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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report: July 19, 2000
(Date of earliest event reported: July 11, 2000)
EL PASO ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in the charter)
Delaware 1-11680 76-0396023
(State or other jurisdiction (Commission File Number) (I.R.S. Employer
of incorporation) Identification No.)
El Paso Energy Building
1001 Louisiana Street
Houston, Texas 77002
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code (713) 420-2131
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Item 5. Other Events.
On July 11, 2000, we entered into a letter of intent to acquire the
salt dome natural gas storage businesses of Crystal Gas Storage, Inc., a
subsidiary of El Paso Energy Corporation. In exchange for these businesses, we
would issue to Crystal $170 million, subject to adjustment, of Series B 10%
Cumulative Redeemable Preference Units.
Crystal's gas storage businesses include the Petal and Hattiesburg
natural gas storage facilities located in Mississippi. These facilities are well
situated to serve the Northeast, Mid-Atlantic and Southeast natural gas markets.
On a combined basis, these storage facilities currently have a natural gas
working capacity of 6.7 billion cubic feet, or Bcf, and are capable of
delivering in excess of 670 million cubic feet per day of natural gas into three
interstate pipelines, including pipelines owned by Koch Gateway Pipeline,
Transcontinental Gas Pipeline and an affiliate of El Paso Energy, Tennessee Gas
Pipeline. A 6.8 Bcf expansion is underway at these facilities, all of which is
contractually dedicated for the next 20 years to a subsidiary of the Southern
Company, the largest producer of electricity in the United States. Each of the
Petal and Hattiesburg facilities is capable of making deliveries at the high
rates necessary to satisfy peaking requirements in the electric generation
industry.
The consummation of this acquisition is subject to customary
conditions, including negotiating definitive agreements and obtaining approvals
from third parties and applicable governmental authorities.
This Current Report on Form 8-K provides pro forma condensed combined
financial statements relating to our proposed acquisition of Crystal's storage
businesses, audited financial statements of Crystal's storage businesses for the
year ended December 31, 1999, and unaudited interim financial statements as of
March 31, 2000, and for the quarters ended March 31, 2000 and 1999.
Item 7. Financial Statements and Exhibits.
(a) Financial statements of business to be acquired.
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FIRST RESERVE GAS COMPANY AND SUBSIDIARIES
PETAL GAS STORAGE COMPANY, AND
CRYSTAL PROPERTIES AND TRADING COMPANY
COMBINED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
DECEMBER 31, 1999
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INDEPENDENT AUDITORS' REPORT
The Board of Directors
El Paso Energy Partners, L.P.:
We have audited the accompanying combined balance sheet of First Reserve Gas
Company and Subsidiaries, Petal Gas Storage Company, and Crystal Properties &
Trading Company (the "Company") as of December 31, 1999, and the related
combined income statement, combined statement of cash flows, and combined
statement of stockholder's equity for the year then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the combined financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the combined financial statements. An audit also
includes assessing the accounting principles used and significant estimates made
by management, as well as evaluating the overall combined financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of the Company as of
December 31, 1999, and the results of their operations and their cash flows for
the year then ended in conformity with generally accepted accounting principles.
/s/ KPMG LLP
Shreveport, Louisiana
March 17, 2000
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FIRST RESERVE GAS COMPANY AND SUBSIDIARIES,
PETAL GAS STORAGE COMPANY, AND
CRYSTAL PROPERTIES & TRADING COMPANY
COMBINED BALANCE SHEET
(IN THOUSANDS)
December 31
1999
------------
ASSETS
Current assets
Cash and cash equivalents ............................... $ 512
Accounts receivable ..................................... 953
Prepaid expenses and other current assets................ 198
-----------
Total current assets .............................. 1,663
Gas storage facilities....................................... 145,291
Less accumulated depreciation and amortization............... (15,393)
-----------
129,898
Restricted debt securities................................... 1,807
Other assets................................................. 577
-----------
2,384
-----------
Total assets....................................... $ 133,945
===========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current Liabilities
Current portion of long-term obligations................. $ 2,960
Accounts payable......................................... 2,150
Accounts payable to parent, net.......................... 5,256
Accrued expenses ........................................ 1,067
-----------
Total current liabilities.......................... 11,433
Long-term obligations........................................ 38,810
Deferred income taxes........................................ 20,564
Deferred revenue from sale of future contract receivables.... 2,847
Stockholder's equity
Common stock............................................. 2
Additional paid-in capital............................... 51,651
Retained earnings........................................ 8,638
-----------
Total stockholder's equity......................... 60,291
-----------
Total liabilities and stockholder's equity ........ $ 133,945
===========
See notes to combined financial statements.
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FIRST RESERVE GAS COMPANY AND SUBSIDIARIES,
PETAL GAS STORAGE COMPANY, AND
CRYSTAL PROPERTIES & TRADING COMPANY
COMBINED INCOME STATEMENT
(IN THOUSANDS)
Year Ended
December 31, 1999
------------------
Gas storage revenues........................................ $ 14,029
------------
Costs and expenses
Operating expenses...................................... 3,021
Depreciation and amortization........................... 4,047
------------
7,068
------------
Operating income............................................ 6,961
Other income................................................ 110
------------
Income before interest, taxes, and other expenses........... 7,071
Interest, debt, and other expenses.......................... 3,626
------------
Income before provision for income taxes.................... 3,445
Provision for income taxes ................................. 1,181
------------
Net income.................................................. $ 2,264
============
See notes to combined financial statements.
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FIRST RESERVE GAS COMPANY AND SUBSIDIARIES,
PETAL GAS STORAGE COMPANY, AND
CRYSTAL PROPERTIES & TRADING COMPANY
COMBINED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
Year Ended
December 31, 1999
----------------------
Cash flows from operating activities:
Net income....................................................... $ 2,264
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation and amortization.............................. 4,047
Deferred income taxes...................................... (505)
Decrease in accounts receivable............................ 754
Increase in prepaid expenses and
other assets............................................ (117)
Decrease in accounts payable............................... (15)
Increase in accrued expenses............................... 106
Other ..................................................... 204
----------
Net cash provided by operating activities.............. 6,738
----------
Cash flows from investing activities:
Capital expenditures............................................. (16,487)
Other............................................................ 2,105
----------
Net cash used in investing activities.................. (14,382)
----------
Cash flows from financing activities:
Decrease in deferred revenue from sale of future
contract receivables ......................................... (5,384)
Decrease in deferred revenue from forward sales.................. (6,389)
Return of capital to Crystal Gas Storage, Inc. .................. (6,400)
Increase in taxes payable to parent.............................. 1,369
Increase in accounts payable to parent........................... 6,422
----------
Net cash used in financing activities.................. (10,382)
----------
Net decrease in cash and cash equivalents............................ (18,026)
Cash and cash equivalents at beginning of year....................... 18,538
----------
Cash and cash equivalents at end of year............................. $ 512
==========
Supplemental cash flow information:
Cash paid for interest........................................... $ 2,962
==========
Cash paid related to the amortization of discount
on sale of future contract receivables ...................... $ 460
==========
Cash paid for income taxes....................................... $ 263
==========
See notes to combined financial statements.
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FIRST RESERVE GAS COMPANY AND SUBSIDIARIES,
PETAL GAS STORAGE COMPANY, AND
CRYSTAL PROPERTIES & TRADING COMPANY
COMBINED STATEMENT OF STOCKHOLDER'S EQUITY
(IN THOUSANDS)
Additional Total
Common Paid-In Retained Stockholder's
Stock Capital Earnings Equity
------ ------- -------- ------
Balance at January 1, 1999................. $ 2 $ 58,051 $ 6,374 $ 64,427
Return of capital to Crystal Gas
Storage, Inc......................... - (6,400) - (6,400)
Net income.............................. - - 2,264 2,264
--------- ---------------- --------- -----------
Balance at December 31, 1999............... $ 2 $ 51,651 $ 8,638 $ 60,291
======== ================ ============= ===========
See notes to combined financial statements.
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First Reserve Gas Company and subsidiaries,
Petal Gas Storage Company, and
Crystal Properties & Trading Company
Notes to Combined Financial Statements
December 31, 1999
NOTE A - ORGANIZATION AND BASIS OF PRESENTATION
First Reserve Gas Company and subsidiaries (First Reserve Gas), Petal
Gas Storage Company (Petal), and Crystal Properties & Trading Company (Crystal
Properties & Trading), are known collectively as the Company. The Company is
primarily engaged in the ownership and operation of two natural gas storage
facilities located near Hattiesburg, Mississippi, which serve the Northeast,
Mid-Atlantic and Southeast natural gas markets. The Hattiesburg facility is
operated as a regulated utility under the jurisdiction of the Mississippi Public
Service Commission and the Petal facility is subject to federal regulation by
the Federal Energy Regulatory Commission (FERC).
On October 15, 1999, the parent of the Company, Crystal Gas Storage
Inc. (Crystal), entered into a merger agreement with El Paso Energy Corporation
(El Paso Energy). The merger was completed in January 2000.
The combined financial statements are presented on a carved-out basis
and include only those historical results of operations and assets and
liabilities directly related to the Company. These statements have been prepared
from the Company's and Crystal's historical accounting records, and all material
intercompany accounts and transactions have been eliminated. Overhead costs were
allocated based on a specific identification of Crystal's administrative costs
attributable to the Company. The allocated costs are included in operating
expenses in the combined income statement. Management believes that the
allocation methodology is reasonable.
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NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents - Short-term investments purchased with an
original maturity of three months or less are considered cash equivalents.
Depreciation and Amortization - Depreciation of gas storage facilities
and equipment is computed using the straight-line method over the estimated
useful lives of the assets, which range from 20 to 40 years. The gas storage
facilities classification also includes approximately $8.0 million of intangible
assets associated with the value assigned to certain gas storage contracts when
First Reserve Gas was acquired in 1995. These contracts, which expire in 2005,
are amortized using the straight-line method over the term of the contracts.
Long-Lived Assets - The Company evaluates long-lived assets on a
specific basis or in groups of similar assets, as applicable. Recoverability of
assets to be held and used is measured by comparing the carrying amount of an
asset to future net cash flows expected to be generated by the asset. If these
net cash flows are less than the asset's carrying value, the asset is considered
to be impaired. The impairment recognized is measured by the amount by which the
carrying amount of the assets exceeds the fair value of the assets based on
discounted cash flows. Assets to be disposed of are reported at the lower of the
carrying amount or fair value less costs to sell. There is no impairment in the
carrying value of long-lived assets for the year ended December 31, 1999.
Revenue Recognition - Gas storage revenues consist primarily of fixed
rental fees for gas storage capacity and are recognized and due during the month
in which the space is reserved for the customer, regardless of how much space is
actually used. Interruptible revenues, which are generated by
providing excess storage capacity, are variable in nature and are recognized
when the service is provided.
Income Taxes - The Company is included in the consolidated federal
income tax return of its parent. The tax allocation agreement requires the
Company to calculate federal income tax expense on a stand-alone basis with the
exception of the tax impact of the sale of future contract receivables. Under
the Company's note agreement governing its 8.12% Secured Guaranteed Notes, First
Reserve Gas's settlement of its tax obligations may not be paid while the notes
are outstanding.
Business Segments - The Company is only involved in the operation of
natural gas storage facilities. Therefore, no segment disclosures are included
in these combined financial statements.
Accounting Estimates - The preparation of financial statements in
conformity with generally accepted accounting principles requires the use of
estimates and assumptions that affect the reporting of assets, liabilities,
revenues and expenses, and disclosure of contingent assets and liabilities that
exist at the date of the financial statements. Actual results could differ from
those estimates.
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Natural Gas Imbalances - The Company maintains operating balancing
agreements with pipeline companies transporting natural gas into its storage
facilities to account for differences between the volumes injected into or
withdrawn from the storage facility through the pipelines and the volumes
nominated for the customers utilizing the storage facility. A payable or
receivable to or from the pipeline companies is recorded for the over or under
delivery of natural gas and the level of base natural gas in the storage
facility is adjusted. The imbalances are settled with the pipelines through the
exchange of volumes in-kind or cash.
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NOTE C - DEFERRED REVENUE FROM SALE OF FUTURE CONTRACT
RECEIVABLES
In 1995, certain subsidiaries of First Reserve Gas sold their right to
receive payments on firm storage contract receivables generated from the
operation of the Hattiesburg gas storage facility from the date of the sale
agreement to June 30, 2000. The receivables were sold to a trust in which the
Company had a 47.3 percent ownership interest. Proceeds from the sale were $42.7
million, which represented a gross sales price of $50.6 million, discounted at
an annualized discount of 7.52 percent during the contract period.
The receivables sold under the agreement are secured by substantially
all of the assets of First Reserve Gas and its subsidiaries, including the
Hattiesburg facility and its storage contracts, but excluding the receivables
generated from the operation of this facility after June 30, 2000. The net
proceeds from the sale of receivables were classified for accounting purposes as
deferred revenue from sale of future contract receivables and are being
recognized over the period during which the receivables are generated. The
balance of deferred revenue from the sale of future contract receivables was
approximately $2.8 million as of December 31, 1999 and will be fully amortized
in 2000. The discount between the funds received on the sale and the scheduled
payments thereunder, and the related deferred cost on the transaction, are
being amortized using the interest method over the life of the agreement based
on the discount rate applied in determining the sale price of the receivables.
This amortization is recorded as amortization of discount on sale of future
contract receivables. For 1999, approximately $436,000 was expensed for the
amortization of discount on sale of future contract receivables. This charge is
included in interest, debt, and other expenses in the combined income statement.
At December 31, 1999, the Company has $1.8 million of investments in
debt securities. These securities, which were deposited into a trust account to
collateralize the Company's obligations under its sale of future contract
receivables, are classified on the balance sheet as restricted debt securities.
The estimated fair value of these investments approximates their amortized cost,
and therefore, unrealized gains or losses as of December 31, 1999, are not
significant.
Prior to 1999, Crystal Properties & Trading maintained certain forward
sales contracts of oil and natural gas with a third party. The decrease in
deferred revenue from forward sales included in the combined statement of cash
flows for the year ended December 31, 1999, represents the final settlement of
obligations under these forward sale arrangements.
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NOTE D - LONG-TERM OBLIGATIONS
December 31, 1999
-------------------
(In thousands)
8.12% Secured guaranteed notes, due in monthly
amounts from July 2000 through July 2005 $ 36,474
Obligation to parent for federal income taxes 5,296
---------
41,770
Less current portion (2,960)
---------
Total long-term obligations $ 38,810
=========
The terms of the 8.12 percent secured guaranteed notes provide for the
payment of interest only through June 30, 2000, at which time the principal is
to be amortized over the remaining life of the notes. The interest method is
used to amortize the deferred costs related to the issuance of this long-term
debt. The notes, which are without recourse to the Company's parent, are secured
by substantially all of First Reserve Gas's assets, including the Hattiesburg
facility and its storage contracts, as well as certain accounts receivable to be
generated after June 30, 2000. A $1.5 million irrevocable letter of credit is
outstanding to support certain obligations with respect to the outstanding
notes. This letter of credit expires on November 21, 2000.
Under the terms of these notes, First Reserve Gas is also subject to
various restrictions on the distribution of assets to its parent, including non
payment of dividends, the funding of any current tax liability, and the
settlement of long-term obligations until the full repayment of the notes.
In connection with the merger of Crystal with El Paso Energy, First
Reserve Gas redeemed all of its outstanding notes on March 6, 2000, for
approximately $37.5 million. El Paso Energy provided First Reserve Gas with the
necessary funds.
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NOTE E - PROVISION FOR INCOME TAXES
The components of the provision for income taxes for the year ended
December 31, 1999, are as follows (in thousands):
Current:
Federal $ 1,441
State 245
Deferred:
Federal (505)
--------
$ 1,181
========
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amounts of assets and liabilities for financial
reporting purposes and the amounts used for income tax purposes. Deferred tax
liabilities and assets at December 31, 1999, are as follows (in thousands):
Deferred tax liabilities $ (21,133)
Deferred tax assets 1,003
Valuation allowance (434)
---------
Net deferred tax liability $ (20,564)
=========
Deferred tax liabilities result principally from the different cost
bases, depreciation methods, and estimated useful lives on gas storage
facilities and equipment for financial reporting and income tax purposes.
Deferred tax assets at December 31, 1999, resulted primarily from alternative
minimum tax credits.
In connection with the acquisition of First Reserve Gas in 1995, the
Company's parent was able to utilize its available net operating loss to offset
the portion of its taxable income generated by the sale of future contract
receivables of approximately $43.0 million. In accordance with Crystal's tax
allocation policy and the indenture relating to First Reserve Gas' notes, it is
not intended for First Reserve Gas to fund the current tax liability associated
with this transaction. Accordingly, the tax effect of utilizing Crystal's net
operating loss and the resulting deductible temporary difference have been
netted for purposes of presentation in the accompanying notes and combined
financial statements.
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A reconciliation of the "expected" federal income tax expense, based on a
statutory rate of 34 percent of pretax accounting income to actual tax expense
for the year ended December 31, 1999, follows (in thousands):
Expected federal income tax expense $ 1,172
State taxes (net of federal benefit) 161
Other (152)
--------
Income tax expense $ 1,181
========
NOTE F - COMMITMENTS AND CONTINGENCIES
On May 7, 1999, Petal entered into an agreement with a subsidiary of the
Southern Company to provide salt cavern peaking firm storage with up to 700,000
million british thermal units, or MMbtu, per day of withdrawal capacity and up
to 350,000 MMBtu per day of injection capacity with receipt and delivery points
to be on Transcontinental Gas Pipeline, Southern Natural Gas Pipeline, Koch
Gateway Pipeline and Destin Pipeline. The 20 year agreement is subject to
certain conditions precedent including FERC approval, construction of certain
facilities and satisfactory financing for the project. The pricing for the
storage service was negotiated based on market based rates.
In March 1999, the Company obtained authorization from the FERC to
expand the capacity of its Petal storage facility by drilling, leaching, and
developing a second underground salt dome cavern. In September 1999, the Company
applied for, and subsequently received, authorization to expand both caverns.
The Company has also applied to obtain authorization to construct, install,
operate and maintain certain pipeline, compression and other equipment related
to the expansion of the gas storage facility. As of December 31, 1999, the
Company has incurred capital expenditures of approximately $13.6 million related
to the expansion of the facility.
On November 23, 1999, the Company's parent entered into a credit
agreement with a bank, which provided for a revolving credit facility. The
outstanding borrowings are secured by substantially all of the assets of Petal
including its natural gas storage facility and certain natural gas storage
contracts. As of December 31, 1999, the Company's parent had outstanding
borrowings of $2.0 million under the facility. On January 5, 2000, and pursuant
to the merger with El Paso Energy, El Paso Energy prepaid the outstanding
borrowings and terminated the facility.
NOTE G - COMBINED SHAREHOLDER'S EQUITY
On December 31, 1999, First Reserve Gas had 10,000 shares of $.01 par
value common stock authorized and 973 shares issued and outstanding. Its paid-in
capital and retained earnings were $19.1 million and $8.4 million, respectively.
On December 31, 1999, Petal had 1,000 shares of $1 par value common stock
authorized of which 1,000 shares were outstanding. Its additional paid-in
capital and retained earnings were $29.0 million and $1.1 million, respectively.
On December 31, 1999, Crystal Properties & Trading had 1,000 authorized shares
of $1 par value common stock of which, 1,000 shares were outstanding. Its
additional paid-in capital and accumulated deficit for the period were $3.6
million and $0.9 million, respectively.
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NOTE H - CONCENTRATION OF CREDIT RISK
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of trade accounts receivables.
The Company's operating revenues are derived principally by providing firm gas
storage capacity to eleven customers under 15-year contracts expiring in 2005
and another customer under a five year contract expiring in 2001. These
customers consist of eight local natural gas distribution companies, one major
natural gas producer and three natural gas marketers. The concentration of
credit risk in a relatively small number of customers in the natural gas
industry affects the Company's overall exposure to credit risk because customers
may be similarly affected by changes in economic and other conditions. The
Company monitors its outstanding receivables to ascertain the timely collection
of payments from its customers.
During 1999, three customers accounted for $2.3 million (16.5 percent),
$2.1 million (15 percent) and $1.9 million (13.5 percent) of total revenues. No
other customer accounted for more than 10 percent of total revenues during the
year ended December 31, 1999.
NOTE I - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and estimated fair
values of certain of the Company's financial instruments at December 31, 1999
(in thousands):
Carrying Fair
Amount Value
--------------------
Long-term obligations,
including current maturities $ 36,474 $ 36,612
======== ========
Deferred revenue from sale of
future contract receivables $ 2,847 $ 2,847
======== ========
The Company used the following methods and assumptions in determining
the fair values of its financial instruments:
Current and Long-Term Obligations: The fair value of the secured
guaranteed notes approximates its fair value, which is estimated using the
discounted cash flow method based on borrowing rates for similar types of
financing arrangements.
Deferred Revenue from Sale of Future Contract Receivables: The
carrying amount of deferred revenue from sale of future contract receivables
reflects the net proceeds from the sale of the Hattiesburg receivables. The fair
value of the receivables sold is estimated using the discounted cash flow method
based on the discount rate for similar types of arrangements.
Off-balance-sheet instruments: Fair values for the Company's letter of
credit contracts are based on costs which would be incurred to terminate
existing agreements and enter into new agreements for similar amounts,
expiration dates and counterparties' credit standing. Such estimated fair value
approximates the carrying amount of the obligation for fees related to letters
of credit.
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The carrying amounts of restricted cash, accounts receivable, accounts
payable and accrued expenses approximate their fair value due to the short-term
nature of these instruments.
NOTE J - EMPLOYEE BENEFIT PLANS
Eligible employees of the Company can participate in a retirement
savings plan sponsored by the Company's parent. The plan allows participants to
defer a portion of their income through contributions to the plan pursuant to
section 401(k) of the Internal Revenue Code. The Company provides a matching
contribution equivalent to 50 percent of each participant's contribution not
exceeding 6 percent of annual employee compensation with amounts being vested at
a rate of 20 percent for each year of employment. The Company is proportionally
allocated costs for the administration of the plan. On January 5, 2000 the plan
was merged into El Paso Energy's Savings Plan following the consummation of the
merger with El Paso Energy. The participants in the plan became fully vested
with respect to the Company's matching contribution as the El Paso Energy
Savings Plan provides for immediate vesting of the employer's matching
contribution.
NOTE K - TRANSACTIONS WITH RELATED PARTIES
The transactions with related parties include amounts paid to the
Company's parent for reimbursement of expenditures incurred on its behalf for
the operation of the natural gas storage facilities, expansion of the storage
facilities, and for the allocation of general and administrative expenses. In
addition, Federal Reserve Gas has a long-term obligation to its parent as a
result of the allocation of federal income taxes under a tax sharing agreement.
This long-term obligation is non-interest bearing.
The Company participates in an entity-wide cash management program with
its parent. As of December 31, 1999, the Company had an account payable to its
parent of $5.3 million. The majority of the payable represents costs in
connection with the expansion project at the Petal facility.
For the year ended December 31, 1999, the Company was charged $533,000
for general and administrative expenses incurred on its behalf by its parent.
The Company was also allocated federal income tax expense of $1.4 million for
the year ended December 31, 1999.
As a result of the final settlement of obligations under Crystal
Properties & Trading's forward sales contracts in 1999, Crystal Properties &
Trading returned $6.4 million of capital to its parent, Crystal.
In connection with Crystal's merger with El Paso Energy, El Paso Energy
contributed capital of $10.6 million to the Company to repay the intercompany
payables owed to Crystal.
NOTE L - SUBSEQUENT EVENTS (UNAUDITED)
In July 2000, Crystal entered into a letter of intent for the Company to
be acquired by El Paso Energy Partners, L.P. El Paso Energy owns the general
partner of, and an effective 34.5 percent interest in, El Paso Energy Partners.
As of July 1, 2000, the Company's restricted cash balances were no
longer restricted as a result of the expiration of the Company's forward sale of
its receivables.
In connection with the acquisition of the Company's parent by El Paso
Energy, each of the legal entities that comprised the Company's operations,
First Reserve Gas Company and Subsidiaries, Petal Gas Storage Company, and
Crystal Properties and Trading Company, were converted to limited liability
companies and are now treated as partnerships for book and income tax purposes.
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FIRST RESERVE GAS, L.L.C. AND SUBSIDIARIES
PETAL GAS STORAGE, L.L.C.
CRYSTAL PROPERTIES & TRADING, L.L.C.
COMBINED INTERIM FINANCIAL STATEMENTS
MARCH 31, 2000
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FIRST RESERVE GAS, L.L.C. AND SUBSIDIARIES,
PETAL GAS STORAGE, L.L.C, AND
CRYSTAL PROPERTIES & TRADING, L.L.C.
COMBINED BALANCE SHEETS
(IN THOUSANDS)
March 31, | December 31,
2000 | 1999
----------- | ------------
Post-merger | Pre-merger
Combined | Combined
(Unaudited) |
|
ASSETS |
|
Current assets |
Cash and cash equivalents ............................... $ 8 | $ 512
Accounts receivable ..................................... 1,296 | 953
Prepaid expenses and other current assets ............... -- | 198
---------- | ----------
Total current assets .............................. 1,304 | 1,663
|
Gas storage facilities....................................... 170,467 | 145,291
Less accumulated depreciation and amortization............... (1,327) | (15,393)
---------- | ----------
169,140 | 129,898
|
Restricted debt securities................................... 1,808 | 1,807
Other assets ................................................ -- | 577
---------- | ----------
1,808 | 2,384
---------- | ----------
Total assets....................................... $ 172,252 | $ 133,945
========== | ==========
|
LIABILITIES AND EQUITY |
|
Current liabilities |
Current portion of long-term obligations ................ $ -- | $ 2,960
Accounts payable......................................... 256 | 2,150
Accounts payable to parent, net ........................ -- | 5,256
Accrued expenses ........................................ 157 | 1,067
---------- | ----------
Total current liabilities.......................... 413 | 11,433
|
Long-term obligations ........................................ -- | 38,810
|
Deferred income taxes ....................................... -- | 20,564
|
Deferred revenue from sale of future contract receivables.... 1,436 | 2,847
|
Stockholder's equity ........................................ -- | 60,291
|
Member's interest............................................ 170,403 | --
---------- | ----------
Total liabilities and equity ...................... $ 172,252 | $ 133,945
========== | ==========
See note to combined interim financial statements.
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FIRST RESERVE GAS, L.L.C. AND SUBSIDIARIES,
PETAL GAS STORAGE, L.L.C., AND
CRYSTAL PROPERTIES & TRADING, L.L.C.
COMBINED INCOME STATEMENTS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended | Three Months Ended
March 31, 2000 | March 31, 1999
------------------ | ------------------
Post-merger | Pre-merger
Combined | Combined
|
Gas storage revenues........................................ $ 3,427 | $ 3,591
----------- | ------------
Costs and expenses |
Operating expenses...................................... 1,178 | 686
Depreciation and amortization........................... 1,327 | 1,002
----------- | ------------
2,505 | 1,688
----------- | ------------
|
Operating income............................................ 922 | 1,903
|
Other income................................................ 77 | 207
----------- | ------------
Income before interest, taxes and other expenses............ 999 | 2,110
|
Interest, debt and other expenses........................... 596 | 964
----------- | ------------
Income before provision for income taxes.................... 403 | 1,146
|
Provision for Income taxes.................................. -- | 439
----------- | ------------
Net income.................................................. $ 403 | $ 707
=========== | ============
See note to combined interim financial statements.
20
21
FIRST RESERVE GAS COMPANY AND SUBSIDIARIES,
PETAL GAS STORAGE COMPANY, AND
CRYSTAL PROPERTIES & TRADING COMPANY
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
Three Months Ended | Three Months Ended
March 31, 2000 | March 31, 1999
---------------------- | ----------------------
Post-merger | Pre-merger
Combined | Combined
|
Cash flows from operating activities: |
Net income....................................................... $ 403 | $ 707
Adjustments to reconcile net income to net cash |
provided by (used in) operating activities: |
Depreciation and amortization.............................. 1,327 | 1,002
Deferred income taxes...................................... -- | 330
(Increase) decrease in accounts receivable................. (343) | 869
Decrease in prepaid expenses and other assets.............. 198 | 61
Decrease in accounts payable............................... (969) | (74)
Increase (decrease) in accrued expenses.................... 11 | (232)
Other...................................................... -- | 55
---------- | ----------
Net cash provided by operating activities.............. 627 | 2,718
---------- | ----------
|
Cash flows from investing activities: |
Capital expenditures............................................. (467) | (948)
Other............................................................ -- | 2,105
---------- | ----------
Net cash provided by (used in) investing activities.... (467) | 1,157
---------- | ----------
|
Cash flows from financing activities: |
Capital contribution from parent................................. 48,766 | --
Retirement of long term debt..................................... (37,468) | --
Decrease in deferred revenue from sale of future |
contract receivables.......................................... (1,410) | (1,308)
Decrease in deferred revenue from forward sales.................. -- | (6,389)
(Decrease) increase in accounts payable and |
taxes payable to parent....................................... (10,552) | 1,198
---------- | ----------
Net cash used in financing activities.................. (664) | (6,499)
---------- | ----------
|
Net decrease in cash and cash equivalents............................ (504) | (2,624)
|
Cash and cash equivalents at beginning of periods.................... 512 | 18,538
---------- | ----------
Cash and cash equivalents at end of periods.......................... $ 8 | $ 15,914
========== | ==========
Supplemental cash flow information: |
Cash paid for interest........................................... $ 740 | $ 740
========== | ==========
Cash paid related to the |
amortization of discount |
on sale of future contract |
receivables................................................... $ 42 | $ 171
========== | ==========
Cash paid for income taxes....................................... $ -- | $ 88
========== | ===========
See note to combined interim financial statements.
21
22
FIRST RESERVE GAS, L.L.C. AND SUBSIDIARIES,
PETAL GAS STORAGE, L.L.C., AND
CRYSTAL PROPERTIES & TRADING, L.L.C.
COMBINED STATEMENT OF EQUITY
(IN THOUSANDS)
(UNAUDITED)
Additional Total
Member's | Common Paid-In Retained Stockholder's
Interest | Stock Capital Earnings Equity
--------- | -------- ---------- -------- -------------
|
Pre-merger Combined: |
Balance at December 31, 1999............. | $ 2 $ 51,651 $ 8,638 $ 60,291
Post-merger Combined: |
Elimination of former balances........... | (2) (51,561) (8,638) (60,291)
Impact of acquisition and conversion to |
limited liability company ............. $ 121,234 |
Capital contributions.................... 48,766 |
Net income............................... 403 |
--------- | -------- -------- -------- ---------
Balance at March 31, 2000.................. $ 170,403 | $ -- $ -- $ -- $ --
========= | ======== ======== ======== =========
See note to combined interim financial statements.
22
23
First Reserve Gas L.L.C. and Subsidiaries,
Petal Gas Storage L.L.C., and
Crystal Properties and Trading L.L.C.
Note to Combined Interim Financial Statements
NOTE A - BASIS OF PRESENTATION (UNAUDITED)
The interim combined financial statements as of and for the three month
period ended March 31, 2000, include the combined accounts of First Reserve Gas
L.L.C. and Subsidiaries, Petal Gas Storage L.L.C., and Crystal Properties and
Trading L.L.C., all entities related through common ownership and management.
The combined balance sheet as of December 31, 1999, and the interim combined
financial statements for the three month period ended March 31, 1999, include
the combined accounts of First Reserve Gas Company and Subsidiaries, Petal Gas
Storage Company, and Crystal Properties and Trading Company, all entities
related through common ownership and management. Collectively, and respectively,
these combined entities are referred to as the Company.
In January 2000, Crystal Gas Storage, Inc., the parent of the Company, was
acquired by El Paso Energy Corporation, or El Paso Energy, in a transaction
accounted for as a purchase. In connection with this merger, a new basis of
reporting was established for the legal entities that comprised the Company's
operations. This new basis of reporting has been reflected in the interim
combined financial statements by separating, through the use of a line, those
statements prior to the change in reporting (pre-merger combined) from those
statements following the change (post-merger combined).
In the merger transaction, El Paso Energy undertook the following actions:
o The common stock of the combined company was cancelled and the
corresponding stockholder's equity accounts were eliminated.
o The acquired businesses were converted into limited liability companies
for book and income tax purposes. As a result, a new category of equity,
members's interest, was created. The value assigned to member's interest
was $121.2 million, consisting of $100.6 million based on the fair value
of the Company's assets and liabilities at the acquisition date and $20.6
million related to the deferred income taxes assumed by the Company's
parent upon the limited liability company formation.
Also, during the first quarter of 2000, the Company's parent contributed
$48.8 million to the Company to pay off its long-term notes and settle its
intercompany account and tax payables.
These interim combined financial statements include the elimination of all
intercompany accounts and transactions. The balance sheet as of December 31,
1999 has been derived from the audited financial statements. In addition,
adjustments which, in the opinion of the respective management of these
entities, are of a normal, recurring nature, have been made to fairly present
the interim results of operations. However, information for interim periods may
not necessarily be indicative of the results of operations for the entire year
due to the seasonal nature of these businesses. Furthermore, the adjustments
made related to El Paso Energy's acquisition of the Company and the conversion
to limited liability companies, cause certain relationships in the interim
financial statements for the three months ended March 31, 2000 and March 31,
1999 to not be comparable.
While the basis of presentation of these statements has changed for the
reasons discussed above, the accounting policies which govern the preparation
and presentation of assets, liabilities and cash flows in these interim
financial statements are consistent with those accounting policies used in the
annual audited financial statements of the Company. For a further discussion of
those policies, as well as a discussion of matters impacting the Company's
financial position, results of operations, and cash flows, readers should also
refer to the annual audited financial statements of the Company included in this
Current Report on Form 8-K.
In July 2000, the Company's parent entered into a letter of intent for the
Company to be acquired by El Paso Energy Partners L.P. El Paso Energy owns the
general partner of, and an effective 34.5 percent ownership interest in, El Paso
Energy Partners.
23
24
(b) Pro forma financial information.
Presented below are the unaudited pro forma condensed combined
financial statements reflecting our proposed purchase of the natural gas storage
businesses of Crystal Gas Storage, Inc. This information is included to give you
a better understanding of what our combined results of operations and financial
position may have looked like had this acquisition occurred earlier. The
unaudited pro forma condensed combined income statement for the three months
ended March 31, 2000, and for the year ended December 31, 1999 assumes this
transaction occurred January 1, 1999. The unaudited pro forma condensed combined
balance sheet assumes this acquisition occurred on March 31, 2000.
These pro forma statements reflect the acquisition of these storage
businesses using the purchase method of accounting. In this proposed pro forma
transaction, we will issue $170 million of Series B 10% Cumulative Redeemable
Preference Units to fund the acquisition. The values we assigned in these
statements to the assets and liabilities acquired are based upon our preliminary
estimates of their fair value. As a result, these preliminarily allocated values
may change. However, we believe that the unaudited pro forma adjustments and the
underlying assumptions reasonably present the significant effects of the
transaction. In addition, we will undertake studies of the fair value of the
acquired assets and liabilities and will revise, if necessary, purchase
accounting adjustments upon completion of these studies.
In addition to the information on our Crystal acquisition, we have
added income statement information related to our March 2000 acquisition of El
Paso Intrastate - Alabama, Inc., or EPIA, for $26.5 million. We accounted for
the acquisition of EPIA as a purchase and funded the acquisition by borrowing
under our credit facility. These pro forma condensed combined income statements
assume the acquisition of EPIA occurred on January 1, 1999. We have added this
information to provide you with a better understanding of the impact of both
acquisitions on our historical income statements.
Accounting policy differences and intercompany balances between us and
the acquired companies have been determined to be immaterial and, accordingly,
these financial statements have not been adjusted for those differences.
The unaudited pro forma condensed combined financial statements are
presented for illustrative purposes only and are not necessarily indicative of
what our operating results or financial position would have been had the
transactions been consummated earlier, nor are they indicative of our future
operating results or financial position. The unaudited pro forma condensed
combined financial statements do not give effect to any operating efficiencies
or cost savings that may result from our integration of the operations of these
acquired companies.
24
25
UNAUDITED PRO FORMA CONDENSED COMBINED BALANCE SHEET
AS OF MARCH 31, 2000
(IN THOUSANDS)
Crystal's
El Paso Energy Gas Storage
Partners, L.P. Businesses Pro Forma
Historical Historical Adjustments Pro Forma
--------------- ------------ ---------------- ------------
Assets
Total current assets ............................... $ 17,898 $ 1,304 $ -- $ 19,202
Property and equipment, net ........................ 397,951 169,140 -- 567,091
Equity investments ................................. 183,891 -- 170,403 (a) 183,891
(170,403)(b)
Other noncurrent assets ............................ 10,948 1,808 -- 12,756
-------- -------- -------- --------
Total assets .............................. $610,688 $172,252 $ -- $782,940
======== ======== ======== ========
Liabilities and Partners' Capital
Total current liabilities .......................... $ 15,849 $ 413 $ -- $ 16,262
Notes payable ...................................... 327,000 -- -- 327,000
Long-term debt ..................................... 175,000 -- -- 175,000
Other noncurrent liabilities ....................... 12,539 1,436 -- 13,975
-------- -------- ------- --------
Total liabilities ......................... 530,388 1,849 -- 532,237
Commitments and contingencies
Minority interest .................................. (654) -- -- (654)
Partners' capital................................... 80,954 170,403 170,403 (a) 251,357
(170,403)(b)
-------- -------- -------- --------
Total liabilities and partners' capital ... $610,688 $172,252 $ -- $782,940
======== ======== ======== ========
See notes to the unaudited pro forma condensed combined financial statements.
25
26
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE THREE MONTHS ENDED MARCH 31, 2000
(IN THOUSANDS)
Pro Forma
Crystal's Adjustments
El Paso Energy Gas Storage Pro Forma Crystal's
Partners, L.P. EPIA Businesses Adjustments Gas Storage
Historical Historical Historical EPIA Businesses Pro Forma
--------------- ---------- ----------------- ---------- --------------- ---------
Operating revenues ................ $ 22,800 $ 8,483 $ 3,427 $ -- $ -- $ 34,710
--------------- ---------- ----------------- ------ --------------- ---------
Operating expenses
Cost of gas sold.............. -- 6,855 -- -- -- 6,855
Operation and maintenance .... 3,080 481 1,178 -- -- 4,739
Depreciation, depletion,
and amortization ........... 6,476 667 1,327 -- -- 8,470
--------------- ---------- ---------------- ------ --------------- ---------
9,556 8,003 2,505 -- -- 20,064
--------------- ---------- ---------------- ------ --------------- ---------
Operating income .................. 13,244 480 922 -- -- 14,646
--------------- ---------- ---------------- ------ --------------- ---------
Other ............................. 82 -- 77 -- -- 159
--------------- ---------- ---------------- ------ --------------- ---------
Income before interest, taxes
and other expenses .............. 13,326 480 999 -- -- 14,805
Interest, debt and
other expenses .................. 11,380 -- 596 490 (c) (494)(d) 11,972
Income tax expense (benefit) ...... (3) (458) -- (198)(e) -- (659)
Minority interest ................. 10 -- -- -- -- 10
--------------- ---------- ---------------- ------ --------------- ---------
11,387 (458) 596 292 (494) 11,323
--------------- ---------- ---------------- ------ --------------- ---------
Net income ........................ 1,939 938 403 (292) 494 3,482
Net income allocated to
General Partner ................. 3,232 -- -- 6 (f) 9 (f) 3,247
Net income allocated to
Series B unitholders ............ -- -- -- 4,250 (g) 4,250
--------------- ---------- ---------------- ------ --------------- ---------
Net income (loss) available
to common and preference
unitholders ..................... $ (1,293) $ 938 $ 403 $ (298) $ (3,765) $ (4,015)
=============== ========== ================ ====== =============== =========
Basic and diluted net loss per
common and preference unit ...... $ (0.05) $ (0.15)
=============== =========
Basic and diluted average common
and preference units
outstanding ..................... 27,029 27,029
=============== =========
See notes to the unaudited pro forma condensed combined financial statements.
26
27
UNAUDITED PRO FORMA CONDENSED COMBINED INCOME STATEMENT
FOR THE YEAR ENDED DECEMBER 31, 1999
(IN THOUSANDS)
Pro Forma
Crystal's Adjustments
El Paso Energy Gas Storage Pro Forma Crystal's
Partners, L.P. EPIA Businesses Adjustments Gas Storage
Historical Historical Historical EPIA Businesses Pro Forma
--------------- ---------- -------------- --------------- --------------- -------------
Operating revenues............ $ 96,473 $ 28,242 $ 14,029 $ -- $ -- $ 138,744
--------------- ---------- -------------- --------------- --------------- -------------
Operating expenses
Cost of gas sold......... -- 21,013 -- -- 21,013
Operation and
maintenance............ 22,402 3,092 3,021 -- -- 28,515
Impairment charges....... -- 7,054 -- 7,054
Depreciation, depletion,
and amortization....... 30,630 3,335 4,047 10 (h) 1,346 (i) 39,368
--------------- ---------- -------------- --------------- --------------- -------------
53,032 34,494 7,068 10 1,346 95,950
--------------- ---------- -------------- --------------- --------------- -------------
Operating income (loss)....... 43,441 (6,252) 6,961 (10) (1,346) 42,794
--------------- ---------- -------------- --------------- --------------- -------------
Other income
Gain on sales of assets.. 10,103 -- -- -- -- 10,103
Other.................... 358 -- 110 -- -- 468
--------------- ---------- -------------- --------------- --------------- -------------
10,461 -- 110 -- -- 10,571
--------------- ---------- -------------- --------------- --------------- -------------
Income (loss) before interest,
taxes and other expenses.... 53,902 (6,252) 7,071 (10) (1,346) 53,365
Interest, debt and other
expenses.................... 35,323 202 3,626 2,245 (c) (2,962)(d) 38,434
Income tax expense (benefit).. (435) (2,612) 1,181 (913)(e) (1,181)(j) (3,960)
Minority interest............. 197 -- -- 197
--------------- ---------- -------------- --------------- --------------- -------------
35,085 (2,410) 4,807 1,332 (4,143) 34,671
--------------- ---------- -------------- --------------- --------------- -------------
Net income (loss)............. 18,817 (3,842) 2,264 (1,342) 2,797 18,694
Net income allocated to
General Partner............. 12,129 -- -- (52)(f) 51 (f) 12,128
Net income allocated to
Series B unitholders........ -- -- -- -- 17,000 (g) 17,000
--------------- ---------- -------------- --------------- --------------- -------------
Net income (loss) available to
common and preference
unitholders................. $ 6,688 $ (3,842) $ 2,264 $ (1,290) $ (14,254) $ (10,434)
=============== ========== ============== =============== =============== =============
Basic and diluted net income
(loss) per common and
preference unit............. $ 0.26 $ (0.40)
=============== =============
Basic and diluted average
common and preference units
outstanding................. 25,928 25,928
=============== =============
See notes to the unaudited pro forma condensed combined financial statements.
27
28
NOTES TO THE UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
(a) This entry represents the proposed acquisition of the storage businesses of
Crystal Gas Storage, Inc. in exchange for Series B 10% Cumulative
Redeemable Preference Units. The letter of intent provides for a purchase
price of $170 million, subject to adjustment. The pro forma balance sheet
is presented as though the purchase occurred on March 31, 2000, at which
time working capital and other non-plant assets and liabilities were ($0.4)
million.
(b) This entry represents the elimination of our investment in Crystal's gas
storage businesses.
(c) This entry represents the increase in interest expense related to the
additional borrowings related to our EPIA acquisition. The amount was
calculated based on the interest rate on our revolving line of credit at
December 31, 1999, which was approximately 9 percent.
(d) This entry represents a reduction of interest expense on Crystal's 8.12%
secured guaranteed notes that were not assumed by us.
(e) This entry represents the income tax effect of the pro forma adjustments
related to the EPIA acquisition assuming an effective tax rate of 40.5
percent.
(f) This entry represents the adjustment for income allocated to our General
Partner as a result of our Crystal and EPIA acquisitions.
(g) This entry represents the allocation of income to the Series B unitholders
resulting from the issuance of cumulative redeemable preference units in
the Crystal acquisition.
(h) This entry represents amortization of excess purchase price recorded as a
result of the EPIA acquisition. The adjustment was calculated based on a 20
year estimated life.
(i) This entry represents the additional depreciation expense associated with
the preliminary allocation of purchase price to Crystal's gas storage
facilities following our proposed acquisition. These facilities will be
depreciated on a straight-line basis over their remaining useful lives,
which is approximately 30 years.
(j) This entry represents the elimination of Crystal's income tax expense as a
result of the conversion of Crystal's gas storage businesses to limited
liability companies.
28
29
(c) Exhibits.
23 Independent accountant's consent.
29
30
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
EL PASO ENERGY PARTNERS, L.P.
By: /s/ D. MARK LELAND
------------------------------------
D. Mark Leland
Senior Vice President and Controller
(Principal Accounting Officer)
Date: July 19, 2000
30
31
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
23 Independent accountant's consent.
1
EXHIBIT 23
INDEPENDENT ACCOUNTANTS' CONSENT
The Board of Directors
El Paso Energy Partners, L.P.:
We consent to the incorporation by reference in the registration statement (No.
333-85987) on Form S-3 of El Paso Energy Partners, L.P., as amended, of our
report dated March 17, 2000, with respect to the combined balance sheet of
First Reserve Gas Company and subsidiaries, Petal Gas Storage Company, and
Crystal Properties and Trading Company as of December 31, 1999, and the related
combined income statement, combined statement of cash flows and combined
statement of stockholder's equity, for the year ended December 31, 1999, which
report appears in the Form 8-K of El Paso Energy Partners, L.P. dated
July 19, 2000.
/s/ KPMG LLP
Shreveport, Louisiana
July 19, 2000
