Paso Energy Partners announced that it will build and
operate the $450 million, 380-mile Cameron Highway Oil Pipeline with capacity of
500 MBbls/d (expected to be in service by the third quarter of 2004), which will
provide the producers with access to onshore delivery points in Texas and
Louisiana. BP p.l.c., BHP Billiton and Unocal have dedicated 86,400 acres of
property to this pipeline for the life of the reserves, including the acreage
underlying their Holstein, Mad Dog and Atlantis developments in the deeper water
regions of the Gulf of Mexico. El Paso Energy Partners plans to seek a partner
or partners for up to 50% of the interest in the pipeline and expects to fund a
majority of its share of the costs through project financing. It is estimated
that the majority of the capital outlay for the project will occur in 2003 and
2004.
EPN HOLDING ACQUISITION
In April 2002, EPN Holding acquired from El Paso Corporation the EPN
Holding assets, midstream assets located in Texas and New Mexico, including the
largest intrastate pipeline system in Texas based on miles of pipe. The acquired
assets include:
- the EPGT Texas intrastate pipeline system;
- the Waha natural gas gathering system and treating plant located in the
Permian Basin region of Texas;
79
- the Carlsbad natural gas gathering system located in the Permian Basin
region of New Mexico;
- an approximate 42.3% non-operating interest in the Indian Basin natural
gas processing and treating facility located in southeastern New Mexico;
- a 50% undivided interest in the Channel natural gas pipeline system
located along the Gulf coast of Texas;
- the TPC Offshore natural gas pipeline system located off the Gulf coast
of Texas; and
- a leased interest in the Wilson natural gas storage facility located in
Wharton County, Texas.
The $750 million sales price was adjusted for the assumption of $15 million
of working capital related to natural gas imbalances. The net consideration of
$735 million for the EPN Holding assets was comprised of the following:
- $420 million of cash;
- $119 million of assumed short-term indebtedness payable to El Paso
Corporation, which has been repaid;
- $6 million in common units; and
- $190 million in assets, comprised of El Paso Energy Partners' Prince TLP
and its 9% Prince overriding royalty interest.
To finance substantially all of the cash consideration related to this
acquisition, EPN Holding entered into a $535 million limited recourse term loan
with a syndicate of commercial banks, of which $375 million has been repaid.
FALCON NEST PROJECT
In April 2002, El Paso Energy Partners entered into an agreement to
construct and own the $53 million Falcon Nest fixed-leg platform with capacity
to handle 300 MMcf/d of natural gas (expected to be in service during the first
quarter of 2003), which was designed and located to process natural gas from
Pioneer Natural Resources Company's and Mariner Energy, Inc.'s Falcon Field
discoveries in the Gulf of Mexico. Pioneer and Mariner have dedicated 69,120
acres of property, including acreage underlying their Falcon Field discovery, to
this platform for the life of the reserves.
PETAL EXPANSION PROJECT
In July 2002, El Paso Energy Partners completed a 6.8 Bcf (5.45 Bcf working
capacity) expansion of its Petal natural gas storage facility, as well as an
approximate 60-mile pipeline addition that interconnects with the storage
facility and offers direct interconnects with the Southern Natural Gas, Transco
and Destin pipeline systems. The additional Petal capacity is dedicated under a
20-year fixed-fee contract to a subsidiary of The Southern Company, one of the
largest producers of electricity in the United States.
SAN JUAN ASSETS ACQUISITION
On July 16, 2002, El Paso Energy Partners and El Paso Corporation entered
into a letter of intent regarding the proposed acquisition by El Paso Energy
Partners of the San Juan assets. The San Juan assets include gathering,
compression and treating assets located in the San Juan
80
Basin of New Mexico, offshore oil and natural gas pipelines located in the Gulf
of Mexico and NGL assets located in Texas. The following is a description of the
San Juan assets:
- The assets located in the San Juan Basin include:
- approximately 5,300-mile natural gas gathering system with capacity of
over 1.1 Bcf/d connected to approximately 9,500 wells producing natural
gas from the San Juan Basin located in northwest New Mexico and
southwest Colorado;
- approximately 250,000 horsepower of compression;
- the 58 MMcf/d Rattlesnake CO2 treating facility;
- a 50% interest in the 250 MMcf/d Coyote Gas CO2 treating facility; and
- the remaining interests in the Chaco cryogenic natural gas processing
plant not already owned by El Paso Energy Partners and the price risk
management positions related to this facility's operations.
- The offshore pipeline assets include:
- The Typhoon gas pipeline, a 35-mile, 20-inch natural gas pipeline
originating on the Chevron/BHP "Typhoon" platform in the Green Canyon
area of the Gulf of Mexico extending to the ANR Patterson System in
Eugene Island Block 371; and
- The Typhoon oil pipeline, a 16-mile, 12-inch oil pipeline originating on
the Chevron/BHP "Typhoon" platform extending to a platform in Green
Canyon Block 19 with onshore access through various oil pipelines.
- The Texas NGL assets include:
- a 230-mile, 8-inch pipeline with capacity of approximately 35 MBbls/d
extending from Corpus Christi to Pasadena, which is currently not in
service;
- a 162-mile, 4-inch to 6-inch propane pipeline extending from Corpus
Christi to McAllen and the Hidalgo truck terminal facilities;
- the Markham butane shuttle, a 138-mile, 8-inch pipeline with capacity of
approximately 20 MBbls/d running between Corpus Christi and leased
storage facilities at Markham with capacity of approximately 3.8 MMBbls;
- a 49-mile, 6-inch pipeline with capacity of approximately 15 MBbls/d
extending from Almeda to Texas City and the Texas City terminal; and
- the Almeda fractionator, a 24 MBbls/d fractionator consisting of two
trains and related leased storage facilities of approximately 9.8
MMBbls.
The purchase price for the San Juan assets is approximately $782 million,
subject to adjustments for capital expenditures, working capital and other
matters.
The parties' obligations under the letter of intent are subject to the
satisfaction of specified conditions, including negotiating and executing
definitive agreements, obtaining Hart Scott Rodino and other third-party
approvals and consents, obtaining satisfactory results from ongoing due
diligence, and completion of El Paso Energy Partners' offering of the i-units to
us, which will occur contemporaneously with the completion of this offering. El
Paso Energy Partners will finance the San Juan assets acquisition with a portion
of the proceeds from its sale of i-units to us and long-term borrowings.
81
SEGMENT RESULTS
El Paso Energy Partners' business activities are segregated into four
distinct operating segments:
- Natural gas pipelines and plants;
- Oil and NGL logistics;
- Natural gas storage; and
- Platform services.
In October 2001, El Paso Energy Partners acquired interests in the title
holder of, and other interests in, the Chaco processing plant and reflected the
operations of this asset in its Oil and NGL logistics segment. In light of its
expectations of acquiring additional natural gas pipeline and processing assets,
effective January 1, 2002, El Paso Energy Partners moved the Chaco processing
plant to its Natural gas pipelines and plants segment. As a result of the
disposition of the Prince TLP and the 9% overriding royalty interest in the
Prince Field in April 2002, the results of operations from these assets are
reflected as discontinued operations in El Paso Energy Partners' statements of
income for all periods presented and are not reflected in its segment results
below. Beginning in 2002, operations from El Paso Energy Partners' oil and
natural gas production are reflected in Other, net.
El Paso Energy Partners has restated the prior periods, to the extent
practicable, in order to conform to its current business segment presentation.
The restated results of operations for the periods ending prior to March 31,
2002, are not necessarily indicative of the results which would have been
achieved had the revised business structure been in effect during the period.
Each of El Paso Energy Partners' segments are business units that offer
different services and products. They are managed separately, as each requires
different technology and marketing strategies. El Paso Energy Partners measures
segment performance using performance cash flows, or an asset's ability to
generate cash flow. Performance cash flows are used as a supplemental financial
measurement in the evaluation of El Paso Energy Partners' businesses and should
not be considered as an alternative to net income as an indicator of its
operating performance or as an alternative to cash flows from operating
activities as a measure of liquidity. Performance cash flows may not be a
comparable measurement among different companies. Following are results as of
and for the quarter ending March 31, 2002 and 2001 and for the years ended
December 31, 2001, 2000 and 1999:
<Table>
<Caption>
QUARTER ENDED YEAR ENDED
MARCH 31, DECEMBER 31,
----------------- -----------------------------
2002 2001 2001 2000 1999
---- ---- ---- ---- ----
(IN THOUSANDS)
EARNINGS BEFORE INTEREST EXPENSE AND INCOME
TAXES
Natural gas pipelines and plants....... $13,673 $ 8,206 $ 30,904 $ 37,004 $33,730
Oil and NGL logistics.................. 8,108 6,720 39,757 21,322 20,042
Natural gas storage.................... 1,308 2,533 9,568 2,193 --
Platform services...................... 6,093 4,755 22,054 22,491 15,962
------- ------- -------- -------- -------
Segment EBIT......................... 29,182 22,214 102,283 83,010 69,734
Other, net............................. (2,683) 2,466 (6,589) (15,651) (15,832)
------- ------- -------- -------- -------
Consolidated EBIT.................... $26,499 $24,680 $ 95,694 $ 67,359 $53,902
======= ======= ======== ======== =======
</Table>
EBIT variances are discussed in the segment results below.
82
NATURAL GAS PIPELINES AND PLANTS
The Natural Gas Pipelines and Plants segment includes the EPGT Texas
intrastate pipeline system, the Viosca Knoll system, the HIOS system, the East
Breaks system, the EPIA system, the Chaco cryogenic natural gas processing plant
and the Indian Basin processing and treating facility. After consummation of the
proposed acquisition, the San Juan natural gas gathering system and related
assets, as well as the Typhoon natural gas pipeline, also will be included in
this segment. The natural gas gathering and transportation pipelines primarily
earn revenue from fixed-fee-based services or market-based rates usually related
to the monthly natural gas price index for volume gathered. These pipelines
often involve life-of-reserve commitments with both firm and interruptible
components. The Chaco plant receives and processes natural gas from the San Juan
Basin. The Indian Basin facility (or plant) receives and processes natural gas
from the Permian basin. EPIA provides transportation services as well as
marketing services through the purchase of natural gas from regional producers
and others, and the sale of natural gas to local distribution companies and
others. Beginning in 2001, El Paso Energy Partners entered into fixed for
floating commodity price swaps to hedge its commodity price exposure to EPIA's
fixed price sales of natural gas, resulting in a fixed margin on the sales.
These fixed price sales agreements represent approximately four percent of
EPIA's sales. There was no significant impact on El Paso Energy Partners'
realized cost of natural gas from these swaps for the year ended December 31,
2001. However, as a result of these swaps, El Paso Energy Partners' realized
cost of natural gas may differ from the actual market prices of natural gas in
future periods.
Starting in April 2002, in connection with El Paso Energy Partners' EPN
Holding acquisition, El Paso Energy Partners has swaps in place for its interest
in the Indian Basin processing plant to hedge the price received for the sale of
natural gas liquids. El Paso Energy Partners does not expect any ineffectiveness
in its hedging relationship since all sale prices are based on the same index as
the hedged item.
83
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
<Table>
<Caption>
QUARTER
ENDED
MARCH 31,
-------------------
2002 2001
---- ----
(IN THOUSANDS,
EXCEPT FOR VOLUMES)
Gathering and processing revenue............................ $ 26,000 $ 6,470
Natural gas sales........................................... 14,419 24,605
-------- --------
Total operating revenues.................................. 40,419 31,075
Cost of natural gas......................................... (12,158) (22,971)
Operating expenses.......................................... (14,906) (6,137)
Other income................................................ 318 6,239
-------- --------
EBIT...................................................... $ 13,673 $ 8,206
======== ========
Natural gas volumes (MDth/d)
HIOS...................................................... 831 978
Viosca Knoll Gathering.................................... 533 563
East Breaks............................................... 214 239
El Paso Intrastate Alabama................................ 195 170
Indian Basin Pipeline..................................... 38 --
Chaco Plant............................................... 619 --
-------- --------
Total natural gas volumes.............................. 2,430 1,950
======== ========
</Table>
Gathering and processing revenue for the quarter ended March 31, 2002, was
$19.5 million higher than in the same period in 2001, primarily due to El Paso
Energy Partners' consolidation of Deepwater Holdings and the purchase of
interests in the titleholder of, and other interests in, the Chaco plant in
October 2001. Natural gas sales margin, or natural gas sales less cost of
natural gas, for the quarter ended March 31, 2002, were $0.6 million higher than
in the same period in 2001 primarily due to increased volumes and an increase in
the spread between El Paso Energy Partners' sales price and its cost of natural
gas on EPIA in 2002.
Operating expenses for the quarter ended March 31, 2002, were $8.8 million
higher than the same period in 2001 primarily due to El Paso Energy Partners'
consolidation of Deepwater Holdings and the purchase of the titleholder of, and
other interests in, the Chaco plant in October 2001.
Other income for the quarter ended March 31, 2002, was $5.9 million lower
than the same period in 2001 primarily due to El Paso Energy Partners' receipt
of $22.0 million in additional consideration from El Paso Corporation associated
with the sale of El Paso Energy Partners' Gulf of Mexico pipeline assets in
2001, partially offset by net losses of $7.8 million due to the sale of its
interests in the Tarpon and Green Canyon pipeline assets in January 2001.
Further contributing to El Paso Energy Partners' decrease in other income was
lower earnings from unconsolidated affiliates of $8.9 million, which relates to
Deepwater Holdings' sale of Stingray and the West Cameron dehydration facility
and the sale of El Paso Energy Partners' interest in Nautilus and Manta Ray
Offshore during the first quarter of 2001.
84
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
--------------------
2001 2000
---- ----
(IN THOUSANDS)
Natural gas gathering and transportation revenue............ $ 40,765 $ 29,597
Natural gas sales........................................... 59,701 34,531
--------- --------
Total operating revenues............................... 100,466 64,128
Cost of natural gas......................................... (51,542) (28,160)
Operating expenses.......................................... (23,135) (9,327)
Other income................................................ 5,115 10,363
--------- --------
EBIT................................................... $ 30,904 $ 37,004
========= ========
Natural gas volumes (Gross MDth/d)
HIOS...................................................... 979 870
Viosca Knoll Gathering.................................... 551 612
East Breaks............................................... 245 112
El Paso Intrastate Alabama................................ 171 120
Indian Basin Pipeline..................................... 22 --
Chaco Plant............................................... 648 --
Gulf of Mexico assets sold................................ 243 1,008
--------- --------
Total natural gas volumes.............................. 2,859 2,722
========= ========
</Table>
Natural gas gathering and transportation revenues for the year ended
December 31, 2001, were $11.2 million higher than in 2000, primarily due to El
Paso Energy Partners' consolidation of Deepwater Holdings and the purchase of
the Chaco plant in October 2001 and revenues received from its Indian Basin
lateral which went into service in June 2001. These increases were partially
offset by lower volumes on the Viosca Knoll Gathering system due to Tropical
Storm Barry in August 2001 and the sale of the Tarpon and Green Canyon pipeline
assets in January 2001. Natural gas sales margin, or natural gas sales less cost
of natural gas, for the year ended December 31, 2001, was $1.8 million higher
than in 2000 due to higher volumes on EPIA as a result of a full twelve months
of ownership in 2001 as well as larger spreads between natural gas sales prices
and the cost to purchase natural gas in 2001. El Paso Energy Partners acquired
EPIA in March 2000.
Operating expenses for the year ended December 31, 2001, were $13.8 million
higher than in 2000, primarily due to the consolidation of Deepwater Holdings
and the purchase of the Chaco plant in October 2001 and the abandonment and
impairment of the Manta Ray pipeline in January 2001, partially offset by lower
operating expenses resulting from the sales of assets in January 2001. El Paso
Energy Partners abandoned the Manta Ray pipeline as a result of its January 2001
sale of the Manta Ray Offshore system.
Other income for the year ended December 31, 2001, was $5.2 million lower
than in 2000, primarily due to lower earnings from unconsolidated affiliates of
$20.0 million, which primarily relates to Deepwater Holdings' sale of Stingray,
UTOS, and the West Cameron dehydration facility and the sale of El Paso Energy
Partners' interest in Nautilus and Manta Ray Offshore during the first six
months of 2001 and the related losses on these sales. Also, El Paso Energy
Partners had a decrease in earnings from unconsolidated affiliates due to its
consolidation of Deepwater Holdings in October 2001. Further contributing to the
decrease in other income were net losses on sales of assets of $7.8 million due
to the sales of El Paso Energy Partners'
85
interests in the Tarpon and Green Canyon pipeline assets in January 2001. These
decreases were offset by $22 million of additional consideration from El Paso
Corporation related to the sales of El Paso Energy Partners' Gulf of Mexico
pipeline assets.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
---- ----
(IN THOUSANDS)
Natural gas gathering and transportation revenue............ $ 29,597 $ 20,975
Natural gas sales........................................... 34,531 --
-------- --------
Total operating revenues............................... 64,128 20,975
Cost of natural gas......................................... (28,160) --
Operating expenses.......................................... (9,327) (11,281)
Other income................................................ 10,363 24,036
-------- --------
EBIT................................................... $ 37,004 $ 33,730
======== ========
Natural gas volumes (Gross MDth/d)
HIOS...................................................... 870 792
Viosca Knoll Gathering.................................... 612 709
East Breaks............................................... 112 --
El Paso Intrastate Alabama................................ 120 --
Indian Basin Pipeline..................................... -- --
Gulf of Mexico assets sold................................ 1,008 1,009
-------- --------
Total natural gas volumes.............................. 2,722 2,510
======== ========
</Table>
Natural gas transportation revenues for the year ended December 31, 2000,
were $8.6 million higher than in 1999, primarily due to the consolidation of
Viosca Knoll in June 1999. Natural gas sales margin for the year ended December
31, 2000, was $6.4 million due to the purchase of EPIA in March 2000.
Operating expenses for the year ended December 31, 2000, were $2.0 million
lower than in 1999, primarily due to cost recoveries under El Paso Energy
Partners' operating agreement with Deepwater Holdings relative to actual costs
incurred.
Other income for the year ended December 31, 2000, was $13.7 million lower
than in 1999, primarily due to the consolidation of Viosca Knoll in June 1999
and a gain related to the sale of a portion of El Paso Energy Partners' interest
in Deepwater Holdings in 1999 to ANR Pipeline as part of the formation of
Deepwater Holdings as a 50/50 joint venture with ANR.
OIL AND NGL LOGISTICS
The Oil and NGL logistics segment includes the NGL transportation pipelines
and fractionation plants of EPN Texas and the Poseidon and Allegheny offshore
oil pipelines. After the acquisition of the San Juan assets, this segment will
also include the Typhoon oil pipeline and the Almeda fractionator and the other
Texas NGL assets acquired in that transaction. The EPN Texas plants fractionate
NGLs into ethane, propane, and butane products, which are used by refineries and
petrochemical plants along the Texas Gulf Coast. El Paso Energy Partners
receives a fixed fee for each barrel of NGLs transported and fractionated by the
EPN Texas facilities from a subsidiary of El Paso Corporation. El Paso Energy
Partners has dedicated 100% of its capacity to this subsidiary. The crude oil
pipeline systems serve production activities in the
86
Gulf of Mexico. Revenues from El Paso Energy Partners' oil pipelines are
generated by production from reserves committed under long-term contracts for
the productive life of the relevant field.
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
<Table>
<Caption>
QUARTER ENDED
MARCH 31,
-------------------
2002 2001
---- ----
(IN THOUSANDS,
EXCEPT FOR VOLUMES)
Oil and NGL logistics revenue............................... $ 8,826 $ 4,272
Operating expenses.......................................... (4,079) (1,645)
Other income................................................ 3,361 4,093
-------- --------
EBIT...................................................... $ 8,108 $ 6,720
======== ========
Volume (Bbls/d)
EPN Texas................................................. 70,837 24,016
Allegheny Oil Pipeline.................................... 18,226 15,774
Unconsolidated affiliate
Poseidon Oil Pipeline(1)............................... 142,677 161,498
-------- --------
Total liquid volumes................................... 231,740 201,288
======== ========
</Table>
- ---------------
(1) Represents 100% of Poseidon's volumes.
For the quarter ended March 31, 2002, revenues were $4.6 million higher and
operating expenses were $2.4 million higher than the same period in 2001, due to
El Paso Energy Partners' acquisitions of the EPN Texas transportation and
fractionation assets in February 2001, the Hattiesburg propane storage facility
in January 2002, and the Anse La Butte NGL storage facility in December 2001.
Other income for the quarter ended March 31, 2002, was $0.7 million lower
than the same period in 2001 primarily due to a decrease in earnings from
unconsolidated affiliates attributable to the Poseidon Oil Pipeline due to lower
volumes.
87
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-------------------
2001 2000
---- ----
(IN THOUSANDS)
Oil and NGL logistics revenue............................... $ 32,925 $ 8,307
Operating expenses.......................................... (11,378) (1,434)
Other income................................................ 18,210 14,449
-------- --------
EBIT................................................... $ 39,757 $ 21,322
======== ========
Volume (Bbls/d)
EPN Texas................................................. 63,212 --
Allegheny Oil Pipeline.................................... 12,985 17,569
Unconsolidated affiliate
Poseidon Oil Pipeline(1)............................... 155,453 157,436
-------- --------
Total volumes.......................................... 231,650 175,005
======== ========
</Table>
- ---------------
(1) Represents 100% of Poseidon's volumes.
Revenues for the year ended December 31, 2001, were $24.6 million higher
and operating expenses were $9.9 million higher than in 2000, primarily due to
the purchases of EPN Texas in February 2001. Excluding these acquisitions,
revenues were down $1.2 million due to decreased volumes on Allegheny as a
result of platform shut-ins attributable to maintenance and tropical storm
activity in late 2001.
Other income for the year ended December 31, 2001, was $3.8 million higher
than in 2000, primarily due to an increase in earnings from unconsolidated
affiliates related to lower average interest rates on Poseidon's revolving
credit facility in 2001 and lower earnings in 2000 resulting from Poseidon's
pipeline rupture in January 2000. Partially offsetting this increase was the
receipt of business interruption insurance proceeds in 2000 related to the
Poseidon pipeline rupture.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-------------------
2000 1999
---- ----
(IN THOUSANDS)
Oil and NGL logistics revenue............................... $ 8,307 $ 2,029
Operating expenses.......................................... (1,434) (874)
Other income................................................ 14,449 18,887
-------- --------
EBIT................................................... $ 21,322 $ 20,042
======== ========
Volume (Bbls/d)
Allegheny Oil Pipeline.................................... 17,569 11,696
Unconsolidated affiliate
Poseidon Oil Pipeline(1)............................... 157,436 169,708
-------- --------
Total volumes.......................................... 175,005 181,404
======== ========
</Table>
- ---------------
(1) Represents 100% of Poseidon's volumes
88
Revenues for the year ended December 31, 2000, were $6.3 million higher and
operating expenses were $0.6 million higher than in 1999, primarily due to a
full year of revenues in 2000 from the Allegheny system, which went into service
in the fourth quarter of 1999.
Other income for the year ended December 31, 2000, was $4.4 million lower
than in 1999, primarily due to lower earnings from Poseidon as a result of a
pipeline rupture in January 2000. Partially offsetting this decrease was the
receipt of business interruption insurance proceeds in 2000 related to the
Poseidon pipeline rupture.
NATURAL GAS STORAGE
The Natural Gas Storage segment includes the Petal and Hattiesburg storage
facilities, which were acquired in August 2000. These facilities serve the
Northeast, Mid-Atlantic and Southeast natural gas markets. For the quarter ended
March 31, 2002 and the years ended December 31, 2001 and 2000, the revenues from
Petal and Hattiesburg consist primarily of fixed reservation fees for natural
gas storage capacity. Natural gas storage capacity revenues are recognized and
due during the month in which capacity is reserved by the customer, regardless
of the capacity actually used. El Paso Energy Partners also receives fees for
injections and withdrawals by its customers and interruptible fees. Operating
expenses consist of management and operating fees and depreciation on the
storage facilities.
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
<Table>
<Caption>
QUARTER
ENDED
MARCH 31,
-----------------
2002 2001
---- ----
(IN THOUSANDS)
Natural gas storage revenue................................. $ 4,388 $ 4,958
Operating expenses.......................................... (3,080) (2,425)
------- -------
EBIT...................................................... $ 1,308 $ 2,533
======= =======
</Table>
Natural gas storage revenue for the quarter ended March 31, 2002, was $0.6
million lower than the same period in 2001, primarily due to lower interruptible
storage services during 2002.
Operating expenses for the quarter ended March 31, 2002, were $0.7 million
higher than the same period in 2001, primarily due to the favorable resolution
of an imbalance settlement in 2001.
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-----------------
2001 2000
---- ----
(IN THOUSANDS)
Natural gas storage revenue................................. $19,373 $ 6,182
Operating expenses.......................................... (9,825) (3,992)
Other income................................................ 20 3
------- -------
EBIT...................................................... $ 9,568 $ 2,193
======= =======
</Table>
The overall change in revenue and operating expenses is primarily the result of
owning the Petal and Hattiesburg storage facilities for the full year of 2001.
Fourth quarter 2001 revenues were $4.3 million compared to $4.6 million in 2000.
This decrease was due to lower interruptible volumes in the fourth quarter of
2001. The overall change in operating expenses is primarily the
89
result of owning the Petal and Hattiesburg storage facilities for the full year
of 2001. Operating expenses for the fourth quarter of 2001 were not
significantly changed from the fourth quarter of 2000.
El Paso Energy Partners did not have any natural gas storage operations
prior to August 2000.
PLATFORM SERVICES
The Platform services segment consists of the East Cameron 373, Viosca
Knoll 817, Garden Banks 72, Ship Shoal 331, and Ship Shoal 332 platforms. These
offshore platforms are used to interconnect El Paso Energy Partners' offshore
pipeline grid, assist in performing pipeline maintenance, and conduct drilling
operations during the initial development phase of an oil or natural gas
property. Platform revenues are based on fixed and commodity charges. Fixed fees
are recognized during the month reserved by the customer, regardless of how much
capacity is actually used. Commodity fees are variable in nature and recognized
when the service is provided. As part of El Paso Energy Partners' acquisition of
the EPN Holding assets from El Paso Corporation in April 2002, El Paso Energy
Partners sold the Prince TLP to a subsidiary of El Paso Corporation.
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
<Table>
<Caption>
QUARTER ENDED
MARCH 31,
-----------------
2002 2001
---- ----
(IN THOUSANDS,
EXCEPT FOR
VOLUMES)
Platform services revenue................................... $ 7,571 $ 7,033
Operating expenses.......................................... (1,478) (2,260)
Other loss.................................................. -- (18)
------- -------
EBIT...................................................... $ 6,093 $ 4,755
======= =======
Natural gas platform volumes (Mdth/d)
East Cameron 373 platform................................. 150 172
Garden Banks 72 platform.................................. 6 12
Viosca Knoll 817 platform................................. 9 10
------- -------
Total natural gas platform volumes..................... 165 194
======= =======
Oil platform volumes (Bbl/d)
East Cameron 373 platform................................. 1,728 2,131
Garden Banks 72 platform.................................. 1,062 1,737
Viosca Knoll 817 platform................................. 2,075 2,040
------- -------
Total oil platform volumes............................. 4,865 5,908
======= =======
</Table>
For the quarter ended March 31, 2002, revenues were $0.5 million higher
than in the same period in 2001, due to an increase in access fees on East
Cameron 373. Operating expenses for the same periods were $0.8 million lower due
to lower direct costs.
Other loss for the quarter ended March 31, 2001, reflects approximately
$3.0 million of losses recognized on the sales of the Gulf of Mexico platform
assets in January 2001, offset by the additional consideration from El Paso
Corporation related to the sale of these assets.
90
Year Ended December 31, 2001 Compared to Year Ended December 31, 2000
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2001 2000
---- ----
(IN THOUSANDS)
Platform services revenue................................... $ 28,005 $26,833
Operating expenses.......................................... (5,319) (4,342)
Other loss.................................................. (632) --
-------- -------
EBIT................................................... $ 22,054 $22,491
======== =======
Natural gas platform volumes (MDth/d)
East Cameron 373.......................................... 170 115
Garden Banks 72........................................... 7 15
Viosca Knoll 817.......................................... 12 3
-------- -------
Total natural gas platform volumes..................... 189 133
======== =======
Oil platform volumes (Bbl/d)
East Cameron 373.......................................... 1,927 101
Garden Banks 72........................................... 1,487 3,408
Viosca Knoll 817.......................................... 2,049 1,982
-------- -------
Total oil platform volumes............................. 5,463 5,491
======== =======
</Table>
Platform services revenue for the year ended December 31, 2001, were $1.2
million higher than in 2000, primarily due to increased volumes on East Cameron
373. The increase was partially offset by lower volumes on Garden Banks 72 due
to a temporary shut-in of wells.
Operating expenses for the year ended December 31, 2001, were $1.0 million
higher than in 2000, primarily due to the favorable resolution of litigation in
June 2000.
Other loss for the year ended December 31, 2001, included approximately
$4.0 million of losses recognized on the sales of the Gulf of Mexico platform
assets, partially offset by $3.4 million associated with the additional
consideration from El Paso Corporation related to the sale of these assets.
Year Ended December 31, 2000 Compared to Year Ended December 31, 1999
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2000 1999
---- ----
(IN THOUSANDS)
Platform services revenue................................... $ 26,833 $23,883
Operating expenses.......................................... (4,342) (7,921)
-------- -------
EBIT................................................... $ 22,491 $15,962
======== =======
Natural gas platform volumes (MDth/d)
East Cameron 373.......................................... 115 94
Garden Banks 72........................................... 15 --
Viosca Knoll 817.......................................... 3 3
-------- -------
Total natural gas platform volumes..................... 133 97
======== =======
</Table>
91
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
------------------
2000 1999
---- ----
(IN THOUSANDS)
Oil platform volumes (Bbl/d)
East Cameron 373.......................................... 101 138
Garden Banks 72........................................... 3,408 --
Viosca Knoll 817.......................................... 1,982 1,816
-------- -------
Total oil platform volumes............................. 5,491 1,954
======== =======
</Table>
Platform services revenue for the year ended December 31, 2000, were $3.0
million higher than in 1999, primarily due to additional demand charges on East
Cameron 373.
Operating expenses for the year ended December 31, 2000, were $3.6 million
lower than in 1999, primarily due to the favorable resolution of litigation in
June 2000.
OTHER, NET
El Paso Energy Partners' oil and natural gas production interests in the
Garden Banks 72, Garden Banks 117 and Viosca Knoll 817 Blocks principally
comprise the non-segment activity. Production from these properties is gathered,
transported, and processed through El Paso Energy Partners' pipeline systems and
platform facilities. Oil and natural gas production volumes are produced and
sold to various third parties and subsidiaries of El Paso Corporation at the
market price. Revenue is recognized in the period of production. These revenues
may be impacted by market changes, hedging activities, and natural declines in
production reserves. El Paso Energy Partners is reducing its oil and natural gas
production activities due to their higher risk profile, including risks
associated with finding production and commodity prices. Accordingly, El Paso
Energy Partners' focus is to maximize the production from its existing portfolio
of oil and natural gas properties.
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
Earnings before interest expense and taxes related to non-segment activity
for the quarter ended March 31, 2002, was $5.1 million lower than the same
period in 2001. The decrease was primarily due to lower natural gas and oil
prices in 2002, partially offset by lower depletion from natural gas production
as a result of upward revisions of prior estimates of reserve quantities.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Earnings before interest expense and taxes related to non-segment activity
for the year ended December 31, 2001 was $9.1 million higher than the same
period in 2001. The increase was primarily due to higher realized natural gas
prices, higher oil volumes and lower depletion from natural gas production as a
result of upward revisions of prior estimates of reserve quantities.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Earnings before interest and taxes related to non-segment activity for the
year ended December 31, 2000, were $0.2 million higher than in 1999. The
increase was a result of higher realized prices for oil and lower depletion from
lower oil and natural gas production as a result of upward revisions of prior
estimates of reserve quantities. Partially offsetting these increases were lower
oil and natural gas production due to normal production declines of existing
reserves, the permanent shut-in of two wells at Viosca Knoll Block 817, the
temporary shut-in of Garden Banks Blocks 72 and 117 as a result of the Poseidon
pipeline rupture, and lower realized prices
92
for natural gas. Realized prices for oil and natural gas were affected by hedges
in place during 1999 and 2000.
INTEREST AND DEBT EXPENSE
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
Interest and debt expense, net of capitalized interest, for the quarter
ended March 31, 2002, was approximately $0.8 million higher than the same period
in 2001. This increase primarily relates to the $250 million of 8 1/2% Senior
Subordinated Notes issued in May 2001 partially offset by a decrease in interest
rates on the revolving credit facility. Capitalized interest in the first
quarter of 2002 was $1.6 million.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Interest and debt expense, net of capitalized interest, for the year ended
December 31, 2001, was approximately $5.3 million lower than 2000. This decrease
primarily relates to an increase in capitalized interest of approximately $4.1
million due to an increase in El Paso Energy Partners' construction activity in
2001, as well as lower average interest rates in 2001. The overall decrease in
interest expense was partially offset by the issuance of $250 million of 8 1/2%
Senior Subordinated Notes in May 2001.
Year Ended December 31, 2000 Compared to the Year Ended December 31, 1999
Interest and debt expense, net of capitalized interest, for the year ended
December 31, 2000, was approximately $11.5 million higher than 1999. This
increase primarily relates to an increase in interest expense of approximately
$13.1 million due to higher average interest rates and higher average debt
outstanding related to construction activities and the acquisition of EPIA. This
increase was slightly offset by higher capitalized interest of approximately
$1.6 million in 2000.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
Net cash provided by operating activities was $43.2 million for the quarter
ended March 31, 2002, compared to $24.8 million for the same period in 2001. The
increase was attributable to operating cash flows from the acquisitions of the
titleholder of, and other interests in, the Chaco plant and the remaining 50%
interest in Deepwater Holdings that El Paso Energy Partners did not already own
in October 2001. This increase was partially offset by lower cash distributions
from unconsolidated affiliates relating to the consolidation of Deepwater
Holdings in October 2001.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Net cash provided by operating activities was approximately $82 million for
the year ended December 31, 2001, compared to approximately $49 million for the
same period in 2000. The increase was primarily attributable to operating cash
flows from acquisitions of the Crystal natural gas storage businesses in August
2000, EPN Texas in February 2001 and Chaco and Deepwater Holdings in October
2001, as well as higher cash distributions from unconsolidated affiliates,
partially offset by lower operating cash flows as a result of the sale of
several of El Paso Energy Partners' Gulf of Mexico assets in 2001.
93
CASH FROM INVESTING ACTIVITIES
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
Net cash used in investing activities was approximately $33.2 million for
the quarter ended March 31, 2002. Capital expenditures primarily related to the
expansion of the Petal natural gas storage facility. Proceeds from asset sales
related to the Buffalo Treating Facility, which El Paso Energy Partners sold to
El Paso Production Company, a subsidiary of El Paso Corporation, in the first
quarter of 2002.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Net cash used in investing activities was approximately $431 million for
the year ended December 31, 2001. El Paso Energy Partners' investing activities
during 2001 included its purchase of EPN Texas in February 2001, its general
partner's 1% non-managing ownership interest in El Paso Energy Partners'
operating subsidiaries in May 2001, the Chaco plant and the remaining 50%
interest in Deepwater Holdings that El Paso Energy Partners did not already own
in October 2001. Additional capital investments also included the expansion of
the Petal natural gas storage facility and routine investments in existing
assets, partially offset by net proceeds of $109 million received from the sale
of several Gulf of Mexico assets.
CASH FROM FINANCING ACTIVITIES
Quarter Ended March 31, 2002 Compared to the Quarter Ended March 31, 2001
Net cash provided by financing activities was approximately $110.3 million
for the quarter ended March 31, 2002. El Paso Energy Partners received net
proceeds of $144 million from borrowings under its revolving credit facility,
$95 million of which was subsequently used to pay in full the limited recourse
term loan in April 2002. El Paso Energy Partners paid distributions to its
partners of $33.7 million.
El Paso Energy Partners expects that future funding for capital
expenditures, acquisitions, and other investing activities and for long-term
debt retirements, distributions, and other financing activities will be provided
by internally generated funds, available capacity under existing credit
facilities, and the issuance of long-term debt or equity. In February 2002, El
Paso Energy Partners' registration statement, as filed with the Securities and
Exchange Commission, covering up to $1 billion of securities representing
limited partnership interests, became effective.
Year Ended December 31, 2001 Compared to the Year Ended December 31, 2000
Net cash flows provided by financing activities totaled approximately $355
million for the year ended December 31, 2001. During 2001, El Paso Energy
Partners received net proceeds of $610 million from borrowings under its
revolving credit facility. El Paso Energy Partners obtained net proceeds of $243
million in May 2001 through the issuance of $250 million 8 1/2% Senior
Subordinated Notes. El Paso Energy Partners' financing activities in 2001 also
include cumulative issuances of 8.2 million common units generating net proceeds
of $287 million. Partially offsetting these activities were distributions to
partners of $106 million, the redemption of $50 million liquidation value of
Series B preference units and payments on the revolving credit facility of $581
million.
LIQUIDITY
El Paso Energy Partners relies on cash generated from internal operations,
including cash distributions from its joint ventures, as its primary source of
liquidity, supplemented by its available credit facility, and the issuance of
long-term debt, common units and i-units. El Paso Energy Partners' cash from
internal operations may change in the future due to a number of factors, some of
which it cannot control, including the price it will receive for the services it
94
provides, and products it sells and the demand for its services and products,
operational risks, and other factors. The availability of borrowings under El
Paso Energy Partners' credit agreement is subject to specified conditions, which
El Paso Energy Partners' management believes it currently meets. These
conditions include compliance with the financial covenants and ratios required
by the agreement, absence of default under the agreement, and continued accuracy
of the representations and warranties contained in the agreement, including the
absence of any material adverse changes since the specified dates. Funding from
the capital markets for long-term debt or equity may not be available for a
number of reasons, including a lack of liquidity for El Paso Energy Partners'
industry segment, a change in El Paso Energy Partners' credit rating or changes
in market conditions.
El Paso Energy Partners' strategy contemplates substantial growth through
constructing and acquiring additional assets and businesses. Limitations on El
Paso Energy Partners' access to capital would impair its ability to execute this
strategy, and expensive capital would limit its ability to acquire or construct
assets. Accordingly, access to necessary capital resources on satisfactory
terms, including through periodic debt and equity offerings, is a key component
of El Paso Energy Partners' strategy.
The following table presents the timing and amounts of El Paso Energy
Partners' contractual cash obligations as of March 31, 2002 that El Paso Energy
Partners believes could affect its liquidity (in millions):
<Table>
<Caption>
LESS THAN AFTER
CONTRACTUAL CASH OBLIGATIONS 1 YEAR 1-3 YEARS 4-5 YEARS 5 YEARS TOTAL
- ---------------------------- --------- --------- --------- ------- -----
Revolving credit facility.............. $ -- $444 $ -- $ -- $444
Argo limited recourse term loan........ 19 38 38 -- 95
10 3/8% Senior Subordinated Notes...... -- -- -- 175 175
8 1/2% Senior Subordinated Notes....... -- -- -- 250 250
---- ---- ---- ---- ----
Total Contractual Cash Obligations... $ 19 $482 $ 38 $425 $964
==== ==== ==== ==== ====
</Table>
El Paso Energy Partners has two features contained in its debt instruments
described as ratings triggers. The features provide El Paso Energy Partners,
rather than creditors, with certain rights in the event that its credit ratings
change to an investment grade level. These triggers are contained in El Paso
Energy Partners':
- $480 million ($230 million of which were issued in May 2002) 8 1/2%
Senior Subordinated Notes due 2011, where many covenants will be
suspended in the event El Paso Energy Partners achieves an investment
grade credit rating; and
- $600 million revolving credit facility, where El Paso Energy Partners
will receive a 38 to 50 basis point reduction in its interest rate in the
event it achieves an investment grade credit rating.
There are no other trigger features related to the Senior Subordinated Notes or
the revolving credit facility. In addition, there are no trigger features or
mechanisms contained in any of El Paso Energy Partners' other debt instruments
or commercial arrangements.
SHELF REGISTRATION
In February 2002, El Paso Energy Partners' shelf registration statement, as
filed with the Securities and Exchange Commission, covering up to $1 billion of
securities representing limited partnership interests, became effective.
95
EPN HOLDING CREDIT FACILITY
In connection with its $750 million acquisition in April 2002, EPN Holding
entered into a $560 million limited recourse credit agreement with a group of
commercial lenders. The credit agreement provides for an initial term loan of
$535 million to finance the acquisition of the EPN Holding assets, and a
revolving loan of up to $25 million to finance EPN Holding's working capital. As
of July 31, 2002, EPN Holding had $160 million outstanding under that credit
agreement.
REVOLVING CREDIT FACILITY
As of July 31, 2002, El Paso Energy Partners had $514 million outstanding
with an average interest rate of 3.55% under its $600 million revolving credit
facility with the full unused amount available. In April 2002, El Paso Energy
Partners borrowed an additional $99 million in connection with its acquisition
of the EPN Holding assets to repay the $95 million limited recourse term loan
related to the Prince TLP and provide additional funding for that transaction.
POSEIDON CREDIT AGREEMENT
Poseidon is party to a $185 million credit agreement under which it has
outstanding obligations that may restrict its ability to pay distributions to
its owners.
In January 2002, Poseidon entered into a two-year interest rate swap
agreement to fix the interest rate at 4.99% through January 2004 on $75 million
of the $150 million outstanding on its credit facility. As of March 31, 2002,
the remaining $75 million was at an average floating interest rate of 3.375%.
SERIES B PREFERENCE UNITS
In August 2000, El Paso Energy Partners issued $170 million of Series B
preference units to acquire the natural gas storage businesses of Crystal Gas
Storage, Inc. These preference units are non-voting and have rights to income
allocations on a cumulative basis, compounded semi-annually at an annual rate of
10%. El Paso Energy Partners is not obligated to pay cash distributions on these
units until 2010. After September 2010, the rate will increase to 12% and
preference income allocation after 2010 will be required to be paid on a current
basis; accordingly, after September 2010, El Paso Energy Partners will not be
able to make distributions on its common units unless all unpaid accruals
occurring after September 2010 on its then-outstanding Series B preference units
have been paid. These preference units contain no mandatory redemption
obligation, but may be redeemed at El Paso Energy Partners' option at any time.
In October 2001, El Paso Energy Partners redeemed 44,608 of the Series B
preference units for $50 million liquidation value including accrued
distributions of approximately $5.4 million, bringing the total number of units
outstanding to 125,392. As of March 31, 2002, the liquidation value of the
outstanding Series B preference units was approximately $146 million.
Assuming that El Paso Energy Partners can access capital as currently
contemplated, and depending on its other needs for cash, El Paso Energy Partners
expects to redeem all outstanding Series B preference units in the next 12
months.
OTHER FINANCINGS
El Paso Energy Partners plans to seek a partner or partners for up to 50%
of the interest in the Cameron Highway oil pipeline project and seek
non-recourse project financing. In addition, El Paso Energy Partners would
expect to use its revolving credit facility to initially fund this project or to
cover expenditures for a short period of time.
El Paso Energy Partners has firm commitments related to the Cameron Highway
project and is obligated for the entire cost of the project until it obtains a
partner.
96
COMMITMENTS AND CONTINGENCIES
LEGAL PROCEEDINGS
In 1997, El Paso Energy Partners, along with several subsidiaries of El
Paso Corporation, were named defendants in actions brought by Jack Grynberg on
behalf of the U.S. Government under the False Claims Act. Generally, these
complaints allege an industry-wide conspiracy to under report the heating value
as well as the volumes of the natural gas produced from federal and Native
American lands, which deprived the U.S. Government of royalties. These matters
have been consolidated for pretrial purposes (In re: Natural Gas Royalties Qui
Tam Litigation, U.S. District Court for the District of Wyoming, filed June
1997). In May 2001, the court denied the defendants' motions to dismiss.
El Paso Energy Partners has also been a named defendant in Quinque
Operating Company, et al v. Gas Pipelines and Their Predecessors, et al, filed
in 1999 in the District Court of Stevens County, Kansas. This class action
complaint alleges that the defendants mismeasured natural gas volumes and
heating content of natural gas on non-federal and non-Native American lands. The
Quinque complaint was transferred to the same court handling the Grynberg
complaint and has now been sent back to Kansas State Court for further
proceedings. A motion to dismiss this case is pending.
El Paso Energy Partners' Argo L.L.C. subsidiary received a claim from its
contractor related to El Paso Energy Partners' recently completed Prince TLP.
The contractor received a request for additional payments from its subcontractor
as a result of variation orders and is seeking to pass these costs along to
Argo. After negotiations, the contractor and the subcontractor agreed upon a
settlement in July 2002. This settlement will not have a material adverse effect
on El Paso Energy Partners' financial position, results of operations or cash
flow.
Under the terms of El Paso Energy Partners' agreement with El Paso
Corporation pursuant to which El Paso Energy Partners acquired the EPN Holding
assets, subsidiaries of El Paso Corporation have agreed to indemnify El Paso
Energy Partners against all obligations related to existing legal matters at the
acquisition date, including the legal matters involving Leapartners, L.P., City
of Edinburg and Houston Pipe Line Company LP discussed below.
During 2000, Leapartners, L.P. filed a suit against El Paso Field Services
and others in the District Court of Loving County, Texas, alleging a breach of
contract to gather and process gas in areas of western Texas related to an asset
now owned by EPN Holding. In May 2001, the court ruled in favor of Leapartners
and entered a judgment against El Paso Field Services of approximately $10
million. El Paso Field Services has filed an appeal with the Eighth Court of
Appeals in El Paso, Texas. Review by the Court of Appeals is expected in
December 2002.
Also, EPGT Texas Pipeline L.P., now owned by EPN Holding, is involved in
litigation with the City of Edinburg concerning the City's claim that EPGT Texas
was required to pay pipeline franchise fees under a contract the City had with
Rio Grande Valley Gas Company, which was previously owned by EPGT Texas and is
now owned by Southern Union Gas Company. An adverse judgment against Southern
Union and EPGT Texas was rendered in December 1998 and upheld for breach of
contract, holding both EPGT Texas and Southern Union jointly and severally
liable to the City for approximately $4.7 million. The judgment relies on the
single business enterprise doctrine to impose contractual obligations on EPGT
Texas and Southern Union's entities that were not parties to the contract with
the City. EPGT Texas has appealed this case to the Texas Supreme Court seeking
reversal of the judgment rendered against EPGT Texas. The City seeks a remand to
the trial court of its claim of tortious interference against EPGT Texas. The
briefing before the Texas Supreme Court is complete.
In December 2000, a 30-inch natural gas pipeline jointly owned now by EPN
Holding and Houston Pipe Line Company LP ruptured in Mont Belvieu, Texas, near
Baytown, resulting in substantial property damage and minor physical injury. EPN
Holding is the operator of the
97
pipeline. Lawsuits have been filed in state district court in Chambers County,
Texas. An additional landowner has intervened in the Chambers County suits, as
well as the homeowners' insurers. The suits seek recovery for physical pain and
suffering, mental anguish, physical impairment, medical expenses, and property
damage. Houston Pipe Line Company has been added as an additional defendant. In
accordance with the terms of the operating agreement, EPN Holding agreed to
assume the defense of and to indemnify Houston Pipe Line Company in the
litigated cases. Discovery is proceeding and trial is set for November 2002. As
discussed above, any obligation to Houston Pipe Line Company incurred by EPN
Holding is indemnified by subsidiaries of El Paso Corporation.
In addition to the above matters, El Paso Energy Partners and its
subsidiaries and affiliates are named defendants in numerous lawsuits and
governmental proceedings that arise in the ordinary course of our business.
For each of our outstanding legal matters, El Paso Energy Partners
evaluates the merits of the case, its exposure to the matter and possible legal
or settlement strategies and the likelihood of an unfavorable outcome. If El
Paso Energy Partners determines that an unfavorable outcome is probable and can
be estimated, it will establish the necessary accruals. As of March 31, 2002, El
Paso Energy Partners had no reserves for its legal matters.
While the outcome of the outstanding legal matters cannot be predicted with
certainty, based on information known to date, El Paso Energy Partners does not
expect the ultimate resolution of these matters will have a material adverse
effect on its financial position, results of operations or cash flows. As new
information becomes available or relevant developments occur, El Paso Energy
Partners will establish accruals as appropriate. The impact of these changes may
have a material effect on its results of operations.
ENVIRONMENTAL
El Paso Energy Partners is subject to extensive federal, state, and local
laws and regulations governing environmental quality and pollution control.
These laws and regulations require it to remove or remedy the effect on the
environment of the disposal or release of specified substances at current and
former operating sites. As of March 31, 2002, El Paso Energy Partners had no
accruals for environmental matters. However, in conjunction with its April 2002
acquisition of the midstream assets, El Paso Energy Partners assumed an
estimated liability of approximately $24 million for remediation costs expected
to be incurred over time associated with mercury meters.
While the outcome of El Paso Energy Partners' outstanding environmental
matters cannot be predicted with certainty, based on the information known to
date and their existing accruals, we do not expect the ultimate resolution of
these matters will have a material adverse effect on their financial position,
results of operations or cash flows. It is possible that new information or
future developments could require them to reassess their potential exposure
related to environmental matters. It is also possible that other developments,
such as increasingly strict environmental laws and regulations and claims for
damages to property, employees, other persons and the environment resulting from
their current or past operations, could result in substantial costs and
liabilities in the future. As new information becomes available, or relevant
developments occur, El Paso Energy Partners will review their accruals and make
any appropriate adjustments. The impact of these changes may have a material
effect on their results of operations.
REGULATORY MATTERS
In September 2001, the Federal Energy Regulatory Commission, or FERC,
issued a Notice of Proposed Rulemaking, or NOPR, that proposes to apply the
standards of conduct governing the relationship between interstate pipelines and
marketing affiliates to all energy affiliates. Since our High Island Offshore
System, referred to as HIOS, and Petal Gas Storage facility are interstate
98
facilities as defined by the Natural Gas Act, the proposed regulations, if
adopted by FERC, would dictate how HIOS and Petal conduct business and interact
with all energy affiliates of El Paso Energy Partners and El Paso Corporation. A
public hearing was held on May 21, 2002 at which interested parties were given
an opportunity to comment further on the NOPR. We cannot predict the outcome of
the NOPR, but adoption of the regulations in substantially the form proposed
would, at a minimum, place administrative and operational burdens on us.
Further, more fundamental changes could be required such as a complete
organizational separation or sale of HIOS and Petal.
In August 2002, the FERC issued a NOPR requiring that all arrangements
concerning the cash management or money pool arrangements between a FERC
regulated subsidiary and a non FERC regulated parent must be in writing, and set
forth: the duties and responsibilities of cash management participants and
administrators; the methods of calculating interest and for allocating interest
income and expenses; and the restrictions on deposits or borrowings by money
pool members. The NOPR also requires certain specified documentation for all
deposits into, borrowings from, interest income from, and interest expenses
related to, these arrangements. Finally, the NOPR proposes that as a condition
of participating in a cash management or money pool arrangement, the FERC
regulated entity must maintain a minimum proprietary capital balance of 30
percent, and the FERC regulated entity and its parent must maintain investment
grade credit ratings. Comments on the NOPR are due on Thursday, August 22, 2002.
El Paso Energy Partners cannot predict the outcome of this NOPR.
Also in August 2002, FERC's Chief Accountant issued, to be effective
immediately, an Accounting Release providing guidance on how jurisdictional
entities should account for money pool arrangements and the types of
documentation that should be maintained for these arrangements. The Accounting
Release sets forth the documentation requirements set forth in the NOPR for
money pool arrangements, but does not address the requirements in the NOPR that
as a condition for participating in money pool arrangements the FERC regulated
entity must maintain a minimum proprietary capital balance of 30 percent and
that the entity and its parent must have investment grade credit ratings.
Requests for rehearing are due on September 3, 2002.
In December 1999, EPGT Texas filed a petition with the FERC for approval of
its rates for interstate transportation service. In June 2002, the FERC issued
an order that required revisions to EPGT Texas' proposed rates. It also ordered
refunds to customers for the difference, if any, between the originally proposed
levels and the revised rates ordered by the FERC. The changes ordered by the
FERC involve reductions to rate of return, depreciation rates and revisions to
the proposed rate design, including a requirement to separately state rates for
gathering service. El Paso Energy Partners believes the amount of any rate
refund would be minimal since, as provided for in its tariff, it was not
charging its customers at the maximum rate. In July 2002, EPGT Texas requested
rehearing on certain issues raised by the FERC's order, including the ordered
changes to rate design and depreciation rates, and the requirement to separately
state a gathering rate. This request for rehearing is pending before the FERC.
While the outcome of all of El Paso Energy Partners' rates and regulatory
matters cannot be predicted with certainty, based on information known to date,
we do not expect the ultimate resolution of these matters will have a material
adverse effect on their financial position, results of operations or cash flows.
As new information becomes available or relevant developments occur, they will
review their accruals and make any appropriate adjustments. The impact of these
changes may have a material effect on their results of operations.
CRITICAL ACCOUNTING POLICIES
The selection and application of accounting policies is an important
process that has developed as El Paso Energy Partners' business activities have
evolved and as the accounting rules have developed. Accounting rules generally
do not involve a selection among alternatives,
99
but involve an implementation and interpretation of existing rules, and the use
of judgment, to the specific set of circumstances existing in El Paso Energy
Partners' business. El Paso Energy Partners makes every effort to properly
comply with all applicable rules on or before their adoption, and it believes
the proper implementation and consistent application of the accounting rules is
critical. However, not all situations are specifically addressed in the
accounting literature. In these cases, El Paso Energy Partners must use its best
judgment to adopt a policy for accounting for these situations. El Paso Energy
Partners accomplishes this by analyzing similar situations and the accounting
guidance governing them, and often consults with its independent accountants
about the appropriate interpretation and application of these policies. In
addition, the preparation of El Paso Energy Partners' financial statements in
conformity with accounting policies generally accepted in the United States
requires El Paso Energy Partners to make estimates and assumptions that affect
the reported amounts of assets, liabilities, revenues and expenses and
disclosure of contingent assets and liabilities that exist at the date of its
financial statements. While El Paso Energy Partners believes its estimates are
appropriate, actual results can, and often do, differ from those estimates. El
Paso Energy Partners' critical accounting policies are discussed below. Each of
these areas involves complex situations and a high degree of judgment either in
the application and interpretation of existing literature or in the development
of estimates that impact El Paso Energy Partners' financial statements.
RESERVES FOR CONTINGENCIES
El Paso Energy Partners accrues reserves for contingent liabilities
including, but not limited to, environmental remediation and clean-up costs, and
potential legal claims, when its assessments indicate that it is probable that a
liability has been incurred and an amount can be reasonably estimated. El Paso
Energy Partners' estimates for these liabilities are based on currently
available facts and estimates of the ultimate outcome or resolution of the
liability in the future. El Paso Energy Partners' actual results may differ from
its estimates, and such estimates can be, and often are, revised in the future,
either negatively or positively, depending upon the outcome or expectations
based on the facts surrounding each exposure.
New environmental developments, such as increasingly strict environmental
laws and regulations and new claims for damages to property, employees, other
persons and the environment resulting from current or past operations, could
result in substantial cost and future liabilities. Also, new legal matters,
adverse rulings or anticipated adverse rulings on pending legal matters, or
proposed settlements on pending legal matters could result in substantial cost
or future liabilities.
COLLECTIBILITY OF ACCOUNTS RECEIVABLE
El Paso Energy Partners has established an allowance for losses on accounts
that may become uncollectible. Collectibility is reviewed regularly and the
allowance is adjusted as necessary, primarily under the specific identification
method. The allowance could increase or decrease based on a change in El Paso
Energy Partners' view of the cash flow strength of its customers. This view is
generally customer specific and includes known cash flow problems such as
bankruptcies, possible bankruptcies, changes in credit ratings and other
factors. El Paso Energy Partners' view of account collectibility is also
affected by the current weakness or strength of the customers' business sector,
the overall energy sector and overall general economic conditions.
ASSET IMPAIRMENT
The asset impairment accounting rules require us to determine if an event
has occurred indicating that a long-lived asset may be impaired. In certain
cases, a clearly identifiable triggering event does not occur, but rather a
series of individually insignificant events over a period of time leads to an
indication that an asset may be impaired. El Paso Energy Partners
100
continually monitors its businesses and the market and business environments and
makes its judgments and assessments concerning whether a triggering event has
occurred. If an event occurs, El Paso Energy Partners must make an estimate of
its future cash flows from these assets to determine if the asset is impaired.
These cash flow estimates require El Paso Energy Partners to make projections
and assumptions for many years into the future for pricing, demand, competition,
prices, operating costs, legal, regulatory and other factors. Changes in the
economic and business environment in the future, such as production declines
that are not replaced by new discoveries, long term decreases in the demand or
price of oil and natural gas, may lead to an indication that an impairment may
have occurred.
VOLUME MEASUREMENT
El Paso Energy Partners records amounts for natural gas gathering and
transportation revenue, liquid transportation and handling revenue, natural gas
sales and related natural gas purchases, and the sale of production based on
volumetric calculations. Variances resulting from such calculations are inherent
in El Paso Energy Partners' business. El Paso Energy Partners does not believe
that differences attributable to unresolved variances are material.
DEPRECIATION OF PROPERTY, PLANT AND EQUIPMENT
El Paso Energy Partners estimates its depreciation based on an estimated
useful life and residual salvage values. Estimated dismantlement, restoration
and abandonment costs are taken into account in determining depreciation
provisions for gathering pipelines, platforms, related facilities and oil and
natural gas properties. At the time El Paso Energy Partners places its assets
into service, it believes its estimates are accurate. However, circumstances in
the future may develop which would cause El Paso Energy Partners to change these
estimates and in turn would change its depreciation amounts on a going forward
basis. Some of these circumstances include changes in laws and regulations
relating to restoration and abandonment requirements; changes in the expected
costs for dismantlement, restoration and abandonment as a result of changes, or
expected changes, in labor, materials and other related costs associated with
these activities; changes in the useful life of an asset based on the actual
known life of similar assets, changes in technology, or other factors; and
changes in expected salvage proceeds as a result of a change, or expected
change, in the salvage market.
OIL AND NATURAL GAS RESERVES AND AMORTIZATION OF OIL AND NATURAL GAS
PROPERTIES
The process of estimating quantities of natural gas and crude oil reserves
is very complex, requiring significant decisions in the evaluation of all
available geological, geophysical, engineering and economic data. The data for a
given field may also change substantially over time as a result of numerous
factors including, but not limited to, additional development activity, evolving
production history and continual reassessment of the viability of production
under varying economic conditions. As a result, material revisions to existing
reserve estimates may occur from time to time. Although every reasonable effort
is made to ensure that reserve estimates reported represent the most accurate
assessments possible, the subjective decisions and variances in available data
for various fields make these estimates generally less precise than other
estimates included in the financial statement disclosures. El Paso Energy
Partners uses the units-of-production method to amortize capitalized costs of
its oil and natural gas properties. Changes in reserve quantities as described
above will cause corresponding changes in depletion expense in periods
subsequent to the quantity revision.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
El Paso Energy Partners continually monitors and revises its accounting
policies as developments occur. At this time, there are several new accounting
pronouncements that have recently been issued, but are not yet adopted, which
will impact El Paso Energy Partners'
101
accounting when these rules become effective in 2002 and 2003. Some of these new
rules will have an impact on El Paso Energy Partners' critical accounting
policies.
Accounting for Asset Retirement Obligations
In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. This statement requires
companies to record a liability relating to the retirement and removal costs of
assets used in their business. The liability is discounted to its present value,
and the related asset value is increased by the amount of the resulting
liability. Over the life of the asset, the liability will be accreted to its
future value and eventually extinguished when the asset is taken out of service.
Capitalized retirement and removal costs will be depreciated over the useful
life of the related asset. The provisions of this statement are effective for
fiscal years beginning after June 15, 2002. We are currently evaluating the
effects of this pronouncement.
Reporting Gains and Losses from the Early Extinguishment of Debt
In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
Nos. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement addresses how to report gains or losses resulting
from the early extinguishment of debt. Previously, any gains or losses were
reported as an extraordinary item. Upon adoption of SFAS No. 145, an entity will
be required to evaluate whether the debt extinguishment is truly extraordinary
in nature, in accordance with Accounting Principles Board Opinion No. 30. If the
entity routinely extinguishes debt early, the gain or loss should be included in
income from continuing operations. This statement is effective for our 2003
year-end reporting.
Accounting for Costs Associated with Exit or Disposal Activities
In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by this guidance include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The provisions of
this statement are effective for fiscal years beginning after December 31, 2002.
The provisions of this statement will impact any exit or disposal activities
that we initiate after January 1, 2003.
EPN HOLDING ASSETS -- RESULTS OF OPERATIONS
El Paso Energy Partners acquired the EPN Holding assets on April 8, 2002
for total net consideration of $735 million.
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OVERVIEW
The following tables present summary historical financial information for
the EPN Holding assets for the periods indicated, and are derived from the
financial statements filed by El Paso Energy Partners on its Current Reports on
Form 8-K filed April 22, 2002 and July 30, 2002.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
----------------------
2002 2001
-------- --------
(IN THOUSANDS)
Gross Margin................................................ $ 50,770 $ 28,217
Operating expenses.......................................... (22,347) (27,334)
Other income (expense)...................................... (29) 176
-------- --------
EBIT.............................................. $ 28,394 $ 1,059
======== ========
</Table>
EPN HOLDING ASSETS -- THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE
THREE MONTHS ENDED MARCH 31, 2001
Gross margin for the first quarter of 2002 was $50.8 million, an increase
of $22.6 million compared to first quarter 2001 gross margin of $28.2 million.
The increase in gross margin was primarily due to the favorable resolution of
fuel, rate and volume matters in the first quarter of 2002 and higher realized
transportation rates in 2002 from the pipeline system.
Operating expenses for the first quarter of 2002 were $22.3 million, a
decrease of $5.0 million compared to first quarter 2001 operating expenses of
$27.3 million. The decrease in operating expenses was primarily due to merger
related employee severance and relocation expenses in 2001, in addition to other
administrative and general cost savings resulting from realization of cost
synergies upon the acquisition of additional assets by our owners.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
-----------------------
2001 2000
-------- ---------
(IN THOUSANDS)
Gross Margin................................................ $156,107 $ 166,516
Operating expenses.......................................... (98,920) (145,025)
Other income (expense)...................................... (5,026) (5,819)
-------- ---------
EBIT.............................................. $ 52,161 $ 15,672
======== =========
</Table>
EPN HOLDING ASSETS -- YEAR ENDED DECEMBER 31, 2001 COMPARED TO THE YEAR
ENDED DECEMBER 31, 2000
Gross margin for the year ended December 31, 2001 was $156.1 million, a
decrease of $10.4 million compared to 2000 gross margin of $166.5 million. The
decrease in gross margin was primarily due to the unfavorable resolution of
volume issues in 2001.
Operating expenses for the year ended December 31, 2001 were $98.9 million,
a decrease of $46.1 million compared to 2000 operating expenses of $145.0
million. The decrease in operating expenses was primarily due to cost savings
attributable the realization of cost synergies and lower depreciation expense in
2001 resulting from asset bases stepped down at the date of acquisition.
SAN JUAN ASSETS -- RESULTS OF OPERATIONS
El Paso Energy Partners will acquire the San Juan assets upon consummation
of this offering for total consideration of $782 million.
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OVERVIEW
The following tables present summary historical financial information for
the San Juan assets for the periods indicated, and are derived from the
financial statements filed by El Paso Energy Partners on its Current Report on
Form 8-K filed August 12, 2002.
<Table>
<Caption>
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
-------- --------
(IN THOUSANDS)
(UNAUDITED)
Gross margin................................................ $ 28,903 $ 61,573
Operating expenses.......................................... (20,100) (18,608)
Other income (expense)...................................... (70) 267
-------- --------
EBIT.............................................. $ 8,733 $ 43,232
======== ========
</Table>
SAN JUAN ASSETS -- THREE MONTHS ENDED MARCH 31, 2002 COMPARED TO THE THREE
MONTHS ENDED MARCH 31, 2001
Gross margin for the three months ended March 31, 2002 was $28.9 million, a
decrease of $32.7 million compared to the same period in 2001. The decrease in
gross margin was primarily due to lower fees realized on gathering and
processing contracts as a result of a reduction in natural gas and NGL prices
during the three months ended March 31, 2002 from the corresponding period in
2001. Natural gas prices in the first quarter of 2001 averaged $5.00 higher per
Mcf than the first quarter of 2002. Substantially all of the volumes handled by
the San Juan gathering system are fee-based arrangements for which fees are
calculated as a percentage of a regional index for natural gas prices. In
addition, revenues from the Chaco plant fluctuate directly with the price of
NGLs. During these periods, these businesses did not enter into any significant
hedging transactions to minimize the exposure to fluctuations in commodity
prices. These lower fees were offset partially by additional margin resulting
from the Typhoon Oil and Typhoon Gas assets being placed in service in the third
quarter of 2001.
Operating expenses for the three months ended March 31, 2002 were $20.1
million, an increase of $1.5 million compared to the same period in 2001. The
increase in operating expenses was primarily due to higher operating and
maintenance expenses and depreciation expense related to the Typhoon Oil and
Typhoon Gas assets placed in service in the third quarter of 2001.
<Table>
<Caption>
YEAR ENDED
DECEMBER 31,
--------------------
2001 2000
-------- --------
(IN THOUSANDS)
Gross Margin............................................... $184,072 $164,360
Operating expenses......................................... (83,823) (85,987)
Other income............................................... 2,177 2,234
-------- --------
EBIT............................................. $102,426 $ 80,607
======== ========
</Table>
SAN JUAN ASSETS -- YEAR ENDED DECEMBER 31, 2001 COMPARED TO YEAR ENDED
DECEMBER 31, 2000
Gross margin for the year ended December 31, 2001 was $184.1 million, an
increase of $19.7 million compared to 2000 gross margin of $164.4 million. The
increase in gross margin was primarily due to higher realized natural gas and
NGL prices for the year ended December 31,
104
2001 as compared to the same period of 2000, higher purification fee revenue
resulting from the Rattlesnake Treating Facility becoming fully operational in
2001, and additional margin generated as a result of the Typhoon Oil and Typhoon
Gas assets being placed in service during the third quarter of 2001.
Operating expenses for the year ended December 31, 2001 were $83.8 million,
a decrease of $2.2 million compared to 2000 operating expenses of $86.0 million.
The decrease in operating expenses was primarily due to lower operating and
maintenance expense resulting from cost savings efforts, offset by additional
operating expenses resulting from the Typhoon Oil and Typhoon Gas assets coming
online in the third quarter of 2001.
Other income for the year ended December 31, 2001 was $2.2 million as
compared to $2.2 million in 2000. Other income includes earnings from San Juan's
unconsolidated affiliate, the Coyote Gas Treating Facility, which was higher for
the year ended December 31, 2001 than for the year 2000, offset by a net gain on
sale of assets recorded in 2000.
105
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
El Paso Energy Partners may utilize derivative financial instruments to
manage its exposure to movements in interest rates and commodity prices. In
accordance with procedures established by its general partner, El Paso Energy
Partners monitors current economic conditions and evaluates its expectations of
future prices and interest rates when making decisions with respect to risk
management.
NON-TRADING COMMODITY PRICE RISK
A majority of El Paso Energy Partners' commodity purchases and sales, which
relate to sales of oil and natural gas associated with its production operations
and purchases and sales of natural gas associated with its El Paso
Intrastate-Alabama, or EPIA, pipeline, are at spot market or forward market
prices. El Paso Energy Partners uses futures, forward contracts, and swaps from
time to time to limit is EPIA-related exposure to fluctuations in the commodity
markets and allow for a fixed cash flow stream from these activities.
During 2001 and 2002, in connection with its EPIA operations, El Paso
Energy Partners entered into fixed price contracts with specific customers for
the sale of predetermined volumes of natural gas for delivery over established
periods of time. These sales contracts expose El Paso Energy Partners to price
risk that results from the fluctuations in the market price of natural gas it is
required to purchase to fulfill these contracts. El Paso Energy Partners manages
this price risk by simultaneously entering into commodity price swap contracts
for comparable volumes of natural gas at fixed prices that settle over the same
time periods as the underlying sales contracts. These commodity price swap
transactions are commonly referred to as "hedges," because, if effective, they
minimize any gain or loss to its margin on the underlying sales contract at the
time of settlement. El Paso Energy Partners settles the commodity price swap
transactions by paying the negative difference or receiving the positive
difference between the price specified in the contract and the applicable
settlement price indicated in the SONAT-Louisiana index, or the Southern
National Pipeline index as published by the periodical "Inside FERC," for the
specified commodity on the established settlement date. All of El Paso Energy
Partners' contracts at March 31, 2002, were short term in nature.
Starting in April 2002, in connection with El Paso Energy Partners' EPN
Holding acquisition, El Paso Energy Partners has swaps in place for its interest
in the Indian Basin processing plant to hedge the price received for the sale of
natural gas liquids. El Paso Energy Partners does not expect any ineffectiveness
in its hedging relationship since all sale prices are based on the same index as
the hedged item. El Paso Energy Partners estimates that the entire amount will
be reclassified from accumulated other comprehensive income to earnings over the
next three months.
El Paso Energy Partners' counterparty for EPIA and Indian Basin hedging
activities is El Paso Merchant Energy and El Paso Field Services, respectively.
El Paso Energy Partners does not require collateral and does not anticipate
non-performance by its counterparty.
The Alabama-Intrastate gathering system functions as a merchant operation
and, accordingly, purchases and resells the natural gas it gathers. Several of
El Paso Energy Partners' other gathering systems, while not functioning as a
merchant operation, have some exposure to risks related to commodity prices. For
example, approximately 80% of the volumes handled by the San Juan gathering
system are fee-based arrangements for which the fees are calculated as a
percentage of a regional price index for natural gas. In addition, the San Juan
gathering system provides aggregating and bundling services -- in which it
purchases gas at the wellhead and resells gas in the open market -- for some
smaller producers, which account for less than 5% of the volumes on that system.
El Paso Energy Partners intends to use contractual arrangements, like fixed-fee
contracts and hedging and tolling arrangements, to limit its San Juan
Basin-related
106
exposure to fluctuations in the commodity markets and allow for a fixed cash
flow stream from these activities.
El Paso Energy Partners has not entered into any hedging activities on its
oil and natural gas production since its previous hedging transactions expired
in December 2000.
INTEREST RATE RISK
El Paso Energy Partners utilizes both fixed and variable rate long-term
debt, and is exposed to market risk due to the floating interest rates on its
revolving credit facility. Under its revolving credit facility, the remaining
principal and the final interest payment are due in May 2004. As of July 31,
2002, El Paso Energy Partners' revolving credit facility had a principal balance
of $514 million at an average variable interest rate of 3.55%. A change of one
percent in the interest rates would cause a change in interest expense on these
outstanding borrowings of approximately $5.1 million on an annualized basis. El
Paso Energy Partners is exposed to similar risks under its Poseidon joint
venture credit facility and its EPN Holding limited recourse loan agreement.
Since El Paso Energy Partners has $480 million outstanding under its indentures
at fixed interest rates of 8 1/2% and 10 3/8%, it has not benefitted from the
recent declines in interest rates. On the other hand, had interest rates
increased, El Paso Energy Partners would not have incurred additional interest
costs.
In January 2002, Poseidon entered into a two-year interest rate swap
agreement to fix the interest rate on $75 million of its $150 million variable
rate revolving credit facility at 4.99% over the life of the swap. As of March
31, 2002, the fair value of its interest rate swap was an asset of $0.4 million
resulting in an unrealized gain of $0.4 million. El Paso Energy Partners
included its 36% share of this asset of $0.1 million as an increase to its
investment in Poseidon and as an unrealized gain in other comprehensive income
which it estimates will be reclassified to earnings proportionately over the
next 18 months. Additionally, El Paso Energy Partners has recognized in income
its 36% share of Poseidon's realized loss of $0.3 million for the three months
ended March 31, 2002, or $0.1 million, through its earnings from unconsolidated
affiliates.
The counterparty for Poseidon hedging activity is Credit Lyonnais. Poseidon
does not require collateral and does not anticipate non-performance by the
counterparty.
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BUSINESS
EL PASO ENERGY MANAGEMENT
We are a limited liability company formed in Delaware on July 19, 2002.
Upon completion of this offering, our only business will consist of managing the
operations of El Paso Energy Partners. We were formed as a limited liability
company to accommodate the interrelationships among us and El Paso Energy
Partners Company, El Paso Energy Partners, El Paso Corporation and all of their
respective affiliates. These interrelationships required that the fiduciary
duties owed by our board of directors to us and our shareholders be modified
from what otherwise would have been required under Delaware law. For a
description of these interrelationships, please read "Conflicts of Interest and
Fiduciary Responsibilities".
We will have no operations prior to the closing of this offering. Upon the
closing of this offering, the general partner of El Paso Energy Partners will
delegate to us substantially all of the rights and powers to manage the business
and affairs of El Paso Energy Partners and its subsidiaries. For more
information regarding our management of the business and affairs of El Paso
Energy Partners, please read "Relationships and Related Party Transactions --
Delegation Agreement" and "Business -- El Paso Energy Partners -- Employees".
We will have no assets other than our interest in El Paso Energy Partners.
Further, we will have no operations other than the management of the business
and affairs of El Paso Energy Partners. As a result, our financial condition and
results of operations will depend upon the performance of El Paso Energy
Partners. We do not expect to have any cash flow attributable to our ownership
of the i-units, but we will own additional i-units in El Paso Energy Partners
(as a result of an i-unit split) each quarter when cash distributions are made
by El Paso Energy Partners on its common units. The number of additional i-units
we will own will be based on the amount of cash to be distributed by El Paso
Energy Partners to owners of its common units, which will be determined by the
operations of El Paso Energy Partners and its direct and indirect operating
subsidiaries.
Effective with the closing of this offering, we will elect to be treated as
a corporation for U.S. federal income tax purposes. As a result, an owner of our
shares will not report on its U.S. federal income tax return any of our items of
income, gain, loss and deduction.
Although we will be subject to U.S. federal income taxes on our taxable
income, El Paso Energy Partners will not allocate taxable income or gain to the
i-units we own until such time as there is a liquidation of El Paso Energy
Partners or after El Paso Corporation has acquired all of our shares and we have
become a wholly-owned subsidiary of El Paso Corporation. Therefore, we do not
anticipate that we will have material amounts of taxable income resulting from
the ownership of the i-units unless we enter into a sale or exchange of the
i-units or El Paso Energy Partners is liquidated.
We are not a party to any litigation.
EL PASO ENERGY PARTNERS
El Paso Energy Partners, a Delaware limited partnership with common units
traded on the New York Stock Exchange under the symbol "EPN," was formed in
1993. El Paso Energy Partners is one of the largest publicly-traded MLPs in
terms of market capitalization. El Paso Energy Partners currently manages a
balanced, diversified portfolio of midstream energy interests and assets that
includes:
- offshore oil and natural gas pipelines, platforms, processing facilities
and other energy infrastructure in the Gulf of Mexico, primarily offshore
Louisiana and Texas;
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- onshore natural gas pipeline assets and processing facilities in Alabama,
Mississippi, New Mexico and Texas; and
- onshore NGL transportation and fractionation facilities in Texas.
Since El Paso Corporation's 1998 acquisition of an interest in El Paso
Energy Partners, El Paso Energy Partners has diversified its assets base,
stabilized its cash flow and decreased its financial leverage as a percentage of
total capital. El Paso Energy Partners has accomplished this through a series of
acquisitions and development projects.
SAN JUAN ASSET ACQUISITION AND DISTRIBUTION INCREASE
On July 16, 2002, El Paso Energy Partners and El Paso Corporation entered
into a letter of intent regarding the proposed acquisition by El Paso Energy
Partners of the San Juan assets from El Paso Corporation for approximately $782
million, subject to adjustment for capital expenditures, working capital and
other matters. The San Juan assets include:
- substantially all of El Paso Corporation's natural gas gathering,
processing and treating assets in the San Juan Basin of New
Mexico--specifically, its 5,300-mile San Juan Basin gathering system,
including the associated compression, processing and treating facilities
and contracts, and the remaining interest in the Chaco processing plant
not already owned by El Paso Energy Partners;
- a 35-mile, 20-inch natural gas pipeline and a 16-mile, 12-inch oil
pipeline originating on the Chevron/BHP "Typhoon" platform in the Green
Canyon area of the Gulf of Mexico; and
- over 570 miles of NGL pipelines and a related fractionation facility in
South Texas.
The acquisition is expected to be consummated simultaneously with the
consummation of this offering, and this offering is contingent upon the
consummation of the acquisition. We will use substantially all of the net
proceeds of this offering to purchase i-units from El Paso Energy Partners, and
El Paso Energy Partners will use the proceeds from that purchase of i-units to,
among other things, finance its acquisition of the San Juan assets and fund
general business requirements, including repaying indebtedness under its
revolving credit facility. The San Juan assets generated approximately $114
million of pro forma EBITDA during the year ended December 31, 2001, as adjusted
to reflect the San Juan asset acquisition.
El Paso Energy Partners approved a quarterly distribution of $0.675 ($2.70
annualized) per common unit payable in November 2002. This represented the third
increase to the distribution rate announced in 2002. During 2002, El Paso Energy
Partners has declared or approved the following quarterly distributions:
<Table>
<Caption>
QUARTERLY INCREASE
PAYMENT DISTRIBUTION OVER PRIOR
DATE AMOUNT QUARTER
------- ------------- ----------
November......................................... $0.6750 $ 0.0250
August 15........................................ $0.6500 --
May 15........................................... $0.6500 $ 0.0250
February 15...................................... $0.6250 $ 0.0125
</Table>
EL PASO ENERGY PARTNERS' GENERAL PARTNER
El Paso Energy Partners continues to benefit from the unique corporate
sponsorship it receives from El Paso Corporation, the indirect parent of El Paso
Energy Partners Company, the general partner of El Paso Energy Partners. El Paso
Corporation, a Delaware corporation with its stock traded on the NYSE under the
symbol "EP," is a global energy company with operations
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that extend from energy production and extraction to power generation, with
total assets of $49 billion at March 31, 2002. El Paso Corporation's principal
operations include:
- natural gas transportation, gathering, processing and storage;
- natural gas and oil exploration, development and production;
- energy and energy-related commodities and products marketing;
- power generation;
- energy infrastructure facility development and operation;
- petroleum refining; and
- chemicals production.
El Paso Corporation has designated its investment in El Paso Energy
Partners as its primary vehicle for growth and development of its midstream
energy business. Through its subsidiaries, El Paso Corporation owns
approximately 26.5%, or 11,674,245, of El Paso Energy Partners' common units and
its 1% general partner interest. Additionally, El Paso Corporation, through a
subsidiary, owns all 125,392 of El Paso Energy Partners' outstanding Series B
preference units. As of March 31, 2002, the liquidation value of the Series B
preference units was approximately $146 million. El Paso Corporation will
purchase 5,300,000 shares in this offering (up to 6,095,000 shares if the
underwriters exercise all or a portion of their over-allotment option).
Through an arrangement with El Paso Energy Partners Company, El Paso Energy
Partners' sole general partner and an indirect wholly-owned subsidiary of El
Paso Corporation, we will manage the business and affairs of El Paso Energy
Partners. Through us, El Paso Energy Partners utilizes the employees of, and
management services provided by, El Paso Corporation and its affiliates under a
general and administrative services agreement.
EL PASO ENERGY PARTNERS' OBJECTIVE AND STRATEGY
El Paso Energy Partners' objective is to operate as a growth-oriented MLP
with a focus on increasing cash flow, earnings and return to its unitholders by
becoming one of the industry's leading providers of midstream energy services.
Its strategy is to maintain and grow a diversified, balanced base of
strategically located and efficiently operated midstream energy assets with
stable cash flows. Upon completion of its acquisition of the San Juan assets, El
Paso Energy Partners will be the largest natural gas gatherer, based on miles of
pipeline, in the prolific natural gas supply regions in Texas and the San Juan
Basin, which collectively accounted for approximately 35% of domestic natural
gas production during 2001. El Paso Energy Partners is also one of the largest
natural gas gatherers, based on miles of pipeline, in the Gulf of Mexico, which
accounted for approximately 27% of domestic natural gas production during 2001.
These regions, especially the deeper water regions of the Gulf of
Mexico -- one of the United States' fastest growing natural gas producing
regions -- offer El Paso Energy Partners significant infrastructure growth
potential through the acquisition and construction of pipelines, platforms,
processing and storage facilities and other infrastructure.
El Paso Energy Partners' strategy entails continually enhancing the quality
of its cash flow by emphasizing operations and services for which the fees are
not traditionally linked to commodity prices, like gathering, transportation and
storage; shifting commodity price risks by using contractual arrangements, like
fixed-fee contracts and hedging and tolling arrangements; and exiting the oil
and gas production business by not acquiring additional properties.
However, El Paso Energy Partners' financial results from some of its
onshore pipelines, including the Alabama-Intrastate, Carlsbad, Waha and San Juan
gathering systems, can be dramatically affected by a reduction in, or volatility
of, commodity prices. The Alabama-Intrastate
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gathering system functions as a merchant operation and, accordingly, purchases
and resells the natural gas it gathers. Several of El Paso Energy Partners'
other gathering systems, while not functioning as a merchant operation, have
some exposure to risks related to commodity prices. For example, over 95% of the
volumes handled by the San Juan gathering system are fee-based arrangements, 80%
of which the fees are calculated as a percentage of a regional price index for
natural gas. In addition, the San Juan gathering system provides aggregating and
bundling services -- in which it purchases gas at the wellhead and resells gas
in the open market -- for some smaller producers, which account for less than 5%
of the volumes on that system.
El Paso Energy Partners' offshore gathering and transportation arrangements
tend to have longer terms, which often last for the productive life of the
producing property, and its onshore gathering, transportation, processing and
fractionating arrangements tend to have multiple-year terms.
El Paso Energy Partners intends to execute its business strategy by:
- purchasing and constructing onshore pipelines; gathering systems;
storage, processing and fractionation facilities; and other midstream
assets to provide a broad range of more stable, fee-based services to
producers, marketers and users of energy products;
- expanding its existing asset base, supported by the dedication of new
discoveries and long-term commitments, to capitalize on the accelerated
growth of oil and natural gas supplies from the deeper water regions of
the Gulf of Mexico;
- operating at low cost by achieving economics of scale in select regions
through reinvesting in and expanding its organic growth opportunities, as
well as by acquiring new assets; and
- continuing to strengthen its solid balance sheet by seeking to finance
its growth with 50% equity so as to provide the financial flexibility to
fund future opportunities.
RECENT DEVELOPMENTS
COMPLETED ACQUISITIONS
In accordance with its business strategy, El Paso Energy Partners has
entered into transactions that have further diversified and grown its midstream
asset base and expanded its sources of cash flow over the past several months.
For example, in April 2002, EPN Holding acquired the EPN Holding assets from El
Paso Corporation for net consideration of $735 million. The EPN Holding assets
include:
- interests in four intrastate natural gas gathering systems, including the
EPGT Texas intrastate pipeline system;
- a non-operating interest in a natural gas processing and treating
facility; and
- a leased interest in a natural gas storage facility.
Also, in January 2002, El Paso Energy Partners acquired a 3.3 million
barrel propane storage business and leaching operation located in Hattiesburg,
Mississippi.
PROJECTS UNDER DEVELOPMENT
El Paso Energy Partners also expects to continue to experience organic
growth in 2002 and beyond by constructing and operating strategic midstream
infrastructure assets onshore and offshore, including the following projects:
- A $99 million, 60-mile takeaway pipeline, including a 9,000 horsepower
compression station, connected to the Petal facility with capacity of
1.25 Bcf/d (currently FERC certified
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to 700 MMcf/d) completed in June 2002, which was designed and located to
expand Petal's delivery capabilities to the Southern Natural Gas and
Destin pipeline systems.
- A $58 million, 5.4 Bcf expansion of the Petal natural gas storage
facility, including a withdrawal facility and a 20,000 horsepower
compression station, located near Hattiesburg, Mississippi, completed in
June 2002. This additional storage capacity is dedicated to a subsidiary
of The Southern Company under a 20-year fixed-fee contract.
- The $28 million, 37-mile Medusa natural gas pipeline extension of El Paso
Energy Partners' Viosca Knoll gathering system with capacity to handle
160 MMcf/d of natural gas (expected to be in service in the first quarter
of 2003), which was designed and located to gather production from Murphy
Exploration and Production Company's Medusa development in the Gulf of
Mexico. Murphy has dedicated 34,560 acres of property to this pipeline
for the life of the reserves.
- The $53 million Falcon Nest fixed-leg platform with capacity to handle
300 MMcf/d of natural gas (expected to be in service during the first
quarter of 2003), which was designed and located to process natural gas
from Pioneer Natural Resources Company's and Mariner Energy, Inc.'s
Falcon Field discoveries in the Gulf of Mexico. Pioneer and Mariner have
dedicated 69,120 acres of property, including acreage underlying their
Falcon Field discovery, to this platform for the life of the reserves.
- The $206 million Marco Polo TLP, expected to be in service in 2004, with
capacity to handle 100 MBbls/d of oil and 250 MMcf/d of natural gas. This
TLP, which was designed and located to process natural gas from Anadarko
Petroleum Corporation's Marco Polo Field discovery in the Gulf of Mexico
will be owned by El Paso Energy Partners' 50%-owned Deepwater Gateway
joint venture. Anadarko has dedicated 69,120 acres of property to this
TLP, including the acreage underlying their Marco Polo Field discovery,
for the life of the reserves.
- The $96 million Marco Polo oil and gas pipelines, expected to be in
service in 2004. The oil pipeline, a 36-mile, 14 inch line, will gather
oil from the Marco Polo platform in Green Canyon Block 608 to EPN's
Allegheny pipeline in Green Canyon Block 164 and have a maximum capacity
of 100 MBbls/d. The natural gas pipeline, a 75-mile, 18-20 inch line will
gather natural gas from the Marco Polo platform in Green Canyon Block 608
to the Typhoon natural gas pipeline in Green Canyon Block 237 and have a
maximum capacity of 400 MMcf/d.
- The $450 million, 380-mile Cameron Highway Oil Pipeline, expected to be
in service by the third quarter of 2004 with capacity of 500 MBbls/d. BP
p.l.c., BHP Billiton and Unocal have dedicated 86,400 acres of property
to this pipeline for the life of the reserves, including the acreage
underlying their Holstein, Mad Dog and Atlantis developments in the
deeper water regions of the Gulf of Mexico.
RECENT FINANCINGS
During 2002, El Paso Energy Partners has executed several financings
intended to facilitate growth and help achieve its targeted capital structure,
including:
- raising approximately $150 million in net proceeds through the issuance
of 4,083,938 common units;
- raising approximately $230 million in net proceeds in a private offering
of long-term debt securities;
- entering into the $560 million EPN Holding acquisition and working
capital facility, of which $375 million has been repaid to date; and
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- repaying a $95 million limited recourse term loan used to construct its
Prince TLP, which El Paso Energy Partners sold to El Paso Corporation in
connection with its April 2002 EPN Holding acquisition.
KEY STRENGTHS
STABLE CASH FLOW DRIVEN BY FEE-BASED REVENUES
- Since El Paso Corporation's acquisition of an interest in El Paso Energy
Partners in 1998, El Paso Energy Partners has focused primarily on
increasing its fee-based services. As a result, including the San Juan
assets, El Paso Energy Partners' EBITDA is primarily derived from
gathering, transportation, storage and other fee-based services, the fees
for most of which are not directly affected by changes in energy
commodity prices.
- In addition to focusing on fee-based services, El Paso Energy Partners
seeks to enhance the quality of its cash flow by reducing energy
commodity price risks through the use, from time to time, of fixed-fee
contracts, hedging and other contractual arrangements.
SUPERIOR PLATFORM FOR CONTINUED EXPANSION THROUGH ATTRACTIVE ORGANIC GROWTH
PROSPECTS AND ACCRETIVE ACQUISITIONS
- El Paso Energy Partners has an expansive portfolio of organic development
opportunities for onshore and offshore projects totaling over $800
million.
- El Paso Energy Partners has the expertise to continue to execute
strategic transactions, as evidenced by the over $2 billion of
construction projects and accretive (in terms of cash flow per unit)
acquisitions announced over the last 12 months.
- El Paso Energy Partners benefits from additional economies of scale and
operating efficiencies as it expands its midstream asset base.
- El Paso Energy Partners' competitive cost of capital, resulting in part
from its MLP structure, helps El Paso Energy Partners efficiently execute
its growth strategy and compete in the midstream arena.
DIVERSIFIED PORTFOLIO OF ATTRACTIVE, STRATEGICALLY LOCATED ASSETS
- Through the utilization of available capacity in its existing offshore
pipelines and platforms, El Paso Energy Partners is well-positioned to
capture increasing oil and natural gas production from select active
deeper water regions of the Gulf of Mexico.
- The EPGT system, the largest intrastate pipeline system in Texas based on
miles of pipeline, accesses the most prolific supply basins and serves
all major markets in Texas, the largest producer and consumer of natural
gas in North America.
- The Petal and Hattiesburg natural gas storage facilities, with five major
pipeline interconnects, are strategically located between the Gulf of
Mexico supply basin and long-line transmission systems in the United
States.
- The San Juan gathering system and the Chaco plant are located in the San
Juan Basin, one of the most prolific natural gas producing areas in North
America and an access point for imported Canadian natural gas.
- El Paso Energy Partners' Texas NGL fractionation and transportation
assets, which provide essential supplies of NGLs to major Gulf Coast
petrochemical plants and refineries, interconnect with multiple El Paso
Corporation gas processing plants and intrastate pipeline facilities,
offering significant growth opportunities.
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PROVEN TRACK RECORD OF CASH FLOW DIVERSIFICATION AND LEVERAGE REDUCTION
- Since 1998, El Paso Energy Partners has diversified and balanced its
asset base in terms of services, businesses, customers and geography by
making $3 billion in capital expenditures (including the San Juan assets
acquisition), including constructing and acquiring gathering, storage,
processing and fractionating facilities.
- El Paso Energy Partners' target of financing its growth through 50%
equity and 50% debt has resulted in a significant reduction in financial
leverage and increased financial flexibility.
- The share structure contemplated in this offering further enhances El
Paso Energy Partners' access to the equity capital markets to fund future
growth without increasing leverage.
STEADY GROWTH IN ADJUSTED EBITDA AND QUARTERLY DISTRIBUTIONS
- Since 1998, El Paso Energy Partners' annual adjusted EBITDA has increased
at a compound annual growth rate of 45.6% through 2001.
- El Paso Energy Partners has increased its quarterly distribution rate
seven times, a 28.5% increase since 1998, including three increases
announced in 2002. Currently, its quarterly distribution rate is $0.675
per common unit ($2.70 per common unit annually).
- Since 1994, El Paso Energy Partners' distribution rate has increased at a
compound annual growth rate of 10.7%.
STRONG SPONSORSHIP
- El Paso Corporation has designated its investment in El Paso Energy
Partners as its primary vehicle for growth and development of its
midstream energy business.
- El Paso Corporation has elected to purchase 5,300,000 shares from us in
this offering (up to 6,095,000 shares if the underwriters exercise all or
a part of their overallotment option). This is in addition to El Paso
Corporation's ownership, through subsidiaries, of 11,674,245 common units
(approximately 26.5% of the aggregate outstanding), the 1% general
partner interest in El Paso Energy Partners, and 125,392 of El Paso
Energy Partners' Series B preference units, with a liquidation value of
approximately $146 million as of March 31, 2002.
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BUSINESS SEGMENTS
El Paso Energy Partners' business and operations cover four primary
business segments. This section of the prospectus, including the following
chart, depicts El Paso Energy Partners' business segments after completion of
the San Juan assets acquisition.
(CHART)
<Table>
<Caption>
OWNERSHIP
- - EPGT Texas
Intrastate 100.0%
- - Waha Gathering
System and Treating
Plant 100.0%
- - El Paso Intrastate
Alabama 100.0%
- - Carlsbad Gathering
System 100.0%
- - Channel Pipeline
System 50.0%
- - HIOS 100.0%
- - TPC Offshore System 100.0%
- - Viosca Knoll 100.0%
- - East Breaks 100.0%
- - Chaco Plant 100.0%
- - Indian Basin
Processing Plant 42.3%
San Juan Assets:
- - San Juan Gathering
System 100.0%
- - Typhoon Natural Gas
Pipeline 100.0%
- - Coyote Treating
Facility 50.0%
- - Rattlesnake
Treating Facility 100.0%
</Table>
<Table>
<Caption>
OWNERSHIP
- - Shoup Fractionator 100.0%
- - Armstrong
Fractionator 100.0%
- - Delmita
Fractionator 100.0%
- - Thompsonville
Lateral 100.0%
- - Shilling Lateral 100.0%
- - SACC Mainline 100.0%
- - South Texas
Pipeline 100.0%
- - Allegheny Pipeline 100.0%
- - Poseidon Pipeline 36.0%
- - Hattiesburg Propane
Storage 100.0%
- - Anse La Butte
Storage 100.0%
San Juan Assets:
- - Almeda Fractionator 100.0%
- - Typhoon Oil
Pipeline 100.0%
- - Texas NGL
Pipelines
</Table>
<Table>
<Caption>
OWNERSHIP
- - East Cameron 373 100.0%
- - Ship Shoal 331 100.0%
- - Viosca Knoll 817 100.0%
- - Ship Shoal 332 50.0%
- - Garden Banks 72 50.0%
</Table>
<Table>
<Caption>
OWNERSHIP
- - Hattiesburg 100.0%
- - Petal 100.0%
- - Wilson(1) 100.0%
</Table>
<Table>
<Caption>
OWNERSHIP
- - Viosca Knoll Block
817 100.0%
- - Garden Banks Block
72 50.0%
- - Garden Banks Block
117 50.0%
- - West Delta Block 35 38.8%
- - Garden Banks Block
73 2.5%(2)
</Table>
- ---------------
(1) El Paso Energy Partners has the exclusive right to use the Wilson natural
gas storage facility under an operating lease that expires in January 2008.
(2) Overriding royalty interest.
These segments are strategic business units that provide a variety of
energy-related services. Effective January 1, 2002, for accounting presentation
purposes, El Paso Energy Partners is reporting the results of operations
relating to its interests in the Chaco plant in its Natural Gas Pipelines and
Plants segment instead of its Oil and NGL Logistics Segment. Each of these
segments is discussed more fully below.
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NATURAL GAS PIPELINES AND PLANTS
NATURAL GAS PIPELINE SYSTEMS
El Paso Energy Partners owns interests in natural gas pipeline systems
extending over 16,900 miles, with a combined maximum design capacity (net to its
interest) of over 10.3 Bcf/d of natural gas. El Paso Energy Partners owns or has
interests in gathering systems onshore in Texas, New Mexico, Alabama and
Colorado, including the EPGT Texas system, the largest intrastate pipeline
system in Texas based on miles of pipeline, and the San Juan gathering system,
which includes 5,300 miles of pipeline currently gathering over 1.1 Bcf/d of
natural gas. In addition to its onshore natural gas pipeline systems, El Paso
Energy Partners' offshore natural gas pipeline systems are strategically located
to serve production activities in some of the most active drilling and
development regions in the Gulf of Mexico, including select locations offshore
of Texas, Louisiana and Mississippi, and to provide relatively low cost access
to long-line transmission pipelines that access multiple markets in the eastern
half of the United States.
The following table and discussions describe El Paso Energy Partners'
natural gas pipelines, all of which (other than portions of EPGT Texas, TPC
Offshore and Channel) it wholly owns and operates.
<Table>
<Caption>
EPGT SAN TPC VIOSCA
TEXAS(1) JUAN(2) WAHA(1) CARLSBAD(1) CHANNEL(1) OFFSHORE(1) KNOLL HIOS(3)
-------- ------- ------- ----------- ---------- ----------- ------ -------
Unregulated(U)/
Regulated(R)................ R(6) U U U R(6) R(6) U R(6)
In-service date.............. 1997-2000 Various 1996 1996 1996 1997 1994 1977
Approximate capacity(4)...... 3,725 1,100 280 185 500 750 1,000 1,800
Aggregate miles of
Pipeline.................... 8,462 5,300 501 842 743 197 125 204
Average throughput for the
years ended:(5)
December 31, 2001............ 2,721 1,031 187 154 450 344 551 979
December 31, 2000............ 2,996 1,066 189 126 548 457 612 870
December 31, 1999............ 2,742 1,087 179 121 556 500 709 792
<Caption>
EAST
BREAKS(3) TYPHOON(2) EPIA
--------- ---------- ----
Unregulated(U)/
Regulated(R)................ U U U
In-service date.............. 2000 2001 1972
Approximate capacity(4)...... 400 400 200
Aggregate miles of
Pipeline.................... 85 35 450
Average throughput for the
years ended:(5)
December 31, 2001............ 245 41 171
December 31, 2000............ 112 -- 120
December 31, 1999............ -- -- --
</Table>
- ---------------
(1) The average throughput reflects 100% of the throughput. Prior to April 2002,
El Paso Energy Partners did not own the EPN Holding assets. El Paso Energy
Partners acquired the EPN Holding assets in April 2002 from subsidiaries of
El Paso Corporation.
(2) El Paso Energy Partners will acquire the San Juan gathering system and
Typhoon natural gas pipeline contemporaneously with the completion of this
offering.
(3) The average throughput reflects 100% of the throughput. Prior to October
2001, El Paso Energy Partners owned a 50% interest in HIOS and East Breaks
through Deepwater Holdings. El Paso Energy Partners acquired the remaining
50% interest in October 2001 from subsidiaries of El Paso Corporation.
(4) All capacity measures are on a MMcf/d basis, and with respect to EPGT Texas,
Channel and TPC Offshore, net to El Paso Energy Partners' interests.
(5) All average throughput measures are on a MDth/d basis. For the pipelines
described above, one MDth is substantially equivalent to one MMcf.
(6) EPGT Texas and Channel are regulated by the Railroad Commission of Texas
and, along with TPC Offshore, also provide FERC Section 311 services. HIOS
is regulated by FERC.
EPGT Texas Intrastate. The EPGT Texas intrastate natural gas gathering
system is the largest intrastate pipeline system based on miles of pipe in the
United States. It is also the only intrastate pipeline in Texas that offers
transportation and storage services fully unbundled from merchant services. The
system consists of approximately 8,500 miles of main lines, laterals and
gathering lines with an operating capacity (net to El Paso Energy Partners'
interest) of 3,725 MMcf/d. The EPGT Texas intrastate system includes some small
pipelines in which El Paso Energy Partners owns undivided interests.
San Juan Gathering System. The San Juan natural gas gathering system is
located in the San Juan Basin of New Mexico. The system consists of 5,300 miles
of main lines, laterals and gathering lines with capacity of over 1.1 Bcf/d. A
significant portion of the rights-of-way underlying the San Juan gathering
system on Native American lands expire in 2005. Although it can make no
assurances, El Paso Energy Partners believes it will be able to renew those
rights-of-way on terms and conditions that will not materially adversely affect
it.
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Waha Natural Gas Gathering System and Treating Plant. The Waha natural gas
gathering system is a rich gas gathering system located in the Permian Basin
region of Texas, and consists of 501 miles of predominantly 8-inch to 20-inch
pipelines. The treating plant, located in Texas, has a capacity of 280 MMcf/d.
The average utilization rates for the Waha treating plant for the calendar years
2001, 2000 and 1999 were 61%, 61% and 58%.
Carlsbad Natural Gas Gathering System. The Carlsbad gathering system is a
rich gas gathering system located in the Permian Basin region of New Mexico and
consists of approximately 842 miles of predominantly 4-inch to 12-inch
pipelines.
Channel Pipeline System. In April 2002, El Paso Energy Partners acquired
its 50% undivided interest in the Channel pipeline system, an intrastate natural
gas transmission system located along the Gulf coast of Texas consisting of 743
miles of predominantly 30-inch pipelines.
TPC Offshore. TPC Offshore is a rich gas gathering system located in the
south Texas region consisting of 197 miles of predominantly 8-inch to 20-inch
pipelines. The TPC Offshore system includes some smaller pipelines in which El
Paso Energy Partners owns undivided interests.
Viosca Knoll System. The Viosca Knoll system is an offshore natural gas
gathering system designed to serve the Main Pass, Mississippi Canyon and Viosca
Knoll areas of the Gulf of Mexico and consists of 125 miles of predominantly
20-inch natural gas pipeline and a 7,000 horsepower compressor. The system
provides its customers access to the facilities of a number of major interstate
pipelines, including pipelines owned by Tennessee Gas Pipeline Company, Columbia
Gulf Transmission Company, Southern Natural Gas Company, Transco, and Destin
Pipeline Company.
HIOS. In October 2001, HIOS became a wholly-owned asset through El Paso
Energy Partners' acquisition of the remaining 50% equity interest in Deepwater
Holdings that it did not already own from subsidiaries of El Paso Corporation.
HIOS is a natural gas transmission system regulated by the FERC, that consists
of 204 miles of pipeline. HIOS transports natural gas from producing fields
located in the Galveston, Garden Banks, West Cameron, High Island, and East
Breaks areas of the Gulf of Mexico to numerous downstream pipelines, including
the ANR and Tennessee Gas pipelines owned by El Paso Corporation.
East Breaks System. In October 2001, the East Breaks natural gas gathering
system became a wholly-owned asset through El Paso Energy Partners' acquisition
of the remaining 50% equity interest in Deepwater Holdings that it did not
already own. East Breaks is a natural gas gathering system that consists of an
85-mile pipeline and 400 MMcf/d of capacity connecting HIOS to the Hoover-Diana
project developed by subsidiaries of ExxonMobil and BP in the Alaminos Canyon
and East Breaks areas of the Gulf of Mexico. East Breaks was placed in service
in June 2000 and has the ability to expand its throughput capacity further,
which would provide HIOS with the ability to compete for the right to gather and
transport the substantial reserves associated with properties being, and
expected to be, developed in these deepwater frontier regions.
Typhoon Natural Gas Pipeline. The Typhoon natural gas pipeline, acquired
in the San Juan assets transaction, is a 35-mile, 20-inch pipeline with a
capacity of 400 MMcf/d originating on the Chevron/BHP "Typhoon" platform in the
Green Canyon area of the Gulf of Mexico. The Typhoon natural gas pipeline
currently gathers approximately 60 MMcf/d from the Typhoon field for redelivery
into El Paso Corporation's ANR Patterson Offshore pipeline system. El Paso
Energy Partners intends to integrate this pipeline into the Marco Polo pipeline
being constructed by its Deepwater Gateway joint venture.
El Paso Intrastate-Alabama System. The EPIA system is a natural gas
pipeline system that serves the coal bed methane producing regions of Alabama.
The system consists of over 450 miles of pipeline. EPIA also provides marketing
services through the purchase and resale of
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natural gas by purchasing natural gas from regional producers and others, and
selling natural gas to local distribution companies and others.
NATURAL GAS PROCESSING FACILITIES
El Paso Energy Partners owns interests in three processing and treating
plants in New Mexico, with a combined maximum capacity of over 1.2 Bcf/d of
natural gas and 50 MBbls/d of NGLs, including the Chaco cryogenic natural gas
plant, the third largest natural gas processing plant in the United States by
liquids produced.
In April 2002, El Paso Energy Partners acquired an approximate 42.3%
non-operating interest in the Indian Basin processing and treating facility. The
plant is capable of processing up to 240 MMcf/d with overflow volumes up to 60
MMcf/d. The utilization rates for the Indian Basin processing and treating
facility for 2001, 2000 and 1999 were 93%, 82% and 77%.
In October 2001, El Paso Energy Partners acquired interests in the
titleholder of, and other interests in, the Chaco plant. El Paso Energy Partners
will acquire the remaining interests in the Chaco Plant that it does not already
own as part of the San Juan assets acquisition including El Paso Corporation's
rights under the tolling agreement El Paso Energy Partners entered into in the
October 2001 acquisition, as well as El Paso Corporation's obligation to
repurchase the Chaco plant from El Paso Energy Partners. By acquiring these
remaining interests, we will be able to capitalize on increased cost
efficiencies and marketing efforts. The Chaco plant is a state-of-the-art
cryogenic plant located in the San Juan Basin in New Mexico that uses high
pressures and extremely low temperatures to remove water, impurities and excess
hydrocarbon liquids from the raw natural gas stream and to recover ethane,
propane and the heavier hydrocarbons. It is capable of processing up to 700
MDth/d of natural gas and handling up to 50 MBbls/d of NGLs. Utilization rates
in the processing industry can fluctuate dramatically from month to month,
depending on the needs of producers. The average utilization rates for the Chaco
plant for the calendar years 2001, 2000 and 1999 were 89%, 91% and 93%. The
average utilization rate from El Paso Energy Partners' acquisition date of
October 18, 2001 to December 31, 2001 was 93%.
MARKETS AND COMPETITION
Each of El Paso Energy Partners' natural gas pipeline systems are located
at or near natural gas production areas that are served by other pipelines. El
Paso Energy Partners' natural gas pipeline systems face competition from both
regulated and unregulated systems. Some of these competitors are not subject to
the same level of rate and service regulation as is El Paso Energy Partners.
Other competing pipelines, such as long-haul transporters, may have rate design
alternatives unavailable to El Paso Energy Partners. Consequently, those
competing pipelines may be able to provide service on more flexible terms and at
rates significantly below those El Paso Energy Partners offers.
El Paso Energy Partners' gathering and transportation agreements have
varying terms. El Paso Energy Partners' offshore gathering and transportation
arrangements tend to have longer terms, often involving life-of-reserve
commitments with both firm and interruptible components, and its onshore
gathering and transportation arrangements generally have terms from one month to
several years. With respect to the San Juan gathering system, approximately 70%
of the volume is attributable to three contracts that expire in 2006, 2006 and
2008, respectively. Although it can make no assurances, El Paso Energy Partners
believes it will be able to negotiate replacement contracts with the relevant
producers on terms and conditions that will not materially adversely affect it.
Furthermore, the rates El Paso Energy Partners charges for its services are
dependent on whether the relevant pipeline system is regulated or unregulated,
the quality of the service required by the customer, and the amount and term of
the reserve commitment by the customer.
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Gathering arrangements are fee based and, except for the Alabama-Intrastate and
San Juan gathering systems fees, generally do not have exposure to risks
associated with changes in commodity prices. However, El Paso Energy Partners'
financial results from some of its onshore pipelines, including the
Alabama-Intrastate, Carlsbad, Waha and San Juan gathering systems, can be
dramatically affected by a reduction in, or volatility of, commodity prices. The
Alabama-Intrastate gathering system functions as a merchant operation and,
accordingly, purchases and resells the natural gas it gathers. Several of El
Paso Energy Partners' other gathering systems, while not functioning as a
merchant operation, have some exposure to risks related to commodity prices. For
example, over 95% of the volumes handled by the San Juan gathering system are
fee-based arrangements, 80% of which the fees are calculated as a percentage of
a regional price index for natural gas. In addition, the San Juan gathering
system provides aggregating and bundling services -- in which it purchases gas
at the wellhead and resells gas in the open market -- for some smaller
producers, which account for less than 5% of the volumes on that system. El Paso
Energy Partners uses hedges from time to time to mitigate exposure to risks
related to commodity prices.
At the closing of the San Juan asset acquisition El Paso Energy Partners
will terminate the processing agreement with the former owner of the San Juan
gathering system, a subsidiary of El Paso Corporation, relating to the use of
the Chaco plant and will acquire the agreements under which natural gas
producers using the San Juan gathering system utilize the Chaco plant.
REGULATORY ENVIRONMENT
El Paso Energy Partners' Texas intrastate natural gas assets, some of which
are classified as "gas utilities," are regulated by the Railroad Commission of
Texas. EPGT's FERC Section 311 service rates are subject to FERC rate
jurisdiction. EPGT has requested rehearing of the rate order issued by FERC on
June 11, 2002. That order required EPGT to utilize an inch-mile rate design
methodology and to refunctionalize its intrastate system between gathering and
transmission. The Section 311 rates that were filed on December 20, 1999, were
system-wide and are subject to refund.
El Paso Energy Partners' natural gas pipeline systems are subject to the
Natural Gas Pipeline Safety Act of 1968, which establishes pipeline and
liquified natural gas plant safety requirements. All of El Paso Energy Partners'
offshore pipeline systems are subject to regulation under the Outer Continental
Shelf Lands Act, which calls for nondiscriminatory transportation on pipelines
operating in the outer continental shelf region of the Gulf of Mexico. All of El
Paso Energy Partners' pipeline systems are subject to the National Environmental
Policy Act and other environmental legislation. Each of the pipeline systems has
a continuing program of inspection designed to keep all of El Paso Energy
Partners' facilities in compliance with pollution control and pipeline safety
requirements. El Paso Energy Partners believes that its pipeline systems are in
compliance with the applicable requirements of these regulations.
El Paso Energy Partners' HIOS system is also subject to the jurisdiction of
the FERC in accordance with the Natural Gas Act of 1938 and the Natural Gas
Policy Act of 1978. HIOS operates under a separate FERC approved tariff that
governs its operations, terms and conditions of service and rates. The natural
gas pipeline industry has historically been heavily regulated by federal and
state government and El Paso Energy Partners cannot predict what further actions
FERC, state regulators, or federal and state legislators may take in the future.
In September 2001, FERC issued a NOPR that proposes to apply the standards
of conduct governing the relationship between interstate pipelines and marketing
affiliates to all energy affiliates. Since HIOS is an interstate facility as
defined by the Natural Gas Act, the proposed regulations, if adopted by FERC,
would dictate how HIOS conducts business and interacts with all energy
affiliates of El Paso Corporation. El Paso Energy Partners cannot predict the
outcome of the NOPR, but adoption of the regulations in substantially the form
proposed would, at a
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minimum, place administrative and operational burdens on El Paso Energy
Partners. Further, more fundamental changes could be required such as a complete
organizational separation or sale of HIOS.
In August 2002, the FERC issued an order requiring that all arrangements
concerning the cash management or money pool arrangements between a FERC
regulated subsidiary and a non FERC regulated parent must be in writing, and set
forth: the duties and responsibilities of cash management participants and
administrators; the methods of calculating interest and for allocating interest
income and expenses; and the restrictions on deposits or borrowings by money
pool members. The NOPR also requires certain specified documentation for all
deposits into, borrowings from, interest income from, and interest expenses
related to, such arrangements. Finally, the NOPR proposes that as a condition of
participating in a cash management or money pool arrangement, the FERC regulated
entity must maintain a minimum proprietary capital balance of 30 percent, and
its parent must maintain investment grade credit ratings. Comments on the NOPR
are due by Thursday, August 22, 2002.
Also in August 2002, FERC's Chief Accountant issued, to be effective
immediately, an Accounting Release providing guidance on how jurisdictional
entities should account for money pool arrangements and the types of
documentation that should be maintained for these arrangements. The Accounting
Release sets forth the documentation requirements set forth in the NOPR for
money pool arrangements, but does not address the requirements in the NOPR that
as a condition for participating in money pool arrangements the FERC regulated
entity must maintain a minimum proprietary capital balance of 30 percent and
that the entity and its parent must have investment grade credit ratings.
Requests for rehearing are due on September 3, 2002.
In December 1999, EPGT Texas filed a petition with the FERC for approval of
its rates for interstate transportation service. In June 2002, the FERC issued
an order that required revisions to EPGT Texas' proposed rates. It also ordered
refunds to customers for the difference, if any, between the originally proposed
levels and the revised rates ordered by the FERC. The changes ordered by the
FERC involve reductions to rate of return, depreciation rates and revisions to
the proposed rate design, including a requirement to separately state rates for
gathering service. El Paso Energy Partners believes the amount of any rate
refund would be minimal since, as provided for in its tariff, it was not
charging its customers at the maximum rate. In July 2002, EPGT Texas requested
rehearing on certain issues raised by the FERC's order, including the ordered
changes to rate design and depreciation rates, and the requirement to separately
state a gathering rate. This request for rehearing is pending before the FERC.
While the outcome of all of El Paso Energy Partners' rates and regulatory
matters cannot be predicted with certainty, based on information known to date,
they do not expect the ultimate resolution of these matters will have a material
adverse effect on its financial position, results of operations or cash flows.
As new information becomes available or relevant developments occur, they will
establish accruals as appropriate. The impact of these changes may have a
material effect on our results of operations.
MAINTENANCE
Each of El Paso Energy Partners' pipeline systems requires regular
maintenance. The interior of the pipelines is maintained through the regular
cleaning of the line of liquids that collect in the pipeline. Corrosion
inhibitors are also injected into all of the systems through the flow stream on
a continuous basis. To prevent external corrosion of the pipe, anodes are
fastened to the pipeline itself at prescribed intervals, providing protection
from sea water. El Paso Energy Partners' HIOS and Viosca Knoll natural gas
pipeline systems include platforms that are manned on a continuous basis. The
personnel onboard these platforms are responsible for site maintenance,
operations of the platform facilities, measurement of the oil or natural gas
stream
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at the source of production and corrosion control. Furthermore, the integrity of
El Paso Energy Partners' onshore pipelines are subject to on-going integrity
assessment and evaluation pursuant to the Pipeline Integrity Management Plan
filed by El Paso Field Services with the Railroad Commission of Texas and
revised from time to time. The Pipeline Integrity Management Plan identifies all
pipelines covered by the plan; establishes a priority ranking for performing the
integrity assessment of pipeline segments of each pipeline system; and makes an
assessment of pipeline integrity using methods such as in-line inspection,
pressure testing, direct assessment or other technology or assessment
methodology. This integrity management program is reassessed and refined as
necessary on at least an annual basis by qualified personnel.
The Chaco plant is manned on a continuous basis by personnel who are
responsible for maintenance and operations. The maintenance of the facility is
an ongoing process, which is performed based on the hours of operation, oil
analysis and vibration hours. Shutdown of the Chaco plant is not required for
regular maintenance activity.
OIL AND NGL LOGISTICS
NGL TRANSPORTATION AND FRACTIONATION FACILITIES
EPN Texas. In February 2001, El Paso Energy Partners acquired EPN Texas
from El Paso Corporation. EPN Texas includes more than 600 miles of intrastate
NGL gathering and transportation pipelines and three fractionation plants
located in south Texas. The intrastate NGL pipeline system is comprised of 379
miles of pipeline used to gather and transport unfractionated NGLs from various
processing plants to the Shoup Plant, located in Corpus Christi, the largest of
EPN Texas' three fractionators. The system also includes 177 miles of pipelines
that deliver fractionated products such as ethane, propane and butane to
refineries and petrochemical plants along the Texas Gulf Coast and to common
carrier NGL pipelines. The three fractionation facilities have a combined
capacity of approximately 96 MBbls/d. Utilization rates in the fractionation
industry can fluctuate dramatically from month to month, depending on the needs
of producers. However, the average utilization rate for EPN Texas for 2001, 2000
and 1999 was 73%, 89% and 88%.
Additional Texas NGL facilities. As part of the San Juan assets
acquisition, El Paso Energy Partners acquired from El Paso Corporation
additional NGL assets located in Texas. These assets include over 570 miles of
NGL pipelines that transport propane and butane from Corpus Christi to Houston,
and within the Houston-Texas City area, to refineries and petrochemical users,
and also provide access to the Mont Belvieu NGL markets. Portions of these NGL
assets are shut-in pending refurbishment and expansion, which is expected to be
completed by the end of the year. These NGL assets also include the Almeda
fractionator, which has fractionation capacity of 24 MBbls/d.
OFFSHORE OIL PIPELINE SYSTEMS
El Paso Energy Partners has interests in three offshore oil pipeline
systems, which extend over 340 miles and have a combined capacity of over 580
MBbls/d of oil with the addition of pumps and the use of friction reducers. In
addition to being strategically located in the vicinity of some prolific
producing regions in the Gulf of Mexico, El Paso Energy Partners' oil pipeline
systems are parallel to and interconnect with key segments of some of its
natural gas pipeline systems and offshore platforms, which contain separation
and handling facilities. This distinguishes El Paso Energy Partners from its
competitors by allowing it to provide some producing properties with a unique
single point of contact through which they may access a wide range of midstream
services and assets.
Poseidon System. Poseidon is a major offshore sour crude oil pipeline
system built in response to the increased demand for additional sour crude oil
pipeline capacity in the central
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Gulf of Mexico. El Paso Energy Partners owns an effective 36% interest in
Poseidon and began operating this system in January 2001. The Poseidon system
consists of:
- 117 miles of 16- to 20-inch diameter pipeline extending from El Paso
Energy Partners' 50% owned Garden Banks 72 platform to its 50% owned Ship
Shoal 332 Platform;
- 122 miles of 24-inch diameter pipeline extending from the Ship Shoal 332
platform to Houma, Louisiana;
- 32 miles of 16-inch diameter pipeline extending from Ewing Bank Block 873
to the 24-inch pipeline in the area of South Timbalier Block 212; and
- 17 miles of 16-inch pipeline extending from Garden Banks Block 260 to
South Marsh Island Block 205.
Allegheny System. El Paso Energy Partners' Allegheny system is an offshore
crude oil system consisting of 43 miles of 14-inch diameter pipeline that
connects the Allegheny field in the Green Canyon area of the Gulf of Mexico with
Poseidon at El Paso Energy Partners' 50% owned Ship Shoal 332 platform.
Allegheny has an approximate capacity of 80 MBbls/d and El Paso Energy Partners'
average throughput was 13 MBbls/d, 18 MBbls/d and 12 MBbls/d for the years ended
December 31, 2001, 2000 and 1999. Oil production from the Allegheny field is
committed to this system. The Allegheny system was placed into service in
October 1999.
Typhoon Oil Pipeline. El Paso Energy Partners' Typhoon oil pipeline is an
offshore crude oil pipeline consisting of 16 miles of 12-inch diameter pipeline
with a capacity of 100 MBbls/d that connects the Typhoon discovery in the Green
Canyon area of the Gulf of Mexico to the Shell Boxer platform, a delivery point
into the Poseidon pipeline. The Typhoon oil pipeline has an approximate capacity
of 100 MBbls/d.
NGL STORAGE
Hattiesburg Propane Storage. In January 2002, El Paso Energy Partners
acquired a 3.3 million barrel propane storage business and leaching operation
located in Hattiesburg, Mississippi from Suburban Propane, L.P. As part of that
transaction, El Paso Energy Partners entered into a long-term propane storage
agreement with Suburban Propane for a portion of the acquired propane storage
capacity. El Paso Energy Partners intends to convert a portion of these
facilities into natural gas storage facilities, and to integrate them with its
adjacent Petal natural gas storage facility.
Texas Leased NGL Storage Facilities. As part of the San Juan assets
acquisition, El Paso Energy Partners acquired leased NGL storage facilities in
Texas with aggregate capacity of approximately 13.6 MMBbls. The lease covering
these facilities expires in 2012.
MARKETS AND COMPETITION
Utilization of El Paso Energy Partners' processing and fractionation
facilities occurs only when the producer can receive more net proceeds by
physically separating and selling the NGL components contained in the raw
natural gas stream than they would receive by merely selling the raw natural gas
stream. The spread between the prices for natural gas and NGLs is greatest when
the demand for NGLs increases, which often occurs in the winter. If, and when,
this spread becomes too narrow to justify the costs, producers will choose to
sell the raw natural gas stream rather than process and fractionate, and El Paso
Energy Partners' fractionation facilities will be underutilized.
In connection with El Paso Energy Partners' acquisition of EPN Texas, it
entered into a 20-year fee-based transportation and fractionation agreement and
has dedicated 100% of the capacity of El Paso Energy Partners' fractionation
facilities to a subsidiary of El Paso Corporation. In this agreement, all of the
NGLs derived from processing operations at seven
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natural gas processing plants in south Texas owned by subsidiaries of El Paso
Corporation are delivered to El Paso Energy Partners' NGL transportation and
fractionation facilities. Effectively, El Paso Energy Partners will receive a
fixed fee for each barrel of NGLs transported and fractionated by its
facilities. Approximately 25% of El Paso Energy Partners' per barrel fee is
escalated annually for increases in inflation. El Paso Corporation's subsidiary
will bear substantially all of the risks and rewards associated with changes in
the commodity prices for NGLs.
El Paso Energy Partners' offshore oil pipeline systems were built as a
result of the need for additional crude oil capacity to transport new deepwater
oil production to shore. El Paso Energy Partners' principal competition includes
other oil pipeline systems, built, owned and operated by producers to handle
their own production and, as capacity is available, production for others. El
Paso Energy Partners' oil pipelines compete for new production on the basis of
geographic proximity to the production, cost of connection, available capacity,
transportation rates and access to onshore markets. In addition, the ability of
El Paso Energy Partners' pipelines to access future reserves will be subject to
its ability, or the producers' ability, to fund the significant capital
expenditures required to connect to the new production.
A substantial portion of the revenues generated by El Paso Energy Partners'
offshore pipelines systems are attributed to production from reserves committed
under long-term contracts for the productive life of the relevant field.
Nonetheless, these reserves and other reserves that may become available to El
Paso Energy Partners' pipeline systems are depleting assets and will be produced
over a finite period. Each of El Paso Energy Partners' pipeline systems must
access additional reserves to offset the natural decline in production from
existing connected wells or the loss of any other production to a competitor.
Furthermore, the rates El Paso Energy Partners charges for its services are
dependent on the quality of the service required by the customer, and the amount
and term of the reserve commitment by the customer. A majority of El Paso Energy
Partners' offshore arrangements involve life-of-reserve commitments with both
firm and interruptible components. Generally, El Paso Energy Partners receives a
price per barrel of oil or water handled.
REGULATORY ENVIRONMENT
El Paso Energy Partners' offshore oil pipeline systems are subject to
regulation under the Outer Continental Shelf Lands Act, which calls for
nondiscriminatory transportation on pipelines operating in the outer continental
shelf region of the Gulf of Mexico. All of El Paso Energy Partners' oil pipeline
systems are subject to the National Environmental Policy Act and other
environmental legislation. Each of the oil pipeline systems has a continuing
program of inspection designed to keep all of El Paso Energy Partners'
facilities in compliance with pollution control and pipeline safety
requirements. El Paso Energy Partners believes that its oil pipeline systems are
in compliance with the applicable requirements of these regulations.
In August 2002, the FERC issued an order requiring that all arrangements
concerning the cash management or money pool arrangements between a FERC
regulated subsidiary and a non FERC regulated parent must be in writing, and set
forth: the duties and responsibilities of cash management participants and
administrators; the methods of calculating interest and for allocating interest
income and expenses; and the restrictions on deposits or borrowings by money
pool members. The NOPR also requires certain specified documentation for all
deposits into, borrowings from, interest income from, and interest expenses
related to, such arrangements. Finally, the NOPR proposes that as a condition of
participating in a cash management or money pool arrangement, the FERC regulated
entity must maintain a minimum proprietary capital balance of 30 percent, and
its parent must maintain investment grade credit ratings. Comments on the NOPR
are due on Thursday, August 22, 2002.
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Also on August 1, 2002, FERC's Chief Accountant issued, to be effective
immediately, an Accounting Release providing guidance on how jurisdictional
entities should account for money pool arrangements and the types of
documentation that should be maintained for these arrangements. The Accounting
Release sets forth the documentation requirements set forth in the NOPR for
money pool arrangements, but does not address the requirements in the NOPR that
as a condition for participating in money pool arrangements the FERC regulated
entity must maintain a minimum proprietary capital balance of 30 percent and
that the entity and its parent must have investment grade credit ratings.
Requests for rehearing are due on September 3, 2002.
El Paso Energy Partners' NGL assets located in Texas are regulated by the
Railroad Commission of Texas.
In addition, these assets are subject to extensive federal, state, and
local laws and regulations governing environmental quality and pollution
control. These assets have a continuing program of inspection designed to keep
all of El Paso Energy Partners' assets in compliance with pollution control and
pipeline safety requirements. EPN believes that these NGL assets are in
compliance with the applicable requirements of these regulations.
MAINTENANCE
Each of El Paso Energy Partners' pipeline systems, its fractionation
facilities and its processing facilities require regular maintenance. The
interiors of the EPN Texas, Allegheny, Typhoon and Poseidon pipelines are
maintained through the regular cleaning of the lines of liquids that collect in
the pipelines. Corrosion inhibitors are also injected into all of the systems
through the flow stream on a continuous basis. El Paso Energy Partners'
Allegheny and Poseidon oil pipeline systems include platforms that are manned on
a continuous basis. The personnel onboard these platforms are responsible for
site maintenance, operations of the platform facilities, measurement of the oil
stream at the source of production and corrosion control.
PLATFORM SERVICES
Offshore platforms are critical components of the offshore infrastructure
in the Gulf of Mexico, supporting drilling and production operations, and
therefore play a key role in the overall development of offshore oil and natural
gas reserves. Platforms are used to:
- interconnect the offshore pipeline grid;
- provide an efficient means to perform pipeline maintenance;
- locate compression, separation, production handling and other facilities;
and
- conduct drilling operations during the initial development phase of an
oil and natural gas property.
El Paso Energy Partners has interests in five multi-purpose offshore hub
platforms in the Gulf of Mexico. These platforms were specifically designed to
be used as deepwater hubs and production handling and pipeline maintenance
facilities. Through these facilities, El Paso Energy Partners is able to provide
a variety of midstream services to increase deliverability and attract
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new volumes into El Paso Energy Partners' offshore pipeline systems. The
following table and discussions describe El Paso Energy Partners' platforms.
<Table>
<Caption>
EAST VIOSCA SHIP GARDEN SHIP
CAMERON KNOLL SHOAL BANKS SHOAL
373 817 331(1) 72 332
------- ------ ------ ------ -----
Ownership interest.................. 100% 100% 100% 50% 50%
In-service date..................... 1998 1995 1994 1995 1985
Water depth (in feet)............... 441 671 376 518 438
Acquired (A) or constructed (C)..... C C A C A
Approximate handling capacity:
Natural gas (MMcf/d).............. 110 140 -- 80 150
Oil and condensate (MBbls/d)...... 5 5 -- 55 12
</Table>
- ---------------
(1) The Ship Shoal 331 platform is currently used as a satellite landing area.
All products transported to the Ship Shoal 331 platform are processed on the
Ship Shoal 332 platform.
East Cameron 373. The East Cameron 373 platform is located at the south
end of the central leg of Shell's Stingray system. The platform serves as the
host for Kerr-McGee Corporation's East Cameron Block 373 production and as the
landing site for Garden Banks Blocks 108, 152 and 200 production.
Viosca Knoll 817. The Viosca Knoll 817 platform is centrally located on
the Viosca Knoll system. The platform serves as a base for landing deepwater
production in the area, including ExxonMobil's, Shell's, and BP's Ram Powell
development. A 7,000 horsepower compressor on the platform facilitates
deliveries from the Viosca Knoll system to multiple downstream interstate
pipelines. The platform is also used as a base for oil and natural gas
production from El Paso Energy Partners' Viosca Knoll Block 817 lease.
Ship Shoal 331. The Ship Shoal 331 platform is a production facility
located approximately 75 miles off the coast of Louisiana. Pogo Producing
Company has rights to utilize the platform pursuant to a production handling and
use of space agreement.
Garden Banks 72. The Garden Banks 72 platform is located at the south end
of the eastern leg of Shell's Stingray system and serves as the western-most
termination point of the Poseidon system. The platform serves as a base for
landing deepwater production from Enterprise Oil Gulf of Mexico, Inc.'s and
Devon Energy Inc.'s Garden Banks Block 161 development and Mariner Energy Inc.'s
development in Garden Banks Block 73, and will serve as the host for Amerada
Hess Corporation's Garden Banks 158 development. El Paso Energy Partners also
uses this platform as the host for its Garden Banks Block 72 production and the
landing site for production from its Garden Banks Block 117 lease located in an
adjacent lease block.
Ship Shoal 332. The Ship Shoal 332 platform serves as a major junction
platform for pipelines in the Allegheny and Poseidon systems.
MARKETS AND COMPETITION
El Paso Energy Partners' platforms are subject to similar competitive
factors as its pipeline systems. These assets generally compete on the basis of
proximity and access to existing reserves and pipeline systems, as well as costs
and rates. Furthermore, competitors to these platforms may possess greater
technical skill and capital resources than does El Paso Energy Partners.
For a discussion of El Paso Energy Partners' significant customers see the
financial statements accompanying and incorporated by reference in this
prospectus.
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MAINTENANCE
Each of El Paso Energy Partners' platforms requires regular maintenance.
The platforms are painted to the waterline every three to five years to prevent
atmospheric corrosion. Corrosion protection devices are also fastened to
platform legs below the waterline to prevent corrosion. Remotely operated
vehicles or divers inspect the platforms below the waterline generally every
five years. Most of El Paso Energy Partners' platforms are manned on a
continuous basis. The personnel on board these platforms are responsible for
site maintenance, operations of the platform facilities, measurement of the oil
and natural gas stream at the source of production and corrosion control.
NATURAL GAS STORAGE
El Paso Energy Partners owns the Petal and Hattiesburg salt dome natural
gas storage facilities located in Mississippi, which are strategically situated
to serve the Northeast, Mid-Atlantic and Southeast natural gas markets. The two
primary facilities, Petal and Hattiesburg, have a combined current working
capacity of 12.65 Bcf, and are capable of delivering in excess of 1.2 Bcf/d of
natural gas into five interstate pipeline systems: Transcontinental Gas Pipeline
Company (Transco), Destin Pipeline, Gulf South Pipeline, Southern Natural Gas
Pipeline and Tennessee Gas Pipeline. Each of these facilities is capable of
making deliveries at the high rates necessary to satisfy peaking requirements in
the electric generation industry.
The Hattiesburg facility is comprised of 73 acres outside of Hattiesburg,
Mississippi, and consists of three salt caverns with a working gas capacity of
approximately 4.0 Bcf. The Hattiesburg facility has an injection capacity in
excess of 175 MMcf/d of natural gas and a withdrawal capacity in excess of 400
MMcf/d of natural gas. The Hattiesburg capacity is currently fully subscribed,
primarily with long-term contracts expiring between 2005 and 2006. The Petal
facility is comprised of 16.5 acres, is less than one mile from the Hattiesburg
facility and consists of two high-deliverability natural gas storage caverns
with a working gas capacity of approximately 8.65 Bcf. The Petal facility is
designed to deliver in excess of 8 Bcf/d of ten-day storage services with the
capability of being refilled in 20 days. The Petal capacity is currently fully
subscribed, with 7.0 Bcf dedicated under a 20-year fixed-fee contract to a
subsidiary of The Southern Company, one of the largest producers of electricity
in the United States, and the remainder subscribed primarily with short-term
contracts. The ability of the facilities to handle these high levels of
injections and withdrawals of natural gas makes the facilities well suited for
customers who desire the ability to meet short duration load swings and to cover
major supply interruption events, such as hurricanes and temporary losses of
production. The high injection and withdrawal rates also allow customers to take
advantage of price savings in natural gas by allowing for quick delivery. The
characteristics of the salt domes at the facilities permit sustained periods of
high delivery, the ability to quickly switch from full injection to full
withdrawal and the ability to provide an impermeable storage medium.
As a result of its acquisition of the EPN Holding assets, El Paso Energy
Partners has the exclusive right to use the Wilson natural gas storage facility,
located in Wharton County, Texas, under an operating lease that expires in
January 2008. The facility has a current working gas capacity of approximately 7
Bcf.
MARKETS AND COMPETITION
Competition for natural gas storage is primarily based on location and the
ability to deliver natural gas in a timely and reliable manner. El Paso Energy
Partners' Petal and Hattiesburg natural gas storage facilities are located in an
area in Mississippi that can effectively service the Northeastern, Mid-Atlantic
and Southeastern natural gas markets, and the facilities have the ability to
deliver all of their stored natural gas within a short timeframe. El Paso Energy
Partners'
126
natural gas storage facilities compete with other means of natural gas storage,
including other salt dome storage facilities, depleted reservoir facilities,
liquified natural gas and pipelines.
Most of the capacity relating to the Petal facility is dedicated under a
20-year, fixed-fee contract. Most of the contracts relating to the Hattiesburg
facility are long-term, expiring between 2005 and 2006. El Paso Energy Partners
believes that the existence of these long-term contracts for storage and the
location of its natural gas storage facilities should allow it to compete
effectively with other companies who provide natural gas storage services. El
Paso Energy Partners believes that many of its natural gas storage contracts
will be renewed, although it also expects that once these firm storage contracts
have expired, it will experience greater competition for providing storage
services. The competition El Paso Energy Partners experiences will be dependent
upon the nature of the natural gas storage market existing at that time. In
addition to long-term contracts, El Paso Energy Partners actively markets
interruptible storage services at the Petal facility to enhance its revenue
generating ability beyond the firm storage contracts.
REGULATORY ENVIRONMENT
El Paso Energy Partners' Hattiesburg facility is a regulated utility under
the jurisdiction of the Mississippi Public Service Commission. Accordingly, the
rates charged for natural gas storage services are subject to approval from this
agency. The present rates of the firm long-term contracts for natural gas
storage in the Hattiesburg facility were approved in 1990. A portion of its
natural gas storage business is also subject to a limited jurisdiction
certificate issued by FERC. The certificate authorizes El Paso Energy Partners
to provide natural gas storage services that may be ultimately consumed outside
of Mississippi. El Paso Energy Partners' Petal facility is subject to regulation
under the Natural Gas Act of 1938, as amended, and to the jurisdiction of FERC.
The Petal facility currently holds certificates of public convenience and
necessity that permit it to charge market based rates. The natural gas pipeline
industry has historically been heavily regulated by federal and state government
and El Paso Energy Partners cannot predict what further actions FERC, state
regulators, or federal and state legislators may take in the future.
In September 2001, FERC issued a NOPR that proposes to apply the standards
of conduct governing the relationship between interstate pipelines and marketing
affiliates to all energy affiliates. Since Petal is an interstate facility as
defined by the Natural Gas Act, the proposed regulations, if adopted by FERC,
would dictate how Petal conducts business and interacts with all energy
affiliates of El Paso Corporation and El Paso Energy Partners. El Paso Energy
Partners cannot predict the outcome of the NOPR, but adoption of the regulations
in substantially the form proposed would, at a minimum, place administrative and
operational burdens on El Paso Energy Partners. Further, more fundamental
changes could be required such as a complete organizational separation or sale
of Petal.
The Wilson natural gas storage facility is regulated by the Railroad
Commission of Texas.
OTHER
Currently, El Paso Energy Partners owns interests in five oil and natural
gas properties located in waters offshore of Louisiana. Production is gathered,
transported and processed through El Paso Energy Partners' pipeline systems and
platform facilities, and sold to various third Parties and subsidiaries of El
Paso Corporation. El Paso Energy Partners is reducing its oil and natural gas
production activities due to these activities' higher risk profile, including
risks associated with finding production and commodity prices. El Paso Energy
Partners disposed of its overriding royalty interest in the Prince Field in
connection with its EPN Holding acquisition.
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PRODUCING PROPERTIES
El Paso Energy Partners did not drill any exploratory or developmental
wells in 2001 or 2000 and does not plan to drill any exploratory wells in 2002.
One developmental oil well was drilled during 1998. In addition, El Paso Energy
Partners participated through its 38% non-operating working interest in a
developmental well at West Delta Block 35 in 2001.
<Table>
<Caption>
GARDEN GARDEN GARDEN VIOSCA WEST
BANKS BANKS BANKS KNOLL DELTA
BLOCK 72 BLOCK 73(1) BLOCK 117 BLOCK 817(2) BLOCK 35(3)
-------- ----------- --------- ------------ -----------
Working interest............ 50% -- 50% 100% 38%
Net revenue interest........ 40.2% 2.5% 37.5% 80% 29.8%
In-service date............. 1996 2000 1996 1995 1993
Net acres................... 2,880 -- 2,880 5,760 1,894
Distance offshore (in
miles).................... 120 115 120 40 10
Water depth (in feet)....... 518 743 1,000 671 60
Producing wells............. 5 1 2 7 3
Cumulative production:
Natural gas (MMcf)........ 4,565 219 2,056 61,589 2,174
Oil (MBbls)............... 1,387 -- 1,146 142 14
</Table>
- ---------------
(1) El Paso Energy Partners owns a 2.5% overriding interest in Garden Banks
Block 73, which began producing in mid-2000.
(2) El Paso Energy Partners' working interest in Viosca Knoll Block 817 is
subject to a production payment that entitles holders to 25% of the proceeds
from the production attributable to this working interest (after deducting
all leasehold operating expenses, including platform access and production
handling fees) until the holders have received the aggregate sum of $16
million. At December 31, 2001, the unpaid portion of the production payment
obligation totaled $9.4 million.
(3) The West Delta Block 35 field commenced production in 1993, but El Paso
Energy Partners' interest in this field was acquired in connection with El
Paso Corporation's acquisition of El Paso Energy Partners' general partner
in 1998. Production data is for the period from August 1998.
Acreage and Wells. The following table sets forth El Paso Energy Partners'
developed and undeveloped oil and natural gas acreage as of December 31, 2001.
Undeveloped acreage refers to those lease acres on which wells have not been
drilled or completed to a point that would permit the production of commercial
quantities of oil and natural gas, regardless of whether or not such acreage
contains proved reserves. Gross acres in the following table refer to the number
of acres in which a working interest is owned directly by El Paso Energy
Partners. The number of net acres is El Paso Energy Partners' fractional
ownership of the working interest in the gross acres.
<Table>
<Caption>
GROSS NET
----- ---
Developed acreage........................................... 4,872 3,576
Undeveloped acreage......................................... 23,153 14,518
------ ------
Total acreage............................................. 28,025 18,094
====== ======
</Table>
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El Paso Energy Partners' gross and net ownership in producing wells in
which it directly owns a working interest at December 31, 2001, is as follows:
<Table>
<Caption>
GROSS NET
----- ---
Natural gas................................................. 11.0 8.6
Oil......................................................... 6.0 3.0
---- ----
Total..................................................... 17.0 11.6
==== ====
</Table>
NET PRODUCTION, UNIT PRICES AND PRODUCTION COSTS
The following table sets forth information regarding the production volumes
of, average unit prices received for, and average production costs for El Paso
Energy Partners' oil and natural gas properties for the years ended December 31:
<Table>
<Caption>
OIL (MBBLS) NATURAL GAS (MMCF)
------------------------ -------------------------
2001 2000 1999 2001 2000 1999
---- ---- ---- ---- ---- ----
Net production(1)............ 343 295 357 4,038 7,185 12,211
Average sales price(1)....... $23.47 $25.26 $14.32 $ 4.52 $ 1.86 $ 2.02
Average production
costs(2)................... $ 7.59 $ 7.82 $ 2.38 $ 1.26 $ 1.30 $ 0.40
</Table>
- ---------------
(1) The information regarding net production and average sales prices excludes
overriding royalty interests. Average realized oil and natural gas sales
prices for 2000 and 1999 were impacted by hedging activities.
(2) The components of average production costs, which consist of operating
expenses per unit of oil or natural gas produced, may vary substantially
among wells depending on the methods of recovery employed and other factors,
but generally include third party transportation expenses, maintenance and
repair, labor and utilities costs. The increase in per unit production costs
from 1999 to 2000 was a result of production decline coupled with higher
offshore oil and gas field servicing and production costs.
The relationship between average sales prices and average production costs
depicted by the table above is not necessarily indicative of true results of
operations. For a discussion of oil and natural gas reserve information and
estimated future net cash flows, see Item 8, Financial Statements and
Supplementary Data, Note 16 to El Paso Energy Partners' Annual Report on Form
10-K for the year ended December 31, 2001, which is incorporated by reference
herein.
REGULATORY ENVIRONMENT
El Paso Energy Partners' production and development operations are subject
to regulation at the federal and state levels. Regulated activities include:
- requiring permits for the drilling of wells;
- maintaining bonds and insurance requirements in order to drill or operate
wells;
- drilling and casing wells;
- the surface use and restoring of properties upon which wells are drilled;
and
- plugging and abandoning of wells.
El Paso Energy Partners' production and development operations are also
subject to various conservation laws and regulations. These include the
regulation of the size of drilling and spacing units or proration units, the
density of wells that may be drilled, the levels of production, and the pooling
of oil and natural gas properties.
129
El Paso Energy Partners presently has interests in, or rights to, offshore
leases located in federal waters. Federal leases are administered by the
Minerals Management Service, or MMS. Individuals and entities must qualify with
the MMS prior to owning and operating any leasehold or right-of-way interest in
federal waters. Qualification with the MMS generally involves filing certain
documents and obtaining an area-wide performance bond and/or supplemental bonds
representing security for facility abandonment and site clearance costs.
MARKETS AND COMPETITION
El Paso Energy Partners is reducing its oil and natural gas production
activities due to its higher risk profile, including risks associated with
finding production and commodity prices. Accordingly, El Paso Energy Partners'
focus is to maximize the production from its existing portfolio of oil and
natural gas properties. As a result, the competitive factors that would normally
impact exploration and production activities are not as pertinent to its
operations. However, the oil and natural gas industry is intensely competitive,
and El Paso Energy Partners competes with a substantial number of other
companies, including many with larger technical staffs and greater financial and
operational resources in terms of accessing transportation, hiring personnel,
marketing production and withstanding the effects of general and
industry-specific economic changes.
OPERATING ENVIRONMENT
El Paso Energy Partners' oil and natural gas production operations are
subject to all of the operating risks normally associated with the production of
oil and natural gas, including blowouts, cratering, pollution and fires, each of
which could result in damage to life or property. Offshore operations are
subject to usual marine perils, including hurricanes and other adverse weather
conditions, and governmental regulations, including interruption or termination
by governmental authorities based on environmental and other considerations. In
accordance with customary industry practices, El Paso Energy Partners maintains
broad insurance coverage with respect to potential losses resulting from these
operating hazards.
MAJOR ENCUMBRANCES
Substantially all of El Paso Energy Partners' assets and the assets of its
subsidiaries other than its unrestricted subsidiaries, together with El Paso
Energy Partners' general partner's 1% general partner interest and its general
and administrative services agreement, are pledged as collateral under El Paso
Energy Partners' revolving credit facility. The subsidiaries of El Paso Energy
Partners that own the EPN Holding assets are unrestricted subsidiaries, and have
pledged all of their assets as collateral under the EPN Holding credit
agreement. In addition, Poseidon, a joint venture of El Paso Energy Partners,
currently has a credit facility or credit agreement under which substantially
all of its assets are pledged.
EMPLOYEES
None of us, El Paso Energy Partners or El Paso Energy Partners Company has
any employees. As discussed under "Business -- El Paso Energy Partners
Management," El Paso Energy Partners Company will delegate to us, pursuant to
the delegation agreement, substantially all of the responsibility for the
day-to-day management and operation of El Paso Energy Partners. El Paso Energy
Partners Company will, however, retain certain functions and approval rights
over the operations of El Paso Energy Partners. To fulfill our management
obligations, we will enter into agreements with El Paso Corporation and some of
its subsidiaries to provide us with the necessary services and support
personnel. El Paso Energy Partners reimburses its general partner, and will
reimburse us, for all reasonable general and administrative expenses and other
reasonable expenses incurred by us or El Paso Energy Partners' general partner
and its affiliates for, or on behalf of, El Paso Energy Partners', including
expenses incurred by the
130
general partner under the general and administrative services agreement and by
us under the delegation agreement. We will become a party to the general and
administrative agreement upon the closing of this offering.
131
DESCRIPTION OF OUR SHARES
The following is a summary of the principal documents that relate to our
shares, as well as documents that relate to the i-units we will purchase upon
completion of the offering. Copies of those documents are on file with the SEC
as part of our registration statement. Please read "Where You Can Find
Additional Information" for information on how to obtain copies. You should
refer to the provisions of each of the following agreements because they, and
not this summary, will govern your rights as a holder of shares. These
agreements include:
- our limited liability company agreement, which provides for the issuance
of the shares, distributions, limited voting rights and the
indemnification of us by El Paso Energy Partners and El Paso Energy
Partners Company;
- the El Paso Corporation purchase provisions, which are part of our
limited liability company agreement and which provide for the purchase of
our shares by El Paso Corporation in the limited circumstances set forth
in our limited liability company agreement;
- the El Paso Corporation tax indemnification agreement, which generally
provides that El Paso Corporation will indemnify us for any tax liability
attributable to our formation or our management of the business and
affairs of El Paso Energy Partners and for any taxes arising out of a
transaction involving the i-units to the extent the transaction does not
generate sufficient cash to pay such taxes;
- the El Paso Energy Partners limited partnership agreement which
establishes the i-units as a class and specifies the relative rights and
preferences of the i-units; and
- the delegation agreement, which delegates to us substantially all of El
Paso Energy Partners Company's power and authority to manage the business
and affairs of El Paso Energy Partners, subject to the right of the
general partner of El Paso Energy Partners to approve specified actions.
DISTRIBUTIONS
Under the terms of our limited liability company agreement:
- we will only make distributions to owners of shares in additional shares
or fractions of shares, except in connection with our liquidation or
after all of our shares have been acquired by El Paso Corporation;
- we will calculate the fraction of an additional share to be distributed
each quarter per outstanding share by dividing:
- the amount of the cash distribution made by El Paso Energy Partners on
each common unit for that quarter; by
- the average market price of a share during the ten consecutive trading
days preceding the date on which the shares begin to trade ex-dividend
under the rules of the principal exchange on which they are listed;
- we will make our distributions of shares at the same time as El Paso
Energy Partners makes its quarterly distributions of cash to owners of
common units; and
- we will simultaneously make a distribution of an equivalent fraction of a
voting share on each voting share or fraction of a voting share owned by
the general partner of El Paso Energy Partners.
When El Paso Energy Partners makes its quarterly distribution on its common
units, the number of i-units we own will also automatically increase under the
provisions of the El Paso
132
Energy Partners partnership agreement with the result that the number of i-units
we own will equal the number of our shares and voting shares that are then
outstanding.
El Paso Energy Partners has been distributing all of its "available cash"
to its general partner and common unitholders of record on the applicable record
date within approximately 45 days after the end of each quarter. "Available
cash" is defined in the partnership agreement of El Paso Energy Partners, and it
generally means, for any calendar quarter, all cash received by El Paso Energy
Partners from all sources, plus net reductions to cash reserves, less all of its
cash disbursements and net additions to cash reserves. On May 15, 2002, El Paso
Energy Partners made a quarterly distribution to owners of its common units of
$0.65 per common unit, or $2.60 on an annual basis.
Concurrently with the closing of this offering, El Paso Energy Partners'
partnership agreement will be amended to provide for distributions of cash with
respect to common units, Series B preference units and the general partner
interest and for our ownership of additional i-units (by means of a split) after
each such distribution, except in the event of a liquidation or dissolution. As
a result of these amendments, El Paso Energy Partners will make non-liquidating
distributions in cash to owners of common units and, as applicable, of Series B
preference units and to the general partner and, instead of receiving cash
distributions, the number of i-units we own will increase with the result that
the number of i-units we own will equal the number of our shares and voting
shares that are then outstanding.
We also will distribute additional shares to owners of our shares if owners
of common units receive a cash distribution or other cash payment on their
common units other than a regular quarterly distribution. In that event, we will
distribute on each share that fraction of a share determined as described above.
Our limited liability company agreement provides that we may not declare
any distribution on our shares after El Paso Corporation gives notice to us that
it has elected to purchase our shares under the terms of the purchase
provisions.
There will be no public market for trading fractional shares. No fraction
of a share can be traded on any exchange on which our shares are listed until a
holder acquires the remainder of the fraction and has a whole share.
The term "average market price" is used above in connection with the share
distributions and it is used below in connection with the purchase of our shares
by El Paso Corporation. When we refer to the average market price of a share or
a common unit, we mean the average closing price of a share or common unit
during the ten consecutive trading days prior to the determination date but not
including that date, unless a longer or shorter number of trading days is
expressly noted.
The "closing price" of securities on any day means:
- for securities listed on a national securities exchange, the last sale
price for that day, regular way, or, if there are no sales on that day,
the average of the closing bid and asked prices for that day, regular
way, in either case as reported in the principal composite transactions
reporting system for the principal United States national securities
exchange on which the securities are listed;
- if the securities are not listed on a United States national securities
exchange on that day, the last quoted price on that day, or, if no price
is quoted, the average of the high bid and low asked prices on that day,
each as reported by the NASDAQ;
- if on that day the securities are not so quoted, the average of the
closing bid and asked prices on that day furnished by a professional
market maker in the securities selected by our board of directors (or, in
the cases of purchases of our shares by El Paso
133
Corporation as described under "-- Special Purchase Events" or "Optional
Purchase Events," the board of directors of El Paso Corporation); or
- if on that day no market maker is making a market in the securities, the
fair value of the securities as determined by our board of directors (or,
in the cases of purchases of our shares by El Paso Corporation as
described under "-- Special Purchase Events," or "-- Optional Purchase
Events," the board of directors of El Paso Corporation).
A "trading day" for securities means a day on which:
- the principal United States national securities exchange on which the
securities are listed is open for business, or
- if the securities are not listed on any United States national securities
exchange, a day in which banking institutions in New York, New York
generally are open.
Distributions will be made in accordance with the distribution standards of
the principal national securities exchange on which our shares are listed or
admitted to trading from time to time.
COVENANTS
Our limited liability company agreement provides that our activities will
be limited to owning limited partnership interests in and managing the business
and affairs of El Paso Energy Partners and its subsidiaries. It also requires
that our issuance of classes of shares, other than the class of shares being
sold in this offering and the class of voting shares currently owned by El Paso
Energy Partners Company, be approved by the owners of our outstanding shares and
further includes covenants that prohibit us from:
- using the proceeds from our sale of shares in this offering other than
for the purchase of i-units from El Paso Energy Partners and to
compensate El Paso Corporation for its tax indemnity obligations;
- borrowing money or issuing debt;
- selling, pledging or otherwise transferring any i-units;
- issuing options, warrants or other securities entitling the holder to
purchase our shares;
- purchasing any of our shares, including voting shares; or
- liquidating, merging or recapitalizing.
These covenants and other matters can be amended, waived or approved, as
applicable, with the approval of the owners of our shares as described under
"-- Limited Voting Rights" below.
Additionally, under our limited liability company agreement, except as
provided below, El Paso Corporation has agreed that neither it nor any of its
affiliates will take any action that would result in El Paso Corporation and its
affiliates ceasing to be the beneficial owners of more than 50% of the total
voting power of the general partner of El Paso Energy Partners, unless:
- prior to taking such action it has notified us and El Paso Energy
Partners that, upon the occurrence of such action, El Paso Corporation
will acquire all of our shares as more fully described under "-- Special
Purchase Events" below; or
134
- following the occurrence of such action another person will become the
beneficial owner of more than 50% of the total voting power of the
general partner of El Paso Energy Partners, and such person:
- is organized under the laws of a state in the United States;
- has long term unsecured debt with an investment grade credit rating as
determined by Moody's Investor Services, Inc. and Standard & Poor's
Rating Service immediately prior to the closing of the transaction; and
- assumes all of El Paso Corporation's obligations under the tax
indemnification agreement.
El Paso Energy Partners Company, the general partner of El Paso Energy
Partners, has guaranteed El Paso Energy Partners' $600 million revolving credit
facility, which matures in May 2004. El Paso Energy Partners Company secured
that guarantee by granting to the lenders a lien on the general partnership
interests. Neither the grant of that lien nor a foreclosure or a settlement with
respect to that lien would be a violation of El Paso Corporation's covenant
under our limited liability agreement. However, any future grant of a lien on
the general partnership interest in connection with extending or replacing that
revolving credit facility or in connection with any other credit facility that
results in El Paso Corporation and its affiliates ceasing to be beneficial
owners of more than 50% of the total voting power of the general partner would
be a breach of El Paso Corporation's covenant, unless the conditions stated
above are satisfied.
This covenant can be amended or waived with the approval of the owners of
our shares as described under "-- Limited Voting Rights" below.
Upon the closing of this offering, the El Paso Energy Partners partnership
agreement will be amended to provide that El Paso Energy Partners will not:
- issue any of its i-units to any person other than us;
- except in liquidation, make a distribution on an i-unit other than in
additional i-units or a security that has in all material respects the
same rights and privileges as the i-units;
- make a distribution on a common unit other than in cash, additional
common units or a security that has in all material respects the same
rights and privileges as the common units;
- make a tender offer for common units unless the consideration payable in
such tender offer:
-- is exclusively cash; and
-- together with any cash payable in respect of any other tender offer by
El Paso Energy Partners for the common units concluded within the
preceding 360 days and the aggregate amount of any cash distributions
to all owners of common units made within the preceding 360-day period
is less than 12% of the aggregate average market value of all classes
of units of El Paso Energy Partners determined on the trading day
immediately preceding the commencement of the tender offer;
- allow an owner of common units to receive any consideration other than
cash, common units or a security that has in all material respects the
same rights and privileges as the common units, or allow us, as the owner
of the i-units, to receive any consideration other than additional
i-units or a security that has in all material respects the same rights
and privileges as the i-units, in either case, in a:
-- merger transaction, if the unitholders of El Paso Energy Partners
immediately prior to the transaction own more than 50% of the common
equity securities of the survivor immediately after the transaction; or
135
-- recapitalization, reorganization or similar transaction;
- be a party to a merger, sell all or substantially all of its assets to
another person or enter into similar transactions if:
-- the survivor of the merger or the other person is to be controlled by
El Paso Corporation or its affiliates after the transaction; and
-- the transaction would result in the occurrence of a special purchase
event described under "-- Special Purchase Events" below; or
- take any action that would result in the occurrence of either of the
events described below, unless prior to the occurrence of the event El
Paso Corporation has notified us and El Paso Energy Partners that upon
the occurrence of the event El Paso Corporation will acquire all of our
outstanding shares as more fully described under "-- Special Purchase
Events" below:
-- aggregate distributions or other payments by El Paso Energy Partners on
each common unit, other than in common units or in securities that have
in all material respects the same rights and privileges as common units
but including pursuant to an issuer tender offer by El Paso Energy
Partners, during a 360-day period exceeding 50% of the average market
price of a common unit for the ten-trading day period ending on the
trading day immediately prior to the beginning of that 360-day period;
-- the merger of El Paso Energy Partners with another entity where El Paso
Energy Partners is not the surviving entity, or the sale of all or
substantially all of El Paso Energy Partners' assets, unless in the
transaction:
- the only consideration that we receive in exchange for our i-units is
a security that has in all material respects the same rights and
privileges as the i-units; and
- the only consideration that the owners of common units receive in
exchange for their common units is a security that has in all material
respects the same rights and privileges as the common units and/or
cash, and the amount of cash received per common unit does not exceed
33 1/3% of the average market price of a common unit for the
ten-trading day period ending on the trading day immediately prior to
the date of execution of the definitive agreement for the transaction.
These covenants can be amended or waived with the approval of the owners of the
i-units as described under "-- Limited Voting Rights" below.
SPECIAL PURCHASE EVENTS
GENERAL
Under the terms of the El Paso Corporation purchase provisions, El Paso
Energy Partners has agreed that it will not take any action that would result in
the occurrence of either of the events described in (1) or (2) below and El Paso
Corporation has agreed that it will not take any action that would result in the
occurrence of the event described in (3) below unless prior to the occurrence of
any such event, El Paso Corporation has notified us and El Paso Energy Partners
that upon the occurrence of such event El Paso Corporation will purchase all of
our outstanding shares.
These special purchase events include:
(1) aggregate distributions or other payments by El Paso Energy Partners on
each common unit, other than in common units or in securities which
have in all material respects the same rights and privileges as common
units but including pursuant to an issuer tender offer by El Paso
Energy Partners, during a 360-day period exceeding 50% of the
136
average market price of a common unit during the ten trading days
ending on the trading day immediately prior to the beginning of that
360-day period;
(2) the merger of El Paso Energy Partners with another entity where El Paso
Energy Partners is not the surviving entity, or the sale of all or
substantially all of El Paso Energy Partners' assets, unless in the
transaction:
- the only consideration that we receive in exchange for our i-units is
a security that has in all material respects the same rights and
privileges as the i-units; and
- the only consideration that the owners of common units receive in
exchange for their common units is a security that has in all material
respects the same rights and privileges as the common units and/or
cash, and the amount of cash received per common unit does not exceed
33 1/3% of the average market price of a common unit for the ten
trading day period ending on the trading day immediately prior to the
date of execution of the definitive agreement for the transaction; or
(3) El Paso Corporation or its affiliates taking any action that would
result in El Paso Corporation and its affiliates ceasing to be the
beneficial owners, as defined in Rule 13d-3 and 13d-5 under the
Securities Exchange Act of 1934, of more than 50% of the total voting
power of the general partner of El Paso Energy Partners, unless
following the occurrence of such action, another person will become the
beneficial owner of more than 50% of the total voting power of the
general partner of El Paso Energy Partners, and such person:
- is organized under the laws of a state in the United States;
- has long term unsecured debt with an investment grade credit rating,
as determined by Moody's Investor Services, Inc. and Standard & Poor's
Rating Service, immediately prior to the closing of the transaction;
and
- assumes all obligations of El Paso Corporation under the purchase
provisions and the tax indemnification agreement.
If El Paso Corporation elects to purchase our shares upon the occurrence of
a special purchase event, the purchase price for the shares will be equal to the
higher of the average market price of the shares and the common units as
determined for a ten-trading day period ending on the trading day immediately
prior to the date of the applicable event.
PROCEDURE
Within three business days following the occurrence of any special purchase
event with respect to which El Paso Corporation has elected to purchase our
shares, El Paso Corporation will mail to each holder of record of the shares a
notice stating, among other things:
- that a special purchase event has occurred and that El Paso Corporation
will purchase such holder's shares for the purchase price described
above;
- the dollar amount per share of the purchase price;
- the circumstances and relevant facts regarding the special purchase
event;
- the purchase date, which shall be no later than five business days from
the date such notice is mailed; and
- the instructions a holder must follow in order to have its shares
purchased.
On or prior to the date of the purchase, El Paso Corporation will
irrevocably deposit with the transfer agent funds sufficient to pay the purchase
price. Following the purchase date, a share
137
owned by any person other than El Paso Corporation and its affiliates will only
represent the right to receive the purchase price.
For purposes of the purchase provisions, which are part of our limited
liability company agreement, El Paso Corporation will be deemed to include El
Paso Corporation, its successors by merger, and any entity that succeeds to El
Paso Corporation's obligations and rights under the purchase provisions and the
tax indemnification agreement in connection with an acquisition of all or
substantially all of the assets of El Paso Corporation.
El Paso Corporation will comply with Rule 13e-3 under the Securities
Exchange Act of 1934 in connection with the occurrence of a special purchase
event.
The ability of El Paso Corporation to purchase our outstanding shares upon
the occurrence of a special purchase event depends upon El Paso Corporation's
financial ability to meet its obligations. Even after El Paso Corporation elects
to purchase our outstanding shares in connection with a special purchase event,
it is not required to elect to secure its purchase obligations or comply with
any financial covenants to ensure performance of these obligations. If El Paso
Corporation elects to purchase our shares upon the occurrence of a special
purchase event but fails to do so, shareholders would be required to institute a
cause of action and obtain a judgment of repayment against El Paso Corporation
in order to enforce their rights.
OPTIONAL PURCHASE EVENTS
GENERAL
The El Paso Corporation purchase provisions, which are part of our limited
liability company agreement, provide that if at any time El Paso Corporation and
its affiliates own 80% or more of our shares, El Paso Corporation has the right,
which it may assign to any of its affiliates, to purchase all, but not less than
all, of our shares not owned by it or its affiliates. El Paso Corporation can
exercise its right to make that purchase by giving notice to the transfer agent
for the shares of its election to make the purchase not less than ten days and
not more than 60 days prior to the date that it selects for the purchase. We
will cause the transfer agent to mail the notice of the purchase to the record
holders of the shares.
The price at which El Paso Corporation may make an optional purchase in
this circumstance is equal to 110% of the higher of:
- the average closing price for our shares for the ten consecutive trading
days ending on the fifth trading day prior to the date the notice of the
purchase is given; and
- the highest price El Paso Corporation or any of its affiliates paid for
the shares during the 90 days prior to the date the notice of purchase is
given.
Our limited liability company agreement and El Paso Energy Partners'
partnership agreement each provides that if at any time El Paso Corporation and
its affiliates own 85% or more of the common units and our shares on a combined
basis, then El Paso Corporation has the right to purchase all, but not less than
all, of our shares but only if the general partner of El Paso Energy Partners
elects to purchase all, but not less than all, of the common units not owned by
it or its affiliates.
The price at which El Paso Corporation may make an optional purchase in
this circumstance is equal to the highest of:
- the average closing price of our shares or the common units, whichever is
higher, for the 20 consecutive trading days ending on the fifth trading
day prior to the date on which the notice of the purchase is given; and
- the highest price El Paso Corporation or any of its affiliates paid
either for our shares or the common units during the 90 days prior to the
giving of the notice of purchase.
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El Paso Corporation and its affiliates currently own approximately 26.5% of
the common units. Following this offering, El Paso Corporation and its
affiliates are expected to own 26.5% of our shares.
PROCEDURE
El Paso Corporation may exercise its right to make the optional purchase in
either circumstance by giving notice to the transfer agents for our shares and
El Paso Energy Partners' common units of its election to make the optional
purchase not less than ten days and not more than 60 days prior to the date
which it selects for the purchase. We and El Paso Corporation or the general
partner of El Paso Energy Partners also will cause the transfer agents to mail a
notice of the purchase to the record holders of our shares and El Paso Energy
Partners' common units.
If El Paso Corporation elects to purchase our shares or if El Paso
Corporation and the general partner of El Paso Energy Partners, respectively,
elect to purchase our shares and El Paso Energy Partners' common units, El Paso
Corporation will deposit the aggregate purchase price for our shares or the
combination of our shares and El Paso Energy Partners' common units, as the case
may be, with the respective transfer agents. On and after the date set for the
purchase, the holders of our shares and El Paso Energy Partners' common units,
as the case may be, will have no rights as holders of shares or common units,
except to receive the purchase price, and their shares or common units will be
deemed to be transferred to El Paso Corporation for all purposes.
El Paso Corporation will comply with Rule 13e-3 under the Securities
Exchange Act of 1934 if it makes an optional purchase.
LIMITED VOTING RIGHTS
NO RIGHT TO VOTE TO ELECT DIRECTORS
Owners of the class of shares being sold in this offering will have no
right to elect our directors. El Paso Energy Partners Company owns all of our
voting shares, which are the only class of shares that are entitled to vote to
elect our directors.
ACTIONS REQUIRING VOTE OF OWNERS OF OUR SHARES
Owners of the class of shares being sold in this offering, other than El
Paso Energy Partners Company and its affiliates, may vote on the matters
discussed below, and we, or El Paso Corporation, as the case may be, may take
action in connection with these matters only after obtaining the approval of the
percentage of our outstanding shares required for each matter.
The following matters require the approval of a majority of the outstanding
shares of the class being sold in this offering:
- an amendment or waiver of our covenants prohibiting us from:
- using the proceeds from our sale of shares in this offering other than
for the purchase of i-units from El Paso Energy Partners and the tax
indemnity obligations from El Paso Corporation;
- borrowing money or issuing debt;
- selling, pledging or transferring any i-units;
- issuing options, warrants or other securities entitling the holder to
purchase our shares;
- purchasing our shares; or
- liquidating, merging or recapitalizing; and
139
- an amendment or waiver of El Paso Corporation's covenant regarding it and
its affiliates' continued ownership of more than 50% of the total voting
power of the general partner of El Paso Energy Partners.
On some matters, the approval of a majority of a quorum of the outstanding
shares of the class being sold in this offering is required. Our limited
liability company agreement provides that the holders of a majority of
outstanding shares of the class being sold in this offering who are present at a
meeting in person or by proxy constitutes a quorum. These matters include:
- a proposed issuance of any new class of our shares; and
- amendments to our limited liability company agreement, including the
purchase provisions, the tax indemnification agreement and the delegation
agreement, but only if the amendment would have a material adverse effect
on us or the owners of our shares, as determined in the sole discretion
of our board of directors, or would reduce the time for any notice to
which the holders of our shares may be entitled.
Additionally, our dissolution requires the approval of either:
- the owner of our voting shares and a majority of the outstanding shares
of the class being sold in this offering; or
- two-thirds of the outstanding shares of the class being sold in this
offering.
We will also submit to a vote of the owners of our shares, including our
voting shares, any matter submitted to us by El Paso Energy Partners for a vote
of i-units. We will vote our i-units in proportion to the number of votes the
owners of our shares, including our voting shares, cast for or against a
proposal. Under the terms of the El Paso Energy Partners partnership agreement,
the i-units are entitled to vote on all matters on which the common units are
entitled to vote. In general, the i-units and common units will vote together as
a single class, with each i-unit and common unit having one vote.
The i-units, however, are entitled to vote as a separate class on some
matters. El Paso Energy Partners may take action in connection with such matters
only after obtaining the approval of the percentage of outstanding i-units
required for each matter, other than the number of i-units equal to the number
of our shares and voting shares owned by the general partner of El Paso Energy
Partners and its affiliates, voting as a separate class.
The following matters require the approval of a majority of the outstanding
i-units, voting as a separate class, which we will vote in accordance with the
votes of the holders of our shares eligible to vote:
- amendments to the El Paso Energy Partners partnership agreement that, in
the sole discretion of the general partner of El Paso Energy Partners,
would have a material adverse effect on the holders of the i-units in
relation to the other classes of units;
- amendments or waivers of covenants in the El Paso Energy Partners
partnership agreement that were created for the benefit of the i-units,
including covenants relating to the first two types of special purchase
events described above under "-- Special purchase events," that are not
permitted to be made by the general partner of El Paso Energy Partners
alone;
- the removal of the general partner of El Paso Energy Partners and the
election of a successor general partner; and
- the transfer by the general partner of El Paso Energy Partners of its
general partner interest to a non-affiliated person and the admission of
that person as a general partner of El Paso Energy Partners.
140
Additionally, any proposed action that would cause El Paso Energy Partners
to be treated as a corporation for U.S. federal income tax purposes requires the
approval of two-thirds of the outstanding i-units, including i-units
corresponding to our shares and voting shares owned by the general partner and
its affiliates, voting as a separate class.
LIMITATIONS ON VOTING RIGHTS OF CERTAIN OWNERS OF OUR SHARES
Our limited liability company agreement provides that any shares, including
voting shares, owned by El Paso Energy Partners Company or its affiliates will
not be entitled to vote on the following matters submitted by El Paso Energy
Partners for a vote of the i-units:
- the removal of the general partner of El Paso Energy Partners and the
election of a successor general partner;
- amendments or waivers of covenants in the El Paso Energy Partners'
partnership agreement that were created for the benefits of the i-units,
including covenants relating to the first two types of special purchase
events described above under "-- Special purchase events," that are not
permitted to be made by the general partner of El Paso Energy Partners
alone;
- the election of a successor general partner upon the voluntary withdrawal
of the general partner of El Paso Energy Partners;
- the transfer by the general partner of El Paso Energy Partners of its
general partner interest to a non-affiliated person and the admission of
that person as a general partner; and
- amendments to the terms of the i-units that would have a material adverse
effect on the i-units, as determined in the sole discretion of the
general partner of El Paso Energy Partners.
In addition, any person or group owning 20% or more of the aggregate number
of issued and outstanding common units and our shares cannot vote the shares
that they own on any matter. This limitation does not apply to El Paso
Corporation and its affiliates although, as described above, there are a number
of matters on which El Paso Corporation and its affiliates cannot vote the
shares that they own.
When the shares owned by El Paso Corporation and its affiliates, or by a
person or group owning 20% or more of the aggregate number of common units and
our shares, are not entitled to vote as described above, they will be treated as
not outstanding. Therefore, they will not be included in the numerator of the
number of shares voting for approval or the denominator of the number of shares
outstanding in determining whether the required percentage has been voted to
approve a matter. The same is true with respect to the i-units. In other words,
in this circumstance a number of i-units equal to the number of our shares and
voting shares not entitled to vote as described above will be treated as not
outstanding and will not be included in the numerator or the denominator in
determining if the required percentage of i-units or total units, as the case
may be, has been voted to approve a matter.
ACTIONS NOT REQUIRING THE VOTE OF OWNERS OF OUR SHARES
Notwithstanding the voting provisions described above, we may take the
following actions without obtaining approval of the owners of our shares:
- make changes in the terms of our shares; and
- make changes in the terms of our limited liability company agreement,
including the purchase provisions, the tax indemnification agreement and
the delegation agreement;
that, in either case:
- are necessary or desirable to meet the requirements of applicable
securities and other laws and regulations and exchange rules;
141
- are necessary to effect the intent of, or that are otherwise contemplated
by, our limited liability company agreement; or
- our board of directors determines in its sole discretion will not have a
material adverse effect on the preferences or rights of our shares.
Additionally, the agreements governing the terms of our shares provide that
we are permitted, in the good faith discretion of our board, to amend the terms
of the shares and these agreements without the approval of the holders of our
shares to accommodate:
- the assumption of the obligations of El Paso Corporation by a person,
other than El Paso Corporation and its affiliates, who becomes the
beneficial owner of more than 50% of the total voting power of all shares
of the general partner of El Paso Energy Partners in a transaction with
respect to which El Paso Corporation will not purchase all of our shares
but that requires the vote of the holders of the outstanding common units
and/or shares; or
- changes resulting from a merger, recapitalization, reorganization or
similar transaction involving El Paso Energy Partners with respect to
which, in each case, El Paso Corporation will not purchase all of our
shares but that requires the vote of the holders of the outstanding
common units and/or shares.
We believe that amendments made pursuant to these agreements, except in some
cases in the context of a merger, recapitalization, reorganization or similar
transaction, would not be significant enough to constitute the issuance of a new
security. However, if such an amendment were deemed to constitute the issuance
of a new security, we would have to register the issuance of such new security
with the SEC or rely on an exemption from registration.
MERGER
As discussed under "Limited Liability Company Agreement -- Merger," if El
Paso Energy Partners were to be treated as a corporation for federal income tax
purposes, the owner of our voting shares has the right to cause us to merge with
or into El Paso Energy Partners or one of its subsidiaries. As a condition to
such merger, we must obtain either an opinion of counsel or a ruling from the
IRS that such merger should be currently non-taxable to holders of our shares,
except as to consideration received for fractional shares or as to the
termination of any rights or obligations related to the purchase provisions. In
such event, you would receive common units or other securities substantially
similar to the common units in exchange for our shares that you own.
TAX INDEMNITY OF EL PASO CORPORATION
Concurrently with the closing of this offering, we will enter into a tax
indemnification agreement with El Paso Corporation. Pursuant to this tax
indemnification agreement, El Paso Corporation has agreed to indemnify us for
any tax liability attributable to our formation or our management of El Paso
Energy Partners and for any taxes arising out of a transaction involving the
i-units we own to the extent the transaction does not generate sufficient cash
to pay our taxes.
ANTI-DILUTION ADJUSTMENTS
Concurrently with the closing of this offering, El Paso Energy Partners
will amend its partnership agreement to provide that El Paso Energy Partners
will adjust proportionately the number of i-units held by us by causing an
i-unit subdivision, split or combination if various events occur, including:
- the payment of a common unit distribution on the common units; and
- a subdivision, split or combination of the common units.
142
Our limited liability company agreement provides that the number of all of
our outstanding shares, including voting shares, shall at all times equal the
number of i-units we own. If there is a change in the number of i-units we own,
we will pay to all shareholders a share distribution or effect a split or
combination of our shares to provide that at all times the number of shares
outstanding equals the number of i-units we own. Through the combined effect of
the provisions in the El Paso Energy Partners partnership agreement and the
provisions of our limited liability company agreement, the number of outstanding
shares and i-units will always be equal.
Our limited liability company agreement and El Paso Energy Partners'
partnership agreement provide that, whenever we or El Paso Energy Partners issue
equity securities to any person other than El Paso Energy Partners Company and
its affiliates, the holder of our voting shares (currently El Paso Energy
Partners Company) has a preemptive right to purchase additional shares or common
units on the same terms in order to maintain its percentage interest.
TRANSFER AGENT AND REGISTRAR
We anticipate that Mellon Investor Services will serve as transfer agent
and registrar for our shares and will receive a fee from us for serving in those
capacities. All fees charged by the transfer agent for transfers of shares, in
connection with distributions of additional shares by us or otherwise, will be
borne by us and not by you, except that fees similar to those customarily paid
by shareholders for surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges, special charges for services requested by
you and other similar fees or charges will be borne by you. There will be no
charge to you for disbursements by us of additional shares or cash
distributions, if any. We will indemnify the transfer agent and registrar, their
agents and each of their respective shareholders, directors, officers and
employees against all claims and losses that may arise out of acts performed or
omitted in respect of our activities, except for any liability due to any
negligence, gross negligence, bad faith or intentional misconduct of the
indemnified person or entity.
The transfer agent and registrar may at any time resign, by notice to us,
or be removed by us, that resignation or removal to become effective upon the
appointment by us of a successor transfer agent and registrar and its acceptance
of that appointment. If no successor has been appointed and accepted that
appointment within 30 days after notice of that resignation or removal, we are
authorized to act as the transfer agent and registrar until a successor is
appointed.
REPLACEMENT OF SHARE CERTIFICATES
We will replace any mutilated certificate at your expense upon surrender of
that certificate to the transfer agent. We will replace certificates that become
destroyed, lost or stolen at your expense upon delivery to us and the transfer
agent of satisfactory evidence that the certificate has been destroyed, lost or
stolen, together with any indemnity that may be required by us.
FRACTIONAL SHARES
We will make distributions of additional shares, including fractional
shares. Records of fractional interests held by the holders of shares will be
maintained by The Depository Trust Company or the broker or other nominees
through which you hold your shares. You will be able to sell such fractional
shares on the New York Stock Exchange only when they equal, in the aggregate,
whole shares. Certificates representing fractional shares will not be issued
under any condition. Fractional shares will receive distributions when
distributions are made on our shares. All fractional shares will be rounded
down, if necessary, and stated in six decimal places.
143
DESCRIPTION OF THE I-UNITS
The i-units are a separate class of limited partner interests in El Paso
Energy Partners. All the i-units will be owned by us and will not be publicly
traded. A number of the covenants in our limited liability company agreement and
in El Paso Energy Partners' partnership agreement affect us as the holder of
i-units. For a description of the material covenants, please read "Description
of Our Shares -- Covenants."
VOTING RIGHTS
Generally, owners of i-units are entitled to vote together with the common
units as a single class and sometimes are entitled to vote as a class separate
from the holders of common units. The i-units will have the same voting rights
as the common units voting together as a single class on the following matters:
- a sale or exchange of all or substantially all of El Paso Energy
Partners' assets;
- the election of a successor general partner in connection with the
removal of the general partner of El Paso Energy Partners;
- a dissolution or reconstitution of El Paso Energy Partners;
- a merger of El Paso Energy Partners; and
- some amendments to the partnership agreement.
The i-units also will vote as a separate class on the matters discussed
below. As discussed above, some of these matters also require the approval of
the outstanding common units and i-units voting together as a single class. The
following matters require the approval of a majority of the outstanding i-units,
other than i-units corresponding to our shares and voting shares owned by the
general partner of El Paso Energy Partners and its affiliates, voting as a
separate class, which we will vote in accordance with the votes of the holders
of our shares eligible to vote:
- amendments to the El Paso Energy Partners partnership agreement that, in
the sole discretion of the general partner of El Paso Energy Partners,
would have a material adverse effect on the holders of the i-units in
relation to the other classes of units;
- amendments or waivers of covenants in the El Paso Energy Partners
partnership agreement that were created for the benefit of the i-units,
including covenants relating to the first two types of special purchase
events described above under "Description of Our Shares -- Special
Purchase Events-General," that are not permitted to be made by the
general partner of El Paso Energy Partners alone;
- the removal of the general partner of El Paso Energy Partners and the
election of a successor general partner; and
- the transfer by the general partner of El Paso Energy Partners of its
general partner interest to a non-affiliated person and the admission of
that person as a general partner of El Paso Energy Partners.
Additionally, any proposed action that would cause El Paso Energy Partners
to be treated as a corporation for U.S. federal income tax purposes requires the
approval of two-thirds of the outstanding i-units, including i-units
corresponding to our shares and voting shares owned by the general partner and
its affiliates, voting as a separate class.
In all cases, i-units will be voted in proportion to the affirmative and
negative votes, abstentions and non-votes of owners of our shares, including our
voting shares.
144
For further information regarding the voting rights of i-units and our
shares, see "Description of Our Shares -- Limited Voting Rights."
DISTRIBUTIONS AND PAYMENTS
Under El Paso Energy Partners' partnership agreement, unless El Paso
Corporation has acquired all of our shares, the number of additional i-units we
own after each quarterly distribution of cash will be based upon the amount of
cash distributed by El Paso Energy Partners to an owner of a common unit and the
average market price of one of our shares. Following each quarterly
distribution, the number of additional i-units we own also will equal the number
of additional shares, including voting shares, distributed by us.
MERGER, CONSOLIDATION OR SALE OF ASSETS
In the case of any of the following events:
- a consolidation or merger of El Paso Energy Partners with or into another
person;
- a merger of another person into El Paso Energy Partners, except a merger
which does not result in any reclassification, conversion, exchange or
cancellation of the common units of El Paso Energy Partners; or
- any sale, transfer or lease of all or substantially all the properties
and assets of El Paso Energy Partners;
if the owners of the common units receive cash in the transaction, the number of
i-units outstanding will increase automatically under the provisions of the El
Paso Energy Partners partnership agreement by dividing the cash received on a
common unit by the average market price of one of our shares determined for a
ten-day trading period ending immediately prior to the effective time of the
transaction, except that in the case of a liquidation, as the owner of the
i-units we will receive the distributions provided for pursuant to the
liquidation provisions in El Paso Energy Partners' partnership agreement.
ACQUISITION BY EL PASO CORPORATION
If El Paso Corporation has acquired all of our outstanding shares, and we
have become a wholly owned subsidiary of El Paso Corporation, thereafter El Paso
Energy Partners will make cash distributions on and allocate income to the
i-units on the same basis as the common units and the i-units will not subdivide
except in connection with a subdivision of the common units. If El Paso
Corporation has acquired all of our outstanding shares and the common
unitholders have voted against allowing the i-units to be exchangeable for or
convertible into common units on a one-for-one basis, then, at any time after
October 1, 2010, El Paso Corporation will have the right to increase the
distribution rate paid on the i-units to 2% more than of the rate payable on the
common units from time to time.
U.S. FEDERAL INCOME TAX CHARACTERISTICS AND DISTRIBUTION UPON LIQUIDATION OF EL
PASO ENERGY PARTNERS
The i-units we own generally will not be allocated income, gain, loss or
deduction until such time as there is a liquidation of El Paso Energy Partners.
Therefore we do not anticipate that we will have material amounts of taxable
income resulting from the ownership of the i-units unless we enter into a sale
or exchange of the i-units, El Paso Energy Partners is liquidated or El Paso
Corporation acquires all of our shares.
El Paso Energy Partners may not take any action to cause a liquidation
unless prior to such liquidation El Paso Corporation has agreed to purchase all
of the shares or the holders of the shares shall have voted to approve such
liquidation. In the event of a liquidation of El Paso
145
Energy Partners not resulting from any action taken by El Paso Corporation or El
Paso Energy Partners or otherwise approved by the shareholders, the following
will be important to you as an owner of our shares.
The liquidating distribution per i-unit may be less than the liquidating
distribution received per common unit. The liquidating distribution for each
i-unit and common unit will depend upon the relative per unit capital accounts
of the i-units and the common units at liquidation. It is anticipated that over
time the capital account per common unit will exceed the capital account per
i-unit because the common units will be allocated income and gain prior to
liquidation but the i-units will not. At liquidation, it is intended that each
i-unit will be allocated income and gain in an amount necessary to equalize the
capital account of a common unit and an i-unit. However, there may not be
sufficient amounts of income and gain at liquidation to cause the capital
accounts of an i-unit to be increased to that of a common unit. In that event,
the liquidating distribution per common unit will exceed the liquidating
distribution per i-unit.
Additionally as a result of the allocation of income and gain to the
i-units, we will likely recognize taxable income upon the liquidation of El Paso
Energy Partners. In the event income and gain is allocated to each i-unit then,
because of taxes we pay, shareholders will receive less than the holders of the
common units.
146
MANAGEMENT OF EL PASO ENERGY MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
Our business and affairs will be managed by a board of managers whom we
call our directors.
Our directors and executive officers have served since our formation on
July 19, 2002.
The following table sets forth specific information for our executive
officers and directors. All of our directors are elected annually by, and may be
removed by, El Paso Energy Partners Company as the sole owner of our voting
shares. Executive officers are elected for one-year terms.
<Table>
<Caption>
POSITION WITH EL PASO ENERGY
NAME AGE MANAGEMENT
- ---- --- ----------------------------
William A. Wise................. 56 Director and Chairman of the Board
Robert G. Phillips.............. 47 Director and Chief Executive
Officer
James H. Lytal.................. 44 Director and President
H. Brent Austin................. 47 Director and Executive Vice
President
D. Mark Leland.................. 40 Senior Vice President and
Controller
Keith B. Forman................. 43 Vice President and Chief Financial
Officer
</Table>
Mr. Wise has served as Director and Chairman of the Board of El Paso Energy
Management since its formation and El Paso Energy Partners Company since August
1998. He has served as Chief Executive Officer of El Paso Corporation since
January 1990 and has served as Chairman of El Paso Corporation's board of
directors from January 1994 until October 1999 and from January 2001 to present.
Mr. Wise became President of El Paso Corporation in July 1998 and also served in
that capacity from January 1990 to April 1996. Mr. Wise is a member of the Board
of Directors of Praxair, Inc. and is Chairman of the Board of El Paso Tennessee
Pipeline Co.
Mr. Phillips has served as a Director of El Paso Energy Management since
its formation and El Paso Energy Partners Company since August 1998. He has
served as Chief Executive Officer for El Paso Energy Partners Company and El
Paso Energy Partners since November 1999. He served as Executive Vice President
from August 1998 to October 1999. Mr. Phillips has served as President of El
Paso Field Services Company since June 1997. He served as President of El Paso
Energy Resources Company from December 1996 to June 1997, President of El Paso
Field Services Company from April 1996 to December 1996 and Senior Vice
President of El Paso from September 1995 to April 1996. For more than five years
prior, Mr. Phillips was Chief Executive Officer of Eastex Energy, Inc.
Mr. Lytal has served as a Director of El Paso Energy Management since its
formation and El Paso Energy Partners Company since August 1994 and as the
President of El Paso Energy Partners and El Paso Energy Partners Company since
July 1995. He served as Senior Vice President for El Paso Energy Partners and El
Paso Energy Partners Company from August 1994 to June 1995. Prior to joining us,
Mr. Lytal served in various capacities in the oil and gas exploration and
production and gas pipeline industries with United Gas Pipeline Company, Texas
Oil and Gas, Inc. and American Pipeline Company.
Mr. Austin has served as a Director of El Paso Energy Management since its
formation and El Paso Energy Partners Company and as Executive Vice President
for El Paso Energy Partners Company and El Paso Energy Partners since August
1998. Mr. Austin has served as an Executive Vice President of El Paso
Corporation since May 1995. He has been Chief Financial
147
Officer of El Paso Corporation since April 1992. Prior to that period, he served
in various positions with Burlington Resources, Inc.
Mr. Leland has served as Senior Vice President and Controller for El Paso
Energy Management since its formation and for El Paso Energy Partners Company
and El Paso Energy Partners since July 2000 and as Vice President of El Paso
Field Services Company since September 1997. He served as Vice President and
Controller for El Paso Energy Partners and El Paso Energy Partners Company from
August 1998 to July 2000. He served as Director of Business Development for El
Paso Field Services Company from September 1994 to September 1997. For more than
five years prior, Mr. Leland served in various capacities in the finance and
accounting functions of El Paso Corporation.
Mr. Forman has served as Chief Financial Officer for El Paso Energy
Management since its formation and for El Paso Energy Partners Company and El
Paso Energy Partners since January 1992 and served as a Director of El Paso
Energy Partners Company from July 1992 to August 1998. From 1982 to 1992, Mr.
Forman served as Vice President of the Natural Gas Pipeline Group of
Manufacturers Hanover Trust Company.
BOARD OF DIRECTORS AND COMMITTEES
We intend to have three independent directors by the closing of this
offering. We anticipate that we will have an audit committee composed of a
number of our independent directors upon the closing of the sale of shares
offered by this prospectus.
DIRECTOR COMPENSATION
Our directors, other than our independent directors, do not receive
compensation for their services as directors nor do they receive compensation
for attending our board meetings. However, each director will be reimbursed for
travel expenses incurred for each meeting of the board or for each board
committee meeting attended.
EXECUTIVE COMPENSATION
Because we were formed in 2002, our directors and executive officers
received no compensation in 2001. We have made no decision regarding 2002
compensation for our executive officers. We will be reimbursed for the aggregate
amount of compensation we pay our executive officers and other employees by El
Paso Energy Partners.
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COMPARISON OF EL PASO ENERGY PARTNERS' UNITS WITH OUR SHARES
The following table compares important features of the units of El Paso
Energy Partners and our shares.
<Table>
<Caption>
UNITS OUR SHARES
----- ----------
Numbers of Units and 44,030,314 common units One voting share now outstanding
Shares outstanding on July 31, 2002
125,392 Series B preference
units now outstanding
20,000,001 i-units to be 20,000,000 shares to be issued
outstanding immediately after in this offering
this offering
Current or Non-liquidating On a quarterly basis El Paso We will distribute additional
Distributions Energy Partners is required to shares or fractions of shares
distribute to the owners of all whenever El Paso Energy Partners
classes of its units, other than distributes cash to owners of
i-units, an amount equal to its common units and the number of
available cash. Distributions to i-units we own is automatically
owners of common units and increased.
Series B preference units will
be made in cash. I-units do not
receive cash distributions.
Instead of receiving cash
distributions, the number of
i-units we own will
automatically increase.
For more information, please For more information, please
read "El Paso Energy Partners' read "Description of Our
Distribution Policy." Shares -- Distributions."
Liquidation El Paso Energy Partners will be We will dissolve upon any of the
dissolved upon any of the following:
following:
- certain events of withdrawal - entry of a decree of judicial
of the general partner of El dissolution of us;
Paso Energy Partners; - the approval by the owner of
- an election to dissolve El our voting shares and the
Paso Energy Partners by its owners of at least a majority
general partner that is of our other shares; or
approved by at least 66 2/3% - the approval by the owner of
of all outstanding units; at least two-thirds of our
- entry of a decree of judicial shares, other than the voting
dissolution of El Paso Energy shares.
Partners; or
- the sale of all or
substantially all of the assets
of El Paso Energy Partners and
its subsidiaries.
Voting Generally, owners of common We will vote our i-units in the
units vote with owners of same manner as our owners of our
i-units as a combined class on shares vote on the matters
the following matters: listed in the "Units" column.
</Table>
149
<Table>
<Caption>
UNITS OUR SHARES
----- ----------
- the transfer of the general In addition, owners of the class
partner interest to a person of shares issued in this
other than an affiliate; offering, other than El Paso
- a merger or the sale of all or Energy Partners Company and its
substantially all of the affiliates, may vote on the
assets of El Paso Energy following matters:
Partners;
- the withdrawal of the general - materially adverse amendments
partner in some circumstances; to our limited liability
and company agreement, including
- certain amendments to the the purchase provisions, the
partnership agreement of El tax indemnification agreement
Paso Energy Partners and the delegation agreement;
- amendments or waivers of our
As the owner of the i-units, we covenants or covenants of El
vote as a separate class, in Paso Corporation in our
accordance with the votes of the limited liability company
owners of our shares, on the agreement;
following matters: - a proposed issuance of any new
class of our shares; and
- amendments to El Paso Energy - our dissolution.
Partners' partnership
agreement that would have a
material adverse effect on the
i-units in relation to other
classes of units;
- amendments or waivers of
covenants in the El Paso
Energy Partners partnership
agreement created for the
benefit of the i-units;
- the removal of the general
partner and the election of a
successor general partner;
- the transfer by the general
partner of El Paso Energy
Partners of its general
partner interest to a
non-affiliate and the
admission of the transferee as
a general partner; and
- any proposed action that would
cause El Paso Energy Partners
to be treated as a corporation
for U.S. federal income tax
purposes.
For more information, please
read "Description of the
i-Units -- Voting Rights."
Removal El Paso Energy Partners' general Our directors may not be removed
partner may be removed by the by the holders of the shares.
vote of owners of (1) at least
55% of the outstanding common In voting on removal of the
units, including common units general partner of El Paso
owned by El Paso Energy Energy Partners, the owners of
Partners' general partner and our shares, excluding shares
its affiliates but excluding the owned by the owner of our
</Table>
150
<Table>
<Caption>
UNITS OUR SHARES
----- ----------
Series B preference units, and voting shares and its
(2) a majority of the affiliates, direct how the
outstanding i-units, excluding i-units will be voted.
i-units corresponding to our
shares and voting shares owned
by El Paso Energy Partners'
general partner and its
affiliates, voting as a separate
class.
Optional Purchase Events If El Paso Corporation and its If El Paso Corporation and its
affiliates own 85% or more of affiliates own 85% or more of
the outstanding common units and the outstanding common units and
our shares, on a combined basis, our shares on a combined basis,
then El Paso Corporation has the then El Paso Corporation has the
option, which it may assign to option, which it may assign to
any of its affiliates, to any of its affiliates, to
purchase all of the common units purchase all of the shares that
that it and its affiliates do it and its affiliates do not
not own, but only if El Paso own, but only if El Paso Energy
Corporation and its affiliates Partners Company or its assignee
elect to purchase all, but not elects to purchase all, but not
less than all, of our less than all, of the
outstanding shares that El Paso outstanding common units that El
Corporation and its affiliates Paso Energy Partners Company and
do not own. its affiliates do not own. In
addition, if El Paso Corporation
and its affiliates own 80% or
more of our outstanding shares,
then El Paso Corporation has the
option, which it may assign to
any of its affiliates to
purchase all, but not less than
all, of the outstanding shares
that it and its affiliates do
not own.
Special Purchase Events None. Each of El Paso Energy Partners
and El Paso Corporation have
agreed not to take any actions
that would result in a special
purchase event unless El Paso
Corporation has agreed to
purchase all of our outstanding
shares as described in
"Description of Our Shares --
Special Purchase Events".
Preemptive Rights to Whenever El Paso Energy Partners No holder of any of our i-shares
Acquire Securities issues equity securities to any has any preemptive right. The
person other than the general holder of our voting shares has
partner and its affiliates, the a preemptive right to purchase
general partner has a preemptive additional shares or common
right to purchase additional units in order to maintain its
limited partnership interests on percentage interest.
the same terms in order to
maintain its percentage
interest.
Fractional Securities Other than fractional i-units, Distributions on our shares will
no
</Table>
151
<Table>
<Caption>
UNITS OUR SHARES
----- ----------
fractional units may be issued. be made in fractional shares.
These fractional shares may not
be traded on the New York Stock
Exchange.
Where Traded Common units are traded on the We intend to apply to list the
New York Stock Exchange under shares sold in this offering on
the symbol "EPN." the New York Stock Exchange
under the symbol " ".
All Series B preference units The voting shares owned by El
are owned by an affiliate of El Paso Energy Partners Company
Paso Corporation. They are not will not be listed for trading
listed for trading on any stock on any stock exchange.
exchange.
All i-units will be owned by us.
They will not be listed for
trading on any stock exchange.
Transfer Agent and Mellon Investor Services We anticipate that Mellon
Registrar Investor Services will serve as
transfer agent and registrar for
our shares.
</Table>
152
LIMITED LIABILITY COMPANY AGREEMENT
FORMATION
Our certificate of formation has been filed in the office of the Secretary
of State of the State of Delaware and is effective.
PURPOSE AND POWERS
Our business purpose is to own limited partnership interests in and to
manage the business and affairs of El Paso Energy Partners and its subsidiaries
and to engage in any lawful business purpose or activity related thereto. We
possess and may exercise all the powers and privileges granted by the Delaware
Limited Liability Company Act, by any other law or by our limited liability
company agreement, together with any incidental powers necessary, appropriate,
advisable or convenient to the conduct, promotion or attainment of our business
purposes or activities.
U.S. FEDERAL INCOME TAX STATUS AS A CORPORATION
We will elect, effective upon closing of this offering, to be treated as a
corporation for U.S. federal income tax purposes. The i-units owned by us will
not be allocated income, gain, loss or deduction of El Paso Energy Partners
until such time as El Paso Energy Partners is liquidated or El Paso Corporation
acquires all outstanding i-shares and we become a wholly-owned subsidiary of El
Paso Corporation. Thus, we do not expect to have material amounts of taxable
income resulting from our ownership of the i-units unless we dispose of the
i-units in a taxable transaction or El Paso Energy Partners is liquidated.
Please read "Our Status as a Corporation For Federal Income Tax Purposes" below.
POWER OF ATTORNEY
Each shareholder appoints any person specifically authorized by our board
of directors to act as its true and lawful representative and attorney-in-fact,
in its name, place and stead, to swear to, acknowledge, deliver and file:
- all certificates, documents and other instruments that our board of
directors deems necessary or appropriate to form, qualify or continue the
existence or qualification of us in the State of Delaware and in all
other jurisdictions in which the we may conduct business or own property;
- all certificates, documents and other instruments that our board of
directors deems necessary or appropriate to reflect, in accordance with
its terms, any amendment, change, modification or restatement of our
limited liability company agreement;
- all certificates, documents and other instruments that our board of
directors deems necessary or appropriate to reflect our dissolution and
liquidation pursuant to the terms of our limited liability company
agreement;
- all certificates, documents and other instruments relating to the
transfer of any shares or other securities we may issue;
- all certificates, documents and other instruments relating to the
determination of the rights, preferences and privileges of any class or
series of shares or other securities that we may issue;
- all certificates, documents and other instruments relating to our merger
or consolidation with another entity; and
- all ballots, consents, approvals, waivers, certificates and other
instruments necessary or appropriate, in the sole discretion of our board
of directors, to make, evidence, give,
153
confirm or ratify any vote, consent, approval, agreement or other action
that is made or given by the owners of our shares under the power of
attorney or is consistent with the terms of our limited liability company
agreement or is necessary or appropriate, in the sole discretion of our
board of directors, to effectuate the terms or intent of our limited
liability company agreement.
When required by any provision of our limited liability company agreement
that establishes a percentage of our shares or of any class or series of our
shares required to take any action, our board of directors may exercise this
power of attorney only after the required vote, consent or approval of the
percentage of our shares or of such class or series of our shares.
The power of attorney is irrevocable and coupled with an interest, and it
survives and is not affected by the subsequent death, incompetency, disability,
incapacity, dissolution, bankruptcy or termination of any shareholder or the
transfer of any of the shareholder's shares. The power of attorney also extends
to the shareholder's heirs, successors, assigns and personal representatives.
MEMBERS
El Paso Energy Partners Company is our organizational shareholder and owns
the outstanding voting shares as our sole voting member. Our other members are
the owners of the class of shares being sold in this offering.
The voting member may approve a matter or take any action at a meeting or
without a meeting by written consent. As the owner of our voting shares, it may
call a meeting of the voting shares, as a class at any time. In limited
circumstances described in "Description of Our Shares -- Limited Voting Rights,"
the owners of our outstanding shares have the right to approve a number of
significant actions.
LIMITED LIABILITY
All of our debts, obligations and liabilities, whether arising in contract,
tort or otherwise, will be our debts, obligations and liabilities alone, and no
owner of shares will be obligated for any of these debts, obligations or
liabilities as a result of being an owner of our shares.
THE BOARD
Our business and affairs will be managed by a board of managers whom we
call our directors. Members of the board will be selected only by the owner of
our voting shares. The number of our directors may be fixed from time to time by
the owner of our voting shares. Our initial board consists of four directors.
The board will hold regular and special meetings at any time as may be
necessary. Regular meetings may be held without notice on dates set by the board
from time to time. Special meetings of the board may be called with reasonable
notice to each director upon request of the chairman of the board or upon the
written request of any two directors. A quorum for a regular or special meeting
will exist when one-third of the directors are participating in the meeting
either in person or by conference telephone. Any action required or permitted to
be taken at a meeting may be taken without a meeting, without prior notice and
without a vote if all of the directors sign a written consent authorizing the
action. The board will be required to establish an audit committee which
satisfies the requirements of the principal national securities exchange on
which our shares are listed or admitted to trading from time to time. In
addition to the audit committee, the board can establish other committees
composed of two or more directors and can delegate power and authority to these
committees.
154
OFFICERS AND EMPLOYEES
Subject to the terms of any employment agreements we might have in the
future, the board can appoint and terminate officers and retain and terminate
employees, agents and consultants. The board can delegate power and authority to
officers, employees, agents and consultants, including the power to represent us
and bind us in accordance with the scope of their duties. An affiliate of El
Paso Energy Partners Company provides us and El Paso Energy Partners Company
with our employees. The costs of these employees related to their provision of
services to us or El Paso Energy Partners will be borne directly or reimbursed
by El Paso Energy Partners without profit to the affiliate.
CAPITAL STRUCTURE
Our present capital structure consists of two classes of membership equity
interests:
- the class of nonvoting shares being sold in this offering; and
- the class of voting shares held by El Paso Energy Partners Company.
We are authorized to issue an unlimited number of voting shares and the
class of shares being sold in this offering.
DISSOLUTION AND LIQUIDATION
We will be dissolved only upon
- a judicial decree;
- upon the approval by the owner of the voting shares and by the holders of
a majority of the outstanding shares of the class sold in this offering;
or
- upon the approval of holders of two-thirds of our outstanding shares of
the class sold in this offering.
In the event that we are dissolved, we will be liquidated and our affairs
will be wound up. All proceeds from the liquidation will be distributed in equal
amounts to the holders of our outstanding shares of all classes.
MERGER
Under the provisions of our limited liability company agreement and El Paso
Energy Partners' partnership agreement, if El Paso Energy Partners were to be
treated as a corporation for U.S. federal income tax purposes, the owner of our
voting shares has the right to cause us to merge with or into El Paso Energy
Partners or one of its subsidiaries provided that such merger should be
currently non-taxable to our shareholders, except as to consideration received
for fractional shares or as to the termination of any rights or obligations
related to the purchase provisions. As a condition to such merger, we must
obtain either an opinion of counsel or a ruling from the IRS that such merger
should be currently non-taxable to holders of our shares, except as to
consideration received for fractional shares or as to the termination of any
rights or obligations related to the purchase provisions. In such a merger, you
would receive common units or other securities substantially similar to the
common units in exchange for your shares.
EXCULPATION AND INDEMNIFICATION
Notwithstanding any express or implied provision of our limited liability
company agreement, or any other legal duty or obligation, none of our directors,
officers or owners of our voting shares will be liable to us, our affiliates or
any other person for any act or omission taken or omitted by the person if such
person acted in good faith.
155
Our limited liability company agreement provides that we will indemnify our
directors, officers and the owners of our voting shares from liabilities arising
in the course of such persons' service to us, provided that the indemnitee acted
in good faith and in a manner that such indemnitee believed to be in or not
opposed to our best interests and, with respect to any criminal proceeding, had
no reasonable cause to believe such indemnitee's conduct was unlawful. We expect
that the directors and officers will be covered by directors' and officers'
liability insurance for potential liability under such indemnification. The
owners of our shares will not be personally liable for such indemnification.
To the extent that the indemnification provisions purport to include
indemnification for liabilities arising under the Securities Act of 1933, in the
opinion of the SEC, such indemnification is contrary to public policy and
therefore unenforceable.
AMENDMENTS
Amendments to our limited liability company agreement and to our
certificate of formation can be approved in writing solely by owners of our
voting shares, except for amendments that would reduce the time for any notice
to which owners of shares of the class being sold in this offering would be
entitled or that would have a material adverse effect on the rights or
preferences of the class of shares being sold in this offering, as determined by
our board of directors, in their sole discretion. These types of amendments must
be approved by the owners of a majority of the outstanding shares of the class
being sold in this offering excluding shares held by the owner of our voting
shares and its affiliates. Additionally, any amendment with respect to a matter
that requires the approval of the owners of shares of the class being sold in
this offering must be approved by the owners of not less than the percentage of
shares required to approve such matter. For more information regarding the
voting rights of our shares and other amendments we may make, please read
"Description of Our Shares -- Limited Voting Rights."
MEETINGS; VOTING
Meetings of the shareholders may be called by the board, the chairman of
the board or by El Paso Energy Partners Company, as the sole owner of our voting
shares. Within 60 days after such a call or within such greater time as may be
reasonably necessary for us to comply with applicable law or the regulations of
any securities exchange on which the shares are listed, the board of directors
will send a notice of the meeting to the shareholders owning shares for which a
meeting is being called either directly or indirectly through the transfer
agent. The meeting will be held at a time and place determined by the board of
directors on a date not more than 60 nor less than ten days after the mailing of
notice of the meeting.
Except for the sole purpose of voting on a proposal to cause our
dissolution, the owners of the class of shares being sold in this offering do
not have the right to call a meeting of the shareholders. A meeting of
shareholders for the sole purpose of voting on a proposal to cause our
dissolution may be called by the owners of 20% of the class of shares being sold
in this offering.
A majority of the shares entitled to vote at a meeting constitutes a
quorum. The act of a majority of a quorum at a meeting constitutes the act of
the shareholders, except with respect to any proposed action that we have agreed
not to take without the approval of a greater percentage of all outstanding
shares of the class being sold in this offering. Owners of the class of shares
being sold in this offering may not take any action by written consent. For more
information on the voting rights of owners of our shares, please read
"Description of Our Shares -- Limited Voting Rights."
156
BOOKS AND RECORDS; LIST OF SHAREHOLDERS
We will keep at our principal office complete and accurate books and
records, supporting documentation of the transactions with respect to the
conduct of our business and affairs and minutes of the proceedings of our board,
the shareholders and each committee of the board of directors. The records will
include:
- complete and accurate information regarding the state of our business and
financial condition;
- a copy of our limited liability company agreement and our certificate of
formation, and any amendments thereto;
- a current list of the names and last known business, residence, or
mailing addresses of all of our directors and officers; and
- our federal, state and local tax returns for our six most recent tax
years.
Subject to reasonable standards, including standards governing what information
and documents are to be furnished and at what time and location and at whose
expense, as may be established by the board of directors or any officer, each
shareholder is entitled to all information to which a member of a Delaware
limited liability company is entitled to have access pursuant to the Delaware
Limited Liability Company Act under the circumstances and subject to the
conditions stated in that statute. Specifically, each shareholder will have
access to:
- true and full information regarding the status of our business and
financial condition;
- a copy of our U.S. federal, state and local income tax returns for each
year;
- a current list of the name and last known business, residence or mailing
address of each director and each shareholder of record;
- a copy of our limited liability company agreement and certificate of
formation, including all amendments, together with executed copies of any
written powers of attorney pursuant to which our limited liability
company agreement and any certificate and all amendments have been
executed;
- true and full information regarding the amount of cash and a description
and statement of the agreed value of any other property or services
contributed by each shareholder and which each shareholder has agreed to
contribute in the future, and the date on which each became a
shareholder; and
- other information regarding our affairs as is just and reasonable.
Our board will have the right to keep confidential from the shareholders, for
such period of time as the board deems reasonable, any information which the
board reasonably believes to be in the nature of trade secrets or other
information the disclosure of which the board in good faith believes is not in
our best interest or could damage us or our business or which we are required by
law or by agreement with a third party to keep confidential.
NO REMOVAL
A shareholder does not have the right or power to resign or withdraw as a
shareholder and no shareholder may be expelled or removed as a shareholder. The
restriction on a shareholder's ability to resign or withdraw as a shareholder
does not, however, apply to a sale or other transfer of our shares by a
shareholder, even though the shareholder so selling or transferring may cease to
be a shareholder as a result of such sale or transfer.
157
DISTRIBUTIONS
For information regarding distributions payable on our shares, please read
"Description of Our Shares -- Distributions."
OPTIONAL AND SPECIAL PURCHASE EVENTS
For information regarding the obligation of owners of our shares to sell
those shares under specified circumstances, please read "Description of Our
Shares -- Special Purchase Events" and "Description of Our Shares -- Optional
Purchase Events."
158
RELATIONSHIPS AND RELATED PARTY TRANSACTIONS
OUR RELATIONSHIP WITH EL PASO CORPORATION AND EL PASO ENERGY PARTNERS
The following charts depict a simplified organizational structure of El
Paso Corporation and El Paso Energy Partners immediately prior to and following
the offering.
PRIOR TO THE OFFERING
(CHART)
- ---------------
(1) El Paso Corporation owns its common units and Series B preference units
indirectly, through wholly-owned indirect subsidiaries.
(2) El Paso Energy Partners Company is the sole general partner of El Paso
Energy Partners.
159
FOLLOWING THE OFFERING
(CHART)
OWNERSHIP OF EL PASO ENERGY PARTNERS AFTER THE OFFERING(3):
<Table>
i-units (entire class owned by us).......................... 30.9%
Common units owned by the public............................ 50.0%
Common units owned by El Paso Corporation................... 18.1%
General partner interest.................................... 1.0%
-----
Total..................................................... 100.0%
=====
</Table>
- ---------------
(1) El Paso Corporation owns its i-shares and common units indirectly, through
wholly-owned indirect subsidiaries.
(2) El Paso Energy Partners Company is the sole general partner of El Paso
Energy Partners.
(3) This presentation assumes that each i-unit and common unit represents an
equal interest in El Paso Energy Partners and that the Series B preference
units represent no ownership interest in El Paso Energy Partners.
Following this offering, subsidiaries of El Paso Corporation are expected
to own collectively 26.5% of El Paso Energy Partners through their ownership of
our shares and general and limited partner interests in El Paso Energy Partners.
160
DELEGATION AGREEMENT
Pursuant to a delegation agreement among El Paso Energy Partners Company,
El Paso Energy Partners and its subsidiaries and us, the parties have agreed
that:
- El Paso Energy Partners Company, as general partner of El Paso Energy
Partners, will delegate to us, and we will assume, upon the closing of
this offering, substantially all of El Paso Energy Partners Company's
power and authority to manage the business and affairs of El Paso Energy
Partners and its subsidiaries;
- The delegation agreement will provide that we will not take any of the
following actions without the approval of El Paso Energy Partners
Company;
- amend or propose to amend El Paso Energy Partners' partnership
agreement;
- allow a merger or consolidation involving El Paso Energy Partners;
- allow a sale or exchange of all or substantially all of the assets of El
Paso Energy Partners; or
- dissolve or liquidate El Paso Energy Partners.
- El Paso Energy Partners Company:
- will remain responsible to El Paso Energy Partners for actions taken or
omitted by El Paso Energy Management in connection with serving as the
delegee of El Paso Energy Partners Company as if El Paso Energy Partners
Company had itself taken or omitted to take such actions;
- will own (or one of its affiliates will own) all of our voting shares;
and
- has agreed not to withdraw as general partner, or otherwise, from El
Paso Energy Partners .
- El Paso Energy Partners will:
- recognize the delegation of rights and powers to us;
- indemnify and protect us and our officers and directors to the same
extent as it does with respect to El Paso Energy Partners Company as
general partner; and
- reimburse our expenses to the same extent as it does with respect to El
Paso Energy Partners Company as general partner and reimburse us for any
foreign, state and local taxes not otherwise paid or reimbursed pursuant
to the tax indemnification agreement.
The delegation agreement with El Paso Energy Partners Company will continue
until the earlier to occur of such time as El Paso Energy Partners Company has
withdrawn or been removed as the general partner of El Paso Energy Partners or
termination of the delegation agreement shall have been approved by El Paso
Energy Partners Company, us and holders (other than El Paso Energy Partners
Company and its affiliates) of a majority of the outstanding shares, excluding
those owned by El Paso Energy Partners Company and its affiliates. The
partnership agreement of El Paso Energy Partners will be amended to reflect
these agreements. These agreements also will apply to the direct and indirect
subsidiaries of El Paso Energy Partners and their partnership and other
organizational agreements will be amended accordingly.
El Paso Energy Partners Company will remain the only general partner of El
Paso Energy Partners. El Paso Energy Partners Company will retain its general
partner interest and share in the profits, losses and distributions from El Paso
Energy Partners.
The withdrawal or removal of El Paso Energy Partners Company as general
partner of El Paso Energy Partners will simultaneously result in the termination
of our power and authority to manage the business and affairs of El Paso Energy
Partners. Similarly, if El Paso Energy
161
Partners Company's power and authority as general partner are modified in the
partnership agreement of El Paso Energy Partners, then the power and authority
delegated to us will be modified on the same basis. The delegation agreement can
be amended by all parties to the agreement, but on any amendment that would
reduce the time for any notice to which owners of our shares are entitled or
would have a material adverse effect on the shares, as determined by our board
of directors in its discretion, the approval of the owners of a majority of the
shares, excluding shares owned by El Paso Energy Partners Company and its
affiliates, is required.
TAX INDEMNIFICATION AGREEMENT AND PURCHASE AGREEMENT
We have entered into the tax indemnification agreement and purchase
provisions with El Paso Corporation that are described under "Description of Our
Shares."
ADDITIONAL MATTERS
El Paso Energy Partners Company owns the one outstanding voting share
eligible to elect our directors. For more information regarding voting rights,
please read "Description of Our Shares -- Limited Voting Rights."
162
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
El Paso Corporation owns indirectly all of the outstanding capital stock
and elects all of the directors of El Paso Energy Partners Company, the general
partner of El Paso Energy Partners. El Paso Energy Partners Company owns the
initial outstanding share of our voting stock and elects all of our directors.
El Paso Corporation has a number of interests that differ from those interests
of our shareholders. As a result, there is a risk that important business
decisions will not be made in your best interest.
EL PASO CORPORATION AND ITS SUBSIDIARIES HAVE CONFLICTS OF INTEREST WITH EL
PASO ENERGY PARTNERS AND, ACCORDINGLY, YOU.
El Paso Energy Partners has potential and existing conflicts of interest
with El Paso Corporation and its affiliates in four general areas:
- they often enter into transactions with each other, including some
relating to operating and managing assets, acquiring and selling assets,
and performing services;
- they often share personnel, assets, systems and other resources;
- from time to time, they compete for business and customers; and
- from time to time, they both may have an interest in acquiring the same
asset, business or other business opportunity.
El Paso Energy Partners expects to continue to enter into substantial
transactions and other activities with El Paso Corporation and its subsidiaries
because of the businesses and areas in which it and El Paso Corporation
currently operate, as well as those in which it plans to operate in the future.
Some more recent transactions in which it, on the one hand, and El Paso
Corporation and its subsidiaries, on the other hand, had a conflict of interest
include:
- in July 2002, it agreed to acquire the San Juan assets from El Paso
Corporation for approximately $782 million;
- in April 2002, it acquired the EPN Holding assets from El Paso
Corporation for approximately $750 million of total consideration;
- in October 2001, it acquired interests in the titleholder of, and other
interests in, the Chaco cryogenic natural gas processing plant in New
Mexico from a subsidiary of El Paso Corporation, among others;
- in October 2001, it purchased the remaining 50% equity interest that it
did not already own in Deepwater Holdings, L.L.C. from a subsidiary of El
Paso Corporation;
- in May 2001, it purchased its general partner's 1.01% non-managing
interest owned in twelve of its subsidiaries;
- in February 2001, it purchased fee-based NGL transportation and
fractionation assets located in south Texas from subsidiaries of El Paso
Corporation;
- in January and April 2001, it and Deepwater Holdings sold their
respective interests in several offshore Gulf of Mexico assets as a
result of an FTC order related to El Paso Corporation's merger with The
Coastal Corporation; and
- pursuant to a general and administrative services agreement, subsidiaries
of El Paso Corporation provide it with administrative, operational and
other services.
In addition, El Paso Energy Partners and El Paso Corporation and its
subsidiaries share and, therefore will compete for, the time and effort of El
Paso Corporation personnel who provide
163
services to El Paso Energy Partners, including directors, officers and other
personnel. Officers of the general partner and its subsidiaries do not, and will
not be required to, spend any specified percentage or amount of time on El Paso
Energy Partners' business. Since these shared officers and directors function as
both its representatives and those of El Paso Corporation and its subsidiaries,
conflicts of interest could arise between El Paso Corporation and its
subsidiaries, on the one hand, and El Paso Energy Partners or its unitholders,
on the other. Additionally, some of these shared officers and directors own and
are awarded from time to time financial shares, or options to purchase shares,
of El Paso Corporation; accordingly, their financial interests may not always be
aligned completely with those of El Paso Energy Partners or its limited
partners.
Some other situations in which an actual or potential conflict of interest
arises between El Paso Energy Partners, on the one hand, and El Paso Energy
Partners Company, its general partner, or its affiliates (including El Paso
Corporation), on the other hand, and there is a benefit to its general partner
or its subsidiaries in which none of El Paso Energy Partners, its limited
partners or owners of shares will share include:
- compensation paid to the general partner, which includes incentive
distributions and reimbursements for reasonable general and
administrative expenses;
- payments to the general partner and its subsidiaries for any services
rendered to El Paso Energy Partners or on its behalf;
- the general partner's determination (which has been delegated to us) of
which direct and indirect costs it must reimburse; and
- the general partner's determination (which has been delegated to us) to
establish cash reserves under certain circumstances and thereby decrease
cash available for distributions to unitholders, which would decrease the
value of the shares to be distributed to holders of shares.
Under the delegation agreement, we will manage El Paso Energy Partners'
day-to-day operations and strategic direction. El Paso Corporation elects all of
El Paso Energy Partners Company's directors, and the general partner elects all
of our directors. In addition, El Paso Corporation's beneficial ownership
interest in El Paso Energy Partners' outstanding partnership interests could
have a substantial effect on the outcome of some actions requiring partner
approval. Accordingly, subject to certain minimum legal requirements, El Paso
Corporation makes the final determination regarding how any particular conflict
of interest is resolved.
El Paso Energy Partners cannot assure you that El Paso Corporation and its
subsidiaries will always act in your best interest, even though doing so may
appear to:
- protect and enhance El Paso Corporation's substantial investment in El
Paso Energy Partners;
- generate substantial cash flows to El Paso Corporation; and
- provide El Paso Corporation with efficiently priced capital for its
planned acquisitions.
El Paso Corporation has designated its investment in El Paso Energy
Partners as its primary vehicle for growth and development of its midstream
energy business, and it expects to receive additional transfers of assets from
El Paso Corporation in the future. These future transfers from El Paso
Corporation and other third-party acquisitions will be selected from time to
time, based on El Paso Energy Partners' cost-of-capital advantage, its ability
to integrate these growth assets into El Paso Corporation's significant North
American midstream business and its investment profile, which requires accretive
transactions based on stable cash flows with growth potential. However, El Paso
Corporation is neither contractually nor legally bound to use El Paso Energy
Partners as its primary vehicle for growth and development of midstream energy
assets, and may reconsider at any time, without notice. Further, El Paso
Corporation is not required to pursue any
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business strategy that will favor El Paso Energy Partners' business
opportunities over the business opportunities of El Paso Corporation or any of
its affiliates (or any of its other competitors acquired by El Paso
Corporation). In fact, El Paso Corporation may have financial motives to favor
its competitors. El Paso Corporation and its subsidiaries (many of which are
wholly owned) operate in some of the same lines of business and in some of the
same geographic areas in which El Paso Energy Partners operates.
THE INTERESTS OF EL PASO CORPORATION MAY DIFFER FROM OUR INTERESTS, AND OUR
INTERESTS MAY DIFFER FROM THE INTERESTS OF LIMITED PARTNERS OF EL PASO ENERGY
PARTNERS.
El Paso Corporation indirectly owns all of the stock of El Paso Energy
Partners Company, the general partner of El Paso Energy Partners, and elects all
of its directors. El Paso Energy Partners Company owns all of our voting shares
and elects all of our directors. Furthermore, some of our directors and officers
are also directors and officers of El Paso Corporation and El Paso Energy
Partners Company and have fiduciary duties to manage the businesses of El Paso
Corporation and El Paso Energy Partners in a manner that may not be in your best
interest.
Under the delegation agreement, El Paso Energy Partners Company will
delegate to us substantially all of its management of El Paso Energy Partners.
As a result of this delegation, our board of directors could be held to have
fiduciary duties similar to those of the general partner of El Paso Energy
Partners. However, our limited liability company agreement limits the fiduciary
duties of our board of directors to our shareholders and El Paso Energy
Partners' partnership agreement limits the fiduciary duties of its general
partner to El Paso Energy Partners' unitholders, and those agreements also allow
our board of directors and El Paso Energy Partners' general partner to resolve
conflicts of interest by considering the interests of all the parties to the
conflict. These limitations reduce your rights under our limited liability
company agreement and the rights of El Paso Energy Partners' unitholders under
its partnership agreement to sue our board of directors or El Paso Energy
Partners Company should either of them act in a way that, were it not for these
limitations of liability, would be a breach of fiduciary duties. These limited
duties are very different from the more familiar fiduciary duties of a corporate
board of directors, which must always act in the best interests of the
corporation and its stockholders.
Consequently, conflicts of interest could arise from time to time among
you, El Paso Energy Partners' unitholders and El Paso Corporation. Our board of
directors may consider the interests of all parties to a conflict in making
important business decisions and may not make those decisions in the best
interests of you or El Paso Energy Partners' unitholders. The following
situations, among others, could give rise to conflicts of interest:
- We have the sole discretion to determine whether El Paso Energy Partners
will issue additional units or other equity securities or whether it will
purchase outstanding units, and we may decide not to do so even when such
issuance or purchase would be in the best interests of El Paso Energy
Partners and its unitholders.
- We have the sole discretion to determine whether we issue additional
shares, other than in connection with the subdivision of i-units upon a
cash distribution on the common units, and we may decide not to do so
even when such issuance would be in the best interests of our
shareholders and El Paso Energy Partners.
- We control payments to El Paso Corporation for any services rendered for
El Paso Energy Partners' benefit, subject to the limitations described in
"Conflicts of Interest and Fiduciary Responsibilities."
- We determine which costs are reimbursable by El Paso Energy Partners.
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- We control the enforcement of obligations owed to El Paso Energy Partners
by us and El Paso Energy Partners Company.
- We decide whether to retain separate counsel, accountants or others to
perform services for El Paso Energy Partners.
In these situations, our shareholders, El Paso Energy Partners' unitholders and
El Paso Corporation may have interests that are adverse to one another, and we
may consider all of these interests in deciding to take a particular course of
action.
OUR LIMITED LIABILITY COMPANY AGREEMENT RESTRICTS OR ELIMINATES A NUMBER OF
THE FIDUCIARY DUTIES THAT OTHERWISE WOULD BE OWED BY OUR BOARD OF DIRECTORS TO
YOU.
Modifications of state law standards of fiduciary duties may significantly
limit your ability to successfully challenge the actions of our board of
directors that might otherwise be a breach of their fiduciary duties. Our
limited liability company agreement restricts or eliminates a number of the
fiduciary duties that would otherwise be owed by our board of directors to our
shareholders.
Our limited liability company agreement provides that none of our directors
or officers will be liable to us or any other person for any act or omission
taken or omitted in the reasonable belief that the act or omission is in or is
not contrary to our best interests and is within his or her scope of authority,
so long as the act or omission does not constitute fraud, willful misconduct,
bad faith or gross negligence.
WE MAY INCREASE THE CASH RESERVES AND EXPENDITURES OF EL PASO ENERGY PARTNERS,
WHICH WOULD DECREASE CASH DISTRIBUTIONS ON ITS COMMON UNITS AND THE VALUE OF
DISTRIBUTIONS OF ADDITIONAL SHARES WE MAKE TO YOU.
Under the delegation agreement that we will enter into with El Paso Energy
Partners Company, we will have broad discretion to make cash expenditures and to
establish and make additions to cash reserves for any proper partnership
purpose, including reserves for the purpose of:
- providing for future operating and capital expenditures;
- providing for debt service;
- providing funds for up to the next four quarterly distributions;
- providing funds to redeem or otherwise repurchase its outstanding debt or
equity;
- stabilizing distributions of cash to capital security holders;
- complying with the terms of any agreement or obligation of ours; and
- providing for a discretionary reserve amount.
If we increase cash reserves, the amount of cash that El Paso Energy Partners
can distribute to its common unitholders will decrease, which would decrease the
number and value of the additional shares we distribute to you. The timing and
amount of additions to discretionary reserves could significantly reduce
potential distributions that certain unitholders could receive or ultimately
affect who gets the distribution. The reduction or elimination of a previously
established reserve in a particular quarter will result in a higher level of
cash available for distribution than would otherwise be available in such
quarter. Depending upon the resulting level of cash available for distribution,
El Paso Energy Partners Company, which owns all of our voting shares and elects
all of our directors, may receive incentive distributions which it would not
have otherwise received. Thus, El Paso Energy Partners Company and us could have
a conflict of
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interest with you in determining the amount and timing of any increases or
decreases in reserves. El Paso Energy Partners Company receives the following
compensation:
- distributions in respect of its general and limited partner interests in
El Paso Energy Partners;
- incentive distributions to the extent that available cash exceeds
specified target levels that are over $0.325 per unit per quarter; and
- reimbursements for reasonable general and administrative expenses, and
other reasonable expenses, incurred by it and its subsidiaries for or on
El Paso Energy Partners' behalf.
El Paso Energy Partners' partnership agreement was not, and many of the
other agreements, contracts and arrangements between El Paso Energy Partners, on
the one hand, and its general partner and its subsidiaries, on the other hand,
were not and may not be the result of arm's-length negotiations.
In addition, increases to reserves (other than the discretionary reserve
amount provided for in the partnership agreement) will reduce El Paso Energy
Partners' cash from operations, which under certain limited circumstances could
result in certain distributions to be attributable to interim capital
transactions rather than to cash from operations. If a cash distribution was
attributable to an interim capital transaction, (1) 99% of the distribution
would be made pro rata in respect of the common units and the Series B
preference units, and (2) the distribution would be deemed a return of a portion
of an investor's investment in his partnership interest and would reduce each of
the general partner's target distribution levels proportionately.
EL PASO ENERGY PARTNERS' PARTNERSHIP AGREEMENT PURPORTS TO LIMIT ITS GENERAL
PARTNER'S FIDUCIARY DUTIES AND CERTAIN OTHER OBLIGATIONS RELATING TO IT.
Because we will manage substantially all of the business and affairs of El
Paso Energy Partners under the delegation agreement with El Paso Energy Partners
Company, we could be held to have fiduciary duties similar to those of the
general partner. These state laws standards include the highest duties of good
faith, fairness and loyalty to the shareholders and to the unitholders, as
applicable. The duty of loyalty generally would prohibit our board of directors
or El Paso Energy Partners Company from taking any action or engaging in any
transaction as to which it has a conflict of interest. Although El Paso Energy
Partners' general partner owes certain fiduciary duties to it and will be liable
for all of El Paso Energy Partners' debts, other than non-recourse debts, to the
extent not paid by El Paso Energy Partners, certain provisions of El Paso Energy
Partners' partnership agreement contain exculpatory language purporting to limit
the liability of its general partner to it and its unitholders. For example, the
partnership agreement provides that:
- borrowings of money by El Paso Energy Partners, or the approval of the
borrowings by its general partner, will not constitute a breach of any
duty of its general partner to it or its unitholders whether or not the
purpose or effect of the borrowing is to permit distributions on its
limited partner interests or to result in or increase incentive
distributions to its general partner;
- any action taken by its general partner consistent with the standards of
reasonable discretion set forth in certain definitions in its partnership
agreement will be deemed not to breach any duty of its general partner to
it or to its unitholders; and
- in the absence of bad faith by its general partner, the resolution of
conflicts of interest by its general partner will not constitute a breach
of the partnership agreement or a breach of any standard of care or duty.
Provisions of the partnership agreement also purport to modify the
fiduciary duty standards to which its general partner would otherwise be subject
under Delaware law, under which a
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general partner owes its limited partners the highest duties of good faith,
fairness and loyalty. The duty of loyalty would generally prohibit its general
partner from taking any action or engaging in any transaction as to which it had
a conflict of interest. The partnership agreement permits its general partner to
exercise the discretion and authority granted to it in that agreement in
managing it and in conducting its retained operations, so long as its actions
are not inconsistent with its interests. El Paso Energy Partners' general
partner and its officers and directors may not be liable to it or to its
unitholders for certain actions or omissions which might otherwise be deemed to
be a breach of fiduciary duty under Delaware or other applicable state law.
Further, the partnership agreement requires it to indemnify its general partner
to the fullest extent permitted by law, which indemnification, in light of the
exculpatory provisions in the partnership agreement, could result in it
indemnifying its general partner for negligent acts. Neither El Paso Corporation
nor any of its other subsidiaries, other than its general partner, owes
fiduciary duties to us.
EL PASO CORPORATION MAY EXERCISE ITS PURCHASE RIGHTS AT A TIME OR PRICE THAT
MAY BE UNDESIRABLE TO YOU.
El Paso Corporation or its affiliates may exercise its purchase rights to
acquire your shares at any time in its sole discretion after the conditions for
such exercise have been satisfied. In exercising the rights, El Paso Corporation
and its affiliates do not have to consider whether the exercise is in your best
interest. As a result, El Paso Corporation may purchase your shares at a time or
price that you find undesirable. For more information, please read "Description
of Our Shares -- Optional Purchase Events" and "Description of Our
Shares -- Special Purchase Events."
FIDUCIARY DUTIES OWED TO OUR SHAREHOLDERS AND TO THE OWNERS OF UNITS
The fiduciary duties owed to you by our board of directors are prescribed
by Delaware law and our limited liability company agreement. Similarly, the
fiduciary duties owed to the owners of units of El Paso Energy Partners by the
general partner of El Paso Energy Partners and its board of directors are
prescribed by Delaware law and El Paso Energy Partners' partnership agreement.
Also, as a result of the delegation agreement, our board of directors could be
held to have fiduciary duties similar to the general partner of El Paso Energy
Partners. The Delaware Limited Liability Company Act and the Delaware Revised
Uniform Limited Partnership Act provide that Delaware limited liability
companies and Delaware limited partnerships, respectively, may, in their limited
liability company agreements and partnership agreements, as applicable, restrict
the fiduciary duties owed by their boards of directors to their shareholders and
by their general partner to their limited partners.
Our limited liability company agreement and the El Paso Energy Partners
partnership agreement contain various provisions restricting the fiduciary
duties that might otherwise be owed. We have modified the fiduciary duties that
might otherwise be owed to the shareholders and unitholders in order to
accommodate the complex organizational structure and the interrelationships
among us and El Paso Energy Partners Company, El Paso Energy Partners, El Paso
Corporation and all of their respective affiliates. Additionally, without these
modifications, the ability of our board of directors and the general partner of
El Paso Energy Partners to make decisions involving conflicts of interest would
be restricted. The modifications also enable us to attract and retain
experienced and capable directors and officers. These modifications could be
detrimental to our shareholders and the limited partners of El Paso Energy
Partners because they restrict the remedies available to our shareholders and
the limited partners of El Paso Energy Partners for actions that, without those
limitations, might constitute breaches of fiduciary duty, as described below.
The following is a summary of the material restrictions of the fiduciary
duties owed by our board of directors to our shareholders and by our board of
directors and the general partner of
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El Paso Energy Partners to the limited partners of El Paso Energy Partners. Any
fiduciary duties owed to our shareholders by El Paso Corporation and its
affiliates, as the beneficial owner of all our voting shares, are similarly
restricted or eliminated. These limited fiduciary duties are very different from
the more familiar duties of a corporate board of directors, which must always
act in the best interests of the corporation and its stockholders.
State-law fiduciary duty
standards..................... Fiduciary duties generally are considered to
include an obligation to act with due care and
loyalty. The duty of care, unless the limited
liability company agreement or partnership
agreement provides otherwise, generally would
require a manager, director or general partner
to act for the limited liability company or
limited partnership, as applicable, in the same
manner as a prudent person would act on his or
her own behalf. The duty of loyalty, in the
absence of a provision in a limited liability
company agreement or partnership agreement
providing otherwise, would generally prohibit a
manager of a Delaware limited liability company
or a general partner of a Delaware limited
partnership from taking any action or engaging
in any transaction where a conflict of interest
is present.
Our limited liability company
agreement modifies these
standards..................... Our limited liability company agreement
contains provisions that prohibit shareholders
from advancing claims arising from conduct by
our board of directors that might otherwise
raise issues as to compliance with fiduciary
duties or applicable law. For example, our
limited liability company agreement permits our
board of directors to make a number of
decisions in its "sole discretion." This
entitles our board of directors to consider
only the interests and factors that it desires,
and it has no duty or obligation to give any
consideration to any interest of, or factors
affecting, us, our affiliates or any
shareholder.
El Paso Corporation, its affiliates, and their
officers and directors who are also our
officers or directors are not required to offer
to us any business opportunity.
In addition to the other more specific
provisions limiting the obligations of our
board of directors, our limited liability
company agreement further provides that our
board of directors will not be liable for
monetary damages to us or our shareholders for
any acts or omissions if our board of directors
acted in good faith. Please read "Limited
Liability Company Agreement -- Exculpation and
Indemnification."
El Paso Energy Partners
partnership agreement modifies
these standards............... The general partner of El Paso Energy Partners,
pursuant to the partnership agreement of El
Paso Energy Partners, and our board of
directors, by virtue of the delegation
agreement, are permitted to avoid personal
liability in connection with the management of
El Paso Energy
169
Partners. The partnership agreement provides
that the general partner does not breach its
fiduciary duty even if the partnership could
have obtained more favorable terms without
limitations on the general partner's liability.
The partnership agreement of El Paso Energy
Partners contains provisions that allow the
general partner and by virtue of the delegation
agreement, our board of directors, to take into
account the interests of parties in addition to
El Paso Energy Partners in resolving conflicts
of interest, thereby limiting its fiduciary
duties to the limited partners. Also, the
partnership agreement contains provisions that
may restrict the remedies available to limited
partners for actions taken that might, without
such limitations, constitute breaches of
fiduciary duties. Because some of our directors
and officers are also directors and officers of
El Paso Corporation and the general partner of
El Paso Energy Partners, the duties of the
directors and officers of El Paso Corporation
to the shareholders of El Paso Corporation may,
therefore, come into conflict with the duties
of the general partner and our board of
directors, to the limited partners, and the
duties of our board of directors to our
shareholders.
Rights and remedies of
shareholders.................. The Delaware Limited Liability Company Act
generally provides that a shareholder of a
limited liability company may bring an action
in the right of a limited liability company to
recover a judgment in its favor if the board of
directors has refused to bring the action or if
an effort to cause the board of directors to
bring the action is not likely to succeed.
These actions could include actions against the
board of directors or particular directors for
breach of fiduciary duties or of the limited
liability company agreement. In addition, the
statutory or case law of some jurisdictions may
permit a shareholder to institute legal action
on behalf of himself or herself and all other
similarly situated shareholders to recover
damages from our board of directors or officers
for violations of fiduciary duties or our
limited liability company agreement.
By becoming one of our shareholders, a shareholder agrees to be bound by
the provisions in the limited liability company agreement, including the
provisions discussed above. This is in accordance with the policy of the
Delaware Limited Liability Company Act favoring the principle of freedom of
contract and the enforceability of limited liability company agreements. It is
not necessary for a shareholder to sign the limited liability company agreement
in order for the limited liability company agreement to be enforceable against
that shareholder.
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SHARES ELIGIBLE FOR FUTURE SALE
Prior to this offering there has been no public market for or holders of
our shares, and no predictions can be made regarding the effect, if any, that
market sales of shares or the availability of shares for sale will have on the
market price prevailing from time to time.
The shares sold in the offering generally will be freely transferable
without restriction or further registration under the Securities Act of 1933,
except that any shares owned by an "affiliate" of our company, including El Paso
Corporation and El Paso Energy Partners Company, may not be resold publicly
other than in compliance with the registration requirements of the Securities
Act of 1933 or under an exemption under Rule 144 of the Securities Act of 1933
or otherwise. Rule 144 permits securities acquired by an affiliate of the issuer
to be sold into the market in an amount that does not exceed, during any
three-month period, the greater of:
- 1% of the total number of the securities outstanding; or
- the average weekly reported trading volume of the securities for the four
calendar weeks prior to the sale.
Sales under Rule 144 also are subject to specific manner of sale
provisions, notice requirements and the availability of current public
information about us.
El Paso Energy Partners Company and its affiliates have agreed not to sell
any shares they beneficially own for a period of 180 days from the date of this
prospectus. Please read "Underwriting" for a description of these lock-up
provisions.
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MATERIAL TAX CONSEQUENCES
This section is a summary of the material United States federal income tax
considerations that may be relevant to prospective owners of shares and, unless
otherwise noted in the following discussion, is the opinion of our counsel,
Akin, Gump, Strauss, Hauer & Feld, L.L.P., in so far as it relates to matters of
the United States federal income tax law and legal conclusions with respect to
those matters. All statements as to matters of law and legal conclusions, but
not as to factual matters, contained in this section, unless otherwise noted,
constitute the opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. and are
based on the accuracy of the representations made by us and El Paso Energy
Partners Company. This section is based upon current provisions of the Internal
Revenue Code of 1986, as amended, existing and proposed regulations thereunder
and current administrative rulings and court decisions.
The following discussion does not address all federal income tax matters
affecting us, El Paso Energy Partners or the owners of shares, nor does it
address all state, local or foreign tax matters. Moreover, the discussion does
not address the federal income tax consequences that may be relevant to certain
types of investors subject to special treatment under the federal income tax
laws, such as financial institutions, insurance companies, estates, trusts,
dealers and persons entering into hedging transactions. Accordingly, we urge
prospective holders of shares to consult, and depend on, their own tax advisors
in analyzing the tax consequences, including the applicability and effect of any
federal, state, local or foreign tax laws, particular to their ownership or
disposition of shares.
LEGAL OPINIONS
Akin, Gump, Strauss, Hauer & Feld, L.L.P. is of the opinion that, based on
the accuracy of the representations made by us and El Paso Energy Partners
Company and subject to the qualifications set forth in the detailed discussion
that follows, for federal income tax purposes, (1) El Paso Energy Partners and
its subsidiaries will each be treated as a partnership or as a disregarded
entity, (2) owners of units will be treated as partners of El Paso Energy
Partners, and (3) except upon a liquidation of El Paso Energy Partners, our
election to be allocated income after all of our shares are purchased by El Paso
Corporation, or upon a disposition of the i-units, we will not have income for
federal income tax purposes as a result of our ownership of the i-units. In
addition, all statements as to matters of law and legal conclusions contained in
this section, unless otherwise noted, are the opinion of Akin, Gump, Strauss,
Hauer & Feld, L.L.P.
No ruling has been requested from the IRS regarding any matter affecting us
or prospective owners of shares or units. The opinion of Akin, Gump, Strauss,
Hauer & Feld, L.L.P. represents only its best legal judgment and does not bind
the IRS or the courts. Accordingly, the opinions and statements made here may
not be sustained by a court if contested by the IRS. Any contest of this sort
with the IRS may materially and adversely impact the market for shares and the
price at which they trade. The cost of any contest with the IRS will be borne
directly or indirectly by us and indirectly by the owners of shares.
Furthermore, the tax considerations discussed herein may be significantly
modified by future legislative or administrative changes or court decisions. Any
modification may or may not be retroactively applied.
FEDERAL INCOME TAX CONSIDERATIONS ASSOCIATED WITH THE OWNERSHIP AND DISPOSITION
OF SHARES
OUR STATUS AS A CORPORATION FOR FEDERAL INCOME TAX PURPOSES
We will elect, effective upon the closing of this offering, to be treated
as a corporation for federal income tax purposes. Thus, we are subject to
federal income tax on our taxable income at tax rates up to 35%. Additionally,
in certain instances we could be subject to the alternative minimum tax of 20%
on our alternative minimum taxable income to the extent that the alternative
minimum tax exceeds our regular tax.
172
The i-units owned by us will not be entitled to allocations of income,
gain, loss or deduction of El Paso Energy Partners until such time as it is
liquidated. See "Our Ownership of i-units" below. Thus, we do not anticipate
that we will have material amounts of either taxable income or alternative
minimum taxable income resulting from our ownership of the i-units unless we
dispose of the i-units in a taxable transaction or El Paso Energy Partners is
liquidated. See "Material Tax Consequences -- Federal Income Tax Considerations
Associated with the Ownership and Disposition of Shares -- Our Ownership of
i-units."
TAX CONSEQUENCES OF SHARE OWNERSHIP
No Flow-Through of Our Taxable Income. Because we are treated as a
corporation for federal income tax purposes, an owner of shares will not report
on its federal income tax return any of our items of income, gain, loss and
deduction.
Distributions of Additional Shares. Under the terms of our limited
liability company agreement, except in connection with our liquidation, we will
not make distributions of cash in respect of shares but rather will make
distributions of additional shares. Because these distributions of additional
shares will be made proportionately to all owners of shares, the receipt of
these additional shares will not be includable in the gross income of an owner
of our shares for federal income tax purposes. As each owner of our shares
receives distributions of additional shares, it will be required to allocate its
basis in the shares in the manner described below. See "Material Tax
Consequences -- Tax Consequences of Share Ownership -- Basis of Shares."
Basis of Shares. A holder's initial tax basis for its shares will be the
amount paid for them. As additional shares are received by an owner of shares,
that owner will be required to allocate its tax basis in its shares equally
between the old shares and the new shares received. If the old shares were
acquired for different prices, and the owner can identify each separate lot,
then the basis of each old lot of shares can be used separately in the
allocation. If an owner of shares cannot identify each lot, then it must use the
first-in first-out tracing approach.
Disposition of Shares for Cash. Gain or loss will be recognized on a sale
or other disposition of shares, whether to a third party or to El Paso
Corporation pursuant to the El Paso Corporation purchase provisions or in
connection with the liquidation of us, equal to the difference between the
amount realized and the owner's tax basis for the shares sold or otherwise
disposed of. An owner's amount realized will be measured by the sum of the cash
and the fair market value of other property received by it.
Except as noted below, gain or loss recognized by an owner of shares, other
than a "dealer" in shares, on the sale of a share will generally be taxable as
capital gain or loss. Capital gain recognized by an individual on the sale of
shares held more than 12 months will generally be taxed at a maximum rate of
20%, subject to the discussion below relating to straddles. Capital gain
recognized by a corporation on the sale of shares will generally be taxed at a
maximum rate of 35%. Net capital loss may offset capital gains and no more than
$3,000 of ordinary income, in the case of individuals, and may only be used to
offset capital gain in the case of corporations.
Capital gain treatment may not result from a disposition of shares if our
shareholders as a group own 50% or more of the stock of El Paso Corporation. In
this case, if either we or El Paso Corporation has earnings and profits, then
the amount received by a seller of shares may be taxed as ordinary income to the
extent of its portion of those earnings and profits, but only if the seller
sells less than all of its shares or is a shareholder of El Paso Corporation
after applying the ownership attribution rules.
For purposes of determining whether capital gains or losses on the
disposition of shares are long or short term, subject to the discussion below
relating to straddles, an owner's holding period begins on its acquisition of
shares pursuant to this offering. As additional shares are
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received by an owner of shares, the holding period of each new share received
will also include the period for which the owner held the old shares to which
the new share relates.
Because the purchase rights in respect of the shares arise as a result of
agreements other than solely with us, these rights do not appear to constitute
inherent features of the shares for tax purposes, See "Description of the
Shares -- Optional Purchase Events, -- Special Purchase Events." As such, it is
possible that the IRS would assert that shares and the related purchase rights
constitute a straddle for federal income tax purposes to the extent that such
rights are viewed as resulting in a substantial diminution of a share
purchaser's risk of loss from owning its shares. In that case, any owner who
incurs interest or other carrying charges that are allocable to the shares (as
would be the case if the owner finances its acquisition of shares with debt)
would have to capitalize such interest or carrying charges to the basis of the
related shares and purchase rights rather than deducting them currently. In
addition, the holding period of the shares would be suspended, resulting in
short-term capital gain or loss (generally taxed at ordinary income rates) upon
a taxable disposition even if the shares were held for more than 12 months.
However, we believe that the purchase rights have minimal value and do not
result in a substantial diminution of a share purchaser's risk of loss from
owning shares. Based on that, the shares and the related purchase rights should
not constitute a straddle for federal income tax purposes and therefore should
not result in any suspension of an owner's holding period or interest and
carrying charge capitalization, although there can be no assurance that the IRS
or the courts would agree with this conclusion.
Investment in Shares by Tax-Exempt Investors, Regulated Investment
Companies and Non-U.S. Persons. Employee benefit plans and most other
organizations exempt from federal income tax, including individual retirement
accounts, known as IRAs, and other retirement plans, are subject to federal
income tax on unrelated business taxable income. Because we will be treated as a
corporation for federal income tax purposes, an owner of shares will not report
on its federal income tax return any of our items of income, gain, loss and
deduction. Therefore, a tax-exempt investor will not have unrelated business
taxable income attributable to its ownership or sale of shares unless its
ownership of the shares is debt financed. In general, a share would be debt
financed if the tax-exempt owner of shares incurs debt to acquire a share or
otherwise incurs or maintains a debt that would not have been incurred or
maintained if that share had not been acquired.
A regulated investment company, known as a mutual fund, is required to
derive 90% or more of its gross income from qualifying income. As stated above,
an owner of shares will not report on its federal income tax return any of our
items of income, gain, loss and deduction. Thus, ownership of shares will not
result in income which is not qualifying income to a mutual fund. Furthermore,
any gain from the sale or other disposition of the shares, and the associated
purchase rights, will qualify for purposes of that 90% test. Finally, shares,
and the associated purchase rights, will constitute qualifying assets to mutual
funds which also must own at least 50% qualifying assets at the end of each
quarter.
Because distributions of additional shares will be made proportionately to
all owners of shares, the receipt of these additional shares will not be
includable in the gross income of an owner of shares for United States federal
income tax purposes. Therefore, no withholding taxes will be imposed on
distributions of additional shares to non-resident aliens and foreign
corporations, trust or estates. A non-United States owner of shares generally
will not be subject to United States federal income tax or subject to
withholding on any gain recognized on the sale or other disposition of shares
unless:
- the gain is considered effectively connected with the conduct of a trade
or business by the non-United States owner within the United States and,
where a tax treaty applies, is attributable to a United States permanent
establishment of that owner (and, in which case,
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if the owner is a foreign corporation, it may be subject to an additional branch
profits tax equal to 30% or a lower rate as may be specified by an applicable
income tax treaty);
- the non-United States owner is an individual who holds the shares as a
capital asset and is present in the United States for 183 or more days in
the taxable year of the sale or other disposition and other conditions
are met; or
- we are or have been a "United States real property holding corporation,"
or a USRPHC, for United States federal income tax purposes.
We believe that we will be a USRPHC for United States federal income tax
purposes. Therefore, any gain on the sale or other disposition of shares by a
non-United States owner will be subject to United States federal income tax
unless the shares are regularly traded on established securities market and the
non-United States owner has not actually or constructively held more than 5% of
the shares at any time during the shorter of the five-year period preceding the
disposition or that owner's holding period. We expect our shares to be traded on
such an established securities market.
Merger of El Paso Energy Partners and El Paso Energy Management. As
discussed under "Limited Liability Company Agreement -- Merger," if El Paso
Energy Partners were to be treated as a corporation for federal income tax
purposes, the owner of our voting shares could cause us to merge into El Paso
Energy Partners or one of its subsidiaries provided that the merger is currently
non-taxable to our shareholders based upon an opinion of counsel or a ruling
from the IRS. In such event, you would receive common units or other securities
substantially similar to the common units in exchange for your shares in a
transaction in which neither gain nor loss is recognized.
Our Ownership of i-Units. A partner in a partnership is generally required
to report on its federal income tax return its share of the partnership's
income, gain, loss and deduction. However, the terms of the i-units provide that
no allocations of income, gain, loss or deduction will be made in respect of the
i-units until such time as there is a liquidation of El Paso Energy Partners. If
there is a liquidation of El Paso Energy Partners, it is intended that we will
receive allocations of income and gain, or deduction and loss, in an amount
necessary for the capital account attributable to each i-unit to be equal to
that of a common unit. As a result, we would likely realize taxable income or
loss upon the liquidation of El Paso Energy Partners. However, no assurance can
be given that there will be sufficient amounts of income and gain, or deduction
or loss, to cause the capital account attributable to each i-unit to be equal to
that of a common unit. If they are not equal, we may receive less value than
would be received by a holder of common units upon such a liquidation. We would
also likely realize taxable income or loss upon any sale or other disposition of
our i-units.
In rendering its opinion, Akin, Gump, Strauss, Hauer & Feld, L.L.P. has
relied on factual representations made by us, El Paso Energy Partners and its
general partner. The representations made by us, El Paso Energy Partners and its
general partner upon which Akin, Gump, Strauss, Hauer & Feld, L.L.P. has relied
are:
- neither El Paso Energy Partners nor its subsidiaries have elected or will
elect to be treated as a corporation;
- prior to January 1, 1997, (i) El Paso Energy Partners and each of its
subsidiaries were operated in accordance with applicable state
partnership statutes, their respective partnership agreements and the
statements and representations made in this prospectus, and (ii) in the
aggregate as a general and limited partner at least a 20% interest in the
capital and 19% of our outstanding units and was acting for its own
account and not as a mere agent of the limited partners, or (iii) assets
(excluding any interest in, or notes or receivables due from, us or our
operating subsidiaries), the fair market value of which exceed their
liabilities by the amount of at least 5% of the fair market value of all
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partnership interests outstanding immediately after the initial public
offering of preference units, plus 5% of any additional net capital
contributions to us made after the initial public offering;
- for each taxable year, more than 90% of El Paso Energy Partners' gross
income has been and will be income from sources that Akin, Gump, Strauss,
Hauer & Feld, L.L.P. has opined or will opine is "qualifying income"
within the meaning of Section 7704(d) of the Internal Revenue Code;
- prior to January 1, 1992, except as otherwise required by Section 704 of
the Code, our general partner had an interest in each material item of
our operating subsidiaries' income, gain, loss, deduction and credit
equal to at least 1% at all times during our existence and the existence
of our operating companies;
- prior to January 1, 1992, our general partner acted independently of our
limited partners; and
- each hedging transaction treated as resulting in "qualifying income" by
El Paso Energy Partners will be accurately identified as a hedging
transaction pursuant to applicable Treasury regulations, and will be
associated with oil, gas or products thereof that are held or to be held
by El Paso Energy Partners in activities that Akin, Gump, Strauss, Hauer
& Feld, L.L.P. has opined or will opine result in qualifying income.
Section 7704 of the Internal Revenue Service Code provides that
publicly-traded partnerships will, as a general rule, be taxed as corporations.
However, an exception, referred to as the "Qualifying Income Exception," exists
with respect to publicly-traded partnerships of which 90% or more of the gross
income for every taxable year consists of "qualifying income." Qualifying income
includes income and gains derived from the marketing, transportation, storage
and processing of crude oil, natural gas and products thereof. Other types of
qualifying income include interest other than from a financial business,
dividends, gains from the sale of real property and gains from the sale or other
disposition of assets held for the production of income that otherwise
constitutes qualifying income. El Paso Energy Partners estimates that less than
5% of its current gross income is not qualifying income; however, this estimate
could change from time to time. Based upon and subject to this estimate, the
factual representations made by us, El Paso Energy Partners and its general
partner and a review of the applicable legal authorities, Akin, Gump, Strauss,
Hauer & Feld, L.L.P. is of the opinion that at least 90% of El Paso Energy
Partners' current gross income constitutes qualifying income.
If El Paso Energy Partners fails to meet the Qualifying Income Exception,
other than a failure which is determined by the IRS to be inadvertent and which
is cured within a reasonable time after discovery, El Paso Energy Partners will
be treated as if it had transferred all of its assets, subject to liabilities,
to a newly formed corporation, on the first day of the year in which it fails to
meet the Qualifying Income Exception, in return for stock in that corporation
and then distributed that stock to the unitholders in liquidation of their
interests in El Paso Energy Partners. This contribution and liquidation should
be tax-free to unitholders and El Paso Energy Partners so long as El Paso Energy
Partners, at that time, does not have liabilities in excess of the tax basis of
its assets. Thereafter, El Paso Energy Partners would be treated as a
corporation for U.S. federal income tax purposes.
If El Paso Energy Partners were treated as a corporation in any taxable
year, either as a result of a failure to meet the Qualifying Income Exception or
otherwise, its items of income, gain, loss and deduction would be reflected only
on its tax return rather than being passed through to its unitholders, and its
net income would be taxed to it at corporate rates. Our ownership of additional
i-units after each quarterly distribution of cash to common unitholders
generally would be taxed as a corporate distribution to us, with that
distribution treated as either taxable dividend income, to the extent of El Paso
Energy Partners' current or accumulated
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earning and profits, or, in the absence of earnings and profits, a nontaxable
return of capital, to the extent of our tax basis in our i-units, or taxable
capital gain, after our tax basis in our i-units is reduced to zero. Because a
tax would be imposed upon El Paso Energy Partners as a corporation, the cash
available for distribution to a common unitholder would be substantially
reduced, which would reduce the value of additional i-units we own after a
distribution of cash is made to other unitholders and the value of our share
distributed quarterly to you. Accordingly, El Paso Energy Partners' treatment as
a corporation would result in a substantial reduction of the value of our
shares.
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ERISA CONSIDERATIONS
The following is a summary of material considerations arising under the
Employee Retirement Income Security Act of 1974, as amended, commonly known as
"ERISA," and the prohibited transaction provisions of section 4975 of the
Internal Revenue Code that may be relevant to a prospective purchaser of shares.
The discussion does not purport to deal with all aspects of ERISA or section
4975 of the Internal Revenue Code that may be relevant to particular
shareholders in light of their particular circumstances.
The discussion is based on current provisions of ERISA and the Internal
Revenue Code, existing and currently proposed regulations under ERISA and the
Internal Revenue Code, the legislative history of ERISA and the Internal Revenue
Code, existing administrative rulings of the Department of Labor, or the DOL,
and reported judicial decisions. No assurance can be given that legislative,
judicial, or administrative changes will not affect the accuracy of any
statements herein with respect to transactions entered into or contemplated
prior to the effective date of such changes.
A FIDUCIARY MAKING A DECISION TO INVEST IN THE SHARES ON BEHALF OF A
PROSPECTIVE PURCHASER THAT IS AN EMPLOYEE BENEFIT PLAN, A TAX-QUALIFIED
RETIREMENT PLAN, OR AN IRA IS ADVISED TO CONSULT ITS OWN LEGAL ADVISOR REGARDING
THE SPECIFIC CONSIDERATIONS ARISING UNDER ERISA, SECTION 4975 OF THE INTERNAL
REVENUE CODE, AND STATE LAW WITH RESPECT TO THE PURCHASE, OWNERSHIP, SALE OR
EXCHANGE OF THE SHARES BY SUCH PLAN OR IRA.
Each fiduciary of a pension, profit-sharing, or other employee benefit
plan, known as an "ERISA Plan," subject to Title I of ERISA should consider
carefully whether an investment in the shares is consistent with his fiduciary
responsibilities under ERISA. In particular, the fiduciary requirements of Part
4 of Title I of ERISA require an ERISA Plan's investments to be (1) prudent and
in the best interests of the ERISA Plan, its participants, and its
beneficiaries, (2) diversified in order to minimize the risk of large losses,
unless it is clearly prudent not to do so, and (3) authorized under the terms of
the ERISA Plan's governing documents, provided the documents are consistent with
ERISA. In determining whether an investment in the shares is prudent for
purposes of ERISA, the appropriate fiduciary of an ERISA Plan should consider
all of the facts and circumstances, including whether the investment is
reasonably designed, as a part of the ERISA Plan's portfolio for which the
fiduciary has investment responsibility, to meet the objectives of the ERISA
Plan, taking into consideration the risk of loss and opportunity for gain or
other return from the investment, the diversification, cash flow, and funding
requirements of the ERISA Plan's portfolio.
The fiduciary of an individual retirement account, commonly called an
"IRA," or of a qualified retirement plan not subject to Title I of ERISA because
it is a governmental or church plan or because it does not cover common law
employees, which we refer to as a "Non-ERISA Plan," should consider that such an
IRA or Non-ERISA Plan may only make investments that are authorized by the
appropriate governing documents and under applicable state law.
Fiduciaries of ERISA Plans and persons making the investment decision for
an IRA or other Non-ERISA Plan should consider the application of the prohibited
transaction provisions of ERISA and the Internal Revenue Code in making their
investment decision. A "party in interest" or "disqualified person" with respect
to an ERISA Plan or with respect to a Non-ERISA Plan or IRA subject to Internal
Revenue Code section 4975 is subject to (1) an initial 15% excise tax on the
amount involved in any prohibited transaction involving the assets of the plan
or IRA and (2) an excise tax equal to 100% of the amount involved if any
prohibited transaction is not corrected. If the disqualified person who engages
in the transaction is the individual on behalf of whom an IRA is maintained or
his or her beneficiary, the IRA will lose its tax-exempt status and its assets
will be deemed to have been distributed to such individual in a taxable
distribution, and no excise tax will be imposed on account of the prohibited
transaction. In addition, a fiduciary who permits an ERISA Plan to engage in a
transaction that the fiduciary knows or should know
178
is a prohibited transaction may be liable to the ERISA Plan for any loss the
ERISA Plan incurs as a result of the transaction or for any profits earned by
the fiduciary in the transaction.
The following section discusses certain principles that apply in
determining whether the fiduciary requirements of ERISA and the prohibited
transaction provisions of ERISA and the Internal Revenue Code apply to an entity
because one or more investors in the equity interests in the entity is an ERISA
Plan or is a Non-ERISA Plan or IRA subject to section 4975 of the Internal
Revenue Code. An ERISA Plan fiduciary also should consider the relevance of
those principles to ERISA's prohibition on improper delegation of control over
or responsibility for "plan assets" and ERISA's imposition of co-fiduciary
liability who participates in, permits (by action or inaction) the occurrence
of, or fails to remedy a known breach by another fiduciary.
Regulations of the DOL defining "plan assets," which we refer to as the
"Plan Asset Regulations," generally provide that when an ERISA Plan or Non-ERISA
Plan or IRA acquires a security that is an equity interest in an entity and the
security is neither a "publicly-offered security" nor a security issued by an
investment company registered under the Investment Company Act of 1940, the
ERISA or Non-ERISA Plan's or IRA's assets include both the equity interest and
an undivided interest in each of the underlying assets of the issuer of such
equity interest, unless one or more exceptions specified in the Plan Asset
Regulations are satisfied.
The Plan Asset Regulations define a publicly-offered security as a security
that is "widely-held," "freely transferable," and either part of a class of
securities registered under the Exchange Act, or sold pursuant to an effective
registration statement under the Securities Act, provided the securities are
registered under the Exchange Act within 120 days after the end of the fiscal
year of the issuer during which the offering occurred. The Plan Asset
Regulations provide that a security is "widely held" only if it is part of a
class of securities that is owned by 100 or more investors independent of the
issuer and of one another. A security will not fail to be widely held because
the number of independent investors falls below 100 subsequent to the initial
public offering as a result of events beyond the issuer's control. The Plan
Asset Regulations provide that whether a security is "freely transferable" is a
factual question to be determined on the basis of all relevant facts and
circumstances.
It is anticipated that the shares will meet the criteria of publicly
offered securities under the Plan Asset Regulations. The Underwriters expect,
although no assurance can be given, that the shares will be held beneficially by
more than 100 independent persons by the conclusion of the offering; there are
no restrictions imposed on the transfer of shares; and the shares will be sold
as part of an offering pursuant to an effective registration statement under the
Securities Act of 1933, and thus will be timely registered under the Securities
Exchange Act of 1934.
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UNDERWRITING
We and the underwriters named below have entered into an underwriting
agreement with respect to the shares being offered. Subject to certain
conditions, each underwriter has severally agreed to purchase the number of
shares indicated in the following table. Goldman, Sachs & Co. is a
representative of the underwriters.
<Table>
<Caption>
Underwriters Number of Shares
------------ ----------------
Goldman, Sachs & Co.........................................
-----------
Total..................................................... 20,000,000
===========
</Table>
As part of this offering, the underwriters will sell 5,300,000 shares to El
Paso Corporation. The underwriters are not entitled to any discount or
commission on these shares.
The underwriters are committed to take and pay for all of the shares being
offered, if any are taken, other than the shares covered by the option described
below unless and until this option is exercised.
If the underwriters sell more shares than the total number set forth in the
table above, the underwriters have an option to buy up to an additional
2,205,000 shares from us to cover such sales. They may exercise that option for
30 days. If any shares are purchased pursuant to this option, the underwriters
will severally purchase shares in approximately the same proportion as set forth
in the table above.
The following table shows the per share and total underwriting discounts
and commissions to be paid by us to the underwriters. Such amounts are shown
assuming both no exercise and full exercise of the underwriters' option to
purchase 2,205,000 additional shares.
<Table>
<Caption>
Paid by El Paso Energy Management No Exercise Full Exercise
--------------------------------- ----------- -------------
Per Share.............................................. $ $
Total.................................................. $ $
</Table>
Shares sold by the underwriters to the public will initially be offered at
the initial public offering price set forth on the cover of this prospectus. Any
shares sold by the underwriters to securities dealers may be sold at a discount
of up to $ per share from the initial public offering price. Any such
securities dealers may resell any shares purchased from the underwriters to
certain other brokers or dealers at a discount of up to $ per share from the
initial public offering price. If all the shares are not sold at the initial
public offering price, the representatives may change the offering price and the
other selling terms.
We, El Paso Energy Partners, El Paso Energy Partners Company and some of
its affiliates, our and their directors and executive officers have agreed with
the underwriters not to dispose of or hedge any securities of El Paso Energy
Partners or El Paso Energy Management that are substantially similar to the
shares, i-units or common units, including, but not limited to, any securities
that are convertible or exchangeable for shares, i-units or common units or any
substantially similar securities, other than transfers to affiliates that remain
affiliates, without the prior written consent of Goldman, Sachs & Co. in its
sole discretion. Goldman, Sachs & Co. has no set criteria for the waiver of
these restrictions and currently has no intention to waive these restrictions.
With respect to shares and i-units and securities of such issuers that are
substantially similar to the shares and i-units as described above, but
specifically excluding common units, the lock-up period will be from the date of
this prospectus and continuing through the date 180 days after the date of this
prospectus. With respect to the common units and securities of such issuers that
are substantially similar to the common units as described above, the lock-up
period will be from the date of this prospectus and continuing through the date
of 60 days after the date of this prospectus. This agreement does not apply to
(1) the sale of
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i-units by El Paso Energy Partners to us and subsequent quarterly splits of
i-units and distribution of shares as contemplated by the prospectus, (2) the
disposal of these securities in connection with the acquisition of assets (other
than cash), businesses or the capital stock or other ownership interests of
businesses by any of El Paso Corporation, El Paso Energy Partners, or any
operating subsidiary of El Paso Energy Partners owning common units or Series B
preference units on the date of this prospectus if the recipient of such
securities agrees not to dispose of the securities received in connection with
such acquisitions during the lock-up period, (3) the disposal of these
securities pursuant to an employee stock or unit option plan existing on, or
upon the conversion or exchange of convertible or exchangeable securities
outstanding as of, the date of this prospectus, and (4) the redemption of Series
B preference units. Please read "Shares Eligible for Future Sale" for a
discussion of certain transfer restrictions.
Prior to the offering, there has been no public market for the shares. The
initial public offering price will be negotiated between us and the
representatives of the underwriters. We expect our shares to be offered at a
price within approximately 5% of the closing price of El Paso Energy Partners'
common units, which trade on the New York Stock Exchange under the symbol "EPN,"
prior to the determination of the offering price. Among the factors to be
considered in determining the initial public offering price of the shares, in
addition to prevailing market conditions and the recent market price of the
common units, will be El Paso Energy Partners' historical performance, estimates
of our business potential and earnings prospects and that of El Paso Energy
Partners, an assessment of our management and the consideration of the above
factors in relation to market valuation of companies in related businesses.
We intend to apply to list our shares on the New York Stock Exchange under
the symbol " ." In order to meet one of the requirements for listing the
shares on the New York Stock Exchange, the underwriters have undertaken to sell
lots of 100 or more shares to a minimum of 2,000 beneficial holders.
In connection with the offering, the underwriters may purchase and sell
shares and common units in the open market. These transactions may include short
sales, stabilizing transactions and purchases to cover positions created by
short sales. Short sales involve the sale by the underwriters of a greater
number of shares than they are required to purchase in the offering. "Covered"
short sales are sales made in an amount not greater than the underwriters'
option to purchase additional shares from us in the offering. The underwriters
may close out any covered short position by either exercising their option to
purchase additional shares or purchasing shares in the open market. In
determining the source of shares to close out the covered short position, the
underwriters will consider, among other things, the price of shares available
for purchase in the open market as compared to the price at which they may
purchase shares through their option to purchase additional shares from us.
"Naked" short sales are any sales in excess of such option. The underwriters
must close out any naked short position by purchasing shares in the open market.
A naked short position is more likely to be created if the underwriters are
concerned that there may be downward pressure on the price of the shares in the
open market after pricing that could adversely affect investors who purchase in
the offering. Stabilizing transactions consist of various bids for or purchases
of shares or common units made by the underwriters in the open market prior to
the completion of the offering.
The underwriters may also impose a penalty bid. This occurs when a
particular underwriter repays to the underwriters a portion of the underwriting
discount received by it because the representative has repurchased shares sold
by or for the account of such underwriter in stabilizing or short covering
transactions.
Purchases to cover a short position and stabilizing transactions may have
the effect of preventing or retarding a decline in the market price of the
shares or the common units, and together with the imposition of the penalty bid,
may stabilize, maintain or otherwise affect the market price of the shares or
the common units. As a result, the price of the shares or the
181
common units may be higher than the price that otherwise might exist in the open
market. If these activities are commenced, they may be discontinued at any time.
These transactions may be effected on the New York Stock Exchange, in the
over-the-counter market or otherwise.
Each underwriter has represented, warranted and agreed that: (i) it has not
offered or sold and, prior to the expiry of a period of six months from the
Closing Date, will not offer or sell any shares to persons in the United Kingdom
except to persons whose ordinary activities involve them in acquiring, holding,
managing or disposing of investments (as principal or agent) for the purposes of
their businesses or otherwise in circumstances which have not resulted and will
not result in an offer to the public in the United Kingdom within the meaning of
the Public Offers of Securities Regulations 1995; (ii) it has only communicated
or caused to be communicated and will only communicate or cause to be
communicated any invitation or inducement to engage in investment activity
(within the meaning of section 21 of the Financial Services and Markets Act
2000, or the ("FSMA,") received by it in connection with the issue or sale of
any shares in circumstances in which section 21(1) of the FSMA does not apply to
us; and (iii) it has complied and will comply with all applicable provisions of
the FSMA with respect to anything done by it in relation to the shares in, from
or otherwise involving the United Kingdom.
A prospectus in electronic format will be made available on the websites
maintained by one or more of the lead managers of this offering and may also be
made available on websites maintained by other underwriters. The underwriters
may agree to allocate a number of shares to underwriters for sale to their
online brokerage account holders. Internet distributions will be allocated by
the lead managers to underwriters that may make internet distributions on the
same basis as other allocations.
The underwriters do not expect sales to discretionary accounts to exceed
five percent of the total number of shares offered.
We estimate that our share of the total expenses of the offering, excluding
underwriting discounts and commissions, will be approximately $ .
We and El Paso Energy Partners have agreed to indemnify the several
underwriters against certain liabilities, including liabilities under the
Securities Act of 1933.
Some of the underwriters and their affiliates have from time to time
performed various investment banking and financial advisory services,
participated in the underwriting of debt and equity securities offerings and
served as lender or agent under credit facilities for El Paso Energy Partners,
El Paso Corporation and their affiliates for which they have received customary
fees and reimbursement of their out of pocket expenses. The underwriters and
their affiliates may, from time to time in the future, engage in transactions
with and perform services for us, El Paso Energy Partners, El Paso Corporation
and their affiliates in the ordinary course of business.
LEGAL MATTERS
The validity of the shares and i-units offered by this prospectus will be
passed upon for us by Akin, Gump, Strauss, Hauer & Feld, L.L.P., Houston, Texas.
Various legal matters relating to the offering will be passed upon for the
underwriters by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The financial statement as of July 31, 2002 of El Paso Energy Management,
L.L.C. included in this prospectus and registration statement, has been so
included in reliance on the report of PricewaterhouseCoopers LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
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The financial statements incorporated in this prospectus and registration
statement by reference to the Current Report on Form 8-K/A dated July 19, 2002
of El Paso Energy Partners, L.P., the Annual Report on Form 10-K of El Paso
Energy Partners, L.P. for Poseidon Oil Pipeline Company, L.L.C., the Current
Report on Form 8-K dated April 22, 2002 of El Paso Energy Partners, L.P., and
the Current Report on Form 8-K dated August 12, 2002 of El Paso Energy Partners,
L.P., have been so incorporated in reliance on the reports of
PricewaterhouseCoopers L.L.P., independent accountants, given on the authority
of said firm as experts in auditing and accounting.
The consent of Arthur Andersen LLP to the inclusion of its report regarding
the financial statements of Poseidon Oil Pipeline Company, L.L.C. with respect
to periods prior to 2001, incorporated in this prospectus and registration
statement by reference to El Paso Energy Partners' Annual Report on Form 10-K
for the year ended December 31, 2000, is omitted pursuant to Securities Act Rule
437a. We attempted to obtain the appropriate consent from Arthur Andersen LLP,
but the personnel responsible for the audit of Poseidon's financial statements
are no longer employed by Arthur Andersen LLP. Because Arthur Andersen LLP has
not consented to the inclusion of their report in this prospectus, you will not
be able to recover against Arthur Andersen LLP under Section 11 of the
Securities Act of 1933 for any untrue statement of a material fact contained in
the financial statements audited by Arthur Andersen LLP or any omissions to
state a material fact required to be stated therein. We have not obtained a
consent from Arthur Andersen LLP with respect to such financial statements.
Please see "Risk Factors -- Risks Related to El Paso Energy Partners' Business"
for more information regarding Arthur Andersen LLP.
Information derived from the report of Netherland, Sewell & Associates,
Inc., independent petroleum engineers, with respect to El Paso Energy Partners'
estimated oil and natural gas reserves incorporated in this prospectus and
registration statement by reference to El Paso Energy Partners' Annual Report on
Form 10-K for the year ended December 31, 2001, has been so incorporated in
reliance on the authority of said firm as experts with respect to such matters
contained in their report.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed on Form S-1, and El Paso Energy Partners have filed on Form
S-3, a registration statement with the SEC under the Securities Act of 1933 with
respect to the securities offered in this offering. This prospectus, which is a
part of the registration statement, does not contain all of the information set
forth in the registration statement, or the exhibits which are part of the
registration statement, parts of which are omitted as permitted by the rules and
regulations of the SEC. For further information about us and El Paso Energy
Partners and about the securities to be sold in this offering, please refer to
the registration statement and the exhibits which are part of the registration
statement.
Upon completion of this offering, we will become subject to the information
and periodic reporting requirements of the Securities Exchange Act of 1934 and,
in accordance therewith, will file periodic reports, proxy and information
statements and other information with the SEC. Our periodic reports, proxy and
information statements and other information will be available for inspection
and copying at the regional offices, public references facilities and web site
of the SEC referred to below.
We intend to furnish our shareholders with annual reports containing
audited financial statements and an opinion thereon expressed by independent
certified public accountants. We also intend to furnish other reports as we may
determine or as required by law.
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El Paso Energy Partners file annual, quarterly and other reports, proxy
statements and other information with the SEC. You can inspect and/or copy these
reports and other information on the Internet or at offices maintained by the
SEC, including:
- the SEC's website at http://www.sec.gov; and
- the SEC's public reference room located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549.
You may obtain information on the operation of the SEC's public reference
room by calling the SEC at 1-800-SEC-0330.
Because El Paso Energy Partners' common units are listed on the New York
Stock Exchange, El Paso Energy Partners' reports, proxy statements and other
information can be reviewed and copied at the office of that exchange at 20
Broad Street, New York, New York 10005.
The SEC allows El Paso Energy Partners to "incorporate by reference" the
information they file with them, which means that El Paso Energy Partners can
disclose important information to you by referring you to those documents. The
information incorporated by reference is an important part of this prospectus,
and information that El Paso Energy Partners file later with the SEC will
automatically update and supersede this information. El Paso Energy Partners
incorporate by reference the documents listed below and any future filings made
with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities Exchange
Act of 1934 until the termination of the offering, other than information
furnished under Item 9 of any Current Report on Form 8-K that is listed below or
filed in the future and which is not deemed filed under the Securities Exchange
Act of 1934 and is not incorporated in this prospectus:
<Table>
<Caption>
EL PASO ENERGY PARTNERS SEC FILINGS
(FILE NO. 1-11680) PERIOD
- ----------------------------------- ------
Current Report on Form 8-K Filed August 12, 2002
Current Report on Form 8-K Filed July 31, 2002
Current Report on Form 8-K Filed July 24, 2002
Current Report on Form 8-K/A Filed July 19, 2002
Current Report on Form 8-K Filed July 15, 2002
Current Report on Form 8-K Filed June 5, 2002
Quarterly Report on Form 10-Q Quarter Ended March 31, 2002
Current Report on Form 8-K Filed April 29, 2002
Current Report on Form 8-K Filed April 24, 2002
Current Report on Form 8-K Filed April 22, 2002
Current Report on Form 8-K Filed April 15, 2002
Annual Report on Form 10-K Year Ended December 31, 2001
</Table>
El Paso Energy Partners will provide a copy of any document incorporated by
reference in this prospectus and any exhibit specifically incorporated by
reference in those documents at no cost by request directed to them at the
following address and telephone number:
<Table>
El Paso Energy Partners
4 East Greenway Plaza
Houston, Texas 77046
(832) 676-5332
Attention: Investor Relations
</Table>
184
The information concerning El Paso Energy Partners contained or
incorporated by reference in this document has been provided by El Paso Energy
Partners.
You should rely only on the information contained or incorporated by
reference in this prospectus to purchase the securities offered by this
prospectus. Neither we nor El Paso Energy Partners have authorized anyone to
provide you with information that is different from what is contained in this
prospectus. You should not assume that the information contained in this
prospectus is accurate as of any date other than the date on the cover, and the
mailing of the prospectus to shareholders shall not create any implication to
the contrary.
185
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Member of
El Paso Energy Management, L.L.C.:
In our opinion, the accompanying balance sheet presents fairly, in all
material respects, the financial position of El Paso Energy Management, L.L.C.
at July 31, 2002 in conformity with accounting principles generally accepted in
the United States of America. This financial statement is the responsibility of
the Company's management; our responsibility is to express an opinion on this
financial statement based on our audit. We conducted our audit of this statement
in accordance with auditing standards generally accepted in the United States of
America which require that we plan and perform the audit to obtain reasonable
assurance about whether the balance sheet is free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and
disclosures in the balance sheet, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall balance
sheet presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
August 12, 2002
F-1
EL PASO ENERGY MANAGEMENT, L.L.C.
BALANCE SHEET
JULY 31, 2002
<Table>
<Caption>
ASSETS
Total assets........................................... $ --
======
EQUITY
Voting shares; unlimited shares authorized; 1 share issued
and outstanding........................................... $1,000
Nonvoting shares; unlimited shares authorized; no shares
issued.................................................... --
Contribution receivable from parent......................... (1,000)
------
Total equity........................................... $ --
======
</Table>
See accompanying notes.
F-2
EL PASO ENERGY MANAGEMENT, LLC
NOTES TO BALANCE SHEET
1. FORMATION AND NATURE OF BUSINESS
We are a Delaware limited liability company formed on July 19, 2002 under
the Delaware Limited Liability Company Act. El Paso Energy Partners Company, a
wholly owned subsidiary of El Paso Corporation, a major energy company traded on
the New York Stock Exchange under the ticker symbol "EP", owns all of our voting
securities and is our sole managing member.
We were formed to (i) issue shares and invest substantially all of the
proceeds from such share offering in a new class of limited partner interests,
referred to as i-units, in El Paso Energy Partners and (ii) enter into an
agreement with El Paso Energy Partners Company whereby we will manage the
business and affairs of El Paso Energy Partners, L.P. We can provide no
assurance that these transactions and agreements will be consummated as
described. We have had no operations since our formation.
2. CAPITALIZATION
Our authorized capital structure consists of two classes of membership
interests (1) nonvoting shares and (2) voting shares. Additional equity
interests may be approved by our board and the vote of the holders of a majority
of the outstanding shares of nonvoting equity interests. As of July 31, 2002,
the issued capitalization consists of $1,000 contributed by El Paso Energy
Partners Company for its voting equity interest. Our contribution receivable was
generated from the initial capitalization of us.
F-3
------------------------------------------------------------
------------------------------------------------------------
No dealer, salesperson or other person is authorized to give any
information or to represent anything not contained in this prospectus. You must
not rely on any unauthorized information or representations. This prospectus is
an offer to sell only the shares offered hereby, but only under circumstances
and in jurisdictions where it is lawful to do so. The information contained in
this prospectus is current only as of its date.
----------------------
TABLE OF CONTENTS
<Table>
<Caption>
Page
----
Prospectus Summary............................. 1
Risk Factors................................... 31
Information Regarding Forward Looking
Statements................................... 50
Planned Acquisition of the San Juan Assets..... 51
Use of Proceeds................................ 53
Distributions and Distribution Policy.......... 54
Capitalization of El Paso Management........... 63
Capitalization of El Paso Energy Partners...... 64
Selected Financial Data of El Paso Energy
Partners..................................... 66
Selected Pro Forma Financial Data of El Paso
Energy Partners, L.P. ....................... 70
Management's Discussion and Analysis of
Financial Condition and Results of
Operations................................... 74
Business....................................... 108
Description of Our Shares...................... 132
Description of the i-Units..................... 144
Management of El Paso Management............... 147
Comparison of El Paso Energy Partners' Units
With Our Shares.............................. 149
Limited Liability Company Agreement............ 153
Relationships and Related Party Transactions... 159
Conflicts of Interest and Fiduciary
Relationships................................ 163
Shares Eligible for Future Sale................ 171
Material Tax Consequences...................... 172
ERISA Considerations........................... 178
Underwriting................................... 180
Legal Matters.................................. 182
Experts........................................ 182
Where You Can Find Additional Information...... 183
Index to Financial Statements.................. F-1
</Table>
----------------------
Through and including , 2002 (the 25th day after the date of this
prospectus), all dealers effecting transactions in these securities, whether or
not participating in this offering, may be required to deliver a prospectus.
This is in addition to a dealer's obligation to deliver a prospectus when acting
as an underwriter and with respect to an unsold allotment or subscription.
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
------------------------------------------------------------
20,000,000 Shares
EL PASO ENERGY
MANAGEMENT, L.L.C.
Representing Limited Liability
Company Interests
---------------------
PROSPECTUS
---------------------
GOLDMAN, SACHS & CO.
Representatives of the Underwriters
------------------------------------------------------------
------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION (FORM S-1; ITEM 14 OF FORM
S-3)
Shown below are the expenses (other than underwriting discounts) we expect
to incur in connection with the issuance and distribution of the securities
being registered. With the exception of the Securities and Exchange Commission
registration fee, the NASD filing fee and the securities exchange listing fee,
the amounts shown below are estimates:
<Table>
Securities and Exchange Commission registration fee......... $62,983.20
NASD filing fee............................................. 30,500
Securities exchange listing fee............................. *
Printing and engraving expenses............................. *
Legal fees and expenses..................................... *
Accounting fees and expenses................................ *
Blue Sky fees and expenses.................................. *
Transfer agent and registrar fees........................... *
Miscellaneous............................................... *
TOTAL..................................................... *
</Table>
- ---------------
* To be provided by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS (FORM S-1; ITEM 15 OF FORM
S-3)
EL PASO ENERGY MANAGEMENT
Section 18-108 of the Delaware Limited Liability Act provides that, subject
to such standards and restrictions, if any, as are set forth in its limited
liability company agreement, a limited liability company may, and shall have the
power to, indemnify and hold harmless any member or manager or other person from
and against any and all claims and demands whatsoever. Our limited liability
company agreement provides that we will indemnify the members of our board and
our officers from liabilities arising in the course of such persons' service to
us, provided that the indemnitee acted in good faith and in a manner which such
indemnitee believed to be in or not opposed to our best interests and, with
respect to any criminal proceeding, had no reasonable cause to believe such
indemnitee's conduct was unlawful. Such liabilities include all losses; claims;
damages; expenses (including, without limitation, legal fees and expenses);
judgments; fines; penalties; interests; settlements; and other amounts, provided
that with respect to any criminal proceeding, the indemnitee had no reasonable
cause to believe its conduct was unlawful. We expect to be included within the
same coverage available to El Paso Energy Partners Company for directors' and
officers' liability insurance for potential liability under such
indemnification. The holders of our shares will not be personally liable for
such indemnification.
EL PASO ENERGY PARTNERS
The partnership agreement for El Paso Energy Partners provides that:
- El Paso Energy Partners will indemnify (1) El Paso Energy Partners
Company, (2) any departing general partner and (3) any person who is or
was an officer, director or other representative of El Paso Energy
Partners Company, any departing general partner or El Paso Energy
Partners, to the fullest extent permitted by law, and
II-1
- El Paso Energy Partners may indemnify, to the fullest extent permitted by
law, (1) any person who is or was an affiliate of El Paso Energy Partners
Company, any departing general partner or El Paso Energy Partners, (2)
any person who is or was an employee, partner, agent or trustee of El
Paso Energy Partners Company, any departing general partner, El Paso
Energy Partners or any such affiliate, or (3) any person who is or was
serving at El Paso Energy Partners' request as an officer, director,
employee, partner, member, agent or other representative of another
corporation, partnership, joint venture, trust, committee or other
enterprise;
each, as well as any employee, partner, agent or other representative of El Paso
Energy Partners Company, any departing general partner, El Paso Energy Partners
or any of their affiliates, which we refer to as an "Indemnitee," from and
against any and all claims, damages, expenses and fines, whether civil,
criminal, administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or otherwise, by reason of
its status as (1) El Paso Energy Partners Company, departing general partner, El
Paso Energy Partners or an affiliate of either, (2) an officer, director,
employee, partner, agent, trustee or other representative of El Paso Energy
Partners Company, any departing general partner, El Paso Energy Partners or any
of their affiliates or (3) a person serving at El Paso Energy Partners' request
in any other entity in a similar capacity. Indemnification will be conditioned
on the determination that, in each case, the Indemnitee acted in good faith, in
a manner which such Indemnitee believed to be in, or not opposed to, El Paso
Energy Partners' best interests and, with respect to any criminal proceeding,
had no reasonable cause to believe its conduct was unlawful.
The above indemnification may result in indemnification of Indemnitees for
negligent acts, and may include indemnification for liabilities under the
Securities Act. El Paso Energy Partners has been advised that, in the opinion of
the SEC, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. Any indemnification under these
provisions will be only out of El Paso Energy Partners' assets. El Paso Energy
Partners is authorized to purchase, or to reimburse El Paso Energy Partners
Company or its affiliates for the cost of, insurance against liabilities
asserted against and expenses incurred by such persons in connection with El
Paso Energy Partners' activities, whether or not El Paso Energy Partners would
have the power to indemnify such person against such liabilities under the
provisions described above.
Subject to any terms, conditions or restrictions set forth in El Paso
Energy Partners' partnership agreement, Section 17-108 of the Delaware Revised
Uniform Limited Partnership Act empowers a Delaware limited partnership to
indemnify and hold harmless any partner or other person from and against all
claims and demands whatsoever.
Section 145(a) of the General Corporation Law of the State of Delaware, or
the "DGCL," provides that a Delaware corporation may indemnify any person who
was or is a party or is threatened to be made a party to any threatened, pending
or completed action, suit or proceeding, whether civil, criminal, administrative
or investigative (other than an action by or in the right of the corporation) by
reason of the fact that he or she is or was a director, officer, employee or
agent of the corporation or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorney
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by him or her in connection with such action, suit or proceeding if he
or she acted in good faith and in a manner he or she reasonably believed to be
in or not opposed to the best interests of the corporation, and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his or her
conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by
II-2
reason of the fact that such person set forth against expenses (including
attorney fees) actually and reasonably incurred by him or her in connection with
the defense or settlement of such action or suit if he or she acted above in
good faith and in a manner he or she reasonably believed to be in or not opposed
to the best interest of the corporation, except that no indemnification may be
made in respect of any claim, issue or matter as to which such person shall have
been adjudged to be liable to the corporation unless and only to the extent that
the court in which such action or suit was brought shall determine, that despite
the adjudication of liability, but in view of all the circumstances of the case,
such person is fairly and reasonably entitled to be indemnified for such
expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a present or
former director or officer of a corporation has been successful in the defense
of any action, suit or proceeding referred to in the immediately preceding two
paragraphs above or in the defense of any claim, issue or matter therein, he or
she shall be indemnified against any expenses (including attorney fees) actually
and reasonably incurred by him or her in connection therewith; that
indemnification provided for by Section 145 shall not be deemed exclusive of any
other rights to which the indemnified party may be entitled both to actions in
his or her official capacity and in other capacities while holding such office;
and that the corporation may purchase and maintain insurance on behalf of a
director, officer, employee or agent of the corporation against any liability
asserted against him or her or incurred by him or her in any such capacity or
arising out of his or her status as such whether or not the corporation would
have the power to indemnify him or her against such liabilities under Section
145.
Section 102(b)(7) of the DGCL provides that a corporation in its original
certificate of incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members of its board
of directors or governing body for breach of a director's fiduciary duty.
However, no such provision may eliminate or limit the liability of a director
for breaching his or her duty of loyalty, not acting in good faith, failing to
act in good faith, engaging in intentional misconduct, knowingly violating a
law, paying a dividend or approving a stock repurchase which was illegal or
obtaining an improper personal benefit. A provision of this type has no effect
on the availability of equitable remedies, such as injunction or rescission, for
breach of fiduciary duty.
The certificate of incorporation of El Paso Energy Partners Company
contains a provision which limits the liability of its directors to El Paso
Energy Partners Company or its stockholders, in their capacity as directors but
not in their capacity as officers, to the fullest extent permitted by the DGCL.
In addition, the bylaws of El Paso Energy Partners Company, in substance,
require El Paso Energy Partners Company to indemnify each person who is or was a
director, officer, employee or agent of El Paso Energy Partners Company to the
full extent permitted by the laws of the State of Delaware in the event such
person is involved in legal proceedings by reason of the fact that he or she is
or was a director, officer, employee or agent of El Paso Energy Partners
Company, or is or was serving at El Paso Energy Partners Company's request as a
director, officer, employee or agent of El Paso Energy Partners Company and its
subsidiaries, another corporation, partnership or other enterprise. El Paso
Energy Partners Company is also required to advance to these persons payments
incurred in defending a proceeding to which indemnification might apply,
provided the recipient provides an undertaking agreeing to repay all such
advanced amounts if it is ultimately determined that he or she is not entitled
to be indemnified. In addition, El Paso Energy Partners Company's bylaws
specifically provide that the indemnification rights granted in it are
non-exclusive.
El Paso Energy Partners Company has entered into indemnification agreements
with certain of its current and past directors providing for indemnification to
the full extent permitted by the laws of the State of Delaware. These agreements
provide for specific procedures to assure the directors' rights to
indemnification, including procedures for directors to submit claims, for
II-3
determination of directors' entitlement to indemnification, including the
allocation of the burden of proof and selection of a reviewing party, and for
enforcement of directors' indemnification rights.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling El Paso Energy
Partners or El Paso Energy Partners Company as set forth above, El Paso Energy
Partners and El Paso Energy Partners Company have been informed that in the
opinion of the SEC such indemnification is against public policy as expressed in
the Securities Act and is therefore unenforceable.
EL PASO ENERGY MANAGEMENT AND EL PASO ENERGY PARTNERS
The Form of Underwriting Agreement filed with this registration statement
as Exhibit 1.1, under certain circumstances, provides for indemnification by the
underwriters of our directors, officers and controlling persons as well as the
directors, officers and controlling persons of El Paso Energy Partners.
We and El Paso Energy Partners Company have each purchased liability
insurance policies covering the members or directors, as the case may be, and
officers of each of us and them, including to provide protection where we or
they cannot legally indemnify a director or officer and where a claim arises
under the Employee Retirement Income Security Act of 1974 against a director or
officer based on an alleged breach of fiduciary duty or other wrongful act.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES (FORM S-1 ONLY)
The Company's sole voting share was sold to El Paso Energy Partners Company
on July 19, 2002. Such sale was completed without registration under the
Securities Act in reliance upon the exemption provided by Section 4(2) of the
Securities Act.
ITEM 16. EXHIBITS (BOTH FORMS S-1 AND S-3) AND FINANCIAL STATEMENT SCHEDULES
(FORM S-1 ONLY)
(a) Exhibits:
Reference is made to the Index to Exhibits following the signature pages
hereto, which Index to Exhibits is hereby incorporated into this Item.
(b) Financial Statement Schedules of El Paso Management, LLC.
All financial statement schedules are omitted because the information is
not required, is inapplicable, is not material or is otherwise included in the
financial statements or related notes thereto.
ITEM 17. UNDERTAKINGS (BOTH FORMS S-1 AND S-3)
EL PASO ENERGY MANAGEMENT
(a) El Paso Energy Management hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the Underwriters to permit prompt
delivery to each purchaser.
(b) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of El Paso
Energy Management under the foregoing provisions, or otherwise, El Paso Energy
Management has been advised that in the opinion of the SEC such indemnification
is against public policy as expressed in the Securities Act and is, therefore,
unenforceable. In the event that a claim for indemnification against such
liabilities, other than the payment by El Paso Energy Management in the
successful defense of any action, suit or proceeding, is asserted by such
director, officer or controlling person in connection with the securities being
registered, El Paso Energy Management will, unless in the opinion of its
II-4
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication of such issue.
(c) El Paso Energy Management hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by El Paso Energy Management under Rule 424(b)(1)
or (4) or 497(h) under the Securities Act shall be deemed to be part of
this Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
EL PASO ENERGY PARTNERS
(a) El Paso Energy Partners hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement to include
any material information with respect to the plan of distribution not
previously disclosed in the registration statement or any material change
to such information in the registration statement;
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof; and
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(b) El Paso Energy Partners hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of their
respective annual reports pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of each of
El Paso Energy Partners, L.P. pursuant to the foregoing or otherwise, each
company has been advised that in the opinion of the SEC such indemnification is
against public policy as expressed in the Securities Act of 1933 and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities, other than payment by the respective company of expenses
incurred or paid by a director, officer or controlling person of the respective
company in the successful defense of any action, suit or proceeding, is asserted
by such director, officer or controlling person in connection with the
securities being registered, the respective company will, unless in the opinion
of its counsel the matter has been settled by controlling precedent, submit to a
court of appropriate jurisdiction the question whether such indemnification by
it is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
(d) El Paso Energy Partners hereby undertakes to deliver or cause to be
delivered with the prospectus, to each person to whom the prospectus is sent or
given, the latest annual report, to security holders that is incorporated by
reference in the prospectus and furnished pursuant to and meeting the
requirements of Rule 14a-3 or Rule 14c-3 under the Securities Exchange Act of
II-5
1934; and, where interim financial information required to be presented by
Article 3 of Regulation S-X is not set forth in the prospectus, to deliver, or
cause to be delivered to each person to whom the prospectus is sent or given,
the latest quarterly report that is specifically incorporated by reference in
the prospectus to provide such interim financial information.
II-6
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement on Form S-3 or amendment thereto to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Houston, state of Texas
on August 12, 2002.
EL PASO ENERGY PARTNERS, L.P.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and Chief Financial
Officer
---------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below, constitute and appoint H. Brent Austin and Peggy Heeg, and each of
them as their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for them and in their names, places and steads,
in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and the other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-3 or amendment thereto has been signed below by
the following persons in the indicated capacities on August 12, 2002:
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ WILLIAM A. WISE Chairman of the Board and Director
------------------------------------------------
William A. Wise
/s/ ROBERT G. PHILLIPS Chief Executive Officer and Director
------------------------------------------------
Robert G. Phillips
/s/ KEITH B. FORMAN Vice President and Chief Financial Officer
------------------------------------------------
Keith B. Forman
/s/ JAMES H. LYTAL President and Director
------------------------------------------------
James H. Lytal
/s/ D. MARK LELAND Senior Vice President and Controller
------------------------------------------------ (Principal Accounting Officer)
D. Mark Leland
</Table>
II-7
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ H. BRENT AUSTIN Executive Vice President and Director
------------------------------------------------
H. Brent Austin
/s/ MICHAEL B. BRACY Director
------------------------------------------------
Michael B. Bracy
/s/ H. DOUGLAS CHURCH Director
------------------------------------------------
H. Douglas Church
/s/ KENNETH L. SMALLEY Director
------------------------------------------------
Kenneth L. Smalley
/s/ MALCOLM WALLOP Director
------------------------------------------------
Malcolm Wallop
</Table>
II-8
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
has duly caused this Registration Statement on Form S-1 or amendment thereto to
be signed on its behalf by the undersigned, thereunto duly authorized, in the
City of Houston, state of Texas on August 12, 2002.
EL PASO ENERGY MANAGEMENT, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and Chief Financial
Officer
---------------------
KNOW ALL PERSONS BY THESE PRESENTS, that the persons whose signatures
appear below, constitute and appoint H. Brent Austin and Peggy Heeg, and each of
them as their true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for them and in their names, places and steads,
in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and any subsequent
registration statement filed pursuant to Rule 462(b) under the Securities Act of
1933, as amended, and to file the same, with all exhibits thereto, and the other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in connection therewith, as fully to all intents and
purposes as they might or could do in person, hereby ratifying and confirming
all that said attorneys-in-fact and agents, or any of them, or their or his or
her substitute or substitutes, may lawfully do or cause to be done by virtue
hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement on Form S-1 or amendment thereto has been signed below by
the following persons in the indicated capacities on August 12, 2002:
<Table>
<Caption>
SIGNATURE TITLE
--------- -----
/s/ WILLIAM A. WISE Chairman of the Board and Director
------------------------------------------------
William A. Wise
/s/ ROBERT G. PHILLIPS Chief Executive Officer and Director
------------------------------------------------
Robert G. Phillips
/s/ KEITH B. FORMAN Vice President and Chief Financial Officer
------------------------------------------------
Keith B. Forman
/s/ JAMES H. LYTAL President and Director
------------------------------------------------
James H. Lytal
/s/ D. MARK LELAND Senior Vice President and Controller
------------------------------------------------ (Principal Accounting Officer)
D. Mark Leland
/s/ H. BRENT AUSTIN Executive Vice President and Director
------------------------------------------------
H. Brent Austin
</Table>
II-9
INDEX TO EXHIBITS
<Table>
1.1 Form of Underwriting Agreement.
3.1* Certificate of Formation of the Company.
3.2* Certificate of Amendment of Certificate of Formation of the
Company.
3.3* Amended and Restated Limited Liability Company Agreement of
the Company.
4.1 Form of certificate representing shares of the Company.
4.2 Form of Certificate Evidencing Common Units Representing
Limited Partner Interests of El Paso Energy Partners (filed
as Exhibit 4.2 to Amendment No. 2 to El Paso Energy
Partners' Registration Statement on Form S-1, File No.
33-55642).
4.3 Form of certificate representing the i-units of El Paso
Energy Partners (included as an exhibit to the Third Amended
and Restated Agreement of Limited Partnership filed as
Exhibit 4.7).
4.4 Form of Purchase Provisions between the Company and El Paso
Corporation (included as Annex B to the Limited Liability
Company Agreement filed as Exhibit 3.2).
4.5 Form of Third Amended and Restated Agreement of Limited
Partnership of El Paso Energy Partners.
5 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to
the legality of the securities being offered.
8 Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to
certain federal income tax matters.
10.1 Form of Tax Indemnity Agreement between the Company and El
Paso Corporation.
10.2 Form of Delegation Agreement among El Paso Management,
L.L.C., El Paso Energy Partners Company, El Paso Energy
Partners and its subsidiaries (included as Annex C to the
Limited Liability Company Agreement filed as Exhibit 3.2).
23.1 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in their opinions filed as Exhibits 5 and 8).
23.2* Consent of PricewaterhouseCoopers LLP.
23.3* Consent of PricewaterhouseCoopers LLP.
23.4* Consent of Netherland, Sewell & Associates, Inc.
24.1* Powers of Attorney with respect to the Company (included on
the signature pages of this Registration Statement).
24.2* Powers of Attorney with respect to El Paso Energy Partners
(included on the signature pages of this Registration
Statement).
</Table>
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* Filed herewith.
Arthur Andersen LLP has not consented to the inclusion of their report in this
registration statement, and we have dispensed with the requirement to file their
consent in reliance upon Rule 437a of the Securities Act of 1933.