1
Filed Pursuant to Rule 424(b)(5)
Registration No. 333-85987
PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED JUNE 30, 2000)
[EL PASO ENERGY PARTNERS, L.P. LOGO]
2,250,000 COMMON UNITS
EL PASO ENERGY PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
$31.00 PER UNIT
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We are selling 2,250,000 common units with this prospectus supplement and
the accompanying base prospectus. The underwriters named in this prospectus
supplement may purchase up to 337,500 additional common units from us under
certain circumstances.
The common units are listed for trading on the New York Stock Exchange
under the symbol "EPN." The last reported sale price of the common units on the
New York Stock Exchange on March 20, 2001, was $31.00 per unit.
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INVESTING IN THE COMMON UNITS INVOLVES CERTAIN RISKS. LIMITED PARTNER
INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A CORPORATION. SEE
"RISK FACTORS" BEGINNING ON PAGE 1 OF THE ACCOMPANYING BASE PROSPECTUS.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the accompanying base prospectus is truthful or
complete. Any representation to the contrary is a criminal offense.
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PER UNIT TOTAL
-------- -----------
Public Offering Price....................................... $ 31.00 $69,750,000
Underwriting Discount....................................... $ 1.32 $ 2,970,000
Proceeds to El Paso Energy Partners, L.P. (before
expenses)................................................. $ 29.68 $66,780,000
The underwriters are offering the common units subject to various
conditions. The underwriters expect to deliver the common units to purchasers on
or about March 23, 2001.
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SALOMON SMITH BARNEY UBS WARBURG LLC
March 20, 2001
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TABLE OF CONTENTS
PROSPECTUS SUPPLEMENT
Prospectus Supplement Summary............................... S-1
Use of Proceeds............................................. S-8
Capitalization.............................................. S-8
Selected Historical Consolidated Financial Data............. S-9
Underwriting................................................ S-11
Legal Matters............................................... S-12
Forward-Looking Statements.................................. S-12
PROSPECTUS
El Paso Energy Partners, L.P................................ iii
About this Prospectus....................................... iii
Forward-Looking Statements and Other Information............ iii
Where You Can Find More Information......................... iv
Incorporation of Documents by Reference..................... v
Risk Factors................................................ 1
Use of Proceeds............................................. 15
Description of Limited Partner Interests.................... 16
Certain Other Partnership Agreement Provisions.............. 25
Income Tax Considerations................................... 30
Investment by Employee Benefit Plans........................ 45
Plan of Distribution........................................ 46
Legal Matters............................................... 47
Experts..................................................... 47
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IMPORTANT NOTICE ABOUT INFORMATION IN THIS
PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS
THIS DOCUMENT IS IN TWO PARTS. THE FIRST PART IS THE PROSPECTUS SUPPLEMENT,
WHICH PROVIDES AN OVERVIEW OF OUR BUSINESS AND THE SPECIFIC TERMS OF THIS COMMON
UNIT OFFERING. THE SECOND PART, THE BASE PROSPECTUS, GIVES MORE GENERAL
INFORMATION, SOME OF WHICH MAY NOT APPLY TO THIS OFFERING. GENERALLY, WHEN WE
REFER ONLY TO THE "PROSPECTUS," WE ARE REFERRING TO BOTH PARTS COMBINED.
IF THE DESCRIPTION OF THE OFFERING VARIES BETWEEN THE PROSPECTUS SUPPLEMENT
AND THE BASE PROSPECTUS, YOU SHOULD RELY ON THE INFORMATION IN THE PROSPECTUS
SUPPLEMENT. FORWARD-LOOKING STATEMENTS IN THIS PROSPECTUS SUPPLEMENT ARE SUBJECT
TO THE RISKS AND UNCERTAINTIES DISCUSSED IN THE BASE PROSPECTUS UNDER
"FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION" AND IN THIS PROSPECTUS
SUPPLEMENT UNDER "FORWARD-LOOKING STATEMENTS."
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT, AND THE UNDERWRITERS HAVE NOT,
AUTHORIZED ANYONE TO PROVIDE YOU WITH DIFFERENT INFORMATION. WE ARE NOT MAKING
AN OFFER OF THE COMMON UNITS IN ANY JURISDICTION WHERE THE OFFER IS NOT
PERMITTED. YOU SHOULD NOT ASSUME THAT THE INFORMATION CONTAINED IN THIS
PROSPECTUS OR IN THE DOCUMENTS INCORPORATED BY REFERENCE IN THIS PROSPECTUS IS
ACCURATE AS OF ANY DATE OTHER THAN THE DATE ON THE FRONT OF THOSE DOCUMENTS.
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PROSPECTUS SUPPLEMENT SUMMARY
This summary highlights some basic information from this prospectus
supplement and the accompanying base prospectus to help you understand the
common units. It likely does not contain all the information that is important
to you. You should carefully read the entire prospectus supplement, the
accompanying base prospectus and the other documents incorporated by reference
to understand fully the terms of the common units, as well as the tax and 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 1
of the accompanying base prospectus, as well as the risk factors contained in
the other documents incorporated by reference, to determine whether an
investment in the common units is appropriate for you. For purposes of this
prospectus, including the accompanying base prospectus, unless the context
otherwise indicates, when we refer to "us," "we," "our," "ours" or the
"Partnership," we are describing ourselves, El Paso Energy Partners, L.P.,
together with our subsidiaries.
EL PASO ENERGY PARTNERS, L.P.
WHO WE ARE
El Paso Energy Partners, L.P. (NYSE: EPN) is one of the largest
publicly-traded master limited partnerships in terms of market capitalization.
Due to our successful acquisitions during the past 12 months, we have announced
three distribution increases and are currently paying $2.30 per unit annually to
our unitholders. Formed in 1993, we provide midstream energy services both
onshore and offshore in the Gulf of Mexico, one of the world's fastest growing
natural gas producing regions which accounted for more than 25% of all domestic
natural gas production during 2000. Today, we have a diversified portfolio of
interests and assets that includes natural gas and oil pipelines, platforms,
processing facilities and other infrastructure in the deeper water regions of
the Gulf of Mexico; natural gas storage facilities in Mississippi; intrastate
natural gas pipeline assets in Alabama; and natural gas liquids transportation
and fractionation facilities in south Texas. Through our subsidiaries and joint
ventures, we own or have interests in:
- six natural gas and oil pipeline systems;
- six multi-purpose offshore platforms, including related production and
processing facilities;
- two salt dome natural gas storage facilities in Mississippi;
- fee-based natural gas liquid, or NGL, transportation and fractionation
facilities in south Texas;
- five producing oil and natural gas properties; and
- an overriding royalty interest in a non-producing oil and natural gas
property.
Our pipeline systems have a combined capacity of over 3.4 billion cubic
feet per day, or Bcf/d, of natural gas and over 340 thousand barrels per day, or
MBbls/d, of oil and include over 1,100 miles of pipeline. Our offshore systems
are strategically placed to serve production activities in some of the most
active drilling and development regions in the Gulf of Mexico, including the
offshore regions of Texas, Louisiana, and Mississippi, and provide relatively
low cost access to long line transmission pipelines that access multiple markets
in the eastern half of the United States. In March 2000, we acquired El Paso
Intrastate-Alabama, an intrastate pipeline system located in the coal bed
methane producing regions of Alabama.
Upon completion of our Prince tension leg platform, or TLP, in mid 2001,
our multi-purpose offshore platforms will have a combined product handling
capacity of over 480 million cubic feet per day, or MMcf/d, of natural gas and
over 120 MBbls/d of oil and condensate. Through these facilities, we are able to
provide a variety of producer and midstream services to enhance deliverability
and volumes into our pipeline systems.
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In August 2000, we acquired salt dome natural gas storage facilities
located in Mississippi which are well situated to serve the Northeast,
Mid-Atlantic and Southeast natural gas markets. These facilities have a combined
working capacity of 6.7 Bcf, and are capable of delivering in excess of 670
MMcf/d of natural gas into three interstate pipelines, Koch Gateway Pipeline,
Transcontinental Gas Pipeline Company, 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. A 6.8 Bcf
expansion of these facilities has been approved by the Federal Energy Regulatory
Commission, or FERC, and is currently under construction. All of this additional
capacity is contractually dedicated for the next 20 years to a subsidiary of
Southern Company, the largest producer of electricity in the United States. Also
currently waiting for FERC approval is a 60 mile pipeline addition that will
have new interconnects with various customers.
In February 2001, we acquired NGL transportation and fractionation assets
located in south Texas. These assets include more than 600 miles of NGL
pipelines that gather and transport unfractionated and fractionated products.
The three fractionation plants have 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.
Our producing properties have total proved reserves of approximately 11.5
Bcf of natural gas and over 1,200 MBbls of oil. We also have an overriding
interest in a non-producing property in the Ewing Bank region of the Gulf of
Mexico to capitalize on future development efforts in that region.
OUR GENERAL PARTNER
El Paso Corporation (NYSE: EPG), or El Paso, is one of the largest natural
gas companies in the world. Through its subsidiaries, El Paso owns 27.6% of our
common units consisting of 8,953,764 units, a one percent general partner
interest, and an approximate one percent non-managing member interest in many of
our subsidiaries. In addition, we issued $170 million of Series B Cumulative
Redeemable Preference Units to an El Paso subsidiary in August of 2000 in
connection with our acquisition of the Crystal gas storage businesses. We are El
Paso's primary growth vehicle for acquiring and developing midstream onshore and
offshore assets and providing related services and solutions. Our general
partner and other affiliates of El Paso perform all of our administrative and
operational functions.
El Paso has an enterprise value in excess of $50 billion following its
recent merger with The Coastal Corporation. El Paso is a major participant in
every phase of the wholesale natural gas industry, spanning the energy value
chain from natural gas production and extraction to power generation. It owns
and operates a significant portion of the North America natural gas delivery
grid, operates a sophisticated energy merchant group, and is one of the nations
largest natural gas producers.
OUR OBJECTIVE AND STRATEGY
Our objective is to operate as a growth-oriented master limited partnership
with a focus on increasing our cash flow and distributions to our unitholders.
Our strategy is to combine our position as a provider of midstream services in
the deeper water regions of the Gulf of Mexico with an aggressive effort to
acquire and develop diversified onshore midstream energy assets. Accordingly, we
also expect a substantial portion of our growth to relate to onshore activities
and operations. Further, our strategy includes identifying opportunities that
create synergies with the other assets and operations of El Paso. We intend to
continue de-emphasizing our commodity-based activities, such as exploration and
production operations, in the future and concentrate on fee-based operations,
such as gathering, processing, storage and fractionation, which provide more
stable cash flows. We intend to execute our business strategy by:
- expanding our existing Gulf of Mexico assets further into the deeper
water regions through projects supported by new discoveries and long-term
commitments, by:
- constructing new pipelines and gathering systems, as well as expanding
the capacity of our existing infrastructure;
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- constructing platforms at strategically located points to act as
multi-purpose hubs and to attract incremental supplies to our network of
pipelines; and
- using excess capacity in our offshore assets to attract new throughput
at low incremental costs;
- purchasing or constructing onshore pipelines, gathering systems, storage
and fractionation facilities and other midstream assets to provide a
broad range of fee-based services to producers, marketers and users of
energy products; and
- leveraging the significant nationwide asset base and operational
expertise of El Paso.
RECENT EVENTS
Increased Quarterly Distributions
On January 29, 2001, we announced an increase of $0.10 per year in our
quarterly distribution to common unitholders, resulting in a quarterly rate of
$0.575 per unit ($2.30 per unit annually). This increase will be effective for
the distribution scheduled to be paid in May 2001.
Fourth Quarter and Year-To-Date Results
We announced net income and cash flow, as measured by adjusted earnings
before interest, depreciation and taxes, or adjusted EBITDA, of $5.3 million and
$30.4 million, respectively, for the quarter ended December 31, 2000. These
results compared with $1.9 million and $27.1 million, respectively, for the
fourth quarter of 1999. Net income and adjusted EBITDA for 2000 totaled $20.5
million and $107.1 million, respectively, compared with $18.8 million and $91.3
million, respectively, for the year ended December 31, 1999.
In the fourth quarter, the improved net income and adjusted EBITDA reflect
the addition of our El Paso Intrastate-Alabama pipeline, the first full quarter
of operations from our Crystal gas storage businesses, and additional proceeds
from business interruption insurance related to the January 2000 rupture of our
Poseidon oil pipeline. For the year, net income and adjusted EBITDA were higher
in 2000 compared with 1999 due to our increased ownership of the Viosca Knoll
gathering system and a full year of operations from our Allegheny pipeline,
along with significant contributions from our El Paso Intrastate-Alabama
pipeline and our Crystal gas storage businesses.
After income allocated to our general partner and our Series B Preference
Unit holder, we announced a fourth quarter net loss of $0.11 per common unit as
compared with a net loss of $0.05 per common unit for the fourth quarter 1999.
We also announced a net loss of $0.03 per common unit for 2000 compared with a
net loss of $0.34 per common unit in 1999.
Asset Acquisitions and Dispositions
During the first quarter of 2001, we entered into a series of transactions
that will allow us to further diversify our portfolio of assets and grow our
sources of cash flow. In February 2001, we purchased for approximately $133
million fee-based NGL transportation and fractionation assets located in south
Texas from subsidiaries of El Paso, which had purchased those assets from
subsidiaries of PG&E in December 2000. We paid for these NGL facilities by
borrowing from our revolving credit facility.
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In January 2001, we and Deepwater Holdings L.L.C., our equity investee,
sold our interests in several offshore Gulf of Mexico assets including our
interests in the Stingray, Nautilus, Manta Ray Offshore, Green Canyon and Tarpon
natural gas pipeline systems, as well as interests in two offshore platforms and
a dehydration facility. Total proceeds from the sale of these assets were
approximately $158 million. Additionally, upon Federal Trade Commission, or FTC,
approval, we will sell our interest in the UTOS natural gas pipeline system. We
expect this sale to occur by the end of March 2001 and the proceeds to be
approximately $4 million. As additional consideration for the sales, El Paso
will pay us $29 million in quarterly installments of $2.25 million over the next
three years and $2 million in the first quarter of 2004. These sales occurred as
a result of a FTC order relating to El Paso's merger with The Coastal
Corporation. We still own and operate significant offshore assets, including our
interest in the Viosca Knoll, East Breaks and HIOS natural gas pipeline systems;
the Poseidon and Allegheny oil pipeline systems; and several multi-purpose
offshore production-handling platforms, including the Prince TLP, which we
expect to place in service in mid-2001.
Financings
In the third quarter of 2000, we raised approximately $101 million in cash
from a public offering of 4.6 million common units. Additionally, we financed
our August 2000 acquisition of the Crystal gas storage businesses by issuing
approximately $170 million of a new series of non-voting, perpetual limited
partner interests. We do not have to make cash distributions in respect of these
new units until 2010.
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OUR STRUCTURE
El Paso Energy Partners Company, our sole general partner and an indirect
wholly-owned subsidiary of El Paso Corporation, manages our activities and
conducts our business. Through our general partner, we utilize the employees of,
and management services provided by, El Paso Corporation and its affiliates
under a management agreement. The following chart depicts our ownership
structure after giving effect to the transactions described in this prospectus
supplement.
[A chart depicting El Paso Corporation's 25.8% ownership interest (qualified by
footnotes (1) and (2)) and public unitholders' 74.2% ownership interest
(qualified by footnote (1)) in El Paso Energy Partners following the offering
assuming the underwriters do not exercise their over-allotment option. The chart
also depicts El Paso Energy Partners ownership in each of its four business
segments and the assets that comprise such business segments as follows:]
NGL Fractionation &
Pipelines & Offshore Platforms Natural Gas & Oil Properties Transportation
- ----------------------------------------- ------------------------------------- ------------------------------------
PIPELINES OWNERSHIP OWNERSHIP FRACTIONATORS OWNERSHIP
- --------- --------- --------- ------------- ---------
- - Allegheny 100.0% - Viosca Knoll Block 817 100.0% - Shoup 100.0%
- - El Paso Intrastate-Alabama 100.0% - Garden Banks Block 72 50.0% - Armstrong 100.0%
- - Viosca Knoll 100.0% - Garden Banks Block 117 50.0% - Delmita 100.0%
- - East Breaks 50.0% - West Delta Block 35 38.8% - Hattiesburg 100.0%
- - HIOS 50.0% - Prince Field 9.0%(4) - Petal 100.0%
- - Poseidon 36.0% - Garden Banks Block 73 2.5%(5)
Natural Gas Storage
PLATFORMS -----------------------------------
- ------ -------- GATHERING PIPELINES
- - East Cameron Block 373 100.0% -------------------
- - Prince TLP 100.0%(3) - Thompsonville Lateral 100.0%
- - Ship Shoal Block 331 100.0% - Shilling Lateral 100.0%
- - Viosca Knoll Block 817 100.0% - SACC Mainline 100.0%
- - Ship Shoal Block 332 50.0% - South Texas Pipeline 100.0%
- - Garden Banks Block 72 50.0%
- ---------------
(1) Represents ownership interest after giving effect to this common unit
offering, assuming the underwriters do not exercise their over-allotment
option. Prior to the consummation of this offering, El Paso Corporation,
through its subsidiaries, owns 27.6% of our common units representing
limited partner interests and 72.4% is held publicly.
(2) El Paso Energy Partners Company, a wholly-owned indirect subsidiary of El
Paso Corporation, is our general partner. El Paso Corporation's ownership
interest in us, which is held by our general partner and its affiliates,
includes the limited partner interest described in footnote (1), a 1.0%
general partner interest, and a 1.0% non-managing member interest in
substantially all of our subsidiaries. In addition, a subsidiary of El Paso
Corporation holds $170 million of our Series B Cumulative Redeemable
Preference Units.
(3) Currently under construction in the Prince Field. We expect to place the
Prince TLP in service in mid-2001.
(4) Overriding royalty interest convertible into a 30% undivided working
interest. Production from this field is committed to our Prince TLP.
(5) Overriding royalty interest.
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THE OFFERING
Securities offered......... 2,250,000 common units
2,587,500 common units if the underwriters exercise
in full their over-allotment option
NUMBER OF PERCENT
UNITS OF TOTAL
---------- --------
Units to be outstanding after the
Offering........................... Common Units............................. 34,042,814 100%
========== =====
If the underwriters exercise in full their
over-allotment option, we will issue an additional
337,500 common units, which will result in
34,380,314 common units outstanding after the
offering.
Use of proceeds............ We estimate that we will receive approximately
$66.7 million from the sale of the common units, or
$76.8 million if the underwriters' over-allotment
option is exercised in full, in each case, after
deducting underwriting discounts and commissions.
We plan to use the net proceeds from this offering,
including any from the exercise of the
underwriters' over-allotment option, to reduce
indebtedness under our revolving credit facility.
We may reborrow funds available under our revolving
credit facility in the future for general business
purposes, including expanding our offshore and
onshore infrastructure through acquisitions and
construction.
New York Stock Exchange
symbol................... EPN
TAX CONSIDERATIONS
The tax consequences to you of an investment in common units will depend in
part on your own tax circumstances. For a discussion of the principal federal
income tax considerations associated with our operations and the purchase,
ownership and disposition of units, see "Income Tax Considerations" beginning on
page 30 of the accompanying prospectus. You should consult your own tax advisor
about the federal, state and local tax consequences peculiar to your
circumstances.
We estimate that if you purchase a common unit in this offering and hold
the unit through the record date for the distribution with respect to the final
calendar quarter of 2003 (assuming quarterly distributions on the common units
with respect to that period are equal to the current quarterly distribution rate
of $0.575 per common unit), you will be allocated an amount of federal taxable
income for that period that is less than or equal to approximately 20% of the
amount of cash distributed to you with respect to that period.
This estimate is based upon many assumptions regarding our business and
operations, including assumptions as to tariffs, capital expenditures, cash
flows and anticipated cash distributions. This estimate and the assumptions are
subject to, among other things, numerous business, economic, regulatory and
competitive uncertainties beyond our control and to certain tax reporting
positions that we have adopted. The Internal Revenue Service could disagree with
our tax reporting positions, including estimates of the relative fair market
values of our assets and the validity of curative allocations. Accordingly, we
cannot assure you that the estimate will be correct. The actual percentage of
distributions that will constitute taxable income could be higher or lower, and
any differences could be material.
Ownership of common units by tax-exempt entities, regulated investment
companies and foreign investors raises issues unique to such persons. See
"Income Tax Considerations -- Tax Exempt Organizations and Certain Other
Investors" in the accompanying base prospectus.
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SUMMARY OF RISK FACTORS
You should carefully consider the discussion of risks set forth in this
prospectus, including the prospectus supplement, the accompanying base
prospectus and the other documents incorporated by reference, prior to investing
in our common units. Some of the risks discussed include:
- Our ability to distribute cash to you depends on factors out of our
control, including the continuation of distributions from our joint
ventures, declines in the market prices for natural gas and oil,
increases in interest rates, the development and production of natural
gas and oil reserves, and the rates for, and volume of, production that
we handle.
- Our substantial indebtedness could adversely restrict our ability to
operate, affect our financial condition and prevent us from making
distributions to you.
- Potential future acquisitions and expansions may adversely affect our
business by increasing our risks of being unable to effectively integrate
these new operations and substantially increasing the level of our
indebtedness and contingent liabilities.
- We cannot cause our joint ventures to take or not to take certain actions
unless some or all of our joint venture partners agree.
- Our actual project costs could exceed our forecast, and our cash flow
from projects may not be immediate.
- You will have limited voting rights and will not control our general
partner, we may issue additional securities, diluting your interests, and
a change of control of our general partner may adversely affect you.
- El Paso and its affiliates have conflicts of interest with us and,
accordingly, you.
- Our partnership agreement purports to limit our general partner's
fiduciary duties and certain other obligations relating to us.
- Our general partner and its affiliates may sell units or other limited
partner interests in the trading market, which could reduce the market
price of your securities.
- Your tax liability resulting from an investment in our limited partner
interests could exceed any cash you receive as a distribution from us or
the proceeds from dispositions of those securities.
- The fractionation business is cyclical.
- Our fractionation facilities are dedicated to a single customer, which is
an affiliate of our general partner, for a twenty-year period.
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USE OF PROCEEDS
We expect that we will receive approximately $66.7 million from the sale of
our common units, or $76.8 million if the underwriters' over-allotment option is
exercised in full, in each case, after deducting underwriting discounts and
commissions.
We plan to use the net proceeds from this offering, including any from the
exercise of the underwriters' over-allotment option, to reduce indebtedness
under our revolving credit facility. We may reborrow funds available under our
revolving credit facility in the future for general business purposes, including
expanding our offshore and onshore infrastructure through acquisitions and
construction.
As of March 20, 2001, we had $338 million outstanding under our revolving
credit facility bearing interest at an average rate of 7.81% per annum with a
final maturity of May 2002. Over the past 12 months, we used proceeds from our
revolving credit facility for general business purposes, including acquiring and
constructing pipelines, platforms and related infrastructure facilities and
funding working capital.
CAPITALIZATION
The following table sets forth our unaudited consolidated capitalization on
a historical basis as of September 30, 2000, our unaudited pro forma
consolidated capitalization which reflects (1) additional borrowings in the
fourth quarter of 2000 for the Prince TLP and other working capital uses, (2)
the disposition of our interests in several offshore assets in the first quarter
of 2001 and the application of the net proceeds received to repay our
indebtedness under our revolving credit facility, and (3) additional borrowings
related to the acquisition of the NGL transportation and fractionation assets in
the first quarter of 2001. The unaudited pro forma as adjusted consolidated
capitalization reflects (1) through (3) above, as well as the sale of the common
units offered by this prospectus supplement and the accompanying base prospectus
and the application of the net proceeds (assuming the underwriters'
over-allotment option is not exercised) to repay our indebtedness under our
revolving credit facility, and the capital contribution by our general partner
in order to maintain its 1% general partner interest in us as a result of
issuing additional common units. See "Use of Proceeds" above. This table should
be read in conjunction with our consolidated financial statements and the notes
to those financial statements that are incorporated by reference in this
prospectus supplement and the accompanying base prospectus.
AS OF SEPTEMBER 30, 2000
----------------------------------
PRO FORMA
ACTUAL PRO FORMA AS ADJUSTED
-------- --------- -----------
(IN THOUSANDS)
Long-term debt:
Revolving credit facility........................ $288,000 $ 342,767 $275,812
Senior subordinated notes due 2009............... 175,000 175,000 175,000
Project financing................................ 21,000 45,000 45,000
-------- --------- --------
Total long-term debt..................... 484,000 562,767 495,812
-------- --------- --------
Minority interest.................................. (2,115) (2,262) (2,262)
-------- --------- --------
Partners' capital:
Series B preference unitholders.................. 171,417 175,668 175,668
Series A preference unitholders.................. 812 0(1) 0(1)
Common unitholders............................... 153,832 131,437 197,723
General partner.................................. 2,722 2,601 3,271
-------- --------- --------
Total partners' capital.................. 328,783 309,706 376,661
-------- --------- --------
Total capitalization..................... $810,668 $ 870,211 $870,211
======== ========= ========
- ---------------
(1) The remaining Series A preference units were redeemed in the fourth quarter
of 2000.
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SELECTED HISTORICAL CONSOLIDATED FINANCIAL DATA
The historical financial information as of and for the nine months ended
September 30, 2000 and 1999, and as of and for the years ended December 31,
1999, 1998 and 1997, were derived from our historical consolidated financial
statements and notes thereto incorporated into this prospectus supplement by
reference. We believe that all material adjustments, consisting only of normal
recurring adjustments necessary for the fair presentation of our interim
results, have been included. Results of operations for any interim period are
not necessarily indicative of the results of operations for the entire year due
to the seasonal nature of our business.
NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
STATEMENT OF OPERATIONS:
Gathering, transportation and platform
services.............................. $ 57,417 $ 21,645 $ 33,694 $ 17,320 $ 17,329
Oil and natural gas sales............... 16,443 23,229 29,965 31,411 58,106
Gas storage services.................... 1,544 -- -- -- --
-------- -------- -------- -------- --------
Total revenue(1).............. 75,404 44,874 63,659 48,731 75,435
-------- -------- -------- -------- --------
Costs of gas and other products......... 14,933 -- -- -- --
Operating expenses...................... 7,208 18,751 22,402 27,558 26,013
Depreciation, depletion and
amortization.......................... 20,418 21,694 30,630 29,267 46,289
Impairment, abandonment and other....... -- -- -- (1,131) 21,222
-------- -------- -------- -------- --------
Total operating costs......... 42,559 40,445 53,032 55,694 93,524
-------- -------- -------- -------- --------
Operating income........................ 32,845 4,429 10,627 (6,963) (18,089)
Equity investment earnings(1)........... 16,287 26,594 32,814 26,724 29,327
Interest income and other(2)............ 1,460 10,409 10,461 771 1,475
Interest and other financing costs...... (35,524) (24,667) (35,323) (20,242) (14,169)
Minority interest in (income) loss...... (121) (176) (197) (15) 7
-------- -------- -------- -------- --------
Income (loss) before income taxes....... 14,947 16,589 18,382 275 (1,449)
Income tax benefit...................... 221 355 435 471 311
-------- -------- -------- -------- --------
Net income (loss)............. $ 15,160 $ 16,944 $ 18,817 $ 746 $ (1,138)
======== ======== ======== ======== ========
Basic and diluted net income (loss) per
unit.................................. $ .10 $ (.29) $ 0.26 $ 0.02 $ (0.06)
======== ======== ======== ======== ========
CASH DISTRIBUTIONS DECLARED PER UNIT:
Preference unit......................... $ .83 $ .83 $ 1.10 $ 1.60 $ 1.85
======== ======== ======== ======== ========
Common unit............................. $ 1.60 $ 1.58 $ 2.10 $ 2.10 $ 1.85
======== ======== ======== ======== ========
BALANCE SHEET DATA (AT END OF PERIOD):
Property and equipment, net............. $612,712 $375,286 $373,759 $241,992 $200,639
Equity investments...................... 191,020 190,178 185,766 186,079 182,301
Total assets............................ 842,548 593,654 583,585 442,726 409,842
Total debt.............................. 484,000 447,000 465,000 338,000 238,000
Partners' capital....................... 328,783 112,090 96,489 82,896 143,966
S-9
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NINE MONTHS ENDED
SEPTEMBER 30, YEAR ENDED DECEMBER 31,
------------------- ------------------------------
2000 1999 1999 1998 1997
-------- -------- -------- -------- --------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
OTHER FINANCIAL DATA:
EBITDA(3)............................... 71,010 63,126 74,429 48,668 80,224
Distributions from equity investments... 23,216 34,933 46,180 31,171 27,135
Non-cash items.......................... 1,214 (6,889) 3,869 -- --
Adjusted EBITDA(4)...................... 76,725 64,578 91,664 53,115 78,032
Net cash provided by operating
activities............................ 49,263 48,028 50,760 25,677 67,485
Net cash used in investing activities... 104,237 59,118 67,135 65,624 41,769
Net cash provided by (used in) financing
activities............................ 63,302 17,138 17,469 36,625 (35,775)
Capital expenditures included in
investing activities.................. 104,051 105,125 113,579 66,111 41,957
- ---------------
(1) We have changed our presentation of total revenue to exclude equity
investment earnings. This change has been reflected for all periods
presented and does not impact our reported net income.
(2) Includes, for the year ended December 31, 1999, $10.1 million gain on sale
of assets that is excluded from EBITDA and adjusted EBITDA for the year
ended December 31, 1999.
(3) EBITDA is defined for this purpose as net income before depreciation,
depletion and amortization; impairment, abandonment and other; interest and
other financing costs; minority interests and income tax benefit. EBITDA is
used as a supplemental financial measurement in the evaluation of our
business and should not be considered as an alternative to net income as an
indicator of our operating performance or as an alternative to cash flows
from operating activities as a measure of liquidity or any other measure in
accordance with generally accepted accounting principles. EBITDA may not be
a comparable measurement among different companies.
(4) Adjusted EBITDA is defined for this purpose as EBITDA, less equity
investment earnings, plus cash distributions from equity investments, and,
as appropriate, other non-cash items. Because a significant portion of our
cash flow comes from distributions from our unconsolidated joint ventures,
we believe adjusted EBITDA provides additional information which may be used
to better understand our operations. Adjusted EBITDA is used as a
supplemental financial measurement in the evaluation of our business and
should not be considered as an alternative to net income as an indicator of
our 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.
S-10
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UNDERWRITING
Under the terms and subject to the conditions stated in the underwriting
agreement dated the date of this prospectus supplement, each underwriter named
below has severally agreed to purchase from us, and we have agreed to sell to
such underwriter, the number of units set forth opposite the name of such
underwriter.
NUMBER OF
UNDERWRITERS COMMON UNITS
- ------------ ------------
Salomon Smith Barney Inc. .................................. 1,125,000
UBS Warburg LLC............................................. 1,125,000
---------
Total............................................. 2,250,000
=========
The underwriting agreement provides that the obligations of the several
underwriters to purchase the units included in this offering are subject to
approval of certain legal matters by counsel and to certain other conditions.
The underwriters are obligated to purchase all the units (other than those
covered by the over-allotment option described below) if they purchase any of
the units.
The underwriters, for whom Salomon Smith Barney Inc. and UBS Warburg LLC
are acting as representatives, propose to offer some of the units directly to
the public at the public offering price set forth on the cover page of this
prospectus supplement and some of the units to certain dealers at the public
offering price less a concession not in excess of $0.80 per unit. The
underwriters may allow, and such dealers may reallow, a concession not in excess
of $0.10 per unit on sales to certain other dealers. If all of the units are not
sold at the initial offering price, the underwriters may change the public
offering price and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 337,500 additional
common units at the public offering price less the underwriting discount. The
underwriters may exercise such option solely for the purpose of covering
over-allotments, if any, in connection with this offering. To the extent such
option is exercised, each underwriter will be obligated, subject to certain
conditions, to purchase a number of additional units approximately proportionate
to such underwriter's initial purchase commitment.
We, our general partner and some affiliates of our general partner have
agreed with the underwriters, for a period of 90 days from the date of this
prospectus supplement, not to, without the prior written consent of Salomon
Smith Barney Inc., dispose of or hedge any common units of El Paso Energy
Partners or any securities convertible into or exchangeable for common units,
except for pledges of such common units to secure certain loans and the
disposition of such common units in connection with the lender exercising its
remedies as a secured party. Salomon Smith Barney Inc. in its sole discretion
may release any of the securities subject to these lock-up agreements at any
time without notice.
The common units are listed on the New York Stock Exchange under the symbol
"EPN." The following table shows the per unit and total underwriting discounts
and commissions to be paid to the underwriters by us in connection with this
offering. These amounts are shown assuming both no exercise and full exercise of
the underwriters' option to purchase additional common units.
PAID BY EL PASO
ENERGY PARTNERS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per unit.................................................... $ 1.32 $ 1.32
Total....................................................... $2,964,375 $3,409,031
In connection with the offering, Salomon Smith Barney Inc., on behalf of
the underwriters, may purchase and sell the common units in the open market.
These transactions may include over-allotment, syndicate covering transactions
and stabilizing transactions. Over-allotment involves syndicate sales of common
units in excess of the number of shares to be purchased by the underwriters in
the offering,
S-11
14
which creates a syndicate short position. Syndicate covering transactions
involve purchases of the common units in the open market after the distribution
has been completed in order to cover syndicate short positions. Stabilizing
transactions consist of certain bids or purchases of common units made for the
purpose of preventing or retarding a decline in the market price of the common
units while the offering is in progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when
Salomon Smith Barney Inc., in covering syndicate short positions or making
stabilizing purchases, repurchases shares originally sold by that syndicate
member.
Any of these activities by the underwriters may cause the price of the
common units to be higher than the price that otherwise would exist in the open
market in the absence of such transactions. These transactions may be effected
on the New York Stock Exchange or in the over-the-counter market, or otherwise
and, if commenced, may be discontinued by the underwriters at any time.
We estimate that our portion of the total expenses, excluding underwriting
discounts and commissions, of this offering will be $500,000.
The underwriters have performed certain investment banking and advisory
services for us from time to time for which they have received customary fees
and expenses. The representatives may, from time to time, engage in transactions
with and perform services for us in the ordinary course of their business.
We have agreed to indemnify the underwriters against certain liabilities,
including liabilities under the Securities Act of 1933, or to contribute to
payments the underwriters may be required to make in respect of any of those
liabilities.
LEGAL MATTERS
Certain legal matters with respect to the legality of the common units
being offered and certain tax matters will be passed upon for us by Akin, Gump,
Strauss, Hauer & Feld, L.L.P., Houston, Texas. Certain legal matters with
respect to the legality of the common units being offered will be passed upon
for the underwriters by Andrews & Kurth L.L.P., Houston, Texas.
FORWARD-LOOKING STATEMENTS
This prospectus supplement, the accompanying prospectus and the documents
we have incorporated by reference include and incorporate by reference
forward-looking statements within the meaning of the Private Securities
Litigation Reform Act of 1995. 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 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 "Prospectus Supplement Summary," "Risk Factors," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
other sections of this prospectus supplement, the accompanying prospectus and in
the documents we have 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 supplement, the accompanying
prospectus or the documents we have incorporated by reference. These risks
include the risks that are identified in this prospectus supplement and the
accompanying prospectus, which are primarily listed in the "Risk Factors"
section. These risks may also be specifically described in our Annual Report on
Form 10-K and Quarterly Reports on Form 10-Q and other documents we have filed
with the Securities and Exchange Commission. We undertake no obligation to
publicly update or revise any forward-looking statements, whether as a result of
new information, future 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.
S-12
15
DATED JUNE 30, 2000
PROSPECTUS
[EL PASO LOGO]
$500,000,000
EL PASO ENERGY PARTNERS, L.P.
------------------
We may offer and sell from time to time up to $500,000,000 in one or more
classes or series of any limited partnership interests we are authorized by our
partnership agreement to issue, including, but not limited to common units,
preference units, subordinate units and any other capital or equity securities
in one or more separate offerings with this prospectus. We will determine the
prices and terms of the sales at the time of each offering and will describe
them in a supplement to this prospectus.
This prospectus may only be used to offer or sell securities if it is
accompanied by a prospectus supplement. The prospectus supplement will contain
important information about us and the securities which is not included in this
prospectus. You should read this prospectus and the prospectus supplement
carefully.
We may sell these securities to underwriters or dealers, or we may sell
them directly to other purchasers. See "Plan of Distribution." The prospectus
supplement will list any underwriters and the compensation that they will
receive. The prospectus supplement will also show you the total amount of money
that we will receive from selling these securities, after we pay certain
expenses of the offering.
Our existing common units are listed for trading on the New York Stock
Exchange under the symbol "EPN" and our existing preference units are listed
under the symbol "EPN.P".
INVESTING IN OUR SECURITIES INVOLVES CERTAIN RISKS. LIMITED PARTNER
INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A CORPORATION. SEE
"RISK FACTORS" BEGINNING ON PAGE 1.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved these securities or determined if this
prospectus is truthful or complete. Any representation to the contrary is a
criminal offense.
The date of this prospectus is June 30, 2000
16
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE IN THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANYONE TO PROVIDE YOU WITH
DIFFERENT INFORMATION. WE ARE NOT MAKING AN OFFER OF THESE SECURITIES IN ANY
STATE WHERE THE OFFER IS NOT PERMITTED. YOU SHOULD NOT ASSUME THAT THE
INFORMATION PROVIDED BY THIS PROSPECTUS IS ACCURATE AS OF ANY DATE OTHER THAN
THE DATE ON THE FRONT OF THIS PROSPECTUS.
TABLE OF CONTENTS
PAGE
----
El Paso Energy Partners, L.P. .............................. iii
About this Prospectus....................................... iii
Forward-Looking Statements and Other Information............ iii
Where You Can Find More Information......................... iv
Incorporation of Documents by Reference..................... v
Risk Factors................................................ 1
Risks Related to Our Business............................. 1
Risks Inherent in an Investment in Our Limited Partner
Interests.............................................. 6
Conflicts of Interest Risks............................... 8
Risks Related to Our Legal Structure...................... 11
Tax Risks................................................. 12
Use of Proceeds............................................. 15
Description of Limited Partner Interests.................... 16
Certain Other Partnership Agreement Provisions.............. 25
Income Tax Considerations................................... 30
Investment by Employee Benefit Plans........................ 45
Plan of Distribution........................................ 46
Legal Matters............................................... 47
Experts..................................................... 47
ii
17
EL PASO ENERGY PARTNERS, L.P.
We are one of the largest publicly-traded limited partnerships. Formed in
1993, we provide integrated energy services, including those relating to
gathering, transportation and other midstream activities. We are a leading
provider of gathering, transportation and other related midstream energy
services in the flextrend and deepwater trends in the Gulf of Mexico, offshore
of Louisiana and Texas. In addition, we have onshore assets and operations. Our
objective is to increase the value of our limited and general partnership
interests by acquiring and developing offshore and onshore midstream energy
assets in order to consistently grow cash flow and increase distributions to our
unitholders.
El Paso Energy Corporation, which manages our day-to-day operations and our
strategic direction through its ownership of our general partner, plans to use
us as one of its primary vehicles for acquiring and developing midstream onshore
and offshore energy infrastructure assets. With over $16 billion in assets, El
Paso Energy is engaged through its subsidiaries and affiliates in the interstate
and intrastate transportation, gathering, processing, and storage of natural
gas; the marketing of natural gas, power, and other energy-related commodities;
the generation of power; the development and operation of energy infrastructure
facilities worldwide; and the domestic exploration and production of oil and
natural gas. El Paso Energy also owns the only integrated coast-to-coast natural
gas pipeline system in the United States. On May 5, 2000, the stockholders of
both El Paso Energy and The Coastal Corporation overwhelmingly voted in favor of
matters relating to merging the two organizations to form one of the world's
leading integrated energy companies, with total assets in excess of $32 billion.
The completion of that merger is subject to the satisfaction of customary
conditions to closing, including regulatory approval.
For purposes of this prospectus, unless the context otherwise indicates,
when we refer to "us," "we," "our," "ours" or the "Partnership," we are
describing ourselves, El Paso Energy Partners, L.P., together with our
subsidiaries.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we have filed with
the Securities and Exchange Commission using a "shelf" registration process.
Under this shelf registration process, we may sell the securities described in
this prospectus in one or more offerings up to a total amount of $500,000,000.
This prospectus provides you with a general description of us and the
securities. Each time we sell securities with this prospectus, we will provide a
prospectus supplement that will contain specific information about the terms of
that offering. The prospectus supplement may also add to, update or change
information in this prospectus. The information in this prospectus is accurate
as of June 30, 2000. You should carefully read both this prospectus and any
prospectus supplement, together with additional information described under the
heading "Where You Can Find More Information" beginning on page iv.
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
This prospectus, any prospectus supplement and the documents we have
incorporated by reference contain forward-looking statements. The words
"believe," "expect," "estimate," "could," "intend," "may," "plan," "predict,"
"project," "will" and "anticipate" and similar expressions identify
forward-looking statements. Forward-looking statements include those that
address activities, events or developments that we expect or anticipate will or
may occur in the future. These include the following:
- the amount and nature of future capital expenditures;
- business strategy and measures to carry out strategy;
- competitive strengths;
- goals and plans;
- expansion and growth of our business and operations;
iii
18
- references to intentions as to future matters; and
- other similar matters.
A forward-looking statement may include a statement of the assumptions or bases
underlying the forward-looking statement. We believe we have chosen these
assumptions or bases in good faith and that they are reasonable. However, we
caution you that assumed facts or bases almost always vary from actual results,
and the differences between assumed facts or bases and actual results can be
material, depending on the circumstances. When considering forward-looking
statements, you should keep in mind the risk factors and other cautionary
statements in this prospectus, any prospectus supplement and the documents we
have incorporated by reference. We will not update these statements unless the
securities laws require us to do so.
You should rely only on the information contained in or incorporated by
reference in this prospectus or any prospectus supplement. We have not
authorized anyone to provide you with different information. We are not making
an offer of these securities in any state or jurisdiction where the offer is not
permitted. You should not assume that the information provided by this
prospectus is accurate as of any date other than the date on the front of this
prospectus.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You can inspect and/or copy these reports and other
information at offices maintained by the SEC, including:
- the principal offices of the SEC located at Judiciary Plaza, 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549;
- the Regional Offices of the SEC located at Northwestern Atrium Center,
500 West Madison Street, Suite 1400, Chicago, Illinois 60661-2511;
- the Regional Offices of the SEC located at 7 World Trade Center, New
York, New York 10048; and
- the SEC's website at http://www.sec.gov.
You may obtain information on the operation of the SEC's public reference
room by calling the SEC at 1-800-SEC-0330. Further, you can inspect similar
information at the offices of the New York Stock Exchange, located at 20 Broad
Street, New York, New York 10005.
iv
19
INCORPORATION OF DOCUMENTS BY REFERENCE
The SEC allows us to "incorporate by reference" the information we have
filed with the SEC. This means that we can disclose important information to you
without actually including the specific information in this prospectus by
referring you to those documents. The information incorporated by reference is
an important part of this prospectus. Information that we file later with the
SEC will automatically update and may replace information in this prospectus and
information previously filed with the SEC. 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 are incorporated by reference in this
prospectus until we sell all of the limited partner interests offered by this
prospectus.
- Annual Report on Form 10-K for the year ended December 31, 1999;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2000;
- Current Report on Form 8-K filed April 4, 2000; and
- Current Report on Form 8-K/A filed June 5, 2000.
- You may request a copy of any of these filings, at no cost, by writing or
telephoning us at the following address or phone number:
El Paso Energy Partners, L.P.
El Paso Energy Building
1001 Louisiana Street, 29th Floor
Houston, Texas 77002
(713) 420-2131
Attention: Investor Relations
v
20
RISK FACTORS
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION, ALTHOUGH MANY OF THE BUSINESS RISKS TO WHICH WE ARE SUBJECT ARE
SIMILAR TO THOSE THAT WOULD BE FACED BY A CORPORATION ENGAGED IN THE SAME
BUSINESS. YOU SHOULD CAREFULLY CONSIDER THE FOLLOWING RISK FACTORS, TOGETHER
WITH OTHER INFORMATION CONTAINED IN THIS PROSPECTUS, ANY PROSPECTUS SUPPLEMENT
AND THE INFORMATION WE HAVE INCORPORATED BY REFERENCE BEFORE INVESTING IN
LIMITED PARTNER INTERESTS.
This prospectus and any prospectus supplement includes, or may include,
"forward-looking statements" within the meaning of Section 27A of the Securities
Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including,
in particular, the statements about our plans, strategies and prospects.
Although we believe that our plans, intentions and expectations reflected in or
suggested by such forward-looking statements are reasonable, we cannot assure
you that we will achieve such plans, intentions or expectations. Important
factors that could cause actual results to differ materially from the
forward-looking statements we make in this prospectus and in any prospectus
supplement are set forth below and elsewhere in this prospectus. All
forward-looking statements attributable to us or persons acting on our behalf
are expressly qualified in their entirety by the following cautionary
statements.
RISKS RELATED TO OUR BUSINESS
OUR ABILITY TO DISTRIBUTE CASH TO YOU DEPENDS ON FACTORS OUT OF OUR
CONTROL, INCLUDING THE RATES FOR, AND VOLUME OF, PRODUCTION THAT WE HANDLE.
We do not guarantee that we will make cash distributions to you. Our
ability to make cash distributions, as well as our ability to make payments on
our indebtedness and to fund future working capital, capital expenditures and
other general corporate requirements will depend on our ability to generate cash
in the future. This, to a certain extent, is subject to economic, financial,
competitive, legislative, regulatory and other factors that are beyond our
control.
Our future performance and, therefore, our ability to make cash
distributions will largely depend on the volume of, and rates for, the natural
gas and oil handled by our pipelines, platforms and other energy infrastructure
assets. Many factors outside of our control can affect these volumes and rates.
The following factors, among others, affect the rates that our pipelines and
other facilities may charge:
- commodity prices for the production handled;
- regional, domestic and international supply and demand;
- energy legislation;
- federal or state taxes, if any, on the sale or transportation of natural
gas and natural gas liquids;
- abundance of supplies of alternative energy sources;
- future production and development costs;
- competition from others; and
- the maximum rates established by the FERC for our regulated facilities.
Any decrease in the rates charged or volumes handled by any of our pipelines and
other facilities could reduce our available cash. Accordingly, we cannot assure
you that we will be able to continue to generate enough cash flow to satisfy our
existing commitments, including paying our indebtedness, funding our other
liquidity needs, including the purchase, construction or other acquisition of
assets or businesses in the future, and making cash distributions to you.
1
21
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY RESTRICT OUR ABILITY TO
OPERATE, AFFECT OUR FINANCIAL CONDITION AND PREVENT US FROM MAKING DISTRIBUTIONS
TO YOU.
We have a significant amount of indebtedness and the ability to incur more
indebtedness. In May 1999, we issued $175.0 million of 10 3/8% senior
subordinated notes due in 2009, which are supported by guarantees of our
subsidiaries. We are also party to a $375.0 million revolving credit facility,
which is collateralized by a pledge of the equity of our subsidiaries and
substantially all of our other assets and supported by guarantees of our
subsidiaries. As of May 31, 2000, we had $364.0 million outstanding under this
revolving credit facility and would have been permitted to borrow up to an
additional $11.0 million.
We must comply with various affirmative and negative covenants contained in
the indenture related to our senior subordinated notes and our revolving credit
facility. Among other things, these covenants limit our ability 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 our contracts.
Our indebtedness also requires us to make mandatory repayments under certain
circumstances, including when we sell certain assets, fail to achieve or
maintain certain financial targets or experience a change in control. We cannot
prepay the balance outstanding under our senior subordinated notes without
incurring substantial economic penalties.
The restrictions under our indebtedness may prevent us from engaging in
certain transactions which might otherwise be considered beneficial to us. In
addition, our substantial indebtedness could have other important consequences
to you. For example, it could:
- increase our vulnerability to general adverse economic and industry
conditions;
- limit our ability to make distributions to you, 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 our assets and opportunities
because of the need to dedicate a substantial portion of our cash flow
from operations to payments on our indebtedness or to comply with any
restrictive terms of our indebtedness;
- limit our flexibility in planning for, or reacting to, changes in our
businesses and the industries in which we operate; and
- place us at a competitive disadvantage as compared to our competitors
that have less debt.
We may incur additional indebtedness in the future, either under our
existing credit agreement, under joint venture credit agreements, on a project
finance or similar basis, or a combination of any of these. If we incur
additional indebtedness in the future, it would be under our existing credit
agreement or under arrangements which may have terms and conditions at least as
restrictive as those contained in our existing credit agreement. 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 such indebtedness and
foreclose upon the collateral, if any, securing that indebtedness. Such an event
could limit our ability to make cash distributions to you, and could adversely
affect the market price of our securities.
2
22
POTENTIAL FUTURE ACQUISITIONS AND EXPANSIONS MAY ADVERSELY AFFECT OUR
BUSINESS BY SUBSTANTIALLY INCREASING THE LEVEL OF OUR INDEBTEDNESS AND
CONTINGENT LIABILITIES AND INCREASING OUR RISKS OF BEING UNABLE TO EFFECTIVELY
INTEGRATE THESE NEW OPERATIONS.
Part of our business strategy includes purchasing, constructing and
otherwise acquiring assets, including entire businesses, that we believe will
present opportunities to realize synergies, expand our role in the energy
infrastructure business, increase our market position or ultimately increase
distributions to unitholders. Although we intend to continue to expand our
business through acquisitions, this strategy may require substantial capital,
and we may not be able to raise the necessary funds on satisfactory terms or at
all.
We regularly engage in discussions with respect to potential acquisition
and investment opportunities. If we consummate any future acquisitions, our
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 we will consider in determining the application of these funds.
We are currently considering some specific future acquisitions or
investments, although we cannot assure you that we will be able to reach
agreement with respect to any of these opportunities. If consummated, any
acquisition or investment would likely result in the incurrence of indebtedness
and contingent liabilities and an increase in interest expense and amortization
expenses related to goodwill and other intangible assets, which could have a
material adverse effect upon our business.
While, historically, our operations have been focused primarily on
pipelines, platforms and other energy infrastructure assets in the Gulf of
Mexico, our current strategy contemplates substantial growth through the
acquisition and development of a wider range of midstream and other energy
infrastructure assets, including onshore and offshore, domestic and foreign, and
pipeline and non-pipeline assets. 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 difficulties which arise because of unfamiliarity
with new assets and the businesses associated with them and new geographic areas
and the diversion of management's attention from other business concerns.
Further, unexpected costs and challenges may arise whenever businesses with
different operations or management are combined. Management and other personnel
must devote substantial time to integrate an acquired business with existing
operations, for instance, and these efforts may temporarily distract their
attention from day-to-day business, the development or acquisition of new
businesses and other business opportunities. For all of these reasons, as
acquisitions and expansions occur, our business could be adversely affected.
OUR ACTUAL PROJECT COSTS COULD EXCEED OUR FORECAST, AND OUR CASH FLOW FROM
PROJECTS MAY NOT BE IMMEDIATE.
Our forecast contemplates significant expenditures for the purchase,
construction or other acquisition of pipelines and related infrastructure,
including some projects with significant technological challenges. Underwater
operations, especially those in water depths in excess of 600 feet, are very
expensive and involve much more uncertainty and risk than other operations.
Further, if a problem occurs, 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 we will be able to complete our
projects at the costs currently estimated. If we experience material cost
overruns, we would 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 our future results of operations.
3
23
Our revenues and cash flow may not increase immediately upon the
expenditure of funds on a particular project. For instance, if we build a new
pipeline or platform or expand an existing facility, the construction may occur
over an extended period of time and we 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 our revenues and cash flow do not
increase at projected levels because of substantial unanticipated delays of any
future projects, we might not meet our obligations as they become due.
WE WILL FACE COMPETITION FROM THIRD PARTIES TO HANDLE ANY NEW PRODUCTION.
Even if additional reserves exist in the areas accessed by our pipelines
and other facilities and are ultimately produced, we cannot assure you that any
of these reserves will be gathered, transported, processed or otherwise handled
by us. We would compete 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;
- available capacity;
- rates; and
- access to onshore markets.
FERC REGULATION AND A CHANGING REGULATORY ENVIRONMENT COULD AFFECT OUR CASH
FLOW.
The FERC extensively regulates certain of our pipelines and other
facilities. This regulation extends to such matters as:
- rate structures;
- rates of return on equity;
- the services that our regulated pipelines are permitted to perform;
- our ability to seek recovery of various categories of costs;
- the acquisition, construction and disposition of assets; and
- to an extent, the level of competition in that regulated industry.
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 our financial position, results of operations or cash
flows.
All but one of our regulated pipelines is over 20 years old. As a result,
each such pipeline has depreciated significant portions of its initial capital
expenditures. Unless those pipelines make additional capital expenditures, they
could be fully depreciated within a couple of years. This would reduce the rate
base and increase the likelihood that FERC would reduce the approved rates for
each of those pipelines.
A NATURAL DISASTER, CATASTROPHE OR OTHER INTERRUPTION EVENT COULD DAMAGE
PIPELINES AND OTHER FACILITIES THAT ARE OWNED BY US OR THAT DELIVER NATURAL GAS
OR OIL TO US, WHICH COULD CURTAIL OUR OPERATIONS AND, POSSIBLY, ADVERSELY AFFECT
OUR CASH FLOW.
If one or more pipelines or other facilities that are owned by us or that
deliver natural gas or oil to us is damaged by severe weather or any other
natural disaster, accident, catastrophe or other event, our operations could be
significantly interrupted. Similar interruptions could result from damage to
production facilities or other production stoppages arising from factors beyond
our control. These interruptions might range from a week or less for a minor
incident to six months or a year or more for a major interruption.
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Any event that interrupts the fees generated by our pipelines or other
income-producing assets, or which causes us to make significant expenditures not
covered by insurance, could adversely impact the market price of our limited
partner interests and the amount of cash available for distribution to our
limited partners. Further, although we carry limited business interruption
insurance, which we consider to be appropriate, it would not cover many
interruptions that might occur, and in the future we may not be able to obtain
other desirable insurance on commercially reasonable terms.
ENVIRONMENTAL COSTS AND LIABILITIES AND CHANGING ENVIRONMENTAL REGULATION
COULD AFFECT OUR CASH FLOW.
Our operations are subject to extensive federal, state and local regulatory
requirements relating to environmental affairs, health and safety, waste
management and chemical products. Governmental authorities have the power to
enforce compliance with applicable regulations and permits and to subject
violators to civil and criminal penalties, including civil fines, injunctions or
both. Third parties may also have the right to pursue legal actions to enforce
compliance. We will probably make expenditures in connection with environmental
matters as part of normal capital expenditure programs. However, future
environmental law developments, such as stricter laws, regulations or
enforcement policies, could significantly increase our cost of handling,
manufacture, use, emission or disposal of substances or wastes. Moreover, as
with other companies engaged in similar or related businesses, our operations
always have some risk of environmental costs and liabilities because we handle
petroleum products. We cannot assure you that we will not incur material
environmental costs and liabilities.
THE FUTURE PERFORMANCE OF OUR PRODUCTION HANDLING OPERATIONS, AND THUS OUR
ABILITY TO MAINTAIN OUR CASH DISTRIBUTIONS, DEPENDS ON SUCCESSFUL EXPLORATION
AND DEVELOPMENT OF ADDITIONAL OIL AND NATURAL GAS RESERVES.
The natural gas and oil reserves available to our pipelines and other
production handling infrastructure from existing wells naturally decline over
time. In order to offset this natural decline, our pipelines and other
infrastructure must access additional reserves. Additionally, some of the
projects we have planned or recently completed are dependent on reserves that we
expect to be produced from newly discovered properties which producers are
currently developing. This means that our long-term prospects depend upon the
successful exploration and development of additional reserves in areas
accessible to our pipelines and other infrastructure, such as El Paso Energy's
Prince Field.
Finding and developing new natural gas and oil reserves from offshore
properties is very expensive. The flextrend (water depths of 600 to 1,500 feet)
and deepwater (water depths greater than 1,500 feet) areas, especially, will
require large capital expenditures by producers for exploration, development
drilling, installation of production facilities and pipeline extensions to reach
the new wells.
Many economic and business factors out of our control can adversely affect
the decision by any producer to explore for and develop new reserves. These
factors include relatively low natural gas and oil 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 in the Gulf of Mexico declined in relation to prior
years. If hydrocarbon prices decline to those levels again or capital spending
by the energy industry continues to decrease or remains at low levels for
prolonged periods, our results of operations and cash flow could suffer.
PRICE AND VOLUME VOLATILITY IS SUBSTANTIALLY OUT OF OUR CONTROL AND COULD
HAVE AN ADVERSE EFFECT ON REVENUES AND CASH FLOW FROM OUR PRODUCING OIL AND
NATURAL GAS PROPERTIES.
Revenues and cash flows from our producing oil and natural gas properties
will be substantially affected by our future production from those properties
and the prices we receive for that production, both of which are often beyond
our ability to control. In 1998, oil and natural gas prices dramatically
declined,
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and although prices have since improved, we cannot assure you that there will
not be future declines in commodity prices.
WE HAVE EXPOSURE TO MOVEMENTS IN INTEREST RATES AND COMMODITY PRICES
RELATING TO OUR NATURAL GAS AND OIL PRODUCTION, WHICH WE HEDGE PARTIALLY USING
FINANCIAL DERIVATIVE INSTRUMENTS.
We have exposure to movements in interest rates and commodity prices
relating to our natural gas and oil production, which we hedge using financial
derivative instruments. Our results of operations, and our cash flows, could be
materially adversely affected by significant increases in interest rates or
declines in natural gas and oil commodity prices. The interest rate on our
senior notes is fixed and the interest rates on our other indebtedness and the
indebtedness of our joint ventures are variable. In addition, the prices we
receive for natural gas and oil production vary from month to month.
We try to limit a portion of the adverse effects resulting from changes in
natural gas and oil commodity prices by using financial derivative instruments
and other hedging mechanisms. To the extent we hedge our commodity price
exposure, we forego the benefits we would otherwise experience if commodity
prices were to increase. In addition, even though our management monitors our
hedging activities, we could experience losses resulting from them. Such losses
could occur under various circumstances, including if the other party to our
hedge does not perform its obligations under the hedge arrangement, our hedge is
imperfect, or our hedging policies and procedures are not followed.
RISKS INHERENT IN AN INVESTMENT IN OUR LIMITED PARTNER INTERESTS
YOU WILL HAVE LIMITED VOTING RIGHTS AND WILL NOT CONTROL OUR GENERAL
PARTNER.
Unlike the holder of capital stock in a corporation, you only have limited
voting rights on matters affecting our business. Our general partner, whose
directors you do not elect, manages our activities. You will have no right to
elect our general partner on an annual or any other continuing basis. If our
general partner voluntarily withdraws, however, the holders of a majority of our
outstanding limited partner interests (excluding for purposes of such
determination interests owned by the withdrawing general partner and its
affiliates) may elect its successor.
Our general partner may not be removed as our general partner except upon
approval by the affirmative vote of the holders of at least 55% of our
outstanding limited partner interests (including limited partner interests owned
by our general partner and its affiliates), subject to the satisfaction of
certain conditions. Any removal of our general partner is not effective until
the holders of a majority of our outstanding limited partner interests approve a
successor general partner. Before the holders of outstanding limited partner
interests may remove our general partner, they must receive an opinion of
counsel that:
- such action will not result in the loss of limited liability of any
limited partner or of any member of any of our subsidiaries or cause us
or any of our subsidiaries to be taxable as a corporation or to be
treated as an association taxable as a corporation for federal income tax
purposes; and
- all required consents by any regulatory authorities have been obtained.
Our general partner has agreed not to withdraw voluntarily as our general
partner on or before December 31, 2002 (with limited exceptions), unless the
holders of at least a majority of our outstanding limited partner interests
(excluding limited partner interests owned by our general partner and its
affiliates) approve the withdrawal. The withdrawal or removal of our general
partner as our general partner would effectively result in its concurrent
withdrawal or removal as the manager of our subsidiaries.
WE MAY ISSUE ADDITIONAL SECURITIES, DILUTING YOUR INTERESTS.
We 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 securities described in this prospectus and any prospectus supplement, for
any amount and on any terms and conditions established by our general partner.
If we issue more limited
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partner interests, it will reduce your proportionate ownership interest in us.
This could cause the market price of your securities to fall and reduce the cash
distributions paid to our limited partners. Further, we have the ability to
issue partnership interests with voting rights superior to yours. If we issued
any such securities, it could adversely affect your voting power.
YOU MAY NOT HAVE LIMITED LIABILITY IN THE CIRCUMSTANCES DESCRIBED BELOW AND
MAY BE LIABLE FOR THE RETURN OF DISTRIBUTIONS THAT CAUSE OUR LIABILITIES TO
EXCEED OUR ASSETS.
We currently conduct our business in Texas, Alabama and Louisiana, and plan
to expand our business 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 we conduct business in one of those
states, you might be held liable for our obligations as if you were a general
partner if:
- a court or government agency determined that we had not complied with
that state's partnership statute; or
- our unitholders' rights to act together to remove or replace our general
partner or take other actions under our partnership agreement were to
constitute "control" of our 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 assignor
to make contributions to the partnership, except the assignee is not obligated
for liabilities that were unknown to him at the time he became a limited partner
and that could not be ascertained from the partnership agreement.
You will not be liable for assessments in addition to your initial capital
investment in any of our capital securities representing limited partnership
interests. However, you may be required to repay to us amounts wrongfully
returned or distributed to you under some circumstances. Under Delaware law, we
may not make a distribution to you if the distribution causes our liabilities
(other than liabilities to partners on account of their partnership interests
and nonrecourse liabilities) to exceed the fair value of our 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.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL
YOUR LIMITED PARTNER INTERESTS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates hold 85% or more of
any class or series of our issued and outstanding limited partner interests, our
general partner will have the right to purchase all, but not less than all, of
the outstanding securities of that class or series held by nonaffiliates. This
purchase would take place as of a record date which would be selected by our
general partner, on at least 30 but not more than 60 days' notice. Our general
partner may assign and transfer this call right to any of its affiliates or to
us. If our general partner (or its assignee) exercises this call right, it must
purchase the securities at the higher of (1) the highest cash price paid by our
general partner or its affiliates for any unit or other limited partner interest
purchased within the 90 days preceding the date our general partner mails notice
of the election to call the units or other limited partner interests or (2) the
average of the last reported sales price per unit or other limited partner
interest over the 20 trading days preceding the date five days before our
general partner mails such notice. Accordingly, under certain circumstances you
may be required to sell your limited partner interests against your will and the
price you receive for those securities may be less than you would like to
receive.
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IF YOU DO NOT DELIVER A TRANSFER APPLICATION TO US IN ACCORDANCE WITH THE
TERMS OF OUR PARTNERSHIP AGREEMENT, OR IF YOU ARE NOT A U.S. RESIDENT, OR IF YOU
OTHERWISE DO NOT SATISFY THE REQUIREMENTS SET FORTH IN OUR TRANSFER APPLICATION,
YOU MAY NOT BECOME A LIMITED PARTNER, AND WE MAY REDEEM THE LIMITED PARTNER
INTERESTS YOU INTENDED TO PURCHASE.
All purchasers of our existing units, and potentially any purchasers of
limited partner interests we issue in the future, who wish to become holders of
record and receive cash distributions must deliver an executed transfer
application in which the purchaser or transferee must certify that, among other
things, he, she or it agrees to be bound by our partnership agreement and is
eligible to purchase our securities. A person purchasing our existing units, or
possibly limited partner interests we issue in the future, who does not execute
a transfer application and certify that the purchaser is eligible to purchase
those securities acquires no rights in those securities other than the right to
resell those securities. Further, our general partner may request each record
holder to furnish certain information, including that holder's nationality,
citizenship or other related status. An investor who is not a U.S. resident may
not be eligible to become a record holder or one of our limited partners if that
investor's ownership would subject us to the risk of cancellation or forfeiture
of any of our assets under any federal, state or local law or regulation. If the
record holder fails to furnish the information or if our general partner
determines, on the basis of the information furnished by the holder in response
to the request, that such holder is not qualified to become one of our limited
partners, our general partner may be substituted as a holder for the record
holder, who will then be treated as a non-citizen assignee, and we will have the
right to redeem those securities held by the record holder.
CONFLICTS OF INTEREST RISKS
EL PASO ENERGY AND ITS AFFILIATES HAVE CONFLICTS OF INTEREST WITH US AND,
ACCORDINGLY, YOU.
We have potential and existing conflicts of interest with El Paso Energy
and its affiliates in four general areas:
- we often enter into transactions with each other, including some relating
to operating and managing assets, acquiring and selling assets, and
performing services;
- we often share personnel, assets, systems and other resources;
- from time to time, we compete for business and customers; and
- from time to time, we both may have an interest in acquiring the same
asset, business or other business opportunity.
Through its ownership of our general partner, El Paso Energy manages our
day-to-day operations and strategic direction. Accordingly, it makes the final
determination regarding how any particular conflict of interest is resolved.
In the future, we expect to encounter more transactions and other
activities in which we have a conflict of interest with El Paso Energy and its
affiliates resulting from our growth and our strategic expansion into new
businesses and geographic areas. We intend to provide integrated energy services
and solutions, without regard to geographic limitations, which may conflict with
El Paso Energy's worldwide operations. Some more recent transactions involving
us in which El Paso Energy and its affiliates had a conflict of interest
include:
- in March 2000, we purchased a natural gas gathering system located in
Alabama from a subsidiary of El Paso Energy;
- in March, 2000, we entered into a letter of intent relating to platform
construction and processing for the development of El Paso Energy's
Prince Field;
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- in October 1998, we purchased the Ewing Bank 958 Unit from El Paso
Energy, and, in October 1999, we executed an agreement with El Paso
Production GOM, Inc. (formerly Sonat Production GOM, Inc.) to farmout our
working interest in the Ewing Bank 958 Unit;
- In September 1999, we entered into an agreement with an affiliate of El
Paso Energy pursuant to which it operates the facilities of Deepwater
Holdings and its subsidiaries on our behalf.
- in June 1999, we purchased substantially all of El Paso Energy's interest
in the Viosca Knoll gathering system; and
- pursuant to a management agreement, subsidiaries of El Paso Energy
provide us administrative and operational services.
We expect to enter into substantial transactions with El Paso Energy and
its affiliates in the future, because of the businesses and areas in which we
and El Paso Energy currently operate, as well as those in which we plan to
operate in the future. In addition, on May 5, 2000, stockholders of both El Paso
Energy and The Coastal Corporation voted in favor of matters related to El Paso
Energy's merger with Coastal, subject to obtaining necessary regulatory
approvals. If El Paso Energy completes its merger with Coastal, we would
anticipate more transactions with El Paso Energy and its affiliates.
In addition, we and our general partner and its affiliates share and,
therefore will compete for, the time and effort of general partner personnel who
provide services to us. Officers of the general partner and its affiliates do
not, and will not be required to, spend any specified percentage or amount of
time on our business. Since these shared officers function as both our
representatives and those of our general partner and its affiliates, conflicts
of interest could arise between our general partner and its affiliates, on the
one hand, and us or you, on the other.
In most instances in which an actual or potential conflict of interest
arises between us, on the one hand, and our general partner or its affiliates,
on the other hand, there will be a benefit to our general partner or its
affiliates in which neither we nor you will share. Such conflicts may arise in
situations which 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 affiliates for any services
rendered to us or on our behalf;
- our general partner's determination of which direct and indirect costs we
must reimburse;
- decisions to enter into and the terms of transactions between us and our
general partner or any of its affiliates, including transactions
involving joint ventures, acquisitions and gathering and transportation;
- the acquisition or operation of businesses by our general partner or its
affiliates that would compete with us; and
- our general partner's determination to establish cash reserves under
certain circumstances and thereby decrease cash available for
distributions to you.
Through its ownership of our general partner, El Paso Energy manages our
day-to-day operations and strategic direction. It elects all of our general
partner's directors, who in turn select all of our executive officers and those
of the general partner. In addition, El Paso Energy's beneficial ownership
interest in our 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 Energy makes the final
determination regarding how any particular conflict of interest is resolved.
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We cannot assure you that El Paso Energy and its affiliates will always act
in your best interest, even though doing so may appear to:
- protect and enhance El Paso Energy's substantial investment in us;
- generate substantial cash flows to El Paso Energy; and
- provide El Paso Energy with efficiently priced capital for its planned
acquisitions.
Although El Paso Energy plans to use us as one of its primary vehicles for
acquiring and developing midstream onshore and offshore energy infrastructure
assets, it is neither contractually nor legally bound to do so, and it may
reconsider at any time, without notice. Further, El Paso Energy is not required
to pursue any business strategy that will favor our business opportunities over
the business opportunities of El Paso Energy or any of its affiliates (or any of
our other competitors acquired by El Paso Energy). In fact, El Paso Energy may
have financial motives to favor our competitors. El Paso Energy 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 we operate.
CASH RESERVES, EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION OF OUR
GENERAL PARTNER MAY AFFECT DISTRIBUTIONS.
Our general partner has broad discretion 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;
- 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.
The timing and amount of additions to discretionary reserves could
significantly reduce potential distributions that you 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, our general partner may receive incentive distributions which it
would not have otherwise received. Thus, our general partner could have a
conflict of interest in determining the amount and timing of any increases or
decreases in reserves. Our general partner receives the following compensation:
- distributions in respect of its general and limited partner interests in
us;
- distributions in respect of its 1.01% interest in each of our
subsidiaries organized as a limited liability company;
- the incentive distributions described in the section entitled
"Description of Limited Partner Interests -- Rights to Cash
Distributions" beginning on page 16; and
- reimbursements for reasonable general and administrative expenses, and
other reasonable expenses, incurred by our general partner and its
affiliates for or on our behalf.
Our partnership agreement was not, and many of the other agreements, contracts
and arrangements between us, on the one hand, and our general partner and its
affiliates, on the other hand, were not and may not be the result of
arm's-length negotiations.
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In addition, increases to reserves (other than the discretionary reserve
amount provided for in the partnership agreement) will reduce our 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 to all
limited partners 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
our general partner's target distribution levels proportionately.
OUR PARTNERSHIP AGREEMENT PURPORTS TO LIMIT OUR GENERAL PARTNER'S FIDUCIARY
DUTIES AND CERTAIN OTHER OBLIGATIONS RELATING TO US.
Although our general partner owes certain fiduciary duties to us and will
be liable for all our debts, other than non-recourse debts, to the extent not
paid by us, certain provisions of our partnership agreement contain exculpatory
language purporting to limit the liability of our general partner to us and you.
For example, the partnership agreement provides that:
- borrowings of money by us, or the approval thereof by our general
partner, will not constitute a breach of any duty of our general partner
to us or you whether or not the purpose or effect of the borrowing is to
permit distributions on our limited partner interests or to result in or
increase incentive distributions to our general partner;
- any action taken by our general partner consistent with the standards of
reasonable discretion set forth in certain definitions in our partnership
agreement will be deemed not to breach any duty of our general partner to
us or to you; and
- in the absence of bad faith by our general partner, the resolution of
conflicts of interest by our 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 our 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 our general partner from taking any action or engaging in any
transaction as to which it had a conflict of interest. The partnership agreement
permits our general partner to exercise the discretion and authority granted to
it in that agreement in managing us and in conducting its retained operations,
so long as its actions are not inconsistent with our interests. Our general
partner and its officers and directors may not be liable to us or to you 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 us to indemnify our general partner to the
fullest extent permitted by law, which indemnification, in light of the
exculpatory provisions in the partnership agreement, could result in us
indemnifying our general partner for negligent acts. Neither El Paso Energy nor
any of its other affiliates, other than our general partner, owes fiduciary
duties to us.
OUR GENERAL PARTNER AND ITS AFFILIATES MAY SELL UNITS OR OTHER LIMITED
PARTNER INTERESTS IN THE TRADING MARKET, WHICH COULD REDUCE THE MARKET PRICE OF
YOUR SECURITIES.
As of the date of this prospectus, our general partner and its affiliates
own 8,953,764 common units. In the future, they may acquire additional interest
or dispose of some or all of their interest. If they were to dispose of a
substantial portion of their interest in the trading markets, it could reduce
the market price of your securities. Our partnership agreement, and other
agreements to which we are party, allow our general partner and certain of its
affiliates to cause us to register for sale the units held by such persons.
These registration rights allow our general partner and its affiliates to
request registration of those common units and to include any of those common
units in a registration of other capital securities by us.
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RISKS RELATED TO OUR LEGAL STRUCTURE
THE INTERRUPTION OF DISTRIBUTIONS TO US FROM OUR SUBSIDIARIES AND JOINT
VENTURES MAY AFFECT OUR ABILITY TO MAKE CASH DISTRIBUTIONS TO YOU.
El Paso Energy Partners, L.P. is a holding company. As such, our primary
assets are the capital stock and other equity interests in our subsidiaries and
joint ventures. Consequently, our ability to make cash distributions depends
upon the earnings and cash flow of our subsidiaries and joint ventures and the
distribution of that cash to us. Distributions from our joint ventures are
subject to the discretion of their respective management committees. In
addition, several of our joint ventures have credit arrangements that contain
various restrictive covenants. Among other things, those covenants limit or
restrict each such joint venture's ability to make distributions to us under
certain circumstances. Further, the joint venture charter documents typically
vest in their management committees sole discretion regarding distributions. We
cannot assure you that our joint ventures will continue to make distributions to
us at current levels or at all.
Moreover, pursuant to some of the joint venture credit arrangements, we
have agreed to return a limited amount of the distributions made to us by the
applicable joint venture if certain conditions exist.
WE CANNOT CAUSE OUR JOINT VENTURES TO TAKE OR NOT TO TAKE CERTAIN ACTIONS
UNLESS SOME OR ALL OF OUR JOINT VENTURE PARTNERS AGREE.
Due to the nature of joint ventures, each partner (including us) in each of
our 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
partner with the opportunity to protect its investment in that joint venture, as
well as any other assets which may be substantially dependent on or otherwise
affected by the activities of that joint venture. These protective features
include a corporate governance structure which requires at least a majority in
interest vote to authorize many basic activities and requires a greater voting
interest (sometimes up to 100%) 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, transactions with affiliates of a joint
venture partner, litigation and transactions not in the ordinary course of
business, among others. Thus, without the concurrence of joint venture partners
with enough voting interests, we cannot cause any of our joint ventures to take
or not to take certain actions, even though such actions may be in the best
interest of the particular joint venture or us.
WE DO 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, our partnership agreement requires us to make
quarterly distributions to our partners of all available cash reduced by any
amounts reserved for commitments and contingencies, including capital and
operating costs and debt service requirements. The value of our units and other
limited partner interests will decrease in direct correlation with decreases in
the amount we distribute per such securities. Accordingly, if we experience a
liquidity problem in the future, we may not be able to issue more equity to
recapitalize.
CHANGES OF CONTROL OF OUR GENERAL PARTNER MAY ADVERSELY AFFECT YOU.
Our results of operations and, thus, our ability to make cash distributions
could be adversely affected if there is a change in management resulting from a
change of control of our general partner. Although such an action would result
in a change of control under the terms of the indenture governing our
publicly-held debt, El Paso Energy is not restricted from selling our general
partner or any of the common units or other limited partner interests it holds.
As a result, El Paso Energy could sell control of our general partner to another
company with less familiarity and experience with our businesses and with
different business philosophies and objectives. We cannot assure you that any
such acquiror would
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continue our current business strategy, or even a business strategy economically
compatible with our current business strategy.
TAX RISKS
For general discussion of the expected federal income tax consequences of
owning and disposing of our units or other limited partner interests, see
"Income Tax Considerations" beginning on page 30.
WE HAVE NOT RECEIVED A RULING OR ASSURANCES FROM THE IRS ON ANY MATTERS
AFFECTING US.
We have not requested, and will not request, any ruling from the Internal
Revenue Service with respect to our classification, or the classification of any
of our subsidiaries which are organized as limited liability companies or
partnerships, as a partnership for federal income tax purposes or any other
matter affecting us or our subsidiaries. Accordingly, the IRS may propose
positions that differ from the conclusions expressed by our counsel in this
prospectus. It may be necessary to resort to administrative or court proceedings
in an effort to sustain some or all of those conclusions, and some or all of
those conclusions ultimately may not be sustained. The limited partners and our
general partner will bear, directly or indirectly, the costs of any contest with
the IRS.
OUR TAX TREATMENT DEPENDS ON OUR PARTNERSHIP STATUS.
Based upon the continued accuracy of the representations of our general
partner set forth in "Income Tax Considerations--Partnership Status" on page 31,
our counsel believes that under current law and regulations we and our
subsidiaries which are limited liability companies or partnerships have been and
will be classified as partnerships for federal income tax purposes. However, as
stated above, we have not requested, and will not request, any ruling from the
IRS as to this status, and our counsel's opinion is not binding on the IRS. In
addition, you cannot be sure that those representations will continue to be
accurate. If the IRS were to challenge our federal income tax status or the
status of one of our subsidiaries, such a challenge could result in (1) an audit
of your entire tax return and (2) adjustments to items on that return that are
unrelated to the ownership of units or other limited partner interests. In
addition, you would bear the cost of any expenses incurred in connection with an
examination of your personal tax return. Except as specifically noted, this
discussion assumes that we and our subsidiaries which are organized as limited
liability companies or partnerships have been and are treated as partnerships
for federal income tax purposes.
If we or any of our subsidiaries which are organized as limited liability
companies were taxable as a corporation for federal income tax purposes in any
taxable year, its income, gain, losses and deductions would be reflected on its
tax return rather than being passed through (proportionately) to you, and its
net income would be taxed at corporate rates. In addition, some or all of the
distributions made to you would be treated as dividend income and would be
reduced as a result of the federal, state and local taxes paid by us or our
subsidiaries.
WE MAINTAIN UNIFORMITY OF OUR LIMITED PARTNER INTERESTS THROUGH
NONCONFORMING DEPRECIATION CONVENTIONS.
Since we cannot match transferors and transferees of our limited partner
interests, we must maintain uniformity of the economic and tax characteristics
of the limited partner interests to their purchasers. To maintain uniformity and
for other reasons, we have adopted certain depreciation conventions which do not
conform with all aspects of certain proposed and final Treasury Regulations. The
IRS may challenge those conventions and, if such a challenge were sustained, the
uniformity or the value of our limited partner interests may be affected. For
example, non-uniformity could adversely affect the amount of tax depreciation
available to you and could have a negative impact on the value of your limited
partner interests.
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WE CAN ONLY DEDUCT CERTAIN LOSSES.
Any losses that we generate will be available to offset future income
(except certain portfolio net income) that we generate and cannot be used to
offset income from any other source, including other passive activities or
investments.
YOUR PARTNERSHIP TAX INFORMATION MAY BE AUDITED.
We will furnish you a substitute Schedule K-1 that sets forth your
allocable share of income, gains, losses and deductions. In preparing this
schedule, we will use various accounting and reporting conventions and various
depreciation and amortization methods we have adopted. You cannot be sure that
this schedule will yield a result that conforms to statutory or regulatory
requirements or to administrative pronouncements of the IRS. Further, our tax
return may be audited, and any such audit could result in an audit of your
individual tax return as well as increased liabilities for taxes because of
adjustments resulting from the audit.
YOUR TAX LIABILITY RESULTING FROM AN INVESTMENT IN OUR LIMITED PARTNER
INTERESTS COULD EXCEED ANY CASH YOU RECEIVE AS A DISTRIBUTION FROM US OR THE
PROCEEDS FROM DISPOSITIONS OF THOSE SECURITIES.
You will be required to pay federal income tax and, in certain cases, state
and local income taxes on your allocable share of our income, whether or not you
receive any cash distributions from us. You cannot be sure that you will receive
cash distributions equal to your allocable share of taxable income from us. In
fact, you may incur tax liability in excess of the amount of cash distribution
we make to you or the cash you receive on the sale of your units or other
limited partner interests.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS SHOULD CAREFULLY
CONSIDER OWNERSHIP OF OUR SECURITIES.
Investment in our securities by tax-exempt organizations and regulated
investment companies raises issues unique to such persons. Virtually all of our
income allocated to a tax-exempt organization will be unrelated business taxable
income and will be taxable to such tax-exempt organization. Additionally, very
little of our income will qualify for purposes of determining whether an
investor will qualify as a regulated investment company. Furthermore, an
investor who is a nonresident alien, a foreign corporation or other foreign
person will be required to file federal income tax returns and to pay taxes on
his share of our taxable income because he will be regarded as being engaged in
a trade or business in the United States as a result of his ownership of units
or other limited partnership units. We have the right to redeem units or other
limited partner interests held by certain non-U.S. residents or holders
otherwise not qualified to become one of our limited partners.
WE ARE REGISTERED AS A TAX SHELTER. ANY IRS AUDIT WHICH ADJUSTS OUR RETURNS
WOULD ALSO ADJUST YOURS.
We have been registered with the IRS as a "tax shelter." The tax shelter
registration number is 93084000079. As a result, you cannot be sure that we will
not be audited by the IRS or that tax adjustments will not be made. If you own
less than a 1% profit interest in us, your right to participate in the income
tax audit process is limited. Further, any adjustments in our tax returns will
lead to adjustments in your returns and may lead to audits of your returns and
adjustments of items unrelated to us. You would bear the cost of any expenses
incurred in connection with an examination of your personal tax return.
YOU MAY HAVE NEGATIVE TAX CONSEQUENCES IF WE DEFAULT ON OUR DEBT OR SELL
ASSETS.
If we default on any of our debt, the lenders will have the right to sue us
for non-payment. Such an action could cause an investment loss and cause
negative tax consequences for you through the realization of taxable income by
you without a corresponding cash distribution. Likewise, if we were to dispose
of assets and realize a taxable gain while there is substantial debt outstanding
and proceeds of the sale were applied to the debt, you could have increased
taxable income without a corresponding cash distribution.
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USE OF PROCEEDS
Unless we specify otherwise in a related prospectus supplement, the net
proceeds (after the payment of offering expenses and underwriting discounts or
commissions) we receive from the sale of the limited partner interests offered
by this prospectus and any prospectus supplement will be used for general
partnership purposes, including constructing, purchasing or otherwise acquiring
additional assets and repaying indebtedness.
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DESCRIPTION OF LIMITED PARTNER INTERESTS
As of May 31, 2000, we had 26,739,065 common units representing limited
partner interests and 289,699 preference units representing limited partner
interests outstanding. On that date, the public owned an effective 65.5%
interest in us, and El Paso Energy, through its subsidiaries, owned an effective
34.5% economic interest in us, consisting of common units representing limited
partner interests, its 1% general partner interest and its approximate 1%
non-managing member interest in certain of our subsidiaries.
The following description sets forth certain general terms and provisions
of capital securities representing limited partner interests we are authorized
by our partnership agreement to issue. You should refer to the applicable
provisions of our partnership agreement, and the documents we have incorporated
by reference for a complete statement of the terms and rights of the securities
we are authorized to issue.
The board of directors of our general partner can, without limited partner
approval, issue from time to time one or more series or classes of limited
partner interest or other capital securities, including capital securities with
rights to distributions and allocations or in liquidation equal or superior to
the units currently outstanding. The board of directors can also determine the
voting powers, designations, preferences and relative, participating, optional
or other special rights and qualifications, limitations or restrictions of any
series or class and the number of units or other limited partner interests
constituting any series or class of capital securities representing limited
partner interests.
If we offer a new series or class of capital securities representing
limited partner interests, the particular terms of such securities will be
described in a prospectus supplement.
RIGHTS TO CASH DISTRIBUTIONS
GENERAL. Our limited partner interests (common units and preference units)
are capital securities entitled (1) to participate in distributions of available
cash that may be made from time to time and (2) in the event we liquidate or
wind-up, to share in any of our assets remaining after satisfaction of our
liabilities. Except to the extent our general partner has earned the right to
receive any incentive distributions, we will distribute 98% of our available
cash constituting cash from operations to our limited partners in respect of
their common units and preference units and 2% of such available cash to our
general partner in respect of its 1% general partner interest and its 1%
non-managing member interest. Our general partner will become entitled, as an
incentive, to a greater share of the distributions of available cash
constituting cash from operations to the extent that available cash exceeds
specified target levels that are above $0.275 per unit per quarter, as further
described below.
Our partnership agreement requires us to distribute all of our "available
cash," as such term is defined in our partnership agreement. Generally,
"available cash" means, for the applicable quarter, all cash receipts for such
quarter and any reductions in reserves established in prior quarters less all
cash disbursements made in such quarter and additions to reserves, as determined
by our general partner. Our partnership agreement characterizes available cash
into two categories--"cash from operations" and "cash from interim capital
contributions." This distinction affects the amounts distributed to the
unitholders relative to our general partner and the priority of distributions to
preference unitholders relative to common unitholders. "Cash from operations,"
which is determined on a cumulative basis, generally refers to all cash
generated by the operations of our business (excluding any cash from interim
capital transactions), after deducting related cash operating expenditures, cash
debt service payments, cash capital expenditures, reserves and certain other
items. "Cash from interim capital transactions" will, generally, be generated
only by (1) borrowings and sales of debt securities by us (other than for
working capital purposes and other than for goods or services purchased on open
account in the ordinary course of business), (2) sales of equity interests in us
for cash and (3) sales or other voluntary or involuntary dispositions of any of
our assets for cash (other than inventory, accounts receivable and other current
assets and assets disposed of in the ordinary course of business).
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Amounts of cash distributed by us on any date from any source will be
treated as a distribution of cash from operations, until the sum of all amounts
so distributed to the unitholders and to our general partner (including any
incentive distributions) equals the aggregate amount of all cash from operations
from February 19, 1993 through the end of the calendar quarter prior to such
distribution. Any amount of such cash (irrespective of its source) distributed
on such date which, together with prior distributions of cash from operations,
is in excess of the aggregate amount of all cash from operations from February
19, 1993 through the end of the calendar quarter prior to such distribution will
be deemed to constitute cash from interim capital transactions and will be
distributed accordingly. If cash that is deemed to constitute cash from interim
capital transactions is distributed in respect of each preference unit in an
aggregate amount per preference unit equal to the unrecovered capital with
respect thereto, the distinction between cash from operations and cash from
interim capital transactions will cease, and all cash will be distributed as
cash from operations.
Capital expenditures that our general partner determines are necessary or
desirable to maintain our facilities and operations (as distinguished from
capital expenditures made to expand the capacity of such facilities or make
strategic acquisitions) will reduce the amount of cash from operations.
Therefore, if our general partner were to determine that substantial capital
expenditures were necessary or desirable to maintain our facilities, the amount
of cash distributions that are deemed to constitute cash from operations would
decrease and, if such expenditures were subsequently refinanced and all or a
portion of the proceeds distributed to unitholders, the amount of cash
distributions deemed to constitute cash from interim capital transactions might
increase.
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH. Our partnership agreement
requires us to distribute available cash for each calendar quarter within 45
days after the end of such quarter.
PARTICIPATION IN DISTRIBUTIONS. The holders of our common units are
entitled to fully participate in quarterly distributions of available cash
constituting cash from operations, subject to the right of our general partner
to receive the incentive distributions described below, the right of holders of
our preference units to receive minimum quarterly distributions and any
arrearages, and the right of holders of any capital securities we issue in the
future to receive any priority distributions attributable to such securities.
The holders of our preference units do not have the right to fully participate
in distributions of available cash constituting cash from operations. They do
not participate in such distributions in excess of the minimum quarterly
distribution amount plus arrearages, if any.
SENIORITY. The common unit distribution rights with respect to available
cash constituting cash from operations (1) are subordinate to the right of
preference units to receive the minimum quarterly distribution amount (including
arrearages) and (2) until the common units receive an amount equal to the
minimum quarterly distribution amount (excluding arrearages), are senior to the
right of any other unit or other limited partner interests to receive a share of
distributions of available cash constituting cash from operations.
The holders of our preference units are entitled to receive minimum
distributions of available cash constituting cash from operations, for each
quarter of $0.275 per preference unit, aggregating $1.10 per preference unit on
an annualized basis. Such rights are cumulative, and arrearages will accrue.
After the holders of our preference units have received distributions of
available cash constituting cash from operations, during any relevant quarter
equal to the minimum quarterly distribution amount plus any arrearages, but
before any other units may participate in distributions of such available cash
during such quarter, the holders of our common units or other limited partner
interests are entitled to receive during such quarter distributions of such
available cash, if any, in an amount up to the minimum quarterly distribution
amount. However, our common units do not have cumulative distribution
participation rights, and no arrearages will accrue.
After our preference unit holders and common unitholders are paid the
minimum quarterly distribution amount and any arrearages, holders of our common
units are entitled to fully participate in
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quarterly distributions of available cash, subject to the right of our general
partner to receive the incentive distributions described below and the rights of
holders of any capital securities we may issue in the future.
In the future, we may issue unlimited amounts of additional capital
securities that would participate in, or have preferences with respect to,
distributions of available cash constituting cash from operations, whether up to
or in excess of the minimum quarterly distribution amount.
The minimum quarterly distribution and the specified target levels relating
to incentive distributions may be adjusted under certain circumstances in
accordance with our partnership agreement.
DISTRIBUTION OF CASH FROM OPERATIONS, UP TO THE MINIMUM QUARTERLY
DISTRIBUTION, ON ALL UNITS. Available cash constituting cash from operations in
respect of any calendar quarter will be distributed in the following manner:
first, 98% will be distributed to the preference unitholders, pro
rata, and 2% will be distributed to our general partner until there has
been distributed in respect of each preference unit an amount equal to
the minimum quarterly distribution for such quarter;
second, 98% will be distributed to the preference unitholders, pro
rata, and 2% will be distributed to our general partner until there has
been distributed in respect of each preference unit an amount equal to
any cumulative arrearages in the minimum quarterly distribution on each
preference unit with respect to any prior quarter;
third, 98% will be distributed to the common unitholders, pro rata,
and 2% will be distributed to our general partner until there has been
distributed in respect of each common unit an amount equal to the
minimum quarterly distribution for such quarter; and
thereafter, in the manner described under "--Incentive
Distributions" below.
Notwithstanding the foregoing, the minimum quarterly distribution is subject to
adjustment as described below.
INCENTIVE DISTRIBUTIONS. Subject to the payment of incentive distributions
to our general partner if certain target levels of distributions of available
cash constituting cash from operations to preference and common unitholders are
achieved, distributions of available cash are effectively made 98% to the
limited partners and 2% to our general partner. For any calendar quarter with
respect to which available cash constituting cash from operations is distributed
in respect of both the preference units and the common units in an amount equal
to the minimum quarterly distribution of $0.275 per unit, plus any preference
unit arrearages, any additional available cash constituting cash from operations
will be allocated between our general partner and the common unitholders at
differing percentage rates, which increase the share of such additional
available cash allocable to our general partner. As an incentive, in respect of
its 2% interest, our general partner's share of such quarterly cash
distributions in excess of $0.325 per common unit will increase depending on the
relevant target distribution level achieved.
The following table illustrates the percentage allocation of distributions
of available cash among the unitholders and our general partner up to the
various target distribution levels.
PERCENT OF MARGINAL
QUARTERLY AVAILABLE CASH DISTRIBUTED TO
DISTRIBUTION -----------------------------
AMOUNT PER COMMON
UNIT UP TO UNITHOLDERS GENERAL PARTNER
------------ ----------- ---------------
Minimum Quarterly Distribution.................... $0.275 98% 2%
First Target Distribution......................... 0.325 98% 2%
Second Target Distribution........................ 0.375 85% 15%
Third Target Distribution......................... 0.425 75% 25%
Thereafter........................................ n/a 50% 50%
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DISTRIBUTIONS OF CASH FROM INTERIM CAPITAL TRANSACTIONS. Distributions on
any date by us of available cash constituting cash from interim capital
transactions will be distributed 98% to preference and common unitholders, pro
rata, and 2% to our general partner until a hypothetical holder of a preference
unit acquired on February 19, 1993 has received with respect to such preference
unit distributions of available cash constituting cash from interim capital
transactions in an amount equal to such preference unit's unrecovered capital
(being $10.25 per preference unit less any amounts previously distributed as
cash from interim capital transactions) plus accrued arrearages, if any.
Thereafter, distributions of available cash that constitute cash from interim
capital transactions will be distributed as if they were cash from operations,
and because the minimum quarterly distribution and first, second and third
target distribution levels will have been reduced to zero as described below,
our general partner's share of distributions of available cash will increase, in
general, to 50% of all distributions of available cash.
ADJUSTMENT OF THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION
LEVELS. The minimum quarterly distribution, unrecovered capital per unit and the
first, second and third target distribution levels 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 units or
otherwise) but not by reason of the issuance of additional units for cash or
property. For example, in the event of a two-for-one split of the units
(assuming no prior adjustments), then the minimum quarterly distribution,
unrecovered capital for a unit and the first, second and third target
distribution levels would each be reduced to 50% of its initial level. In
addition, if unrecovered capital is reduced as a result of a distribution of
available cash constituting cash from interim capital transactions, the minimum
quarterly distribution and the first, second and third target distribution
levels will be adjusted downward proportionately, by multiplying each such
amount, as the same may have been previously adjusted, by a fraction, the
numerator of which is the unrecovered capital immediately after giving effect to
such distribution and the denominator of which is the unrecovered capital
immediately prior to such distribution. "Unrecovered capital" means, generally,
the amount by which $10.25 per unit exceeds the aggregate distributions of Cash
from Interim Capital Transactions with respect to such unit, as adjusted. For
example, the initial unrecovered capital is $10.25 per unit (which was the
initial public offering price per unit, as adjusted for a two-for-one split); if
cash from interim capital transactions of $7.50 per unit is distributed to
unitholders (assuming no prior adjustments), then the amount of the minimum
quarterly distribution, and of each of the target distribution levels, would be
reduced to 26.8% of its initial level. If and when the unrecovered capital is
zero, the minimum quarterly distribution and the first, second and third target
distribution levels each will have been reduced to zero, and our general
partner's share of distributions of available cash will increase, in general, to
50% of all distributions of available cash. Further, if the minimum quarterly
distribution and the first, second and third target distribution levels each
have been reduced to zero, then any preference units that have not either been
redeemed or converted into common units, if any, (1) will receive no further
distributions, (2) will be treated as if they had been redeemed and (3) will
cease to be outstanding for all purposes.
The minimum quarterly distribution and the first, second and third target
distribution levels may also be adjusted if legislation is enacted or the
interpretation or existing legislation is modified which causes us to become
taxable as a corporation or otherwise subjects us to taxation as an entity for
federal income tax purposes. In such event, the minimum quarterly distribution
and the first, second and third target distribution levels for each quarter
thereafter would be reduced to an amount equal to the product of (1) each of the
minimum quarterly distribution and the first, second and third target
distribution levels multiplied by (2) one minus the sum of (a) the estimated
effective federal income tax rate to which we are subject as an entity plus (b)
the estimated effective overall state and local income tax rate to which we are
subject as an entity for the taxable year in which such quarter occurs. For
example, if we were to become taxable as an entity for federal income tax
purposes and we became subject to a combined estimated effective federal, state
and local income tax rate of 38%, then the minimum quarterly distribution, and
each of the target distribution levels, would be reduced to 62% of the amount
thereof immediately prior to such adjustment.
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Distributions of cash from interim capital transactions will not reduce the
minimum quarterly distribution in the quarter in which they are distributed.
DISTRIBUTION OF CASH UPON LIQUIDATION. Following the commencement of our
liquidation, our assets will be sold or otherwise disposed of, and the partners'
capital account balances will be adjusted to reflect any resulting gain or loss.
The proceeds of such liquidation will, first, be applied to the payment of our
creditors in the order of priority provided in the partnership agreement and by
law, and thereafter, be distributed to the unitholders and our general partner
in accordance with their respective capital account balances, as so adjusted.
Partners are entitled to liquidation distributions in accordance with
capital account balances. The allocations of gain or loss at the time of
liquidation are intended to entitle the holders of outstanding preference units
to a preference over the holders of outstanding common units upon our
liquidation, to the extent of their Unrecovered Capital and any arrearages.
However, you cannot be sure that gain or loss will be sufficient to achieve this
result. Preference unitholders will not be entitled to share with our general
partner and common unitholders in our assets in excess of such Unrecovered
Capital and arrearages. The manner of such adjustment is as provided in the
partnership agreement. Any gain (or unrealized gain attributable to assets
distributed in kind) will be allocated to the partners as follows:
- first, to our general partner and the holders of units which have
negative balances in their capital accounts to the extent of and in
proportion to such negative balance;
- second, 98% to the preference unitholders and 2% to our general partner,
until the capital account for each preference unit is equal to the sum of
the Unrecovered Capital in respect of such preference unit plus any
cumulative arrearages then existing in the payment of the minimum
quarterly distribution on such preference unit;
- third, 98% to the common unitholders and 2% to our general partner until
the capital account for each common unit is equal to the Unrecovered
Capital in respect of such common unit;
- fourth, 98% to all unitholders (or, if liquidation occurs after the
second anniversary of the preference unit conversion, to all common
unitholders) and 2% to our general partner until there has been allocated
under this clause fourth an amount per unit equal to (a) the excess of
the first target distribution per unit over the minimum quarterly
distribution per unit for each quarter of our existence, less (b) the
amount per unit of any distributions of available cash constituting cash
from operations in excess of the minimum quarterly distribution per unit
which was distributed 98% to the common unitholders and 2% to our general
partner for any quarter of our existence;
- fifth, 85% to all unitholders (or, if liquidation occurs after the second
anniversary of the preference unit conversion, to all common unitholders)
and 15% to our general partner until there has been allocated under this
clause fifth an amount per unit equal to (a) the excess of the second
target distribution per unit over the first target distribution per unit
for each quarter of our existence, less (b) the amount per unit of any
distributions of available cash constituting cash from operations in
excess of the first target distribution per unit which was distributed
85% to the common unitholders and 15% to our general partner for any
quarter of our existence;
- sixth, 75% to all unitholders (or, if liquidation occurs after the second
anniversary of the preference unit conversion, to all common unitholders)
and 25% to our general partner until there has been allocated under this
clause sixth an amount per unit equal to (a) the excess of the third
target distribution per unit over the second target distribution per unit
for each quarter of our existence, less (b) the amount per unit of any
distributions of available cash constituting cash from operations in
excess of the second target distribution per unit which was distributed
75% to the common unitholders and 25% to our general partner for any
quarter of our existence; and
- thereafter, 50% to all unitholders (or, if liquidation occurs after the
second anniversary of the preference unit conversion, to all common
unitholders) and 50% to our general partner.
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Any loss or unrealized loss will be allocated to the partners: first, in
proportion to the positive balances of the preference unitholders' capital
accounts until the preference unitholders' capital account balances are reduced
to the amount of their Unrecovered Capital plus any arrearages; second, in
proportion to the positive balances in our general partner's and the common
unitholders' capital accounts until the common unitholders' capital accounts are
reduced to zero; third, in proportion to the positive balances in our general
partners' and the preference unitholders' capital accounts until the preference
unitholders' capital accounts are reduced to zero; and thereafter, to our
general partner.
LIMITED CALL RIGHT
If, at any time, non-affiliates of our general partner own 15% or less of
the issued and outstanding units or other limited partner interests of any class
(including common units), then our general partner may call, or assign to us or
its affiliates our right to call, such remaining publicly-held units or other
limited partner interests at a purchase price equal to the greater of (1) the
highest cash price paid by our general partner or its affiliates for any unit or
other limited partner interest purchased within the 90 days preceding the date
our general partner mails notice of the election to call the units or other
limited partner interests or (2) the average of the last reported sales price
per unit or other limited partner interest over the 20 trading days preceding
the date five days before our general partner mails such notice.
VOTING RIGHTS
Our general partner manages and operates our business. Unlike the holders
of common stock in a corporation, you will have only limited voting rights on
matters affecting our business. You will have no right to elect our general
partner on an annual or other continuing basis. Our general partner may not be
removed except pursuant to the vote of the holders of at least 55.0% of our
limited partner interests, including limited partner interests owned by our
general partner and its affiliates. And to the extent our limited partners do
have the right to vote on a particular matter, our general partner and its
affiliates will be able to exert influence over such vote because of their
effective 34.5% ownership of us as of the date of this prospectus. You are
entitled to vote only on the following matters:
- a merger or consolidation involving us;
- the sale, exchange or other disposition of all or substantially all of
our assets;
- our conversion into a corporation for tax purposes;
- the transfer of all of our general partner interest (but not the sale of
our general partner);
- the election of any successor general partner upon the current general
partner's withdrawal;
- the removal of our general partner;
- our continuation upon an event of dissolution; and
- certain amendments to our partnership agreement.
In addition, holders of record of limited partner interests will be
entitled to notice of, and to vote at, meetings of our limited partners and to
act with respect to matters as to which approvals may be solicited. The
partnership agreement provides that limited partner interests held in nominee or
street name account will be voted by the broker (or other nominee) pursuant to
the instruction of the beneficial owner unless the arrangement between the
beneficial owner and his nominee provides otherwise.
PREEMPTIVE AND DISSENTER'S APPRAISAL RIGHTS
Holders of limited partner interests do not have preemptive rights and do
not have dissenters' rights of appraisal under the partnership agreement or
applicable Delaware law in the event of a merger or consolidation involving us
or a sale of substantially all of our assets.
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TRANSFER AGENT AND REGISTRAR
DUTIES. ChaseMellon Shareholder Services acts as the registrar and transfer
agent for our preference and common units and receives a fee from us for serving
in such capacities. All fees charged by the transfer agent for transfers and
withdrawals of units are borne by us and not by the limited partners, except
that fees similar to those customarily paid by stockholders for surety bond
premiums to replace lost or stolen certificates, taxes or other governmental
charges, special charges for services requested by a limited partner and other
similar fees or charges are borne by the affected limited partner. There is no
charge to limited partners for disbursements of our distributions of available
cash. We indemnify the transfer agent and its agents from certain liabilities.
RESIGNATION OR REMOVAL. The transfer agent may at any time resign, by
notice to us, or be removed by us, such resignation or removal to become
effective upon the appointment by our general partner of a successor transfer
agent and registrar and its acceptance of such appointment. If no successor has
been appointed and has accepted such appointment with 30 days after notice of
such resignation or removal, our general partner is authorized to act as the
transfer agent and registrar until a successor is appointed.
TRANSFER OF LIMITED PARTNER INTERESTS
Until a unit or other limited partner interest has been transferred on our
books, we and the transfer agent may treat the record holder thereof as the
absolute owner for all purposes, notwithstanding any notice to the contrary or
any notation or other writing on the certificate representing such unit or other
limited partner interest, except as otherwise required by law. Any transfer of a
unit or other limited partner interest will not be recorded by the transfer
agent or recognized by us unless certificates representing those units or other
limited partner interests are surrendered. When acquiring units or other limited
partner interests, the transferee of such units or other limited partner
interests:
- is an assignee until admitted as a substituted limited partner;
- automatically requests admission as a substituted limited partner;
- agrees to be bound by the terms and conditions of, and executes, our
partnership agreement;
- represents that such transferee has the capacity and authority to enter
into our partnership agreement;
- grants powers of attorney to our general partner and any liquidator of
us;
- makes the consents and waivers contained in our partnership agreement;
and
- certifies that such transferee is an eligible U.S. citizen as required by
the FERC.
An assignee will become a limited partner in respect of the transferred
units or other limited partner interests upon the consent of our general partner
and the recordation of the name of the assignee on our books and records. Such
consent may be withheld in the sole discretion of our general partner. Our units
or other limited partner interests are securities and are transferable according
to the laws governing transfers of securities.
In addition to other rights acquired upon transfer, the transferor gives
the transferee the right to request admission as a substituted limited partner
in respect of the transferred units or other limited partner interests. A
purchaser or transferee of units or other limited partner interests who does not
become a limited partner obtains only (1) the right to assign the units or other
limited partner interests to a purchaser or other transferee and (2) the right
to transfer the right to seek admission as a substituted limited partner with
respect to the transferred units or other limited partner interests. Thus, a
purchaser or transferee of units or other limited partner interests who does not
meet the requirements of limited partner admission will not be the record holder
of such units or other limited partner interests, will not receive cash
distributions unless the units or other limited partner interests are held in a
nominee or street name account and the nominee or broker has ensured that such
transferee satisfies such requirements of
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admission with respect to such units or other limited partner interests and may
not receive certain federal income tax information or reports furnished to
holders of record.
LIQUIDATION RIGHTS
Following the commencement of our liquidation, assets will be sold or
otherwise disposed of, and the partners' capital account balances will be
adjusted to reflect any resulting gain or loss. The manner of such adjustment is
as provided in our partnership agreement. The proceeds of any liquidation will,
first, be applied to the payment of our creditors in the order of priority
provided in our partnership agreement and by law, and thereafter, be distributed
to the limited partners and our general partner in accordance with their
respective capital account balances, as so adjusted.
Partners are entitled to liquidation distributions in accordance with
capital account balances. The allocations of gain or loss at the time of
liquidation are intended to entitle the holders of outstanding preference units
to a preference over the holders of outstanding common units upon our
liquidation, to the extent of any unrecovered capital (as defined in our
partnership agreement), and any arrearages, applicable thereto. However, no
assurance can be given that gain or loss will be sufficient to achieve this
result. Further, preference unitholders are not entitled to share with our
general partner and other limited partners in our assets in excess of the
unrecovered capital and arrearages. Any gain (or unrealized gain attributable to
assets distributed in kind) will be allocated to our partners as follows:
first, to our general partner and limited partners which have
negative balances in their capital accounts to the extent of and in
proportion to such negative balance;
second, 98% to the preference unitholders and 2% to our general
partner, until the capital account for each preference unit is equal to
the sum of the unrecovered capital in respect of such preference unit
plus any cumulative arrearages then existing in the payment of the
minimum quarterly distribution on such preference unit.
third, 98% to the common unitholders and 2% to our general partner
until the capital account for each common unit is equal to the
unrecovered capital in respect of such common unit;
fourth, 98% to all limited partners (or, if liquidation occurs
after August 2000, to all common unitholders) and 2% to our general
partner until there has been allocated under this clause fourth an
amount per unit equal to (1) the excess of the first target distribution
per unit over the minimum quarterly distribution per unit for each
quarter of our existence, less (2) the amount per unit of any
distributions of available cash constituting "cash from operations" (as
defined in our partnership agreement) in excess of the minimum quarterly
distribution per unit which was distributed 98% to our common
unitholders and 2% to our general partner for any quarter of our
existence;
fifth, 85% to all limited partners (or, if liquidation occurs after
August 2000, to all common unitholders) and 15% to our general partner
until there has been allocated under this clause fifth an amount per
unit equal to (1) the excess of the second target distribution per unit
over the first target distribution per unit for each quarter of our
existence, less (2) the amount per unit of any distributions of
available cash constituting cash from operations in excess of the first
target distribution per unit which was distributed 85% to our common
unitholders and 15% to our general partner for any quarter of our
existence;
sixth, 75% to all limited partners (or, if liquidation occurs after
August 2000, to all common unitholders) and 25% to our general partner
until there has been allocated under this clause sixth an amount per
unit equal to (1) the excess of the third target distribution per unit
over the second target distribution per unit for each quarter our
existence, less (2) the amount per unit of any distributions of
available cash constituting cash from operations in excess of the second
target distribution per unit which was distributed 75% to the common
unitholders and 25% to our general partner for any quarter of our
existence; and
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thereafter, 50% to all limited partners (or, if liquidation occurs
after August 2000, to all common unitholders) and 50% to our general
partner.
Any loss or unrealized loss will be allocated to the partners: first, in
proportion to the positive balances of the preference unitholders' capital
accounts until the preference unitholders' capital account balances are reduced
to the amount of their unrecovered capital plus any arrearages; second, in
proportion to the positive balances in our general partner's and the common
unitholders' capital accounts until the common unitholders' capital account
balances are reduced to zero; third, in proportion to the positive balances in
our general partner's and the preference unitholders' capital accounts until the
preference unitholders' capital accounts are reduced to zero; and thereafter, to
our general partner.
FURTHER ASSESSMENTS
Generally, limited partners will not be liable for assessments in addition
to their initial capital investment in their units or other limited partner
interests. Under certain circumstances, however, limited partners may be
required to repay us amounts wrongfully returned or distributed to such limited
partners. Under Delaware law, a limited partnership may not make a distribution
to a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
nonrecourse liabilities, exceed the fair value of the assets of the limited
partnership. 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. Under Delaware
law, an assignee who becomes a substitute limited partner of a limited
partnership is liable for the obligations of his assignor to make contributions
to the partnership, except the assignee is not obligated for liabilities that
were unknown to him at the time he became a limited partner and that could not
be ascertained from the partnership agreement.
If it were determined under Delaware law that certain actions which the
limited partners may take under our partnership agreement constituted "control"
of our business, then our limited partners could be held personally liable for
our obligations to the same extent as our general partner.
MODIFICATION OF RIGHTS
In general, amendments which would enlarge the obligations of the limited
partners or our general partner require the consent of the limited partner or
general partner, as applicable. Notwithstanding the foregoing, our partnership
agreement permits our general partner to make certain amendments to our
partnership agreement without the approval of any limited partner, including,
subject to certain limitations, (1) an amendment that in the sole discretion of
our general partner is necessary or desirable in connection with the
authorization of additional preference units or other capital securities, (2)
any amendment made, the effect of which is to separate into a separate security,
separate and apart from the units, the right of preference unitholders to
receive any arrearage, and (3) several other amendments expressly permitted in
our partnership agreement to be made by our general partner acting alone.
In addition, our general partner may make amendments to our partnership
agreement without the approval of any limited partner if such amendments do not
adversely affect the limited partners in any material respect, or are required
by law or by our partnership agreement.
RELATIONSHIP TO PREFERENCE UNITS
As of May 31, 2000, there were 289,699 preference units outstanding, which
have certain rights which are superior to those of common units. These rights
include:
- the right to receive a cumulative minimum quarterly distribution of
available cash of $0.275 (plus any arrearages) per preference unit before
the common units may receive any quarterly distribution; and
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- a liquidation preference of the unrecovered capital per preference
unit--that is, if we are liquidated, each preference unit must receive a
liquidating distribution equal to its unrecovered capital (plus any
arrearages on the minimum quarterly distributions) before the common
units may receive any liquidating distribution.
RELATIONSHIP TO OTHER UNITS
As of May 31, 2000, there were 26,739,065 common units outstanding, which
have certain rights which are superior to those of other units or other limited
partner interests that may be issued in the future. These rights include:
- the right to receive a cumulative minimum quarterly distribution of
available cash of $0.275 (plus any arrearages) per common unit before the
other units or other limited partner interests may receive any quarterly
distribution; and
- a liquidation preference of the unrecovered capital per common unit--that
is, if we are liquidated, each common unit must receive a liquidating
distribution equal to its unrecovered capital (plus any arrearages on the
minimum quarterly distributions) before the other units or other limited
partner interests may receive any liquidating distribution.
CERTAIN OTHER PARTNERSHIP AGREEMENT PROVISIONS
The following paragraphs are a summary of certain provisions of our
partnership agreement as in effect on the date of this prospectus. The following
discussion is qualified in its entirety by reference to our partnership
agreement.
PURPOSE
Our stated purposes under our partnership agreement are to serve as the
managing member of our subsidiaries and to engage in any business activity
permitted under Delaware law. Our general partner is generally authorized to
perform all acts deemed necessary to carry out these purposes and to conduct our
business. Our partnership existence will continue until December 31, 2043,
unless sooner dissolved pursuant to the terms of our partnership agreement.
AUTHORITY OF OUR GENERAL PARTNER
Our general partner has a power of attorney to take certain actions,
including the execution and filing of documents, on our behalf and with respect
to our partnership agreement. However, our partnership agreement limits the
authority of our general partner as follows:
- Without the prior approval of at least a majority in interest of our
limited partners, our general partner may not, among other things, (1)
sell or exchange all or substantially all of our assets (whether in a
single transaction or a series of related transactions) or (2) approve on
our behalf the sale, exchange or other disposition of all or
substantially all of our assets; however, we may mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of
our assets without such approval;
- With certain exceptions generally described below under "--Amendment of
Partnership Agreement," an amendment to a provision of our partnership
agreement generally requires the approval of the holders of at least
66 2/3% of the outstanding limited partner interests;
- With certain exceptions described below, any amendment that would
materially and adversely affect the rights and preference of any type or
class of partnership interests in relation to other types or classes of
partnership interests will require the approval of the holders of at
least a majority of such type or class of partnership interest (excluding
those held by our general partner and its affiliates); and
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- In general, our general partner may not take any action, or refuse to
take any reasonable action, the effect of which would be to cause us to
be taxable as a corporation or to be treated as an association taxable as
a corporation for federal income tax purposes, without the consent of the
holders of at least 66 2/3% of the outstanding limited partner interests,
including the vote of the holders of a majority of the preference units
(other than preference units held by our general partner and its
affiliates).
WITHDRAWAL OR REMOVAL OF OUR GENERAL PARTNER
Our general partner has agreed not to voluntarily withdraw as general
partner on or prior to December 31, 2002 (with limited exceptions described
below) without the approval of at least a majority of the remaining outstanding
units and an opinion of counsel that (following the selection of a successor)
its withdrawal would not result in the loss of limited liability or cause us to
be taxed as a corporation or other entity for federal income tax purposes.
However, our general partner may withdraw without such approval of the
unitholders, upon 90 days' notice, if more than 50.0% of the outstanding
preference units are held or controlled by one person and its affiliates other
than the withdrawing general partner and its affiliates.
After December 31, 2002, our general partner may withdraw by giving 90
days' written notice. If an appropriate opinion of counsel cannot be obtained,
we would be dissolved as a result of such withdrawal.
Our general partner may not be removed, with or without cause, as general
partner except upon approval by the affirmative vote of the holders of not less
than 55.0% of the outstanding limited partner interests, subject to the
satisfaction of certain conditions.
In the event of withdrawal of our general partner where such withdrawal
violates our partnership agreement or removal of our general partner for
"cause," a successor general partner will have the option to acquire the general
partner interest of the departing general partner (the "Departing Partner") and,
if requested by the Departing Partner, its nonmanaging member interests in our
subsidiaries, for a fair market value cash payment. Under all other
circumstances where our general partner withdraws or is removed by our limited
partners, the Departing Partner will have the option to require the successor
general partner to acquire the general partner and nonmanaging member interests
of the Departing Partner for a fair market value cash payment.
Our general partner may transfer all, but not less than all, of its general
partner interest and its nonmanaging interests in our subsidiaries without the
approval of our limited partners (1) to an affiliate of our general partner or
(2) upon its merger or consolidation into another entity or the transfer of all
or substantially all of its assets to another entity. In the case of any other
transfer, in addition to the foregoing requirements, the approval of the holders
of at least a majority of the outstanding limited partner interests is required,
excluding for purposes of such determination units held by our general partner
and its affiliates. However, no approval of the limited partners is required for
transfers of the stock or other securities representing equity interest in our
general partner.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to our partnership agreement may be proposed only by our general
partner. Proposed amendments (other than those described below) must be approved
by holders of at least 66 2/3% of the outstanding limited partner interests,
except (1) that any amendment that would have a disproportionate material
adverse effect on a class of units or other limited partner interests will
require the approval of the holders of at least a majority of the outstanding
limited partner interests (excluding those held by our general partner and its
affiliates) of the class so affected or (2) as otherwise provided in our
partnership agreement. No provision of our partnership agreement that
establishes a percentage of outstanding limited partner interests required to
take any action may be amended or otherwise modified to reduce such voting
requirement without the approval of the holders of that percentage of
outstanding limited partner interests constituting the voting requirement sought
to be amended.
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In general, amendments which would enlarge the obligations of any type or
class of our limited partners or our general partner require the consent of such
limited partners or general partner, as applicable. Notwithstanding the
foregoing, our partnership agreement permits our general partner to make certain
amendments to our partnership agreement without the approval of any limited
partner, including, subject to certain limitations, (1) an amendment that in the
sole discretion of our general partner is necessary or desirable in connection
with the authorization of additional preference units or other capital
securities, (2) any amendment made, the effect of which is to separate into a
separate security, separate and apart from the units, the right of preference
unitholders to receive any arrearage, and (3) several other amendments expressly
permitted in our partnership agreement to be made by our general partner acting
alone.
In addition, our general partner may make amendments to our partnership
agreement without the approval of any limited partner if such amendments do not
adversely affect the limited partners in any material respect, or are required
by law or by our partnership agreement.
No other amendments to our partnership agreement will become effective
without the approval of at least 95.0% of the limited partner interests unless
we obtain an opinion of counsel to the effect that such amendment will not cause
us to be taxable as a corporation or otherwise taxed as an entity for federal
income tax purposes and will not affect the limited liability of any limited
partner or any member of our subsidiaries.
MEETINGS; VOTING
Record holders of limited partner interests on the record date set pursuant
to our partnership agreement will be entitled to notice of, and to vote at,
meetings of limited partners. Meetings of our limited partners may only be
called by our general partner or, with respect to meetings called to remove our
general partner, by limited partners owning 55.0% or more of the outstanding
limited partner interests.
Representation in person or by proxy of two-thirds (or a majority, if that
is the vote required to take action at the meeting in question) of the
outstanding units or other limited partner interests of the class for which a
meeting is to be held will constitute a quorum at a meeting of limited partners.
Except for (1) a proposal for removal or withdrawal of our general partner, (2)
the sale of all or substantially all of our assets or (3) certain amendments to
our partnership agreement described above, substantially all matters submitted
for a vote are determined by the affirmative vote, in person or by proxy, of
holders of at least a majority of the outstanding limited partner interests.
Each record holder of a limited partner interest has one vote per unit or
other limited partner interest, according to his percentage interest in us.
However, our partnership agreement does not restrict our general partner from
issuing limited partner interests having special or superior voting rights.
INDEMNIFICATION
Our partnership agreement provides that we:
- will indemnify our general partner, any Departing Partner and any person
who is or was an officer, director or other representative of our general
partner, any Departing Partner or us, to the fullest extent permitted by
law, and
- may indemnify, to the fullest extent permitted by law, (1) any person who
is or was an affiliate of our general partner, any Departing Partner or
us, (2) any person who is or was an employee, partner, agent or trustee
of our general partner, any Departing Partner, us or any such affiliate,
or (3) any person who is or was serving at our 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 our
general partner, any Departing Partner, us or any of their affiliates, an
"Indemnitee") from and against any and all claims,
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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) our general
partner, Departing Partner, us or an affiliate of either, (2) an officer,
director, employee, partner, agent, trustee or other representative of our
general partner, any Departing Partner, us or any of their affiliates or (3) a
person serving at our 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, our 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. We have 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 our assets. We are authorized to purchase (or to reimburse our
general partner or its affiliates for the cost of) insurance against liabilities
asserted against and expenses incurred by such persons in connection with our
activities, whether or not we would have the power to indemnify such person
against such liabilities under the provisions described above.
GENERAL PARTNER EXPENSES
Our general partner will be reimbursed for its direct and indirect expenses
incurred on our behalf on a monthly or other appropriate basis as provided for
in our partnership agreement, including, without limitation, expenses allocated
to our general partner by its affiliates and payments made by our general
partner to El Paso Energy and its affiliates pursuant to the management
agreement.
CONVERSION OF PREFERENCE UNITS INTO COMMON UNITS AND SUBSEQUENT REDEMPTION OF
PREFERENCE UNITS
From May 8, 2000 until August 7, 2000, the holders of our 289,699 then
outstanding preference units have the right to convert their preference units
into an equal number of common units. This is the third and final conversion
opportunity that we will offer to holders of preference units.
During the first and second conversion opportunities, which occurred in
1998 and 1999, the holders of 17,785,301 preference units, representing
approximately 98.0% of the preference units issued by us, converted their
preference units into common units. As a result of that conversion, the common
units (including the 8,953,764 common units held by our general partner and its
affiliates) have become the primary listed security on the NYSE under the symbol
"EPN". The preference units currently outstanding trade as our secondary listed
security on the NYSE under the symbol "EPN.P".
After August 7, 2000, any or all of the outstanding preference units may be
redeemed at any time at our option, exercised in the sole discretion of our
general partner, upon at least 30 but not more than 60 days' notice. We must
redeem all such preference units if we redeem any preference units. The
redemption price for each preference unit would be the amount of the
"unrecovered capital," which is $10.25 as of the date of this prospectus.
Unrecovered capital is more particularly defined in our partnership agreement,
but generally is the difference between $10.25 less the amount of available cash
from interim capital transactions that has been distributed to a hypothetical
preference unit issued on February 19, 1993.
LIMITED LIABILITY
Assuming that a limited partner does not take part in the control of our
business, and that he otherwise acts in conformity with the provisions of our
partnership agreement, his liability under Delaware law will be limited, subject
to certain possible exceptions, generally to the amount of capital he is
obligated to contribute to us in respect of his units or other limited partner
interests plus his share of any of our undistributed profits and assets.
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TERMINATION, DISSOLUTION AND LIQUIDATION
Our partnership existence will continue until December 31, 2043, unless
sooner terminated pursuant to our partnership agreement. We will be dissolved
upon (1) the election of our general partner, if approved by the holders of at
least 66 2/3% of the outstanding limited partner interests, (2) the sale,
exchange or other disposition of all or substantially all of our assets and
properties, (3) bankruptcy or dissolution of our general partner or (4)
withdrawal or removal of our general partner or any other event that results in
its ceasing to be our general partner (other than by reason of transfer in
accordance with our partnership agreement or withdrawal or removal following
approval of a successor). Notwithstanding the foregoing, we will not be
dissolved if within 90 days after such event our partners agree in writing to
continue our business and to the appointment, effective as of the date of such
event, of a successor general partner.
Upon a dissolution pursuant to clause (3) or (4) above, the holders of at
least 66 2/3% of the outstanding limited partner interests may also elect,
within certain time limitations, to reconstitute and continue our business on
the same terms and conditions set forth in our partnership agreement by forming
a new limited partnership on terms identical to those set forth in our
partnership agreement and having as a general partner an entity approved by the
holders of at least 66 2/3% of the outstanding limited partner interests,
subject to our receipt of an opinion of counsel that such reconstitution,
continuation and approval will not result in the loss of the limited liability
of our limited partners or cause us, the reconstituted limited partnership or
our subsidiaries to be taxable as a corporation or otherwise subject to taxation
as an entity for federal income tax purposes.
Upon our dissolution, unless we are reconstituted and continue as a new
limited partnership, a liquidator will liquidate our assets and apply the
proceeds of the liquidation in the order of priority set forth in our
partnership agreement. The liquidator may defer liquidation or distribution of
our assets and/or distribute assets to partners in kind if it determines that a
sale or other disposition of our assets would be unsuitable.
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INCOME TAX CONSIDERATIONS
The tax consequences to you of an investment in our units or other limited
partner interests will depend in part on your own tax circumstances. You should
therefore consult your own tax advisor about the federal, state, local and
foreign tax consequences to you of an investment in our units or other limited
partner interests.
This section is a summary of material tax considerations that may be
relevant to prospective limited partners and, to the extent set forth below
under "--Legal Opinions and Advice," expresses the opinion of Akin, Gump,
Strauss, Hauer & Feld, L.L.P., counsel to us and our general partner, insofar as
it relates to matters of law and legal conclusions. This section is based upon
current provisions of the Internal Revenue Code of 1986, as amended (the
"Code"), existing and proposed regulations thereunder and current administrative
rulings and court decisions, all of which are subject to change, possibly
retroactively. Subsequent changes in such authorities may cause the tax
consequences to vary substantially from the consequences described below.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting us or you. Moreover, the discussion focuses
on limited partners who are individual citizens or residents of the U.S. and has
only limited application to corporations, estates, trusts, non-resident aliens
or other limited partners subject to specialized tax treatment (such as
tax-exempt institutions, foreign persons, individual retirement accounts, REITs
or mutual funds). Accordingly, you should consult, and should depend on, your
own tax advisor in analyzing the federal, state, local and foreign tax
consequences peculiar to you of the ownership or disposition of units or other
limited partner interests.
LEGAL OPINIONS AND ADVICE
Our counsel is of the opinion that, based on the accuracy of the
representations and subject to the qualifications set forth in the detailed
discussion that follows, for federal income tax purposes (1) we will be treated
as a partnership, and (2) owners of units or other limited partner interests
(with certain exceptions, as described in "--Limited Partner Status" below) will
be treated as our partners. In addition, all statements as to matters of law and
legal conclusions contained in this section, unless otherwise noted, reflect the
opinion of our counsel.
We have not requested and will not request a ruling from the IRS, and the
IRS has made no determination, with respect to the foregoing issues or any other
matter affecting us or you. An opinion of counsel represents only that counsel's
best legal judgment and does not bind the IRS or the courts. Thus, no assurance
can be provided that, if contested by the IRS, a court would agree with the
opinions and statements set forth herein. Any such contest with the IRS may
materially and adversely impact the market for our units or other limited
partner interests and the prices at which they trade. In addition, the costs of
any contest with the IRS will be borne directly or indirectly by the limited
partners and our general partner. Furthermore, no assurance can be given that
our treatment or the treatment of an investment in us will not be significantly
modified by future legislative or administrative changes or court decisions. Any
such modification may or may not be retroactively applied.
For the reasons hereinafter described, our counsel has not rendered an
opinion with respect to the following specific federal income tax issues:
(1) the treatment of a holder of units or other limited partner interests
whose securities are loaned to a short seller to cover a short sale of
those securities (see "--Tax Treatment of Operations--Treatment of
Short Sales"),
(2) whether a holder of units or other limited partner interests acquiring
securities in separate transactions must maintain a single aggregate
adjusted tax basis in his securities (see "--Disposition of Limited
Partner Interests --Recognition of Gain or Loss"),
(3) whether our monthly convention for allocating taxable income and losses
is permitted by existing Treasury Regulations (see "--Disposition of
Limited Partner Interests--Allocations Between Transferors and
Transferees"), and;
(4) whether our method for depreciating Section 743 adjustments is
sustainable (see "--Tax Treatment of Operations--Section 754
Election").
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TAX RATES
The maximum effective income tax rate for individuals for 2000 is 39.6%. In
general, net capital gains of an individual are subject to a maximum 20% tax
rate if the asset giving rise to gain was held for more than 12 months at the
time of disposition.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash distributions are made. Distributions by a partnership to a partner are
generally not taxable unless the amount of cash distributed is in excess of the
partner's adjusted basis in his partnership interest immediately before the
distribution.
We have not requested and will not request a ruling from the IRS, and the
IRS has made no determination, as to our status as a partnership for federal
income tax purposes. Instead we have relied on the opinion of our counsel that,
based upon the Code, the regulations thereunder, published revenue rulings and
court decisions, we will be classified as a partnership for federal income tax
purposes.
In rendering its opinion, our counsel has relied on certain factual
representations made by us and our general partner. Such factual matters are as
follows:
- We will not elect to be treated as an association or corporation;
- We will be operated in accordance with (1) all applicable partnership
statutes, (2) our partnership agreement, and (3) the description thereof
in this prospectus;
- For each taxable year, more than 90% of our gross income will be income
from sources that our counsel has opined or may opine is "qualifying
income" within the meaning of Section 7704(d) of the Code;
- Each futures contract entered into by us for the purchase or sale of
natural gas or crude oil will be identified as a hedging transaction
pursuant to Treasury Regulation Section 1.1221-2(e)(1);
- Gain or loss resulting from our future transactions will be treated as an
adjustment in the computation of cost of goods sold with respect to sales
of crude oil for federal income tax purposes;
- Prior to January 1, 1997 our general partner had at all times while
acting as our general partner either (1) 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 (2) 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 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;
- 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 and 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; and
- Prior to January 1, 1992, our general partner acted independently of our
limited partners.
Section 7704 of the Code provides that publicly-traded partnerships will,
as a general rule, be taxed as corporations. However, an exception (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 transportation and marketing, processing, production and
development of, and exploration for, natural gas and crude oil,
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among other activities. Other types of qualifying income include interest (from
other than a financial business), dividends, gains from the sale of real
property and gains from the sale or other disposition of capital assets held for
the production of income that otherwise constitutes qualifying income. Based
upon our representations and the representations of our general partner and a
review of the applicable legal authorities, our counsel is of the opinion that
at least 90% of our gross income will constitute qualifying income. We estimate
that less than 10.0% of our gross income for each taxable year will not
constitute qualifying income.
If we fail 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), we will be treated as if we had transferred
all of our assets (subject to liabilities) to a newly formed corporation (on the
first day of the year in which we fail to meet the Qualifying Income Exception)
in return for stock in that corporation, and then distributed that stock to our
partners in liquidation of their interests in us. This contribution and
liquidation should be tax-free to us and unitholders, so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the limited partners, and our net income
would be taxed to us at corporate rates. In addition, any distribution made to a
limited partner would be treated as either taxable dividend income (to the
extent of our current or accumulated earnings and profits) or (in the absence of
earnings and profits) a nontaxable return of capital (to the extent of the
limited partner's tax basis in his units or other limited partner interests) or
taxable capital gain (after the limited partner's tax basis in his units or
other limited partner interests is reduced to zero). Accordingly, taxation as a
corporation would result in a material reduction in a limited partner's cash
flow and after-tax return and thus would likely result in a substantial
reduction of the value of the units or other limited partner interests.
The discussion below is based on the assumption that we will be classified
as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Holders of our capital securities who have become our limited partners will
be treated as our partners for federal income tax purposes. Our counsel is also
of the opinion that (1) assignees who have executed and delivered transfer
applications and are awaiting admission as limited partners and (2) holders
whose units or other limited partner interests are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their units or other limited
partner interests will be treated as our partners for federal income tax
purposes. As there is no direct authority addressing assignees of units or other
limited partner interests who are entitled to execute and deliver transfer
applications and thereby become entitled to direct the exercise of attendant
rights, but who fail to execute and deliver transfer applications, our counsel's
opinion does not extend to these persons. Furthermore, a purchaser or other
transferee of units or other limited partner interests who does not execute and
deliver a transfer application may not receive certain federal income tax
information or reports furnished to record holders of units or other limited
partner interests unless the units or other limited partner interests are held
in a nominee or street name account and the nominee or broker has executed and
delivered a transfer application with respect to such units or other limited
partner interests.
A beneficial owner of units or other limited partner interests whose
securities have been transferred to a short seller to complete a short sale
would appear to lose his status as a partner with respect to such units or other
limited partner interests for federal income tax purposes. See "--Tax Treatment
of Operations--Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
holder who is not a partner for federal income tax purposes, and any cash
distributions received by such a holder would therefore be
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fully taxable as ordinary income. These holders should consult their own tax
advisors with respect to their status as our partners for federal income tax
purposes.
TAX CONSEQUENCES OF LIMITED PARTNER INTEREST OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
We will pay no federal income tax. Instead, each limited partner will be
required to report on his income tax return his allocable share of our income,
gains, losses and deductions without regard to whether corresponding cash
distributions are received by him. Consequently, we may allocate income to a
limited partner even if he has not received a cash distribution. Each limited
partner will be required to include in income his allocable share of our income,
gain, loss and deduction for our taxable year ending with or within the taxable
year of the limited partner.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by us to a limited partner generally will not be taxable to
him for federal income tax purposes to the extent of his tax basis in his units
or other limited partner interests immediately before the distribution.
Cash distributions in excess of a limited partner's tax basis generally
will be considered to be gain from the sale or exchange of the units or other
limited partner interests, taxable in accordance with the rules described under
"--Disposition of Limited Partner Interests" below. Any reduction in a limited
partner's share of our liabilities for which no partner, including the general
partner, bears the economic risk of loss ("nonrecourse liabilities") will be
treated as a distribution of cash to that limited partner. To the extent that
our distributions cause a limited partner's "at risk" amount to be less than
zero at the end of any taxable year, he must recapture any losses deducted in
previous years. See "--Limitations on Deductibility of Partnership Losses."
A decrease in a limited partner's percentage interest in us because of our
issuance of additional units or other limited partner interests will decrease
his share of our nonrecourse liabilities and, thus will result in a
corresponding deemed distribution of cash. A non-pro rata distribution of money
or property may result in ordinary income to a limited partner, regardless of
his tax basis in his units or other limited partner interests, if the
distribution reduces his share of our "unrealized receivables" (including
depreciation recapture) and/or substantially appreciated "inventory items" (both
as defined in Section 751 of the Code) (collectively, "Section 751 Assets"). To
that extent, he will be treated as having been distributed his proportionate
share of the Section 751 Assets and having exchanged those assets with us in
return for the non-pro rata portion of the actual distribution made to him. This
latter deemed exchange will generally result in the limited partner's
realization of ordinary income under Section 751(b) of the Code. This income
will equal the excess of (1) the non-pro rata portion of the distribution over
(2) the limited partner's tax basis for the share of the Section 751 Assets
deemed relinquished in the exchange.
BASIS OF UNITS
A limited partner's initial tax basis for his units or other limited
partner interests will be the amount he paid for the units or other limited
partner interests plus his share of our nonrecourse liabilities. That basis will
be increased by his share of our income and by any increases in his share of our
nonrecourse liabilities. That basis will be decreased (but not below zero) by
distributions from us to him, by his share of our losses, by any decrease in his
share of our nonrecourse liabilities and by his share of our expenditures that
are not deductible in computing its taxable income and are not required to be
capitalized. A limited partner will have no share of our debt which is recourse
to our general partner, but will have a share, generally based on his share of
profits, of our nonrecourse liabilities. See "--Disposition of Limited Partner
Interests--Recognition of Gain or Loss."
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LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The deduction by a limited partner of his share of our losses will be
limited to the tax basis in his units or other limited partner interests and, in
the case of an individual limited partner or a corporate limited partner (if
more than 50% of the value of its stock is owned directly or indirectly by five
or fewer individuals or certain tax-exempt organizations), to the amount for
which the limited partner is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A limited partner must recapture
losses deducted in previous years to the extent that our distributions cause his
at risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a limited partner or recaptured as a result of these limitations
will carry forward and will be allowable to the extent that his tax basis or at
risk amount (whichever is the limiting factor) is subsequently increased. Upon
the taxable disposition of a unit or other limited partner interests, any gain
recognized by a limited partner can be offset by losses that were previously
suspended by the at risk limitation but may not be offset by losses suspended by
the basis limitation. Any excess loss (above such gain) previously suspended by
the at risk or basis limitations is no longer utilizable.
In general, a limited partner will be at risk to the extent of the tax
basis of his units or other limited partner interests, excluding any portion of
that basis attributable to his share of our nonrecourse liabilities, reduced by
any amount of money he borrows to acquire or hold his units or other limited
partner interests if the lender of such borrowed funds owns an interest in us,
is related to such a person or can look only to units or other limited partner
interests for repayment. A limited partner's at risk amount will increase or
decrease as the tax basis of his units or other limited partner interests
increases or decreases (other than tax basis increases or decreases attributable
to increases or decreases in his share of our nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by us will only be available to offset future income
generated by us and will not be available to offset income from other passive
activities or investments (including other publicly-traded partnerships) or
salary or active business income. Passive losses which are not deductible
because they exceed a limited partner's income generated by us may be deducted
in full when he disposes of his entire investment in us in a fully taxable
transaction to an unrelated party. The passive activity loss rules are applied
after other applicable limitations on deductions such as the at risk rules and
the basis limitation.
A limited partner's share of our net income may be offset by any suspended
passive losses from us, but it may not be offset by any other current or
carryover losses from other passive activities, including those attributable to
other publicly-traded partnerships. The IRS has announced that Treasury
Regulations will be issued which characterize net passive income from a
publicly-traded partnership as investment income for purposes of the limitations
on the deductibility of investment interest.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." As noted, a limited partner's net passive income from us will be
treated as investment income for this purpose. In addition, a limited partner's
share of our portfolio income will be treated as investment income. Investment
interest expense includes (1) interest on indebtedness properly allocable to
property held for investment, (2) our interest expense attributed to portfolio
income, and (3) the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio income.
The computation of a limited partner's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit or other limited partner interest. Net investment
income includes gross income from property held for investment and amounts
treated as portfolio income pursuant to the passive
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loss rules less deductible expenses (other than interest) directly connected
with the production of investment income, but generally does not include gains
attributable to the disposition of property held for investment.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
In general, if we have a net profit, items of income, gain, loss and
deduction will be allocated among our general partner and the limited partners
in accordance with their respective percentage interests in us. At any time that
distributions are made to the preference units and not to the common units or
other limited partner interests, or that incentive distributions are made to our
general partner, gross income will be allocated to the recipients to the extent
of such distribution. If we have a net loss, items of income, gain, loss and
deduction will generally be allocated first, to our general partner and the
limited partners in accordance with their respective percentage interests to the
extent of their positive capital accounts (as maintained under the partnership
agreement) and, second, to our general partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of our income, deduction, gain and loss will be
allocated to account for the difference between the tax basis and fair market
value of property contributed to us by our general partner or others
("Contributed Property"). The effect of these allocations to a limited partner
will be essentially the same as if the tax basis of the Contributed Property
were equal to its fair market value at the time of contribution. In addition,
certain items of recapture income will be allocated to the extent possible to
the partner allocated the deduction giving rise to the treatment of such gain as
recapture income in order to minimize the recognition of ordinary income by some
limited partners. Finally, although we do not expect that our operations will
result in the creation of negative capital accounts, if negative capital
accounts nevertheless result, items of our income and gain will be allocated in
an amount and manner sufficient to eliminate the negative balance as quickly as
possible.
Regulations provide that an allocation of items of partnership income,
gain, loss or deduction, other than an allocation required by Section 704(c) of
the Code to eliminate the difference between a partner's "book" capital account
(credited with the fair market value of Contributed Property) and "tax" capital
account (credited with the tax basis of Contributed Property) (the "Book-Tax
Disparity"), will generally be given effect for federal income tax purposes in
determining a partner's distributive share of an item of income, gain, loss or
deduction only if the allocation has substantial economic effect. In any other
case, a partner's distributive share of an item will be determined on the basis
of the partner's interest in the partnership, which will be determined by taking
into account all the facts and circumstances, including the partners' relative
contributions to the partnership, the interests of the partners in economic
profits and losses, the interest of the partners in cash flow and other
nonliquidating distributions and rights of the partners to distributions of
capital upon liquidation.
Our counsel is of the opinion that allocations under our partnership
agreement will be given effect for federal income tax purposes in determining a
limited partner's distributive share of an item of income, gain, loss or
deduction.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
We use the year ending December 31 as our taxable year and have adopted the
accrual method of accounting for federal income tax purposes. Each limited
partner will be required to include in income his allocable share of partnership
income, gain, loss and deduction for our taxable year ending within or with the
taxable year of the limited partner. In addition, a limited partner who has a
taxable year ending on a date other than December 31 and who disposes of all of
his units or other limited partner interests following the close of our taxable
year but before the close of his taxable year must include his allocable share
of our income, gain, loss and deduction in income for his taxable year with the
result that he will be required to report in income for his taxable year his
distributive share of more than one year of our
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income, gain, loss and deduction. See "--Disposition of Limited Partner
Interests--Allocations Between Transferors and Transferees."
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of our various assets will be used for purposes of computing
depreciation and cost recovery deductions and, ultimately, gain or loss on the
disposition of such assets. Our assets initially have an aggregate tax basis
equal to the consideration we paid for such assets or, with respect to assets we
acquired upon our formation or by contribution, the tax basis of the assets in
the possession of our general partner or other contributor immediately prior to
our formation. The federal income tax burden associated with the difference
between the fair market value of property contributed by our general partner or
other contributor and the tax basis established for such property will be borne
by our general partner or other contributor. See "--Allocation of Partnership
Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depletion, depreciation
and cost recovery methods that will result in the largest deductions in our
early years. We are not entitled to any amortization deductions with respect to
any goodwill conveyed to us on formation. Property subsequently acquired or
constructed by us may be depreciated using accelerated methods permitted by the
Code.
If we dispose of depreciable property by sale, foreclosure or otherwise,
all or a portion of any gain (determined by reference to the amount of
depreciation previously deducted and the nature of the property) may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to our property may be required to recapture such deductions as ordinary
income upon a sale of his units or other limited partner interests. See
"--Allocation of Partnership Income, Gain, Loss and Deduction" and
"--Disposition of Limited Partner Interests--Recognition of Gain or Loss."
The costs incurred in promoting the issuance of units or other limited
partner interests (i.e. syndication expenses) must be capitalized and cannot be
deducted currently, ratably or upon our termination. There are uncertainties
regarding the classification of costs as organization expenses, which may be
amortized, and as syndication expenses, which may not be amortized. Under
recently adopted regulations, underwriting discounts and commissions would be
treated as a syndication cost.
SECTION 754 ELECTION
We have made the election permitted by Section 754 of the Code. That
election is irrevocable without the consent of the IRS. The election will
generally permit us to adjust a unit or other limited partner interest
purchaser's (other than a unit or other limited partner interest purchaser that
purchases units or other limited partner interests directly from us) tax basis
in our assets ("inside basis") pursuant to Section 743(b) of the Code to reflect
his purchase price. The Section 743(b) adjustment belongs to the purchaser and
not to other partners. (For purposes of this discussion, a partner's inside
basis in our assets will be considered to have two components: (1) his share of
our tax basis in such assets ("common basis") and (2) his Section 743(b)
adjustment to that basis.)
If a partnership elects the remedial allocation method with respect to an
item of partnership property (which we may do with respect to certain assets),
newly adopted Treasury regulations under Section 743 of the Code require that
the portion of any Section 743(b) adjustment that is attributable to Section
704(c) built in gain must be depreciated over the remaining cost recovery period
for the Section 704(c) built in gain. Nevertheless, the proposed regulations
under Section 197 indicate that the Section 743(b) adjustment attributable to an
amortizable Section 197 intangible should be treated as a newly-acquired asset
placed in service in the month when the purchaser acquires the unit or other
limited partner interest. Under Treasury Regulation Section 1.167(c)-1(a)(6), a
Section 743(b) adjustment attributable to property subject to depreciation under
Section 167 of the Code rather than cost recovery deductions under Section 168
is generally required to be depreciated using either the straight-line method or
the 150% declining balance method. Although the newly adopted regulations under
Section 743 likely eliminated many of the problems, the depreciation and
amortization methods and useful lives associated
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with the Section 743(b) adjustment may differ from the methods and useful lives
generally used to depreciate the common basis in such properties. Pursuant to
our partnership agreement, we are authorized to adopt a convention to preserve
the uniformity of units or other limited partner interests even if that
convention is not consistent with Treasury Regulation Section 1.167(c)-1(a)(6)
and Proposed Treasury Regulation Section 1.197-2(g)(3). See "--Uniformity of
Limited Partner Interests."
Although our counsel is unable to opine as to the validity of such an
approach, we intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized Book-Tax Disparity) using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the common basis of such property, or treat that portion as
non-amortizable to the extent attributable to property the common basis of which
is not amortizable. This method is consistent with the newly adopted regulations
under Section 743 but is arguably inconsistent with Treasury Regulation Section
1.167(c)-1(a)(6) and Proposed Treasury Regulation Section 1.197-2(g)(3) (neither
of which is expected to directly apply to a material portion of our assets). To
the extent such Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Regulations and legislative history. If we determine that such
position cannot reasonably be taken, we may adopt a depreciation or amortization
convention under which all purchasers acquiring units or other limited partner
interests in the same month would receive depreciation or amortization, whether
attributable to common basis or Section 743(b) adjustment, based upon the same
applicable rate as if they had purchased a direct interest in our assets. Such
an aggregate approach may result in lower annual depreciation or amortization
deductions than would otherwise be allowable to certain unitholders. See
"--Uniformity of Limited Partner Interests."
The allocation of the Section 743(b) adjustment must be made in accordance
with the Code. The IRS may seek to reallocate some or all of any Section 743(b)
adjustment not so allocated by us to goodwill which, as an intangible asset,
would be amortizable over a longer period of time than some of our tangible
assets.
A Section 754 election is advantageous if the transferee's tax basis in his
units or other limited partner interests is higher than such securities' share
of the aggregate tax basis of our assets immediately prior to the transfer. In
such a case, as a result of the election, the transferee would have a higher tax
basis in his share of our assets for purposes of calculating, among other items,
his depreciation and depletion deductions and his share of any gain or loss on a
sale of our assets. Conversely, a Section 754 election is disadvantageous if the
transferee's tax basis in such units or other limited partner interests is lower
than such security's share of the aggregate tax basis of our assets immediately
prior to the transfer. Thus, the fair market value of the units or other limited
partner interests may be affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by us on the basis of certain assumptions as to the value of our assets
and other matters. There is no assurance that the determinations made by us will
not be successfully challenged by the IRS and that the deductions resulting from
them will not be reduced or disallowed altogether. Should the IRS require a
different basis adjustment to be made, and should, in our opinion, the expense
of compliance exceed the benefit of the election, we may seek permission from
the IRS to revoke our Section 754 election. If such permission is granted, a
subsequent purchaser of units or other limited partner interests may be
allocated more income than he would have been allocated had the election not
been revoked.
ALTERNATIVE MINIMUM TAX
Each limited partner will be required to take into account his distributive
share of any items of our income, gain, deduction or loss for purposes of the
alternative minimum tax. The current minimum tax rate for noncorporate taxpayers
is 26% on the first $175,000 of alternative minimum taxable income in excess of
the exemption amount and 28% on any additional alternative minimum taxable
income.
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Prospective limited partners should consult with their tax advisors as to the
impact of an investment in units or other limited partner interests on their
liability for the alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the ownership and disposition of
units or other limited partner interests will depend in part on our estimates of
the relative fair market values of our assets. Although we may from time to time
consult with professional appraisers with respect to valuation matters, many of
the relative fair market value estimates will be made by us. These estimates are
subject to challenge and will not be binding on the IRS or the courts. If the
estimates of fair market value are subsequently found to be incorrect, the
character and amount of items of income, gain, loss or deductions previously
reported by limited partners might change, and limited partners might be
required to adjust their tax liability for prior years.
TREATMENT OF SHORT SALES
A limited partner whose units or other limited partner interests are loaned
to a "short seller" to cover a short sale of units or other limited partner
interests may be considered as having disposed of ownership of those securities.
If so, he would no longer be a partner with respect to those securities during
the period of the loan and may recognize gain or loss from the disposition. As a
result, during this period, any of our income, gain, deduction or loss with
respect to those securities would not be reportable by the limited partner, any
cash distributions received by the limited partner with respect to those
securities would be fully taxable and all of such distributions would appear to
be treated as ordinary income. Limited partners desiring to assure their status
as partners and avoid the risk of gain recognition should modify any applicable
brokerage account agreements to prohibit their brokers from borrowing their
units or other limited partner interests. The IRS has announced that it is
actively studying issues relating to the tax treatment of short sales of
partnership interests. See also "--Disposition of Limited Partner
Interests--Recognition of Gain or Loss."
DISPOSITION OF LIMITED PARTNER INTERESTS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of units or other limited partner
interests equal to the difference between the amount realized and the limited
partner's tax basis for the units or other limited partner interests sold. A
limited partner's amount realized will be measured by the sum of the cash or the
fair market value of other property received plus his share of our nonrecourse
liabilities. Because the amount realized includes a limited partner's share of
our nonrecourse liabilities, the gain recognized on the sale of units or other
limited partner interests could result in a tax liability in excess of any cash
received from such sale.
Prior distributions by us in excess of cumulative net taxable income in
respect of a unit or other limited partner interest which decreased a limited
partner's tax basis in such unit or other limited partner interest will, in
effect, become taxable income if the unit or other limited partner interest is
sold at a price greater than the limited partner's tax basis in such unit or
other limited partner interest, even if the price is less than his original
cost.
Should the IRS successfully contest the convention used by us to amortize
only a portion of the Section 743(b) adjustment (described under "--Tax
Treatment of Operations--Section 754 Election") attributable to an amortizable
Section 197 intangible after a sale by our general partner of units or other
limited partner interests, a limited partner could realize additional gain from
the sale of units or other limited partner interests than had such convention
been respected. In that case, the limited partner may have been entitled to
additional deductions against income in prior years but may be unable to claim
them, with the result to him of greater overall taxable income than appropriate.
Our counsel is unable to opine as to the validity of the convention but believes
such a contest by the IRS to be unlikely because a successful contest could
result in substantial additional deductions to other limited partners.
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Gain or loss recognized by a limited partner (other than a "dealer" in
units or other limited partner interests) on the sale or exchange of a unit or
other limited partner interest held for more than one year will generally be
taxable as capital gain or loss. Capital gain recognized on the sale of units or
other limited partner interests held for more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss (which could be
substantial), however, will be separately computed and taxed as ordinary income
or loss under Section 751 of the Code to the extent attributable to assets
giving rise to depreciation recapture or other "unrealized receivables" or to
"inventory items" owned by us. The term "unrealized receivables" includes
potential recapture items, including depreciation recapture. Ordinary income
attributable to unrealized receivables, inventory items and depreciation
recapture may exceed net taxable gain realized upon the sale of the unit or
other limited partner interest and may be recognized even if there is a net
taxable loss realized on the sale of the unit or other limited partner interest.
Thus, a limited partner may recognize both ordinary income and a capital loss
upon a disposition of units or other limited partner interests. Net capital loss
may offset 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.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If this
ruling is applicable to the holders of units or other limited partner interests,
a limited partner will be unable to select high or low basis units or other
limited partner interests to sell as would be the case with corporate stock. It
is not clear whether the ruling applies to us because, similar to corporate
stock, interests in us are evidenced by separate certificates. Accordingly, our
counsel is unable to opine as to the effect such ruling will have on the limited
partners. A limited partner considering the purchase of additional units or
other limited partner interests or a sale of units or other limited partner
interests purchased in separate transactions should consult his own tax advisor
as to the possible consequences of that ruling.
Some provisions of the Code affect the taxation of certain financial
products and securities, including partnership interests, by treating a taxpayer
as having sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or terminated at its fair market value) if
the taxpayer or related persons enters into a short sale, an offsetting notional
principal contract or a futures or forward contract with respect to the
partnership interest or substantially identical property. Moreover, if a
taxpayer has previously entered into a short sale, an offsetting notional
principal contract or a futures or forward contract with respect to the
partnership interest, the taxpayer will be treated as having sold such position
if the taxpayer or related person then acquires the partnership interest or
substantially identical property. The Secretary of Treasury is also authorized
to issue regulations that treat a taxpayer that enters into transactions or
positions that have substantially the same effect as the preceding transactions
as having constructively sold the financial position.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, our taxable income and losses will be determined annually, will
be prorated on a monthly basis and will be subsequently apportioned among the
limited partners in proportion to the number of units or other limited partner
interests owned by each of them as of the opening of the NYSE on the first
business day of the month (the "Allocation Date"). However, gain or loss
realized on a sale or other disposition of our assets other than in the ordinary
course of business will be allocated among the limited partners on the
Allocation Date in the month in which that gain or loss is recognized. As a
result, a limited partner transferring units or other limited partner interests
may be allocated income, gain, loss and deduction accrued after the date of
transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, our counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of units or other limited partner interests. If this method is not
allowed under the Treasury Regulations (or only applies to transfers of less
than all of the limited partner's
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interest), our taxable income or losses might be reallocated among the limited
partners. We are authorized to revise our method of allocation between
transferors and transferees (as well as among partners whose interests otherwise
vary during a taxable period) to conform to a method permitted under future
Treasury Regulations.
A limited partner who owns units or other limited partner interests at any
time during a quarter and who disposes of those securities prior to the record
date set for a cash distribution with respect to such quarter will be allocated
items of our income, gain, loss and deductions attributable to such quarter but
will not be entitled to receive that cash distribution.
NOTIFICATION REQUIREMENTS
A limited partner who sells or exchanges units or other limited partner
interests is required to notify us in writing of that sale or exchange within 30
days after the sale or exchange and in any event by no later than January 15 of
the year following the calendar year in which the sale or exchange occurred. We
are required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the U.S. and who effects the sale or exchange through a broker.
Additionally, a transferor and a transferee of a unit or other limited partner
interest will be required to furnish statements to the IRS, filed with their
income tax returns for the taxable year in which the sale or exchange occurred,
that set forth the amount of the consideration received for the unit or other
limited partner interest that is allocated to goodwill or going concern value of
ours. Failure to satisfy these reporting obligations may lead to the imposition
of substantial penalties.
CONSTRUCTIVE TERMINATION
We will be considered to have been terminated if there is a sale or
exchange of 50% or more of the total interests in our capital and profits within
a 12-month period. Our termination will result in the closing of our taxable
year for all limited partners. In the case of a limited partner reporting on a
taxable year other than a fiscal year ending December 31, the closing of our
taxable year may result in more than 12 months' taxable income or the inability
to include our results in his taxable income for the year of termination. New
tax elections required to be made by us, including a new election under Section
754 of the Code, must be made subsequent to a termination, and a termination
could result in a deferral of our deductions for depreciation. A termination
could also result in penalties if we were unable to determine that the
termination had occurred. Moreover, a termination might either accelerate the
application of, or subject us to, any tax legislation enacted prior to the
termination.
ENTITY-LEVEL COLLECTIONS
If we are required or elect under applicable law to pay any federal, state
or local income tax on behalf of any limited partner or our general partner or
any former limited partner, we are authorized to pay those taxes from our funds.
Such payment, if made, will be treated as a distribution of cash to the partner
on whose behalf the payment was made. If the payment is made on behalf of a
person whose identity cannot be determined, we are authorized to treat the
payment as a distribution to current limited partners. We are authorized to
amend our partnership agreement in the manner necessary to maintain uniformity
of intrinsic tax characteristics of units or other limited partner interests and
to adjust subsequent distributions, so that after giving effect to such
distributions, the priority and characterization of distributions otherwise
applicable under the partnership agreement is maintained as nearly as is
practicable. Payments by us as described above could give rise to an overpayment
of tax on behalf of an individual partner in which event the partner could file
a claim for credit or refund.
UNIFORMITY OF LIMITED PARTNER INTERESTS
Because we cannot match transferors and transferees of units or other
limited partner interests, we must maintain uniformity of the economic and tax
characteristics of the units or other limited partner
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interests to a purchaser of such securities. In the absence of uniformity,
compliance with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Treasury Regulation Section 1.167(c)-1(a)(6) and
Proposed Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could
have a negative impact on the value of the units or other limited partner
interests. See "-- Tax Treatment of Operations -- Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property or
adjusted property (to the extent of any unamortized Book-Tax Disparity) using a
rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis of such
property, or treat that portion as nonamortizable, to the extent attributable to
property the common basis of which is not amortizable, consistent with the newly
adopted regulations under Section 743 but despite its inconsistency with
Treasury Regulation Section 1.167(c)-1(a)(6) and Proposed Treasury Regulation
Section 1.197- 2(g)(3) (neither of which is expected to directly apply to a
material portion of our assets). See "--Tax Treatment of Operations--Section 754
Election." To the extent such Section 743(b) adjustment is attributable to
appreciation in value in excess of the unamortized Book-Tax Disparity, we will
apply the rules described in the Regulations and legislative history. If we
determine that such a position cannot reasonably be taken, we may adopt a
depreciation and amortization convention under which all purchasers acquiring
units or other limited partner interests in the same month would receive
depreciation and amortization deductions, whether attributable to common basis
or Section 743(b) basis, based upon the same applicable rate as if they had
purchased a direct interest in our property. If such an aggregate approach is
adopted, it may result in lower annual depreciation and amortization deductions
than would otherwise be allowable to certain limited partners and risk the loss
of depreciation and amortization deductions not taken in the year that such
deductions are otherwise allowable. We will not adopt this convention if we
determine that the loss of depreciation and amortization deductions will have a
material adverse effect on the limited partners. If we choose not to utilize
this aggregate method, we may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic tax
characteristics of any units or other limited partner interests that would not
have a material adverse effect on the limited partners. The IRS may challenge
any method of depreciating the Section 743(b) adjustment described in this
paragraph. If such a challenge were sustained, the uniformity of units or other
limited partner interests might be affected, and the gain from the sale of units
or other limited partner interests might be increased without the benefit of
additional deductions. See "-- Disposition of Limited Partner
Interests -- Recognition of Gain or Loss."
TAX EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of units or other limited partner interests by employee benefit
plans, other tax-exempt organizations, nonresident aliens, foreign corporations,
other foreign persons and regulated investment companies raises issues unique to
such persons and, as described below, may have substantially adverse tax
consequences. Employee benefit plans and most other organizations exempt from
federal income tax (including individual retirement accounts ("IRAs") and other
retirement plans) are subject to federal income tax on unrelated business
taxable income. Virtually all of the taxable income derived by such an
organization from the ownership of a unit or other limited partner interest will
be unrelated business taxable income and thus will be taxable to such a limited
partner.
A regulated investment partnership or "mutual fund" is required to derive
90% or more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. We do not
anticipate that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
units or other limited partner interests will be considered to be engaged in
business in the U.S. on account of ownership of units or other limited partner
interests. As a consequence they will be required to file federal tax returns in
respect of their share of our income, gain, loss or deduction and pay federal
income tax at regular rates on
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any net income or gain. Generally, a partnership is required to deduct
withholding tax on the portion of the partnership's income which is effectively
connected with the conduct of a U.S. trade or business and which is allocable to
the foreign partners, regardless of whether any actual distributions have been
made to such partners. However, under rules applicable to publicly-traded
partnerships, we will withhold (currently at the rate of 39.6%) on actual cash
distributions made quarterly to foreign limited partners. Each foreign limited
partner must obtain a taxpayer identification number from the IRS and submit
that number to the Transfer Agent on a Form W-8 in order to obtain credit for
the taxes withheld. A change in applicable law may require us to change these
procedures. We have the right to redeem units or other limited partner interests
held by certain non-U.S. residents or holders otherwise not qualified to become
one of our limited partners.
Because a foreign corporation which owns units or other limited partner
interests will be treated as engaged in a U.S. trade or business, such a
corporation may be subject to U.S. branch profits tax at a rate of 30%, in
addition to regular federal income tax, on its allocable share of our income and
gain (as adjusted for changes in the foreign corporation's "U.S. net equity")
which are effectively connected with the conduct of a U.S. trade or business.
That tax may be reduced or eliminated by an income tax treaty between the U.S.
and the country with respect to which the foreign corporate limited partner is a
"qualified resident." In addition, such a limited partner is subject to special
information reporting requirements under Section 6038C of the Code.
The IRS has ruled that a foreign limited partner who sells or otherwise
disposes of a unit or other limited partner interest will be subject to federal
income tax on gain realized on the disposition of the unit or other limited
partner interest to the extent that the gain is effectively connected with a
U.S. trade or business of the foreign limited partner. Apart from the
application of that ruling, a foreign limited partner will not be taxed or
subject to withholding upon the disposition of a unit or other limited partner
interest if that foreign limited partner has held less than 5% in value of the
units or other limited partner interests during the five-year period ending on
the date of the disposition and if the units or other limited partner interests
are regularly traded on an established securities market at the time of the
disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
We intend to furnish to each limited partner, within 90 days after the
close of each calendar year, certain tax information, including a substitute
Schedule K-1, which sets forth each limited partner's share of our income, gain,
loss and deduction for our preceding taxable year. In preparing this
information, which will generally not be reviewed by counsel, we will use
various accounting and reporting conventions, some of which have been mentioned
in the previous discussion, to determine the limited partner's share of income,
gain, loss and deduction. There is no assurance that any of those conventions
will yield a result which conforms to the requirements of the Code, regulations
or administrative interpretations of the IRS. We cannot assure prospective
limited partners that the IRS will not successfully contend in court that such
accounting and reporting conventions are impermissible. Any such challenge by
the IRS could negatively affect the value of the units or other limited partner
interests.
The federal income tax information returns filed by us may be audited by
the IRS. Adjustments resulting from any such audit may require each limited
partner to adjust a prior year's tax liability, and possibly may result in an
audit of the limited partner's own return. Any audit of a limited partner's
return could result in adjustments of non-partnership as well as partnership
items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Code provides for one partner to
be designated as the "Tax Matters Partner" for these purposes. Our partnership
agreement appoints our general partner as our Tax Matters Partner.
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The Tax Matters Partner has made and will make certain elections on our
behalf and on behalf of the limited partners and can extend the statute of
limitations for assessment of tax deficiencies against limited partners with
respect to our items. The Tax Matters Partner may bind a limited partner with
less than a 1% profits interest in us to a settlement with the IRS unless that
limited partner elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review (by which all the limited partners are bound) of a final partnership
administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, such review may be sought by any limited partner having at least a 1%
interest in our profits and by the limited partners having in the aggregate at
least a 5% profits interest. However, only one action for judicial review will
go forward, and each limited partner with an interest in the outcome may
participate. However, if we elect to be treated as a large partnership, a
partner will not have the right to participate in settlement conferences with
the IRS or to seek a refund.
A limited partner must file a statement with the IRS identifying the
treatment of any item on his federal income tax return that is not consistent
with the treatment of the item on our return. Intentional or negligent disregard
of the consistency requirement may subject a limited partner to substantial
penalties. However, if we elect to be treated as a large partnership, our
partners would be required to treat all of our items in a manner consistent with
our return.
NOMINEE REPORTING
Persons who hold an interest in us as a nominee for another person are
required to furnish to us (a) the name, address and taxpayer identification
number of the beneficial owner and the nominee; (b) whether the beneficial owner
is (1) a person that is not a U.S. person, (2) a foreign government, an
international organization or any wholly-owned agency or instrumentality of
either of the foregoing, or (3) a tax-exempt entity; (c) the amount and
description of units or other limited partner interests held, acquired or
transferred for the beneficial owner; and (d) certain information including the
dates of acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are U.S. persons and certain information on
units or other limited partner interests they acquire, hold or transfer for
their own account. A penalty of $50 per failure (up to a maximum of $100,000 per
calendar year) is imposed by the Code for failure to report such information to
us. The nominee is required to supply the beneficial owner of the units or other
limited partner interests with the information furnished to us.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that we
are not subject to the registration requirement on the basis that we will not
constitute a tax shelter. However, our general partner, as our principal
organizer, has registered us as a tax shelter with the Secretary of the Treasury
in the absence of assurance that we will not be subject to tax shelter
registration and in light of the substantial penalties which might be imposed if
registration is required and not undertaken. ISSUANCE OF THE REGISTRATION NUMBER
DOES NOT INDICATE THAT AN INVESTMENT IN US OR THE CLAIMED TAX BENEFITS HAVE BEEN
REVIEWED, EXAMINED OR APPROVED BY THE IRS. The IRS has issued the following
shelter registration number to us: 93084000079. We must furnish the registration
number to the limited partners, and a limited partner who sells or otherwise
transfers a unit or other limited partner interest in a subsequent transaction
must furnish the registration number to the transferee. The penalty for failure
of the transferor of a unit or other limited partner interest to furnish the
registration number to the transferee is $100 for each such failure. The limited
partners must disclose our tax shelter registration number on Form 8271 to be
attached to the tax return on which any deduction, loss or other benefit
generated by us is claimed or income of ours is included. A limited partner who
fails to disclose the tax shelter registration number on his return, without
reasonable cause for that failure, will be subject to a $250 penalty for each
failure. Any penalties discussed herein are not deductible for federal income
tax purposes.
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ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause for
that portion and that the taxpayer acted in good faith with respect to that
portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally is
reduced if any portion is attributable to a position adopted on the return (1)
with respect to which there is, or was, "substantial authority" or (2) as to
which there is a reasonable basis and the pertinent facts of such position are
disclosed on the return. Certain more stringent rules apply to "tax shelters," a
term that in this context does not appear to include us. If any item of our
income, gain, loss or deduction included in the distributive shares of limited
partners might result in such an "understatement" of income for which no
"substantial authority" exists, we must disclose the pertinent facts on its
return. In addition, we will make a reasonable effort to furnish sufficient
information for limited partners to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property
(or the adjusted basis of any property) claimed on a tax return is 200% or more
of the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, limited partners will be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that may be imposed by the
various jurisdictions in which we do business or own property. Although an
analysis of those various taxes is not presented here, each prospective limited
partner should consider their potential impact on his investment in our units or
other limited partner interests. We will own property and conduct business in
Texas and Louisiana; among other places. Of those, only Texas does not currently
impose a personal income tax. A limited partner will be required to file state
income tax returns and to pay state income taxes in some or all of the states in
which we do business or own property and may be subject to penalties for failure
to comply with those requirements. In certain states, tax losses may not produce
a tax benefit in the year incurred (if, for example, we have no income from
sources within that state) and also may not be available to offset income in
subsequent taxable years. Some of the states may require us, or we may elect, to
withhold a percentage of income from amounts to be distributed to a limited
partner who is not a resident of the state. Withholding, the amount of which may
be greater or less than a particular limited partner's income tax liability to
the state, generally does not relieve the non-resident limited partner from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to limited partners for purposes of determining the amounts
distributed by us. See "--Disposition of Limited Partner Interests--Entity-Level
Collections." Based on current law and its estimate of our future operations,
our general partner anticipates that any amounts required to be withheld will
not be material.
It is the responsibility of each limited partner to investigate the legal
and tax consequences, under the laws of pertinent states and localities, of his
investment in our units or other limited partner interests. Accordingly, each
prospective limited partner should consult, and must depend upon, his own tax
counsel or other advisor with regard to those matters. Further, it is the
responsibility of each limited partner to file all state and local, as well as
U.S. federal, tax returns that may be required of such limited partner. Our
counsel has not rendered an opinion on the state or local tax consequences of an
investment in our units or other limited partner interests.
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INVESTMENT BY EMPLOYEE BENEFIT PLANS
An investment in us by an employee benefit plan is subject to certain
additional considerations because persons with discretionary control of assets
of such plans (a "fiduciary") are subject to the fiduciary responsibility
provisions of the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and transactions are subject to restrictions imposed by Section 4975
of the Code. As used herein, the term "employee benefit plan" includes, but is
not limited to, qualified pension, profit-sharing and stock bonus plans, Keogh
plans, Simplified Employee Pension Plans, and tax deferred annuities or
Individual Retirement Accounts ("IRAs") established or maintained for employees
by an employer or employee organization. Among other things, consideration
should be given to (1) whether such investment is prudent under Section
404(a)(1)(B) of ERISA, (2) whether in making such investment such plan will
satisfy the diversification requirement of Section 404(a)(1)(C) of ERISA, and
(3) whether such investment will result in recognition of unrelated business
taxable income by such plan. See "Income Tax Considerations -- Tax Exempt
Organizations and Certain Other Investors." Fiduciaries should determine whether
an investment in us is authorized by the appropriate governing instrument and is
an appropriate investment for such plan.
In addition, a fiduciary of an employee benefit plan should consider
whether such plan will, by investing in us, be deemed to own an undivided
interest in our assets, with the result that our general partner would also be a
fiduciary of such plan and we would be subject to the regulatory restrictions of
ERISA, including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code. Section 406 of ERISA and Section 4975 of the Code
(which also applies to IRAs that are not considered part of an employee benefit
plan; i.e., IRAs established or maintained by individuals rather than an
employer or employee organization) prohibit an employee benefit plan from
engaging in certain transactions involving "plan assets" with parties who are
"parties in interest" under ERISA or "disqualified persons" under the Code with
respect to the plan.
Under Department of Labor regulations the assets of an entity in which
employee benefit plans acquire equity interests would not be deemed "plan
assets" if, among other things, (1) the equity interests acquired by employee
benefit plans are publicly offered securities -- i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the federal
securities law, (2) the entity is an "operating company" -- i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital, or (3) there is no significant investment by benefit
plan investors, which is defined to mean that less than 25% of the value of each
class of equity interest is held by the employee benefit plans referred to
above, IRAs and other employee benefit plans not subject to ERISA (such as
governmental plans). Our assets are not expected to be considered "plan assets"
under these regulations because it is expected that the investment will satisfy
the requirements in (1) above, and may also satisfy the requirements in (2) and
(3).
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PLAN OF DISTRIBUTION
We may sell the capital securities representing limited partner interests
described in this prospectus and any prospectus supplement to one or more
underwriters for public offering and sale, or we may sell the securities to
investors directly or through agents. Any underwriter or agent involved in the
offer and sale of these securities will be named in the applicable prospectus
supplement.
Underwriters may offer and sell these securities at fixed prices, which may
be changed, at prices related to the prevailing market prices at the time of
sale or at negotiated prices. We also may authorize underwriters acting as our
agents to offer and sell these securities upon the terms and conditions as are
set forth in the applicable prospectus supplement. In connection with the sale
of these securities, underwriters may be deemed to have received compensation
from us in the form of underwriting discounts or commissions and may also
receive commissions from purchasers of these securities for whom they may act as
agent. Underwriters may sell these securities to or through dealers. Dealers may
receive compensation in the form of discounts, concessions or commissions from
the underwriters and/or commissions from the purchasers for whom they may act as
agent.
Any underwriting compensation paid by us to underwriters or agents in
connection with the offering of these securities, and any discounts, concessions
or commissions allowed by underwriters to participating dealers, will be set
forth in the applicable prospectus supplement. Underwriters, dealers and agents
participating in the distribution of these securities may be deemed to be
underwriters, and any discounts and commissions received by them and any profit
realized by them on resale of these securities may be deemed to be underwriting
discounts and commissions under the Securities Act. Underwriters, dealers and
agents may be entitled, under agreements entered into with us, to
indemnification against the contribution toward certain civil liabilities,
including liabilities under the Securities Act.
If a prospectus supplement so indicates, we will authorize agents,
underwriters or dealers to solicit offers by certain institutional investors to
purchase these securities to which such prospectus supplement relates, providing
for payment and delivery on a future date specified in such prospectus
supplement. There may be limitations on the minimum amount that may be purchased
by any such institutional investor or on the number of these securities that may
be sold pursuant to such arrangements. Institutional investors include
commercial and savings banks, insurance companies, pension funds, investment
companies, educational and charitable institutions and such other institutions
as we may approve. The obligations of the purchasers pursuant to such delayed
delivery and payment arrangements will not be subject to any conditions except
that (1) the purchase by an institution of the securities shall not be
prohibited under the applicable laws of any jurisdiction in the United States
and (2) if these securities are being sold to underwriters, we shall have sold
to such underwriters the total number of such securities less the number thereof
covered by such arrangements. Underwriters will not have any responsibility in
respect of the validity of such arrangements or our performance or such
institutional investors thereunder.
If a prospectus supplement so indicates, the underwriters engaged in an
offering of these securities may engage in transactions that stabilize, maintain
or otherwise affect the market price of these securities at levels above those
that might otherwise prevail in the open market. Specifically, the underwriters
may over-allot in connection with the offering creating a short position in
these securities for their own account. For the purposes of covering a syndicate
short position or pegging, fixing or maintaining the price of these securities,
the underwriters may place bids for these securities or effect purchases of
these securities in the open market. A syndicate short position may also be
covered by exercise of an over-allotment option, if one is granted to the
underwriters. Finally, the underwriters may impose a penalty bid on certain
underwriters and dealers. This means that the underwriting syndicate may reclaim
selling concessions allowed to an underwriter or a dealer for distributing
securities in transactions to cover syndicate short positions, in stabilization
transactions or otherwise. The underwriters will not be required to engage in
any of these activities and any such activities, if commenced, may be
discontinued at any time.
Certain of the underwriters and their affiliates may be customers of,
engage in transactions with and perform services for us in the ordinary course
of business.
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LEGAL MATTERS
Certain legal matters with respect to the legality of the capital
securities representing limited partner interests being offered and certain tax
matters will be passed upon for us by Akin, Gump, Strauss, Hauer & Feld, L.L.P.,
Houston, Texas. If the securities are being distributed in an underwritten
offering, certain legal matters will be passed upon for the underwriters by
counsel identified in the applicable prospectus supplement.
EXPERTS
The consolidated financial statements incorporated in this Registration
Statement by reference to the Annual Report on Form 10-K of El Paso Energy
Partners, L.P. for the year ended December 31, 1999, and the audited historical
financial statements included in El Paso Energy Partners, L.P.'s Current Report
on Form 8-K/A dated June 5, 2000, have been so incorporated in reliance on the
reports of PricewaterhouseCoopers LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
The consolidated financial statements of Western Gulf Holdings, L.L.C. as
of December 31, 1999 and the related statements of income, members' equity, and
cash flows for the year ended December 31, 1999 incorporated into this
Registration Statement by reference to our Annual Report on Form 10-K for the
year ended December 31, 1999 have been so incorporated in reliance on the report
of Deloitte & Touche LLP, independent auditors, given upon the authority of said
firm as experts in auditing and accounting.
The financial statements of Poseidon Oil Pipeline Company, L.L.C. as of
December 31, 1999 and 1998, and for each of the three years in the period ended
December 31, 1999, incorporated in this Registration Statement by reference to
our Annual Report on Form 10-K for the year ended December 31, 1999, have been
audited by Arthur Andersen LLP, independent public accountants, as indicated in
their report with respect thereto, and are incorporated by reference in reliance
upon the report of said firm and upon the authority of said firm as experts in
accounting and auditing.
The consolidated financial statements of Neptune Pipeline Company, L.L.C.
incorporated in this Registration Statement by reference to the Annual Report on
Form 10-K of El Paso Energy Partners, L.P. for the year ended December 31, 1999
have been so incorporated in reliance on the report of PricewaterhouseCoopers
LLP, independent accountants, given on the authority of said firm as experts in
auditing and accounting.
The information derived from the report of Netherland, Sewell & Associates,
Inc., independent petroleum engineers, with respect to our estimated oil and
natural gas reserves incorporated into this Registration Statement by reference
to our Annual Report on Form 10-K for the year ended December 31, 1999 have been
so incorporated in reliance upon the authority of said firm as experts with
respect to such matters contained in their report.
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2,250,000 COMMON UNITS
EL PASO ENERGY PARTNERS, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
[LOGO]
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PROSPECTUS SUPPLEMENT
MARCH 20, 2001
(INCLUDING PROSPECTUS DATED JUNE 30, 2000)
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SALOMON SMITH BARNEY
UBS WARBURG LLC
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