AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 7, 2002
REGISTRATION NOS. 333-81772, 333-81772-01, 333-81772-02, 333-81772-03,
333-81772-04, 333-81772-05, 333-81772-06, 333-81772-07, 333-81772-08,
333-81772-09, 333-81772-10, 333-81772-11, 333-81772-12, 333-81772-13,
33-81772-14, 333-81772-15, 333-81772-16, 333-81772-17, 333-81772-18,
333-81772-19, 333-81772-20
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
---------------------
AMENDMENT NO. 1 TO
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
EL PASO ENERGY PARTNERS, L.P.
EL PASO ENERGY PARTNERS FINANCE CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 1311 76-0396023
DELAWARE 1311 76-0605880
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
PEGGY A. HEEG, ESQ. D. MARK LELAND
EL PASO BUILDING SENIOR VICE PRESIDENT AND CONTROLLER
1001 LOUISIANA STREET, 30TH FLOOR 4 EAST GREENWAY PLAZA
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77046
(713) 420-2600 (832) 676-5332
(Address, including zip code, and telephone number, (Name, address, including zip code, and telephone
including area code, of each registrant's principal number, including area code, of agent for service)
executive offices)
COPIES TO:
J. VINCENT KENDRICK
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
1900 PENNZOIL PLACE, SOUTH TOWER
711 LOUISIANA STREET
HOUSTON, TEXAS 77002
(713) 220-5800
---------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: From time
to time after the registration statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box. [ ]
If any of the securities being registered on this form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, other than securities offered only in connection with dividend or interest
reinvestment plans, check the following box. [X]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
- ------
If this form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
- ------------
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
TABLE OF ADDITIONAL REGISTRANT GUARANTORS
STATE OR OTHER JURISDICTION I.R.S. EMPLOYER
OF INCORPORATION OR IDENTIFICATION
EXACT NAME OF REGISTRANT GUARANTOR(1) ORGANIZATION NUMBER
- ------------------------------------- --------------------------- ---------------
Argo II, L.L.C. ......................................... Delaware 76-0396023
Crystal Holding, L.L.C. ................................. Delaware 76-0396023
Crystal Properties and Trading Company, L.L.C. .......... Delaware 76-0396023
Delos Offshore Company, L.L.C. .......................... Delaware 76-0396023
East Breaks Gathering Company, L.L.C. ................... Delaware 76-0396023
El Paso Energy Partners Deepwater, L.L.C. ............... Delaware 76-0396023
El Paso Energy Partners Oil Transport, L.L.C. ........... Delaware 76-0396023
El Paso Energy Partners Operating Company, L.L.C. ....... Delaware 76-0396023
First Reserve Gas, L.L.C. ............................... Delaware 76-0396023
Flextrend Development Company, L.L.C. ................... Delaware 76-0396023
Green Canyon Pipe Line Company, L.P. .................... Delaware N/A
Hattiesburg Gas Storage Company.......................... Delaware N/A
Hattiesburg Industrial Gas Sales Company, L.L.C. ........ Delaware 76-0396023
High Island Offshore System, L.L.C. ..................... Delaware 76-0396023
Manta Ray Gathering Company, L.L.C. ..................... Delaware 76-0396023
Petal Gas Storage Company, L.L.C. ....................... Delaware 76-0396023
Poseidon Pipeline Company, L.L.C. ....................... Delaware 76-0396023
VK Deepwater Gathering Company, L.L.C. .................. Delaware 76-0396023
VK-Main Pass Gathering Company, L.L.C. .................. Delaware 76-0396023
- ---------------
(1) The debt securities will be guaranteed by the subsidiaries of El Paso Energy
Partners, L.P. listed above and may be guaranteed by any subsidiaries
acquired or created by El Paso Energy Partners, L.P. in the future, all of
which are listed on Exhibit 99.1 to this Registration Statement. The address
for each Registrant Guarantor is El Paso Building, 1001 Louisiana Street,
Houston, Texas 77002.
PROSPECTUS
[EL PASO ENERGY PARTNERS, L.P. LOGO]
$1,000,000,000
EL PASO ENERGY PARTNERS, L.P.
EL PASO ENERGY PARTNERS FINANCE CORPORATION
CAPITAL SECURITIES
REPRESENTING LIMITED PARTNER INTERESTS
DEBT SECURITIES
---------------------
We may offer and sell from time to time up to $1,000,000,000 in any
combination of one or more classes or series of any limited partnership
interests we are authorized by our partnership agreement to issue and in one or
more classes or series of any debt securities, including, but not limited to,
common units, preference units, subordinate units, notes and any other capital,
equity or debt securities in one or more separate offerings with this base
prospectus. El Paso Energy Partners Finance Corporation, a wholly owned
subsidiary of El Paso Energy Partners, L.P., was formed for the sole purpose of
being a co-issuer of certain indebtedness, including some debt securities
covered by this registration statement. 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 base prospectus.
This base 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 then being offered which
information is not included in this base prospectus. You should read this base
prospectus and the applicable 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." Each prospectus
supplement will list any underwriters, and the compensation that they will
receive, in connection with a particular offering. Each prospectus supplement
will also show you the total amount of money that we will receive, after we pay
certain expenses of the offering, from selling the securities so offered.
Our existing common units are listed for trading on the New York Stock
Exchange under the symbol "EPN".
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 OF 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 February 7, 2002
TABLE OF CONTENTS
PAGE
----
El Paso Energy Partners, L.P................................ ii
About this Prospectus....................................... ii
Forward-Looking Statements and Other Information............ iii
Where You Can Find More Information......................... iii
Incorporation of Documents by Reference..................... iv
Risk Factors................................................ 1
Risks Related to Our Business............................. 1
Risks Inherent in an Investment in Our Securities......... 8
Conflicts of Interest Risks............................... 12
Risks Related to Our Legal Structure...................... 16
Tax Risks................................................. 17
Ratio of Earnings to Fixed Charges.......................... 19
Use of Proceeds............................................. 20
Description of Debt Securities.............................. 20
Description of Limited Partner Interests.................... 26
Certain Other Partnership Agreement Provisions.............. 33
Income Tax Considerations................................... 38
Investment by Employee Benefit Plans........................ 53
Plan of Distribution........................................ 55
Legal Matters............................................... 56
Experts..................................................... 56
---------------------
The information contained in this base prospectus was obtained from us and
other sources believed by us to be reliable. This base prospectus also
incorporates important business and financial information about us that is not
included in or delivered with this base prospectus.
You should rely only on the information contained in this base prospectus
or any applicable prospectus supplement and any information incorporated by
reference in this base prospectus or any applicable prospectus supplement. We
have not authorized anyone to provide you with any information that is
different. If you receive any unauthorized information, you must not rely on it.
You should disregard anything we said in an earlier document that is
inconsistent with what is included in or incorporated by reference in this base
prospectus or any applicable prospectus supplement. Generally, unless the
context requires otherwise, when we refer only to the "prospectus," we are
referring to the base prospectus and the applicable prospectus supplement.
You should not assume that the information in this base prospectus or any
applicable supplement is current as of any date other than the date on the front
page of this base prospectus or the date on the front page of any applicable
prospectus supplement. This base prospectus is not an offer to sell nor is it
seeking an offer to buy these securities in any state or jurisdiction where the
offer or sale is not permitted.
We include cross references in this base prospectus to captions in these
materials where you can find further related discussions. The above table of
contents tells you where to find these captions.
---------------------
EL PASO ENERGY PARTNERS, L.P.
Formed in 1993, we are one of the largest publicly-traded limited
partnerships, or MLPs, in terms of market capitalization. We currently manage a
balanced, diversified portfolio of interests and assets that includes:
- oil and natural gas pipelines, platforms, processing facilities and other
energy infrastructure assets in the deeper water regions of the Gulf of
Mexico, primarily offshore Louisiana and Texas;
- natural gas storage facilities in Mississippi;
- natural gas processing facilities in New Mexico;
- natural gas liquids, or NGLs, transportation and fractionation facilities
in south Texas;
- intrastate natural gas pipeline assets in Alabama; and
- oil and natural gas properties in the Gulf of Mexico.
Our objective is to increase distributions to our unitholders and general
partner and to increase the value of our limited and general partnership
interests by growing and enhancing the quality of our cash flow. Our strategy to
achieve this objective involves combining 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
infrastructure assets.
We continue to benefit from the unique corporate sponsorship we receive
from El Paso Corporation, the indirect parent of our general partner. El Paso
Corporation is a global energy company with operations that range from energy
production and extraction to power generation, with total assets of $47 billion
as of September 30, 2001 and senior unsecured credit ratings of Baa2 from
Moody's and BBB from Standard & Poor's as of December 31, 2001. We are a primary
vehicle for growth and development of midstream energy assets for El Paso
Corporation. Since 1999, we have completed approximately $700 million of asset
transfers from El Paso Corporation's portfolio of midstream assets. Through its
subsidiaries, El Paso Corporation owns approximately 26%, or 10,430,834, of our
common units and our 1% general partner interest. Additionally, El Paso
Corporation owns, through a subsidiary, 125,392 of our Series B Preference
Units, with a liquidation value of approximately $143 million at December 31,
2001.
For purposes of this base prospectus, unless the context otherwise
indicates, when we refer to "us," "we," "our," "ours," we are describing
ourselves, El Paso Energy Partners, L.P., together with our subsidiaries,
including El Paso Energy Partners Finance Corporation.
ABOUT THIS PROSPECTUS
This base 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 base prospectus in one or more offerings up to a total amount
of $1,000,000,000. This base prospectus provides you with a general description
of us and the securities. Each time we sell securities with this base
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 base prospectus. If the description
of the offering varies between the prospectus supplement and this base
prospectus, you should rely on the information in the prospectus supplement. The
information in this base prospectus is accurate as of February 7, 2002. You
should carefully read both this base prospectus and any prospectus supplement,
together with additional information described under the heading "Where You Can
Find More Information" beginning on page iii.
ii
FORWARD-LOOKING STATEMENTS AND OTHER INFORMATION
This base 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 base prospectus and in any prospectus
supplement are set forth below and elsewhere in this base 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.
This base 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;
- 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 base 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 base 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 base
prospectus is accurate as of any date other than the date on the front of this
base 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 SEC's public reference room located at Judiciary Plaza, 450 Fifth
Street, N.W., Washington, D.C. 20549;
- the SEC's regional offices in Chicago, Illinois and New York, New York;
and
- the SEC's website at http://www.sec.gov.
iii
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.
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 base prospectus by
referring you to those documents. The information incorporated by reference is
an important part of this base prospectus. Information that we file later with
the SEC will automatically update and may replace information in this base
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 base prospectus until we sell all of the limited partner interests and debt
securities offered by this base prospectus.
- Annual Report on Form 10-K for the year ended December 31, 2000;
- Quarterly Report on Form 10-Q for the quarter ended March 31, 2001;
- Quarterly Report on Form 10-Q for the quarter ended June 30, 2001;
- Quarterly Report on Form 10-Q for the quarter ended September 30, 2001;
and
- Current Reports on Form 8-K filed January 30, 2001; February 13, 2001;
March 6, 2001; March 15, 2001; March 21, 2001; March 27, 2001; May 7,
2001; May 14, 2001; May 24, 2001; August 28, 2001; October 4, 2001;
October 19, 2001; October 25, 2001; October 30, 2001; November 8, 2001;
and December 14, 2001.
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.
4 East Greenway Plaza
Houston, Texas 77046
(832) 676-5332
Attention: Investor Relations
iv
RISK FACTORS
Investing in our securities involves risks. In addition, 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 base prospectus, any prospectus supplement and the information
we have incorporated by reference before investing in our limited partner
interests or debt securities.
RISKS RELATED TO OUR BUSINESS
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY RESTRICT OUR ABILITY TO OPERATE,
AFFECT OUR FINANCIAL CONDITION AND PREVENT US FROM FULFILLING OUR OBLIGATIONS
UNDER OUR DEBT SECURITIES AND MAKING DISTRIBUTIONS TO UNITHOLDERS.
We have a significant amount of indebtedness and the ability to incur
substantially more indebtedness. As of December 31, 2001, we had approximately
$820 million of debt and a debt to total capitalization ratio of 54.9%. In May
2001, we issued $250 million of 8 1/2% Senior Subordinated Notes due in 2011 and
in May 1999, we issued $175 million of 10 3/8% senior subordinated notes due in
2009. All of our senior subordinated notes are supported by guarantees of our
subsidiaries. We are also party to a $600 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 December 31, 2001, we had $300 million outstanding under
this revolving credit facility. In addition, Argo, L.L.C., an indirect
wholly-owned subsidiary, has a $95 million limited recourse loan from a group of
commercial lenders, which was entered into in August 2000. As of December 31,
2001, Argo had $95 million outstanding under that loan, and the average interest
rate was 4.10%. If Argo defaults on its payment obligations, we would be
required to pay to the lenders all distributions we or any of our subsidiaries
have received from Argo up to $30 million. Our obligation to make such a payment
is collateralized by substantially all of our assets on the same basis as our
obligations under our credit facility.
From time to time, our joint ventures also incur indebtedness. As of
December 31, 2001, one of our joint ventures, Poseidon Oil Pipeline Company,
L.L.C., had a revolving credit facility to provide up to $185 million with $150
million outstanding which is collateralized by a substantial portion of
Poseidon's assets. The average floating interest rate was 3.81% during the
twelve months ending December 31, 2001.
We and all of our subsidiaries except for our unrestricted subsidiaries
must comply with various affirmative and negative covenants contained in the
indentures related to our senior subordinated notes and our revolving credit
facility. Argo, L.L.C. and Argo I, L.L.C., our only unrestricted subsidiaries as
of the date of this base prospectus, must also comply with various affirmative
and negative covenants related to Argo, L.L.C.'s credit facility. Among other
things, these covenants limit the ability of us and those subsidiaries 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.
That indebtedness also requires us and those subsidiaries 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 do not have the right to prepay the balance outstanding under our
senior subordinated notes without incurring substantial economic penalties.
1
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 unitholders, including our
minimum quarterly distribution amounts, to fund future working capital,
capital expenditures and other general partnership requirements, to
engage in future acquisitions, construction or development activities, or
to otherwise fully realize the value of 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 new credit agreements, under joint venture
credit agreements, under capital leases or synthetic leases, on a project
finance or other basis, or a combination of any of these. If 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 and existing indentures.
Failure to comply with the terms and conditions of any existing or future
indebtedness would constitute an event of default. If an event of default
occurs, the lenders will have the right to accelerate the maturity of such
indebtedness and foreclose upon the collateral, if any, securing that
indebtedness, and if an event of default occurs under our joint ventures' credit
facilities, we may be required to repay amounts previously distributed to us and
our subsidiaries. Such an event could limit our ability to fulfill our
obligations under our debt securities and to make cash distributions to
unitholders, including our minimum quarterly distribution amounts, which could
adversely affect the market price of our securities.
WE MAY NOT BE ABLE TO FULLY EXECUTE OUR GROWTH STRATEGY IF WE ENCOUNTER TIGHT
CAPITAL MARKETS OR INCREASED COMPETITION FOR QUALIFIED ASSETS.
Our current strategy contemplates substantial growth through the
acquisition and development of a wider range of midstream and other energy
infrastructure assets, onshore and offshore, domestic and foreign. This strategy
includes purchasing, constructing and otherwise acquiring additional assets and
businesses to diversify our portfolio and, hopefully, provide more stable cash
flow. We regularly consider and enter into discussions regarding, and are
currently contemplating, additional potential acquisitions, joint ventures and
stand-alone projects that we believe will present opportunities to realize
synergies, expand our role in the energy infrastructure business, increase our
market position and, ultimately, increase distributions to unitholders. These
acquisitions can be effected quickly, may occur at any time and may be
significant in size relative to our existing assets. 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 will need new capital to finance the future acquisition and construction
of assets and businesses. Limitations on our access to capital will impair our
ability to execute this strategy. Expensive capital will limit our ability to
acquire or construct accretive assets. Although we intend to continue to expand
our business, this strategy may require substantial capital, and we may not be
able to raise the necessary funds on satisfactory terms, if at all.
In addition, we are experiencing increased competition for the assets we
purchase. Increased competition for a limited pool of assets could result in our
not being the successful bidder more often or our acquiring assets at a higher
relative price than we have paid historically. Either occurrence would limit
2
our ability to fully execute our growth strategy. Our ability to execute our
growth strategy may impact the market price of our securities.
OUR GROWTH STRATEGY MAY ADVERSELY AFFECT OUR RESULTS OF OPERATIONS IF WE DO
NOT SUCCESSFULLY INTEGRATE THE BUSINESSES THAT WE ACQUIRE OR IF WE
SUBSTANTIALLY INCREASE OUR INDEBTEDNESS AND CONTINGENT LIABILITIES TO MAKE
ACQUISITIONS.
We may be unable to integrate successfully businesses we acquire. We may
incur substantial expenses, delays or other problems in connection with our
growth strategy that could negatively impact our results of operations.
Moreover, acquisitions and business expansions involve numerous risks,
including:
- difficulties in the assimilation of the operations, technologies,
services and products of the acquired companies or business segments;
- inefficiencies and complexities that can arise because of unfamiliarity
with new assets and the businesses associated with them, including
unfamiliarity with their markets; and
- diversion of the attention of management and other personnel from
day-to-day business, the development or acquisition of new businesses and
other business opportunities.
If consummated, any acquisition or investment would also likely result in
the incurrence of indebtedness and contingent liabilities and an increase in
interest expense and depreciation, depletion and amortization expenses. A
substantial increase in our indebtedness and contingent liabilities could have a
material adverse effect upon our business, as discussed above.
OUR ACTUAL ACQUISITION, CONSTRUCTION AND DEVELOPMENT COSTS COULD EXCEED OUR
FORECAST, AND OUR CASH FLOW FROM CONSTRUCTION AND DEVELOPMENT PROJECTS MAY NOT
BE IMMEDIATE.
Our forecast contemplates significant expenditures for the purchase,
construction or other acquisition of energy infrastructure assets, including
some construction and development projects with significant technological
challenges. For example, underwater operations, especially those in water depths
in excess of 600 feet, are very expensive and involve much more uncertainty and
risk. 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 will have to finance these overruns using one or more
of the following methods:
- using cash from operations;
- delaying other planned projects; or
- issuing additional debt or equity.
Any or all of these methods may not be available when needed or may adversely
affect our future results of operations.
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 design, construction,
development and installation 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, we may not meet our obligations as
they become due and we may have to reduce or eliminate distributions to
unitholders.
3
FERC REGULATION AND A CHANGING REGULATORY ENVIRONMENT COULD AFFECT OUR CASH
FLOW.
The FERC extensively regulates certain of our energy infrastructure assets.
This regulation extends to such matters as:
- rate structures;
- rates of return on equity;
- recovery of costs;
- the services that our regulated assets are permitted to perform;
- the acquisition, construction and disposition of assets; and
- to an extent, the level of competition in that regulated industry.
In September 2001, the FERC issued a Notice of Proposed Rulemaking, or
NOPR. The NOPR proposes to apply the standards of conduct governing the
relationship between interstate pipelines and marketing affiliates to all energy
affiliates. Since our High Island Offshore System, or HIOS, and Petal natural
gas storage facilities are interstate facilities as defined by the Natural Gas
Act, the proposed regulations, if adopted by FERC, would dictate how HIOS and
Petal conduct business and interact with all energy affiliates of El Paso
Corporation and us. We cannot predict the outcome of the NOPR, but adoption of
the regulations in substantially the form proposed would, at a minimum, place
administrative and operational burdens on us. Further, more fundamental changes
could be required such as a complete organizational separation or sale of HIOS
and Petal.
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.
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 and petroleum products. Governmental authorities have
the power to enforce compliance with applicable regulations and permits and to
subject violators to civil and criminal penalties, including fines, injunctions
or both. Third parties may also have the right to pursue legal actions to
enforce compliance. 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,
permits or enforcement policies, could significantly increase some costs of our
operations, including the handling, manufacture, use, emission or disposal of
substances and 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.
A NATURAL DISASTER, CATASTROPHE OR OTHER INTERRUPTION EVENT COULD RESULT IN
SEVERE PERSONAL INJURY, PROPERTY DAMAGE AND ENVIRONMENTAL DAMAGE, WHICH COULD
CURTAIL OUR OPERATIONS AND OTHERWISE ADVERSELY AFFECT OUR CASH FLOW.
The nature of some of our operations involves higher risks of severe
personal injury, property damage and environmental damage, which could curtail
our operations and otherwise adversely affect our cash flow. For example, our
natural gas facilities operate at high pressures, sometimes in excess of 1,100
pounds per square inch. We also operate oil and natural gas facilities located
underwater in the Gulf of Mexico,
4
which can involve complexities, such as extreme water pressure. Virtually all of
our operations are exposed to the elements, including hurricanes, tornadoes,
storms, floods and earthquakes.
If one or more facilities that are owned by us or that deliver oil, natural
gas or other products to us is damaged by severe weather or any other disaster,
accident, catastrophe or event, our operations could be significantly
interrupted. Similar interruptions could result from damage to production or
other facilities that supply our facilities or other stoppages arising from
factors beyond our control. These interruptions might involve significant damage
to people, property or the environment, and repairs might take from a week or
less for a minor incident to six months or more for a major interruption.
Additionally, some of our storage contracts obligate us to indemnify our
customers for any damage or injury occurring during the period in which the
customers' natural gas is in our possession. Any event that interrupts the fees
generated by our energy infrastructure assets, or which causes us to make
significant expenditures not covered by insurance, could adversely impact the
market price of our debt and equity securities and the amount of cash available
for payment of the debt securities and distribution to our limited partners. In
order to reduce the effects of any such incident, we maintain insurance coverage
that includes some property and business interruption insurance. We believe that
this insurance coverage is adequate, although it does not cover many types of
interruptions that might occur. We cannot assure you that the proceeds of any
such insurance would be paid in a timely manner or be in an amount sufficient to
meet our needs if such an event were to occur or that we can renew it or other
desirable insurance on commercially reasonable terms, if at all.
THE FUTURE PERFORMANCE OF OUR ENERGY INFRASTRUCTURE OPERATIONS, AND THUS OUR
ABILITY TO SATISFY OUR DEBT REQUIREMENTS AND MAINTAIN CASH DISTRIBUTIONS,
DEPENDS ON SUCCESSFUL EXPLORATION AND DEVELOPMENT OF ADDITIONAL OIL AND
NATURAL GAS RESERVES BY OTHERS.
The oil, natural gas and other products available to our energy
infrastructure assets are derived from reserves produced from existing wells,
which reserves naturally decline over time. In order to offset this natural
decline, our energy infrastructure assets 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 that producers are currently developing.
Finding and developing new oil and natural gas reserves is very expensive,
especially offshore. 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 and development
drilling, installing production facilities and constructing 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 oil and natural gas prices, cost
and availability of equipment, capital budget limitations or the lack of
available capital. We cannot assure you that additional reserves, if discovered,
would be developed in the near future or at all. For example, because of the
level to which hydrocarbon prices declined during 1998 and the first quarter of
1999, overall oil and natural gas activity declined in relation to prior years.
If hydrocarbon prices decline to those levels again or if capital spending by
the energy industry decreases or remains at low levels for prolonged periods,
our results of operations and cash flow could suffer.
OUR STORAGE BUSINESSES DEPEND ON NEIGHBORING PIPELINES TO TRANSPORT NATURAL
GAS.
To obtain natural gas, our storage businesses depend on the pipelines to
which they have access. Many of these pipelines are owned by parties not
affiliated with us. Any interruption of service on those pipelines or adverse
change in their terms and conditions of service could have a material adverse
effect on our ability (and the ability of our customers) to transport natural
gas to and from our facilities and a corresponding material adverse effect on
our storage revenues. In addition, the rates charged by those interconnected
pipelines for transportation to and from our facilities affect the utilization
and value of our storage services. Significant changes in the rates charged by
those pipelines or the rates charged by other pipelines with which the
interconnected pipelines compete could also have a material adverse effect on
our storage revenues.
5
WE WILL FACE COMPETITION FROM THIRD PARTIES TO GATHER, TRANSPORT, PROCESS,
FRACTIONATE, STORE OR OTHERWISE HANDLE OIL, NATURAL GAS AND OTHER PETROLEUM
PRODUCTS.
Even if reserves exist in the areas accessed by our facilities and are
ultimately produced, we cannot assure you that any of these reserves will be
gathered, transported, processed, fractionated, stored or otherwise handled by
us. We 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 markets.
FLUCTUATIONS IN ENERGY COMMODITY PRICES COULD ADVERSELY AFFECT OUR BUSINESS.
Oil, natural gas and other petroleum products prices are volatile and could
have an adverse effect on a portion of our revenues and cash flow. Although our
strategy involves reducing our exposure to the volatility in commodity prices,
primarily by focusing on fee-based services, all segments of our operations are
somewhat affected by price reductions and some of our segments are significantly
affected by price reductions. Price reductions can materially reduce the level
of oil and natural gas exploration, pipeline volumes, production and development
operations, which provide reserves to replace those that are produced over time.
In addition, some of our operations, like production, processing and
fractionation, are very sensitive to price declines.
Pipelines and Platforms -- Price decreases could have an adverse effect on the
discovery and development of replacement reserves.
Currently, the primary consequence of commodity price reductions to our
pipeline and platform operations is the risk that less replacement reserves will
be discovered and developed as a result of a long-term decline in prices.
Although the majority of our pipeline and platform operations involve fee-based
arrangements for gathering, transporting and handling reserves that are
dedicated to the facilities for the life of the reserves, some of our pipelines
can be dramatically affected by a reduction in commodity prices because those
pipelines purchase and resell the commodity.
Natural Gas Storage -- Natural gas price stability could have an adverse
effect on revenues and cash flow from our storage assets.
Prices for natural gas have historically been seasonal and volatile, which
has enhanced demand for our storage services. The storage business has benefited
from large price swings resulting from seasonal price sensitivity through
increased withdrawal charges and demand for non-storage hub services. However,
we cannot assure you that the market for natural gas will continue to experience
volatility and seasonal price sensitivity in the future at the levels previously
seen. If volatility and seasonality in the natural gas industry decrease,
because of increased storage capacity throughout the pipeline grid, increased
production capacity or otherwise, the demand for our storage services and,
therefore, the prices that we will be able to charge for those services may
decline.
Processing and Fractionation -- The processing and fractionation businesses
are cyclical and are dependent in part upon the spreads between prices for
natural gas, NGLs and petroleum products.
Prices for natural gas, NGLs and NGL components can fluctuate in response
to changes in supply, market uncertainty and a variety of additional factors
that are beyond our control. Since our processing and fractionation facilities
provide fee-based services, for which we receive a fixed fee for each unit of
natural gas we process or NGL we fractionate, our processing and fractionation
operations are not directly
6
affected by fluctuations in prices for natural gas, NGLs and NGL components.
However, if the spread between prices for natural gas, NGLs and NGL components
do not provide sufficient profits to natural gas producers, then those producers
may decide not to process their natural gas or fractionate their NGLs, or to
process less natural gas or fractionate less NGLs. This could decrease the
volumes to our processing and fractionation facilities and, accordingly,
negatively affect our operational results. In many cases, processing and
fractionating is profitable only when the producer can receive more net proceeds
by physically separating the natural gas from the NGLs and separating the NGL
components from the NGLs and selling those products than it would receive by
merely selling the raw natural gas stream. The spread between the prices for
natural gas and NGLs is greatest when the demand for NGLs increases for use in
petrochemical and refinery feedstock. If, and when, this spread becomes too
narrow to justify the costs, producers have the option to sell the raw natural
gas stream rather than process and fractionate. In such a case, our processing
or fractionation facilities or both will be underutilized. Although our fixed
fee-based arrangements limit the direct effects of decreases in commodity prices
on our processing and fractionation operations, those arrangements also cause us
to forego any benefits we would otherwise experience if commodity prices were to
increase.
Utilization rates in the processing and fractionation industries can
fluctuate dramatically from month to month, depending on the needs of producers.
The average utilization rate for the Chaco processing plant for the calendar
years 2001, 2000 and 1999 was 89%, 91% and 93%. The monthly utilization rate for
our fractionation facilities during the 12 months ending December 31, 2001 was
as low as 41% and as high as 88%. However, our average annual utilization rate
for our fractionation facilities for 2001, 2000 and 1999 were 73%, 90% and 88%.
Oil and Natural Gas Production -- 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.
We have exposure to movements in commodity prices relating to our oil and
natural gas production, which we partially hedge, from time to time, using
financial derivative instruments. Our results of operations and our cash flows
could be materially adversely affected by factors we cannot control, including:
- fluctuations in prices of oil and natural gas;
- future operating costs; and
- risks incident to the operation of oil and natural gas wells.
FLUCTUATIONS IN INTEREST RATES COULD ADVERSELY AFFECT OUR BUSINESS.
In addition to our exposure to commodity prices, we also have exposure to
movements in interest rates. The interest rates on some of our indebtedness,
like our senior subordinated notes, are fixed and the interest rates on some of
our other indebtedness, like our revolving credit facility and the credit
facilities of our joint ventures, are variable. We partially hedge our interest
rate exposure, from time to time, using financial derivative instruments. Our
results of operations, and our cash flows, could be materially adversely
affected by significant increases or decreases in interest rates.
OUR USE OF DERIVATIVE FINANCIAL INSTRUMENTS COULD RESULT IN FINANCIAL LOSSES.
We try to limit a portion of the adverse effects resulting from changes in
oil and natural gas commodity prices and interest rates by using financial
derivative instruments and other hedging mechanisms from time to time, although
there are times when we do not have any hedging mechanisms in place. To the
extent we hedge our commodity price exposure and interest rate exposure, we
forego the benefits we would otherwise experience if commodity prices were to
increase or interest rates were to change. 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 our
7
counterparty does not perform its obligations under the hedge arrangement, our
hedge is imperfect, or our hedging policies and procedures are not followed.
OUR FRACTIONATION FACILITIES ARE DEDICATED, AND OUR CHACO PROCESSING PLANT IS
PRIMARILY DEDICATED, TO A SINGLE CUSTOMER, THE LOSS OF WHICH COULD ADVERSELY
AFFECT US.
In connection with our acquisition of our fractionation facilities, we
entered into a twenty-year transportation and fractionation agreement with El
Paso NGL Marketing, L.P., an affiliate of our general partner. In that
agreement, El Paso NGL Marketing agreed to deliver to our fractionation
facilities all of the NGLs derived from processing operations at seven natural
gas processing plants in south Texas owned by affiliates of El Paso NGL
Marketing to our south Texas NGL gathering and fractionation facilities. In
exchange, we have dedicated 100% of the capacity of our facilities to El Paso
NGL Marketing. For each gallon of NGLs we fractionate, we receive a fee of which
approximately 25% is adjusted using an inflation index.
In addition, in connection with our acquisition of title to and other
interests in the Chaco cryogenic natural gas processing plant, we entered into a
twenty-year processing agreement with El Paso Field Services, an affiliate of
our general partner. In that agreement, El Paso Field Services agreed to deliver
all of the natural gas received into the gathering system and certain related
facilities owned by El Paso Field Services and its subsidiaries located in the
San Juan Basin area of New Mexico to our Chaco natural gas processing plant. We
have agreed to use 100% of the capacity of our Chaco plant to process the
natural gas delivered by El Paso Field Services, subject to our ability to use
our available capacity to process natural gas delivered by third parties at any
time that El Paso Field Services does not utilize 100% of our capacity. We
receive a fixed fee from El Paso Field Services for each dekatherm of natural
gas that the plant processes, and will bear all costs associated with the
plant's ownership and operations.
Our operations are likely to be materially adversely affected if either of
these arrangements are terminated or if El Paso NGL Marketing or El Paso Field
Services does not deliver enough NGLs or natural gas to us to ensure that we can
maintain a profitable utilization rate or does not fully perform its obligations
under the agreement.
RISKS INHERENT IN AN INVESTMENT IN OUR SECURITIES
UNITHOLDERS HAVE LIMITED VOTING RIGHTS AND MAY NOT BE ABLE TO REMOVE OUR
GENERAL PARTNER WITHOUT ITS CONSENT.
Unlike the holder of capital stock in a corporation, unitholders have only
limited voting rights on matters affecting our business. Our general partner,
whose directors are not elected by our unitholders, manages our day-to-day
operations and strategic direction. Unitholders will have no right to elect our
general partner or the directors of our general partner or our directors on an
annual or any other continuing basis. If our general partner voluntarily
withdraws, however, the holders of a majority of our outstanding voting 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 voting units (including voting units 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 voting units approve a successor general partner. Before the
holders of outstanding voting units 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, other than entities organized as
corporations, 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.
8
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 voting units (excluding voting
units 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, WHICH WILL DILUTE INTERESTS OF UNITHOLDERS
AND MAY ADVERSELY EFFECT THEIR VOTING POWER.
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 equity securities described in this base prospectus and any prospectus
supplement, for any amount and on any terms and conditions established by our
general partner. If we issue more limited partner interests, it will reduce each
unitholder's proportionate ownership interest in us. This could cause the market
price of the unitholders' 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 the unitholders. If we issued any such
securities, it could adversely affect each unitholder's voting power.
OUR GENERAL PARTNER HAS ANTI-DILUTION RIGHTS.
Whenever we issue equity securities to any person other than our general
partner and its affiliates, our general partner and its affiliates have the
right to purchase an additional amount of those equity securities on the same
terms as they are issued to the other purchasers. This allows our general
partner and its affiliates to maintain their percentage partnership interest in
us. No other unitholder has a similar right. Therefore, only our general partner
may protect itself against dilution caused by the issuance of additional equity
securities.
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN THE CIRCUMSTANCES DESCRIBED
BELOW, INCLUDING POTENTIALLY HAVING LIABILITY FOR THE RETURN OF WRONGFUL
DISTRIBUTIONS.
As of the date of this base prospectus, we conduct business in Texas,
Alabama, Louisiana, Mississippi and New Mexico and plan to expand into more
states. In some states, the limitations on the liability of limited partners for
the obligations of a limited partnership have not been clearly established. To
the extent we conduct business in one of those states, a unitholder might be
held liable for our obligations as if it was 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.
A unitholder will not be liable for assessments in addition to its initial
capital investment in any of our capital securities representing limited
partnership interests. However, a unitholder may be required to repay to us
amounts wrongfully returned or distributed to it under some circumstances. Under
Delaware law, we may not make a distribution to unitholders 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.
9
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE UNITHOLDERS TO
SELL THEIR 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
of such class 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 of such class over the 20 trading days preceding the
date five days before our general partner mails such notice. Accordingly, under
certain circumstances unitholders may be required to sell their limited partner
interests against their will and the price they receive for those securities may
be less than they would like to receive.
OUR EXISTING UNITS ARE, AND POTENTIALLY ANY LIMITED PARTNER INTERESTS WE ISSUE
IN THE FUTURE WILL BE, SUBJECT TO RESTRICTIONS ON TRANSFER.
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.
FEDERAL AND STATE STATUTES WOULD ALLOW COURTS, UNDER SPECIFIC CIRCUMSTANCES,
TO SUBORDINATE FURTHER OR VOID THE DEBT SECURITIES AND THE GUARANTEES AND
REQUIRE HOLDERS OF DEBT SECURITIES TO RETURN PAYMENTS RECEIVED FROM US.
Under the federal bankruptcy law and comparable provisions of state
fraudulent transfer laws, a court could further subordinate or void the debt
securities and the guarantees if, at the time we issued the debt securities and
the guarantees, certain facts, circumstances and conditions existed, including
that:
- we received less than reasonably equivalent value or fair consideration
for the incurrence of such indebtedness; or
- we were insolvent or rendered insolvent by reason of such incurrence; or
- we were engaged in a business or transaction for which our remaining
assets constituted unreasonably small capital; or
- we intended to incur, or believed that we would incur, indebtedness we
could not repay at its maturity.
10
In such a circumstance, a court could require the holders of the debt
securities to return to us or pay to our other creditors amounts we paid under
the debt securities. This would entitle other creditors to be paid in full
before any payment could be made under the debt securities. We may not have
sufficient assets to fully pay the debt securities after the payment to other
creditors. The guarantees of the debt securities by our subsidiaries could be
challenged on the same grounds as the debt securities. In addition, a creditor
may avoid a guarantee based on the level of benefits received by a guarantor
compared to the amount of the subsidiary guarantee. The indenture will contain a
savings clause, which generally limits the obligations of each guarantor to the
maximum amount that is not a fraudulent conveyance. If a subsidiary guarantee is
avoided, or limited as a fraudulent conveyance or held unenforceable for any
other reason, you would not have any claim against the guarantors and would be
only creditors of El Paso Energy Partners and El Paso Finance and any guarantor
whose subsidiary guarantee was not avoided or held unenforceable. In such event,
claims of holders of debt securities against a guarantor would be subject to the
prior payment of all liabilities (including trade payables) of such guarantor.
We cannot assure you that, after providing for all prior claims, there would be
sufficient assets to satisfy claims of holders of debt securities relating to
any avoided portions of any of the subsidiary guarantees.
The measures of insolvency for purposes of these fraudulent transfer laws
will vary depending upon the law applied in any proceeding to determine whether
a fraudulent transfer has occurred. Generally, however, we would be considered
insolvent if:
- the sum of our indebtedness, including contingent liabilities, were
greater than the fair value or fair saleable value of all of our assets;
- if the present fair value or fair saleable value of our assets were less
than the amount that would be required to pay our probable liability on
our existing indebtedness, including contingent liabilities, as it
becomes absolute and mature; or
- we could not pay our indebtedness as it becomes due.
There is a risk of a preferential transfer if:
- a subsidiary guarantor declares bankruptcy or its creditors force it to
declare bankruptcy within 90 days (or in certain cases, one year) after a
payment on the guarantee; or
- a subsidiary guarantee was made in contemplation of insolvency.
The subsidiary guarantee could be avoided by a court as a preferential
transfer. In addition, a court could require holders of debt securities to
return any payments made on the debt securities during the 90-day (or one-year)
period.
WE MAY NOT BE ABLE TO REPURCHASE DEBT SECURITIES UPON A CHANGE OF CONTROL.
Upon a change of control, we will be required to repay the amounts
outstanding under our revolving credit facility and to offer to repurchase our
outstanding senior subordinated notes at 101% of the principal amount, plus
accrued and unpaid interest to the date of repurchase. In addition, we may be
required to offer to repurchase any outstanding debt securities issued to you.
We cannot assure you that we will have sufficient funds available or that we
will be permitted by our other debt instruments to fulfill these obligations
upon the occurrence of a change of control.
THERE MAY BE NO PRIOR MARKET FOR SOME OF OUR DEBT OR EQUITY SECURITIES, AND WE
CANNOT ASSURE YOU THAT AN ACTIVE, LIQUID TRADING MARKET WILL DEVELOP FOR THESE
SECURITIES.
Some of our debt and equity securities will be a new issue of securities
with no established trading market and, unless otherwise stated in the
applicable prospectus supplement, will not be listed on any securities exchange.
The liquidity of the trading market in such securities, and the market price
quoted for such securities, may be adversely affected by changes in the overall
market for those securities, especially high yield securities, and by changes in
our financial performance or prospects or in the prospects for
11
companies in our industry generally. As a result, you cannot be sure that an
active trading market will develop for those securities.
THE RIGHTS OF HOLDERS OF SOME OF OUR DEBT SECURITIES TO RECEIVE PAYMENTS WILL
BE UNSECURED AND CONTRACTUALLY SUBORDINATED TO MOST OF OUR EXISTING
INDEBTEDNESS AND, POSSIBLY, ANY ADDITIONAL INDEBTEDNESS WE INCUR. FURTHER, THE
GUARANTEES OF THE DEBT SECURITIES WILL BE JUNIOR TO ALL THE GUARANTORS'
EXISTING INDEBTEDNESS AND POSSIBLY TO ALL THEIR FUTURE BORROWINGS.
Some of our debt securities and the subsidiary guarantees will rank behind
most of our and the subsidiary guarantors' existing senior indebtedness (other
than trade payables and certain other indebtedness) and possibly all additional
senior indebtedness (other than trade payables) we incur unless, and to the
extent, that additional indebtedness expressly provides that it ranks equal
with, or junior in right of payment to, the debt securities and the guarantees.
Further, the debt securities may rank senior to, equal with or subordinate to
our existing senior subordinated notes and the guarantees of those notes.
In addition, all payments on the debt securities and the related guarantees
may be blocked in the event of a payment default or in the event of certain
non-payment defaults on our significant senior indebtedness.
In the event of a bankruptcy, liquidation, reorganization or similar
proceeding relating to us, any subsidiary guarantors or our property, our assets
or the assets of the subsidiary guarantors would be available to pay obligors
under the subordinated debt securities only after all payments had been made on
our or the guarantors' senior indebtedness. Our creditors and the subsidiary
guarantors' creditors holding claims which are not subordinated to any
applicable senior indebtedness will in all likelihood be entitled to payments
before all of our or the subsidiary guarantors' senior indebtedness has been
paid in full. Therefore, holders of the subordinated debt securities will
participate with trade creditors and all other holders of our and the
guarantors' unsubordinated indebtedness in the assets remaining after we and the
guarantors have paid all of the senior indebtedness. However, because the
subordinated debt securities indenture may require that amounts otherwise
payable to holders of the subordinated debt securities in a bankruptcy,
liquidation, reorganization or similar proceeding be paid to holders of senior
indebtedness instead, holders of the subordinated debt securities may receive
less, ratably, than holders of trade payables and other creditors in any such
proceeding. In any of these cases, we and the subsidiary guarantors may not have
sufficient funds to pay all of our creditors and, therefore, holders of
subordinated debt securities would receive less, ratably, than the holders of
senior indebtedness.
SOME OF OUR DEBT SECURITIES WILL BE EFFECTIVELY SUBORDINATED TO INDEBTEDNESS
AND LIABILITIES OF OUR SUBSIDIARIES THAT ARE NOT GUARANTORS.
The debt securities will be effectively subordinated to claims of all
creditors of any of our subsidiaries that are not guarantors of the debt
securities. If a non-guarantor subsidiary defaults on its debt, the holders of
the debt securities would not receive any money from that subsidiary until its
debts are repaid in full. For example, we do not expect that Argo, L.L.C., an
indirect wholly-owned subsidiary, will guarantee the debt securities. Argo has a
$95 million limited recourse loan with $95 million outstanding as of December
31, 2001. If Argo defaults on its payment obligations under its loan, the
holders of the debt securities would not receive any money from Argo until the
loan is repaid in full. Most of our existing subsidiaries will guarantee the
debt securities. See "Description of Debt Securities."
CONFLICTS OF INTEREST RISKS
EL PASO CORPORATION AND ITS AFFILIATES HAVE CONFLICTS OF INTEREST WITH US AND,
ACCORDINGLY, YOU.
We have potential and existing conflicts of interest with El Paso
Corporation 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;
12
- 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.
We expect to continue to enter into substantial transactions and other
activities with El Paso Corporation and its affiliates, because of the
businesses and areas in which we and El Paso Corporation currently operate, as
well as those in which we plan to operate in the future. Some more recent
transactions involving us in which El Paso Corporation and its affiliates had a
conflict of interest include:
- in October 2001, we acquired title to and other interests in the Chaco
cryogenic natural gas processing plant in New Mexico from a subsidiary of
El Paso Corporation, among others;
- in October 2001, we purchased the remaining 50% equity interest that we
did not already own in Deepwater Holdings, L.L.C. from a subsidiary of El
Paso Corporation;
- in October 2001, we issued 5,627,070 common units, including 1,477,070
common units purchased by our general partner, and used a portion of the
proceeds to redeem $50 million of our Series B preference units owned by
our general partner;
- in May 2001, we purchased our general partner's 1.01% non-managing
interest owned in twelve of our subsidiaries;
- in February 2001, we purchased fee-based NGL transportation and
fractionation assets located in south Texas from subsidiaries of El Paso
Corporation;
- in January and April 2001, we and Deepwater Holdings sold our interests
in several offshore Gulf of Mexico assets as a result of an FTC order
related to El Paso Corporation's merger with The Coastal Corporation; and
- pursuant to a management agreement, subsidiaries of El Paso Corporation
provide us administrative and operational services.
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.
Some other situations 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, and there is a benefit to our general partner or its
affiliates in which neither we nor you will share include:
- compensation paid to the general partner, which includes incentive
distributions and reimbursements for reasonable general and
administrative expenses;
- payments to the general partner and its 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;
- our general partner's determination to establish cash reserves under
certain circumstances and thereby decrease cash available for
distributions to unitholders.
Our general partner, which is owned by El Paso Corporation, manages our
day-to-day operations and strategic direction. El Paso Corporation 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 Corporation'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,
13
El Paso Corporation makes the final determination regarding how any particular
conflict of interest is resolved.
We cannot assure you that El Paso Corporation and its affiliates will
always act in your best interest, even though doing so may appear to:
- protect and enhance El Paso Corporation's substantial investment in us;
- generate substantial cash flows to El Paso Corporation; and
- provide El Paso Corporation with efficiently priced capital for its
planned acquisitions.
We are a primary vehicle for growth and development of midstream energy
assets for El Paso Corporation, and we expect to receive additional transfers in
the future. These future transfers from El Paso Corporation and other
third-party acquisitions will be selected from time to time, based on our unique
cost-of-capital advantage, our ability to integrate these growth assets into El
Paso Corporation's significant North American midstream business and our
investment profile, which requires accretive transactions based on stable cash
flows with growth potential. However, El Paso Corporation is neither
contractually nor legally bound to use us as its primary vehicle for growth and
development of midstream energy assets, and it may reconsider at any time,
without notice. Further, El Paso Corporation is not required to pursue any
business strategy that will favor our business opportunities over the business
opportunities of El Paso Corporation or any of its affiliates (or any of our
other competitors acquired by El Paso Corporation). In fact, El Paso Corporation
may have financial motives to favor our competitors. El Paso Corporation and its
subsidiaries (many of which are wholly owned) operate in some of the same lines
of business and in some of the same geographic areas in which we operate.
CASH RESERVES, EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION OF OUR
GENERAL PARTNER MAY AFFECT DISTRIBUTIONS TO UNITHOLDERS.
Our general partner has broad discretion to make cash expenditures and to
establish and make additions to cash reserves for any proper partnership
purpose, including reserves for the purpose of:
- providing for future operating and capital expenditures;
- providing for debt service;
- providing funds for up to the next four quarterly distributions;
- providing funds to redeem or otherwise repurchase our outstanding debt or
equity;
- stabilizing distributions of cash to capital security holders;
- complying with the terms of any agreement or obligation of ours; and
- providing for a discretionary reserve amount.
The timing and amount of additions to discretionary reserves could
significantly reduce potential distributions that certain unitholders could
receive or ultimately affect who gets the distribution. The reduction or
elimination of a previously established reserve in a particular quarter will
result in a higher level of cash available for distribution than would otherwise
be available in such quarter. Depending upon the resulting level of cash
available for distribution, 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;
- the incentive distributions described in the section entitled
"Description of Limited Partner Interests -- Rights to Cash
Distributions" beginning on page 26; and
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- 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.
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, including the Series B preference unitholders, 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
unitholders. 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 unitholders; 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 unitholders
for certain actions or omissions which might otherwise be deemed to be a breach
of fiduciary duty under Delaware or other applicable state law. Further, the
partnership agreement requires 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 Corporation
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
UNITHOLDERS' LIMITED PARTNER INTERESTS.
As of the date of this base prospectus, our general partner and its
affiliates own 10,430,834 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
15
price of unitholders' limited partner interests. 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.
RISKS RELATED TO OUR LEGAL STRUCTURE
THE INTERRUPTION OF DISTRIBUTIONS TO US FROM OUR SUBSIDIARIES AND JOINT
VENTURES MAY AFFECT OUR ABILITY TO MAKE PAYMENTS ON OUR DEBT SECURITIES OR
CASH DISTRIBUTIONS TO OUR UNITHOLDERS.
We are 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 fund our commitments (including payments on our debt securities)
and 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, from time to time, our joint
ventures and some of our subsidiaries have separate credit arrangements that
contain various restrictive covenants. Among other things, those covenants limit
or restrict each such company's ability to make distributions to us under
certain circumstances. Further, each joint venture's charter documents typically
vest in its management committee sole discretion regarding distributions. We
cannot assure you that any of our joint ventures or any of our unrestricted
subsidiaries will continue to make distributions to us at current levels or at
all.
Moreover, pursuant to some of the joint venture and subsidiary credit
arrangements, we have agreed to return a limited amount of the distributions
made to us by the applicable company 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 PARTICIPANTS AGREE.
Due to the nature of joint ventures, each participant (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 participant with the opportunity to participate in the
management of the joint venture and to protect its investment in that joint
venture, as well as any other assets which may be substantially dependent on or
otherwise affected by the activities of that joint venture. These participation
and protective features include a corporate governance structure that requires
at least a majority in interest vote 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 or
otherwise raising capital, transactions with affiliates of a joint venture
participant, litigation and transactions not in the ordinary course of business,
among others. Thus, without the concurrence of joint venture participants with
enough voting interests, we cannot cause any of our joint ventures to take or
not to take certain actions, even though those actions may be in the best
interest of the particular joint venture or 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 unitholders 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 unit. Accordingly, if we experience a liquidity
problem in the future, we may not be able to issue more equity to recapitalize.
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CHANGES OF CONTROL OF OUR GENERAL PARTNER MAY ADVERSELY AFFECT YOU.
Our results of operations and, thus, our ability to pay amounts due under
the debt securities and to make cash distributions could be adversely affected
if there is a change of control of our general partner. For example, El Paso
Corporation and its affiliates are parties to various credit agreements and
other financing arrangements, the obligations of which may be collateralized
(directly or indirectly). El Paso Corporation and its affiliates have used, and
may use in the future, their interests, which include our general partner
interest, common units and Series B preference units as collateral. These
arrangements may allow such lenders to foreclose on that collateral in the event
of a default. Further, El Paso Corporation could sell our general partner or any
of the common units or other limited partner interests it holds. El Paso
Corporation's sale of our general partner would constitute a change of control
under our existing credit agreement and indentures. In such a circumstance, our
indebtedness for borrowed money would effectively become due and payable unless
our creditors agreed otherwise, and we might be required to refinance our
indebtedness. In addition, El Paso Corporation 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 we would be able to refinance our indebtedness or that any such
acquiror would 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 38.
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, or IRS, 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 base 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 AND IF THE IRS TREATS US
AS A CORPORATION FOR TAX PURPOSES, IT WOULD ADVERSELY AFFECT DISTRIBUTIONS TO
OUR UNITHOLDERS AND OUR ABILITY TO MAKE PAYMENTS ON OUR DEBT SECURITIES.
Based upon the continued accuracy of the representations of our general
partner set forth in "Income Tax Considerations -- Partnership Status" on page
39, 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 or will be
ignored as separate entities 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 each unitholder's 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, each unitholder would bear the cost of any expenses
incurred in connection with an examination of its 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 single member limited liability companies disregarded from their
owners or partnerships for federal income tax purposes.
17
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 unitholders,
and its net income would be taxed at corporate rates. This would materially and
adversely affect our ability to make payments on our debt securities. In
addition, some or all of the distributions made to unitholders 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 may
not conform with all aspects of certain 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 unitholders and could have a negative impact on the value of their
limited partner interests.
UNITHOLDERS 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 unless the unitholder disposes of its entire interest.
UNITHOLDERS' PARTNERSHIP TAX INFORMATION MAY BE AUDITED.
We will furnish each unitholder a substitute Schedule K-1 that sets forth
its 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. We cannot guarantee 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 each
unitholder's individual tax return as well as increased liabilities for taxes
because of adjustments resulting from the audit.
UNITHOLDERS' TAX LIABILITY RESULTING FROM AN INVESTMENT IN OUR LIMITED PARTNER
INTERESTS COULD EXCEED ANY CASH UNITHOLDERS RECEIVE AS A DISTRIBUTION FROM US
OR THE PROCEEDS FROM DISPOSITIONS OF THOSE SECURITIES.
A unitholder will be required to pay federal income tax and, in certain
cases, state and local income taxes on its allocable share of our income,
whether or not it receives any cash distributions from us. We cannot guarantee
that a unitholder will receive cash distributions equal to its allocable share
of taxable income from us. In fact, a unitholder may incur tax liability in
excess of the amount of cash distribution we make to it or the cash it receives
on the sale of its units or other limited partner interests.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS MAY EXPERIENCE ADVERSE
TAX CONSEQUENCES FROM 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
18
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 EACH UNITHOLDER'S RETURNS.
We have been registered with the IRS as a "tax shelter." The tax shelter
registration number is 93084000079. As a result, we cannot be sure that we will
not be audited by the IRS or that tax adjustments will not be made. The right of
a unitholder owning less than a 1% profit interest in us to participate in the
income tax audit process is limited. Further, any adjustments in our tax returns
will lead to adjustments in each unitholder's returns and may lead to audits of
each unitholder's returns and adjustments of items unrelated to us. Each
unitholder would bear the cost of any expenses incurred in connection with an
examination of its personal tax return.
UNITHOLDERS 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 each unitholder through the realization of taxable
income by it 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, each unitholder
could have increased taxable income without a corresponding cash distribution.
WE WILL TREAT EACH PURCHASER OF UNITS AS HAVING THE SAME TAX BENEFITS WITHOUT
REGARD TO THE UNITS PURCHASED. THE IRS MAY CHALLENGE THIS TREATMENT, WHICH
COULD ADVERSELY AFFECT THE VALUE OF THE UNITS.
Because we cannot match transferors and transferees of common units, we
have adopted depreciation and amortization positions that do not conform with
all aspects of Treasury Regulations. A successful IRS challenge to those
positions could adversely affect the amount of tax benefits available to you. It
also could affect the timing of these tax benefits or the amount of gain from
your sale of common units and could have a negative impact on the value of the
common units or result in audit adjustments to your tax returns. Please read
"Tax Considerations -- Uniformity of Units" for a further discussion of the
effect of the depreciation and amortization positions we adopt.
YOU WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES IN STATES WHERE YOU DO NOT
LIVE AS A RESULT OF AN INVESTMENT IN OUR UNITS.
In addition to federal income taxes, you will likely be subject to other
taxes, including state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which we do business or own property and in which you do not
reside. You may be required to file state and local income tax returns and pay
state and local income taxes in many or all of the jurisdictions in which we do
business. Further, you may be subject to penalties for failure to comply with
those requirements. We own assets and do business in five states. Four of these
states currently impose a personal income tax on partners of partnerships doing
business in those states but who are not residents of those states. It is your
responsibility to file all United States federal, state and local tax returns.
Our counsel has not rendered an opinion on the state or local tax consequences
of an investment in the common units.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods indicated is
as follows:
YEAR ENDED DECEMBER 31,
NINE MONTHS ENDED ----------------------------------------
SEPTEMBER 30, 2001 2000 1999 1998 1997 1996
------------------ ---- ---- ---- ---- ----
2.32 1.53 1.80 1.17 --(1) 3.36
- ---------------
(1) Earnings were inadequate to cover fixed charges by $5,362,000 for 1997.
19
These computations include us and our Restricted Subsidiaries. For these
ratios, "earnings" is the aggregate of the following items:
- pre-tax income from continuing operations before adjustment for
- minority interests in consolidated subsidiaries and
- income or loss from equity investees;
- plus fixed charges;
- plus distributed income of equity investees;
- less interest capitalized; and
- less minority interest in pre-tax income of subsidiaries that have not
incurred fixed charges.
The term "fixed charges" means the sum of the following:
- interest expensed and capitalized, including amortized premiums,
discounts and capitalized expenses related to indebtedness; and
- an estimate of the interest within rental expenses.
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 and debt
securities offered by this base prospectus and any prospectus supplement will be
used for general partnership purposes, including constructing, purchasing or
otherwise acquiring additional assets and repaying indebtedness.
DESCRIPTION OF DEBT SECURITIES
Unless we specify otherwise in a related prospectus supplement, our debt
securities will have the characteristics described in this section.
Our debt securities will be:
- our direct unsecured general obligations; and
- either senior debt securities or senior subordinated debt securities.
Senior debt securities will be issued under a "senior indenture" and senior
subordinated debt securities will be issued under a "senior subordinated
indenture." Together the senior indenture and senior subordinated indenture are
called the "indentures." We will enter into the indentures with a trustee that
is qualified to act under the Trust Indenture Act of 1939 (together with any
other trustee(s) chosen by us and appointed in a supplemental indenture with
respect to a particular series of debt securities, as the "Trustee"). We will
identify the Trustee for each series of debt securities in the applicable
prospectus supplement. The form of indenture and any supplemental indenture will
be filed by us from time to time by means of an exhibit to a Current Report on
Form 8-K and will be available for inspection at the corporate trust office of
the Trustee, or as described under "Where You Can Find More Information." Each
indenture will be subject to, and governed by, the Trust Indenture Act. We will
execute an indenture or, if applicable, a supplemental indenture if and when we
issue any debt securities.
We summarized the material provisions of the indentures in the following
order:
- those provisions that apply only to the senior indenture;
- those provisions that apply only to the senior subordinated indenture;
and
- those provisions that apply to both indentures.
20
We have not restated the indentures in their entirety. You should read the
indentures, because they, and not this description, control your rights as
holders of the debt securities. Capitalized terms used in the summary have the
meanings specified in the indentures. In this description, the word "Issuers"
refers only to El Paso Energy Partners and El Paso Finance and not to any of
their subsidiaries and any reference to "El Paso Energy Partners" or "El Paso
Finance" does not include any of their respective subsidiaries.
SPECIFIC TERMS OF EACH SERIES OF DEBT SECURITIES IN THE PROSPECTUS SUPPLEMENT
A prospectus supplement relating to any series of debt securities being
offered will describe the specific terms of those debt securities. These terms
will include some or all of the following:
- the form and title of the debt securities;
- the total principal amount;
- the currency or currency unit in which the debt securities will be
payable, if not U.S. dollars;
- the maturity date;
- any right we may have to defer payments of interest by extending the
dates payments are due whether interest on those deferred amounts will be
payable as well and the maximum length of the deferral period;
- the interest rate, if any, and the method for calculating the interest
rate;
- the interest payment dates and the record dates for the interest
payments;
- the portion of the principal amount that will be payable if the maturity
of the debt securities is accelerated;
- any mandatory or optional redemption terms or prepayment, conversion,
sinking fund or exchangeability or convertibility provisions or other
provisions that would obligate us to repurchase or otherwise redeem the
debt securities;
- the place where principal and interest will be payable;
- whether the debt securities will be issuable in registered form or bearer
form or both and, if bearer securities are issuable, any special
provisions or restrictions applicable to the exchange of one form for
another and the offer, sale and delivery of bearer securities;
- any listing on a securities exchange; and
- other specific terms, including events of default and covenants provided
for with respect to the debt securities.
Any particular series of debt securities may contain covenants limiting:
- the incurrence of additional debt (including guarantees) by us and our
affiliates;
- the making of certain payments by us and our affiliates;
- our business activities and those of our affiliates;
- the issuance of other securities by our affiliates;
- asset dispositions;
- transactions with our affiliates;
- a change of control;
- the incurrence of liens; and
- certain mergers and consolidations involving us and our affiliates.
21
PROVISIONS ONLY IN THE SENIOR INDENTURE
The senior debt securities will rank equally in right of payment with all
of our other senior and unsubordinated debt and senior in right of payment to
any of our subordinated debt. The senior debt securities will be effectively
subordinated to all of our secured debt. We will disclose the amount of our
secured debt in the prospectus supplement.
PROVISIONS ONLY IN THE SENIOR SUBORDINATED INDENTURE
SUBORDINATION TO SENIOR DEBT
The senior subordinated debt securities will rank junior in right of
payment to all of our senior debt. "Senior debt" will be defined to include all
notes or other evidences of debt, including our guarantees for money we
borrowed, not expressed to be subordinate or junior in right of payment to any
other of our debt.
PAYMENT BLOCKAGES
The senior subordinated indenture will generally provide that we may not
make any payment or distribution in respect of the senior subordinated debt
securities if:
- a default in the payment of principal, premium or interest (and other
obligations in the case of credit facilities) on any senior debt
permitted under the indenture the principal amount of which exceeds the
amount specified in the senior subordinated indenture and that has been
designated by El Paso Energy Partners as "Designated Senior Debt" occurs
and is continuing; or
- any other default occurs and is continuing on Designated Senior Debt that
permits holders of the Designated Senior Debt to accelerate its maturity
and the Trustee receives a notice of such default from us or the holders
of any Designated Senior Debt.
PROVISIONS IN BOTH INDENTURES
GUARANTY OF DEBT SECURITIES BY SUBSIDIARIES
We are a holding company that conducts all of our operations through our
subsidiaries. Each indenture will require that our Restricted Subsidiaries
(other than El Paso Finance) jointly and severally guarantee, as "Subsidiary
Guarantors," the Issuers' payment obligations under these debt securities. Each
guarantee and the related obligations will be subordinated to the prior payment
in full of all Senior Debt of that Subsidiary Guarantor. The obligations of each
Subsidiary Guarantor under its guarantee will be limited as necessary to prevent
that guarantee from constituting a fraudulent conveyance under applicable law.
Any Restricted Subsidiary that guarantees indebtedness of either of the
Issuers or any other Restricted Subsidiary at a time when it is not a Subsidiary
Guarantor shall execute a guarantee. In addition, if El Paso Energy Partners or
any of its Restricted Subsidiaries acquires or creates another Restricted
Subsidiary after the date of the indenture that guarantees any indebtedness of
either of the Issuers, then that newly acquired or created Restricted Subsidiary
must become a Subsidiary Guarantor.
The indentures will describe the terms and conditions relating to the
designation of a subsidiary as a Restricted Subsidiary or an Unrestricted
Subsidiary. Initially, we expect that the Subsidiary Guarantors will be Argo II,
L.L.C., Crystal Holding, L.L.C., Crystal Properties and Trading Company, L.L.C.,
Delos Offshore Company, L.L.C., East Breaks Gathering Company, L.L.C., El Paso
Energy Partners Deepwater, L.L.C., El Paso Energy Partners Oil Transport,
L.L.C., El Paso Energy Partners Operating Company, L.L.C., First Reserve Gas,
L.L.C., Flextrend Development Company, L.L.C., Green Canyon Pipe Line Company,
L.P., Hattiesburg Gas Storage Company, Hattiesburg Industrial Gas Sales Company,
L.L.C., High Island Offshore System, L.L.C., Manta Ray Gathering Company,
L.L.C., Petal Gas Storage Company, L.L.C., Poseidon Pipeline Company, L.L.C., VK
Deepwater Gathering Company, L.L.C. and VK-Main Pass Gathering Company, L.L.C.
The obligations of each Subsidiary Guarantor with respect to
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the debt securities under its guarantee will be subordinated to its Senior Debt
on the same basis as those debt securities are subordinated to Senior Debt.
SUBORDINATION TO INDEBTEDNESS OF NON-GUARANTOR SUBSIDIARIES
The debt securities will be effectively subordinated to claims of all
creditors of any of our subsidiaries that are not guarantors of the notes, such
as Argo I, L.L.C. and Argo, L.L.C. If a non-guarantor subsidiary defaults on its
debt, the holders of the debt securities would not receive any money from that
subsidiary until its debts are repaid in full. Most of our existing subsidiaries
will guarantee the notes.
MODIFICATION OF INDENTURES
Under the indentures, generally we and the Trustee will be able to modify
our rights and obligations and the rights of the holders with the consent of the
holders of a specified percentage of the outstanding holders of each series of
debt affected by the modification. No modification of the principal or interest
payment terms, and no modification reducing the percentage required for
modifications, will be effective against any holder without its consent. In
addition, we and the Trustee will be able to amend the indentures without the
consent of any holder of the debt securities to make technical changes.
NO LIMIT ON AMOUNT OF DEBT SECURITIES
Neither of the indentures will limit the amount of debt securities that the
Issuers may issue. Each indenture allows the Issuers to issue additional debt
securities under the indenture up to the principal amount that we authorize.
REGISTRATION OF DEBT SECURITIES
The Issuers may issue debt securities of a series in registered, bearer,
coupon or global form.
MINIMUM DENOMINATIONS
Unless the prospectus supplement for each issuance of debt securities
states otherwise, the debt securities will be issued in registered form in
amounts of $1,000 each or multiples of $1,000.
NO PERSONAL LIABILITY OF OUR GENERAL PARTNER
Our general partner and its directors, officers, employees and shareholders
will not have any liability for our obligations under the indentures or the debt
securities. By accepting a debt security, you waive and release these parties
from this liability. Your waiver and release are part of the consideration for
the issuance of the debt securities.
PAYMENT AND TRANSFER
If a holder has given wire transfer instructions to the Issuers, the
Issuers will make all payments of principal, any premium, and interest on the
debt securities in accordance with those instructions. All other payments on
these debt securities will be made at the office or agency of the paying agent
and registrar within the City and State of New York unless the Issuers elect to
make interest payments by check mailed to the holders at their address set forth
in the register of holders.
A holder may transfer or exchange debt securities in accordance with the
indentures. The Registrar and the Trustee may require a holder, among other
things, to furnish appropriate endorsements and transfer documents and we may
require a holder to pay any taxes and fees required by law or permitted by the
indentures. The Issuers are not required to transfer or exchange any debt
security selected for redemption or repurchase (except in the case of a debt
security to be redeemed or repurchased in part, the portion not to be redeemed
or repurchased).
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DISCHARGING OUR OBLIGATIONS
The Issuers may elect to discharge their obligations with respect to the
outstanding debt securities and have all obligations of the Subsidiary
Guarantors discharged with respect to their guarantees except for:
- the rights of holders of outstanding debt securities to receive payments
in respect of the principal of, premium, if any, and interest on such
debt securities when such payments are due (except as set forth in the
indentures) from the list referred to below;
- the Issuers' obligations with respect to the debt securities concerning
issuing temporary debt securities, registration of debt securities,
mutilated, destroyed, lost or stolen debt securities and the maintenance
of an office or agency for payment and money for security payments held
in trust;
- the rights, powers, trusts, duties and immunities of the Trustee, and the
Issuers' obligations in connection therewith;
- the legal defeasance provisions of the indentures; and
- the Issuers' rights of optional redemption.
In addition, El Paso Energy Partners may elect to have the obligations of
the Issuers and the Guarantors released with respect to certain covenants that
are described in the indentures and thereafter any omission to comply with those
covenants shall not constitute a default or event of default with respect to the
debt securities. In the event covenant defeasance occurs, certain events (not
including non-payment, bankruptcy, receivership, rehabilitation and insolvency
events) will no longer constitute an event of default with respect to the debt
securities.
The Issuers may discharge their obligations with respect to the outstanding
debt securities and have all obligations of the Subsidiary Guarantors discharged
with respect to their guarantees or release the Issuers' obligations and the
Subsidiary Guarantors from covenant restrictions only if we meet certain
requirements as described in the indentures.
BOOK ENTRY, DELIVERY AND FORM
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a depositary
identified in a prospectus supplement.
Unless otherwise stated in any prospectus supplement, the debt securities
will be represented by one permanent global registered debt security in global
form, without interest coupons. The global debt securities will be deposited
with, or on behalf of, The Depository Trust Company ("DTC"), or will remain in
the custody of the Trustee pursuant to the FAST Balance Certificate Agreement
between DTC and the Trustee. This means that the Issuers will not issue
certificates to each holder. One global debt security will be issued to DTC who
will keep a computerized record of its participants (for example, your broker)
whose clients have purchased the debt securities. The participant will then keep
a record of its clients who purchased the debt securities. Unless it is
exchanged in whole or in part for a certificate debt security, a global debt
security may not be transferred, except that the DTC, its nominees and their
successors may transfer a global debt security as a whole to one another.
Beneficial interest in global debt securities will be shown on, and
transfers of global debt securities will be made only through, records
maintained by DTC and its participants.
DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered under the provisions of
Section 17A of the Securities Exchange Act of 1934. DTC holds securities that
its participants ("Direct Participants") deposit with DTC. DTC also records the
settlement among Direct Participants of securities transactions, such as
transfers and pledges, in deposited securities through computerized records for
Direct Participants' accounts. This eliminates the need to exchange
certificates. Direct Participants include
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securities brokers and dealers, banks, trust companies, clearing corporations
and certain other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on file
with the SEC.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
Payments in respect of the principal of premium, if any, and interest on
global debt securities registered in the name of DTC or its nominee will be
payable by the Trustee to DTC or its nominee as the registered holder under each
indenture. Consequently, none of the Issuers, the Trustee nor any agent of El
Paso Energy Partners or the Trustee has or will have any responsibility or
liability to pay amounts due on the global debt securities to owners of
beneficial interests in the global debt securities.
DTC has advised us that its current payment practice (for payments of
principal, interest and the like) with respect to securities such as the debt
securities is to credit the accounts of the relevant Direct Participants with
such payment on the payment date in amounts proportionate to such Direct
Participant's respective ownership interests in the global debt securities as
shown on DTC's records. In addition, it is DTC's current practice to assign any
consenting or voting rights to Direct Participants whose accounts are credited
with debt securities on a record date, by using an omnibus proxy. Payments by
participants to owners of beneficial interests in the global debt securities,
and voting by participants, will be governed by the customary practices between
the participants and owners of beneficial interests, as is the case with debt
securities held for the account of customers registered in "street name."
However, payments will be the responsibility of the participants and not of DTC,
the Trustee or the Issuers.
Debt securities represented by a global debt security will be exchangeable
for certificate debt securities with the same terms in authorized denominations
only if:
- DTC notifies the Issuers that it is unwilling or unable to continue as
depositary or if DTC ceases to be a clearing agency registered under
applicable law and a successor depositary is not appointed by us within
90 days; or
- the Issuers determine not to require all of the debt securities of a
series to be represented by a global debt security and notify the Trustee
of our decision; or
- a default or event of default has occurred and is continuing with respect
to the debt securities.
THE TRUSTEE
Resignation or Removal of Trustee. Under the provisions of the indentures
and the Trust Indenture Act of 1939, as amended, governing trustee conflicts of
interest, any uncured event of default with respect to any series of debt
securities will force the Trustee to resign as trustee under the indentures. Any
resignation or removal of the Trustee will require the appointment of a
successor trustee in accordance with the terms of the indentures.
The Trustee may resign or be removed by us with respect to one or more
series of debt securities and a successor trustee may be appointed to act with
respect to any such series. The holders of a majority in aggregate principal
amount of the debt securities of any series may remove the Trustee with respect
to the debt securities of such series.
Limitation on Trustee if it is Our Creditor. If the Trustee becomes a
creditor of El Paso Energy Partners or any Subsidiary Guarantor, the indentures
limit its right to obtain payment of claims in certain cases, or to realize on
certain property received in aspect of any such claim as security or otherwise.
Annual Trustee Report to Holders of Debt Securities. The Trustee is
required to submit an annual report to the holders of the debt securities
regarding, among other things, the Trustee's eligibility to serve
25
as such, the priority of the Trustee's claims regarding certain advances made by
it, and any action taken by the Trustee materially affecting the debt
securities.
Certificates and Opinions to be Furnished to Trustee. Each indenture will
provide that, in addition to other certificates or opinions that may be
specifically required by other provisions of the indenture, every application by
us or any Subsidiary Guarantor for action by the Trustee shall be accompanied by
a certificate of certain of our officers and an opinion of counsel (who may be
our counsel) stating that, in the opinion of the signers, all conditions
precedent to such action have been complied with by us.
DESCRIPTION OF LIMITED PARTNER INTERESTS
As of December 31, 2001, we had 39,738,974 common units representing
limited partner interests and 125,392 Series B preference units representing
limited partner interests outstanding. On that date, the public owned 29,308,140
common units, or 74% of our outstanding common units, and El Paso Corporation,
through its subsidiaries, owned 10,430,834 common units, or 26% of our
outstanding common units, 125,392 Series B preference units (with a liquidation
value of $143 million) and our 1% general partner interest.
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, preference or other 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 our available cash
constituting cash from operations 1% to our general partner and 99% to our
limited partners, which amounts will be allocated among our limited partners
based on the type and number of units held. 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 $0.325 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),
26
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).
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 unit in an aggregate
amount per such 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 rights of holders of
our Series B preference units described below in "-- Relationship to Series B
Preference Units", 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 Series B 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 their
liquidation value plus any accretions.
Seniority. Prior to October 1, 2010, the Series B preference units do not
participate in distributions except and to the extent we decide, in our sole
discretion, to make distributions on those preference units. On and after
October 1, 2010, the Series B preference unit distribution rights are senior to
the common unit distribution rights, and we will not be permitted to make any
distributions in respect of any of our units until we have paid aggregate
distributions in respect of each of our Series B preference units equal to the
liquidation value plus accretions through the date of the last distribution.
Such rights are cumulative, and arrearages will accrue. Our common units do not
have cumulative distribution participation rights, and no arrearages will
accrue.
Holders of our common units are entitled to fully participate in quarterly
distributions of available cash, subject to the right of our general partner to
receive the incentive distributions described below, the rights of Series B
preference units described below in "-- Relationship to Series B Preference
Units," and the rights of holders of any capital securities we may issue in the
future.
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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 Common Units. Available cash constituting cash from
operations in respect of any calendar quarter will be distributed in the
following manner until October 1, 2010:
- first, to the extent that our general partner has decided (in its sole
discretion) to make a distribution in respect of the Series B preference
units, 99% will be distributed to the Series B preference unitholders,
pro rata, and 1% will be distributed to our general partner until there
has been distributed in respect of each Series B preference unit an
amount equal to such discretionary distribution amount for such quarter;
- second, 99% will be distributed to the common unitholders, pro rata, and
1% 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 made 99% to the limited partners
and 1% to our general partner. For any calendar quarter with respect to which
available cash constituting cash from operations is distributed in respect of
our common units in an amount equal to the minimum quarterly distribution of
$0.275 per unit, 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 1% 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
AVAILABLE CASH
QUARTERLY DISTRIBUTED TO
DISTRIBUTION ---------------------
AMOUNT PER COMMON GENERAL
UNIT UP TO UNITHOLDERS PARTNER
------------ ----------- -------
Minimum Quarterly Distribution........................ $0.275 99% 1%
First Target Distribution............................. $0.325 99% 1%
Second Target Distribution............................ $0.375 86% 14%
Third Target Distribution............................. $0.425 76% 24%
Thereafter............................................ $0.425 51% 49%
In August 2000, we issued $170 million of Series B preference units to an
affiliate of El Paso Corporation in exchange for our Crystal natural gas storage
businesses. These Series B preference units have rights to income allocations on
a cumulative basis, compounded semi-annually at an annual rate of 10%. We are
not obligated to pay cash distributions on these Series B preference units until
2010, when the rate will increase to 12%. On and after October 1, 2010, the
common unitholders will not be entitled to any distributions unless and until
the Series B preference unitholders have received cash distributions equal to
the accumulated income through that date. In October 2001, we redeemed 44,608
Series B
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preference units at their liquidation value of $50 million. As of December 31,
2001, we had 125,392 Series B preference units outstanding (with a liquidation
value of $143 million).
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 99% to unitholders and 1% to our general
partner until a hypothetical holder of each type of our units has received with
respect to such units distributions of available cash constituting cash from
interim capital transactions in an amount equal to such unit's unrecovered
capital (being $10.25 for a common unit and the liquidation value plus
accretions for a Series B preference unit). 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 49% 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 common 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 49% 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. With respect to our common units,
"unrecovered capital" means, generally, the amount by which $10.25 per common
unit exceeds the aggregate distributions of cash from interim capital
transactions with respect to such common unit, as adjusted. For example, the
initial unrecovered capital is $10.25 per common 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 common unit is distributed to
common 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% 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 49% of all distributions of available cash.
The minimum quarterly distribution 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.
Distributions of cash from interim capital transactions will not reduce the
minimum quarterly distribution in the quarter in which they are distributed.
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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 Series B
preference units to a preference over the holders of outstanding common units
upon our liquidation, to the extent of their liquidation value. However, you
cannot be sure that gain or loss will be sufficient to achieve this result.
Series B preference unitholders will not be entitled to share with our general
partner and common unitholders in our assets in excess of their liquidation
value. 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, 99% to the Series B preference unitholders and 1% to our general
partner, until the capital account for each Series B preference unit is
equal to its liquidation value;
- third, 99% to the common unitholders and 1% 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, 99% to all common unitholders and 1% 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 99% to the common unitholders
and 1% to our general partner for any quarter of our existence;
- fifth, 86% to all common unitholders and 14% 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 86% to the common unitholders
and 14% to our general partner for any quarter of our existence;
- sixth, 76% to all common unitholders and 24% 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 76% to the common unitholders
and 24% to our general partner for any quarter of our existence; and
- thereafter, 51% to all common unitholders and 49% to our general partner.
Any loss or unrealized loss will be allocated to the partners as follows:
- first, to the Series B preference units in proportion to the positive
balances of the Series B preference unitholders' capital accounts until
the Series B preference unitholders' capital account balances are reduced
to the amount of their liquidation value;
- second, 1% to our general partner and 99% to all common unitholders in
proportion to the positive balances in their respective capital accounts
until all such capital accounts are reduced to zero;
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- third, to the Series B preference unitholders in proportion to, and to
the extent of, the positive balances in their capital accounts until
their capital accounts are reduced to zero; and
- thereafter, the balance, if any, 100% to our general partner.
LIMITED CALL RIGHT
If, at any time, nonaffiliates 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 of such class 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 of such class over the 20
trading days preceding the date five days before our general partner mails such
notice.
VOTING RIGHTS
Our general partner manages our day-to-day operations and strategic
direction. 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% of our voting units, including common units owned by our general
partner and its affiliates but excluding our Series B preference units. 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 26% ownership interest in our common units as of
the date of this base prospectus. Our voting unitholders 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, voting unitholders of record will be entitled to notice of,
and to vote at, meetings of our voting unitholders and to act with respect to
matters as to which approvals may be solicited. The partnership agreement
provides that voting units 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.
Except to the extent required by law, holders of our Series B preference
units do not have the right to vote.
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. Mellon Investor Services acts as the registrar and transfer agent
for our listed 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 will 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 units:
- 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.
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.
RELATIONSHIP TO SERIES B PREFERENCE UNITS
As of December 31, 2001, there were 125,392 Series B preference units
outstanding (all of which were held by an affiliate of our general partner with
a liquidation value of $143 million), which have certain rights that are
superior to those of common units. These rights include:
- an initial per unit liquidation preference (as of August 30, 2000) of
$1,000, which liquidation preference increases semi-annually at an annual
rate of 10% until October 1, 2010 and 12% thereafter; and
- after October 1, 2010, the right to receive distributions equal to their
liquidation preference before any further distributions are made in
respect of any other limited partner interests.
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 base 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.
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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, our general partner may approve
our 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
- 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 voting units, including
common units owned by our general partner and its affiliates but
excluding our Series B preference units.
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
voting 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.
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% of the outstanding voting units, 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 voting unitholders (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 voting units is
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required, excluding for purposes of such determination voting units held by our
general partner and its affiliates. However, no approval of the voting
unitholders 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 voting units, 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.
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% of the voting units 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 voting units on the record date set pursuant to our
partnership agreement will be entitled to notice of, and to vote at, meetings of
voting unitholders. Meetings of our voting unitholders may only be called by our
general partner or, with respect to meetings called to remove our general
partner, by voting unitholders owning 55% or more of the outstanding voting
units, including common units owned by our general partner and its affiliates
but excluding our Series B preference units.
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 voting units will constitute a quorum at a meeting of voting
unitholders. 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 voting units.
Except for holders of our Series B preference units, 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. Our Series B preference
units do not have voting rights.
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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, 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 provisions 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 Corporation and its affiliates pursuant to the management
agreement.
REDEMPTION OF SERIES B PREFERENCE UNITS
We have the right, at any time, to redeem any or all of the outstanding
Series B preference units for an amount equal to the face value ($1,000) of each
Series B preference unit redeemed, plus all unpaid accretions in respect of each
Series B preference unit redeemed through the date of redemption.
In addition, if our general partner and its affiliates own more than 85% of
the outstanding Series B preference units, our general partner will have the
right to acquire all of the outstanding Series B preference units for the fair
value of those Series B preference units, as determined reasonably and in good
faith by the board of directors of our general partner.
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
36
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.
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 any of the following:
- our general partner's election to dissolve us, if approved by the holders
of at least 66 2/3% of the outstanding voting units;
- the sale, exchange or other disposition of all or substantially all of
our assets and properties;
- bankruptcy or dissolution of our general partner; or
- 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 the third or fourth bullet above, the
holders of at least 66 2/3% of the outstanding voting units 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 voting units, 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 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 limited partner
interests.
This section is a summary of material tax considerations that may be
relevant to you 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 (the "Code"), existing and proposed Treasury 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 unitholders. 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 unitholders. 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 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
(3) 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 current maximum statutory income tax rate for individuals for 2002 is
38.6%. 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 Treasury 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 base 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;
- 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, 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
39
income. We estimate that less than 10% 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 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.
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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
Our distributions 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, known as "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 resulting 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."
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
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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, which are 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:
- interest on indebtedness properly allocable to property held for
investment;
- our interest expense attributed to portfolio income; and
- 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 loss rules less deductible
expenses (other than interest) directly connected with the production of
investment income, but generally does not include gains
42
attributable to the disposition of property held for investment. The IRS has
indicated that the net passive income earned by a publicly-traded partnership
will be treated as investment income to its unitholders. In addition, a
unitholder's share of our portfolio income will be treated as investment income.
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.
Specified 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, referred to in this
discussion as "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.
Treasury Regulations provide that an allocation of items of partnership
income, gain, loss or deduction, other than an allocation required by 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, referred to in this
discussion as 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, with the exception of the issues
described in "-- Tax Consequences of Unit Ownership -- Section 754 Election" and
"-- Disposition of Common Units -- Allocations between Transferors and
Transferees," 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
43
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
Treasury Regulations, underwriting discounts and commissions would be treated as
a syndication costs.
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),
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 Section 168 cost recovery period for
the Section 704(c) built in gain. Recently finalized Treasury Regulations under
Section 197 similarly require a portion of the Section 743(b) adjustment
attributable to amortizable Section 197 intangibles to be amortized over the
remaining amortization period for the Section 704(c) built in gain. These
Regulations apply only to partnerships that have adopted the remedial allocation
method with respect to an item of partnership property, which we may adopt with
respect to certain assets. If a different method is adopted, the Section 743(b)
adjustment attributable to property subject to cost recovery deductions under
Section 168 or amortization under Section 197 must be taken into account as if
it were newly-purchased property placed in service when the transfer giving rise
to the Section 743(b) adjustment occurs. Regardless of the
44
method adopted 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 regulations under Section 743
likely eliminated many of the problems, the depreciation and amortization
methods and useful lives associated 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). See "-- Uniformity of Limited
Partner Interests."
Although our counsel is unable to opine as to the validity of this
approach, we depreciate and amortize the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property (to
the extent of any unamortized 704(c) built in gain 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 that preserves the uniformity
of common units, or treat that portion as non-amortizable to the extent
attributable to property the common basis of which is not amortizable. This
method of amortizing and depreciating the Section 743(b) adjustment may be
inconsistent with the Treasury Regulations. To the extent such Section 743(b)
adjustment is attributable to appreciation in value in excess of the unamortized
704(c) built in gain, we will apply the rules described in the Treasury
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. This might affect
the uniformity of common units. As a result, this 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.
45
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. 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
46
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.
Except as noted below, 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%. The Treasury
Regulations under Section 1(h) of the Code generally provide that a portion of
the capital gain that a limited partner realizes upon the sale or exchange of a
unit or other limited partner interest may be subject to a maximum tax rate of
25% (instead of 20%) to the extent attributable to prior depreciation claimed on
real property. This depreciation is referred to as "unrecaptured Section 1250
gain." 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 for all those interests. 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, which is based
upon the relative fair market values of the interest sold and the interest
retained. Although the ruling is unclear as to how the holding period of the
interests is to be determined once they are combined, recently finalized
Treasury Regulations make it clear that this ruling applies to publicly traded
partnerships such as us, but allow a selling limited partner who can identify
common units transferred with an identifiable holding period to elect to use the
actual holding period of the units transferred. Thus, according to the ruling, 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,
but, according to the Treasury Regulations under Section 1223 of the Code, may
designate specific common units sold for purposes of determining the holding
period of units transferred. A limited partner electing to use the actual
holding period of common units transferred must use that identification method
for all subsequent sales or exchanges of common units. 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 this ruling and the application of the Treasury Regulations.
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.
47
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 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. 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
48
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 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). 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."
Consistent with Treasury Regulations promulgated under Section 743 of the
Internal Revenue Code, 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), which is not
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
this 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."
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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 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 taxes at the highest marginal
rate applicable to individuals at the time of distribution (currently at the
rate of 38.6%) 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-8BEN 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
50
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.
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.
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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.
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
- with respect to which there is, or was, "substantial authority" or
- 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%.
52
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, Alabama, Louisiana, Mississippi and New Mexico; 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.
TAX CONSEQUENCES OF OWNERSHIP OF DEBT SECURITIES
A description of the material federal income tax consequences of the
acquisition, ownership and disposition of debt securities will be set forth in
the prospectus supplement relating to the offering of debt securities.
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 assets would
53
be considered "plan assets," our general partner would be considered 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 other 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. If our assets were deemed to be "plan assets" and our general partner
was thus considered a fiduciary of a plan, any decisions involving our assets
would be subject to the prudency and diversification standard set forth in the
preceding paragraph, as well as the trust requirements of ERISA.
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, and by IRAs and other employee benefit plans not subject to ERISA (such
as governmental or church 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
and debt securities described in this base 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.
BY UNDERWRITERS
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.
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.
DIRECT SALES
These securities may also be sold directly by us. In this case, no
underwriters or agents would be involved. We may use electronic media, including
the Internet, to sell offered securities directly.
BY AGENTS
These securities may also be sold through agents designated by us. The
agents agree to use their reasonable best efforts to solicit purchases for the
period of their appointment.
GENERAL INFORMATION
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
55
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. Agents, dealers or underwriters will not have any
responsibility in respect of the validity of such arrangements or our
performance or such institutional investors thereunder.
Certain of the underwriters, agents and their affiliates may be customers
of, engage in transactions with and perform services for us in the ordinary
course of business.
LEGAL MATTERS
Certain legal matters with respect to the legality of the capital
securities representing limited partner interests and debt securities 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 of El Paso Energy Partners, L.P.,
Deepwater Holdings, L.L.C., Neptune Pipeline Company, L.L.C., VK -- Deepwater
Gathering Company, L.L.C. and Crystal Holding, L.L.C., and the financial
statements of Manta Ray Gathering Company, L.L.C., Ewing Bank Gathering Company,
L.L.C., El Paso Energy Partners Operating Company, L.L.C., VK -- Main Pass
Gathering Company, L.L.C., El Paso Energy Partners Deepwater, L.L.C., Delos
Offshore Company, L.L.C., Flextrend Development Company, L.L.C., El Paso Energy
Partners Oil Transport, L.L.C., Poseidon Pipeline Company, L.L.C. and Green
Canyon Pipeline Company, L.P., each of which is incorporated in this prospectus
by reference to our Annual Report on Form 10-K for the year ended December 31,
2000, and the consolidated balance sheet of El Paso Energy Partners Company and
the financial statements of El Paso Energy Partners Finance Corporation, each of
which is incorporated in this prospectus by reference to our Current Report on
Form 8-K filed on August 28, 2001, have all 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 financial statements of Poseidon Oil Pipeline Company, L.L.C.,
incorporated in this prospectus by reference to our Annual Report on Form 10-K
for the year ended December 31, 2000, has been so incorporated in reliance on
the report of Arthur Andersen LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
Information derived from the report of Netherland, Sewell & Associates,
Inc., independent petroleum engineers, with respect to our estimated oil and
natural gas reserves incorporated in this prospectus by reference to our Annual
Report on Form 10-K for the year ended December 31, 2000, has been so
incorporated in reliance on the authority of said firm as experts with respect
to such matters contained in their report.
56
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- --------------------------------------------------------------------------------
$1,000,000,000
EL PASO ENERGY PARTNERS, L.P.
EL PASO ENERGY PARTNERS FINANCE CORPORATION
CAPITAL SECURITIES
REPRESENTING LIMITED PARTNER INTERESTS
DEBT SECURITIES
-------------------------
PROSPECTUS
-------------------------
February [ ], 2002
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following sets forth the estimated expenses and costs expected to be
incurred in connection with the issuance and distribution of the securities
registered hereby. All of such costs will be borne by us.
Securities and Exchange Commission registration fee......... $ 92,000
Printing and engraving expenses............................. 125,000
Legal fees and expenses..................................... 100,000
Accounting fees and expenses................................ 250,000
Miscellaneous............................................... 250,000
--------
Total.................................................. $817,000
========
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The section of the base prospectus entitled "Certain Other Partnership
Agreement Provisions -- Indemnification" is incorporated herein by reference.
Subject to any terms, conditions or restrictions set forth in the Partnership
Agreement, Section 17-108 of the Delaware Revised Uniform Limited Partnership
Act empowers a Delaware limited partnership to indemnify and hold harmless any
partner or other person from and against all claims and demands whatsoever.
Section 145(a) of the General Corporation Law of the State of Delaware (the
"DGCL") provides that a Delaware corporation may indemnify any person who was or
is a party or is threatened to be made a party to any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (other than an action by or in the right of the corporation) by
reason of the fact that he is or was a director, officer, employee or agent of
the corporation or is or was serving at the request of the corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against expenses (including attorney fees),
judgments, fines and amounts paid in settlement actually and reasonably incurred
by him in connection with such action, suit or proceeding if he acted in good
faith and in a manner he reasonably believed to be in or not opposed to the best
interests of the corporation, and, with respect to any criminal action or
proceeding, had no reasonable cause to believe his conduct was unlawful.
Section 145(b) of the DGCL provides that a Delaware corporation may
indemnify any person who was or is a party or is threatened to be made a party
to any threatened, pending or completed action or suit by or in the right of the
corporation to procure a judgment in its favor by reason of the fact that such
person set forth against expenses (including attorney fees) actually and
reasonably incurred by him in connection with the defense or settlement of such
action or suit if he acted above in good faith and in a manner he reasonably
believed to be in or not opposed to the best interest of the corporation, except
that no indemnification may be made in respect of any claim, issue or matter as
to which such person shall have been adjudged to be liable to the corporation
unless and only to the extent that the court in which such action or suit was
brought shall determine, that despite the adjudication of liability, but in view
of all the circumstances of the case, such person is fairly and reasonably
entitled to be indemnified for such expenses which the court shall deem proper.
Section 145 of the DGCL further provides that to the extent a present or
former director or officer of a corporation has been successful in the defense
of any action, suit or proceeding referred to in subsections (a) and (b) or in
the defense of any claim, issue, or matter therein, he shall be indemnified
against any expenses (including attorney fees) actually and reasonably incurred
by him in connection therewith; that indemnification provided for by Section 145
shall not be deemed exclusive of any other rights to which the indemnified party
may be entitled both to actions in his official capacity and in other capacities
while holding such office; and that the corporation may purchase and maintain
insurance on behalf of a director,
II-1
officer, employee or agent of the corporation against any liability asserted
against him or incurred by him in any such capacity or arising out of his status
as such whether or not the corporation would have the power to indemnify him
against such liabilities under Section 145.
Section 102(b)(7) of the DGCL provides that a corporation in its original
certificate of incorporation or an amendment thereto validly approved by
stockholders may eliminate or limit personal liability of members of its board
of directors or governing body for breach of a director's fiduciary duty.
However, no such provision may eliminate or limit the liability of a director
for breaching his duty of loyalty, not acting in good faith, failing to act in
good faith, engaging in intentional misconduct, knowingly violating a law,
paying a dividend or approving a stock repurchase which was illegal or obtaining
an improper personal benefit. A provision of this type has no effect on the
availability of equitable remedies, such as injunction or rescission, for breach
of fiduciary duty.
The Certificate of Incorporation of our general partner contains a
provision which limits the liability of the directors of our general partner to
our general partner or its stockholder (in their capacity as directors but not
in their capacity as officers) to the fullest extent permitted by the DGCL. In
addition, the Amended and Restated Bylaws of our general partner (as amended and
restated, the "Bylaws"), in substance, require our general partner to indemnify
each person who is or was a director, officer, employee or agent of our general
partner to the full extent permitted by the laws of the state of Delaware in the
event such person is involved in legal proceedings by reason of the fact that he
is or was a director, officer, employee or agent of our general partner, or is
or was serving at our general partner's request as a director, officer, employee
or agent of our general partner and its subsidiaries, another corporation,
partnership or other enterprise. Our general partner is also required to advance
to such persons payments incurred in defending a proceeding to which
indemnification might apply, provided the recipient provides an undertaking
agreeing to repay all such advanced amounts if it is ultimately determined that
he is not entitled to be indemnified. In addition, the Bylaws specifically
provide that the indemnification rights granted thereunder are non-exclusive.
Our general partner has entered into indemnification agreements with
certain of its current and past directors providing for indemnification to the
full extent permitted by the laws of the state of Delaware. These agreements
provide for specific procedures to assure the directors' rights to
indemnification, including procedures for directors to submit claims, for
determination of directors' entitlement to indemnification (including the
allocation of the burden of proof and selection of a reviewing party) and for
enforcement of directors' indemnification rights.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers or persons controlling us or our general
partner pursuant to the foregoing, us and our general partner have been informed
that in the opinion of the SEC such indemnification is against public policy as
expressed in the Securities Act and is therefore unenforceable.
Reference is made to Exhibit 1.1 hereto, which will contain provisions for
indemnification of us, our general partner and its directors, officers, and any
controlling persons, against certain liabilities for information furnished by
the underwriters and/or agents, as applicable, expressly for use in a prospectus
supplement.
II-2
ITEM 16. EXHIBITS
The following is a list of exhibits filed as part of this Registration
Statement. Where so indicated, exhibits which were previously filed are
incorporated by reference.
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1# Form of Underwriting Agreement.
4.1 Our Certificate of Limited Partnership (filed as Exhibit 3.1
to our Registration Statement on Form S-1, File No.
33-55642); Certificate of Amendment to the Certificate of
Limited Partnership (filed as Exhibit 3.1 to our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000,
File No. 001-11680).
4.2 Our Second Amended and Restated Agreement of Limited
Partnership (filed as Exhibit 3.B to our Current Report on
Form 8-K dated March 6, 2001).
4.3 Form of Certificate Evidencing Preference Units Representing
Limited Partner Interests (filed as Exhibit 4.1 to Amendment
No. 2 to our Registration Statement on Form S-1, File No.
33-55642).
4.4 Form of Certificate Evidencing Common Units Representing
Limited Partner Interests (filed as Exhibit 4.2 to Amendment
No. 2 to our Registration Statement on Form S-1, File No.
33-55642).
4.5# Form of Indenture.
4.6 Form of Debt Securities (included in Exhibit 4.5).
5.1* Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to
the legality of securities offered hereby.
8.1* Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
relating to tax matters.
12.1** Calculation of Ratio of Earnings to Fixed Charges.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Arthur Andersen LLP.
23.3* Consent of Netherland, Sewell & Associates, Inc.
23.5 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5.1).
24.1** Power of Attorney.
25.1# Statement of Eligibility of Trustee on Form T-1.
99.1** List of Subsidiary Guarantors.
- ---------------
* Filed herewith as an exhibit to this Registration Statement.
**Filed previously.
# To be filed as an exhibit to a Current Report on Form 8-K or as an amendment
to this Registration Statement.
ITEM 17. UNDERTAKINGS
(A) The undersigned registrants hereby undertake:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
i. To include any prospectus required by Section 10(a)(3) of the
Securities Act of 1933;
ii. To reflect in the prospectus any facts or events arising after
the effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed
with the Commission pursuant to Rule 424(b) if, in the aggregate, the
changes in volume and price represent no more than 20 percent change
II-3
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
iii. To include any material information with respect to the plan
of distribution not previously disclosed in the registration statement
or any material change to such information in the registration
statement;
provided, however, that paragraphs (A)(1)(i) and (A)(1)(ii) do not apply if the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed with or furnished to the
commission by the registrant pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 that are incorporated by reference in the registration
statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed
to be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
(B) The undersigned registrants hereby undertake that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(C) Insofar as indemnification for liabilities arising under the Securities
Act of 1993 may be permitted to directors, officers, and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrants have been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses
incurred or paid by a director, officer, or controlling person of the registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer, or controlling person in connection with the securities being
registered, the registrants will, unless in the opinion of counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by them is against public
policy as expressed in the Act and will be governed by the final adjudication of
such issue.
(D) The registrants hereby undertake to file an application for the purpose
of determining the eligibility of the trustee to act under subsection (a) of
Section 310 of the Trust Indenture Act (the "Act") in accordance with the rules
and regulations prescribed by the Securities and Exchange Commission under
Section 305(b)(2) of the Act.
II-4
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the city of Houston, state of Texas, on February 7, 2002.
EL PASO ENERGY PARTNERS, L.P.
(Registrant)
By: El Paso Energy Partners Company,
its General Partner
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Chief Financial Officer and
Vice President
---------------------
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed below by the following persons in
the capacities and on the dates as indicated:
TITLE DATE
----- ----
* Chairman of the Board February 7, 2002
------------------------------------------------ and Director(1)
William A. Wise
* Chief Executive Officer February 7, 2002
------------------------------------------------ and Director(2)
Robert G. Phillips
* Chief Financial Officer February 7, 2002
------------------------------------------------ and Vice President(3)
Keith B. Forman
* President and Director(4) February 7, 2002
------------------------------------------------
James H. Lytal
* Senior Vice President and February 7, 2002
------------------------------------------------ Controller (Principal
D. Mark Leland Accounting Officer)(5)
* Executive Vice President and February 7, 2002
------------------------------------------------ Director(6)
H. Brent Austin
* Director(7) February 7, 2002
------------------------------------------------
Michael B. Bracy
* Director(7) February 7, 2002
------------------------------------------------
H. Douglas Church
* Director(7) February 7, 2002
------------------------------------------------
Malcolm Wallop
* Director(7) February 7, 2002
------------------------------------------------
Kenneth L. Smalley
*By: /s/ H. BRENT AUSTIN
-------------------------------------------
H. Brent Austin
Attorney-in-fact
II-5
- ---------------
1. William A. Wise has signed this registration statement in his capacity as the
Chairman of the Board and Director of El Paso Energy Partners Company and El
Paso Energy Partners Finance Corporation
2. Robert G. Phillips has signed this registration statement in his capacity as
Chief Executive Officer and Director of El Paso Energy Partners Company and
El Paso Energy Partners Finance Corporation, and Chief Executive Officer of
El Paso Energy Partners, L.P., Argo II, L.L.C., El Paso Energy Partners
Deepwater, L.L.C., Delos Offshore Company, L.L.C., El Paso Energy Partners
Oil Transport, L.L.C., El Paso Energy Partners Operating Company, L.L.C.
Flextrend Development Company, L.L.C., Green Canyon Pipeline Company, L.P.,
Manta Ray Gathering Company, L.L.C., Poseidon Pipeline Company, L.L.C., VK
Deepwater Gathering Company, L.L.C. and VK-Main Pass Gathering Company,
L.L.C.
3. Keith B. Forman has signed this registration statement in his capacity as
Vice President and Chief Financial Officer of El Paso Energy Partners
Company, El Paso Energy Partners, L.P., El Paso Energy Partners Finance
Corporation, Argo II, L.L.C., El Paso Energy Partners Deepwater, L.L.C.,
Delos Offshore Company, L.L.C., El Paso Energy Partners Oil Transport,
L.L.C., El Paso Energy Partners Operating Company, L.L.C. Flextrend
Development Company, L.L.C., Green Canyon Pipeline Company, L.P., Manta Ray
Gathering Company, L.L.C., Poseidon Pipeline Company, L.L.C., VK Deepwater
Gathering Company, L.L.C., VK-Main Pass Gathering Company, L.L.C., First
Reserve Gas, L.L.C., Hattiesburg Industrial Gas Sales Company, L.L.C., Petal
Gas Storage Company, L.L.C., Crystal Holding, L.L.C. and Crystal Properties
and Trading Company, L.L.C.
4. James H. Lytal has signed this registration statement in his capacity as
President and Director of El Paso Energy Partners Company, and El Paso Energy
Partners Finance Corporation; President of El Paso Energy Partners, L.P.,
Argo II, L.L.C., El Paso Energy Partners Deepwater, L.L.C., Delos Offshore
Company, L.L.C., El Paso Energy Partners Oil Transport, L.L.C., El Paso
Energy Partners Operating Company, L.L.C. Flextrend Development Company,
L.L.C., Green Canyon Pipeline Company, L.P., Manta Ray Gathering Company,
L.L.C., Poseidon Pipeline Company, L.L.C., VK Deepwater Gathering Company,
L.L.C. and VK-Main Pass Gathering Company, L.L.C.
5. D. Mark Leland has signed this registration statement in his capacity as
Senior Vice President and Controller of El Paso Energy Partners Company, El
Paso Energy Partners, L.P., El Paso Energy Partners Finance Corporation, Argo
II, L.L.C., El Paso Energy Partners Deepwater, L.L.C., Delos Offshore
Company, L.L.C., El Paso Energy Partners Oil Transport, L.L.C., El Paso
Energy Partners Operating Company, L.L.C. Flextrend Development Company,
L.L.C., Green Canyon Pipeline Company, L.P., Manta Ray Gathering Company,
L.L.C., Poseidon Pipeline Company, L.L.C., VK Deepwater Gathering Company,
L.L.C., VK-Main Pass Gathering Company, L.L.C., First Reserve Gas, L.L.C.,
Hattiesburg Industrial Gas Sales Company, L.L.C., Petal Gas Storage Company,
L.L.C., Crystal Holding, L.L.C. and Crystal Properties and Trading Company,
L.L.C.
II-6
6. H. Brent Austin has signed this registration statement in his capacity as
Executive Vice President and Director of El Paso Energy Partners Company and
El Paso Energy Partners Finance Corporation, and Executive Vice President of
El Paso Energy Partners, L.P., Argo II, L.L.C., El Paso Energy Partners
Deepwater, L.L.C., Delos Offshore Company, L.L.C., El Paso Energy Partners
Oil Transport, L.L.C., El Paso Energy Partners Operating Company, L.L.C.
Flextrend Development Company, L.L.C., Green Canyon Pipeline Company, L.P.,
Manta Ray Gathering Company, L.L.C., Poseidon Pipeline Company, L.L.C., VK
Deepwater Gathering Company, L.L.C. and VK-Main Pass Gathering Company,
L.L.C., First Reserve Gas, L.L.C., Hattiesburg Gas Storage Company,
Hattiesburg Industrial Gas Sales Company, L.L.C., Petal Gas Storage Company,
L.L.C., Crystal Holding, L.L.C. and Crystal Properties and Trading Company,
L.L.C.
7. Michael B. Bracy, H. Douglas Church, Malcolm Wallop and Kenneth E. Smalley
have signed this registration statement in their capacities as Directors of
El Paso Energy Partners Company, general partner of El Paso Energy Partners,
L.P.
EL PASO ENERGY PARTNERS FINANCE
CORPORATION
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
ARGO II, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
DELOS OFFSHORE COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
II-7
EL PASO ENERGY PARTNERS DEEPWATER,
L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
EL PASO ENERGY PARTNERS OIL TRANSPORT,
L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
EL PASO ENERGY PARTNERS OPERATING
COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
II-8
GREEN CANYON PIPE LINE COMPANY, L.P.
By: /s/ KEITH B. FORMAN
----------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
MANTA RAY GATHERING COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
PETAL GAS STORAGE COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
POSEIDON PIPELINE COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
II-9
VK DEEPWATER GATHERING COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
----------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
VK-MAIN PASS GATHERING COMPANY, L.L.C.
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
CRYSTAL HOLDING, L.L.C.
By: /s/ JOE N. AVERETT, JR.
------------------------------------
Joe N. Averett, Jr.
President and
Chief Executive Officer
CRYSTAL PROPERTIES AND TRADING
COMPANY, L.L.C.
By: /s/ JOE N. AVERETT, JR.
------------------------------------
Joe N. Averett, Jr.
President and
Chief Executive Officer
II-10
FIRST RESERVE GAS, L.L.C.
By: /s/ JOE N. AVERETT, JR.
----------------------------------
Joe N. Averett, Jr.
President and
Chief Executive Officer
HATTIESBURG INDUSTRIAL GAS SALES
COMPANY, L.L.C.
By: /s/ JOE N. AVERETT, JR.
------------------------------------
Joe N. Averett, Jr.
President and
Chief Executive Officer
HATTIESBURG GAS STORAGE COMPANY
By: HATTIESBURG INDUSTRIAL GAS SALES
COMPANY, L.L.C.
Its Partner
By: /s/ JOE N. AVERETT, JR.
------------------------------------
Joe N. Averett, Jr.
President and
Chief Executive Officer
By: FIRST RESERVE GAS, L.L.C.
Its Partner
By: /s/ JOE N. AVERETT, JR.
------------------------------------
Joe N. Averett, Jr.
President and
Chief Executive Officer
II-11
EAST BREAKS GATHERING COMPANY, L.L.C.
By: El Paso Energy Partners Deepwater,
L.L.C.
Its Sole Member
By: El Paso Energy Partners, L.P.
Its Managing Member
By: El Paso Energy Partners
Company
Its General Partner
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
HIGH ISLAND OFFSHORE SYSTEM, L.L.C.
By: El Paso Energy Partners Deepwater,
L.L.C.
Its Sole Member
By: El Paso Energy Partners, L.P.
Its Managing Member
By: El Paso Energy Partners
Company
Its General Partner
By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and
Chief Financial Officer
II-12
EXHIBIT INDEX
EXHIBIT
NUMBER DESCRIPTION
- ------- -----------
1.1# Form of Underwriting Agreement.
4.1 Our Certificate of Limited Partnership (filed as Exhibit 3.1
to our Registration Statement on Form S-1, File No.
33-55642); Certificate of Amendment to the Certificate of
Limited Partnership (filed as Exhibit 3.1 to our Quarterly
Report on Form 10-Q for the quarter ended March 31, 2000,
File No. 001-11680).
4.2 Our Second Amended and Restated Agreement of Limited
Partnership (filed as Exhibit 3.B to our Current Report on
Form 8-K dated March 6, 2001).
4.3 Form of Certificate Evidencing Preference Units Representing
Limited Partner Interests (filed as Exhibit 4.1 to Amendment
No. 2 to our Registration Statement on Form S-1, File No.
33-55642).
4.4 Form of Certificate Evidencing Common Units Representing
Limited Partner Interests (filed as Exhibit 4.2 to Amendment
No. 2 to our Registration Statement on Form S-1, File No.
33-55642).
4.5# Form of Indenture.
4.6 Form of Debt Securities (included in Exhibit 4.5).
5.1* Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P. as to
the legality of securities offered hereby.
8.1* Opinion of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
relating to tax matters.
12.1** Calculation of Ratio of Earnings to Fixed Charges.
23.1* Consent of PricewaterhouseCoopers LLP.
23.2* Consent of Arthur Andersen LLP.
23.3* Consent of Netherland, Sewell & Associates, Inc.
23.5 Consent of Akin, Gump, Strauss, Hauer & Feld, L.L.P.
(included in Exhibit 5.1).
24.1** Power of Attorney.
25.1# Statement of Eligibility of Trustee on Form T-1.
99.1** List of Subsidiary Guarantors.
- ---------------
* Filed herewith as an exhibit to this Registration Statement.
**Filed previously.
# To be filed as an exhibit to a Current Report on Form 8-K or as an amendment
to this Registration Statement.
EXHIBIT 5.1
[AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. LETTERHEAD]
February 7, 2002
El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
1001 Louisiana Street, 30th Floor
Houston, Texas 77002
Re: El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
Registration Statement Form S-3
(Registration Nos. 333-81772 through 333-81772-20)
Ladies and Gentlemen:
We have acted as counsel to El Paso Energy Partners, L.P., a Delaware
limited partnership (the "PARTNERSHIP"), and El Paso Energy Partners Finance
Corporation, a Delaware corporation ("EL PASO FINANCE" and, together with the
Partnership, the "COMPANIES"), in connection with the registration, pursuant to
a registration statement on Form S-3, as amended (the "REGISTRATION STATEMENT"),
filed with the Securities and Exchange Commission (the "COMMISSION") under the
Securities Act of 1933, as amended (the "ACT"), relating to the offering and
sale from time to time, as set forth in the Registration Statement, the form of
prospectus contained therein (the "PROSPECTUS"), and one or more supplements to
the Prospectus (each, a "PROSPECTUS SUPPLEMENT"), of one or more classes or
series of capital securities representing limited partnership interests of the
Partnership (the "COMMON UNITS"), one or more series of debt securities (the
"DEBT SECURITIES") of the Companies, and of the guarantees (the "GUARANTEES") of
the guarantors (the "GUARANTORS") listed in the Registration Statement
(collectively, the Common Units, the Debt Securities and the Guarantees are the
"SECURITIES"), having an aggregate offering price not to exceed U.S.
$1,000,000,000, on terms to be determined at the time of each offering. The Debt
Securities will be issued under an indenture (the "INDENTURE") to be entered
into by the Companies, the Guarantors and a trustee to be named therein. We have
examined originals or certified copies of such corporate records of the
Companies and other certificates and documents
El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
February 7, 2002
Page 2
of officials of the Companies, public officials and others as we have deemed
appropriate for purposes of this letter. We have assumed the genuineness of all
signatures, the authenticity of all documents submitted to us as originals, and
the conformity to authentic original documents of all copies submitted to us as
conformed and certified or reproduced copies.
Based upon the foregoing and subject to the assumptions, exceptions,
qualifications and limitations set forth hereinafter, we are of the opinion
that:
1. With respect to the Common Units, when (i) the Partnership has taken
all necessary action to approve the issuance of such Common Units, the terms of
the offering thereof and related matters, and (ii) such Common Units have been
issued and delivered in accordance with the terms of the applicable definitive
purchase, underwriting or similar agreement approved by the Partnership upon
payment (or delivery) of the consideration therefor provided for therein, (a)
such Common Units will have been duly authorized and validly issued and (b) on
the assumption that the holder of such Common Units is not also a general
partner of the Partnership and does not participate in the control of the
Partnership's business, such Common Units will be fully paid and nonassessable.
2. With respect to the Debt Securities and the Guarantees, when (i) the
Companies and the Guarantors have taken all necessary action to approve the
issuance of such Debt Securities and Guarantees, the terms of the offering
thereof and related matters, (ii) the Debt Securities have been duly executed,
authenticated, issued and delivered in accordance with the terms of the
Indenture, (iii) the Debt Securities and Guarantees have been duly executed,
authenticated, issued and delivered in accordance with the terms of the
applicable definitive purchase, underwriting or similar agreement approved by
the Companies upon payment (or delivery) of the consideration therefor provided
for therein, (iv) the Indenture has been duly qualified under the Trust
Indenture Act of 1939, as amended, and (v) applicable provisions of "blue sky"
laws have been complied with,
(a) the Debt Securities will have been duly authorized by all
necessary partnership or corporate action, as applicable, on
the part of the Companies, and will be valid and binding
obligations of the Companies and will be entitled to the
benefits of the Indenture; and
(b) the Guarantees will have been duly authorized by all necessary
partnership or company action, as applicable, on the part of
the Guarantors, and will be valid and binding obligations of
each Guarantor.
The opinions and other matters in this letter are qualified in their
entirety and subject to the following:
A. We have assumed that (i) the Registration Statement, and any
amendments thereto (including post-effective amendments) will
have become effective and such
El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
February 7, 2002
Page 3
effectiveness shall not have been terminated or rescinded, (ii)
a Prospectus Supplement will have been prepared and filed with
the Commission describing the Securities offered thereby, (iii)
all Securities will have been issued and sold in compliance with
applicable United States federal and state securities Laws
(hereinafter defined) and in the manner stated in the
Registration Statement and the applicable Prospectus Supplement,
(iv) a definitive purchase, underwriting or similar agreement
with respect to any Securities offered will have been duly
authorized and validly executed and delivered by the Partnership
(and, if appropriate, El Paso Finance) and the other parties
thereto and (v) at the time of the issuance of the Securities
(a) each of the Companies and the Guarantors validly exists and
is duly qualified and in good standing under the laws of its
respective jurisdiction of incorporation or formation, (b) each
of the Companies and the Guarantors has the necessary corporate,
partnership, limited liability company or other power and due
authorization, as applicable, and (c) the organizational or
charter documents of each of the Companies and the Guarantors
are in full force and effect and have not been amended,
restated, supplemented or otherwise altered, and there has been
no authorization of any such amendment, restatement, supplement
or other alteration, since the date hereof.
B. The opinion set forth in paragraph 1(b) is subject to the
qualification that (i) under Section 17-303(a) of the Delaware
Revised Uniform Limited Partnership Act (the "DELAWARE ACT"), a
limited partner who participates in the "control," within the
meaning of the Delaware Act, of the business of a partnership or
takes action which constitutes "control" may be held personally
liable for such partnership's obligations under the Delaware Act
to the same extent as a general partner and (ii) under Section
17-607 of the Delaware Act, a limited partner who (x) receives a
distribution that, at the time of distribution and after giving
effect to the distribution, causes all liabilities of the
Partnership, other than liabilities to partners on account of
their partnership interests and non-recourse liabilities, to
exceed the fair value of the assets of the limited partnership
(except the fair value of property subject to a liability for
which the recourse of creditors is limited, which property shall
be included in the assets of the limited partnership only to the
extent that the fair value of such property exceeds such
liability) and (y) knew at the time of such distribution that
the distribution was in violation of the Delaware Act shall be
liable to the limited partnership for the amount of the
distribution for three years from the date of the distribution.
C. We express no opinion as to the laws of any jurisdiction other
than any published constitutions, treaties, laws, rules or
regulations or judicial or administrative decisions ("LAWS") of
(i) the federal Laws of the United States and (ii) the General
Corporation Law, Revised Uniform Partnership Act, Revised
Uniform
El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
February 7, 2002
Page 4
Limited Partnership Act and Limited Liability Company Act of the
State of Delaware.
D. This law firm is a registered limited liability partnership
organized under the laws of the state of Texas.
E. The matters expressed in this letter are subject to and
qualified and limited by (i) applicable bankruptcy, insolvency,
fraudulent transfer and conveyance, reorganization, moratorium
and similar laws affecting creditors' rights and remedies
generally, (ii) general principles of equity, including
principles of commercial reasonableness, good faith and fair
dealing (regardless of whether enforcement is sought in a
proceeding at law or in equity), (iii) commercial reasonableness
and unconscionability and an implied covenant of good faith and
fair dealing, (iv) the power of the courts to award damages in
lieu of equitable remedies, (v) securities Laws and public
policy underlying such Laws with respect to rights to
indemnification and contribution and (vi) limitations on the
waiver of rights under usury law.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Discussion. In giving
this consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Act and the rules and
regulations thereunder. We also consent to your filing copies of this opinion as
an exhibit to the Registration Statement.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
EXHIBIT 8.1
[AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P. LETTERHEAD]
February 7, 2002
El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
1001 Louisiana Street, 30th Floor
Houston, Texas 77002
Re: El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
Registration Statement Form S-3 (Registration Nos. 333-81772
through 333-81772-20)
Ladies and Gentlemen:
We have acted as counsel to El Paso Energy Partners, L.P., a Delaware
limited partnership (the "PARTNERSHIP"), and El Paso Energy Partners Finance
Corporation, a Delaware corporation (together with the Partnership, the
"COMPANIES"), in connection with the registration, pursuant to a registration
statement on Form S-3, as amended (the "REGISTRATION STATEMENT"), filed with the
Securities and Exchange Commission under the Securities Act of 1933, as amended
(the "ACT"), relating to the offering and sale (the "OFFERING") from time to
time, as set forth in the Registration Statement, the form of prospectus
contained therein (the "PROSPECTUS"), and one or more supplements to the
Prospectus, of one or more classes or series of capital securities representing
limited partnership interests of the Partnership (the "COMMON UNITS"), one or
more series of debt securities (the "DEBT SECURITIES") of the Companies, and of
the guarantees (the "GUARANTEES") of the guarantors (the "GUARANTORS") listed in
the Registration Statement (collectively, the Common Units, the Debt Securities
and the Guarantees are the "SECURITIES"), having an aggregate offering price not
to exceed U.S. $1,000,000,000, on terms to be determined at the time of each
offering. The Debt Securities will be issued under an indenture to be entered
into by the Companies, the Guarantors and a trustee to be named therein. In
El Paso Energy Partners, L.P.
El Paso Energy Partners Finance Corporation
February 7, 2002
Page 2
connection therewith, we have participated in the discussion set forth under the
caption "Income Tax Considerations" (the "DISCUSSION") in the Registration
Statement with respect to the Securities.
The Discussion, subject to the qualifications stated therein,
constitutes our opinion as to the material United Stated federal income tax
consequences for purchasers of the Common Units pursuant to the Offering.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name in the Discussion. In giving
this consent, we do not thereby admit that we are within the category of persons
whose consent is required under Section 7 of the Act and the rules and
regulations thereunder. We also consent to your filing copies of this opinion as
an exhibit to the Registration Statement.
Very truly yours,
/s/ AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
AKIN, GUMP, STRAUSS, HAUER & FELD, L.L.P.
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3, of El Paso Energy Partners, L.P. (the "PARTNERSHIP"), El
Paso Energy Partners Finance Corporation, and the Subsidiary Guarantors listed
therein of: (A)(i) our report dated March 7, 2001 relating to the consolidated
financial statements of the Partnership and subsidiaries, (ii) our report dated
March 28, 2001 relating to the consolidated financial statements of Deepwater
Holdings, L.L.C., (iii) our report dated March 29, 2001 relating to the
consolidated financial statements of Neptune Pipeline Company, L.L.C., (iv) our
report dated March 28, 2001 relating to the financial statements of Manta Ray
Gathering Company, L.L.C., (v) our report dated March 28, 2001 relating to the
financial statements of Ewing Bank Gathering Company, L.L.C., (vi) our report
dated March 28, 2001 relating to the financial statements of El Paso Energy
Partners Operating Company, L.L.C., (vii) our report dated March 28, 2001
relating to the financial statements of VK - Main Pass Gathering Company,
L.L.C., (viii) our report dated March 28, 2001 relating to the financial
statements of El Paso Energy Partners Deepwater, L.L.C., (ix) our report dated
March 28, 2001 relating to the financial statements of Delos Offshore Company,
L.L.C., (x) our report dated March 28, 2001 relating to the consolidated
financial statements of VK - Deepwater Gathering Company, L.L.C., (xi) our
report dated March 28, 2001 relating to the financial statements of El Paso
Energy Partners Oil Transport, L.L.C., (xii) our report dated March 28, 2001
relating to the financial statements of Poseidon Pipeline Company, L.L.C.,
(xiii) our report dated March 28, 2001 relating to the financial statements of
Flextrend Development Company, L.L.C., (xiv) our report dated March 28, 2001
relating to the consolidated financial statements of Crystal Holding, L.L.C. and
(xv) our report dated March 28, 2001 relating to the financial statements of
Green Canyon Pipeline Company, L.P., each of which appears in the Partnership's
Annual Report on Form 10-K for the year ended December 31, 2000; and (B)(i) our
report dated August 24, 2001 relating to the consolidated balance sheet of El
Paso Energy Partners Company and (ii) our report dated August 24, 2001 relating
to the financial statements of El Paso Energy Partners Finance Corporation, each
of which appears in the Partnership's Current Report on Form 8-K filed on August
28, 2001. We also consent to the reference to us under the heading "Experts" in
this Registration Statement.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
February 7, 2002
EXHIBIT 23.2
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
We hereby consent to the incorporation by reference into this Registration
Statement on Form S-3 of El Paso Energy Partners, L.P., El Paso Energy Partners
Finance Corporation, and the Subsidiary Guarantors listed therein of our report
dated March 16, 2001 relating to the balance sheets of Poseidon Oil Pipeline
Company, L.L.C. as of December 31, 2000 and 1999, and the related statements of
income, members' equity and cash flows for each of the three years in the period
ended December 31, 2000, each of which is included in the Annual Report on Form
10-K of El Paso Energy Partners, L.P. for the year ended December 31, 2000, and
to all references to our Firm included in this Registration Statement.
/s/ Arthur Andersen LLP
Houston, Texas
February 7, 2002
EXHIBIT 23.3
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the incorporation by reference in this Registration
Statement on Form S-3 of El Paso Energy Partners, L.P., El Paso Energy Partners
Finance Corporation, and the Subsidiary Guarantors listed therein of our reserve
reports dated as of December 31, 1998, 1999 and 2000, each of which is included
in the Annual Report on Form 10-K of El Paso Energy Partners, L.P. for the year
ended December 31, 2000. We also consent to the reference to us under the
heading "Experts" in this Registration Statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ FREDERIC D. SEWELL
------------------------------------------
Name: Frederic D. Sewell
------------------------------------------
Title: Chairman and Chief Executive Officer
------------------------------------------
Dallas, Texas
February 7, 2002
