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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from __________ to__________
COMMISSION FILE NO. 1-11680
EL PASO ENERGY PARTNERS, L.P.
(Exact name of registrant as specified in its charter)
DELAWARE 76-0396023
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
EL PASO BUILDING 77002
1001 LOUISIANA STREET (Zip Code)
HOUSTON, TEXAS
(Address of Principal Executive Offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (713) 420-2131
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
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Common units representing limited partner interests New York Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE.
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO SUCH
FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [ ]
INDICATE BY CHECK MARK IF DISCLOSURE OF DELINQUENT FILERS PURSUANT TO ITEM
405 OF REGULATION S-K IS NOT CONTAINED HEREIN, AND WILL NOT BE CONTAINED, TO THE
BEST OF REGISTRANT'S KNOWLEDGE, IN DEFINITIVE PROXY OR INFORMATION STATEMENTS
INCORPORATED BY REFERENCE IN PART III OF THIS FORM 10-K OR ANY AMENDMENT TO THIS
FORM 10-K. [ ]
THE REGISTRANT HAD 34,042,814 COMMON UNITS OUTSTANDING AS OF MARCH 29,
2001. THE AGGREGATE MARKET VALUE ON SUCH DATE OF THE REGISTRANT'S COMMON UNITS
HELD BY NON-AFFILIATES WAS APPROXIMATELY $1,052 MILLION.
DOCUMENTS INCORPORATED BY REFERENCE: NONE
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EL PASO ENERGY PARTNERS, L.P.
TABLE OF CONTENTS
CAPTION PAGE
------- ----
PART I
Item 1. Business.................................................... 1
Item 2. Properties.................................................. 12
Item 3. Legal Proceedings........................................... 12
Item 4. Submission of Matters to a Vote of Security Holders......... 12
PART II
Item 5. Market for Registrant's Units and Related Unitholder
Matters................................................... 13
Item 6. Selected Financial Data..................................... 15
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 16
Risk Factors and Cautionary Statement for Purposes of the
"Safe Harbor" Provisions
of the Private Securities Litigation Reform Act of 1995... 22
Item 7A. Quantitative and Qualitative Disclosures About Market
Risk...................................................... 29
Item 8. Financial Statements and Supplementary Data................. 30
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................. 62
PART III
Item 10. Directors and Executive Officers of the Registrant.......... 62
Item 11. Executive Compensation...................................... 65
Item 12. Security Ownership of Management............................ 67
Item 13. Certain Relationships and Related Transactions.............. 67
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form
8-K....................................................... 68
Signatures.................................................. 238
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PART I
ITEM 1. BUSINESS
GENERAL
We are one of the largest publicly-traded master limited partnerships in
terms of market capitalization and a gatherer of natural gas and oil in the Gulf
of Mexico. Formed in 1993, we provide midstream energy services both onshore and
offshore in the Gulf of Mexico, including gathering, transportation, storage and
other related services for producers of natural gas and oil. Through December
31, 2000, our subsidiaries and joint ventures owned or had interests in (i)
twelve natural gas and oil pipeline systems, (ii) seven offshore platforms,
including related production, processing, and dehydration facilities, (iii) five
producing oil and natural gas properties, (iv) one non-producing oil and natural
gas property, and (v) two natural gas storage facilities in Mississippi.
Our pipeline systems have a combined capacity of over 7.3 Bcf/d of natural
gas and over 340 MBbls/d of oil and include over 2,000 miles of pipeline. These
systems are strategically placed to serve production activities in some of the
most active drilling and development regions in the Gulf, including the offshore
regions of Texas, Louisiana, and Mississippi, and provide relatively low cost
access to long line transmission pipelines that access multiple markets in the
eastern half of the United States. In March 2000, we acquired El Paso
Intrastate-Alabama, or EPIA, a natural gas pipeline system in the coal bed
methane producing regions of Alabama from a subsidiary of El Paso Corporation.
The system consists of over 450 miles of pipeline and has a capacity of
approximately 200 MMcf/d. These systems handled an average of approximately 3.4
MMdth/d of natural gas from 1998 to 2000, as well as an average of approximately
176 MBbls/d of oil in 2000, 181 MBbls/d in 1999 and 97 MBbls/d in 1998.
Upon completion of the Prince tension leg platform, or TLP, our
multi-purpose offshore platforms will have a product handling capacity of over
710 Mcf/d of natural gas and over 120 MBbls/d of oil and condensate. Through
these facilities, we are able to provide a variety of producer and midstream
services to enhance deliverability and volumes into our pipeline systems.
Our producing properties have total proved reserves of approximately 11.5
Bcf of natural gas and over 1.2 MMBbls of oil. We also have an overriding
royalty interest in the Prince Field, a non-producing property in the Ewing Bank
region of the Gulf of Mexico to capitalize on future development efforts in that
region.
In August 2000, we acquired salt dome natural gas storage facilities
located in Mississippi which are well situated to serve the Northeast,
Mid-Atlantic and Southeast natural gas markets. These facilities have a combined
working capacity of 6.7 Bcf, and are capable of delivering in excess of 670
MMcf/d of natural gas into three interstate pipelines, Koch Gateway Pipeline,
Transcontinental Gas Pipeline, or Transco, and Tennessee Gas Pipeline. Each of
these facilities is capable of making deliveries at the high rates necessary to
satisfy peaking requirements in the electric generation industry.
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As generally used in the energy industry and in this document, the following
terms have the following meanings:
Bbl(/d) = barrel (per day)
BBtu(/d) = billion British thermal units (per
day)
Bcf(/d) = billion cubic feet (per day)
MBbls(/d) = thousand barrels (per day)
MMBbls = million barrels
MMBtu = million British thermal units
Mcf(/d) = thousand cubic feet (per day)
MMcf(/d) = million cubic feet (per day)
MMdth(/d) = million dekatherms (per day)
Mdth(/d) = thousand dekatherms (per day)
When we refer to natural gas and oil in "equivalents," we are doing so to
compare quantities of oil with quantities of natural gas or to express these
different commodities in a common unit. In calculating equivalents, we use a
generally recognized standard in which one Bbl of oil is equal to six Mcf of
natural gas. Also, when we refer to cubic feet measurements, all measurements
are at 14.73 pounds per square inch.
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In August 1998, El Paso acquired DeepTech International Inc., the parent
company of our General Partner. Following this acquisition, our General Partner
became an indirect wholly owned subsidiary of El Paso. Our General Partner and
other affiliates of El Paso perform all of our management and operational
functions and together own a 27.8 percent interest in our common units
consisting of 8,953,764 common units. They also own a one percent general
partner interest in us, an approximate one percent non-managing member interest
in many of our subsidiaries and $170 million of our Series B preference units.
For further information on our Series B preference units, see Item 5, Market for
Registrant's Units and Related Unitholder Matters.
BUSINESS STRATEGY
Our objective is to operate as a growth-oriented master limited partnership
with a focus on increasing our cash flow and distributions to our unitholders.
Our strategy is to combine our position as a provider of midstream services in
the deeper water regions of the Gulf of Mexico with an aggressive effort to
acquire and develop diversified onshore midstream energy assets. Accordingly, we
also expect a substantial portion of our growth to relate to onshore activities
and operations. Further, our strategy includes identifying opportunities that
create synergies with the other assets and operations of El Paso. We intend to
continue de-emphasizing our commodity-based activities, such as exploration and
production operations, in the future and concentrate on fee-based operations,
which tend to provide more stable cash flows. As part of our business strategy,
- we acquired EPIA, a natural gas pipeline system in the coal bed methane
producing regions of Alabama from a subsidiary of El Paso, in March 2000;
- we entered into an agreement with El Paso Production in March 2000
committing all natural gas and oil produced from the Prince Field to a
platform we are constructing at Ewing Bank 1003;
- we placed our East Breaks joint venture pipeline system in service in
June 2000;
- we acquired the salt dome natural gas storage businesses of Crystal Gas
Storage, Inc., a subsidiary of El Paso, in August 2000; and
- we acquired the south Texas fee-based natural gas liquids, or NGL,
transportation and fractionation assets from a subsidiary of El Paso in
February 2001.
In accordance with a Federal Trade Commission, or FTC, order related to El
Paso's merger with The Coastal Corporation, we divested a number of our Gulf of
Mexico assets in January 2001. These divestitures allow us to further our plan
to diversify and grow our sources of cash flow. For more information on these
asset divestitures, see Item 7, Management's Discussion and Analysis of
Financial Condition and Results of Operations.
SEGMENTS
We segregate our business activities into three segments:
- Gathering, Transportation, and Platform Services;
- Oil and Natural Gas Production; and
- Gas Storage Services.
These segments are strategic business units that provide a variety of
energy related services. For information relating to operating revenues and
operating income of each segment, see Item 8, Financial Statements and
Supplementary Data, Note 11. Each of these segments is discussed more fully
below.
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GATHERING, TRANSPORTATION, AND PLATFORM SERVICES
Pipeline Systems
We conduct a significant portion of our business activities through equity
investments, many of which are organized as limited liability companies with
subsidiaries of other substantial energy companies. Management decisions related
to these investees are made by committees comprised of representatives from each
member with authority appointed in proportion to the members' relative ownership
interests. The following table and discussions describe our network of
subsidiary and joint venture owned natural gas and crude oil pipelines as of
December 31, 2000:
DEEPWATER HOLDINGS
EL PASO ----------------------------------------
VIOSCA INTRASTATE- EAST GREEN
KNOLL(1) ALABAMA(2) HIOS BREAKS(3) UTOS(4) STINGRAY(4) CANYON(4) TARPON(4)
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Effective ownership
interest............... 100% 100% 50% 50% 50% 50% 100% 100%
Unregulated(U)/
regulated(R)........... U U R U R R U U
Operated(O)/Non-
operated(N)............ O O O(5) O(5) O(5) O O O
In-service date......... 1994 1972 1977 2000 1978 1975 1990 1978
Approximate
capacity(7)............ 1,000 200 1,800 400 1,200 1,120 220 80
Aggregate miles of
pipeline............... 125 450 204 85 30 417 68 40
Average net throughput
for the year ended:(8)
December 31, 2000...... 612 124 435 56 166 298 59 25
December 31, 1999...... 558 -- 371 -- 186 304 90 44
December 31, 1998...... 319 -- 359 -- 171 346 139 66
NEPTUNE AND
OCEAN BREEZE
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MANTA
RAY
OFFSHORE(4) NAUTILUS(4) POSEIDON ALLEGHENY(3)
----------- ----------- -------- ------------
Effective ownership
interest............... 25.67% 25.67% 36% 100%
Unregulated(U)/
regulated(R)........... U R U U
Operated(O)/Non-
operated(N)............ N N N(6) O
In-service date......... 1987 1997 1996 1999
Approximate
capacity(7)............ 755 600 260 80
Aggregate miles of
pipeline............... 225 101 288 43
Average net throughput
for the year ended:(8)
December 31, 2000...... 105 78 57 18
December 31, 1999...... 109 75 61 12
December 31, 1998...... 80 42 35 --
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(1) We acquired an additional 49 percent ownership interest in June 1999 and the
remaining 1 percent in September 2000 from a subsidiary of El Paso.
(2) We acquired the El Paso Intrastate-Alabama system in March 2000.
(3) The East Breaks system was placed in service in June 2000. The Allegheny
system was placed in service in October 1999.
(4) In the first quarter of 2001, we entered into a series of transactions
involving the sale of our interests in the Green Canyon, Tarpon, Manta Ray
Offshore and Nautilus systems. Additionally, Deepwater Holdings sold their
interest in Stingray in the first quarter of 2001 and also agreed to sell
their interest in UTOS. Deepwater Holdings expects this sale to close in
April 2001. These sales are a result of a FTC order related to El Paso's
merger with The Coastal Corporation.
(5) We assumed operation of these systems in June 2000.
(6) We assumed operation of this system in January 2001.
(7) All capacity measures are on a MMcf/d basis except the Poseidon and
Allegheny systems which are measured on a MBbls/d basis.
(8) All average net throughput measures are on a Mdth/d basis except the
Poseidon and Allegheny systems which are measured on a MBbls/d basis.
Viosca Knoll. Viosca Knoll is a natural gas gathering system designed to
serve the Main Pass, Mississippi Canyon and Viosca Knoll areas of the Gulf of
Mexico and consists of 125 miles of predominantly 20-inch natural gas pipeline
and a 7,000 horsepower compressor. Viosca Knoll provides its customers access to
the facilities of a number of major interstate pipelines, including pipelines
owned by Tennessee Gas Pipeline Company, Columbia Gulf Transmission Company,
Southern Natural Gas Company, Transco, and Destin Pipeline Company. During 1999,
we acquired an additional 49 percent interest in Viosca Knoll, and in 2000 we
acquired the remaining 1 percent from a subsidiary of El Paso, bringing our
total interest in Viosca Knoll to 100 percent.
El Paso Intrastate-Alabama. In March 2000, we acquired EPIA, a natural gas
pipeline system in the coal bed methane producing regions of Alabama. The system
consists of over 450 miles of pipeline. EPIA also provides marketing services
through the purchase and resale of natural gas by purchasing natural gas from
regional producers and others, and selling natural gas to local distribution
companies and others.
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Deepwater Holdings. In June 1999, we acquired additional ownership
interests in the High Island Offshore System, or HIOS, U-T Offshore System, or
UTOS, and the East Breaks System. In September 1999, we reorganized our
interests with ANR Pipeline Company, or ANR, in these and other assets through
the formation of Deepwater Holdings, L.L.C. We have a 50 percent ownership
interest in Deepwater Holdings. Through El Paso's merger with The Coastal
Corporation, ANR became a subsidiary of El Paso. As a result of the
reorganization, Deepwater Holdings owns 100 percent of the HIOS, UTOS, East
Breaks and Stingray systems, as well as 100 percent of the West Cameron
dehydration facility.
- HIOS is a natural gas transmission system consisting of 204 miles of
pipeline which includes three supply laterals that connect to a 42-inch
diameter mainline. HIOS transports natural gas received from fields
located in the Galveston, Garden Banks, West Cameron and East Breaks
areas of the Gulf of Mexico to a junction platform owned by HIOS located
in West Cameron Block 167.
- East Breaks is a natural gas gathering system consisting of 85 miles of
18 to 20-inch diameter pipeline that connects HIOS to the Diana and
Hoover fields being developed by subsidiaries of ExxonMobil and BP Amoco
plc. Production from the Diana and Hoover properties has been committed
to this system. East Breaks began operating in June 2000, and has the
ability to expand its throughput capacity further, which would provide
HIOS with the ability to compete for the right to gather and transport
the substantial reserves associated with properties being, and expected
to be, developed in these deepwater frontier regions.
- UTOS is a natural gas transmission system consisting of 30 miles of
42-inch diameter pipeline extending from an interconnection with HIOS at
West Cameron Block 167 to the Johnson Bayou production handling facility,
owned by UTOS. The Johnson Bayou facility provides primarily natural gas
and natural gas liquids separation and dehydration services for natural
gas transported on HIOS and UTOS. Under a FTC order, Deepwater Holdings
agreed to sell its interest in UTOS. The sale is expected to close in
April 2001.
- Stingray is a natural gas gathering system consisting of (i) 361 miles of
6 to 36-inch diameter pipeline that transports natural gas from HIOS,
West Cameron, East Cameron and Vermilion lease areas in the Gulf of
Mexico to onshore transmission systems in Louisiana, (ii) 43 miles of 16
to 20-inch diameter pipeline connecting platforms and leases in the
Garden Banks Blocks 191 and 72 areas to Stingray, and (iii) 13 miles of
16-inch diameter pipeline connecting our platform at East Cameron Block
373 to Stingray at East Cameron Block 338. Under a FTC order, Deepwater
Holdings sold its interest in Stingray in January 2001.
Green Canyon. Green Canyon is a natural gas gathering system consisting of
68 miles of 10 to 20-inch diameter pipeline which transports natural gas from
the South Marsh Island, Eugene Island, Garden Banks, and Green Canyon areas in
the Gulf of Mexico to Transco's South Lateral in South Marsh Island Block 106.
Under a FTC order, we sold our interest in Green Canyon in January 2001.
Tarpon. Tarpon is a natural gas gathering system consisting of 40 miles of
16-inch diameter pipeline that extends from the Trunkline Gas Pipeline system at
Ship Shoal Block 274 to the Eugene Island area in the Gulf of Mexico. Under a
FTC order, we sold our interest in Tarpon in January 2001.
Neptune and Ocean Breeze. We own a 25.67 percent interest in both Neptune
Pipeline Company, L.L.C. and Ocean Breeze Pipeline Company, L.L.C. Together,
Neptune and Ocean Breeze own 100 percent of the Manta Ray Offshore and Nautilus
systems. Under a FTC order, we sold our interest in Neptune and Ocean Breeze in
January 2001.
- Manta Ray Offshore is a natural gas gathering system consisting of three
separate gathering lines in the offshore Louisiana area of the Gulf of
Mexico, including 76 miles of 12 to 24-inch diameter pipeline, each
interconnecting offshore with Transco's Southeast Louisiana Lateral,
which provides transportation to shore in eastern Louisiana and 149 miles
of 14 to 24-inch diameter pipeline extending from the Green Canyon and
South Timbalier areas to facilities located at Ship Shoal Block 207.
Affiliates of the other partners in the system, Shell Oil Company and
Marathon Oil Company, have dedicated production from over 110 lease
blocks in the area to the system.
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- Nautilus is a natural gas transmission system consisting of 101 miles of
30-inch pipeline running downstream from Ship Shoal Block 207 connecting
to a natural gas processing plant in Louisiana and, through the
processing plant, facilitates deliveries into multiple interstate
pipelines. The Shell Oil Company and Marathon Oil Company production
dedicated to Manta Ray Offshore is also dedicated to Nautilus.
Poseidon. Poseidon, which we own a 36 percent interest in, is a major sour
crude oil pipeline system built in response to the increased demand for
additional sour crude oil pipeline capacity in the central Gulf of Mexico.
Poseidon consists of (i) 117 miles of 16 to 20-inch diameter pipeline extending
from our 50 percent owned Garden Banks 72 platform to our platform at Ship Shoal
Block 332, (ii) 122 miles of 24-inch diameter pipeline extending from the Ship
Shoal 332 platform to Houma, Louisiana, (iii) 32 miles of 16-inch diameter
pipeline extending from Ewing Bank Block 873 to the 24-inch pipeline in the area
of South Timbalier Block 212, and (iv) 17 miles of 16-inch pipeline extending
from Garden Banks Block 260 to South Marsh Island Block 205.
Allegheny. Allegheny is a crude oil system consisting of 43 miles of
14-inch diameter pipeline that connects the Allegheny field in the Green Canyon
area of the Gulf of Mexico with Poseidon at our Ship Shoal 332 platform. Oil
production from the Allegheny field is committed to this system.
Nemo. In August 1999, we formed Nemo Gathering Company L.L.C., or Nemo,
with Tejas Offshore Pipeline, L.L.C. to construct, own and operate a natural gas
gathering system extending from the Brutus and Glider deepwater development
properties to Manta Ray Offshore. Under a FTC order, we sold our interest in
Nemo in January 2001.
Offshore Platforms and Related Facilities
Our offshore platforms play a key role in the development of the oil and
natural gas offshore pipeline network. Platforms are used to:
- interconnect the offshore pipeline grid;
- provide an efficient means to perform pipeline maintenance;
- locate compression, separation, production handling and other facilities;
and
- conduct drilling operations during the initial development phase of a
natural gas and oil property.
In addition to numerous platforms owned by our joint ventures, we own seven
strategically-located platforms in the Gulf of Mexico, including six
multi-purpose hub-platforms and one TLP in the Prince Field, which is currently
under construction. These platforms were specifically designed to be used as
deepwater hubs and production handling and pipeline maintenance facilities. The
following table and discussions describe our offshore platforms as of December
31, 2000:
EAST GARDEN SHIP VIOSCA SHIP SOUTH
CAMERON BANKS SHOAL KNOLL PRINCE SHOAL TIMBALIER
373 72 331 817 TLP(1) 332(2) 292(2)
------- ------- ----- ------ ------ -------- ---------
Ownership interest........ 100% 50% 100% 100% 100% 100% 100%
In-service date........... 1998 1995 1994 1995 N/A(1) 1985 1984
Water depth (in feet)..... 441 518 376 671 1,500 438 283
Acquired (A) or
constructed (C)......... C C A C C A A
Approximate handling
capacity:
Natural gas (MMcf/d).... 110 80 --(3) 140 80 150(3) 150
Oil and condensate
(Bbls/d)............. 5,000 55,000 --(3) 5,000 50,000 12,000(3) 2,500
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(1) We plan to place the Prince TLP platform, formerly known as the Ewing Bank
1003 platform, in service by mid 2001.
(2) We sold 50 percent of our interest in Ship Shoal 332 and all of our interest
in South Timbalier 292 in January 2001.
(3) The Ship Shoal 331 platform is currently used as a satellite landing area
and all products transported to the platform are processed on the Ship Shoal
332 platform.
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East Cameron 373. The East Cameron 373 platform is located at the south end
of the central leg of Stingray. The platform serves as the host for Kerr-McGee
Corporation's East Cameron Block 373 production and as the landing site for
Garden Banks Blocks 108 and 152 production.
Garden Banks 72. The Garden Banks 72 platform is located at the south end
of the eastern leg of Stingray and serves as the western-most termination point
of Poseidon. The platform serves as a base for landing deepwater production from
Enterprise Oil Gulf of Mexico, Inc.'s and Devon Energy Inc.'s Garden Banks Block
161 development and will serve as the host for Mariner Energy Inc.'s development
in Garden Banks Block 73. We also use the platform as the host for our Garden
Banks Block 72 production and the landing site for production from our Garden
Banks Block 117 lease located in an adjacent lease block.
Ship Shoal 331. The Ship Shoal 331 platform is a production facility
located approximately 75 miles off the coast of Louisiana. Pogo Producing
Company has rights to utilize the platform pursuant to a production handling and
use of space agreement.
Viosca Knoll 817. The Viosca Knoll 817 platform is centrally located on the
Viosca Knoll system. The platform serves as a base for landing deepwater
production in the area, including ExxonMobil's, Shell Offshore Inc.'s, and BP
Amoco plc's Ram Powell development. A 7,000 horsepower compressor on the
platform facilitates deliveries from the Viosca Knoll system to multiple
downstream interstate pipelines. The platform is also used as a base for oil and
natural gas production from our Viosca Knoll Block 817 lease.
Prince TLP. Prince TLP, is currently under construction with first
production anticipated to commence in mid 2001. The Prince TLP and its related
facilities initially will be capable of handling up to 50,000 Bbls/d of oil and
80 MMcf/d of natural gas.
Ship Shoal 332. The Ship Shoal 332 platform serves as a major junction
platform for pipelines in the Manta Ray Offshore, Allegheny and Poseidon
systems. The platform will also serve as the landing site for the Nemo system.
Under a FTC order, we sold 50 percent of our interest in Ship Shoal 332 in
January 2001.
South Timbalier 292. The South Timbalier 292 platform is located at the
easternmost termination point of Manta Ray Offshore and serves as a landing site
for natural gas production in the area and provides an interconnection to the
Trunkline Gas Pipeline system. Under a FTC order, we sold our interest in South
Timbalier 292 in January 2001.
Other Facilities. Through our 50 percent ownership interest in Deepwater
Holdings, we also own an interest in the West Cameron dehydration facility
located at the northern termination point of Stingray in Louisiana. Under a FTC
order, Deepwater Holdings sold its interest in the dehydration facility in
January 2001.
Markets and Competition
Each of our natural gas pipeline systems are located at or near natural gas
production areas that are served by other pipelines. Our natural gas pipeline
systems face competition from both regulated and unregulated systems. Some of
these competitors are not subject to the same level of rate and service
regulation as we are. Other competing pipelines, such as long-haul transporters,
may have rate design alternatives unavailable to ours. Consequently, those
competing pipelines may be able to provide service on more flexible terms and at
rates significantly below those we offer.
Our oil pipeline systems were built as a result of the need for additional
crude oil capacity to transport new deepwater oil production to shore. Our
principal competition includes other oil pipeline systems, built, owned and
operated by producers to handle their own production and, as capacity is
available, production for others. Our oil pipelines compete for new production
on the basis of geographic proximity to the production, cost of connection,
available capacity, transportation rates and access to onshore markets. In
addition, the ability of our pipelines to access future reserves will be subject
to our ability, or the producers' ability, to fund the significant capital
expenditures required to connect to the new production.
A substantial portion of the revenues generated by our offshore pipeline
systems are attributed to production from reserves committed under long-term
contracts for the productive life of the relevant field.
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Nonetheless, these reserves and other reserves that may become available to our
pipeline systems are depleting assets and will be produced over a finite period.
Each of our pipeline systems must access additional reserves to offset the
natural decline in production from existing connected wells or the loss of any
other production to a competitor. Furthermore, the rates we charge for our
services are dependent on whether the relevant pipeline system is regulated or
unregulated, the quality of the service required by the customer, and the amount
and term of the reserve commitment by the customer. A majority of our offshore
arrangements involve life-of-reserve commitments with both firm and
interruptible components. Generally, we receive a price per barrel of oil or
water or dekatherm of natural gas handled. Also, for firm arrangements, we often
receive a monthly fixed fee which is paid by the customer regardless of the
level of throughput, except under individually specified circumstances.
Our platforms are subject to similar competitive factors as our pipeline
systems. These assets generally compete on the basis of proximity and access to
existing reserves and pipeline systems, as well as costs and rates. Furthermore,
competitors to these platforms may possess greater technical skill and capital
resources than us.
For a discussion of our significant customers see Item 8, Financial
Statements and Supplementary Data, Note 10.
Regulatory Environment
Our natural gas pipeline systems are subject to the Natural Gas Pipeline
Safety Act of 1968, which establishes pipeline and liquified natural gas plant
safety requirements. The Poseidon and Allegheny systems are subject to
regulations under the Hazardous Liquid Pipeline Safety Act. All of our offshore
pipeline systems are subject to the regulation under the Outer Continental Shelf
Lands Act, which calls for nondiscriminatory transportation on pipelines
operating in the outer continental shelf region of the Gulf of Mexico. All of
our pipeline systems are subject to the National Environmental Policy Act and
other environmental legislation. Each of the pipeline systems has a continuing
program of inspection designed to keep all of our facilities in compliance with
pollution control and pipeline safety requirements. We believe that our pipeline
systems are in compliance with the applicable requirements of these regulations.
Our HIOS, UTOS, Stingray and Nautilus pipeline systems are also subject to
the jurisdiction of the Federal Energy Regulatory Commission, or FERC, in
accordance with the Natural Gas Act of 1938 and the Natural Gas Policy Act of
1978. Each of these pipeline systems operates under separate FERC approved
tariffs which establish rates, terms, and conditions under which each pipeline
system provides services to its customers. These pipeline systems operate under
agreements with their respective customers which provide for rates that have
been approved by FERC. Stingray's proposed rates became effective June 1, 1999,
subject to refund. A hearing on the merits of Stingray's filing was held in
December 1999 and the case was still pending before FERC at the time Deepwater
Holdings sold Stingray in January 2001.
Maintenance
Each of our pipeline systems and platforms requires regular and thorough
maintenance. The interior of the pipelines is maintained through the regular
cleaning of the line of liquids that collect in the pipeline. Corrosion
inhibitors are also injected into all of the systems through the flow stream on
a continuous basis. To prevent external corrosion of the pipe, anodes are
fastened to the pipeline itself at prescribed intervals, providing protection
from sea water. The platforms are painted to the waterline every three to five
years to prevent atmospheric corrosion. Corrosion protection devices are also
fastened to platform legs below the waterline to prevent corrosion. Remotely
operated vehicles or divers inspect the platforms below the waterline generally
every five years. The HIOS, Stingray, Manta Ray Offshore, Viosca Knoll,
Allegheny and Poseidon pipeline systems include platforms that are manned on a
continuous basis. The personnel onboard these platforms are responsible for site
maintenance, operations of the platform facilities, measurement of the oil or
natural gas stream at the source of production and corrosion control.
7
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OIL AND NATURAL GAS PRODUCTION
Currently, we own interests in five producing and one non-producing oil and
natural gas properties located in waters offshore of Louisiana. Production from
these properties is gathered, transported, and processed through our pipeline
systems and platform facilities, and sold to an affiliate of El Paso. The
following is information regarding these properties as of December 31, 2000:
Producing Properties
GARDEN BANKS GARDEN BANKS GARDEN BANKS VIOSCA KNOLL WEST DELTA
BLOCK 72 BLOCK 73(1) BLOCK 117 BLOCK 817(2) BLOCK 35(3)
------------ ------------ ------------ ------------ -----------
Working interest................ 50% -- 50% 100% 38%
Net revenue interest............ 40.2% 2.5% 37.5% 80% 29.8%
In-service date................. 1996 2000 1996 1995 1993
Net acres....................... 2,880 -- 2,880 5,760 1,894
Distance offshore (in miles).... 120 115 120 40 10
Water depth (in feet)........... 518 743 1,000 671 60
Producing wells................. 5 1 2 7 2
Cumulative production:
Natural gas (MMcf)............ 3,979 143 1,886 58,766 1,859
Oil (Bbls).................... 1,241,884 -- 1,036,468 97,035 9,873
- ---------------
(1) We own a 2.5 percent overriding interest in Garden Banks Block 73, which
began producing in mid 2000.
(2) Our working interest in Viosca Knoll Block 817 is subject to a production
payment that entitles holders to 25 percent of the proceeds from the
production attributable to this working interest (after deducting all
leasehold operating expenses, including platform access and production
handling fees) until the holders have received the aggregate sum of $16
million. At December 31, 2000, the unpaid portion of the production payment
obligation totaled $9.8 million.
(3) The West Delta Block 35 field commenced production in 1993, but our interest
in this field was acquired in connection with El Paso's acquisition of our
general partner in 1998. Production data is for the period from August 1998.
Acreage and Wells. The following table sets forth our developed and
undeveloped oil and natural gas acreage as of December 31, 2000. Undeveloped
acreage refers to those lease acres on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas, regardless of whether or not such acreage contains
proved reserves. Gross acres in the following table refer to the number of acres
in which a working interest is owned directly by us. The number of net acres is
our fractional ownership of the working interest in the gross acres.
GROSS NET
------ ------
Developed acreage........................................... 6,152 3,576
Undeveloped acreage......................................... 44,913 18,838
------ ------
Total acreage..................................... 51,065 22,414
====== ======
Our gross and net ownership in producing wells at December 31, 2000, is as
follows:
GROSS NET
----- ----
Natural gas................................................. 10.0 8.3
Oil......................................................... 6.0 3.0
---- ----
Total............................................. 16.0 11.3
==== ====
We did not drill any exploratory developmental wells in 1999 or 2000. One
developmental oil well was drilled during 1998.
8
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Net Production, Unit Prices, and Production Costs. The following table sets
forth information regarding the production volumes of, average unit prices
received for, and average production costs for our oil and natural gas
properties for the years ended December 31:
OIL (MBBLS) NATURAL GAS (MMCF)
------------------------------ --------------------------
2000 1999 1998 2000 1999 1998
-------- -------- -------- ------ ------- -------
Net production(1)................. 306 357 540 6,897 12,211 11,324
Average sales price(1)().......... $ 25.26 $ 14.32 $ 15.69 $ 1.86 $ 2.02 $ 2.01
Average production costs(2)()..... $ 7.82 $ 2.38 $ 3.04 $ 1.30 $ 0.40 $ 0.51
- ---------------
(1) The information regarding net production and average sales prices excludes
overriding royalty interests.
(2) The components of average production costs, which consist of operating
expenses per unit of oil or natural gas produced, may vary substantially
among wells depending on the methods of recovery employed and other factors,
but generally include third party transportation expenses, maintenance and
repair, labor and utilities costs.
The relationship between average sales prices and average production costs
depicted by the table above is not necessarily indicative of future results of
operations.
For a discussion of oil and natural gas reserve information and estimated
future net cash flows, see Item 8, Financial Statements and Supplementary Data,
Note 13, which is incorporated herein by reference.
Non-producing Property
Ewing Bank 958 Unit (Prince Field). We own a 9 percent net overriding
royalty interest in the Prince Field, formerly the Ewing Bank 958 Unit. In
November 1999, we entered into an arrangement with El Paso Production to farmout
our working interest in the Prince Field in exchange for an overriding royalty
interest. Under the terms of the farmout agreement, we may convert our
overriding royalty interest in the Prince Field into a 30 percent working
interest once El Paso Production recoups the costs associated with its drilling
and completion activities on the Prince Field. Although four successful
delineation wells have been drilled in the Prince Field, and El Paso Production
has expanded the scope and size of the field development, there has been no
production to date. Production from the Prince Field is expected to commence in
mid 2001 and is committed to our Prince TLP.
Markets and Competition
Our focus is to maximize the production from our existing portfolio of oil
and natural gas properties. As a result, the competitive factors that would
normally impact exploration and production activities are not as pervasive to
our operations. However, the oil and natural gas industry is intensely
competitive, and we do compete with a substantial number of other companies,
including many with larger technical staffs and greater financial and
operational resources in terms of accessing transportation, hiring personnel,
marketing production and withstanding the effects of general and
industry-specific economic changes.
Regulatory Environment
Our production and development operations are subject to regulation at the
federal and state levels. Regulated activities include:
- requiring permits for the drilling of wells;
- maintaining bonds and insurance requirements in order to drill or operate
wells;
- drilling and casing wells;
- the surface use and restoring of properties upon which wells are drilled;
and
- plugging and abandoning of wells.
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Our production and development operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units, the density of wells that may be
drilled, the levels of production, and the pooling of oil and natural gas
properties.
We presently have interests in, or rights to, offshore leases located in
federal waters. Federal leases are administered by the Minerals Management
Service, or MMS. Individuals and entities must qualify with the MMS prior to
owning and operating any leasehold or right-of-way interest in federal waters.
Qualification with the MMS generally involves filing certain documents and
obtaining an area-wide performance bond and/or supplemental bonds representing
security for facility abandonment and site clearance costs.
Operating Environment
Our business is subject to all of the operating risks normally associated
with the production of oil and natural gas, including blowouts, cratering,
pollution, and fires, each of which could result in damage to life or property.
Offshore operations are subject to usual marine perils, including hurricanes and
other adverse weather conditions, and governmental regulations, including
interruption or termination by governmental authorities based on environmental
and other considerations. In accordance with customary industry practices, we
maintain broad insurance coverage with respect to potential losses resulting
from these operating hazards.
GAS STORAGE SERVICES
In August 2000, we acquired the natural gas storage businesses of Crystal
Gas Storage, Inc. These businesses include the Petal and Hattiesburg salt dome
natural gas storage facilities located in Mississippi. These facilities are well
situated to serve the Northeast, Mid-Atlantic and Southeast natural gas markets.
On a combined basis, these storage facilities currently have a natural gas
working capacity of 6.7 Bcf, and are capable of delivering in excess of 670
MMcf/d of natural gas into three interstate pipelines, Koch Gateway Pipeline,
Transco and Tennessee Gas Pipeline. Each of the Petal and Hattiesburg facilities
is capable of making deliveries at the high rates necessary to satisfy peaking
requirements in the electric generation industry. A 6.8 Bcf expansion is
underway at these facilities, all of which is contractually dedicated for the
next 20 years to a subsidiary of Southern Company, the largest producer of
electricity in the United States. The expansion of the storage space and
facilities has been approved by the FERC and is currently under construction.
Also currently waiting for FERC approval is a 60 mile pipeline addition which
will provide interconnects with various customers.
Markets and Competition
Competition for natural gas storage is primarily based on location and the
ability to deliver natural gas in a timely and reliable manner. Our Petal and
Hattiesburg natural gas storage facilities are located in an area in Mississippi
that can effectively service the Northeastern and Southeastern natural gas
markets, and have the ability to deliver all of its stored natural gas within a
short timeframe. The natural gas storage facilities compete with other forms of
natural gas storage including other salt dome storage facilities, depleted
reservoir facilities and pipelines.
We believe that the existence of the long-term contracts for storage,
proposed expansion of our operations and the location of our natural gas storage
facilities should allow us to compete effectively with other companies who
provide for natural gas storage services. In addition to long-term contracts, we
actively market interruptible storage services at the facilities to enhance our
revenue generating ability beyond the firm storage contracts. Once our firm
storage contracts have expired, we will experience greater competition for
providing storage services. Such competition will be dependent upon the nature
of the natural gas storage market existing at that time.
Regulatory Environment
Our Hattiesburg facility is a regulated utility under the jurisdiction of
the Mississippi Public Service Commission. Accordingly, the rates charged for
natural gas storage services are subject to approval from this agency. The
present rates of the firm long-term contracts for natural gas storage in the
Hattiesburg facility
10
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were approved in 1990. Our Petal facility is subject to regulation under the
Natural Gas Act of 1938, as amended, and to the jurisdiction of FERC. The Petal
facility currently holds certificates of public convenience and necessity which
permit it to charge market based rates. A portion of our natural gas storage
business is also subject to a limited jurisdiction certificate issued by FERC.
The certificate authorizes us to provide natural gas storage services that may
be ultimately consumed outside of Mississippi.
The interstate natural gas industry has historically been heavily regulated
by federal and state government and we cannot predict what further actions FERC,
state regulators, or federal and state legislators may take in the future.
PURCHASE OF NGL AND FRACTIONATION ASSETS
In February 2001, we purchased NGL transportation and fractionation assets
from a subsidiary of El Paso. These assets include more than 600 miles of NGL
gathering and transportation pipelines and three fractionation plants located in
south Texas. The NGL pipeline system gathers and transports unfractionated and
fractionated products. The three fractionation plants have a capacity of
approximately 96 MBbls/d. These plants fractionate NGLs into ethane, propane,
and butane products, which are used by refineries and petrochemical plants along
the Texas Gulf Coast.
MAJOR ENCUMBRANCES
Substantially all of our assets, with the exception of one of our
subsidiaries, Argo II, L.L.C., are pledged as collateral under our existing
revolving credit facility. Substantially all of Argo's assets are pledged under
Argo's project finance loan, which is guaranteed in part by us. In addition,
certain of our investees currently have, and others are expected to have, credit
facilities under which substantially all of their assets are, or would be,
pledged. For a discussion of our credit facilities, see Item 8, Financial
Statements and Supplementary Data, Note 5.
ENVIRONMENTAL
A description of our environmental matters is included in Item 8, Financial
Statements and Supplementary Data, Note 8.
EMPLOYEES
Employees of El Paso, through our General Partner, perform all of our
administrative and operational activities under a management agreement.
Therefore, we had no direct employees at December 31, 2000. We reimburse our
General Partner for all reasonable general and administrative expenses and other
reasonable expenses incurred by our General Partner and its affiliates for, or
on our behalf, including, but not limited to, expenses incurred by our General
Partner under this management agreement.
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ITEM 2. PROPERTIES
A description of our properties is included in Item 1, Business.
We believe we have satisfactory title to the properties owned and used in
our businesses, subject to liens for current taxes, liens incident to minor
encumbrances, and easements and restrictions that do not materially detract from
the value of the property, or the interests of the property, or the use of such
properties in our businesses. We believe that our physical properties are
adequate and suitable for the conduct of our business in the future.
ITEM 3. LEGAL PROCEEDINGS
See Item 8, Financial Statements and Supplementary Data, Note 8.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S UNITS AND RELATED UNITHOLDER MATTERS
Our common units are traded on the New York Stock Exchange under the symbol
"EPN". As of March 15, 2001, there were approximately 688 holders of record of
common units.
Since 1998, we have given holders of our publicly held preference units the
opportunity to convert their preference units into common units, in accordance
with our partnership agreement. In October 2000, we redeemed the remainder of
our outstanding publicly held preference units.
The following table reflects the high and low sales prices for common units
based on the daily composite listing of stock transactions for the New York
Stock Exchange and cash distributions declared per common and preference units
during those periods.
DISTRIBUTIONS DECLARED
COMMON UNITS PER UNIT
------------------- -----------------------
HIGH LOW COMMON PREFERENCE(1)
-------- -------- ------- -------------
2000
Fourth Quarter............................................ $27.7500 $23.0000 $0.5500 $ --
Third Quarter............................................. 28.0000 22.5000 0.5375 0.2750
Second Quarter............................................ 26.0000 19.5000 0.5375 0.2750
First Quarter............................................. 21.3750 18.1250 0.5250 0.2750
1999
Fourth Quarter............................................ $24.7500 $16.7500 $0.5250 $0.2750
Third Quarter............................................. 25.1250 21.8750 0.5250 0.2750
Second Quarter............................................ 24.7500 21.3750 0.5250 0.2750
First Quarter............................................. 23.1250 19.5000 0.5250 0.2750
- ----------
(1) As of October 2000, all publicly held preference units have been converted
into common units or redeemed.
In January 2001, we declared a quarterly distribution of $0.5500 per common
unit payable on February 15, 2001, to unitholders of record on January 31, 2001.
In addition, we announced in January 2001, an increase of $0.10 per year in our
quarterly distributions to common unitholders, resulting in a quarterly
distribution of $0.575 per common unit effective for the distribution scheduled
to be paid in May 2001.
CASH DISTRIBUTIONS
We make quarterly distributions of 100 percent of our available cash, as
defined in the partnership agreement, to our unitholders and to our General
Partner. Our available cash consists generally of all cash receipts plus
reductions in reserves less all cash disbursements and net additions to
reserves. Our General Partner has broad discretion to establish cash reserves
that it determines are necessary or appropriate to properly conduct our
business. These can include cash reserves for future capital and maintenance
expenditures, reserves to stabilize distributions of cash to the unitholders and
our General Partner, reserves to reduce debt, or, as necessary, reserves to
comply with the terms of any of our agreements or obligations.
The holders of common units and our General Partner are not entitled to
arrearages of minimum quarterly distributions. Our distributions are effectively
made 98 percent to limited unitholders and 2 percent to our General Partner,
subject to the payment of incentive distributions to our General Partner if
certain target cash distribution levels to common unitholders are achieved.
Incentive distributions to our General Partner increase to 15 percent, 25
percent and 50 percent based on incremental distribution thresholds. Since 1998,
quarterly distributions to common unitholders have been in excess of the highest
incentive threshold of $0.425 per unit, and as a result, our General Partner has
received 50 percent of the incremental amount. For the year ended December 31,
2000, we paid our General Partner incentive distributions totaling $15.5 million
and paid an incentive distribution of $4.6 million in February 2001.
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PUBLIC OFFERING OF COMMON UNITS
In July 2000, we completed a public offering of 4,600,000 common units that
included 600,000 common units to cover over-allotments for the underwriters. We
used the net cash proceeds of approximately $101 million from the offering to
reduce the balance outstanding under our revolving credit facility. In addition,
our General Partner contributed $1.1 million to us in order to satisfy its one
percent capital contribution requirement.
In March 2001, we completed a public offering of 2,250,000 common units. We
used the net cash proceeds of $66.3 million from the offering to reduce the
balance outstanding under our revolving credit facility. In addition, our
General Partner contributed $0.7 million to us in order to satisfy its one
percent capital contribution requirement. If, within 30 days, the underwriters
exercise in full their over-allotment option covering an additional 337,500
common units, we expect to receive approximately $10 million in additional net
cash proceeds, all of which would be used to reduce the balance outstanding
under our revolving credit facility.
SERIES B PREFERENCE UNITS
In August 2000, we issued to an affiliate of El Paso, $170 million of
Cumulative Redeemable Series B preference units in exchange for the Crystal
natural gas storage businesses. These newly issued preference units are
non-voting and 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 units until 2010. After 2010, the rate will increase
to 12% and distributions will be required to be paid on a current basis. The new
preference units contain no mandatory redemption obligation, but may be redeemed
at our option at any time. The issuance of these preference units was an exempt
transaction under Section 4(2) of the Securities Act of 1933 as amended.
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ITEM 6. SELECTED FINANCIAL DATA
YEAR ENDED DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
Operating Results Data(1):
Operating revenues(2)................. $112,415 $63,659 $48,731 $75,435 $71,073
Net income (loss)(3).................. 20,497 18,817 746 (1,138) 38,692
Basic and diluted income (loss) per
unit(4)............................ (0.03) (0.34) 0.02 (0.06) 1.57
Distributions per common unit......... 2.15 2.10 2.075 1.75 1.35
Distributions per preference unit..... 0.825 1.10 1.825 1.75 1.35
AS OF DECEMBER 31,
----------------------------------------------------
2000 1999 1998 1997 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
Financial Position Data(1):
Total assets.......................... $879,259 $583,585 $442,726 $409,842 $453,526
Revolving credit facility............. 318,000 290,000 338,000 238,000 227,000
Project financing(5).................. 45,000 -- -- -- --
Long-term debt........................ 175,000 175,000 -- -- --
Partners' capital(6).................. 311,071 96,489 82,896 143,966 192,023
- ----------
(1) Our operating results and financial position reflect the acquisition in
March 2000 of EPIA and in August 2000 of the Crystal natural gas storage
businesses. These acquisitions were accounted for as purchases and therefore
operating results of these acquired entities are included in our results
prospectively from the purchase date.
(2) Operating revenues for prior years has been restated to exclude equity
investment earnings. The operating revenues in 1998 were effected by lower
realized prices on oil and natural gas and inclement weather conditions
which decreased production volumes.
(3) Reflects impairment charges for capitalized costs written off in 1997 as a
result of the abandonment of certain flow lines connecting to wells
abandoned by third party owners.
(4)Reflects our adoption, in 1999, of a different accounting method for
allocating partnership income to our General Partner and the preference and
common unitholders. See Item 8, Financial Statements and Supplementary Data,
Note 1, for further information.
(5)Project financing relates to a loan to build the Prince TLP on the Prince
Field.
(6)Reflects the issuance of the $170 million Series B Preference Units to an
affiliate of El Paso and the issuance of 4.6 million common units in 2000.
15
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Over the past three years, our business activities have changed as a result
of strategic acquisitions and transactions designed to enhance our ability to
compete effectively and improve our overall financial condition. These changes
have expanded our operating scope, our ability to generate cash flows and our
needs for cash for investment opportunities. Consequently, we have substantially
expanded our credit facilities and created other financing structures to meet
our needs during this period. Significant milestones over the past three years
include:
YEAR TRANSACTION
- ---- -----------
1998 Constructed the East Cameron 373 platform;
Acquired a 100 percent working interest in the Ewing Bank
958 Unit, or the Prince Field;
1999 Increased our ownership interest in Viosca Knoll to 99
percent;
Increased our ownership interests in HIOS, East Breaks and
UTOS to 50 percent;
Placed the Allegheny oil pipeline system into service;
Exchanged our working interest in the Prince Field for a 9
percent overriding royalty interest, with a conditional
option to convert to a 30 percent working interest;
2000 Acquired the natural gas pipeline system of EPIA;
Placed the East Breaks joint venture pipeline system in
service;
Acquired the salt dome natural gas storage businesses of
Crystal; and
Increased our ownership interest in Viosca Knoll to 100
percent.
Sale of Gulf of Mexico Assets
In January 2001, we sold several of our offshore Gulf of Mexico assets to
third parties. The assets sold include our interests in the Tarpon system and
Green Canyon pipeline assets and the Neptune and Ocean Breeze entities, which
included our interests in Manta Ray Offshore and Nautilus. Along with these
entities we also sold our interests in the Nemo system and the South Timbalier
292 offshore platform as well as 50 percent of our interest in the Ship Shoal
332 offshore platform. These sales occurred as a result of a FTC order relating
to El Paso's merger with The Coastal Corporation. El Paso is the indirect parent
of our General Partner. We received approximately $108 million in cash from
these sales and used the proceeds to pay down our revolving credit facility. We
realized losses of approximately $11 million from these sales.
In addition to these sales, Deepwater Holdings, L.L.C., one of our
investees, sold its Stingray system and its West Cameron dehydration facility
for cash of approximately $50 million and used the proceeds to pay down its
credit facility. Our share of the loss realized by Deepwater Holdings on the
sale of its assets was approximately $8 million. Additionally, upon FTC
approval, Deepwater Holdings will sell its interest in UTOS. We expect this sale
to occur in April 2001 and the proceeds to approximate $4 million.
As additional consideration for the above transactions, El Paso will make
payments to us totaling $29 million. These payments will be made in quarterly
installments of $2.25 million, starting on or before March 31, 2001, for the
next three years and $2 million in the first quarter of 2004. From this
additional consideration, we will realize income of approximately $25.4 million
in the first quarter of 2001.
Following these sales, we will continue to own significant offshore
interests and will continue to operate HIOS, East Breaks, Viosca Knoll,
Allegheny, and Poseidon.
16
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Purchase of NGL and Fractionation Assets
In February 2001, we purchased NGL transportation and fractionation assets
from a subsidiary of El Paso for approximately $133 million. We funded the
acquisition of these assets by borrowing from our revolving credit facility.
These assets include more than 600 miles of NGL gathering and transportation
pipelines. The NGL pipeline system gathers and transports unfractionated and
fractionated products. We also acquired three fractionation plants with a
capacity of approximately 96 MBbls/d. These plants fractionate NGLs into ethane,
propane, and butane products which are used by refineries and petrochemical
plants along the Texas Gulf Coast.
Other Matters
In January 2000, an anchor from a submersible drilling rig in tow damaged a
section of Poseidon north of our Ship Shoal 332 platform. The accident resulted
in the release of approximately 2,200 Bbls of crude oil in the waters
surrounding the area, caused damage to our Ship Shoal 332 platform, and resulted
in the shutdown of the system and surrounding facilities in which we have
ownership interests. Poseidon's costs to repair the damaged pipeline and clean
up the crude oil released into the Gulf of Mexico were approximately $18
million. Poseidon has filed a lawsuit against the rig's owner for these damages.
By the end of the first quarter of 2000, the pipeline was repaired and placed
back into service. To date, we have received approximately $6.7 million of
insurance proceeds for business interruption and property damage.
SEGMENT RESULTS OF OPERATIONS
Our business activities are segregated into three segments: Gathering,
Transportation, and Platform Services; Oil and Natural Gas Production; and Gas
Storage Services. This structure reflects management's current view of our
activities and all historical periods have been presented on the basis of the
current segment presentation. Each of our segments is a strategic business unit
that offers different services or products, and we manage each of these segments
separately as they require different technology and marketing strategies. Since
earnings on equity investments can be a significant source of earnings in our
segments, we evaluate segment performance based on earnings before interest
expense and taxes, or EBIT.
To the extent possible, results of operations have been reclassified to
conform to the current business segment presentation, although these results may
not be indicative of the results which would have been achieved had the revised
business segment structure been in effect during those periods. Operating
revenues and expenses by segment include intersegment revenues and expenses
which are eliminated in consolidation. For a further discussion of the
individual segments, see Item 8, Financial Statements and Supplementary Data,
Note 11.
In previous years, we have reported equity earnings as part of operating
revenues. We have changed this presentation as of December 31, 2000, to include
equity earnings as other income. This change has been reflected for all periods
presented and does not impact our reported net income.
The following table presents EBIT by segment and in total for each of the
three years ended December 31:
2000 1999 1998
------- ------- --------
(IN THOUSANDS)
EARNINGS BEFORE INTEREST EXPENSE AND INCOME TAXES
Gathering, transportation, and platform services......... $72,083 $61,070 $ 30,513
Oil and natural gas production........................... (7,402) (7,359) (10,140)
Gas storage services..................................... 2,191 -- --
------- ------- --------
Segment EBIT........................................... 66,872 53,711 20,373
Non-segment activity, net................................ 487 191 159
------- ------- --------
Consolidated EBIT...................................... $67,359 $53,902 $ 20,532
======= ======= ========
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EBIT year to year variances are discussed in the segment results below.
GATHERING, TRANSPORTATION, AND PLATFORM SERVICES
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Gathering and transportation........................... $ 37,903 $ 23,005 $ 6,852
Platform services...................................... 26,563 23,882 21,141
Natural gas sales...................................... 34,531 -- --
-------- -------- --------
Total operating revenues............................. 98,997 46,887 27,993
Purchased natural gas costs............................ (28,160) -- --
Operating expenses..................................... (23,745) (28,932) (24,806)
Equity earnings........................................ 22,931 32,814 26,724
Other income........................................... 2,060 10,301 602
-------- -------- --------
EBIT................................................. $ 72,083 $ 61,070 $ 30,513
======== ======== ========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Operating revenues for the year ended December 31, 2000, were $52.1 million
higher than 1999, primarily due to revenues from EPIA which was acquired in
March 2000. In addition to providing transportation services, EPIA provides
marketing services through the purchase of natural gas from regional producers
and others, and the sale of natural gas to local distribution companies and
others. The revenue from the sale of natural gas is reflected above as "natural
gas sales" and the cost of natural gas acquired for resale is reflected as
"purchased natural gas costs." Revenues were also higher due to the additional
demand charges on our East Cameron 373 platform, a full year of revenues in 2000
from the Allegheny system, which went into service in the fourth quarter of
1999, and the consolidation of Viosca Knoll in June 1999.
Operating expenses for the year ended December 31, 2000, were $5.2 million
lower than 1999 due to the favorable resolution of litigation with Transco in
the second quarter of 2000 and cost recoveries under our operating agreement
with Deepwater Holdings relative to actual costs incurred.
Equity earnings for the year ended December 31, 2000, were $9.9 million
lower than 1999, primarily due to consolidating Viosca Knoll beginning in June
1999 and lower earnings from Poseidon due to the pipeline rupture in the first
quarter 2000.
Other income for the year ended December 31, 2000, was $8.2 million lower
than 1999, primarily due to the $10.1 million gain related to the sale of a
portion of our interest in Deepwater Holdings in 1999. This was offset by $1.7
million of business interruption insurance proceeds relating to the Poseidon
pipeline rupture in January 2000.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Operating revenues for the year ended December 31, 1999, were approximately
$18.9 million higher than 1998. The increase in gathering and transportation
revenues was primarily due to the consolidation of Viosca Knoll beginning in
June 1999 and the Allegheny system which was placed in service in the fourth
quarter of 1999, partially offset by decreased transportation volumes on the
Green Canyon and Tarpon systems due to natural depletion. The increase in
platform services revenues was a result of new production processed at our
Garden Banks 72 platform and a full year of operations at the East Cameron 373
platform.
Operating expenses for the year ended December 31, 1999, were approximately
$4.1 million higher than 1998 primarily as a result of the acquisition of an
additional 49 percent ownership interest in, and the consolidation of, Viosca
Knoll beginning in June 1999, the accrual of costs relating to various
regulatory and operational issues, and higher depreciation as a result of the
Allegheny system being placed into service in the fourth quarter of 1999 and the
East Cameron 373 platform being in service for a full year in 1999.
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Equity earnings for the year ended December 31, 1999, were $6.1 million
higher than 1998, primarily due to increased throughput on Poseidon, Manta Ray
Offshore and Nautilus, partially offset by lower volumes on HIOS, UTOS, and
Stingray and the impact of consolidating Viosca Knoll in June 1999.
Other income for the year ended December 31, 1999, includes a gain on the
sale of a portion of our interest in Deepwater Holdings of $10.1 million.
OIL AND NATURAL GAS PRODUCTION
YEAR ENDED DECEMBER 31,
------------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Natural gas $ 12,819 $ 24,829 $ 22,941
Oil, condensate and liquids 7,733 5,136 8,470
-------- -------- --------
Total operating revenues 20,552 29,965 31,411
Operating expenses (27,954) (37,324) (41,551)
-------- -------- --------
EBIT $ (7,402) $ (7,359) $(10,140)
======== ======== ========
Volumes
Natural gas sales (MMcf) 7,185 12,211 11,324
======== ======== ========
Oil, condensate, and liquid sales (MBbls) 295 357 540
======== ======== ========
Weighted average realized prices
Natural Gas ($/Mcf) $ 1.86 $ 2.02 $ 2.01
======== ======== ========
Oil, condensate, and liquids ($/Bbl) $ 25.26 $ 14.32 $ 15.69
======== ======== ========
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Oil and natural gas sales for the year ended December 31, 2000, were $9.4
million lower than 1999. The decrease was a result of lower oil and natural gas
production due to normal production declines of existing reserves, the permanent
shut-in of two wells at Viosca Knoll Block 817, the temporary shut-in of Garden
Banks Blocks 72 and 117 as a result of the Poseidon rupture, and lower realized
prices for natural gas, offset by higher realized prices for oil. Realized
prices were affected by hedges in place during the period.
Operating expenses for the year ended December 31, 2000, were $9.4 million
lower than 1999 due to lower depletion from lower oil and natural gas
production.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Total operating revenues for the year ended December 31, 1999, were
approximately $1.4 million lower than 1998. The decrease was primarily due to
lower oil production from natural depletion and lower realized oil prices,
partially offset by higher natural gas sales from the acquisition of an
additional 25 percent working interest in Viosca Knoll Block 817 and the
acquisition of a 38 percent working interest in the West Delta Block 35 in the
third quarter of 1998.
Operating expenses for the year ended December 31, 1999, were approximately
$4.2 million lower than 1998, due to decreased depletion and abandonment rates
related to our oil and natural gas wells, and cost reductions associated with
the operations of those properties.
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GAS STORAGES SERVICES
YEAR ENDED
DECEMBER 31, 2000
-----------------
(IN THOUSANDS)
Gas storage services........................................ $ 6,205
-------
Total operating revenues.......................... 6,205
Operating expenses, net..................................... (4,014)
-------
EBIT.............................................. $ 2,191
=======
In August 2000, we acquired the natural gas storage businesses of Crystal
Gas Storage Inc. For the four months ended December 31, 2000, the revenues from
these businesses consisted primarily of the fixed reservation fees for natural
gas storage capacity. Natural gas storage capacity revenues are recognized and
due during the month in which capacity is reserved by the customer regardless of
the amount of capacity actually used. Operating expenses consist of management
and operating fees and depreciation on the storage facilities.
INTEREST AND DEBT EXPENSE
YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999
Interest and debt expense, net of capitalized interest, for the year ended
December 31, 2000, was approximately $11.7 million higher than 1999. The
increase is due to higher average interest rates and higher average debt
outstanding related to construction activities and the acquisition of EPIA.
YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998
Interest and debt expense, net of capitalized interest, for the year ended
December 31, 1999, was approximately $15.1 million higher than 1998. The
increase is due to higher average interest rates and higher average debt
outstanding related to construction activities and acquisitions during 1999.
LIQUIDITY AND CAPITAL RESOURCES
CASH FROM OPERATING ACTIVITIES
Net cash provided by operating activities was approximately $48.4 million
for the year ended December 31, 2000, compared to approximately $50.8 million
for the same period in 1999. The decrease was primarily associated with lower
distributions from equity investments offset by an increase in earnings.
CASH FROM INVESTING ACTIVITIES
Net cash used in investing activities was approximately $126.2 million for
the year ended
December 31, 2000. Our investing activities included the acquisition of EPIA,
additional expenditures for the Prince TLP and increases in our equity
investments.
Funding for capital expenditures, acquisitions, and other investing
activities is expected to be provided by internally generated funds, available
capacity under existing credit facilities, and/or the issuance of other long-
term debt or equity.
CASH FROM FINANCING ACTIVITIES
Net cash flows provided by financing activities totaled approximately $93.9
million for the year ended December 31, 2000. During 2000, we issued 4.6 million
common units in a public offering for approximately $101 million of net
proceeds. We also received approximately $70.6 million in net proceeds from a
project finance loan and borrowings under our revolving credit facility. During
2000, we made distributions to our unitholders and our General Partner of
approximately $79.3 million.
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Future funding for long-term debt retirements, distributions, and other
financing activities is expected to be provided by internally generated funds,
available capacity under existing credit facilities, and/or the issuance of
other long-term debt or equity.
LIQUIDITY
We are in the process of amending and restating our revolving credit
facility with a syndicate of commercial banks to increase our available credit
from $500 million to $600 million subject to borrowing base limitations. We are
also in the process of refinancing Poseidon's revolving credit facility, which
matures on April 30, 2001.
We rely on cash generated from internal operations, including distributions
from our equity investees, as our primary source of liquidity, supplemented by
our available credit facility. The availability of borrowings under our credit
agreement is subject to specified conditions, which management believes we
currently meet. These conditions include compliance with the financial
covenants, ratios and borrowing bases required by such agreements, absence of
default under such agreements, and continued accuracy of the representations and
warranties contained in such agreements, including the absence of any material
adverse changes since the specified dates. For a discussion of our financing
arrangements, see Item 8, Financial Statements and Supplementary Data, Note 5.
COMMITMENTS AND CONTINGENCIES
See Item 8, Financial Statements and Supplementary Data, Note 8, for a
discussion of our commitments and contingencies.
At December 31, 2000, we had capital and investment commitments of
approximately $72.4 million primarily related to the construction of the Prince
TLP, which are expected to be funded through internally generated funds and/or
incremental borrowings. Our other planned capital and investment projects are
discretionary in nature, with no substantial commitments made in advance of the
actual expenditures.
OTHER
In January 2001, El Paso merged with The Coastal Corporation, the parent
company of ANR Pipeline Company, which is our joint venture partner in Deepwater
Holdings. As a result of the merger, ANR has became our affiliate.
NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED
See Item 8, Financial Statements and Supplementary Data, Note 1, for a
discussion relating to new accounting pronouncements not yet adopted.
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RISK FACTORS AND CAUTIONARY STATEMENT FOR PURPOSES OF THE "SAFE HARBOR"
PROVISIONS OF THE PRIVATE SECURITIES LITIGATION REFORM ACT OF 1995
This report contains or incorporates by reference forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Where any forward-looking statement includes a statement of the
assumptions or bases underlying the forward-looking statement, we caution that,
while we believe these assumptions or bases to be reasonable and made in good
faith, assumed facts or bases almost always vary from the actual results, and
the differences between assumed facts or bases and actual results can be
material, depending upon the circumstances. Where, in any forward-looking
statement, we or our management express an expectation or belief as to future
results, such expectation or belief is expressed in good faith and is believed
to have a reasonable basis. We cannot assure you, however, that the statement of
expectation or belief will result or be achieved or accomplished. The words
"believe", "expect", "estimate", "anticipate" and similar expressions may
identify forward-looking statements.
With this in mind, you should consider the following important factors that
could cause actual results to differ materially from those expressed in any
forward-looking statement made by us or on our behalf.
RISKS INHERENT IN AN INVESTMENT IN OUR LIMITED PARTNER INTERESTS
YOU WILL HAVE LIMITED VOTING RIGHTS AND WILL NOT CONTROL OUR GENERAL PARTNER
Unlike the holders of capital stock in a corporation, you only have limited
voting rights on matters affecting our business. Our General Partner, whose
directors you do not elect, manages our activities. In addition, absent
voluntary withdrawal, our unitholders will not have the right to elect the
general partner on an annual or any other continuing basis. Furthermore, the
general partner may not be removed as our general partner except upon the
affirmative vote of the holders of at least 55 percent of our outstanding
limited partner interests, including units owned by the general partner and its
affiliates.
WE MAY ISSUE ADDITIONAL SECURITIES, DILUTING YOUR INTERESTS
We can issue additional common units, preference units and other capital
securities representing limited partner interests, including securities with
rights to distributions and allocations or in liquidation equal or superior to
the securities held by you, for any amount and on any terms and conditions
established by the general partner. If we issue more limited partner interests,
it will reduce your proportionate ownership interest in us. This could cause the
market price of your securities to fall and reduce the cash distributions paid
to our limited partners. Further, we have the ability to issue partnership
interests with voting rights superior to yours. If we issued any such
securities, it could adversely affect your voting power.
YOU MAY NOT HAVE LIMITED LIABILITY IN THE CIRCUMSTANCES DESCRIBED BELOW AND MAY
BE LIABLE FOR THE RETURN OF WRONGFUL DISTRIBUTIONS
You will not be liable for assessments in addition to your initial capital
investment in our securities. However, you may be required to repay to us
amounts wrongfully returned or distributed to you under some circumstances.
Delaware law provides that a limited partner who receives a distribution that
results in liabilities of the partnership exceeding the fair value of the assets
of the partnership and knows at the time of the distribution that the
distribution violates the law will be liable to the limited partnership for the
amount of the distribution for three years from the date of the distribution.
OUR EXISTING UNITS ARE SUBJECT TO RESTRICTIONS ON TRANSFER
All purchasers of our existing units who wish to become holders of record
must deliver an executed transfer application in which the purchaser or
transferee must certify that, among other things, he, she or it is eligible to
purchase those securities before the purchaser or transferee of those securities
will be registered on our records, and before cash distributions can be made and
federal income tax information furnished to the purchaser or transferee. A
person purchasing our existing units, who does not execute a transfer
application
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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 information about the holder's nationality, citizenship or other related
status. If the record holder fails to furnish the information or if our general
partner determines, based on the information furnished by the holder in response
to the request, that the cancellation or forfeiture of any property in which we
have an interest may occur, 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. As
a result of these restrictions, your ability to transfer your limited partner
interests may be adversely affected.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE YOU TO SELL YOUR
LIMITED PARTNER INTERESTS AT AN UNDESIRABLE TIME OR PRICE
If, at any time, our general partner and its affiliates hold 85 percent or
more of any class or series of our issued and outstanding limited partner
interests, the 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. Accordingly, you may be required to sell your limited partner
interests against your will, and the price you receive for those securities may
be less than you would like to receive.
RISKS RELATED TO CONFLICTS OF INTEREST
EL PASO AND ITS AFFILIATES MAY HAVE CONFLICTS OF INTEREST WITH US
Although El Paso controls our general partner and has financial incentives
to protect its investment by encouraging our success, and it plans to use us
when practical as its principal growth vehicle for acquiring and developing
midstream onshore and offshore assets and providing related services and
solutions, El Paso is not contractually bound to do so and may reconsider at any
time, without notice. Additionally, El Paso is not required to pursue a business
strategy that will favor our business opportunities over the business
opportunities of El Paso or any of its affiliates (or any other competitor of
ours acquired by El Paso, including Coastal, with whom El Paso just completed a
merger). In fact, El Paso may have financial motives to favor our competitors.
El Paso 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. El Paso continues to own pipelines and related facilities located in
the Gulf, including the Bluewater and Seahawk Shoreline systems. To the extent
we continue to acquire interests in oil and natural gas properties, we may
compete directly with the exploration, development and marketing activities
conducted by El Paso.
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 our 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 ours
on the other. In addition, we have, and we expect to enter into other,
significant business relationships with El Paso, our general partner and their
affiliates in which conflicts of interest could arise.
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RISKS RELATED TO OUR LEGAL STRUCTURE
THE INTERRUPTION OF DISTRIBUTIONS TO US FROM OUR SUBSIDIARIES AND JOINT VENTURES
MAY AFFECT OUR ABILITY TO MAKE CASH DISTRIBUTIONS
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 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, our Argo subsidiary and several
of our joint ventures have credit arrangements that contain various restrictive
covenants. Among other things, those covenants may limit or restrict such
entities' ability to make distributions to us. Further, the entity charter
documents typically vest in their management committees sole discretion
regarding distributions. We cannot assure you that our Argo subsidiary or our
joint ventures will continue to make distributions to us at current levels or at
all.
Moreover, pursuant to some of the those credit arrangements, we have
conditionally agreed to return a limited amount of the distributions made to us
by the applicable entity.
WE CANNOT CAUSE OUR JOINT VENTURES TO TAKE OR NOT TO TAKE ACTIONS UNLESS SOME OR
ALL OF OUR JOINT VENTURE PARTNERS AGREE
Due to the nature of joint ventures, each partner (us included) in each of
our joint ventures has made substantial contributions and other commitments to
that joint venture and, accordingly, has required that the relevant charter
documents contain certain features designed to provide each partner with the
opportunity to protect its investment in that joint venture, as well as any
other assets which may be substantially dependent on or otherwise affected by
the activities of that joint venture. These protective features include a
corporate governance structure which requires at least a majority in interest
vote to authorize many basic activities and requires a greater voting interest
(sometimes up to 100 percent) to authorize more significant activities.
Depending on the particular joint venture, these more significant activities
might involve large expenditures or contractual commitments, the construction or
acquisition of assets, borrowing money, transactions with affiliates of a joint
venture partner, litigation and/or transactions not in the ordinary course of
business, among others. Thus, without the concurrence of joint venture partners
with enough voting interests, we cannot cause any of our joint ventures to take
or not to take certain actions, even though such actions may be in the best
interest of the particular joint venture or us.
WE DO NOT HAVE THE SAME FLEXIBILITY AS OTHER TYPES OF ORGANIZATIONS TO
ACCUMULATE CASH AND EQUITY TO PROTECT AGAINST ILLIQUIDITY IN THE FUTURE
Unlike a corporation, our partnership agreement requires us to make
quarterly distributions to our 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 common units
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.
CHANGES OF CONTROL OF OUR GENERAL PARTNER MAY ADVERSELY AFFECT YOU
Our results of operations and, thus, our ability to make cash distributions
could be adversely affected if there is a change in management resulting from a
change of control of our general partner. Although such an action would result
in a change of control under the terms of the indenture governing our
publicly-held debt, El Paso is not restricted from selling the general partner
or any of the common units it holds. As a result, El Paso could sell control of
our general partner to another company with less familiarity and experience with
our businesses and with different business philosophies and objectives. We
cannot assure you that any such acquiror would continue our current business
strategy, or even a business strategy economically compatible with our current
business strategy.
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RISKS RELATED TO OUR BUSINESS
OUR INDUSTRY IS HIGHLY COMPETITIVE
The hydrocarbons that we transport, gather, process, and store are, in many
cases, owned by third parties. As a result, the volume of hydrocarbons involved
in these activities depends on the actions of those third parties, and is beyond
our control. Further, the following factors, most of which are beyond our
control, impact our ability to maintain or increase current transmission,
gathering, processing, storage and sales volumes and rates, renegotiate existing
contracts as they expire or to remarket unsubscribed capacity at levels and
rates currently in place:
- future weather conditions, including those that favor alternative energy
sources;
- price competition;
- drilling activity and supply availability; and
- service area competition.
Our future profitability may be affected by our ability to compete with
services offered by other energy enterprises which may be larger, offer more
services, and possess greater resources.
The ongoing profitability of our pipeline systems depends upon having in
place long-term firm transportation contracts for a major portion of their
capacity. Our ability to negotiate new contracts and to renegotiate existing
contracts could be harmed by factors we cannot control, including:
- the proposed construction by other companies of additional pipeline
capacity in markets served by our pipelines;
- reduced demand due to higher oil and natural gas prices;
- actions by regulators that may impact the competitiveness of short-term
and long-term capacity markets;
- the availability of alternative energy sources; and
- the viability of our expansion projects.
FLUCTUATIONS IN ENERGY COMMODITY PRICES COULD ADVERSELY AFFECT OUR BUSINESS
Revenues generated by our gathering, storage, transportation and processing
contracts depend on volumes and rates, both of which can be affected by the
prices of oil and natural gas. The success of our expanding gathering, storage,
transportation, and processing operations is subject to continued development of
additional oil and natural gas reserves in the vicinity of our facilities, and
our ability to access such additional reserves to offset the natural decline
from existing wells connected to our systems. A decline in energy prices could
precipitate a decrease in these development activities and could cause a
decrease in the volume of reserves available for gathering, transportation and
processing through our offshore facilities. Fluctuations in energy prices, which
may impact gathering rates and investments by third parties in the development
of new oil and natural gas reserves connected to our facilities, are caused by a
number of factors, including:
- regional, domestic and international supply and demand;
- availability and adequacy of transportation and platform facilities;
- energy legislation;
- federal or state taxes, if any, on the sale or transportation of natural
gas and natural gas liquids; and
- abundance of supplies of alternative energy sources.
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If there are reductions in the average volume of the natural gas we
transport, store, gather and process for a prolonged period, our results of
operations and financial position could be significantly, negatively affected.
FLUCTUATIONS IN PRODUCTION ACTIVITIES COULD HARM OUR BUSINESS
The success of our production activities could be adversely affected by
factors we can not control, including:
- fluctuations in prices of crude oil and natural gas;
- future production and development costs; and
- risks incident to the operation of oil and natural gas wells.
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 and peaking resulting from seasonal price sensitivity
through increased withdrawal charges and demand for non-storage hub services.
You cannot be certain 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.
PERSONAL INJURY, MECHANICAL FAILURE AND DAMAGE TO THE STORAGE AND RELATED
FACILITIES COULD HAVE AN ADVERSE EFFECT ON REVENUES AND CASH FLOW FROM OUR
STORAGE ASSETS.
Our storage operations are subject to all of the risks generally associated
with the storage of natural gas, a highly volatile product, including personal
injuries and damage to storage facilities, related equipment and surrounding
properties caused by hurricanes, weather and other acts of God, fires and
explosions, subsidence, as well as leakage of natural gas and spills of liquids
and condensate. Our storage facilities incorporate certain primary and backup
equipment which, in the event of mechanical failure, might take some time to
replace. Any prolonged disruption to the operations of our storage facilities,
whether due to mechanical failure, labor difficulties, destruction of or damage
to such facilities, severe weather conditions, interruption of transportation or
utilities service or other reasons, could have a material adverse effect on our
business, results of operations and financial condition. Additionally, some of
our storage contracts obligate us to indemnify the customer for any damage or
injury occurring during the period in which the customer's natural gas is in our
possession. In order to minimize the effects of any such incident, we maintain
insurance coverage which includes property and business interruption insurance.
We believe that this insurance coverage is adequate; however, you cannot be sure
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.
OUR STORAGE BUSINESS DEPENDS ON NEIGHBORING PIPELINES TO TRANSPORT NATURAL GAS.
To obtain natural gas, our storage business depends on the pipelines to
which it has 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.
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THE USE OF DERIVATIVE FINANCIAL INSTRUMENTS COULD RESULT IN FINANCIAL LOSSES
At times, we enter into derivative financial instruments to reduce our
exposure to short-term volatility in changes in energy commodity prices. In
these activities, we could incur financial losses in the future as a result of
volatility in the market values of the underlying commodities or if one of our
counterparties fails to perform under a contract. For additional information
concerning our derivative financial instruments, see item 7A, Quantitative and
Qualitative Disclosures About Market Risk and Item 8, Financial Statements and
Supplementary Data, Note 8.
ATTRACTIVE ACQUISITION AND INVESTMENT OPPORTUNITIES MAY NOT BE AVAILABLE
Our ability to grow will depend, in part, upon our ability to identify and
complete attractive acquisition and investment opportunities. Opportunities for
growth through acquisitions and investments in joint ventures, and the future
operating results and success of these acquisitions and joint ventures within
the United States may be subject to the effects of, and changes in, the
following:
- United States monetary policies;
- laws and regulations;
- political and economic developments;
- inflation rates;
- taxes; and
- operating conditions.
WE COULD INCUR SUBSTANTIAL ENVIRONMENTAL LIABILITIES
We may incur significant costs and liabilities in order to comply with
existing and future environmental laws and regulations. It is also possible that
other developments, such as increasingly strict environmental laws, regulations
and enforcement policies thereunder, and claims for damages to property,
employees, other persons and the environment resulting from our operations could
result in substantial costs and liabilities in the future. For additional
information concerning our environmental matters, see Item 8, Financial
Statements and Supplementary Data, Note 8.
OUR ACTIVITIES INVOLVE OPERATING HAZARDS AND UNINSURED RISKS
While we maintain insurance against the risks normally associated with the
gathering, transportation, processing, exploration and production of oil and
natural gas, including, but not limited to explosions, pollution and fires, the
occurrence of a significant event against which we are not fully insured could
have a significant negative effect on our business.
OUR SUBSTANTIAL INDEBTEDNESS COULD ADVERSELY AFFECT OUR FINANCIAL CONDITION AND
PREVENT US FROM MAKING DISTRIBUTIONS TO OUR UNITHOLDERS
We have a significant amount of indebtedness and the ability to incur more
indebtedness. Furthermore, our indebtedness is collateralized by guarantees of
our subsidiaries. Our substantial indebtedness could have important consequences
to our unitholders. For example, it could:
- limit our ability to make distributions to our unitholders;
- increase our vulnerability to general adverse economic and industry
conditions;
- prevent us from running our businesses as planned;
- limit our ability to pursue acquisition opportunities; and
- place us at a competitive disadvantage as compared to our competitors
that have less debt.
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OUR INDEBTEDNESS MAY RESTRICT OUR ABILITY TO OPERATE
We must comply with various affirmative and negative covenants related to
our senior subordinated notes, our revolving credit facility and our project
finance loan. These restrictions may prevent us from engaging in transactions
beneficial to us. Specifically, these covenants limit our ability to:
- incur additional indebtedness or liens;
- make payments in respect of, 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.
Any additional indebtedness we incur in the future will be under our
existing credit agreements or under arrangements that we believe have terms and
conditions at least as restrictive as those contained in our existing credit
agreements.
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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We may utilize derivative financial instruments for purposes other than
trading to manage market risks associated with energy commodities and interest
rates. In accordance with procedures established by our General Partner, we
monitor current economic conditions and evaluate our expectations of future
prices and interest rates when making decisions with respect to risk management.
COMMODITY PRICE RISK
We occasionally hedge a portion of our oil and natural gas production to
reduce our exposure to fluctuations in the market prices of oil and natural gas,
and to meet requirements under our revolving credit facility. We use commodity
price swap transactions whereby monthly settlements are based on differences
between the prices specified in the commodity price swap agreements and the
settlement prices of our futures contracts quoted on the New York Mercantile
Exchange, or NYMEX, or other indices. We settle the commodity price swap
transactions by paying the negative difference or receiving the positive
difference between the applicable settlement price and the price specified in
the contract. The commodity price swap transactions we use differ from futures
contracts in that there are no contractual obligations which require or allow
for the future delivery of the product. The credit risk from our price swap
contracts is derived from the counterparty to the transaction, typically a major
financial institution. We do not require collateral and do not anticipate
non-performance by this counterparty, which does not transact a sufficient
volume of transactions with us to create a significant concentration of credit
risk. Gains or losses resulting from hedging activities and the termination of
any hedging instruments are initially deferred and included as an increase or
decrease to oil and natural gas sales in the period in which the hedged
production is sold. For the years ended December 31, 2000, 1999, and 1998, we
recorded a net (loss) gain of $(15.0) million, $(2.3) million and $2.5 million,
respectively, from such activities.
At December 31, 1999, we had two outstanding natural gas sales swap
transactions for the calendar year 2000. Under one of the swaps, we received a
fixed price of $1.6686 on 10,000 MMbtu/d, and paid the monthly natural gas
futures contract price on NYMEX. The second swap provided for similar pricing
terms, notional quantity and contract period. On January 18, 2000, we fixed the
contract under the swap whereby we received $1.8050 on 10,000 MMbtu/d from
February to December 2000 and paid monthly NYMEX settlement price.
Each of our derivative instruments expired in December 2000, and we have
not entered into any new hedging activities in 2001.
INTEREST RATE RISK
We utilize both fixed and variable rate long-term debt, and are exposed to
market risk due to the floating interest rate under our credit facility. Under
our amended credit facility, the remaining principal and the final interest
payment are due in May 2002. As of December 31, 2000, our credit facility had a
principal balance of $318 million with an average floating interest rate of 9.1%
per annum. A one percent increase in interest rates would result in a $3.2
million annual increase in interest expense on the existing principal balance.
We are exposed to similar risks under the various joint venture credit
facilities and loan agreements.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
------- -------- -------
Operating revenues
Gathering and transportation services..................... $71,806 $ 22,311 $ 6,852
Oil and natural gas sales................................. 20,552 29,965 31,411
Platform services......................................... 13,875 11,383 10,468
Gas storage services...................................... 6,182 -- --
------- -------- -------
112,415 63,659 48,731
------- -------- -------
Operating expenses
Purchased natural gas costs............................... 28,842 -- --
Operation and maintenance, net............................ 13,779 22,402 27,558
Depreciation, depletion and amortization.................. 27,743 30,630 29,267
Impairment, abandonment and other......................... -- -- (1,131)
------- -------- -------
70,364 53,032 55,694
------- -------- -------
Operating income (loss)..................................... 42,051 10,627 (6,963)
------- -------- -------
Other income
Equity investment earnings................................ 22,931 32,814 26,724
Gain on sale of assets.................................... -- 10,103 311
Other..................................................... 2,377 358 460
------- -------- -------
25,308 43,275 27,495
------- -------- -------
Income before interest, income taxes and other charges...... 67,359 53,902 20,532
Interest and debt expense................................... 47,072 35,323 20,242
Minority interest........................................... 95 197 15
------- -------- -------
Income before income taxes.................................. 20,192 18,382 275
Income tax benefit.......................................... 305 435 471
------- -------- -------
Net income.................................................. 20,497 18,817 746
Net income allocated to General Partner..................... 15,578 12,129 142
Net income allocated to Series B unitholders................ 5,668 -- --
------- -------- -------
Net (loss) income allocated to limited partners before
accounting change......................................... (749) 6,688 604
Cumulative effect of accounting change...................... -- (15,427) --
------- -------- -------
Net (loss) income allocated to limited partners............. $ (749) $ (8,739) $ 604
======= ======== =======
Weighted average basic and diluted units outstanding........ 29,077 25,928 24,367
======= ======== =======
Basic and diluted net (loss) income per unit before
accounting change......................................... $ (0.03) $ 0.26 $ 0.02
Cumulative effect of accounting change...................... -- (0.60) --
------- -------- -------
Basic and diluted net (loss) income per unit after
accounting
change.................................................... $ (0.03) $ (0.34) $ 0.02
======= ======== =======
See accompanying notes.
30
33
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31,
--------------------
2000 1999
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 20,281 $ 4,202
Accounts receivable, trade................................ 31,132 5,149
Accounts receivable, affiliate............................ 1,602 3,352
Other current assets...................................... 633 254
-------- --------
Total current assets.............................. 53,648 12,957
Property, plant and equipment, net.......................... 631,695 373,759
Equity investments.......................................... 182,734 185,766
Other noncurrent assets..................................... 11,182 11,103
-------- --------
Total assets...................................... $879,259 $583,585
======== ========
LIABILITIES AND PARTNERS' CAPITAL
Current liabilities
Accounts payable, trade................................... $ 16,596 $ 3,588
Accounts payable, affiliate............................... -- 1,827
Accrued interest.......................................... 3,107 2,753
Other current liabilities................................. -- 2,250
-------- --------
Total current liabilities......................... 19,703 10,418
Revolving credit facility................................... 318,000 290,000
Project financing........................................... 45,000 --
Long-term debt.............................................. 175,000 175,000
Other noncurrent liabilities................................ 12,851 12,164
-------- --------
Total liabilities................................. 570,554 487,582
-------- --------
Commitments and contingencies
Minority interest........................................... (2,366) (486)
Partners' capital........................................... 311,071 96,489
-------- --------
Total liabilities and partners' capital........... $879,259 $583,585
======== ========
See accompanying notes.
31
34
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------------
2000 1999 1998
--------- --------- --------
Cash flows from operating activities
Net income............................................. $ 20,497 $ 18,817 $ 746
Adjustments to reconcile net income to net cash
provided by operating activities
Depreciation, depletion and amortization........... 27,743 30,630 29,267
Gain of sale of assets............................. -- (10,103) (311)
Impairment, abandonment and other.................. -- -- (1,131)
Distributed earnings of equity investees
Earnings from equity investments................. (22,931) (32,814) (26,724)
Distributions from equity investments............ 33,960 46,180 31,171
Litigation reserve................................. (2,250) 2,250 --
Other noncash items................................ 2,237 4,084 1,682
Working capital changes, net of effects of
acquisitions and non-cash transactions
(Increase) decrease in accounts receivable....... (17,351) 2,107 (27)
Decrease in other current assets................. 1,295 366 406
Increase (decrease) in accounts payable and
accrued liabilities........................... 5,210 (10,757) (9,402)
--------- --------- --------
Net cash provided by operating activities...... 48,410 50,760 25,677
--------- --------- --------
Cash flows from investing activities
Acquisition and development of oil and natural gas
properties.......................................... (172) (3,218) (30,548)
Additions to pipelines, platforms and facilities....... (90,205) (30,662) (27,368)
Investments in equity investees........................ (8,979) (59,348) (8,195)
Cash paid for acquisitions, net of cash acquired....... (26,476) (20,351) --
Proceeds from sale of assets........................... -- 26,122 487
Distributions related to the formation of Deepwater
Holdings............................................ -- 20,000 --
Other.................................................. (381) 322 --
--------- --------- --------
Net cash used in investing activities.......... (126,213) (67,135) (65,624)
--------- --------- --------
Cash flows from financing activities
Net proceeds from revolving credit facility............ 152,043 141,126 128,072
Repayments of revolving credit facility................ (125,000) (226,850) (29,000)
Net proceeds from issuance of long-term debt........... -- 168,878 --
Net proceeds from project financing.................... 43,554 -- --
Net proceeds from issuance of common units............. 100,634 -- --
Redemption of publicly-held preference units........... (804) -- --
Contributions from General Partner..................... 2,785 603 --
Distributions to partners.............................. (79,330) (66,288) (62,447)
--------- --------- --------
Net cash provided by financing activities...... 93,882 17,469 36,625
--------- --------- --------
Net increase (decrease) in cash and cash equivalents..... 16,079 1,094 (3,322)
Cash and cash equivalents at beginning of year........... 4,202 3,108 6,430
--------- --------- --------
Cash and cash equivalents at end of year................. $ 20,281 $ 4,202 $ 3,108
========= ========= ========
See accompanying notes.
32
35
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF PARTNERS' CAPITAL
(IN THOUSANDS)
SERIES B SERIES B
PREFERENCE PREFERENCE PREFERENCE PREFERENCE COMMON COMMON GENERAL
UNITS UNITHOLDERS UNITS UNITHOLDERS UNITS UNITHOLDERS PARTNER(1) TOTAL
---------- ----------- ---------- ----------- ------ ----------- ---------- --------
Partners' capital at
December 31, 1997......... -- $ -- 18,075 $ 163,426 6,292 $(15,400) $ (4,060) $143,966
Net income.................. -- -- -- 63 -- 541 142 746
Conversion of preference
units into common units... -- -- (17,058) (127,842) 17,058 127,842 -- --
Cash distributions.......... -- -- -- (28,296) -- (22,011) (11,509) (61,816)
------- -------- ------- --------- ------ -------- -------- --------
Partners' capital at
December 31, 1998......... -- -- 1,017 7,351 23,350 90,972 (15,427) 82,896
Cumulative effect of
accounting change......... -- -- -- 3,072 -- (18,499) 15,427 --
Net income.................. -- -- -- 919 -- 5,769 12,129 18,817
Acquisition of additional
interest in Viosca
Knoll..................... -- -- -- -- 2,662 59,792 -- 59,792
General Partner contribution
related to issuance of
common units.............. -- -- -- -- -- -- 603 603
Conversion of preference
units into common units... -- -- (727) (7,454) 727 7,454 --
Cash distributions.......... -- -- -- (919) -- (52,211) (12,489) (65,619)
------- -------- ------- --------- ------ -------- -------- --------
Partners' capital at
December 31, 1999......... -- -- 290 2,969 26,739 93,277 243 96,489
Net income (loss)........... -- 5,668 -- 241 -- (990) 15,578 20,497
Conversion of preference
units into common units... -- -- (211) (2,165) 211 2,165 -- --
Redemption of remaining
preference units.......... -- -- (79) (804) -- -- -- (804)
Issuance of common units.... -- -- -- -- 4,600 100,634 -- 100,634
General Partner contribution
related to the issuance of
common units.............. -- -- -- -- -- -- 2,785 2,785
Issuance of Series B
preference units.......... 170,000 170,000 -- -- -- -- -- 170,000
Cash distributions.......... (241) -- (62,284) (16,005) (78,530)
------- -------- ------- --------- ------ -------- -------- --------
Partners' capital at
December 31, 2000......... 170,000 $175,668 -- $ -- 31,550 $132,802 $ 2,601 $311,071
======= ======== ======= ========= ====== ======== ======== ========
- ---------------
(1) El Paso Energy Partners Company, a wholly owned subsidiary of El Paso, owns
a one percent general partner interest in us.
See accompanying notes.
33
36
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
We are a publicly held Delaware master limited partnership established in
1993 for the purpose of providing midstream energy services, including natural
gas and oil gathering, transportation, storage and other related services, both
onshore and offshore in the Gulf of Mexico. In August 1998, El Paso acquired,
through a series of transactions, DeepTech International Inc., or DeepTech. As a
result, El Paso acquired 100 percent of our General Partner's interest and an
overall 27.3 percent effective interest in us. In June 1999, we issued
additional common units to El Paso in connection with the acquisition of a
portion of the Viosca Knoll system, bringing El Paso's overall effective
interest to 34.5 percent. In July 2000, we issued an additional 4.6 million
common units in a public offering, bringing El Paso's overall effective interest
to 29.8 percent. In August 2000, we issued $170 million of Series B preference
units to an affiliate of our General Partner. See Note 2 for further discussion
of these transactions.
Basis of Presentation and Principles of Consolidation
Our consolidated financial statements include the accounts of all
majority-owned, controlled subsidiaries after the elimination of all significant
intercompany accounts and transactions. We account for investments in companies
where we have the ability to exert significant influence over, but not control
over operating and financial policies, using the equity method. The General
Partner's approximate one percent non-managing interest in certain subsidiaries
of ours represent the minority interest in our consolidated financial
statements. Our consolidated financial statements for previous periods include
reclassifications that were made to conform to the current year presentation.
Those reclassifications have no impact on reported net income or partners'
capital.
Use of Estimates
The preparation of our financial statements in conformity with generally
accepted accounting principles requires us to make estimates and assumptions
that affect the reported amounts of assets, liabilities, revenues and expenses
and disclosure of contingent assets and liabilities that exist at the date of
our financial statements. Our actual results are likely to differ from those
estimates.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Allowance for Doubtful Accounts
We have established an allowance for losses on accounts which may become
uncollectible. Collectibility is reviewed regularly and the allowance is
adjusted as necessary, primarily under the specific identification method. At
December 31, 2000, the allowance was $0.4 million. There was no allowance at
December 31, 1999.
Property, Plant and Equipment
Gathering pipelines, platforms and related facilities, and natural gas
storage facilities and equipment are recorded at cost and are depreciated on a
straight-line basis over the estimated useful lives of the assets which
generally range from 5 to 30 years for the gathering pipelines, 18 to 30 years
for platforms and related facilities and 25 to 30 years for natural gas storage
facilities and equipment. Repair and maintenance costs are expensed as incurred,
while additions, improvements and replacements are capitalized.
34
37
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We account for our oil and natural gas exploration and production
activities using the successful efforts method of accounting. Under this method,
costs of successful exploratory wells, developmental wells and acquisitions of
mineral leasehold interests are capitalized. Production, exploratory dry hole
and other exploration costs, including geological and geophysical costs and
delay rentals, are expensed as incurred. Unproved properties are assessed
periodically and any impairment in value is recognized currently as
depreciation, depletion and amortization expense.
Depreciation, depletion and amortization of the capitalized costs of
producing oil and natural gas properties, consisting principally of tangible and
intangible costs incurred in developing a property and costs of productive
leasehold interests, are computed on the unit-of-production method.
Unit-of-production rates are based on annual estimates of remaining proved
developed reserves or proved reserves, as appropriate, for each property.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for gathering pipelines, platforms, related facilities and oil and
natural gas properties. Other noncurrent liabilities at December 31, 2000 and
1999, included approximately $12.5 million and $11.7 million of accrued
dismantlement, restoration and abandonment costs.
Retirements, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation, depletion and amortization of the
disposed assets with any resulting gain or loss reflected in income.
We evaluate impairment of our regulated and non-regulated property, plant,
and equipment in accordance with Statement of Financial Accounting Standards, or
SFAS, No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
Capitalization of Interest
Interest and other financing costs are capitalized in connection with
construction and drilling activities as part of the cost of the asset and
amortized over the related asset's estimated useful life.
Debt Issue Costs
Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or terminated.
Revenue Recognition
Revenue from pipeline transportation of hydrocarbons is recognized upon
receipt of the hydrocarbons into the pipeline systems. Revenue from oil and
natural gas sales is recognized upon delivery in the period of production.
Revenue from platform access and processing services is recognized in the period
the services are provided. Natural gas storage revenues consist primarily of
fixed fees for natural gas storage capacity and are recognized during the month
in which the space is reserved by the customer, regardless of how much space is
actually used. Interruptible revenues, which are generated by providing excess
storage capacity, are variable in nature and are recognized when the service is
provided.
In previous years, we have reported equity earnings as part of operating
revenues. We have changed this presentation as of December 31, 2000, to include
equity earnings as other income. This change has been reflected for all periods
presented and does not impact our reported net income.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
to provide guidance for revenue recognition issues and disclosure requirements.
SAB No. 101 offers guidelines, examples, and explanations for uncertain matters
35
38
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
relating to the recognition of revenue and became effective for us in the fourth
quarter of 2000. The adoption of SAB No. 101 did not have a material impact on
our financial position, results of operations, or cash flows.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Price Risk Management Activities
We enter into commodity price swap instruments for non-trading purposes to
manage our exposure to price fluctuations on anticipated natural gas and crude
oil sales transactions. To qualify for hedge accounting, the transactions must
reduce the price risk of the underlying hedged items, be designated as hedges at
inception, and result in cash flows and financial impacts which are inversely
correlated to the position being hedged. If correlation ceases to exist, hedge
accounting is terminated and mark-to-market accounting is applied. Gains and
losses resulting from hedging activities and the termination of any hedging
instruments are initially deferred and included as an increase or decrease to
oil and natural gas sales in the period in which the hedged production is sold.
Income Taxes
With the exception of Tarpon, neither we nor our subsidiaries are taxable
entities. However, the taxable income or loss resulting from our operations will
ultimately be included in the federal and state income tax returns of the
general and limited partners. Individual partners will have different investment
bases depending upon the timing and price of their acquisition of partnership
units. Further, each partner's tax accounting, which is partially dependent upon
his tax position, may differ from the accounting followed in the consolidated
financial statements. Accordingly, there could be significant differences
between each individual partner's tax basis and his share of the net assets
reported in the consolidated financial statements. We do not have access to
information about each individual partner's tax attributes and the aggregate tax
bases cannot be readily determined.
We utilize SFAS No. 109, Accounting for Income Taxes, to account for
Tarpon's income taxes subject to federal corporate income taxation. The income
tax benefit reported in our Consolidated Statements of Operations for the years
ended 2000, 1999, and 1998, relates solely to Tarpon's book loss at the
effective statutory income tax rate for the respective period since no material
differences exist between book and taxable income. In January 2001, we sold our
interest in Tarpon as a result of a FTC order. All deferred tax balances were
transferred to the buyer at the time of sale.
Income (Loss) per Unit
Basic income (loss) per unit excludes dilution and is computed by dividing
net income (loss) attributable to the limited partners by the weighted average
number of units outstanding during the period. Diluted income (loss) per unit
reflects potential dilution and is computed by dividing net income (loss)
attributable to the limited partners by the weighted average number of units
outstanding during the period increased by the number of additional units that
would have been outstanding if the potentially dilutive units had been issued.
Basic income (loss) per unit and diluted income (loss) per unit are the
same for the years ended December 31, 2000, 1999 and 1998, as no potentially
dilutive units were outstanding during the given periods.
36
39
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We include the outstanding preference units in the basic and diluted net income
(loss) per unit calculation as if the preference units had been converted into
common units.
Unit-Based Compensation
We apply the provisions of Accounting Principles Board Opinion (APB) No. 25
and related interpretations in accounting for our unit compensation plans,
including options issued to employees of our General Partner. Accordingly,
compensation expense is not recognized for unit options unless the options were
granted at an exercise price lower than the market price of common units on the
grant date. We use fixed and variable plan accounting for our fixed and variable
compensation plans.
Cumulative Effect of Accounting Change
In the fourth quarter of 1999, we changed our method of allocating net
income to our partners' capital accounts from a method where we allocated income
based on percentage ownership and proportionate share of cash distributions, to
a method where income is allocated to the partners based upon the change from
period to period in their respective claims on our book value capital. We
believe that the new income allocation method is preferable because it more
accurately reflects the income allocation provisions called for under the
partnership agreement and the resulting partners' capital accounts are more
reflective of a partner's claim on our book value capital at each period end.
This change in accounting had no impact on our consolidated net income or our
consolidated total partners' capital for any period presented. This change did
not impact the declaration of distributions or the individual partner tax basis.
The impact of this change in accounting has been recorded as a cumulative
effect adjustment in our income allocation for the year ended December 31, 1999.
The effect of adopting this change in accounting, excluding the cumulative
adjustment, was to reduce basic and diluted net income per limited partner unit
by $0.33 for the year ended December 31, 1999. In addition, had this change been
in effect for the year ended December 31, 1998, the loss allocated to limited
partners would have been $11.2 million, and basic and diluted net loss per
limited partner unit would have been $0.46.
Accounting for Derivative Instruments and Hedging Activities
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133, and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It requires that we measure all derivative instruments at their fair
value, and classify them as either assets or liabilities on our balance sheet,
with a corresponding offset to income, or other comprehensive income, depending
on their designation, their intended use, or their ability to qualify as hedges
under the standard.
We adopted SFAS No. 133 on January 1, 2001. All of our existing derivative
instruments expired in December 2000 and accordingly, there was no impact as a
result of our adoption.
Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities
In September 2000, the FASB issued SFAS No. 140, Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities, which
replaces SFAS No. 125. This statement revises the standards for accounting for
securitizations and other transfers of financial assets and collateral and
requires certain disclosures, but carries over most of the provisions of SFAS
No. 125 without reconsideration. This
37
40
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
standard has various effective dates, the earliest of which is for fiscal years
ending after December 15, 2000. We do not believe the adoption of SFAS No. 140
will have a material impact on our financial position, results of operations, or
cash flows.
2. ACQUISITIONS AND DISPOSITIONS
Crystal Gas Storage
In August 2000, we acquired the salt dome natural gas storage businesses of
Crystal Gas Storage, Inc., a subsidiary of El Paso, in exchange for $170 million
of Series B 10% Cumulative Redeemable Preference Units. We accounted for the
acquisition as a purchase and assigned the purchase price to the assets and
liabilities acquired based upon the estimated fair value of those assets and
liabilities as of the acquisition date. The values assigned are preliminary and
may be revised based on additional information. The following is summary
information related to the acquisition (in thousands):
Fair value of assets acquired............................... $170,573
Fair value of liabilities assumed........................... (573)
--------
Preference units issued........................... $170,000
========
El Paso Intrastate-Alabama Pipeline System
In March 2000, we acquired EPIA from a subsidiary of El Paso for $26.5
million in cash. We accounted for the acquisition as a purchase and assigned the
purchase price to the assets and liabilities acquired based upon the estimated
fair value of those assets and liabilities as of the acquisition date. The
following is summary information related to the acquisition (in thousands):
Fair value of assets acquired............................... $28,261
Fair value of liabilities assumed........................... (1,785)
-------
Net cash paid..................................... $26,476
=======
The following selected unaudited pro forma information represents our
consolidated results of operations on a pro forma basis for the years ended
December 31, 2000 and 1999, assuming we acquired EPIA and the Crystal natural
gas storage businesses on January 1, 1999:
2000 1999
--------- ---------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
Revenue..................................................... $131,426 $105,930
Operating income............................................ $ 45,171 $ 12,484
Net income allocated to limited partners before accounting
change.................................................... $ 1,887 $ 5,406
Basic and diluted net income per unit before cumulative
effect of accounting change............................... $ 0.06 $ 0.21
Prince Field
In October 1998, we purchased a 100 percent working interest in the Prince
Field, formerly known as the Ewing Bank 958 Unit, from a wholly owned indirect
subsidiary of El Paso for $12.2 million. In October 1999, we executed an
agreement with El Paso Production to farmout our working interest in the Prince
Field in exchange for a 9 percent overriding royalty interest. Under the terms
of the agreement, we may convert our overriding royalty interest into a 30
percent undivided working interest once El Paso Production has recouped the
costs associated with its drilling and completion activities on the unit.
38
41
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Deepwater Holdings
In June 1999, we acquired additional interests in the HIOS, East Breaks and
UTOS systems through our acquisition of Natoco, Inc. and Naloco, Inc. for $51
million. As part of the transaction, we also assumed operations of the Stingray
system, the Stingray Offshore separation facility and the West Cameron
dehydration facility in November 1999. The purchase price exceeded the book
value of net assets acquired by approximately $48 million. This excess cost is
being amortized on a straight-line basis over the estimated lives of the
acquired assets, which approximates 30 years.
In September 1999, we formed Deepwater Holdings with ANR to reorganize our
interests in various joint ventures. In the transaction, both parties
contributed their respective interests in various pipeline systems and
facilities to Deepwater Holdings. Following this reorganization, Deepwater
Holdings owns 100 percent of the East Breaks, HIOS, UTOS, and Stingray systems,
along with the West Cameron dehydration facility. In exchange for our
contribution, we received a 59.66 percent interest in Deepwater Holdings. We
subsequently sold a 9.66 percent members' interest in Deepwater Holdings to ANR
for $26.1 million to effect a 50/50 ownership position. We realized a $10.1
million gain associated with the sale. In conjunction with the transaction, we
became the full operator of the UTOS, HIOS, and East Breaks systems on June 1,
2000.
In connection with its formation, Deepwater Holdings established a $175
million credit facility to:
- retire existing debt of Stingray and Western Gulf, the parent company of
East Breaks and HIOS;
- fund a one-time distribution of $20 million to each of the equity
partners;
- provide funds for the remaining construction costs of the East Breaks
system and any future system expansions; and
- provide for other working capital needs of Deepwater Holdings.
The following selected unaudited pro forma information represents our
consolidated results of operations on a pro forma basis for the years ended
December 31, 1999 and 1998, assuming the transactions relating to Deepwater
Holdings discussed above had occurred on January 1, 1998:
1999 1998
-------- --------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
Revenue..................................................... $93,071 $73,329
Operating income............................................ $39,841 $17,239
Net loss allocated to limited partners before accounting
change.................................................... $(7,364) $(2,689)
Basic and diluted net loss per unit before cumulative effect
of accounting change...................................... $ (0.28) $ (0.11)
As a result of El Paso's January 2001 merger with The Coastal Corporation,
ANR is now our affiliate and Deepwater Holdings no longer has interests in
Stingray or the West Cameron dehydration facility. In addition, Deepwater
Holdings expects to sell its interest in UTOS in April 2001.
Viosca Knoll
In June 1999, we acquired an additional 49 percent interest in Viosca Knoll
from El Paso Field Services Company. In the transaction, Field Services
contributed $33.4 million to Viosca Knoll and then sold a 49 percent interest to
us in exchange for $19.9 million and 2,661,870 common units. We paid closing
costs of $0.9 million in connection with the acquisition and our General Partner
contributed $0.6 million to us in order to maintain its one percent capital
account balance. As a result of the acquisition, we began consolidating Viosca
Knoll effective June 1999.
39
42
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The acquisition was accounted for as a purchase and the purchase price was
assigned to the assets and liabilities acquired based upon their estimated fair
value as of the acquisition date. The following is summary information related
to the acquisition (in thousands):
Fair value of assets acquired.......................... $ 83,105
Cash acquired.......................................... 434
Fair value of liabilities assumed...................... (2,962)
--------
Total purchase price......................... 80,577
Issuance of common units............................... (59,792)
Closing costs paid..................................... (900)
--------
Net cash paid................................ $ 19,885
========
The following selected unaudited pro forma information represents our
consolidated results of operations on a pro forma basis for the years ended
December 31, 1999 and 1998, assuming the Viosca Knoll acquisition had occurred
on January 1, 1998:
1999 1998
-------- -------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
Revenue..................................................... $104,951 $95,676
Operating income............................................ $ 48,710 $31,815
Net income allocated to limited partners before accounting
change.................................................... $ 8,675 $ 5,124
Basic and diluted net income per unit before cumulative
effect of accounting change............................... $ 0.32 $ 0.19
In September 2000, we purchased the remaining one percent of Viosca Knoll
from Field Services for approximately $2.0 million bringing our total investment
in Viosca Knoll to 100 percent.
40
43
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
3. EQUITY INVESTMENTS
We hold equity investments which are accounted for using the equity method
of accounting. As of December 31, 2000, the carrying amount of our equity
investments exceeded the underlying equity in net assets by approximately $82
million. This difference is being amortized on a straight-line basis over the
estimated lives of the underlying net assets of the respective investee.
Summarized financial information for these investments is as follows:
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 2000
--------------------------------------------------------------------
MANTA
RAY DEEPWATER
OFFSHORE(a) NAUTILUS(a) HOLDINGS(b) POSEIDON OTHER TOTAL
----------- ----------- ----------- -------- ----- -------
(DOLLARS IN THOUSANDS)
END OF PERIOD OWNERSHIP
INTEREST........................ 25.67% 25.67% 50% 36% 50%
======== ======== ======== ======== ====
OPERATING RESULTS DATA:
Operating revenues.............. $ 16,272 $ 10,206 $ 67,122 $ 66,131 $110
Other income.................... 2,234 67 532 639 --
Operating expenses.............. (3,570) (1,635) (25,279) (25,371) (51)
Depreciation.................... (4,483) (5,880) (18,138) (10,754) --
Other expenses.................. (72) (360) (10,711) (11,683) (19)
-------- -------- -------- -------- ----
Net income...................... $ 10,381 $ 2,398 $ 13,526 $ 18,962 $ 40
======== ======== ======== ======== ====
OUR SHARE:
Allocated income................ $ 2,665 $ 616 $ 6,763 $ 6,826 $ 20
Adjustments(c).................. (267) (91) 507 5,892 --
-------- -------- -------- -------- ----
Equity earnings................. $ 2,398 $ 525 $ 7,270 $ 12,718 $ 20 $22,931
======== ======== ======== ======== ==== =======
Allocated distributions......... $ 4,359 $ 2,519 $ 13,550 $ 13,532 $ -- $33,960
======== ======== ======== ======== ==== =======
FINANCIAL POSITION DATA:
Current assets.................. $ 2,053 $ 2,322 $ 46,128 $126,360 $111
Noncurrent assets............... 145,970 101,584 237,416 237,996 --
Current liabilities............. 611 812 39,962 264,776 27
Long-term debt.................. -- -- 157,000 -- --
Other noncurrent liabilities.... -- -- 9,517 -- --
- ---------------
(a) We own indirect investments in these investees. However, because we believe
separate data on each of these investees is more meaningful, results have
been reflected separately.
(b) In January 2001, Deepwater Holdings sold its Stingray and West Cameron
subsidiaries. Deepwater Holdings expects to sell its interest in its UTOS
subsidiary in April 2001.
(c) We recorded adjustments primarily for differences from estimated year end
1999 earnings reported in our 1999 Annual Report on Form 10-K and actual
earnings reported in the 1999 audited annual reports of our unconsolidated
affiliates, and for purchase price adjustments under APB Opinion No. 16,
"Business Combinations." The adjustment for Poseidon primarily represents
the receipt or expected receipt of insurance proceeds to offset our share of
the repair costs related to the January 2000 pipeline rupture.
41
44
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1999
---------------------------------------------------------------------------
MANTA
RAY VIOSCA DEEPWATER
OFFSHORE(a) NAUTILUS(a) KNOLL(b) HOLDINGS(c) STINGRAY(c) HIOS(c)
----------- ----------- -------- ----------- ----------- --------
(DOLLARS IN THOUSANDS)
END OF PERIOD OWNERSHIP
INTEREST................ 25.67% 25.67% 99% 50% 50% 50%
======== ======== ======= ======= ======= ========
OPERATING RESULTS DATA:
Operating revenue....... $ 16,782 $ 9,838 $12,338 $14,106 $13,322 $27,370
Other income............ 2,307 21 31 87 1,898 143
Operating expenses...... (3,724) (1,440) (925) (8,183) (7,932) (13,212)
Depreciation............ (5,323) (5,872) (1,752) (4,023) (5,699) (3,475)
Other expenses.......... (57) (293) (1,973) (1,402) (1,516) --
-------- -------- ------- ------- ------- --------
Net income.............. $ 9,985 $ 2,254 $ 7,719 $ 585 $ 73 $10,826
======== ======== ======= ======= ======= ========
OUR SHARE:
Allocated income........ $ 2,563 $ 579 $ 3,860 $ 293 $ 37 $ 4,780
Adjustments(d).......... (784) (55) -- (118) 1,223 92
-------- -------- ------- ------- ------- --------
Equity earnings......... $ 1,779 $ 524 $ 3,860 $ 175 $ 1,260 $ 4,872
======== ======== ======= ======= ======= ========
Allocated
distributions......... $ 4,001 $ 1,905 $ 6,350 $ 4,400 $ 2,501 $ 6,900
======== ======== ======= ======= ======= ========
FINANCIAL POSITION DATA:
Current assets.......... $ 4,394 $ 3,540 $34,334
Noncurrent assets....... 137,700 107,464 208,939
Current liabilities..... 4,749 408 32,727
Long-term debt.......... -- -- 122,000
Other noncurrent
liabilities........... -- -- 41
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------
WEST
CAMERON
UTOS(c) DEHY(c) POSEIDON OTHER TOTAL
------- ------- -------- ----- -------
(DOLLARS IN THOUSANDS)
END OF PERIOD OWNERSHIP
INTEREST................ 50% 50% 36% 50%
======= ====== ======== ====
OPERATING RESULTS DATA:
Operating revenue....... $3,233 $1,934 $76,160 $ 35
Other income............ 52 23 403 --
Operating expenses...... (1,544) (210) (8,774) (18)
Depreciation............ (420) (12) (6,172) --
Other expenses.......... -- -- (9,133) --
------- ------ -------- ----
Net income.............. $1,321 $1,735 $52,484 $ 17
======= ====== ======== ====
OUR SHARE:
Allocated income........ $ 614 $ 868 $18,894 $ 8
Adjustments(d).......... (25) -- (7) (8)
------- ------ -------- ----
Equity earnings......... $ 589 $ 868 $18,887 $ -- $32,814
======= ====== ======== ==== =======
Allocated
distributions......... $1,000 $ 800 $18,191 $132 $46,180
======= ====== ======== ==== =======
FINANCIAL POSITION DATA:
Current assets.......... $171,720 $376
Noncurrent assets....... 243,971 --
Current liabilities..... 159,359 44
Long-term debt.......... 150,000 --
Other noncurrent
liabilities........... 322 --
- ---------------
(a) We own indirect investments in these investees. However, because we believe
separate data on each of these investees is more meaningful, results have
been reflected separately.
(b) The information presented for Viosca Knoll as an equity investment is
through May 31, 1999. On June 1, 1999, we began consolidating the results of
Viosca Knoll as a result of acquiring an additional 49 percent interest in
the system.
(c) Deepwater Holdings was formed in September 1999 and owns 100 percent of
Stingray, HIOS, UTOS, and West Cameron Dehy. The operating results provided
represent activity for the nine months ended September 30, 1999, subsequent
to September 30, 1999, the activity related to these entities is reflected
in Deepwater Holdings.
(d) We recorded adjustments primarily for purchase price adjustments in
accordance with APB Opinion No. 16, except for Stingray which resulted from
changes in estimates of reserves for uncollectable revenues.
42
45
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
AS OF OR FOR THE YEAR ENDED DECEMBER 31, 1998
---------------------------------------------------------------------------------------------------
MANTA WEST
RAY VIOSCA CAMERON
OFFSHORE(a) NAUTILUS(a) KNOLL STINGRAY HIOS UTOS DEHY POSEIDON TOTAL
----------- ----------- ------- -------- -------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
END OF PERIOD OWNERSHIP
INTEREST.............. 25.67% 25.67% 50% 50% 40% 33.3% 50% 36%
======== ======== ======= ======== ======== ======= ====== ========
OPERATING RESULTS DATA:
Operating revenue..... $ 10,949 $ 5,403 $29,334 $ 23,008 $ 43,818 $ 5,174 $2,796 $44,522
Other income.......... 488 100 50 670 -- 100 11 290
Operating expenses.... (3,710) (1,979) (3,031) (16,814) (19,047) (2,466) (183) (4,763)
Depreciation.......... (4,303) (5,845) (3,860) (6,852) (4,772) (559) (16) (8,846)
Interest expense...... -- -- (4,267) (1,668) (16) (2) -- (8,671)
-------- -------- ------- -------- -------- ------- ------ --------
Net income (loss)..... $ 3,424 $ (2,321) $18,226 $ (1,656) $ 19,983 $ 2,247 $2,608 $22,532
======== ======== ======= ======== ======== ======= ====== ========
OUR SHARE:
Allocated income
(loss).............. $ 879 $ (596) $ 9,113 $ (828) $ 7,993 $ 749 $1,304 $ 8,111
Adjustments(b)........ (348) (714) -- 573 627 (19) -- (120)
-------- -------- ------- -------- -------- ------- ------ --------
Equity earnings
(loss).............. $ 531 $ (1,310) $ 9,113 $ (255) $ 8,620 $ 730 $1,304 $ 7,991 $ 26,724
======== ======== ======= ======== ======== ======= ====== ======== ========
Allocated
distributions....... $ 1,182 $ 634 $10,350 $ 1,000 $ 9,240 $ 933 $1,100 $ 6,732 $ 31,171
======== ======== ======= ======== ======== ======= ====== ======== ========
FINANCIAL POSITION DATA:
Current assets........ $ 7,250 $ 2,782 $ 5,451 $ 17,892 $ 4,662 $ 4,699 $ 848 $43,338
Noncurrent assets..... 135,626 113,434 97,758 50,109 12,939 2,745 647 233,082
Current liabilities... 5,023 709 1,021 18,960 2,626 4,125 13 40,134
Long-term debt........ -- -- 66,700 20,583 -- -- -- 131,000
Other noncurrent
liabilities......... -- -- 340 12,924 -- -- -- --
- ---------------
(a) We own indirect investments in these investees. However, because we believe
separate data for each of these investees is more meaningful, results have
been reflected separately.
(b) We recorded adjustments primarily for purchase price adjustments in
accordance with APB Opinion No. 16, except for Nautilus which related to a
revision of the allowance for funds used during construction, which
represents the estimated costs, during the construction period, of funds
used for construction purposes.
4. PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment consisted of the following:
DECEMBER 31,
-------------------
2000 1999
-------- --------
(IN THOUSANDS)
Property, plant and equipment, at cost
Pipelines................................................. $239,920 $179,588
Platforms and facilities.................................. 127,639 120,416
Oil and natural gas properties............................ 156,320 122,222
Natural gas storage facilities............................ 147,294 --
Construction work-in-progress............................. 127,811 92,095
-------- --------
798,984 514,321
Less accumulated depreciation, depletion and amortization... 167,289 140,562
-------- --------
Total property, plant and equipment, net.................... $631,695.. $373,759
======== ========
43
46
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
5. FINANCING TRANSACTIONS
Senior Subordinated Notes
In May 1999, we entered into an indenture with Chase Bank of Texas, under
which we issued $175 million in aggregate principal amount of Senior
Subordinated Notes. We capitalized $6.1 million of debt issue costs related to
the issuance and registration of the Subordinated Notes. The Subordinated Notes
bear interest at a rate of 10 3/8% per year, payable semi-annually, on June 1
and December 1, and mature on June 1, 2009. Our subsidiaries have guaranteed our
obligations under the Subordinated Notes. In addition, we could be required to
repurchase the Subordinated Notes if certain circumstances relating to change of
control or asset dispositions exist. The sales of some of our Gulf of Mexico
assets had no bearing on the Subordinated Notes. The terms of the Subordinated
Notes include, among other things, financial tests and covenants, all of which
we currently meet. The proceeds from the Subordinated Notes were used to fund
the Viosca Knoll acquisition and to pay down our revolving credit facility.
Partnership Credit Facility
In June 2000, we amended and restated our revolving credit facility with a
syndicate of commercial banks to provide up to $500 million of available credit
subject to borrowing base limitations. As of December 31, 2000, we had $318
million outstanding under this facility and $99.4 million available. The average
interest rate for 2000 and 1999 was 9.1% and 9.0%, respectively. We pay a
commitment fee of 0.25% per year on the unused and unavailable portion of the
credit facility and 0.50% per year on the unused and available portion. Our
credit facility matures in May 2002; is guaranteed by us and each of our
subsidiaries; and is collateralized by our management agreement, substantially
all of our assets (excluding our Argo subsidiary), our General Partner's one
percent general partner interest and its approximate one percent nonmanaging
interest in certain of our subsidiaries. We may borrow money under this facility
for capital expenditures, investment and working capital purposes and, to a
limited extent, for capital distributions. We are currently negotiating with a
syndicate bank group to increase the size of our credit facility to $600 million
and extend the maturity through May 2005.
Project Finance Loan
In August 2000, Argo II, L.L.C., one of our subsidiaries, obtained a $95
million limited recourse project finance loan from a group of commercial
lenders. This loan is a syndication of a construction loan that is convertible
into a term loan upon completion of the construction project. As of December 31,
2000, Argo had $45 million outstanding, and the average interest rate was 8.4%.
This loan finances a substantial portion of the estimated $140.0 million costs
of the TLP, pipelines and other facilities that we are installing in the Prince
Field.
During the years ended December 31, 2000, 1999 and 1998, we capitalized
approximately $4.0 million, $1.8 million, and $1.1 million, respectively, of
interest expense in connection with construction projects and drilling
activities. At December 31, 2000 and 1999, the unamortized portion of debt issue
costs totaled approximately $10.4 million and $11.0 million, respectively.
Other Credit Facilities
Deepwater Holdings and Poseidon Oil Pipeline Company, L.L.C. are parties to
credit agreements under which each has outstanding obligations that may restrict
their ability to pay distributions to their respective owners.
In 1999, Deepwater Holdings assumed Western Gulf Holdings L.L.C.'s
obligations under its $100 million revolving credit facility and amended and
restated that facility to, among other things, increase the commitment amount to
$175 million. The amended credit facility matures in February 2004. Deepwater
44
47
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Holdings' ability to borrow money under this credit facility is subject to
certain customary terms and conditions, including borrowing base limitations.
The credit facility is collateralized by substantially all of the material
contracts and agreements of Deepwater Holdings, including its ownership in
Stingray, UTOS, West Cameron dehydration, and Western Gulf Holdings, and its
subsidiaries HIOS and East Breaks Gathering. As of December 31, 2000 and 1999,
Deepwater Holdings had $157 million and $122 million, respectively, outstanding
under its credit facility, and the average floating interest rate was 8.1% and
7.3% at December 31, 2000 and 1999, respectively. The proceeds from the sale of
Stingray and West Cameron dehydration during January 2001 of approximately $50
million were used to reduce the revolving credit facility.
Poseidon has an amended revolving credit facility with a syndicate of
commercial banks to provide up to $150 million for the construction and
expansion of the Poseidon system and for other working capital needs. Poseidon's
ability to borrow money under this facility is subject to certain customary
terms and conditions, including borrowing base limitations. The facility is
collateralized by a substantial portion of Poseidon's assets and matures on
April 30, 2001. As of December 31, 2000 and 1999, Poseidon had $150 million
outstanding under its credit facility. The average floating interest rate was
7.9% and 7.8% at December 31, 2000 and 1999, respectively. Poseidon is currently
negotiating with a syndicate bank group to refinance the credit facility.
In June 1999, the Viosca Knoll revolving credit facility was repaid in the
amount of $66.8 million and cancelled concurrent with the closing of our
acquisition of the additional interest in Viosca Knoll.
In September 1999, the Stingray credit facility was repaid in the amount of
$22.2 million and cancelled concurrent with the formation of Deepwater Holdings.
Borrowings from the newly formed Deepwater Holdings credit facility were used to
pay off the Stingray credit facility.
6. PARTNERS' CAPITAL
General
As of December 31, 2000, we had 31,550,314 common units outstanding. Common
units totaling 22,596,550 are owned by the public, representing a 72.2 percent
limited partner interest in us. Our General Partner has an effective 29.8
percent interest in us, consisting of a 27.8 percent limited partner interest in
the form of 8,953,764 common units, a one percent general partner interest in us
and an approximate one percent non-managing interest in some of our
subsidiaries.
Public Offering of Common Units
In July 2000, we completed a public offering of 4,600,000 common units that
included 600,000 common units to cover over-allotments for the underwriters. We
used the net cash proceeds of $101 million to reduce the balance outstanding
under our revolving credit facility. In addition, our General Partner
contributed $1.1 million to us in order to satisfy its one percent capital
contribution requirement.
In March 2001, we completed a public offering of 2,250,000 common units. We
used the net cash proceeds of $66.3 million from the offering to reduce the
balance outstanding under our revolving credit facility. In addition, our
General Partner contributed $0.7 million to us in order to satisfy its one
percent capital contribution requirement.
Conversion and Redemption of Preference Units
In May 1998, 1999 and 2000, we notified the holders of our publicly-held
preference units of their opportunity to convert their preference units into an
equal number of common units. Total preference units of 211,249 were converted
to common units after the 90-day conversion period in 2000 and 78,450 preference
units remained. In October 2000, we redeemed the remainder of these preference
units for approximately
45
48
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$0.8 million representing a cash price of $10.25 per unit. For the converted
units, we reallocated the partners' capital accounts in the conversion period to
reflect these conversions of preference units into common units.
Series B Preference Units
In August 2000, we issued $170 million of Series B preference units to
acquire the natural gas storage businesses of Crystal Gas Storage, Inc. These
newly issued preference units are non-voting and 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 units until 2010.
After 2010, the rate will increase to 12% and distributions will be required to
be paid on a current basis. The new preference units contain no mandatory
redemption obligation, but may be redeemed at our option at any time. If our
capital was ever liquidated, then these Series B preference units would have
priority after our General Partner, but before our outstanding common
unitholders.
Cash Distributions
We make quarterly distributions of 100 percent of our available cash, as
defined in the partnership agreement, to our unitholders and to our General
Partner. Available cash generally consists of all cash receipts plus reductions
in reserves less all cash disbursements and net additions to reserves. Our
General Partner has broad discretion to establish cash reserves for any proper
partnership purpose. These can include cash reserves for future capital and
maintenance expenditures, reserves to stabilize distributions of cash to the
unitholders and our General Partner, reserves to reduce debt, or, as necessary,
reserves to comply with the terms of our agreements or obligations.
Cash distributions on common units and to our General Partner are
discretionary in nature and are not entitled to arrearages of minimum quarterly
distributions. The following table reflects our per unit cash distributions to
our preference and common unitholders and the total incentive distributions paid
to our General Partner during the year ended December 31, 2000:
PREFERENCE COMMON GENERAL
MONTH PAID UNIT UNIT PARTNER
- ---------- ---------- ------- -------
(PER UNIT) (IN MILLIONS)
February.............................................. $0.275 $0.5250 $3.2
====== ======= ====
May................................................... $0.275 $0.5375 $3.6
====== ======= ====
August................................................ $0.275 $0.5375 $4.1
====== ======= ====
November.............................................. $ -- $0.5500 $5.0
====== ======= ====
In January 2001, we declared a cash distribution of $0.55 per common unit,
or $22.3 million in the aggregate, which we paid on February 15, 2001.
For the year ended December 31, 2000, 1999 and 1998, we paid our General
Partner incentive distributions totaling $15.5 million, $12.1 million, and $11.1
million, respectively, and paid an incentive distribution of $4.6 million in
February 2001.
Unit Rights Appreciation Plan
Prior to 1998, we maintained a unit rights appreciation plan under which
employees of the General Partner were granted a right to market appreciation on
our common and/or preference units. A total of 1.2 million of these rights were
granted to officers and employees of the General Partner and its affiliates. As
a result of the "change in control" occurring upon the closing of El Paso's
acquisition of DeepTech in 1998, these rights fully vested and the holders
elected to be paid $8.6 million, the amount equal to the difference
46
49
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
between the grant price of these rights and the average of the high and the low
sales price of the common units on the date of exercise. Upon the exercise of
all of the rights outstanding, this plan was terminated. We replaced this plan
with the Omnibus Plan discussed below.
Option Plans
In August 1998, we adopted the 1998 Omnibus Compensation Plan, or the
Omnibus Plan, to provide our General Partner with the ability to issue unit
options to attract and retain the services of knowledgeable officers and key
management personnel. Unit options to purchase a maximum of 3 million common
units may be issued pursuant to the Omnibus Plan. Unit options granted pursuant
to the Omnibus Plan are not immediately exercisable. One-half of the unit
options were considered vested and exercisable one year after the date of grant
and the remaining one-half of the unit options were considered vested and
exercisable one year after the first anniversary of the date of grant. The unit
options expire ten years from such grant date, but shall be subject to earlier
termination under certain circumstances.
In August 1998, we adopted the 1998 Unit Option Plan for Non-Employee
Directors, or our Director Plan, to provide our General Partner with the ability
to issue unit options to attract and retain the services of knowledgeable
directors. Unit options to purchase a maximum of 100,000 of our common units may
be issued pursuant to the Director Plan. Each unit option granted under the
Director Plan vests immediately at the date of grant and the grant expires ten
years from such date. The expiration date is subject to earlier termination if
the director ceases to be a director of our General Partner, in which case the
unit options expire 36 months after such date. In the case of death, the unit
options expire 12 months after such date.
The following table summarizes activity under the Omnibus Plan and Director
Plan as of and for the years ended December 31, 2000, 1999 and 1998. No unit
options were granted by the Partnership prior to August 1998.
2000 1999 1998
--------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED
# UNITS OF AVERAGE # UNITS OF AVERAGE # UNITS OF AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICE OPTIONS PRICE OPTIONS PRICE
---------- -------- ---------- -------- ---------- --------
Outstanding at beginning of
year............................ 937,500 $27.16 933,000 $27.19 -- $ --
Granted......................... 3,000 25.56 4,500 21.58 933,000 27.19
Exercised....................... -- -- -- -- -- --
Forfeited....................... 7,500 27.19 -- -- -- --
Canceled........................ 7,500 27.19 -- -- -- --
------- ------ ------- ------ ------- ------
Outstanding at end of year........ 925,500 $27.15 937,500 $27.16 933,000 $27.19
======= ====== ======= ====== ======= ======
Options exercisable at end of
year............................ 925,500 $27.15 687,500(1) $27.15 3,000 $26.17
======= ====== ======= ====== ======= ======
- ---------------
(1) Includes the accelerated vesting of approximately 215,000 unit options under
certain employment agreements as a result of a defined change in control
within El Paso following its merger with Sonat Inc. in 1999.
The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following weighted
average assumptions:
ASSUMPTION 2000 1999
- ---------- ----- -----
Expected term in years...................................... 8 8
Expected volatility......................................... 27.97% 28.70%
Expected dividends.......................................... 9.35% 9.20%
Risk-free interest rate..................................... 5.35% 6.40%
47
50
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Black-Scholes weighted average fair value of options granted during
2000 and 1999 was $2.63 and $3.14 per option, respectively.
Options outstanding as of December 31, 2000, are summarized below:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
----------------------------------------------- ----------------------------
WEIGHTED AVERAGE WEIGHTED WEIGHTED
RANGE OF NUMBER REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$20.63 to $27.34 925,500 5.4 years $27.15 925,500 $27.15
If the compensation expense for our stock-based compensation plans had been
determined applying the provisions of SFAS No. 123, Accounting for Stock Based
Compensation, using the Black-Scholes weighted average fair value of options
granted, our net income allocated to the limited partners and net income per
common unit for 2000, 1999 and 1998 would approximate the pro forma amounts
below:
DECEMBER 31, 2000 DECEMBER 31, 1999 DECEMBER 31, 1998
----------------------- ----------------------- -----------------------
AS REPORTED PRO FORMA AS REPORTED PRO FORMA AS REPORTED PRO FORMA
----------- --------- ----------- --------- ----------- ---------
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
SFAS No. 123 charge, pretax..... $ -- $ 211 $ -- $ 890 $ -- $1,065
Net (loss) income allocated to
the limited partners.......... $ (749) $ (960) $(8,739) $(9,629) $ 604 $ (461)
Basic and diluted (loss) income
per unit...................... $(0.03) $(0.03) $ (0.34) $ (0.37) $0.02 $(0.02)
The effects of applying SFAS No. 123 in this pro forma disclosure are not
indicative of future amounts.
7. RELATED PARTY TRANSACTIONS
Transactions with related parties and affiliates for each of the three
years ended December 31, are as follows:
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Revenues Received from Related Parties:
Oil and natural gas sales................................. $20,448 $29,778 $31,225
Gathering, transportation and platform services........... 4,484 990 3,546
------- ------- -------
$24,932 $30,768 $34,771
======= ======= =======
Expenses Paid to Related Parties:
Purchased natural gas costs............................... $14,295 $ -- $ --
Operating expenses........................................ 22,817 13,494 14,379
------- ------- -------
$37,112 $13,494 $14,379
======= ======= =======
Reimbursements from Related Parties:
Operating expenses........................................ $20,543 $ 2,377 $ 1,524
======= ======= =======
Revenues Received from Related Parties
We have agreed to sell substantially all of our oil and natural gas
production to an affiliate on a month to month basis. The agreement provides
fees equal to 2 percent of the sales value of crude oil and condensate and
$0.015 per dekatherm of natural gas for marketing our production. During the
years ended December 31, 2000, 1999 and 1998, oil and natural gas sales to the
affiliate totaled approximately
48
51
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
$15.7 million, $29.8 million, and $31.2 million, respectively. Beginning in the
fourth quarter 2000, we began selling our oil and natural gas ourself.
In March 2000, we acquired EPIA. EPIA's sales of natural gas and
transportation services include transactions with affiliates of our General
Partner. For the year ended December 31, 2000, EPIA had approximately $4.7
million of natural gas sales and approximately $4.3 million of transportation
services to affiliates.
For the year ended December 31, 2000, we received approximately $0.1
million from Manta Ray Offshore Gathering as platform access and processing fees
related to our platforms located in South Timbalier 292 and Ship Shoal 332.
For the five months ended May 31, 1999, and the year ended December 31,
1998, we received from Viosca Knoll approximately $1.0 million and $2.4 million,
respectively, for expenses and platform fees related to the Viosca Knoll 817
platform. We began consolidating Viosca Knoll following our acquisition of an
additional 49 percent ownership interest in June 1999. As a result, revenues
after this period were eliminated in consolidation.
For the year ended December 31, 1998, we received approximately $1.1
million from Tatham Offshore as platform access and processing fees related to
the Viosca Knoll 817 platform.
Expenses Paid to Related Parties
Purchased Natural Gas Costs. EPIA's purchases of natural gas include
transactions with affiliates of our General Partner. For the year ended December
31, 2000, EPIA had approximately $14.3 million of natural gas purchases from
affiliates.
Management Fees. Substantially all of the individuals who perform the
day-to-day financial, administrative, accounting and operational functions for
us, as well as those who are responsible for directing and controlling us, are
currently employed by El Paso. Under a management agreement between El Paso and
our General Partner, a management fee is charged to our General Partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our General Partner and us. The management agreement expires on
June 30, 2002, and may be terminated thereafter upon 90 days notice by either
party. Under the terms of the partnership agreement, our General Partner is
entitled to reimbursement of all reasonable general and administrative expenses
and other reasonable expenses incurred by our General Partner and its affiliates
for, or on our behalf, including, but not limited to, amounts payable by our
General Partner to El Paso under its management agreement.
In connection with El Paso's acquisition of our General Partner, our
General Partner amended its management agreement to provide for a monthly
management fee of $775,000. Our General Partner charged us $9.3 million in
management fees for each of the years ended December 31, 2000, 1999 and 1998.
Our General Partner is also required to reimburse El Paso, and its
predecessor, DeepTech for certain tax liabilities resulting from, among other
things, additional taxable income allocated to our General Partner due to (i)
the issuance of additional preference units and (ii) the investment of such
proceeds in additional acquisitions or construction projects. As of December
2000, all publicly held preference units had been converted to common units or
redeemed for cash. In 1998, our General Partner charged us approximately $0.5
million to compensate DeepTech for additional taxable income allocated to our
General Partner.
For the five months ended May 31, 1999, and the year ended December 31,
1998, Viosca Knoll charged us approximately $0.8 million and $1.9 million,
respectively, for transportation services related to transporting production
from the Viosca Knoll Block 817 lease.
49
52
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In November 1999, we entered into an agreement with Field Services under
which they provide personnel to operate Stingray and the West Cameron
dehydration facility. During 2000, Field Services also began operating HIOS,
UTOS and East Breaks. To operate these subsidiaries under Deepwater Holdings, we
charged Deepwater Holdings $6.4 million for the year ended December 31, 2000. We
also entered into an agreement during 2000 to operate EPIA and the Crystal
storage businesses. For the year ended December 31, 2000, we charged these
companies a management fee of approximately $4 million pursuant to their
management and operations agreements. All fees paid under these contracts
approximate actual costs incurred.
Garden Banks. For the years ended December 31, 2000, 1999 and 1998,
Poseidon charged us approximately $0.6 million, $0.9 million, and $1.4 million,
respectively, for transportation services related to transporting production
from the Garden Banks Block 72 and 117 leases.
Cost Reimbursements. Under a management agreement between us and Viosca
Knoll, prior to our purchase of an additional 49 percent interest we charged
Viosca Knoll a base fee of $100,000 annually in exchange for our providing
financial, accounting and administrative services on behalf of Viosca Knoll. For
the five months ended May 31, 1999, and for the year ended December 31, 1998, we
charged Viosca Knoll approximately $42,000 and $100,000, respectively, in
accordance with this management agreement. In addition, for the year ended
December 31, 1998, Viosca Knoll reimbursed us approximately $152,000, for costs
incurred by us in connection with the acquisition and installation of a booster
compressor on our Viosca Knoll 817 platform.
For the years ended December 31, 2000, 1999 and 1998, we charged Manta Ray
Offshore a management fee of approximately $0.2 million, $0.5 million, and $1.3
million, respectively, pursuant to its management and operations agreements.
Pursuant to former non-employee director compensation arrangements, we were
obligated to pay each non-employee director 2.5 percent of our General Partner's
incentive distribution as a profit participation fee. During 1998, we paid three
of our non-employee directors a total of $0.6 million as a profit participation
fee. As a result of El Paso's acquisition of Deep Tech, these non-employee
directors resigned and these arrangements were terminated.
As a result of becoming the operator of Deepwater Holdings' assets, we
began receiving reimbursement from Deepwater Holdings for the cost of operating
HIOS, UTOS, East Breaks, Stingray, and West Cameron dehydration. This
reimbursement is a fixed monthly amount covering normal operating activities and
is recorded as a reduction to our operation and maintenance expense. To the
extent our costs are more than the monthly reimbursement, our operating expenses
will be higher, and to the extent our costs are lower than the monthly
reimbursement, our operating expense will be lower. In addition, due to the
timing of actual costs, we may recognize fluctuations in our results of
operations throughout the year. For the year ended December 31, 2000, we
received approximately $20.3 million from the subsidiaries of Deepwater Holdings
pursuant to their respective agreements.
Farmout
In October 1999, we farmed out our working interest in the Prince Field to
El Paso Production. Under the terms of the farmout agreement, our net overriding
royalty interest in the Prince Field increased to a weighted average of
approximately 9 percent. Once El Paso Production recoups the costs associated
with its drilling and completion activities on the field, we can convert our
royalty interest into a 30 percent undivided working interest.
50
53
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Other
In 1997, Tatham Offshore announced its intent to reserve its remaining
costs associated with certain of its wells as a result of production problems.
Accordingly, we recorded a charge totaling $21.2 million in the consolidated
statements of operations. This charge consisted of approximately $6.4 million to
reserve our investment in certain gathering facilities and other assets
associated with these properties, approximately $3.8 million to fully accrue its
abandonment obligations associated with the gathering facilities serving these
properties, approximately $9.1 million to reserve its noncurrent receivable
related to the prepayment of the demand charge obligations under certain
agreements, and approximately $1.9 million to accrue certain abandonment
obligations associated with its Viosca Knoll and Garden Banks properties. During
1998, we abandoned our Ewing Bank flowlines at a cost of $2.9 million and
recorded a credit to impairment of $1.1 million, which represented the excess of
the accrued costs over the actual costs incurred associated with the abandonment
of the flowlines.
8. COMMITMENTS AND CONTINGENCIES
Credit Facilities
Deepwater Holdings and Poseidon are parties to credit agreements under
which they have an obligation that may restrict the payment of distributions to
their respective owners.
Hedging Activities
We hedge a portion of our oil and natural gas production to reduce our
exposure to fluctuations in the market prices of oil and natural gas and to meet
certain requirements under our revolving credit facility. We use commodity price
swap instruments whereby monthly settlements are based on differences between
the prices specified in the commodity price swap agreement and the settlement
prices of certain futures contracts quoted on the NYMEX or certain other
indices. We settle the commodity price swap transactions by paying the negative
difference or receiving the positive difference between the applicable
settlement price and the price specified in the contract. The commodity price
swap transactions we use differ from futures contracts in that there is no
contractual obligation which requires or allows for the future delivery of the
product. The credit risk from our price swap contracts is derived from the
counterparty to the transaction, typically a major financial institution. We do
not require collateral and do not anticipate non-performance by this
counterparty, which does not transact a sufficient volume of transactions with
us to create a significant concentration of credit risk. Gains or losses on
hedging activities and the termination of any hedging instruments are initially
deferred and included as an increase or decrease to oil and natural gas sales in
the period in which the hedged production is sold. For the years ended December
31, 2000, 1999 and 1998, we recorded a net (loss) gain of $(15.0) million,
$(2.3) million and $2.5 million, respectively, from such activities.
As of December 31, 1998, we maintained two natural gas sales swap
transactions, one covering the calendar year 1999, and one covering the calendar
year 2000. Each of these swaps carried a notional amount of 10,000 MMbtu/d.
Under these transactions, we received a fixed price and paid a variable price
based on monthly natural gas futures contract settlement price as set by NYMEX.
In January 1999, we elected to change the term of our 1999 swap to calendar year
2000. In January 1999 and 2000, under the terms of this transaction, we fixed
the contract price at $1.6686 per MMbtu and $1.8050 per MMbtu, respectively, for
each swap.
Each of our derivative instruments expired in December 2000 and we have not
entered into any new hedging activities in 2001.
51
54
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Legal Proceedings
We are a defendant in a lawsuit filed by Transco in the 157th Judicial
District Court, Harris County, Texas in August 1996. Transco alleges that,
pursuant to a platform lease agreement entered into in June 1994, it had the
right to expand its facilities and operations on the offshore platform by
connecting additional pipeline receiving and appurtenant facilities. We denied
Transco's request to expand its facilities and operations because the lease
agreement does not provide for such expansion, and because Transco's activities
would have interfered with the Manta Ray Offshore system and our existing and
planned activities on the platform. The case went to trial on April 3, 2000, and
the jury found that we were not at fault and therefore awarded no damages to
Transco. Transco has filed motions related to the jury's findings. We sold the
platform relating to this incident in January 2001 and therefore all claims have
been dismissed.
In January 2000, an anchor from a submersible drilling rig in tow damaged a
section of the Poseidon system north of our Ship Shoal 332 platform. The
accident resulted in the release of approximately 2,200 barrels of crude oil in
the waters surrounding the system, caused damage to our Ship Shoal 332 platform,
and resulted in the shutdown of the system and surrounding facilities in which
we have ownership interests. Poseidon's costs to repair the damaged pipeline and
clean up the crude oil released into the Gulf was approximately $18 million.
Poseidon has filed a lawsuit against the rig's owner for damages to the
pipeline. By the end of the first quarter 2000, the pipeline was repaired and
was placed back into service. To date, we have received approximately $6.7
million of insurance proceeds for business interruption and property damage.
We, along with several subsidiaries of El Paso, have been named defendants
in actions brought by Jack Grynberg on behalf of the U.S. Government under the
False Claims Act. Generally, the complaints allege an industry-wide conspiracy
to under report the heating value as well as the volumes of the natural gas
produced from federal and Native American lands, which deprived the U.S.
Government of royalties. (In re: Natural Gas Royalties Qui Tam Litigation, U.S.
District Court for the District of Wyoming.)
We have also been named a defendant in an action styled Quinque Operating
Company, et al v. Gas Pipelines and Their Predecessors, et al filed in 1999 in
the District Court of Stevens County, Kansas. This complaint alleges that the
defendants have mismeasured natural gas volumes and heating content of natural
gas on non-federal and non-Native American lands. The Quinque complaint, once
transferred to the same court handling the Grynberg complaint, has been sent
back to the Kansas State Court for further proceedings.
We are also a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of our
business.
While the outcome of the matters discussed above cannot be predicted with
certainty, we do not expect the ultimate resolution of these matters will have a
material adverse effect on our financial position, operating results, or cash
flows.
Environmental
We are subject to extensive federal, state, and local laws and regulations
governing environmental quality and pollution control. These laws and
regulations require us to remove or remedy the effect on the environment of the
disposal or release of specified substances at current and former operating
sites.
It is possible that new information or future developments could require us
to reassess our potential exposure related to environmental matters. We may
incur significant costs and liabilities in order to comply with existing
environmental laws and regulations. It is also possible that other developments,
such as increasingly strict environmental laws, regulations and claims for
damages to property, employees, other persons and the environment resulting from
current or past operations, could result in substantial costs and
52
55
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
liabilities in the future. As this information becomes available, or other
relevant developments occur, we will make accruals accordingly.
Regulatory Matters
FERC has jurisdiction over Nautilus, Stingray, HIOS, and UTOS and the Petal
natural gas storage facility with respect to transportation of natural gas,
rates and charges, construction of new facilities, extension or abandonment of
service and facilities, accounts and records, depreciation and amortization
policies, and certain other matters.
Each of Nautilus, HIOS, UTOS and Petal are currently operating under
agreements with their respective customers that provide for rates that have been
approved by FERC. On December 1, 1998, Stingray filed for a general rate
increase with FERC. Pursuant to an order issued by FERC on December 30, 1998,
the increased rates became effective June 1, 1999, subject to refund. A hearing
on the merits of Stingray's filing was held in December 1999 and the case was
still pending before FERC at the time Deepwater Holdings sold Stingray in
January 2001. Our remaining systems are gathering facilities and, as such, are
not currently subject to rate and certificate regulation by FERC.
All of our pipelines are subject to FERC's administration of the "equal
access" requirements of the Outer Continental Shelf Lands Act. In addition, the
Poseidon and Allegheny systems are subject to regulation under the Hazardous
Liquid Pipeline Safety Act. Operations in offshore federal waters are regulated
by the United States Department of the Interior.
9. SUPPLEMENTAL DISCLOSURES TO THE STATEMENT OF CASH FLOWS
Cash paid for interest, net of amounts capitalized, and taxes were as follows:
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
(IN THOUSANDS)
Interest................................................ $46,768 $31,696 $17,608
Taxes................................................... $ -- $ -- $ --
Noncash investing and financing activities excluded from the statement of cash
flows were as follows:
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------- -------
(IN THOUSANDS)
Acquisition of Crystal natural gas storage businesses
Issuance of Series B preference units............. $170,000 $ -- $ --
Working capital acquired.......................... 220 -- --
Acquisition of EPIA
Working capital acquired.......................... (1,673) -- --
Acquisition of additional ownership interest in Viosca
Knoll
Issuance of common units.......................... -- 59,792 --
Working capital acquired.......................... -- (2,400) --
Decrease in investment in Tatham Offshore.............. -- -- 7,500
Additions to oil and natural gas properties............ -- -- (4,683)
Additions to platform and facilities................... -- -- (7,024)
Assumption of abandonment obligations.................. -- -- 4,033
Conveyance of assets and liabilities to Manta Ray
Offshore and Nautilus................................ -- -- 30
53
56
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. MAJOR CUSTOMERS
As discussed in Note 7, we sell substantially all of our oil and natural
gas production to an affiliated company. The percentage of our revenue from our
other segment's major customers was as follows:
YEAR ENDED
DECEMBER 31,
--------------------
2000 1999 1998
---- ---- ----
Alabama Gas Corporation..................................... 20% -- --
Shell Offshore.............................................. 13% -- --
Kerr-McGee Corporation...................................... 11% 26% 32%
Shell Gas Trading Company................................... -- 21% --
Viosca Knoll................................................ -- -- 13%
Texaco Gas Marketing, Inc................................... -- 10%
11. BUSINESS SEGMENT INFORMATION:
We segregate our business activities into three segments: Gathering,
Transportation, and Platform Services; Oil and Natural Gas Production; and Gas
Storage Services. As a result of our acquisition of EPIA in March 2000, we began
providing marketing services through the purchase and resale of natural gas to
our customers. Our marketing activities are recorded in the Gathering,
Transportation, and Platform Services segment. As a result of our acquisition of
the Crystal storage businesses in August 2000, we began providing natural gas
storage services and have shown these activities as a separate segment. Each of
our segments are business units that offer different services and products. They
are managed separately, as each requires different technology and marketing
strategies.
We measure segment performance based on performance cash flows, or an
asset's or investment's ability to generate cash flow. We determine performance
cash flows by taking earnings before interest, taxes, and depreciation,
depletion, and amortization, and adding or subtracting as appropriate, cash
distributions from equity investments, earnings attributable to equity
investments, and other cash and non-cash items. We use this measure as a
supplemental financial measurement in the evaluation of our business, and you
should not consider it an alternative to EBIT as an indicator of our operating
performance or to cash flows from operating activities as a measure of our
liquidity. In addition, it may not be a comparable measurement among different
companies. Performance cash flows are presented here to provide you with
additional information about our assets and investments. The accounting policies
of the individual segments are the same as ours. The following table summarizes
certain financial information for our business segments (in thousands):
54
57
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
GATHERING,
TRANSPORTATION OIL AND
AND PLATFORM NATURAL GAS GAS STORAGE
SERVICES PRODUCTION SERVICES OTHER(1) TOTAL
-------------- ----------- ----------- -------- --------
FOR THE YEAR ENDED DECEMBER 31, 2000
----------------------------------------------------------------
Revenue from external customers............ $ 85,681 $ 20,552 $ 6,182 $ -- $112,415
Intersegment revenue....................... 13,316 -- 23 (13,339) --
Depreciation, depletion and amortization... 14,707 11,017 1,868 151 27,743
Operating income (loss).................... 47,091 (7,402) 2,190 172 42,051
Earnings from equity investments........... 22,931 -- -- -- 22,931
EBIT....................................... 72,083 (7,402) 2,191 487 67,359
Performance cash flows..................... 100,568 1,838 4,059 639 107,104
Assets..................................... 617,315 62,100 176,420 28,424 884,259
FOR THE YEAR ENDED DECEMBER 31, 1999
----------------------------------------------------------------
Revenue from external customers............ $ 33,694 $ 29,965 $ -- $ -- $ 63,659
Intersegment revenue....................... 13,193 -- -- (13,193) --
Depreciation, depletion and amortization... 12,087 18,543 -- -- 30,630
Operating income (loss).................... 18,336 (7,709) -- -- 10,627
Earnings from equity investments........... 32,814 -- -- -- 32,814
EBIT....................................... 61,070 (7,359) -- 191 53,902
Performance cash flows..................... 78,853 12,452 -- -- 91,305
Assets..................................... 500,720 67,785 -- 15,080 583,585
FOR THE YEAR ENDED DECEMBER 31, 1998
----------------------------------------------------------------
Revenue from external customers............ $ 17,320 $ 31,411 $ -- $ -- $ 48,731
Intersegment revenue....................... 10,673 -- -- (10,673) --
Depreciation, depletion and amortization... 7,266 22,001 -- -- 29,267
Operating income (loss).................... 3,308 (10,271) -- -- (6,963)
Earnings from equity investments........... 26,724 -- -- -- 26,724
EBIT....................................... 30,513 (10,140) -- 159 20,532
Performance cash flows..................... 40,615 11,730 -- -- 52,345
Assets..................................... 349,237 81,195 -- 12,294 442,726
- ---------------
(1) Represents intersegment eliminations and other income or assets not
associated with our segment activities.
55
58
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
12. SUBSEQUENT EVENTS:
NGL and Fractionation Assets
In February 2001, we acquired the south Texas fee-based natural gas liquids
transportation and fractionation assets owned by an affiliate of our General
Partner for approximately $133 million. We funded the acquisition of these
assets, which was accounted for as a purchase, by borrowing from our revolving
credit facility.
Gulf of Mexico Assets
In accordance with a FTC order related to El Paso's merger with The Coastal
Corporation, we, along with Deepwater Holdings, agreed to sell several of our
offshore Gulf of Mexico assets to third parties in January 2001. Total
consideration paid for these assets was approximately $158 million consisting of
approximately $108 million for the assets we sold and approximately $50 million
for the assets Deepwater Holdings sold. The offshore assets sold include
interests in Stingray, Nautilus, Manta Ray Offshore, Nemo, Green Canyon, and
Tarpon, as well as interests in two offshore platforms and one dehydration
facility. Additionally, upon FTC approval, Deepwater Holdings will sell its
interest in UTOS. We expect this sale to occur, in April 2001 and the proceeds
to be approximately $4 million. The net carrying value of the assets sold or to
be sold approximated $190 million at December 31, 2000.
As additional consideration for the above transactions, El Paso will make
payments to us totaling $29 million. These payments will be made in quarterly
installments of $2.25 million, starting on or before March 31, 2001, for the
next three years and $2 million in the first quarter of 2004. From this
additional consideration, we realized income of approximately $25.4 million in
the first quarter of 2001.
13. SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED):
Oil and Natural Gas Reserves
The following table represents our net interest in estimated quantities of
developed and undeveloped reserves of crude oil, condensate and natural gas and
changes in such quantities at year end 2000, 1999 and 1998. Estimates of our
reserves at December 31, 2000, 1999 and 1998, have been made by the independent
engineering consulting firm, Netherland, Sewell & Associates, Inc. Net proved
reserves are the estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserve volumes that
can be expected to be recovered through existing wells with existing equipment
and operating methods. Proved undeveloped reserves are proved reserve volumes
that are expected to be recovered from new wells on undrilled acreage or from
existing wells where a significant expenditure is required for recompletion.
56
59
EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Estimates of reserve quantities are based on sound geological and
engineering principles, but, by their very nature, are still estimates that are
subject to substantial upward or downward revision as additional information
regarding producing fields and technology becomes available.
OIL/CONDENSATE NATURAL GAS
MBbls MMcf
-------------- -----------
(IN THOUSANDS)
Proved reserves -- January 1, 1998......................... 2,119 30,163
Revisions of previous estimates.......................... (33) 1,833
Purchase of reserves in place............................ 32 8,212
Production............................................... (540) (11,324)
----- -------
Proved reserves -- December 31, 1998....................... 1,578 28,884
Revision of previous estimates........................... 251 623
Extension, Discoveries, and other Additions.............. 1 218
Production............................................... (357) (12,211)
----- -------
Proved reserves -- December 31, 1999(1).................... 1,473 17,514
Revision of previous estimates........................... 23 1,171
Production............................................... (295) (7,185)
----- -------
Proved reserves -- December 31, 2000....................... 1,201 11,500
===== =======
- ---------------
(1) Includes our net interest in proved reserves on Garden Banks Block 73
totaling 653 barrels of oil and 218 MMcf of natural gas.
The following are estimates of our total proved developed and proved
undeveloped reserves of oil and natural gas by producing property as of December
31, 2000.
OIL (barrels) NATURAL GAS (Mcf)
------------- -----------------------
PROVED PROVED PROVED
DEVELOPED DEVELOPED UNDEVELOPED
------------- --------- -----------
Garden Banks Block 72............................. 209,008 1,771,981 --
Garden Banks Block 73............................. -- 143,245 --
Garden Banks Block 117............................ 933,823 1,626,785 --
Viosca Knoll Block 817............................ 47,845 4,946,589 2,373,676
West Delta Block 35............................... 10,747 637,645 --
--------- --------- ---------
Total................................... 1,201,423 9,126,245 2,373,676
========= ========= =========
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and natural gas prices, future operating costs
and future plugging and abandonment costs, all of which may vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Estimates with respect to proved undeveloped reserves that may be developed
and produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will
57
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EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
result in variations, which may be substantial, in the estimated reserves. A
significant portion of our reserves is based upon volumetric calculations.
Future Net Cash Flows
The standardized measure of discounted future net cash flows relating to
our proved oil and natural gas reserves is calculated and presented in
accordance with SFAS No. 69, Disclosures About Oil and Gas Producing Activities.
Accordingly, future cash inflows were determined by applying year-end oil and
natural gas prices, as adjusted for fixed price contracts in effect, to our
estimated share of future production from proved oil and natural gas reserves.
The average prices utilized in the calculation of the standardized measure of
discounted future net cash flows at December 31, 2000, were $23.75 per barrel of
oil and $9.39 per Mcf of natural gas. Actual future prices and costs may be
materially higher or lower. Future production and development costs were
computed by applying year-end costs to future years. As we are not a taxable
entity, no future income taxes were provided. A prescribed 10 percent discount
factor was applied to the future net cash flows.
In our opinion, this standardized measure is not a representative measure
of fair market value, and the standardized measure presented for our proved oil
and natural gas reserves is not representative of the reserve value. The
standardized measure is intended only to assist financial statement users in
making comparisons between companies.
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Future cash inflows.................................. $136,658 $ 69,719 $ 53,299
Future production costs.............................. (15,853) (14,530) (13,412)
Future development costs............................. (11,531) (10,681) (10,566)
-------- -------- --------
Future net cash flows................................ 109,274 44,508 29,321
Annual discount at 10% rate.......................... (19,525) (7,990) (2,649)
-------- -------- --------
Standardized measure of discounted future net cash
flows.............................................. $ 89,749 $ 36,518 $ 26,672
======== ======== ========
Estimated future net cash flows for proved developed and proved undeveloped
reserves as of December 31, 2000, are as follows:
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- --------
(IN THOUSANDS)
Undiscounted estimated future net cash flows from
proved reserves before income taxes................ $89,776 $19,498 $109,274
======= ======= ========
Present value of estimated future net cash flows from
proved reserves before income taxes, discounted at
10%................................................ $73,705 $16,044 $ 89,749
======= ======= ========
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EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following are the principal sources of change in the standardized
measure (in thousands):
2000 1999 1998
-------- -------- --------
Beginning of year.................................... $ 36,518 $ 26,672 $ 67,366
Sales and transfers of oil and natural gas
produced, net of production costs............... (33,203) (22,154) (22,131)
Net changes in prices and production costs......... 119,457 29,901 (32,129)
Extensions, discoveries and improved recovery, less
related costs................................... -- 544 --
Oil and natural gas development costs incurred
during the year................................. 172 615 120
Changes in estimated future development costs...... (511) (1,098) (443)
Revisions of previous quantity estimates........... 7,846 5,124 1,920
Purchase of reserves in place...................... -- -- 7,573
Accretion of discount.............................. 3,652 2,666 6,736
Changes in production rates, timing and other...... (44,182) (5,752) (2,340)
-------- -------- --------
End of year.......................................... $ 89,749 $ 36,518 $ 26,672
======== ======== ========
Development, Exploration, and Acquisition Expenditures
The following table details certain information regarding costs incurred in
our development, exploration, and acquisition activities during the years ended
December 31:
2000 1999 1998
---- ------ -------
(IN THOUSANDS)
Development costs........................................... $172 $3,018 $17,783
Proved acquisitions......................................... -- -- 16,945
Capitalized interest........................................ -- 200 328
---- ------ -------
Total capital expenditures........................ $172 $3,218 $35,056
==== ====== =======
Capitalized Costs
Capitalized costs relating to our natural gas and oil producing activities
and related accumulated depreciation, depletion and amortization were as follows
as of December 31:
2000 1999
-------- --------
(IN THOUSANDS)
Oil and natural gas properties
Proved properties......................................... $ 53,572 $ 41,157
Wells, equipment, and related facilities.................. 102,748 81,065
-------- --------
156,320 122,222
Less accumulated depreciation, depletion and amortization... 101,161 90,677
-------- --------
$ 55,159 $ 31,545
======== ========
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EL PASO ENERGY PARTNERS, L.P. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
14. SUPPLEMENTAL QUARTERLY FINANCIAL INFORMATION (UNAUDITED):
As discussed in Note 1, we changed our method for allocating net income
among the partners. The change was adopted during the fourth quarter of 1999,
effective as of January 1, 1999. The information that follows for the year 1999
has been restated to reflect this change as if it were in effect for all periods
presented. In previous years, we have reported equity earnings as part of
operating revenues. We have changed this presentation as of December 31, 2000,
to include equity earnings as other income. This change has been reflected for
all periods presented.
QUARTER ENDED
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31 YEAR
-------- ------- ------------ ----------- --------
(IN THOUSANDS, EXCEPT PER UNIT DATA)
2000
Operating revenue......................... $ 18,950 $26,812 $29,642 $37,011 $112,415
Operating income.......................... 9,394 13,419 10,032 9,206 42,051
Net income................................ 1,939 8,367 4,862 5,329 20,497
Net income allocated to General Partner... 3,232 3,622 4,114 4,610 15,578
Net income allocated to Series B
preference unitholders.................. -- -- 1,417 4,251 5,668
-------- ------- ------- ------- --------
Net (loss) income allocated to Limited
Partners................................ (1,293) 4,745 (669) (3,532) (749)
Basic and diluted net (loss) income per
unit.................................... (0.05) 0.18 (0.02) (0.11) (0.03)
Distributions declared per common unit.... 0.525 0.5375 0.5375 0.55 2.150
Distributions declared per preference
unit.................................... 0.275 0.275 0.275 -- 0.825
Weighted average number of units
outstanding............................. 27,029 27,029 31,229 31,550 29,077
1999
Operating revenue......................... $ 11,178 $14,720 $18,975 $18,786 $ 63,659
Operating (loss) income................... (1,264) 2,501 3,192 6,198 10,627
Net income................................ 3,499 4,188 9,257 1,873 18,817
Net income allocated to General Partner... 2,838 2,847 3,217 3,227 12,129
Net income (loss) allocated to Limited
Partners before accounting change....... 661 1,341 6,040 (1,354) 6,688
Cumulative effect of accounting change.... (15,427) -- -- -- (15,427)
-------- ------- ------- ------- --------
Net (loss) income allocated to Limited
Partners................................ (14,766) 1,341 6,040 (1,354) (8,739)
Basic and diluted net income (loss) per
unit before accounting change........... 0.03 0.05 0.22 (0.05) 0.26
Cumulative effect of accounting change.... (0.60) -- -- -- (0.60)
-------- ------- ------- ------- --------
Basic and diluted net (loss) income per
unit.................................... (0.57) 0.05 0.22 (0.05) (0.34)
Distributions declared per common unit.... 0.525 0.525 0.525 0.525 2.10
Distributions declared per preference
unit.................................... 0.275 0.275 0.275 0.275 1.10
Weighted average number of units
outstanding............................. 24,367 25,244 27,029 27,029 25,928
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REPORT OF INDEPENDENT ACCOUNTANTS
To the Unitholders of El Paso Energy Partners, L.P.
and the Board of Directors and Stockholder of
El Paso Energy Partners Company, as General Partner
In our opinion, the accompanying consolidated balance sheets and related
consolidated statements of operations, of cash flows and of partners' capital
present fairly, in all material respects, the financial position of El Paso
Energy Partners, L.P. and its subsidiaries (the "Partnership") at December 31,
2000 and 1999 and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Partnership's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
As disclosed in Note 1 to the consolidated financial statements, the
Partnership changed its method for allocating net income to its partners in
1999.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 7, 2001
61
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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
GENERAL
We and our General Partner utilize the employees of and management services
provided by El Paso under a management agreement. We reimburse our General
Partner for reasonable general and administrative expenses, and other reasonable
expenses, incurred by our General Partner and its affiliates, on our behalf.
DIRECTORS AND EXECUTIVE OFFICERS OF OUR GENERAL PARTNER
The following table sets forth certain information as of March 24, 2001,
regarding the executive officers and directors of our General Partner. Each
executive officer of our General Partner serves us in the same office or offices
each such officer holds with our General Partner. Directors are elected annually
by our General Partner's sole stockholder, El Paso Energy Partners Holding
Company, and hold office until their successors are elected and qualified. Each
executive officer named in the following table has been elected to serve until
his successor is duly appointed or elected or until his earlier removal or
resignation from office.
There is no family relationship among any of the executive officers or
directors of our General Partner, and, other than described herein, no
arrangement or understanding exists between any executive officer and any other
person pursuant to which he was or is to be selected as an officer.
NAME AGE POSITION(S)
---- --- -----------
William A. Wise.......... 55 Director and Chairman of the Board
Robert G. Phillips....... 46 Director and Chief Executive Officer
James H. Lytal........... 43 Director and President
H. Brent Austin.......... 46 Director and Executive Vice President
Keith B. Forman.......... 42 Vice President and Chief Financial Officer
D. Mark Leland........... 39 Senior Vice President and Controller
Michael B. Bracy......... 59 Director
H. Douglas Church........ 63 Director
Malcolm Wallop........... 68 Director
Mr. Wise has served as Director and Chairman of the Board of our General
Partner since August 1998. He has served as Chief Executive Officer of El Paso
since January 1990 and has served as Chairman of El Paso's board of directors
from January 1994 until October 1999 and from January 2001 to present. Mr. Wise
was President of El Paso from January 1990 to April 1996 and from July 1998 to
present. He served as President and Chief Operating Officer of El Paso from
April 1989 to December 1989. From March 1987 until April 1989, Mr. Wise was an
Executive Vice President of El Paso and a Senior Vice President of El Paso from
January 1984 to February 1987. Mr. Wise is a member of the Board of Directors of
Battle Mountain Gold Company and is Chairman of the Board of El Paso Tennessee
Pipeline Co.
Mr. Phillips has served as a Director of our General Partner since August
1998. He has served as Chief Executive Officer for us and our General Partner
since November 1999. He served as Executive Vice President from August 1998 to
October 1999. Mr. Phillips has served as President of El Paso Field Services
Company since June 1997. He served as President of El Paso Energy Resources
Company from December 1996 to June 1997, President of El Paso Field Services
Company from April 1996 to December 1996 and Senior Vice President of El Paso
from September 1995 to April 1996. For more than five years prior, Mr. Phillips
was Chief Executive Officer of Eastex Energy, Inc.
62
65
Mr. Lytal has served as a Director of our General Partner since August 1994
and as our President and the President of our General Partner since July 1995.
He served as Senior Vice President for us and our General Partner from August
1994 to June 1995. Prior to joining us, Mr. Lytal was Vice President -- Business
Development for American Pipeline Company from December 1992 to August 1994.
From March 1991 to December 1992, Mr. Lytal served as Vice President -- Business
Development for United Gas Pipe Line Company. Prior to March 1991, Mr. Lytal has
served in various capacities in the oil and gas exploration and production and
gas pipeline industries with Texas Oil and Gas, Inc. and American Pipeline
Company.
Mr. Austin has served as a Director of our General Partner and as Executive
Vice President for us and our General Partner since August 1998. Mr. Austin has
served as an Executive Vice President and Chief Financial Officer of El Paso
since May 1995 and as the Chief Financial Officer of El Paso since April 1992.
He served as the Senior Vice President of El Paso from April 1992 to April 1995.
He served as the Vice President, Planning and Treasurer of Burlington Resources
Inc. from November 1990 to March 1992 and Assistant Vice President, Planning of
Burlington from January 1989 to October 1990. Mr. Austin is a member of the
Board of Directors of El Paso Tennessee Pipeline Co.
Mr. Forman has served as Chief Financial Officer for us and our General
Partner since January 1992 and served as a Director of our General Partner from
July 1992 to August 1998. From 1982 to 1992, Mr. Forman served as Vice President
of the Natural Gas Pipeline Group of Manufacturers Hanover Trust Company.
Mr. Leland has served as Senior Vice President and Controller for us and
our General Partner since July 2000 and as Vice President of El Paso Field
Services Company since September 1997. He served as Vice President and
Controller for us and our General Partner from August 1998 to July 2000. He
served as Director of Business Development for El Paso Field Services Company
from September 1994 to September 1997. For more than five years prior, Mr.
Leland served in various capacities in the finance and accounting functions of
El Paso.
Mr. Bracy has served as a Director of our General Partner since October
1998. From January 1993 to August 1997, Mr. Bracy served as a Director,
Executive Vice President and Chief Financial Officer of NorAm Energy Corp. and
as Executive Vice President and Chief Financial Officer of NorAm from December
1991 to January 1993. For seven years prior, Mr. Bracy served in various
executive capacities with NorAm. From December 1977 to October 1984, Mr. Bracy
held various executive financial positions with El Paso. Prior to December 1977,
Mr. Bracy served in various capacities with The Chase Manhattan Bank. Mr. Bracy
is a member of the Board of Directors of Itron, Inc.
Mr. Church has served as a Director of our General Partner since January
1999. From January 1994 to December 1998, Mr. Church served as the Senior Vice
President, Transmission, Engineering and Environmental for a subsidiary of Duke
Energy Corporation, Texas Eastern Transmission Company. For thirty-two years
prior, Mr. Church served in various engineering and operating capacities with
Texas Eastern Transmission Company, Panhandle Eastern Corporation and
Transwestern Pipeline Company. Mr. Church is a past member of the Board of
Directors of Southern Gas Association and Boys and Girls Country of Houston,
Inc. (Chairman).
Mr. Wallop has served as a Director of our General Partner since August
1998 and as a Director of El Paso since January 1995. Since January 1995, Mr.
Wallop has served as President for Frontiers of Freedom Foundation, a political
foundation. For eighteen years prior to 1995, Mr. Wallop was a member of the
United States Senate. He is a member of the Board of Directors of Hubbell Inc.
and Sheridan State Bank.
COMPENSATION OF DIRECTORS
Non-employee directors of our General Partner are entitled to receive an
annual retainer fee of forty-thousand dollars, with the chairman of any board
committees entitled to receive an additional fifteen thousand dollars per year.
All directors of our General Partner are entitled to reimbursement for their
reasonable out-of-pocket expenses in connection with their travel to and from,
and attendance at, meetings of the Board or committees thereof.
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66
In August 1998, we adopted the 1998 Unit Option Plan for Non-Employee
Directors, or the Director Plan, to provide our General Partner with the ability
to issue unit options to attract and retain the services of knowledgeable
directors. Unit options to purchase a maximum of 100,000 of our common units may
be issued pursuant to the Director Plan. Under the Director Plan, each
non-employee director receives a grant of 1,500 unit options upon initial
election to the Board of Directors and an annual unit option grant of 1,000 upon
each re-election to the Board of Directors. Each unit option that is granted
will vest immediately at the date of grant and will expire ten years from such
date, but will be subject to earlier termination in the event that such
non-employee director ceases to be a director of our General Partner for any
reason, in which case the unit options expire 36 months after such date except
in the case of death, in which case the unit options expire 12 months after such
date. The Director Plan is administered by a management committee consisting of
the Chairman of the Board and such other senior officers of our General Partner
or its affiliates as the Chairman of the Board may designate.
In 1998, we granted 3,000 unit options to purchase an equal number of
common units with an average exercise price of $26.17 per unit and, in 1999,
granted 4,500 unit options to purchase an equal number of common units with an
average exercise price of $21.58 per unit; and in 2000, we granted 3,000 unit
options to purchase an equal number of common units with an exercise price of
$25.5625 per unit. At March 15, 2001, all those options remain outstanding.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
We do not currently have a compensation committee or another committee
performing similar functions, and all such matters which would be considered by
such committee are acted upon by the full Board of Directors of our General
Partner. Employees of El Paso, through our General Partner, are the individuals
who work on our matters. Accordingly, the only compensation we addressed relates
to issuance of unit options under our various option plans. The Board of
Directors administers and interprets the Omnibus Plan. See Item 11, Executive
Compensation.
AUDIT AND CONFLICTS COMMITTEE
Currently, Messrs. Bracy and Church, who are neither officers nor employees
of our General Partner nor any of its affiliates, serve as our Audit and
Conflicts Committee of the Board of Directors of our General Partner. The Audit
and Conflicts Committee provides two primary services. First, it advises the
Board of Directors in matters regarding the system of internal controls and the
annual independent audit, and reviews policies and practices of our General
Partner and us. Second, the Audit and Conflicts Committee, at the request of our
General Partner, reviews specific matters as to which our General Partner
believes there may be a conflict of interest in order to determine if the
resolution of such conflict proposed by our General Partner is fair and
reasonable to us. Except as otherwise required by the rules of the NYSE, the
Audit and Conflicts Committee only reviews matters concerning potential
conflicts of interest at the request of our General Partner, which has sole
discretion to determine which matters to submit for review. Any such matters
approved by a majority vote of the Audit and Conflicts Committee will be
conclusively deemed (i) to be fair and reasonable to us, (ii) approved by all of
our limited partners and (iii) not a breach by our General Partner of any duties
it may owe us. However, it is possible that such procedure in itself may
constitute a conflict of interest.
COMPENSATION OF OUR GENERAL PARTNER
Our General Partner receives no remuneration in connection with our
management other than: (i) distributions on its general and limited partner
interests in us and its nonmanaging interest in certain of our subsidiaries;
(ii) incentive distributions on its general partner interest, as provided in the
partnership agreement, and (iii) reimbursement for all direct and indirect costs
and expenses incurred, all selling, general and administrative expenses
incurred, and all other expenses necessary or appropriate to the conduct of the
business of, and allocable to, us, including, but not limited to the management
fees paid by our General Partner to El Paso under its management agreement.
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SECTION 16(a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Our General Partner's directors, officers and beneficial owners of more
than 10 percent of a registered class of our equity securities are required to
file reports of ownership and reports of changes in ownership with the
Securities and Exchange Commission and the NYSE. Directors, officers and
beneficial owners of more than 10 percent of our equity securities are also
required to furnish us with copies of all such reports that are filed. Based on
our review of copies of such forms and amendments, we believe directors,
executive officers and greater than 10 percent beneficial owners, with the
exception of Mr. Robert Phillips, complied with all filing requirements during
the year ended December 31, 2000. Mr. Phillips had one late filing for one
transaction during 2000.
ITEM 11. EXECUTIVE COMPENSATION
Our executive officers and the executive officers of our General Partner
are compensated by El Paso and do not receive compensation from our General
Partner or us for their services in such capacities with the exception of awards
pursuant to Omnibus Plan discussed below. However, our General Partner does make
payments to El Paso pursuant to its management agreement. See Item 10, Directors
and Executive Officers of the Registrant -- Compensation of Directors.
In August 1998, Mr. Lytal entered into an employment agreement with a five
year term with El Paso Energy, pursuant to which he would continue to serve as
our President and president of our General Partner. However, pursuant to the
terms of his employment agreement, Mr. Lytal has the right to terminate such
agreement upon 30 days notice and El Paso has the right to terminate such
agreement under a variety of circumstances.
OMNIBUS PLAN
In August 1998, we adopted the 1998 Omnibus Compensation Plan, or the
Omnibus Plan, to provide our General Partner with the ability to issue unit
options to attract and retain the services of knowledgeable officers and key
management personnel. Unit options to purchase a maximum of 3 million common
units may be issued pursuant to the Omnibus Plan. The Omnibus Plan is
administered by our General Partner's Board of Directors. The Board of Directors
shall interpret the Omnibus Plan, shall prescribe, amend and rescind rules
relating to it, select eligible participants, make grants to participants who
are not Section 16 insiders pursuant to the Securities Exchange Act, and shall
take all other actions necessary for the Omnibus Plan administration, which
actions shall be final and binding upon all the participants.
In August 1998, we granted 930,000 unit options to employees of our General
Partner to purchase an equal number of common units at $27.1875 per unit
pursuant to the Omnibus Plan. As of March 15, 2001, 672,500 unit options remain
outstanding. No grants of unit options were made in 1999 or 2000.
REPORT FROM COMPENSATION COMMITTEE REGARDING EXECUTIVE COMPENSATION
Because we do not have a compensation committee or another committee
performing similar functions, this report is presented by the full Board of
Directors of our General Partner. The Board of Directors is responsible for
establishing appropriate compensation goals for the knowledgeable officers and
key management personnel working for us and evaluating the performance of such
officers and personnel in meeting such goals.
The goals of the Board of Directors in administering the Omnibus Plan are
as follows:
(1) To fairly compensate the knowledgeable officers and key management
personnel working for us and our affiliates for their contributions to our
short-term and long-term performance.
(2) To allow us to attract, motivate and retain the management
personnel necessary to our success by providing an Omnibus Plan comparable
to that offered by companies with which we compete for management
personnel.
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The elements of the Omnibus Plan described above are implemented and
periodically reviewed and adjusted by the Board of Directors. The awards made
under the Omnibus Plan are determined based on individual performance,
experience and comparison with awards made by our industry peers and other
companies in similar industries with comparable revenue while linking such
awards to our achievement of financial goals.
SUMMARY COMPENSATION TABLE
The following table sets forth information concerning the annual
compensation earned by our Chief Executive Officer and each of its other four
most highly compensated executive officers whose annual salary and bonus during
the year ended December 31, 2000, exceeded $100,000 (collectively, the Named
Officers):
LONG-TERM COMPENSATION
ANNUAL COMPENSATION(1) AWARDS
-------------------------------------------- -------------------------
MARKET VALUE OTHER ANNUAL ALL OTHER
NAME/PRINCIPAL FISCAL SALARY BONUS OF UNITS COMPENSATION OPTIONS COMPENSATION
POSITION YEAR ($) ($) ISSUED ($) (#) ($)
-------------- ------ ------ ----- ------------ ------------ ---------- ------------
William A. Wise........................ 2000 -- -- -- -- -- --
Chairman of the Board 1999 -- -- -- -- -- --
1998 -- -- -- -- -- --
Robert G. Phillips..................... 2000 -- -- -- -- -- --
Chief Executive Officer 1999 -- -- -- -- -- --
1998 -- -- -- -- -- --
James H. Lytal......................... 2000 -- -- -- -- -- --
President 1999 -- -- -- -- -- --
1998 -- -- -- -- 215,000(2) --
Keith B. Forman........................ 2000 -- -- -- -- -- --
Chief Financial Officer 1999 -- -- -- -- -- --
1998 -- -- -- -- 215,000(2) --
D. Mark Leland......................... 2000 -- -- -- -- -- --
Senior Vice President & 1999 -- -- -- -- -- --
Controller 1998 -- -- -- -- -- --
- ---------------
(1) Other than awards made under our incentive arrangements, all other
compensation was paid by El Paso or subsidiaries of El Paso.
(2) Issued pursuant to the Omnibus Plan.
OPTION GRANTS
None of the Named Officers received any unit options grants under the
Omnibus Plan during the year ended December 31, 2000.
OPTION EXERCISES AND YEAR-END VALUE TABLE
The following table sets forth information concerning the unit options held
by the Named Officers at December 31, 2000 or exercised by the Named Officers
during the year then ended:
VALUE OF
UNEXERCISED
IN-THE-MONEY
OPTIONS AT FISCAL
NUMBER OF YEAR-END
SHARES ACQUIRED VALUE EXERCISABLE/ EXERCISABLE/
NAME ON EXERCISE(#) REALIZED($) UNEXERCISABLE UNEXERCISABLE
---- --------------- ------------- ------------- -----------------
William A. Wise...................... -- -- --/ -- $ --/$--
Robert G. Phillips................... -- -- --/-- --/ --
James H. Lytal....................... -- -- 215,000/-- $46,763/ --
Keith B. Forman...................... -- -- 215,000/-- $46,763/ --
D. Mark Leland....................... -- -- --/-- --/ --
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ITEM 12. SECURITY OWNERSHIP OF MANAGEMENT
The following table sets forth, as of March 1, 2001, the beneficial
ownership of the outstanding equity securities of us, by (i) each person who is
known to us to beneficially own more than 5 percent of our outstanding units,
(ii) each director of our General Partner and (iii) all directors and executive
officers of our General Partner as a group.
COMMON UNITS
---------------------
BENEFICIAL OWNER NUMBER PERCENT
- ---------------- -------- -------
General Partner/El Paso..................................... (1) (1)
Robert G. Phillips.......................................... 4,000 *
James H. Lytal.............................................. 223,016(2)(3) *
Keith B. Forman............................................. 217,000(3) *
William A. Wise............................................. 9,670(4) *
H. Brent Austin............................................. 2,000 *
D. Mark Leland.............................................. 2,000 *
Michael B. Bracy............................................ 8,500(5) *
H. Douglas Church........................................... 3,500(5) *
Malcolm Wallop.............................................. 3,500(5) *
Executive officers and directors of us as a group (9
persons).................................................. 473,186 *
- ---------------
* Less than 1 percent.
(1) The address for our General Partner and El Paso is El Paso Building, 1001
Louisiana Street, Houston, Texas 77002. All of our General Partner's
outstanding common stock, par value $0.10 per share, is indirectly owned by
El Paso. Our General Partner has no other class of capital stock
outstanding. El Paso, through its subsidiaries, owns a 27.8 percent interest
in us consisting of 8,953,764 common units. They also own a one percent
general partner interest in us, an approximate one percent non-managing
member interest in some of our subsidiaries and $170 million of our Series B
preference units.
(2) The amount reflected for Mr. Lytal excludes 34 common units owned by his
son, a minor.
(3) Includes the option to acquire 215,000 common units pursuant to the 1998
Omnibus Plan.
(4) Mr. Wise disclaims beneficial ownership of 2,500 common units held by spouse
and 6,900 common units held by daughters.
(5) Includes the option to acquire 3,500 common units pursuant to the Director
Plan. See Item 10, Directors and Executive Officers of the
Registrant -- Compensation of Directors.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
A discussion of certain agreements, arrangements and transactions between
or among us, our General Partner, and certain other related parties is
summarized in Part II, Item 8, Financial Statements and Supplementary Data,
Notes 2 and 7. Also see Item 10, Directors and Executive Officers of the
Registrant.
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PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) THE FOLLOWING DOCUMENTS ARE FILED AS PART OF THIS ANNUAL REPORT OR
INCORPORATED BY REFERENCE:
1. Financial Statements
Our consolidated financial statements are included in Part II, Item 8 of
this report:
PAGE
----
Consolidated Statements of Operations....................... 30
Consolidated Balance Sheets................................. 31
Consolidated Statements of Cash Flows....................... 32
Consolidated Statements of Partners' Capital................ 33
Notes to Consolidated Financial Statements.................. 34
Report of Independent Accountants........................... 61
The following consolidated financial statements of certain of our equity
investments are included on the following pages of this report:
PAGE
----
DEEPWATER HOLDINGS, L.L.C.
Report of Independent Accountants......................... 73
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... 74
Consolidated Statements of Operations for the Year ended
December 31, 2000 and the Period from Inception
(September 30, 1999) to December 31, 1999.............. 75
Consolidated Statements of Members' Equity for the Year
Ended December 31, 2000 and the Period from Inception
(September 30, 1999) to December 31, 1999.............. 76
Consolidated Statements of Cash Flows for the Year Ended
December 31, 2000 and the Period from Inception
(September 30, 1999) to December 31, 1999.............. 77
Notes to the Consolidated Financial Statements for the
Year Ended December 31, 2000 and the Period from
Inception (September 30, 1999) to December 31, 1999.... 78
POSEIDON OIL PIPELINE COMPANY, L.L.C.
Report of Independent Public Accountants.................. 86
Balance Sheets -- December 31, 2000 and 1999.............. 87
Statements of Income for the Years Ended December 31,
2000, 1999 and 1998.................................... 88
Statements of Members' Equity for the Years Ended December
31, 2000, 1999 and 1998................................ 89
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 90
Notes to Financial Statements -- December 31, 2000, 1999
and 1998............................................... 91
NEPTUNE PIPELINE COMPANY, L.L.C.
Report of Independent Accountants......................... 96
Consolidated Balance Sheet as of December 31, 2000 and
1999................................................... 97
Consolidated Statement of Income for the Years Ended
December 31, 2000 and 1999............................. 98
Statement of Members' Capital as of December 31, 2000 and
1999................................................... 99
Consolidated Statement of Cash Flows for the Years Ended
December 31, 2000 and 1999............................. 100
Notes to Consolidated Financial Statement -- December 31,
2000 and 1999.......................................... 101
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The following financial statements of certain of our subsidiaries which
have a 1 percent non-managing interest with our General Partner are included on
the following pages of this report:
PAGE
----
MANTA RAY GATHERING COMPANY, L.L.C.
Report of Independent Accounts............................ 107
Balance Sheets as of December 31, 2000 and 1999........... 108
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 109
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 110
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 111
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 112
EWING BANK GATHERING COMPANY, L.L.C.
Report of Independent Accounts............................ 118
Balance Sheets as of December 31, 2000 and 1999........... 119
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 120
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 121
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 122
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 123
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
Report of Independent Accounts............................ 127
Balance Sheets for the Years Ended December 31, 2000 and
1999................................................... 128
Statements of Operations for the Year Ended December 31,
2000 and the Period from Inception (November 1, 1999)
to December 31, 1999................................... 129
Statements of Members' Capital for the Year Ended December
31, 2000 and the Period from Inception (November 1,
1999) to December 31, 1999............................. 130
Statements of Cash Flows for the Year Ended December 31,
2000 and the Period from Inception (November 1, 1999)
to December 31, 1999................................... 131
Notes to Financial Statements for the Year Ended December
31, 2000 and the Period from Inception (November 1,
1999) to December 31, 1999............................. 132
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
Report of Independent Accounts............................ 136
Balance Sheets as of December 31, 2000 and 1999........... 137
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 138
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 139
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 140
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 141
69
72
PAGE
----
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
Report of Independent Accounts............................ 146
Balance Sheets as of December 31, 2000 and 1999........... 147
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 148
Statement of Members' Capital for the Years Ended December
31, 2000, 1999 and 1998................................ 149
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 150
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 151
DELOS OFFSHORE COMPANY, L.L.C.
Report of Independent Accounts............................ 158
Balance Sheets as of December 31, 2000 and 1999........... 159
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 160
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 161
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 162
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 163
VK -- DEEPWATER GATHERING COMPANY, L.L.C.
Report of Independent Accounts............................ 168
Consolidated Balance Sheets as of December 31, 2000 and
1999................................................... 169
Consolidated Statements of Operations for the Years Ended
December 31, 2000, 1999 and 1998....................... 170
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 171
Consolidated Statements of Cash Flows for the Years Ended
December 31, 2000, 1999 and 1998....................... 172
Consolidated Notes to Financial Statements for the Years
Ended December 31, 2000, 1999 and 1998................. 173
EL PASO ENERGY PARTNERS OIL TRANSPORT, L.L.C.
Report of Independent Accounts............................ 180
Balance Sheets as of December 31, 2000 and 1999........... 181
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 182
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 183
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 184
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 185
POSEIDON PIPELINE COMPANY, L.L.C.
Report of Independent Accounts............................ 189
Balance Sheets as of December 31, 2000 and 1999........... 190
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 191
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 192
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 193
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 194
70
73
PAGE
----
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
Report of Independent Accounts............................ 200
Balance Sheets as of December 31, 2000 and 1999........... 201
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 202
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 203
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 204
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 205
CRYSTAL HOLDING, L.L.C.
Report of Independent Accounts............................ 214
Consolidated Balance Sheet as of December 31, 2000........ 215
Consolidated Statement of Operations for the Period from
Inception (September 1, 2000) to December 31, 2000..... 216
Statement of Members' Capital from Inception (September 1,
2000) to December 31, 2000............................. 217
Consolidated Statement of Cash Flows for the Period from
Inception (September 1, 2000) to December 31, 2000..... 218
Notes to Consolidated Financial Statements for the Period
from Inception (September 1, 2000) to December 31,
2000................................................... 219
GREEN CANYON PIPELINE COMPANY, L.P.
Report of Independent Accounts............................ 224
Balance Sheets as of December 31, 2000 and 1999........... 225
Statements of Operations for the Years Ended December 31,
2000, 1999 and 1998.................................... 226
Statements of Members' Capital for the Years Ended
December 31, 2000, 1999 and 1998....................... 227
Statements of Cash Flows for the Years Ended December 31,
2000, 1999 and 1998.................................... 228
Notes to Financial Statements for the Years Ended December
31, 2000, 1999 and 1998................................ 229
2. Financial statement schedules and supplementary
information required to be submitted.
None. All financial statement schedules are omitted because
the information is not required, is not material or is
otherwise included in the consolidated financial statements
or notes thereto included elsewhere in this Annual Report.
3. Exhibit list........................................... 234
71
74
DEEPWATER HOLDINGS, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM INCEPTION
(SEPTEMBER 30, 1999) TO DECEMBER 31, 1999
72
75
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Deepwater Holdings, L.L.C.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of members'
equity present fairly, in all material respects, the financial position of
Deepwater Holdings, L.L.C. (a Delaware Limited Liability Company) and its
subsidiaries (the "Company") at December 31, 2000 and 1999, and the results of
their operations and their cash flows for the year ended December 31, 2000 and
the period from inception (September 30, 1999) to December 31, 1999, in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
73
76
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
AS OF DECEMBER 31, 2000 AND 1999
(IN THOUSANDS)
2000 1999
--------- ---------
ASSETS
Current assets
Cash and cash equivalents................................. $ 11,481 $ 9,166
Net accounts receivable, trade............................ 21,385 5,666
Advances to affiliates.................................... 303 526
Gas imbalances............................................ 9,300 18,545
Gas imbalance cashout..................................... 1,962 --
Other current assets...................................... 1,697 1,449
--------- ---------
Total current assets.............................. 46,128 35,352
--------- ---------
Property, plant and equipment
Property, plant and equipment............................. 929,211 890,833
Less: accumulated depreciation and amortization........... (695,976) (677,839)
--------- ---------
Property, plant and equipment, net................ 233,235 212,994
Other noncurrent assets..................................... 4,181 5,679
--------- ---------
Total assets...................................... $ 283,544 $ 254,025
========= =========
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Accounts payable, trade................................... $ 9,139 $ 3,477
Advances from affiliates.................................. 4,357 --
Gas imbalances............................................ 8,446 23,105
Current obligation under capital lease.................... 1,073 1,073
Regulatory reserve........................................ 7,531 3,587
Accrued expenses and other current liabilities............ 9,416 1,704
--------- ---------
Total current liabilities......................... 39,962 32,946
Obligations under capital lease, less current portion....... 8,302 8,676
Deferred credits............................................ 1,146 --
Long-term debt.............................................. 157,000 122,000
Other noncurrent liabilities................................ 69 41
Commitments and contingencies
Members' equity............................................. 77,065 90,362
--------- ---------
Total liabilities and members' equity............. $ 283,544 $ 254,025
========= =========
See accompanying notes.
74
77
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND
THE PERIOD FROM INCEPTION
(SEPTEMBER 30, 1999) TO DECEMBER 31, 1999
(IN THOUSANDS)
2000 1999
-------- -------
Revenues
Transportation services................................... $ 62,327 $13,461
Liquid transportation services and other.................. 2,339 1,907
Dehydration services...................................... 2,456 493
-------- -------
67,122 15,861
-------- -------
Expenses
Operations and maintenance................................ 25,377 8,185
Depreciation and amortization............................. 18,138 4,112
Taxes, other than income taxes............................ (143) 51
Other expenses............................................ 45 --
-------- -------
43,417 12,348
-------- -------
Operating income............................................ 23,705 3,513
Other income (expense)
Interest income........................................... 532 104
Interest expense and other financing costs................ (10,711) (1,478)
-------- -------
Net income.................................................. $ 13,526 $ 2,139
======== =======
See accompanying notes.
75
78
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 2000 AND
THE PERIOD FROM INCEPTION
(SEPTEMBER 30, 1999) TO DECEMBER 31, 1999
(IN THOUSANDS)
EL PASO ENERGY
DEEPWATER, ANR PIPELINE
L.L.C. COMPANY TOTAL
-------------- ------------ -------------
Initial capital contributions on September 30,
1999............................................... $ 83,698 $ 53,170 $136,868
Capital contributions................................ 155 -- 155
Distributions........................................ (24,400) (24,400) (48,800)
Net income........................................... 943 1,196 2,139
-------- -------- --------
Balance at December 31, 1999......................... 60,396 29,966 90,362
Capital contributions................................ 277 -- 277
Distributions........................................ (13,550) (13,550) (27,100)
Net income........................................... 6,252 7,274 13,526
-------- -------- --------
Balance at December 31, 2000......................... $ 53,375 $ 23,690 $ 77,065
======== ======== ========
See accompanying notes.
76
79
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND
THE PERIOD FROM INCEPTION
(SEPTEMBER 30, 1999) TO DECEMBER 31, 1999
(IN THOUSANDS)
2000 1999
--------- --------
Cash flows from operating activities
Net income................................................ $ 13,526 $ 2,139
Adjustments to reconcile net income to net cash provided
by operating activities
Depreciation and amortization.......................... 18,138 4,112
Working capital changes:
Accounts receivable, net............................. (15,719) 6,112
Gas imbalances, net.................................. (5,414) (67)
Other current assets................................. (248) 708
Other noncurrent assets.............................. 1,498 199
Accounts payable..................................... 5,662 (7,060)
Gas imbalance cashout................................ (1,962) --
Regulatory reserve................................... 3,944 3,587
Accrued expenses and other current liabilities....... 8,886 407
--------- --------
Net cash provided by operating activities......... 28,311 10,137
--------- --------
Cash flows from investing activities
Capital expenditures...................................... (38,379) (3,679)
--------- --------
Net cash used in investing activities............. (38,379) (3,679)
--------- --------
Cash flows from financing activities
Proceeds from long-term debt.............................. 157,000 122,000
Retirement of long-term debt.............................. (122,000) (75,267)
Advances to affiliates.................................... 223 --
Advances from affiliates.................................. 4,357 --
Payment under capital lease obligation.................... (374) --
Capital contributions from members........................ 277 156
Distributions to members.................................. (27,100) (48,800)
--------- --------
Net cash provided by (used in) financing
activities...................................... 12,383 (1,911)
--------- --------
Increase in cash and cash equivalents....................... 2,315 4,547
Cash and cash equivalents
Beginning of period.................................... 9,166 4,619
--------- --------
End of period.......................................... $ 11,481 $ 9,166
========= ========
Supplemental cash flow information
Cash paid during the year for interest.................... $ 8,352 $ 513
========= ========
Noncash investing and financing activities
Increase in property, plant and equipment recorded as a
capital lease obligation............................... $ -- $ 9,748
========= ========
See accompanying notes.
77
80
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
Organization
On September 30, 1999, El Paso Energy Partners Deepwater, L.L.C. and ANR
Pipeline Company, or ANR, a subsidiary of The Coastal Corporation, formed us
(Deepwater Holdings), a Delaware limited liability company, to reorganize their
interests in the High Island Offshore System, or HIOS, U-T Offshore System, or
UTOS, East Breaks System, or East Breaks, Stingray System, or Stingray, West
Cameron dehydration facility, or West Cameron, and other related facilities, or
collectively, the Operating Companies. El Paso Energy Partners Deepwater and ANR
contributed into us, their respective ownership interests in the Operating
Companies at their respective historical carrying values. In exchange for their
contributions, El Paso Energy Partners Deepwater received a 59.66 percent
membership interest and ANR received a 40.34 percent membership interest. El
Paso Energy Partners Deepwater simultaneously sold a 9.66 percent membership
interest in us to ANR to achieve a 50/50 ownership position.
In January 2001, El Paso Corporation merged with The Coastal Corporation.
Coastal is the parent company of ANR Pipeline Company. In connection with the
merger, we sold our Stingray system and our West Cameron dehydration facility to
Shell Gas Transmission, LLC and Enterprise Products Operating, LP. From this
sale, we received cash of approximately $50 million and used the proceeds to pay
down our credit facility. We also entered into an agreement to sell our interest
in the UTOS pipeline system for approximately $4 million to be completed upon
receipt of all necessary approvals, including final approval by the Federal
Trade Commission, or FTC. The sale of UTOS is expected to close in April of
2001. The net carrying value of the assets sold or to be sold was approximately
$70 million at December 31, 2000.
Nature of Operations
The following describes our Operating Companies as of December 31, 2000.
High Island Offshore. HIOS is a natural gas transmission system consisting
of 204 miles of pipeline, which includes three supply laterals that connect to a
42-inch diameter mainline. HIOS transports natural gas received from fields
located in the Galveston, Garden Banks, West Cameron and East Breaks areas of
the Gulf of Mexico to a junction platform owned by HIOS located in West Cameron
Block 167. El Paso Energy Partners assumed operations of HIOS in June 2000,
prior to that date ANR operated HIOS.
U-T Offshore. UTOS is a natural gas transmission system consisting of 30
miles of 42-inch diameter pipeline extending from an interconnection with HIOS
at West Cameron Block 167 to the Johnson Bayou processing facility, owned by
UTOS. The Johnson Bayou production facility provides primarily natural gas and
natural gas liquids separation and natural gas dehydration services for natural
gas transported on HIOS and UTOS. El Paso Energy Partners assumed operations of
UTOS in June 2000, prior to that date ANR operated UTOS. Under a FTC order, we
agreed to sell our interest in UTOS. The sale is expected to close in April
2001.
Stingray. Stingray is a natural gas gathering system consisting of (i) 361
miles of 6 to 36-inch diameter pipeline that transports natural gas from HIOS,
West Cameron, East Cameron and Vermilion lease areas in the Gulf of Mexico to
onshore transmission systems in Louisiana, (ii) 43 miles of 16 to 20-inch
diameter pipeline connecting platforms and leases in the Garden Banks Block 191
and 72 areas to Stingray, and (iii) 13 miles of 16-inch diameter pipeline
connecting El Paso Energy Partners' platform at East Cameron Block 373 to
Stingray at East Cameron Block 338. El Paso Energy Partners began operating the
Stingray system effective November 1, 1999. Under a FTC order, we sold our
interest in Stingray in January 2001.
West Cameron. The West Cameron dehydration facility is located at the
northern terminus of the Stingray system. This onshore Louisiana facility
provides dehydration services for natural gas transported on
78
81
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Stingray system. El Paso Energy Partners began operating West Cameron and
related facilities effective November 1, 1999. Under a FTC order, we sold our
interest in West Cameron in January 2001.
East Breaks. East Breaks is a natural gas gathering system consisting of
85 miles of 18 to 20-inch diameter pipeline that connects HIOS to the Diana and
Hoover fields being developed by subsidiaries of ExxonMobil and BP Amoco plc.
Production from the Diana and Hoover properties has been committed to this
system. East Breaks began operating in June 2000, and has the ability to expand
its throughput capacity further, which would provide HIOS and UTOS with the
ability to compete to gather and transport the substantial reserves associated
with properties being, and expected to be, developed in these deepwater frontier
regions.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
all wholly owned subsidiaries after the elimination of all significant
intercompany balances and transactions. Our consolidated financial statements
for previous periods include reclassifications that were made to conform to the
current year presentation. Those reclassifications have no impact on the
reported net income or partners' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Allowance for Doubtful Accounts
We have established an allowance for losses on accounts which may become
uncollectible. Collectibility is reviewed regularly and the allowance is
adjusted as necessary, primarily under the specific identification method. The
allowance was approximately $1.9 million and $1.6 million at December 31, 2000
and 1999.
Property, Plant and Equipment
Our regulated property, plant and equipment is subject to oversight by the
Federal Energy Regulatory Commission, or FERC. The objectives of this regulation
are to ensure the proper recovery of capital investments in rates. Such recovery
is generally accomplished by allowing a return of that investment through
inclusion of depreciation expense in the cost of service. Rates also allow for a
return on the net unrecovered rate base. Specific procedures are prescribed by
FERC to control capitalized costs, depreciation, and the disposal of assets.
Statement of Financial Accounting Standards (SFAS) No. 71, Accounting for the
Effects of Certain Types of Regulation, specifically acknowledges the obligation
of regulated companies to comply with regulated accounting procedures, even when
they conflict with other generally accepted accounting principle pronouncements.
Regulated property, plant and equipment is recorded at original cost of
construction or, on acquisition, the cost to the first party committing the
asset to utility service. Construction cost includes direct labor and materials,
as well as indirect charges, such as overhead and an allowance for both debt and
equity funds used during construction. Replacements or betterments of major
units of property are capitalized, while replacement or additions of minor units
of property are expensed.
Depreciation for regulated property, plant and equipment is calculated
using the composite method. Assets with similar economic characteristics are
grouped. The depreciation rate prescribed in the rate settlement is applied to
the gross investment for the group until net book value of the group is equal to
the
79
82
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
salvage value. Currently, depreciation rates vary from 0.90 percent to 2.65
percent, inclusive of a provision for negative salvage ranging from 0.20 percent
to 0.35 percent. Depreciation rates are reevaluated in conjunction with the rate
making process.
When regulated property, plant and equipment is retired, due to abandonment
or replacement, the original cost, plus the cost of retirement, less salvage, is
charged to accumulated depreciation and amortization. No gain or loss is
recognized unless an entire operating unit, as defined by FERC, has been
retired. Gains or losses on dispositions of operating units are included in
income.
The cost of our non-regulated property, plant and equipment is based on the
original cost of construction or, on acquisition, the fair value of the assets
acquired. Construction costs include all direct costs of the project, as well as
indirect charges including capitalized interest costs on debt. Depreciation on
these properties is provided using the straight-line method which, in the
opinion of management, is adequate to allocate the cost of properties over their
estimated useful lives. Non-regulated properties have expected useful lives of
30 years for the gathering pipelines and 44 years for platforms and related
facilities. Retirements, sales and disposals of assets are recorded by
eliminating the related costs and accumulated depreciation and amortization of
the disposed assets with any resulting gain or loss reflected in income.
Leased property, plant and equipment are capitalized, as appropriate, and
the present value of the related lease payments are recorded as a liability.
Amortization of capitalized leased assets are computed on a straight-line method
over the term of the lease and recorded as a component of depreciation expense.
The purchase price associated with El Paso Energy Partners' and ANR's
original acquisition of the Operating Companies in excess of their net book
value was approximately $98 million at September 30, 1999 and has been assigned
to property, plant and equipment. This excess purchase price is being amortized
on a straight-line basis over a thirty-year period. As of December 31, 2000 and
1999, the accumulated amortization was approximately $4.0 million and $0.8
million.
We evaluate impairment of our regulated and non-regulated property and
equipment in accordance with SFAS No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
Gas Imbalances
Gas transportation imbalance receivables and payables reflect natural gas
volumes owed to Stingray, HIOS or UTOS, or collectively the Regulated Pipelines,
or to their customers and are valued at an average monthly index price of $5.28
for Stingray for the month ended December 31, 2000, and $2.295 for the month
ended December 31, 1999. Imbalances are settled in kind through a fuel gas and
unaccounted for gas tracking mechanism, negotiated cash-outs between parties, or
are subject to a cash-out procedure included in the respective regulated
pipelines' tariffs. The gas imbalance cashout asset and liability reflect either
cash paid or received by the regulated pipelines' pursuant to their tariff and
due from or to others under various operational balancing agreements.
Capitalization of Interest
Interest and other financing costs are capitalized in connection with
construction activities as part of the cost of the asset and amortized over the
related asset's estimated useful life.
Debt Issue Costs
Debt issue costs are capitalized and amortized over the life of the related
indebtedness. Any unamortized debt issue costs are expensed at the time the
related indebtedness is repaid or otherwise terminated.
80
83
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The estimated fair values of all financial instruments approximate their
carrying amounts in the accompanying balance sheet.
Revenue Recognition
Revenue from pipeline transportation of hydrocarbons is recognized upon
receipt of the hydrocarbons into the pipeline systems. Revenue from dehydration
services are recorded on the accrual basis, including an estimate for natural
gas dehydrated but unbilled at the end of each accounting period.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that rebate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated.
Income Taxes
We and our subsidiaries are not taxable entities. However, the taxable
income or loss resulting from our operations will ultimately be included in the
federal and state income tax returns of our members.
Management's Estimates
The preparation of consolidated financial statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect the reported
amounts of certain assets and liabilities, the disclosure of contingent assets
and liabilities at the date of the consolidated financial statements, and the
related reported amounts of revenues and expenses during the reporting period.
Such estimates and assumptions include those regarding: (i) FERC regulations,
(ii) estimated useful lives of depreciable assets and (iii) potential
abandonment, dismantlement, restoration and environmental liabilities. Actual
results could differ from those estimates. Management believes that its
estimates are reasonable.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with corresponding offset to income or other comprehensive income
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
81
84
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment consists of the following:
DECEMBER 31,
---------------------
2000 1999
--------- ---------
(IN THOUSANDS)
Property, plant and equipment, at cost
Pipelines and equipment................................... $ 919,193 $ 829,680
Pipelines under construction.............................. 240 51,375
Pipeline under capital lease.............................. 9,778 9,778
--------- ---------
929,211 890,833
Less accumulated depreciation and amortization............ (695,976) (677,839)
--------- ---------
Property, plant and equipment, net........................ $ 233,235 $ 212,994
========= =========
Accumulated amortization of assets under capital lease was approximately
$260 thousand at December 31, 2000 and $22 thousand at December 31, 1999.
NOTE 4 -- REGULATORY MATTERS
Regulatory Environment
The FERC has jurisdiction under the Natural Gas Act of 1938 and the Natural
Gas Policy Act of 1978 over the regulated pipelines with respect to
transportation of natural gas, rates and charges, construction of new
facilities, extension or abandonment of service and facilities, accounts and
records, depreciation and amortization policies and other matters.
Rate Cases
On December 1, 1998, Stingray filed a rate case with the FERC (Docket No.
RP99-166) which reflected a proposed annual revenue increase of $3.5 million.
The timing of the rate case filing was in accordance with the requirements of
Stingray's previous rate case settlement in Docket No. RP94-301. The FERC issued
an order on December 30, 1998 which suspended the rates to be effective, subject
to refund, until June 1, 1999. As of December 31, 2000 and 1999, Stingray has
recorded a reserve of approximately $7.5 million and $3.6 million, respectively,
for rates subject to refund. Major issues in the rate case included throughput
levels used in the design of rates, levels of depreciation rates, return on
investment and the overall cost of service, which included a management fee.
Settlement discussions with parties to the rate case are underway. This matter
is currently pending the Administrative Law Judge's initial decision with regard
to the hearing held in December 1999.
On September 18, 1995, by letter order, the FERC approved the settlement of
HIOS' and UTOS' rate filings (Docket No. RP94-162 and RP94-161, respectively)
which required that HIOS and UTOS file a new rate case within three years. On
October 8, 1998, the FERC granted a request for an extension of time for the
filing of their next general rate case until January 1, 2003. Costs incurred in
connection with the extension of the rate case settlement have been deferred and
are being amortized on a straight-line basis through the period ending December
31, 2002.
NOTE 5 -- INDEBTEDNESS
We are a party to credit agreements under which we have outstanding
obligations that may restrict our ability to pay distributions to our respective
owners.
82
85
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
We have a revolving credit facility with a syndicate of commercial banks to
provide up to $175 million of available credit, subject to incurrence
limitations. At our election, interest under our credit facility is determined
by reference to the reserve-adjusted London interbank offer rate, the prime rate
or the 90-day average certificate of deposit. As of December 31, 2000, we had
$157 million outstanding under our credit facility bearing interest at
approximately 8.15% per year, and as of December 31, 1999, we had $122 million
outstanding under our credit facility bearing interest at approximately 7.27%
per year. A commitment fee is charged on the unused and available to be borrowed
portion of our credit facility. This fee was 0.475 percent per year at December
31, 2000 and 1999. Amounts advanced under our credit facility were used to
finance capital expenditures, including the construction of East Breaks, the
repayment of the Stingray credit facility and the $40 million distribution in
1999 to our members. Amounts remaining under our credit facility are available
to us for general corporate purposes, including financing capital expenditures
and for working capital. Our credit facility can also be utilized to issue
letters of credit as may be required from time to time; however, no letters of
credit are currently outstanding. The Credit Facility matures in February 2004;
is guaranteed by us and is collateralized by substantially all of our assets.
Interest and other financing costs totaled approximately $9.6 million at
the year ended December 31, 2000 and $1.3 million for the period from inception
(September 30, 1999) to December 31, 1999 net of capitalized interest of $2.5
million and $0.8 million, respectively. As of December 31, 2000 and 1999, the
unamortized portion of debt issue costs totaled $0.6 million and $0.7 million,
respectively.
NOTE 6 -- CAPITAL LEASE
Stingray leases a 36-inch pipeline from Natural Gas Pipeline Company, or
NGPL, that connects the Stingray pipeline system to onshore Louisiana. In June
1999, Stingray extended its lease agreement with NGPL for an additional 14 years
beginning December 1, 1999 through November 30, 2013, with an option to purchase
the asset at the expiration of the lease. Stingray has accounted for this lease
as a capital lease. Rental payments are based on NGPL's regulatory costs of
service associated with the leased assets. Contingent rentals are paid based on
the natural gas volumes transported through the leased assets. Rent expense
totaled $1.1 million, including contingent rentals of approximately $49 thousand
and $92 thousand for the year ended December 31, 2000 and the period from
inception (September 30, 1999) to December 31, 1999, respectively. The present
value of Stingray's lease payments under the capital lease are recorded as other
current and noncurrent liabilities in the accompanying consolidated balance
sheet.
Future minimum lease payments under capital leases are as follows:
YEAR ENDED DECEMBER 31,
- ----------------------- (IN THOUSANDS)
2001........................................................ $ 1,073
2002........................................................ 1,073
2003........................................................ 1,073
2004........................................................ 1,073
2005........................................................ 1,073
Thereafter.................................................. 8,583
-------
Total minimum lease payments................................ 13,948
Less amount representing interest........................... (4,573)
-------
Present value of net minimum lease payments, including
current maturities of $1,073.............................. $ 9,375
=======
83
86
DEEPWATER HOLDINGS, L.L.C. AND SUBSIDIARIES
(A LIMITED LIABILITY COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 7 -- RELATED PARTY TRANSACTIONS
Transportation and dehydration revenues derived from affiliated companies
were $2.3 million for the year ended December 31, 2000 and $1.5 million for the
period from inception (September 30, 1999) to December 31, 1999. In addition
several of the operating companies have entered into operations agreements with
affiliates for various operational, financial, accounting and administrative
services. Total fees billed to the operating companies under these agreements
were $20.3 million for the year ended December 31, 2000 and $5.6 million for the
period from inception (September 30, 1999) to December 31, 1999.
NOTE 8 -- COMMITMENTS AND CONTINGENCIES
We are party to a credit agreement under which we may be restricted from
paying distributions to our members.
We are involved from time to time in various claims, actions, lawsuits, and
regulatory matters that have arisen in the ordinary course of business,
including various rate cases and other proceedings before the FERC.
We, along with several subsidiaries of El Paso, have been named defendants
in actions brought by Jack Grynberg on behalf of the U.S. Government under the
False Claims Act. Generally, the complaints allege an industry-wide conspiracy
to under report the heating value as well as the volumes of the natural gas
produced from federal and Native American lands, which deprived the U.S.
Government of royalties. (In re: Natural Gas Royalties Qui Tam Litigation, U.S.
District Court for the District of Wyoming.)
We have also been named a defendant in an action styled Quinque Operating
Company, et al v. Gas Pipelines and Their Predecessors, et al filed in 1999 in
the District Court of Stevens County, Kansas. This class action complaint
alleges that the defendants have mismeasured natural gas volumes and heating
content of natural gas on non-federal and non-Native American lands. The Quinque
complaint, once transferred to the same court handling the Grynberg complaint,
has been sent back to the Kansas State Court for further proceedings.
We are also a named defendant in numerous lawsuits and a named party in
numerous governmental proceedings arising in the ordinary course of our
business.
While the outcome of the matters discussed above cannot be predicted with
certainty, we do not expect the ultimate resolution of these matters to have a
material adverse effect on our financial position, results of operations, or
cash flows.
84
87
POSEIDON OIL PIPELINE COMPANY, L.L.C.
Financial Statements
As of December 31, 2000
Together With Auditors' Report
85
88
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Members of
Poseidon Oil Pipeline Company, L.L.C.:
We have audited the accompanying balance sheets of Poseidon Oil Pipeline
Company, L.L.C. (a Delaware limited liability company), 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. These
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Poseidon Oil Pipeline
Company, L.L.C., as of December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000, in conformity with accounting principles generally accepted
in the United States.
/s/ Arthur Andersen LLP
Houston, Texas
March 16, 2001
86
89
POSEIDON OIL PIPELINE COMPANY, L.L.C.
BALANCE SHEETS -- DECEMBER 31, 2000 AND 1999
2000 1999
------------- ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents................................. $ 2,532,264 $ 2,052,631
Crude oil receivables-
Related parties........................................ 53,291,170 58,360,962
Other.................................................. 66,916,843 110,674,707
Construction advances to operator......................... -- 4,452
Materials, supplies and other............................. 3,619,508 626,961
------------- ------------
Total current assets.............................. 126,359,785 171,719,713
DEBT RESERVE FUND (Notes 2 and 4)........................... 6,239,109 4,783,461
PROPERTY, PLANT AND EQUIPMENT, net of accumulated
depreciation (Note 3)..................................... 231,756,592 239,187,586
------------- ------------
Total assets...................................... $ 364,355,486 $415,690,760
============= ============
LIABILITIES AND MEMBERS' EQUITY
CURRENT LIABILITIES:
Accounts payable-
Related parties........................................ $ 2,071,571 $ 565,586
Other.................................................. 7,586,954 5,647,090
Crude oil payables-
Related parties........................................ 50,210,479 51,743,958
Other.................................................. 54,907,404 101,309,853
Other..................................................... -- 92,919
Current maturities of long-term debt (Note 4)............. 150,000,000 --
------------- ------------
Total current liabilities......................... 264,776,408 159,359,406
COMMITMENTS AND CONTINGENCIES (Note 7)...................... 1,296,762 322,242
LONG-TERM DEBT (Note 4)..................................... -- 150,000,000
MEMBERS' EQUITY (Note 1):
Capital contributions..................................... 118,899,320 107,999,320
Capital distributions..................................... (124,818,654) (87,230,323)
Retained earnings......................................... 104,201,650 85,240,115
------------- ------------
Total members' equity............................. 98,282,316 106,009,112
------------- ------------
Total liabilities and members' equity............. $ 364,355,486 $415,690,760
============= ============
The accompanying notes are an integral part of these financial statements.
87
90
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
--------------- --------------- ------------
CRUDE OIL SALES............................... $ 1,467,059,427 $ 1,108,446,271 $370,431,640
CRUDE OIL PURCHASES........................... (1,400,928,376) (1,034,329,971) (325,909,477)
--------------- --------------- ------------
Net sales margin......................... 66,131,051 74,116,300 44,522,163
--------------- --------------- ------------
OPERATING COSTS:
Transportation costs........................ 1,793,324 3,451,676 1,636,162
Operating expenses.......................... 5,459,827 4,509,621 3,127,134
Repair expenses (Note 3).................... 18,117,902 -- --
Depreciation................................ 10,754,293 6,171,803 8,846,395
--------------- --------------- ------------
Total operating costs............... 36,125,346 14,133,100 13,609,691
--------------- --------------- ------------
OPERATING INCOME.............................. 30,005,705 59,983,200 30,912,472
OTHER INCOME (EXPENSE):
Interest income............................. 639,224 403,507 290,745
Interest expense............................ (11,683,394) (9,133,367) (8,671,250)
--------------- --------------- ------------
NET INCOME.................................... $ 18,961,535 $ 51,253,340 $ 22,531,967
=============== =============== ============
The accompanying notes are an integral part of these financial statements.
88
91
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF MEMBERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
POSEIDON
MARATHON OIL PIPELINE EQUILON
COMPANY COMPANY, L.L.C. ENTERPRISES L.L.C.
(28%) (36%) (36%) TOTAL
------------ --------------- ------------------ ------------
BALANCE, December 31, 1997........ $ 28,407,346 $ 36,523,731 $ 36,523,731 $101,454,808
Net income...................... 6,308,951 8,111,508 8,111,508 22,531,967
Cash distributions.............. (5,236,000) (6,732,000) (6,732,000) (18,700,000)
------------ ------------ ------------ ------------
BALANCE, December 31, 1998........ 29,480,297 37,903,239 37,903,239 105,286,775
Net income...................... 14,350,936 18,451,202 18,451,202 51,253,340
Cash distributions.............. (14,148,681) (18,191,161) (18,191,161) (50,531,003)
------------ ------------ ------------ ------------
BALANCE, December 31, 1999........ 29,682,552 38,163,280 38,163,280 106,009,112
Net income...................... 5,309,229 6,826,153 6,826,153 18,961,535
Cash contributions.............. 3,052,000 3,924,000 3,924,000 10,900,000
Cash distributions.............. (10,524,733) (13,531,799) (13,531,799) (37,588,331)
------------ ------------ ------------ ------------
BALANCE, December 31, 2000........ $ 27,519,048 $ 35,381,634 $ 35,381,634 $ 98,282,316
============ ============ ============ ============
The accompanying notes are an integral part of these financial statements.
89
92
POSEIDON OIL PIPELINE COMPANY, L.L.C.
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
2000 1999 1998
------------ ------------- ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 18,961,535 $ 51,253,340 $ 22,531,967
Adjustments to reconcile net income to net cash
provided by operating activities-
Depreciation.................................. 10,754,293 6,171,803 8,846,395
Changes in operating assets and liabilities-
Crude oil receivables...................... 48,827,656 (128,639,893) (11,350,080)
Materials, supplies and other.............. (2,992,547) 395,489 23,487
Accounts payable........................... 3,445,849 (898,322) (1,007,689)
Contingent revenue......................... 974,520 322,242 --
Crude oil payables......................... (47,935,928) 120,628,777 4,750,982
Other current liabilities.................. (92,919) (504,671) 526,668
------------ ------------- ------------
Net cash provided by operating
activities............................... 31,942,459 48,728,765 24,321,730
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............................... (3,323,299) (16,606,479) (15,261,547)
Construction advances to operator, net............. 4,452 1,230,015 (1,234,467)
------------ ------------- ------------
Net cash used in investing activities...... (3,318,847) (15,376,464) (16,496,014)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of debt..................... -- 20,000,000 32,000,000
Repayments of long-term debt....................... -- (1,000,000) (21,500,000)
Cash contributions................................. 10,900,000 -- --
Cash distributions................................. (37,588,331) (50,531,003) (18,700,000)
Increase in debt reserve fund...................... (1,455,648) (454,207) (611,627)
------------ ------------- ------------
Net cash used in financing activities...... (28,143,979) (31,985,210) (8,811,627)
------------ ------------- ------------
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS..... 479,633 1,367,091 (985,911)
CASH AND CASH EQUIVALENTS, beginning of year......... 2,052,631 685,540 1,671,451
------------ ------------- ------------
CASH AND CASH EQUIVALENTS, end of year............... $ 2,532,264 $ 2,052,631 $ 685,540
============ ============= ============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid for interest, net of amounts
capitalized................................... $ 11,683,394 $ 8,729,860 $ 8,596,583
============ ============= ============
The accompanying notes are an integral part of these financial statements.
90
93
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
1. ORGANIZATION AND NATURE OF BUSINESS:
Poseidon Oil Pipeline Company, L.L.C. (the Company), is a Delaware limited
liability company formed on February 14, 1996, to design, construct, own and
operate the unregulated Poseidon Pipeline extending from the Gulf of Mexico to
onshore Louisiana. The original members of the Company were Texaco Trading and
Transportation, Inc. (TTTI), and Poseidon Pipeline Company, L.L.C. (Poseidon), a
subsidiary of Leviathan Gas Pipeline Partners, L.P. TTTI contributed $36,399,660
in cash, and Poseidon contributed property, plant and equipment, valued by the
two parties (TTTI and Poseidon) at $36,399,660, at the formation of the Company.
Each member received a 50 percent ownership interest in the Company.
Subsequently, $2,799,320 in cash was equally distributed to TTTI and Poseidon,
leaving $70 million of equity in the Company as of April 23, 1996.
On July 1, 1996, Marathon Pipeline Company (MPLC) and Texaco Pipeline, Inc.
(TPLI), through their 66 2/3 percent and 33 1/3 percent respectively owned
venture, Block 873 Pipeline Company (Block 873), contributed property, plant and
equipment valued by the parties (Block 873, TTTI and Poseidon) at $30,000,000.
In return, they received a 33 1/3 percent interest in the Company. Immediately
after the contribution, MPLC and TPLI transferred their pro rata ownership
interests in the Company to Marathon Oil Company (Marathon) and TTTI,
respectively. Marathon then contributed an additional $5.2 million in cash, and
distributions of $12.6 million and $2.6 million in cash were made to TTTI and
Poseidon, respectively. Upon completion of this transaction, TTTI, Poseidon and
Marathon owned 36 percent, 36 percent and 28 percent of the Company,
respectively, and total equity was $90,000,000.
Effective January 1, 1998, Shell Oil Company and Texaco Inc. (Texaco)
formed Equilon Enterprises L.L.C. (Equilon). Equilon is a joint venture which
combines both companies' western and midwestern U.S. refining and marketing
businesses and both companies' nationwide trading, transportation and lubricants
businesses. Under the formation agreement, Shell Oil Company and Texaco
assigned, or caused to be assigned, the economic benefits and obligations of
certain regulated and unregulated pipeline assets, including TTTI's beneficial
interest in the Company. As a result of the joint venture, Equilon became
operator of the Company on January 1, 1998.
The Company purchased crude oil line-fill and began operating Phase I of
the pipeline in April 1996. Phase I consists of 16-inch and 20-inch sections of
pipe extending from the Garden Banks Block 72 to Ship Shoal Block 332. Phase II
of the pipeline is a 24-inch section of pipe from Ship Shoal Block 332 to
Caillou Island. Line-fill was purchased for Phase II in late December 1996 and
operations began in January 1997. Construction of Phase III of the pipeline
consisting of a section of 24-inch line extending from Caillou Island to the
Houma, Louisiana, area was completed during 1997, and operations began in
December 1997.
The Company is in the business of transporting crude oil in the Gulf of
Mexico in accordance with various purchase and sale contracts with producers
served by the pipeline. The Company buys crude oil at various points along the
pipeline and resells the crude oil at a destination point in accordance with
each individual contract. Net sales margin is earned based upon the differential
between the sale price and purchase price. Differences between purchased and
sold volumes in any period are recorded as changes in line-fill, which is a
component of property, plant and equipment.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Accounting
The accompanying financial statements have been prepared on the accrual
basis of accounting in accordance with accounting principles generally accepted
in the United States.
91
94
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
Property, Plant and Equipment
Contributed property, plant and equipment is recorded at fair value as
agreed to by the members at the date of contribution. Acquired property, plant
and equipment is recorded at cost. Pipeline equipment is depreciated using a
composite, straight-line method over estimated useful lives of three to 30
years. Line-fill is not depreciated as management of the Company believes the
cost of all barrels is fully recoverable. Major renewals and betterments are
capitalized in the property accounts while maintenance and repairs are expensed
as incurred. No gain or loss is recognized on normal asset retirements under the
composite method.
Cash and Cash Equivalents
The Company considers all highly liquid investments purchased with an
original maturity of three months or less to be cash equivalents.
Debt Reserve Fund
In connection with the Company's revolving credit facility (see Note 4),
the Company is required to maintain a debt reserve account as security on the
outstanding balance. At December 31, 2000, the balance in the account totaled
approximately $6,239,000 and was comprised of funds earning interest at a money
market rate.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash and cash equivalents,
short-term receivables, payables and long-term debt. The carrying values of cash
and cash equivalents, short-term receivables and payables approximate fair
value. The fair value for long-term debt is estimated based on current rates
available for similar debt with similar maturities and securities and, at
December 31, 2000, approximates the carrying value.
92
95
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
3. PROPERTY, PLANT AND EQUIPMENT:
Property, plant and equipment consisted of the following at December 31,
2000 and 1999:
2000 1999
------------ ------------
Rights-of-way............................................ $ 3,218,788 $ 3,218,788
Line-fill................................................ 11,395,022 11,350,466
Line pipe, line pipe fittings and pipeline
construction........................................... 222,961,355 222,380,927
Pumping and station equipment............................ 27,793,687 22,011,496
Office furniture, vehicles and other equipment........... 210,553 202,035
Construction work in progress............................ 581,770 3,681,556
------------ ------------
266,161,175 262,845,268
Less- Accumulated depreciation........................... (34,404,583) (23,657,682)
------------ ------------
$231,756,592 $239,187,586
============ ============
In January 2000, an anchor from a semisubmersible drilling unit of
Transocean 96 (Transocean) allegedly ruptured the Company's 24-inch crude oil
pipeline. The cost of $18.1 million to repair the pipeline and clean up the
released crude has been charged to repair expenses. The Company has filed a
lawsuit against Transocean to recover these costs.
Management evaluates the carrying value of the pipeline in accordance with
the guidelines presented under Statement of Financial Accounting Standards
(SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to Be Disposed Of." Management believes no impairment of
assets exists as of December 31, 2000.
During 2000 and 1999, the Company did not capitalize interest cost into
property, plant and equipment.
4. DEBT:
The Company maintains a $150,000,000 revolving credit facility with a group
of banks. The outstanding balance at December 31, 2000, was $150,000,000. Under
the terms of the related credit agreement, the Company has the option to either
draw or renew amounts at various maturities ranging from one to 12 months if a
Eurodollar interest rate arrangement is selected (7.81 percent at December 31,
2000). These borrowings can then be renewed assuming no event of default exists.
Alternatively, the Company may elect to borrow under a base interest rate
arrangement, calculated in accordance with the credit agreement.
The revolving credit facility matures on April 30, 2001. The Company is
negotiating with a group of banks to refinance its revolving credit facility.
Management is confident that the entire balance will be refinanced to extend the
maturity date beyond January 1, 2002.
At December 31, 2000, the entire outstanding balance had been borrowed
under the Eurodollar alternative, and it is the Company's intent to extend
repayment beyond one year, thus the entire balance has been classified as
long-term.
The debt is secured by various assets of the Company including accounts
receivable, inventory, pipeline equipment and investments. The Company has used
the funds drawn on the revolver primarily for construction costs associated with
Phases II and III of the pipeline.
The revolving credit agreement requires the Company to meet certain
financial and nonfinancial covenants. The Company must maintain a tangible net
worth, calculated in accordance with the credit agreement, of not less than
$80,000,000. Beginning April 1, 1997, the Company is required to maintain a
ratio
93
96
POSEIDON OIL PIPELINE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2000, 1999 AND 1998
of earnings before interest, taxes, depreciation and amortization to interest
paid or accrued, as calculated in accordance with the credit agreement, of 2.50
to 1.00. In addition, the Company is required to maintain a debt reserve fund
(see Note 2) with a balance equal to two times the interest payments made in the
previous quarter under the credit facility.
5. INCOME TAXES:
A provision for income taxes has not been recorded in the accompanying
financial statements because such taxes accrue directly to the members. The
federal and state income tax returns of the Company are prepared and filed by
the operator.
6. TRANSACTIONS WITH RELATED PARTIES:
The Company derives a significant portion of its net revenue from its
members and other related parties. The Company generated approximately
$29,996,600, $40,782,000 and $37,688,000 in affiliated net sales for 2000, 1999
and 1998, respectively.
The Company paid to Equilon approximately $1,076,000, $1,203,000 and
$558,000 in 2000, 1999 and 1998, respectively, for management, administrative
and general overhead. In 2000, 1999 and 1998, the Company paid construction
management fees of $-, $- and $2,134,000, respectively, to Equilon in connection
with the completion of Phase II and Phase III. During 2000, the Company paid
Equilon an additional management fee of approximately $1,710,000 associated with
the repair of the pipeline.
7. COMMITMENTS AND CONTINGENCIES:
In the normal course of business, the Company is involved in various legal
actions arising from its operations. In the opinion of management, the outcome
of these legal actions will not have a significant adverse effect on the
financial position or results of operations of the Company.
In February 1998, Poseidon entered into an oil purchase and sale agreement
with Pennzoil Exploration and Production (Pennzoil). The agreement provides that
if Pennzoil delivers at least 7.5 million barrels by September 2002, Poseidon
will refund $.51 per barrel for all barrels delivered plus interest at 8
percent. Based on barrels delivered, the Company has accrued a potential refund
of contingent revenues of $1,296,762 at December 31, 2000.
8. SUBSEQUENT EVENT (UNAUDITED):
Effective January 1, 2001, Manta Ray Gathering Company, L.L.C., a
subsidiary of El Paso Energy Partners, L.P., became the operator of the Company.
94
97
NEPTUNE PIPELINE COMPANY
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
95
98
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Members of
Neptune Pipeline Company, L.L.C.
In our opinion, the accompanying consolidated balance sheet and the related
consolidated statement of income, of members' capital and of cash flows present
fairly, in all material respects, the financial position of Neptune Pipeline
Company, L.L.C. (the Company) and its subsidiaries at December 31, 2000 and
1999, and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the
United States of America. These financial statements are the responsibility of
the Company's management, our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PRICEWATERHOUSECOOPERS
Houston, Texas
March 29, 2001
96
99
NEPTUNE PIPELINE COMPANY, L.L.C.
CONSOLIDATED BALANCE SHEET
AS OF DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ 1,026,289 $ 2,891,072
Transportation receivable................................. 2,069,894 2,436,194
Owing from related parties................................ 1,067,346 2,265,383
Other assets.............................................. 384,478 260,052
------------ ------------
Total current assets.............................. 4,548,007 7,852,701
Pipelines and equipment..................................... 281,507,487 268,055,626
Less: accumulated depreciation............................ 33,770,593 22,891,850
------------ ------------
247,736,894 245,163,776
------------ ------------
Total assets...................................... $252,284,901 $253,016,477
============ ============
LIABILITIES AND MEMBERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities.................. $ 1,302,691 $ 402,923
Owing to related parties.................................. 372,216 4,419,136
Deferred income........................................... 37,742 25,000
------------ ------------
Total current liabilities......................... 1,712,649 4,847,059
Commitments and contingencies
Minority interest........................................... 2,287,775 1,996,843
Members' equity............................................. 248,284,477 246,172,575
------------ ------------
Total liabilities and members' equity............. $252,284,901 $253,016,477
============ ============
The accompanying notes are an integral part of these statements.
97
100
NEPTUNE PIPELINE COMPANY, L.L.C.
CONSOLIDATED STATEMENT OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
----------- -----------
Operating revenue
Transportation revenue.................................... $26,435,457 $26,620,248
Other gas revenue, net.................................... 1,925,373 1,837,584
----------- -----------
Total revenues.................................... 28,360,830 28,457,832
Operating expenses
Operating and maintenance................................. 3,310,779 3,362,429
Administrative and general................................ 1,525,075 1,398,209
Depreciation and amortization............................. 11,041,020 10,721,566
Property taxes............................................ 426,300 348,800
----------- -----------
Total operating expenses.......................... 16,303,174 15,831,004
Net operating income........................................ 12,057,656 12,626,828
Other income (expense)
Other expense............................................. (50,000) (100,000)
Interest income........................................... 285,614 262,252
----------- -----------
Total other income, net........................... 235,614 162,252
Net income before minority interest......................... 12,293,270 12,789,080
Minority interest in income of subsidiaries............... 123,293 128,059
----------- -----------
Net income.................................................. $12,169,977 $12,661,021
=========== ===========
The accompanying notes are an integral part of these statements.
98
101
NEPTUNE PIPELINE COMPANY, L.L.C.
STATEMENT OF MEMBERS' CAPITAL
AS OF DECEMBER 31, 2000 AND 1999
SHELL GAS
TRANSMISSION LLC/ MARATHON GAS SAILFISH
SHELL SEAHORSE TRANSMISSION PIPELINE
COMPANY INC. COMPANY LLC TOTAL
----------------- ------------ ----------- ------------
Capital account balances at December
31, 1998.......................... $125,604,275 $60,501,768 $65,613,337 $251,719,380
Members' contributions.............. 2,400,643 1,168,151 1,232,491 4,801,285
Net income.......................... 6,394,682 3,111,652 3,154,687 12,661,021
Distributions....................... (11,504,560) (5,598,117) (5,906,434) (23,009,111)
------------ ----------- ----------- ------------
Capital account balances at December
31, 1999.......................... $122,895,040 $59,183,454 $64,094,081 $246,172,575
Members' contributions.............. 8,437,755 4,037,936 4,260,330 16,736,021
Net income.......................... 6,084,988 2,960,956 3,124,033 12,169,977
Distributions....................... (13,397,045) (6,519,005) (6,878,046) (26,794,096)
------------ ----------- ----------- ------------
Capital account balances at December
31, 2000.......................... $124,020,738 $59,663,341 $64,600,398 $248,284,477
============ =========== =========== ============
The accompanying notes are an integral part of these statements.
99
102
NEPTUNE PIPELINE COMPANY, L.L.C.
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 2000 AND 1999
2000 1999
------------ ------------
Cash flows from operating activities
Net income.................................................. $ 12,169,977 $ 12,661,021
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation and amortization............................. 11,041,020 10,721,566
Minority interest in income of subsidiaries............... 123,293 128,059
Changes in working capital:
Transportation receivables................................ 366,300 (1,156,789)
Owing from related parties................................ 1,198,037 615,281
Other assets.............................................. (286,703) (29,589)
Accounts payable and accrued liabilities.................. 899,768 (561,838)
Owing to related parties.................................. (28,956) (4,569,270)
Deferred income........................................... 12,742 25,000
------------ ------------
Net cash provided by operating activities......... 25,495,478 17,833,441
Cash flows from investing activities
Capital expenditures...................................... (17,469,826) (2,777,039)
Proceeds from property sales and salvage.................. 29,830
------------ ------------
Net cash used for investing activities............ (17,469,826) (2,747,209)
Cash flows from financing activities
Members' contributed capital.............................. 16,736,021 4,801,285
Minority interest contributed capital..................... 167,640 (4,175)
Distributions............................................. (26,794,096) (23,009,111)
------------ ------------
Net cash used for financing activities............ (9,890,435) (18,212,001)
------------ ------------
Decrease in cash and cash equivalents....................... $ (1,864,783) $ (3,125,769)
============ ============
Reconciliation of beginning and ending balances
Cash and cash equivalents -- beginning of year............ $ 2,891,072 6,016,841
Decrease in cash and cash equivalents..................... (1,864,783) (3,125,769)
------------ ------------
Cash and cash equivalents -- end of year.................... $ 1,026,289 $ 2,891,072
============ ============
The accompanying notes are an integral part of these statements.
100
103
NEPTUNE PIPELINE COMPANY, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 2000 AND 1999
1. ORGANIZATION AND CONTROL
Neptune Pipeline Company, L.L.C. (Neptune) owns a 99% member interest in
Manta Ray Offshore Gathering Company, L.L.C. (Manta Ray) and Nautilus Pipeline
Company, L.L.C. (Nautilus). Neptune is owned as follows: Shell Gas Transmission,
LLC (Shell), formerly Tejas Offshore Pipeline, LLC (Tejas), an affiliate of
Shell Oil Company, owns a 49.9% member interest; Shell Seahorse Company (Shell
Seahorse), an affiliate of Shell Oil Company, owns a 0.1% member interest;
Marathon Gas Transmission Inc. (Marathon) owns a 24.33% member interest;
Sailfish Pipeline Company, L.L.C. (Sailfish) owns a 25.67% member interest.
Agreements between the member companies address the allocation of income
and capital contributions and distributions amongst the respective members'
capital accounts. As a result of these agreements, the ratio of members' equity
accounts per the Statement of Members' Capital differs from the members'
ownership interests in Neptune.
Neptune was formed to acquire, construct, own and operate through Manta Ray
and Nautilus, the Manta Ray System and the Nautilus System and any other natural
gas pipeline systems approved by the members. As of December 31, 2000 the Manta
Ray System and the Nautilus System are the only pipelines owned by Manta Ray and
Nautilus, respectively.
The formation of Manta Ray was accomplished through cash and fixed assets
contributions from the member companies. Fixed asset contributions, which
accounted for approximately 50% of all contributions, consisted of the Manta Ray
System and various compressor equipment (contributed by Sailfish) and the
Boxer-Bullwinkle System (contributed by Shell Seahorse). Because both cash and
fixed assets were contributed, the Manta Ray System and related compressor
equipment and the Boxer-Bullwinkle System were recorded at 64,342,716, which
represented their fair value on the date of contribution.
The Manta Ray System consists of a 169-mile gathering system located in the
South Timbalier and Ship Shoal areas of the Gulf of Mexico. An additional
segment, 47 miles of 24 inch pipeline and associated facilities, extending from
Green Canyon Block 65, offshore Louisiana, to Ship Shoal Block 207, offshore
Louisiana, was constructed during 1997 and first provided natural gas
transportation service on December 15, 1997. As of December 2000, 21 miles of
20-inch pipeline called the Hickory pipeline was added to the system, connecting
from the GI116 platform to the ST292 platform.
The Nautilus System consists of a 30-inch natural gas pipeline and
appurtenant facilities extending approximately 101 miles from Ship Shoal Block
207, offshore Louisiana, to six delivery point interconnects near the outlet of
Exxon Mobil Corporation's Garden City Gas Processing Plant in St. Mary Parish,
Louisiana. The System was constructed during 1997 and first provided natural gas
transportation service on December 15, 1997.
Neptune, Manta Ray and Nautilus (collectively referred to as the Companies)
have no employees and receive all administrative and operating support through
contractual arrangements with affiliated companies. These services and
agreements are outlined in Note 3, Related Party Transactions.
2. SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Neptune and
its subsidiaries. All intercompany transactions and balances have been
eliminated in consolidation. Neptune has accounting policies that conform to
generally accepted accounting principles.
101
104
NEPTUNE PIPELINE COMPANY L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Regulation
Nautilus, as an interstate pipeline, is subject to regulation by the
Federal Energy Regulatory Commission (FERC). Nautilus has accounting policies
that conform to generally accepted accounting principles, as applied to
regulated enterprises and are in accordance with the accounting requirements and
ratemaking practices of the FERC.
Cash and Cash Equivalents
All highly liquid investments with a maturity of three months or less when
purchased are considered to be cash equivalents.
Pipelines and Equipment
Newly constructed pipelines are recorded at cost when originally devoted to
service. Regulated pipelines and equipment includes an Allowance for Funds Used
During Construction (AFUDC). The rates used in the calculation of AFUDC are
determined in accordance with guidelines established by the FERC. The Manta Ray
pipeline and related facilities are depreciated on a straight-line basis over
their estimated useful life of 30 years, while the Nautilus pipeline and related
facilities are depreciated on a straight-line basis over their estimated useful
life of 20 years. Maintenance and repair costs are expensed as incurred while
additions, improvements and replacements are capitalized.
Income Taxes
Neptune is treated as a tax partnership under the provisions of the
Internal Revenue Code. Accordingly, the accompanying financial statements do not
reflect a provision for income taxes since Neptune's results of operations and
related credits and deductions will be passed through to and taken into account
by its members in computing their respective tax liabilities.
Impairment of Long-Lived Assets
Statement of Financial Accounting Standard (SFAS) No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
requires recognition of impairment losses on long-lived assets if the carrying
amount of such assets, grouped at the lowest level for which there are
identifiable cash flows that are largely independent of the cash flows from
other assets, exceeds the estimated undiscounted future cash flows of such
assets. Measurement of any impairment loss is based on the fair value of the
asset. At December 31, 2000 and 1999 there were no impairments.
REVENUE RECOGNITION
Revenue from Manta Ray's and Nautilus' transportation of natural gas is
recognized upon receipt of natural gas into the pipeline systems.
In the course of providing transportation services to customers, Nautilus
and Manta Ray may receive different quantities of gas from shippers than the
quantities delivered on behalf of those shippers. These transactions result in
imbalances that are settled in cash on a monthly basis. In addition, certain
imbalances may occur with interconnecting facilities when the Companies deliver
more or less than what is nominated (scheduled). The settlement of these
imbalances is governed by Operational Balancing Agreements (OBA). Certain OBAs
stipulate that settlement will occur through delivery of physical quantities in
subsequent months. The Companies record the net of all imbalances as
Transportation Revenue or Other Revenue and carry the net position for each
counterparty, as a payable or a receivable, as appropriate.
102
105
NEPTUNE PIPELINE COMPANY L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The reported amounts of financial instruments such as cash and cash
equivalents, receivables and current liabilities approximate fair value because
of their maturities.
Use of Estimates and Significant Risks
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of certain assets and liabilities,
the disclosure or contingent assets and liabilities at the date of the financial
statements and the related reported amounts of revenue and expenses during the
reporting period. Such estimates and assumptions include those made in areas of
FERC regulations, fair value of financial instruments, future cash flows
associated with assets, useful lives for depreciation and potential
environmental liabilities. Actual results could differ from those estimates.
Management believes that the estimates are reasonable.
Development and production of natural gas in the service area of the
pipelines are subject to, among other factors, prices for natural gas and
federal and state energy policy, none of which are within the Companies'
control.
Reclassification
Certain prior period amounts in the financial statements and notes thereto
have been reclassified to conform with the current year presentation.
3. RELATED PARTY TRANSACTIONS
Construction Management Agreement
Substantially all construction on the Nautilus and Manta Ray Systems has
been performed under Construction Management Agreements with affiliates. On
March 26, 1999, Manta Ray entered into a Construction Management Agreement with
Shell under which Shell agreed to construct the Grand Isle 116 Lateral Facility.
As of December 31, 2000 and 1999, Manta Ray had incurred costs of $16,323,968
and $4,396,792, respectively, under this agreement. On September 1, 1999, Manta
Ray entered into a Construction Management Agreement with Manta Ray Gathering
Company, L.L.C. (Manta Ray Gathering), a subsidiary of El Paso Energy Partners,
L.P., under which Manta Ray Gathering agreed to construct the ST292 Hickory
Facilities. As of December 31, 2000 and 1999, Manta Ray had incurred costs of
$989,662 and $25,000, respectively, under this agreement. At December 31, 2000
and 1999, $151,374 and $4,204,304, respectively, were recorded as liabilities to
affiliates, relating to these agreements.
Transportation Services
During 2000 and 1999, $14,404,701 and $17,681,454, respectively, of
Neptune's transportation revenues were derived from related parties. All
transactions were at negotiated rates or rates pursuant to the existing FERC
tariff. At December 31, 2000 and 1999 respectively, Neptune had affiliate
receivables of $1,067,346 and $2,265,383 relating to transportation and gas
imbalances.
Leases
Effective December 1, 1997, Manta Ray, as lessor, and Nautilus, as lessee,
entered into a lease agreement for usage of offshore platform space located at
Ship Shoal Block 207. The term of the lease is for the life of the platform,
subject to certain early termination conditions, and requires minimum lease
payments of $225,000 per year adjusted annually for inflation. The associated
lease revenue and expense have been eliminated in consolidation.
103
106
NEPTUNE PIPELINE COMPANY L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Effective January 17, 1997 and subsequently amended and restated on April
1, 2000, Manta Ray entered into an agreement to lease usage of offshore platform
space located at Ship Shoal Block 332 and South Timbalier Block 292 from Manta
Ray Gathering. The term of the lease is for the life of the platform subject to
certain early termination conditions. Total expenses incurred under the
agreement were $150,000 annually at the Ship Shoal Block 332 platform and
$50,000 annually at the South Timbalier Block 292 platform.
Operating and Administrative Expense
Since the Companies have no employees, operating, maintenance and general
and administrative services are provided to the Companies under service
agreements with Manta Ray Gathering, Marathon, and Shell, all of which are
affiliates of the Companies. Substantially all operating and administrative
expenses were incurred through services provided under these agreements. At
December 31, 2000 and 1999, respectively, Neptune had affiliate payables of
$220,842 and $214,832, relating to these agreements.
4. PIPELINES AND EQUIPMENT
Pipelines and equipment at December 31, 2000 and 1999 was comprised of the
following (in thousands):
2000 1999
-------- --------
Pipelines and equipment..................................... $273,198 $256,014
Land........................................................ 1,077 1,077
AFUDC....................................................... 6,430 6,430
Construction in progress.................................... 802 4,535
-------- --------
Subtotal.......................................... 281,507 268,056
Accumulated depreciation.................................... 33,770 22,892
-------- --------
Total............................................. $247,737 $245,164
======== ========
At December 31, 2000 and 1999, construction in progress included $186,339
and $4,204,304, respectively, of accrued liabilities.
During 1998, Nautilus entered into interconnection agreements with certain
other parties in which Nautilus agreed to construct interconnection facilities
whereby the parties agreed to contribute $619,000 as partial reimbursement for
construction costs. Nautilus was reimbursed $419,000 during 1998 and the
remaining balance will be paid monthly based on throughput.
The receivable balance at December 31, 2000 and 1999 was $72,361 and
$157,174, respectively, all of which is considered current.
5. REGULATORY MATTERS
The FERC has jurisdiction over the Nautilus System with respect to
transportation of gas, rates and charges, construction of new facilities,
extension or abandonment of service facilities, accounts and records,
depreciation and amortization policies and certain other matters.
An annual charge (ACA) totaling $237,594 and $137,171 was paid to the FERC
for fiscal year 2000 and 1999, respectively. This charge, to be recovered from
customers through rates, was recorded as a regulatory asset and will be
amortized over twelve months. During 2000 and 1999, $162,277 and $34,293,
respectively, were recorded as amortization expense.
104
107
NEPTUNE PIPELINE COMPANY L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
6. COMMITMENTS AND CONTINGENCIES
In the ordinary course of business, the Companies are subject to various
laws and regulations, including regulations of the FERC for Nautilus. In the
opinion of management, compliance with existing laws and regulations will not
materially affect the financial position, the results of operations or cash
flows of the Companies.
Various legal actions, which have arisen in the ordinary course of
business, are pending with respect to the assets of the Companies. Management
believes that the ultimate disposition of these actions, either individually or
in aggregate, will not have a material adverse effect on the financial position,
the results of operations or the cash flows of the Companies.
Pursuant to the terms of a construction agreement entered into in 1995,
Manta Ray agreed to pay liquidated damages to various parties if the Company did
not complete an interconnect between the Manta Ray System and the system
operated by Trunkline Gas Pipeline Company by May 31, 1998 or by May 31 of the
two subsequent years. Under the provision, Manta Ray incurred $50,000 in 2000
and $100,000 in 1999, which were recorded in Other Expense. No further amounts
are due under the agreement.
7. SUBSEQUENT EVENTS
A change of ownership occurred on January 29, 2001, when Sailfish sold its
interest in Neptune to Enterprise Products Operating LP.
105
108
MANTA RAY GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
106
109
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Manta Ray Gathering Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of Manta Ray Gathering Company, L.L.C.
(the "Company") at December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
Houston, Texas
March 28, 2001
107
110
MANTA RAY GATHERING COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Accounts receivable, trade................................ $ 2,261 $ 902
-------- --------
Total current assets.............................. 2,261 902
-------- --------
Property, plant and equipment
Pipelines................................................. 36,023 36,023
Platforms and facilities.................................. 11,620 11,620
Construction work in progress............................. 2,735 1,652
-------- --------
50,378 49,295
Less: accumulated depreciation............................ 11,758 10,057
-------- --------
Property, plant and equipment, net................ 38,620 39,238
-------- --------
Total assets...................................... $ 40,881 $ 40,140
======== ========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable, trade................................... $ 12 $ 21
Advances from affiliate................................... 57,949 56,996
Accrued expenses.......................................... 820 985
-------- --------
Total current liabilities......................... 58,781 58,002
Commitments and contingencies
Members' capital............................................ (17,900) (17,862)
-------- --------
Total liabilities and members' capital............ $ 40,881 $ 40,140
======== ========
See accompanying notes.
108
111
MANTA RAY GATHERING COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues
Transportation services................................... $ 8,308 $ 2,029 $ 59
Platform fees............................................. 271 189 --
Oil and natural gas sales................................. 223 104 162
------- ------- -------
8,802 2,322 221
------- ------- -------
Operating expenses
Operation and maintenance, net............................ 2,103 3,624 4,174
Depreciation.............................................. 1,701 2,034 1,005
------- ------- -------
3,804 5,658 5,179
------- ------- -------
Operating income (loss)..................................... 4,998 (3,336) (4,958)
Other income (expense)
Interest expense.......................................... (4,246) (1,830) (946)
Other income.............................................. -- -- 298
------- ------- -------
Net income (loss)........................................... $ 752 $(5,166) $(5,606)
======= ======= =======
See accompanying notes.
109
112
MANTA RAY GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- --------
Members' capital at January 1, 1998.................. $ (6,870) $ (63) $ (6,933)
Net loss........................................... (5,549) (57) (5,606)
Distributions to members........................... (155) (2) (157)
-------- ----- --------
Members' capital at December 31, 1998................ (12,574) (122) (12,696)
Net loss........................................... (5,113) (53) (5,166)
-------- ----- --------
Members' capital at December 31, 1999................ (17,687) (175) (17,862)
Net income......................................... 743 9 752
Distributions to members........................... (784) (6) (790)
-------- ----- --------
Members' capital at December 31, 2000................ $(17,728) $(172) $(17,900)
======== ===== ========
See accompanying notes.
110
113
MANTA RAY GATHERING COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
------- ------- --------
Cash flows from operating activities:
Net income (loss)......................................... $ 752 $(5,166) $ (5,606)
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Depreciation........................................... 1,701 2,034 1,005
Working capital changes:
Accounts receivable, trade............................. (1,359) (868) (4)
Accounts payable, trade................................ (9) 21 (1,895)
Accrued expenses....................................... (165) 985 --
Other current liabilities.............................. -- (215) (787)
------- ------- --------
Net cash provided by (used in) operating
activities...................................... 920 (3,209) (7,287)
------- ------- --------
Cash flows from investing activities:
Capital expenditures...................................... (1,083) (9,774) (13,934)
------- ------- --------
Net cash used in investing activities............. (1,083) (9,774) (13,934)
------- ------- --------
Cash flows from financing activities:
Advances from affiliate, net.............................. 953 12,983 21,378
Distributions to members.................................. (790) -- (157)
------- ------- --------
Net cash provided by financing activities......... 163 12,983 21,221
------- ------- --------
Change in cash and cash equivalents:........................ -- -- --
Cash and cash equivalents:
Beginning of period.................................... -- -- --
------- ------- --------
End of period.......................................... $ -- $ -- $ --
======= ======= ========
See accompanying notes.
111
114
MANTA RAY GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Manta Ray Gathering Company, L.L.C. is a Delaware limited liability company
established in 1993 for the purpose of owning a crude oil gathering system and
two offshore platforms. We completed and placed into service the Allegheny crude
oil pipeline system in October 1999. Allegheny consists of 43 miles of 14-inch
diameter pipeline that connects the Allegheny field in the Green Canyon area of
the Gulf of Mexico with the Poseidon system at our Ship Shoal 332 platform. Oil
production from the Allegheny field is committed to the Allegheny system. The
Ship Shoal 332 platform serves as a major junction platform for pipelines in the
Manta Ray Offshore, Allegheny and Poseidon systems. The platform will also serve
as the landing site for the Nemo system. The South Timbalier 292 platform is
located at the easternmost termination point of the Manta Ray Offshore system
and serves as a landing site for natural gas production in the area and provides
an interconnection to the Trunkline Gas Pipeline system.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
In connection with a Federal Trade Commission order relating to El Paso
Corporation's merger with The Coastal Corporation, we sold 50 percent of our
interest in the Ship Shoal 332 platform and 100 percent of our interest in the
South Timbalier 292 platform in January 2001 for approximately $7.3 million. The
carrying value of the assets sold was approximately $8.5 million at December 31,
2000. Simultaneously, we abandoned an extension to the Manta Ray Offshore
system, since our managing partner sold its interest in this system. We recorded
a charge of $3.9 million in January 2001 related to this abandonment.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include reclassifications that
were made to conform to the current year presentation. Such reclassifications
have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts. Interest costs are allocated to us based on the
average balance of our affiliated payables times our managing partner's average
interest rate, which was 9.1% and 9.0% at December 31, 2000 and 1999,
respectively.
112
115
MANTA RAY GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded.
Property, Plant and Equipment
Gathering pipelines, platforms, and related facilities are recorded at cost
and are depreciated on a straight-line basis over the estimated useful lives of
the assets which approximates 30 years for the gathering pipelines and from 25
to 30 years for platforms and related facilities. Repair and maintenance costs
are expensed as incurred, while additions, improvements and replacements are
capitalized.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions of gathering pipelines and platforms and related facilities.
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation of the disposed assets with any
resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Revenue Recognition
Revenue from pipeline transportation of hydrocarbons is recognized upon
receipt of the hydrocarbons into the pipeline systems. Revenue from platform and
processing services is recognized in the period the services are provided.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
to provide guidance for revenue recognition issues and disclosure requirements.
SAB No. 101 offers guidelines, examples, and explanations for uncertain matters
relating to the recognition of revenue and became effective for us in the fourth
quarter of 2000. The adoption of SAB No. 101 did not have a material impact on
our financial position, results of operations, or cash flows.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximates their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are
113
116
MANTA RAY GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
recorded when environmental assessments indicate that remediation efforts are
probable and the costs can be reasonably estimated. No environmental liabilities
existed at December 31, 2000 and 1999.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- MAJOR CUSTOMERS
Transportation service revenues, platform fees and oil and natural gas
sales realized from major customers and their respective percent of total
revenues were as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------
2000 1999 1998
------------------- ------------------- -------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------ ---------- ------ ---------- ------ ----------
British Borneo........................ $7,260 82.5% $2,044 88.0% $ -- --
Chieftain International (U.S.),
Inc. ............................... -- -- -- -- 83 37.6%
Enron Oil and Gas Company............. -- -- -- -- 74 33.5%
Pogo Gulf Coast, Ltd.................. -- -- -- -- 59 26.7%
------ ----- ------ ----- ---- -----
$7,260 82.5% $2,044 88.0% $216 97.8%
====== ===== ====== ===== ==== =====
The loss of British Borneo as a customer would have a material adverse
effect on us.
114
117
MANTA RAY GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
Revenues Received from Related Parties
For the year ended December 31, 2000, we received approximately $0.1
million from Manta Ray Offshore Gathering as platform and processing fees
related to our platforms located in South Timbalier 292 and Ship Shoal 332. We
did not receive any fees in 1999 and 1998.
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. The management fee totaled $0.3
million, $0.9 million and $1.2 million for the years ended December 31, 2000,
1999 and 1998, respectively. The management agreement expires on June 30, 2002,
and may be terminated thereafter upon 90 days notice by either party. Under the
terms of our managing partners' partnership agreement, our managing partner is
entitled to reimbursement of all reasonable general and administrative expenses
and other reasonable expenses incurred by our managing partner and its
affiliates for, or on our behalf, including, but not limited to, amounts payable
by our managing partner to El Paso under its management agreement.
Costs Reimbursements
For the years ended December 31, 2000, 1999 and 1998, we charged Manta Ray
Offshore Gathering a management fee of approximately $0.2 million, $0.5 million,
and $1.3 million, respectively, pursuant to its management and operations
agreements. These reimbursements have been recorded as a reduction to operations
and maintenance expense in the accompanying statements of operations.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner
guarantee both the Senior Subordinated Notes and the credit facility.
Legal Proceedings
We are a defendant in a lawsuit filed by Transcontinental Gas Pipeline, or
Transco, in the 157th Judicial District Court, Harris County, Texas in August
1996. Transco alleges that, pursuant to a platform lease agreement entered into
in June 1994, it had the right to expand its facilities and operations on the
offshore platform by connecting additional pipeline receiving and appurtenant
facilities. We denied Transco's request to expand its facilities and operations
because the lease agreement does not provide for such expansion, and because
Transco's activities would have interfered with the Manta Ray Offshore system
and our existing and planned activities on the platform. The case went to trial
in April 2000, and the jury found that we were not at fault and therefore
awarded no damages to Transco. Transco has filed motions related to the jury's
findings. We sold the platform relating to this incident in January 2001 and
therefore all claims have been dismissed.
We, along with several subsidiaries of El Paso, have been named defendants
in actions brought by Jack Grynberg on behalf of the United States Government
under the False Claims Act. Generally, the complaints allege an industry-wide
conspiracy to under report the heating value as well as the volumes of the
natural gas
115
118
MANTA RAY GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
produced from federal and Native American lands, which deprived the United
States Government of royalties. (In re: Natural Gas Royalties Qui Tam
Litigation, U.S. District Court for the District of Wyoming.)
We have also been named a defendant in an action styled, Quinque Operating
Company, et al, v. Gas Pipelines and their Predecessor, et al, filed in 1999 in
the District Court of Stevens County, Kansas. This complaint alleges that the
defendants have mismeasured natural gas volumes and heating content of natural
gas on non-federal and non-Native American lands. The Quinque complaint, once
transferred to the same court handling the Grynberg complaint, has been sent
back to the Kansas State Court for further proceedings.
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
116
119
EWING BANK GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
117
120
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Ewing Bank Gathering Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of Ewing Bank Gathering Company,
L.L.C. (the "Company") at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
118
121
EWING BANK GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Oil and natural gas properties.............................. $ 100 $ 100
-------- --------
Total assets...................................... $ 100 $ 100
======== ========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Advances from affiliate................................... $ 12,376 $ 12,376
-------- --------
Total current liabilities......................... 12,376 12,376
Commitments and contingencies
Members' capital............................................ (12,276) (12,276)
-------- --------
Total liabilities and members' capital............ $ 100 $ 100
======== ========
See accompanying notes.
119
122
EWING BANK GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------- ---- -------
Operating revenues.......................................... $ -- $-- $ --
------- --- -------
Operating expenses
Operation and maintenance................................. -- 2 622
Impairment, abandonment, and other........................ -- -- (1,131)
------- --- -------
-- 2 (509)
------- --- -------
Operating (loss) income..................................... -- (2) 509
------- --- -------
Net (loss) income........................................... $ -- $(2) $ 509
======= === =======
See accompanying notes.
120
123
EWING BANK GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- --------
Members' capital at January 1, 1998.................. $(12,654) $(129) $(12,783)
Net income......................................... 504 5 509
-------- ----- --------
Members' capital at December 31, 1998................ (12,150) (124) (12,274)
Net loss........................................... (2) -- (2)
-------- ----- --------
Members' capital at December 31, 1999................ (12,152) (124) (12,276)
-------- ----- --------
Net income......................................... -- -- --
-------- ----- --------
Members' capital at December 31, 2000................ $(12,152) $(124) $(12,276)
======== ===== ========
See accompanying notes.
121
124
EWING BANK GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------
2000 1999 1998
------- ---- -------
Cash flows from operating activities
Net (loss) income......................................... $ -- $ (2) $ 509
Adjustments to reconcile net income to cash used in
operating activities:
Impairment, abandonment, and other..................... -- -- (1,131)
------- ---- -------
Net cash used in operating activities................ -- (2) (622)
------- ---- -------
Cash flows from financing activities
Advances from affiliate................................... -- 2 622
------- ---- -------
Net cash provided by financing activities......... -- 2 622
------- ---- -------
Change in cash and cash equivalents......................... -- -- --
Cash and cash equivalents
Beginning of period.................................... -- -- --
------- ---- -------
End of period.......................................... $ -- $ -- $ --
======= ==== =======
See accompanying notes.
122
125
EWING BANK GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Ewing Bank Gathering Company, L.L.C. is a limited liability company
established in 1993 for the purpose of owning oil and natural gas properties. We
own a 5.3 percent overriding royalty interest in Ewing Bank Blocks 958 and 959.
Although four successful delineation wells have been drilled in the Prince
Field, which consists of Ewing Bank Blocks 958, 959, 1002 and 1003, and El Paso
Production has expanded the scope and size of the field development, there has
been no production to date. Accordingly, we have recorded no operating revenues
during the three years in the period ended December 31, 2000.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner performs all of our management and operational functions. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts.
Property, Plant and Equipment
We account for our oil and natural gas exploration and production
activities using the successful efforts method of accounting. Under this method,
costs of successful exploratory wells, developmental wells and acquisitions of
mineral leasehold interests are capitalized. Production, exploratory dry hole
and other exploration costs, including geological and geophysical costs and
delay rentals, are expensed as incurred. Unproved properties are assessed
periodically and any impairment in value is recognized currently as depreciation
and amortization expense.
Depreciation and amortization of the capitalized costs of producing oil and
natural gas properties, consisting principally of tangible and intangible costs
incurred in developing a property and costs of productive leasehold interests,
are computed on the unit-of-production method. Unit-of-production rates are
based on annual estimates of remaining proved developed reserves or proved
reserves, as appropriate, for each property.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for gathering pipelines, platforms, related facilities and oil and
natural gas properties.
123
126
EWING BANK GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation of the disposed assets with any
resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximates their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our
124
127
EWING BANK GATHERING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
balance sheet, with a corresponding offset to income, or other comprehensive
income, depending on their designation, their intended use, or their ability to
qualify as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- RELATED PARTY TRANSACTIONS
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. For the year ended December 31, 1998,
the management fee totaled $0.5 million. There were no management fees charged
to us during the years ended December 31, 2000 and 1999. The management
agreement expires on June 30, 2002, and may be terminated thereafter upon 90
days notice by either party. Under the terms of our managing partners'
partnership agreement, our managing partner is entitled to reimbursement of all
reasonable general and administrative expenses and other reasonable expenses
incurred by our managing partner and its affiliates for, or on our behalf,
including, but not limited to, amounts payable by our managing partner to El
Paso under its management agreement.
Other
In 1997, Tatham Offshore, a former affiliate of our managing partner,
announced its intent to reserve its remaining costs associated with certain of
its wells as a result of production problems. Accordingly, in 1997 we reserved
our investment in our gathering facilities associated with these properties for
$4.0 million. During 1998, we abandoned our Ewing Bank flowlines at a cost of
$2.9 million and recorded a credit to impairment, abandonment and other of $1.1
million, which represented the excess of the accrued costs over the actual costs
incurred associated with the abandonment of the flowlines.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner,
guarantee both the Senior Subordinated Notes and the credit facility.
Legal Proceedings
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
125
128
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEAR ENDED DECEMBER 31, 2000 AND THE PERIOD FROM INCEPTION
(NOVEMBER 1, 1999) TO DECEMBER 31, 1999
126
129
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of El Paso Energy Partners Operating Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of El Paso Energy Partners Operating
Company, L.L.C. (the "Company") at December 31, 2000 and 1999, and the results
of its operations and its cash flows for the year ended December 31, 2000 and
the period from inception (November 1, 1999) to December 31, 1999 in conformity
with accounting principles generally accepted in the United States of America.
These financial statements are the responsibility of the Company's management;
our responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
127
130
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Net accounts receivable, trade............................ $1,531 $ 918
Accounts receivable, affiliate............................ 4,718 508
------ ------
Total current assets.............................. 6,249 1,426
------ ------
Other noncurrent assets..................................... 878 --
------ ------
Total assets...................................... $7,127 $1,426
====== ======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable, trade................................... $ 394 $ --
Advances from affiliate................................... 5,907 1,670
Accrued expenses.......................................... 17 591
------ ------
Total current liabilities......................... 6,318 2,261
Commitments and contingencies
Members' capital............................................ 809 (835)
------ ------
Total liabilities and members' capital............ $7,127 $1,426
====== ======
See accompanying notes.
128
131
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
PERIOD FROM INCEPTION
YEAR ENDED (NOVEMBER 1, 1999)
DECEMBER 31, TO
2000 DECEMBER 31, 1999
------------ ---------------------
Operating revenues.......................................... $20,343 $1,820
Operation and maintenance expense........................... 18,699 2,656
------- ------
Net income (loss)........................................... $ 1,644 $ (836)
======= ======
See accompanying notes.
129
132
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- ------
Initial capital contribution on November 1, 1999....... $ 1 $-- $ 1
Net loss............................................. (828) (8) (836)
------ --- ------
Members' capital at December 31, 1999.................. (827) (8) (835)
Net income........................................... 1,628 16 1,644
------ --- ------
Members' capital at December 31, 2000.................. $ 801 $ 8 $ 809
====== === ======
See accompanying notes.
130
133
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
PERIOD FROM
INCEPTION
(NOVEMBER 1,
YEAR ENDED 1999) TO
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ----------------
Cash flows from operating activities
Net income (loss)......................................... $ 1,644 $ (836)
Adjustments to reconcile net income to cash used in
operating activities:
Working capital changes
Accounts receivable, trade........................... (613) (918)
Accounts receivable, affiliate....................... (4,210) (508)
Accounts payable, trade.............................. 394 --
Accrued expenses..................................... (574) 591
Other noncurrent assets.............................. (878) --
------- -------
Net cash used in operating activities............. (4,237) (1,671)
------- -------
Cash flows from financing activities
Advances from affiliate, net.............................. 4,237 1,671
------- -------
Net cash provided by financing activities......... 4,237 1,671
------- -------
Change in cash and cash equivalents......................... -- --
Cash and cash equivalents
Beginning of period....................................... -- --
------- -------
End of period............................................. $ -- $ --
======= =======
See accompanying notes.
131
134
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
El Paso Energy Partners Operating Company, L.L.C. is a limited liability
company established in November 1999 for the purpose of managing and operating
Deepwater Holdings L.L.C. and its subsidiaries. Deepwater Holdings owns 100
percent of High Island Offshore System, or HIOS, U-T Offshore System, or UTOS,
East Breaks Gathering System, or East Breaks, and Stingray system, as well as
100 percent of the West Cameron dehydration facility.
Under a Federal Trade Commission order, Deepwater Holdings sold its
interest in the Stingray system and the West Cameron dehydration facility in
January 2001. Under this same order, Deepwater Holdings has entered into an
agreement to sell its interest in UTOS. The sale of UTOS is expected to close in
April 2001. This order related to El Paso Corporation's merger with The Coastal
Corporation. Subsequent to these sales, we will continue to provide operational
functions for East Breaks and HIOS.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. El Paso
Corporation is Energy Partners' general partner and owns 27.8 percent of Energy
Partners' common units consisting of 8,953,764 units.
We changed our name from Leviathan Operating Company, L.L.C. to El Paso
Energy Partners Operating Company, L.L.C. in December 1999. Also in December
1999, our managing partner changed its name from Leviathan Gas Pipeline
Partners, L.P. to El Paso Energy Partners, L.P.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded. At December 31, 2000, the allowance was approximately $0.4 million.
There was no allowance at December 31, 1999.
132
135
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of our members.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximates their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Distributions and Income Allocations
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
133
136
EL PASO ENERGY PARTNERS OPERATING COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- RELATED PARTY TRANSACTIONS
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. For the year ended December 31, 2000
and the period from inception (November 1, 1999) to December 31, 1999, the
management fee totaled $5.7 million and $1.4 million, respectively. The
management agreement expires on June 30, 2002, and may be terminated thereafter
upon 90 days notice by either party. Under the terms of our managing partners'
partnership agreement, our managing partner is entitled to reimbursement of all
reasonable general and administrative expenses and other reasonable expenses
incurred by our managing partner and its affiliates for, or on our behalf,
including, but not limited to, amounts payable by our managing partner to El
Paso under its management agreement.
In November 1999, we entered into an agreement with El Paso Field Services
Company under which they provide personnel to operate Stingray and West Cameron.
During 2000, Field Services also began operating HIOS, UTOS and East Breaks. To
operate these subsidiaries under Deepwater Holdings, Field Services charged us
$6.4 million for the year ended December 31, 2000. We did not incur any charges
related to this agreement in 1999.
Management Fees Received
We receive management fees from the subsidiaries of Deepwater Holdings for
operating HIOS, UTOS, East Breaks, Stingray, and the West Cameron dehydration
facility. These fees are a fixed monthly amount intended to cover normal
operating activities and are recorded as operating revenues in the accompanying
statements of operations. For the year ended December 31, 2000 and the period
from inception (November 1, 1999) to December 31, 1999, we received
approximately $20.3 million and $1.8 million, respectively, from the
subsidiaries of Deepwater Holdings pursuant to their respective agreements.
NOTE 4 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner,
guarantee both the Senior Subordinated Notes and the credit facility.
Legal Proceedings
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
134
137
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
135
138
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of VK-Main Pass Gathering Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of VK-Main Pass Gathering Company,
L.L.C. (the "Company") at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
136
139
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Accounts receivable, trade................................ $ 448 $ 301
Accounts receivable, affiliate............................ 4,601 1,133
------- -------
Total current assets.............................. 5,049 1,434
------- -------
Property, plant and equipment
Platforms and related facilities.......................... 51,631 51,631
Construction work in progress............................. 180 193
------- -------
51,811 51,824
------- -------
Less: accumulated depreciation............................ 10,764 8,559
------- -------
Property, plant and equipment, net................ 41,047 43,265
------- -------
Total assets...................................... $46,096 $44,699
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Advances from affiliate................................... $41,895 $38,234
------- -------
Total current liabilities......................... 41,895 38,234
Commitments and contingencies
Members' capital............................................ 4,201 6,465
------- -------
Total liabilities and members' capital............ $46,096 $44,699
======= =======
See accompanying notes.
137
140
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues
Platform access fees...................................... $10,368 $10,811 $10,903
------- ------- -------
Operating expenses
Operation and maintenance................................. 539 1,219 2,108
Depreciation.............................................. 2,205 2,205 2,101
------- ------- -------
2,744 3,424 4,209
------- ------- -------
Operating income............................................ 7,624 7,387 6,694
Other income (expense)
Interest expense.......................................... (5,128) (4,189) (3,647)
Other income.............................................. -- -- 80
------- ------- -------
Net income.................................................. $ 2,496 $ 3,198 $ 3,127
======= ======= =======
See accompanying notes.
138
141
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- -------
Members' capital at January 1, 1998................... $ 9,961 $102 $10,063
Net income.......................................... 3,095 32 3,127
Distributions to members............................ (6,307) (64) (6,371)
------- ---- -------
Members' capital at December 31, 1998................. 6,749 70 6,819
Net income.......................................... 3,167 31 3,198
Distributions to members............................ (3,516) (36) (3,552)
------- ---- -------
Members' capital at December 31, 1999................. 6,400 65 6,465
Net income.......................................... 2,471 25 2,496
Distributions to members............................ (4,712) (48) (4,760)
------- ---- -------
Members' capital at December 31, 2000................. $ 4,159 $ 42 $ 4,201
======= ==== =======
See accompanying notes.
139
142
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Cash flows from operating activities
Net income................................................ $ 2,496 $ 3,198 $ 3,127
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 2,205 2,205 2,101
Working capital changes
Accounts receivable, trade........................... (147) (22) (27)
Accounts payable, trade.............................. -- -- (401)
------- ------- -------
Net cash provided by operating activities......... 4,554 5,381 4,800
------- ------- -------
Cash flows from investing activities
Capital expenditures, net of salvage...................... -- (110) (4,522)
Other..................................................... 13 -- --
------- ------- -------
Net cash provided by (used in) investing
activities...................................... 13 (110) (4,522)
------- ------- -------
Cash flows from financing activities
Advances from affiliate, net.............................. 193 (1,719) 6,093
Distributions to members.................................. (4,760) (3,552) (6,371)
------- ------- -------
Net cash used in financing activities............. (4,567) (5,271) (278)
------- ------- -------
Change in cash and cash equivalents......................... -- -- --
Cash and cash equivalents
Beginning of period.................................... -- -- --
------- ------- -------
End of period.......................................... $ -- $ -- $ --
======= ======= =======
See accompanying notes.
140
143
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
VK -- Main Pass Gathering, L.L.C. is a limited liability company
established in 1994 for the purpose of providing midstream energy services in
the Gulf of Mexico. We own the Viosca Knoll 817 platform which is centrally
located on the Viosca Knoll system. The platform serves as a base for landing
deepwater production in the area, including ExxonMobil's, Shell Offshore Inc.'s
and BP Amoco plc's Ram Powell development. A 7,000 horsepower compressor on the
platform facilitates deliveries from the Viosca Knoll system to multiple
downstream interstate pipelines. The platform is also used as a base for oil and
natural gas production from Flextrend Development Company's Viosca Knoll 817
lease.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts. Interest costs are allocated to us based on the
average balances of our affiliated payables times our managing partner's average
interest rate, which was 9.1% and 9.0% at December 31, 2000 and 1999,
respectively.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded.
Property, Plant and Equipment
Platforms and related facilities are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of the assets which
approximates 30 years. Repair and maintenance costs are expensed as incurred,
while additions, improvements and replacements are capitalized.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for platforms and related facilities.
141
144
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation of the disposed assets with any
resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Revenue Recognition
Revenue from platform access fees are recognized in the period the services
are provided. In December 1999, the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial
Statements, to provide guidance for revenue recognition issues and disclosure
requirements. SAB No. 101 offers guidelines, examples, and explanations for
uncertain matters relating to the recognition of revenue and became effective
for us in the fourth quarter of 2000. The adoption of SAB No. 101 did not have a
material impact on our financial position, results of operations, or cash flows.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximate their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
142
145
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- MAJOR CUSTOMERS
Platform access fees realized from major customers and their respective
percent of total revenues were as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- -------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------- ---------- ------- ---------- ------ ----------
Flextrend Development Company,
L.L.C. .......................... $ 6,650 64.1% $ 6,976 64.5% $6,064 55.6%
Viosca Knoll Gathering Company..... 1,880 18.1% 1,980 18.3% 2,297 21.1%
Walters Oil and Gas................ 1,478 14.3% 1,333 12.3% 1,195 11.0%
------- ----- ------- ----- ------ -----
$10,008 96.5% $10,289 95.1% $9,556 87.7%
======= ===== ======= ===== ====== =====
NOTE 4 -- RELATED PARTY TRANSACTIONS
Revenues From Related Parties
We receive platform access fees from Viosca Knoll Gathering Company and
Flextrend Development Company, both of which are affiliates of our managing
partner. For the year ended December 31, 1998, we received approximately $1.1
million from Tatham Offshore, a former affiliate of our managing partner as
platform access fees related to the Viosca Knoll 817 platform.
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. The management fee totaled $0.3
million, $0.7 million and $0.9 million for the years ended December 31, 2000,
1999 and 1998, respectively. The management agreement expires on June 30, 2002,
and may be terminated thereafter upon 90 days notice by either party. Under the
143
146
VK -- MAIN PASS GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
terms of our managing partners' partnership agreement, our managing partner is
entitled to reimbursement of all reasonable general and administrative expenses
and other reasonable expenses incurred by our managing partner and its
affiliates for, or on our behalf, including, but not limited to, amounts payable
by our managing partner to El Paso under its management agreement.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner
guarantee both the Senior Subordinated Notes and the credit facility.
Legal Proceedings
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
144
147
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
145
148
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of El Paso Energy Partners Deepwater, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of El Paso Energy Partners Deepwater,
L.L.C. (the "Company") at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
146
149
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Investment in unconsolidated affiliate.................... $53,043 $59,260
------- -------
Total assets...................................... $53,043 $59,260
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Advances from affiliate................................... $41,594 $28,564
------- -------
Total current liabilities......................... 41,594 28,564
Commitments and contingencies
Members' capital............................................ 11,449 30,696
------- -------
Total liabilities and members' capital............ $53,043 $59,260
======= =======
See accompanying notes.
147
150
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------- ------- -----
Operating revenue........................................... $ -- $ -- $ --
Operation and maintenance expenses.......................... 429 565 606
------- ------- -----
Operating loss.............................................. (429) (565) (606)
Other income (expense)
Equity investment earnings (loss)......................... 7,270 1,436 (255)
Gain on sale, net......................................... -- 10,103 --
Interest expense.......................................... (2,352) (984) (12)
------- ------- -----
4,918 10,555 (267)
------- ------- -----
Net income (loss)........................................... $ 4,489 $ 9,990 $(873)
======= ======= =====
See accompanying notes.
148
151
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- --------
Members' capital at January 1, 1998.................. $ (3,575) $ (20) $ (3,595)
Net loss........................................... (864) (9) (873)
Distributions to members........................... (1,264) (13) (1,277)
-------- ----- --------
Members' capital at December 31, 1998................ (5,703) (42) (5,745)
Net income......................................... 9,889 101 9,990
Contributions from members......................... 39,421 -- 39,421
Distributions to members........................... (12,748) (222) (12,970)
-------- ----- --------
Members' capital at December 31, 1999................ 30,859 (163) 30,696
Net income......................................... 4,454 35 4,489
Contributions from members......................... 63 -- 63
Distributions to members........................... (23,559) (240) (23,799)
-------- ----- --------
Members' capital at December 31, 2000................ $ 11,817 $(368) $ 11,449
======== ===== ========
See accompanying notes.
149
152
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- -------
Cash flows from operating activities
Net income (loss)......................................... $ 4,489 $ 9,990 $ (873)
Adjustments to reconcile net income to cash provided by
operating activities
Gain on sale, net...................................... -- (10,103) --
Distributed earnings of equity investments
(Earnings) loss from equity investments.............. (7,270) (1,436) 255
Distributions from equity investments................ 13,550 6,901 1,000
Working capital changes
Deferred credit........................................ -- (82) --
-------- -------- -------
Net cash provided by operating activities......... 10,769 5,270 382
-------- -------- -------
Cash flows from investing activities
Investment in unconsolidated affiliate.................... (63) (3,978) (299)
Proceeds from sale of investment in unconsolidated
affiliates............................................. -- 26,122 --
Distributions related to the formation of Deepwater
Holdings............................................... -- 20,000 --
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... (63) 42,144 (299)
Cash flows from financing activities
Advances from (to) affiliate, net......................... 13,030 (34,444) 1,194
Contributions from members................................ 63 -- --
Distributions to members.................................. (23,799) (12,970) (1,277)
-------- -------- -------
Net cash used in financing activities............. (10,706) (47,414) (83)
-------- -------- -------
Change in cash and cash equivalents......................... -- -- --
Cash and cash equivalents
Beginning of period.................................... -- -- --
-------- -------- -------
End of period.......................................... $ -- $ -- $ --
======== ======== =======
Noncash investing activity:
Contribution of equity investments as follows:
Investments in unconsolidated subsidiary............... $ 69,484
Capital contributions.................................. $ 39,421
Advances from affiliate................................ $ 30,063
See accompanying notes.
150
153
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
El Paso Energy Partners Deepwater, L.L.C. is a limited liability company
established in 1993 for the purpose of providing midstream energy services,
including natural gas gathering, transportation and other related services
primarily in the Gulf of Mexico. We changed our name in September 1999 from
Stingray Holding Company, L.L.C. in connection with the formation of Deepwater
Holdings L.L.C. Prior to that date, we held a 50 percent investment in Stingray
Pipeline Company, which owns the Stingray system described below. In September
1999, we acquired interests in High Island Offshore System, or HIOS, East Breaks
Gathering System, or East Breaks, U-T Offshore System, or UTOS, and the West
Cameron dehydration facility, through a series of transactions with our managing
partner. Also in September 1999, we and ANR Pipeline Company, or ANR, formed
Deepwater Holdings L.L.C. Collectively, we and ANR owned 100 percent of the
interests in HIOS, East Breaks, UTOS, Stingray and West Cameron. All of the
interests in these assets were contributed to Deepwater Holdings, of which we
have a 50 percent ownership interest.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
In accordance with a Federal Trade Commission order related to El Paso
Corporation's merger with The Coastal Corporation, Deepwater Holdings divested a
number of Gulf of Mexico assets in January 2001. As a result of the merger, ANR,
whose parent company was The Coastal Corporation, has become our affiliate.
Following is a description of Deepwater Holdings' assets:
- HIOS is a natural gas transmission system consisting of 204 miles of
pipeline which includes three supply laterals that connect to a 42-inch
diameter mainline. HIOS transports natural gas received from fields
located in the Galveston, Garden Banks, West Cameron and East Breaks
areas of the Gulf of Mexico to a junction platform owned by HIOS located
in West Cameron Block 167.
- East Breaks is a natural gas gathering system consisting of 85 miles of
18 to 20-inch diameter pipeline that connects HIOS to the Diana and
Hoover fields being developed by subsidiaries of ExxonMobil and BP Amoco
plc. Production from the Diana and Hoover properties has been committed
to this system. East Breaks began operating in June 2000.
- UTOS is a natural gas transmission system consisting of 30 miles of
42-inch diameter pipeline extending from an interconnection with HIOS at
West Cameron Block 167 to the Johnson Bayou production handling facility,
owned by UTOS. The Johnson Bayou facility provides primarily natural gas
and liquids separation and natural gas dehydration services for natural
gas transported on HIOS and UTOS. Under a Federal Trade Commission, or
FTC, order, Deepwater Holdings has agreed to sell its interest in UTOS.
The transaction is expected to close in April 2001.
- Stingray is a natural gas gathering system consisting of (i) 361 miles of
6 to 36-inch diameter pipeline that transports natural gas from HIOS,
West Cameron, East Cameron and Vermilion lease areas in the Gulf of
Mexico to onshore transmission systems in Louisiana, (ii) 43 miles of 16
to 20-inch diameter pipeline connecting platforms and leases in the
Garden Banks Block 191 and 72 areas to Stingray, and (iii) 13 miles of
16-inch diameter pipeline connecting our platform at East Cameron Block
373 to Stingray at East Cameron Block 338. Under a FTC order, Deepwater
Holdings sold its interests in Stingray in January 2001.
- The West Cameron dehydration facility is located at the northern terminus
of the Stingray system. This onshore Louisiana facility provides
dehydration services for natural gas transported on the
151
154
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Stingray system. El Paso Energy Partners, L.P. began operating West Cameron and
related facilities effective November 1, 1999. Under a FTC order, Deepwater
Holdings sold its interest in West Cameron in January 2001.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts. Interest costs are allocated to us based on the
average balance of our affiliated payables times our managing partner's average
interest rate, which was 9.1% and 9.0% at December 31, 2000 and 1999,
respectively.
Investment in Unconsolidated Affiliates
We account for investments in companies where we have the ability to exert
significant influence over, but not control over operating and financial
policies, using the equity method with our proportionate share of net
income(loss) of the investee included in the accompanying statements of
operations. Any difference between the carrying amount of investment and the
underlying equity in net assets of the investee is considered to be goodwill and
amortized on a straight-line basis over the estimated lives of the underlying
net assets of the investee.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
152
155
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximate their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- ACQUISITIONS AND DISPOSITIONS
Deepwater Holdings
In September 1999, our managing partner contributed its interests in HIOS,
East Breaks, UTOS and the West Cameron dehydration facility to us and we formed
Deepwater Holdings with ANR, to reorganize our interests in various joint
ventures. In the transaction, we and ANR contributed our respective interests in
various pipeline systems and facilities to Deepwater Holdings. Following this
reorganization, Deepwater Holdings owned 100 percent of East Breaks, HIOS, UTOS
and Stingray, along with the West Cameron dehydration facility. In exchange for
our contribution, we received a 59.66 percent interest in Deepwater Holdings. We
simultaneously sold a 9.66 percent members' interest in Deepwater Holdings to
ANR for $26.1 million to effect a 50/50 ownership position. We realized a $10.1
million gain associated with the sale. In conjunction with the transaction, we
became the full operator of the UTOS, HIOS and East Breaks systems on June 1,
2000.
153
156
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- EQUITY INVESTMENTS
As of December 31, 2000, the carrying amount of our equity investments
exceeded the underlying equity in net assets by approximately $62.1 million. The
difference is being amortized on a straight-line basis over the estimated life
of the affiliate's underlying net assets. Summarized financial information for
our investment is as follows:
AS OF AND FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------
2000 1999 1998
--------- ------------------------ ------------
DEEPWATER DEEPWATER STINGRAY STINGRAY
HOLDINGS, HOLDINGS, PIPELINE CO. PIPELINE CO.
L.L.C. L.L.C.(A) L.L.C.(A) L.L.C.
--------- --------- ------------ ------------
(IN THOUSANDS)
Operating results data
Operating revenues............................ $ 67,122 $ 14,106 $13,322 $ 23,008
Other income.................................. 532 87 1,898 670
Operating expenses............................ (25,279) (8,183) (7,932) (16,814)
Depreciation.................................. (18,138) (4,023) (5,699) (6,852)
Other expenses................................ (10,711) (1,402) (1,516) (1,668)
--------- -------- ------- --------
Net income (loss)..................... $ 13,526 $ 585 $ 73 $ (1,656)
========= ======== ======= ========
Our share
Allocated income (loss)....................... $ 6,763 $ 293 $ 37 $ (828)
Adjustments(b)................................ 507 (118) 1,224 573
--------- -------- ------- --------
Earnings from equity investments.............. $ 7,270 $ 175 $ 1,261 $ (255)
========= ======== ======= ========
Allocated distributions....................... $ 13,550 $ 4,400 $ 2,501 $ 1,000
========= ======== ======= ========
Financial position data
Current assets................................ $ 46,128 $ 34,334 $ -- $ 17,892
Noncurrent assets............................. 237,012 208,939 -- 50,109
Current liabilities........................... 39,962 32,727 -- 18,960
Long-term debt................................ 157,000 122,000 -- 20,583
Other noncurrent liabilities.................. 9,517 41 -- 12,924
- ---------------
(a) We owned a 50 percent interest in Stingray Pipeline Company L.L.C. through
September 1999. In September 1999, we contributed our interest in Stingray
Pipeline Company to Deepwater Holdings L.L.C. in exchange for a 50 percent
equity interest.
(b) We record adjustments primarily for purchase price adjustments in
accordance with APB Opinion No. 16, except for Stingray Pipeline Company
which resulted from changes in estimates of reserves for uncollectible
revenues.
NOTE 6 -- RELATED PARTY TRANSACTIONS
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. For each of the three years ended
December 31, 2000, 1999 and 1998, the management fee was $0.3 million. The
management agreement expires on June 30, 2002, and may be terminated thereafter
upon 90 days notice by either party. Under the terms of our managing partners'
partnership agreement, our managing partner is entitled to reimbursement of all
reasonable general and administrative expenses and other reasonable expenses
incurred by our managing partner and its affiliates for,
154
157
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
or on our behalf, including, but not limited to, amounts payable by our managing
partner to El Paso under its management agreement.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner,
guarantee both the Senior Subordinated Notes and the credit facility.
Deepwater Holdings has a $175 million revolving credit facility that
matures in February 2004. Deepwater Holdings' ability to borrow money under this
credit facility is subject to certain customary terms and conditions, including
borrowing base limitations. The credit facility is collateralized by
substantially all of the material contracts and agreements of Deepwater
Holdings, including Deepwater Holdings' ownership in Stingray, UTOS, West
Cameron, HIOS and East Breaks. As of December 31, 2000, Deepwater Holdings had
$157 million outstanding under its credit facility at an average floating
interest rate of 8.1% and had $18 million available as a result of its borrowing
base limitations. The proceeds from the sale of Stingray and West Cameron in
January 2001 of approximately $50 million were used to reduce the credit
facility. This facility may restrict the ability of Deepwater Holdings to pay
distributions to us.
Legal Proceedings
We, along with several subsidiaries of El Paso, have been named defendants
in actions brought by Jack Grynberg on behalf of the United States Government
under the False Claims Act. Generally, the complaints allege an industry-wide
conspiracy to under report the heating value as well as the volumes of the
natural gas produced from federal and Native American lands, which deprived the
U.S. Government of royalties. (In re: Natural Gas Royalties Qui Tam Litigation,
U.S. District Court for the District of Wyoming.)
We have also been named a defendant in an action styled Quinque Operating
Company, et al v. Gas Pipelines and Their Predecessors, et al filed in 1999 in
the District Court of Stevens County, Kansas. This class action complaint
alleges that the defendants have mismeasured natural gas volumes and heating
content of natural gas on non-federal and non-Native American lands. The Quinque
complaint, once transferred to the same court handling the Grynberg complaint,
has been sent back to the Kansas State Court for further proceedings.
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
Regulatory Matters
In December 1998, Stingray filed for a general rate increase with the
Federal Energy Regulatory Commission, or FERC. Pursuant to an order issued by
FERC in December 1998, the increased rates became effective in June 1999,
subject to refund. A hearing on the merits of Stingray's filing was held in
December 1999 and the case is still pending before FERC. HIOS and UTOS currently
operate under agreements with their respective customers that provide for rates
that have been approved by FERC. Our remaining systems are gathering facilities
and, as such, are not currently subject to rate and certificate regulation by
FERC.
155
158
EL PASO ENERGY PARTNERS DEEPWATER, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 8 -- SUBSEQUENT EVENTS
In January 2001, Deepwater Holdings sold its interest in Stingray and West
Cameron. Deepwater received cash of approximately $50 million and used the
proceeds to pay down its credit facility. Deepwater also entered into an
agreement to sell its interest in UTOS for approximately $4 million to be
completed upon receipt of all necessary approvals, including final approval by
the FTC. The sale of UTOS is expected to close during April 2001. The carrying
value of our investment in Stingray, West Cameron and UTOS was approximately
$70.3 million at December 31, 2000.
156
159
DELOS OFFSHORE COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
157
160
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Delos Offshore Company:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of Delos Offshore Company, L.L.C. (the
"Company") at December 31, 2000 and 1999, and the results of its operations and
its cash flows for each of the three years in the period ended December 31, 2000
in conformity with accounting principles generally accepted in the United States
of America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
158
161
DELOS OFFSHORE COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Accounts receivable, trade................................ $ 830 $ 280
------- -------
Total current assets.............................. 830 280
------- -------
Property, plant and equipment
Platforms and facilities.................................. 34,832 30,250
Construction work in process.............................. 2,000 12,787
------- -------
36,832 43,037
Less: accumulated depreciation............................ 3,054 1,859
------- -------
Property, plant and equipment, net................ 33,778 41,178
------- -------
Total assets...................................... $34,608 $41,458
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable, trade................................... $ -- $ 633
Advances from affiliate................................... 38,988 44,501
Accrued expenses.......................................... 131 131
------- -------
Total current liabilities......................... 39,119 45,265
Commitments and contingencies
Members' capital............................................ (4,511) (3,807)
------- -------
Total liabilities and members' capital............ $34,608 $41,458
======= =======
See accompanying notes.
159
162
DELOS OFFSHORE COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues
Platform fees............................................. $10,070 $ 8,238 $ 5,517
------- ------- -------
Operating expenses
Operation and maintenance................................. 1,074 1,842 1,968
Depreciation.............................................. 1,195 1,066 794
------- ------- -------
2,269 2,908 2,762
------- ------- -------
Operating income............................................ 7,801 5,330 2,755
------- ------- -------
Interest expense............................................ (3,745) (2,377) (1,873)
------- ------- -------
Net income.................................................. $ 4,056 $ 2,953 $ 882
======= ======= =======
See accompanying notes.
160
163
DELOS OFFSHORE COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- -------
Members' capital at January 1, 1998................... $ (708) $ (7) $ (715)
Net income.......................................... 873 9 882
Distributions to members............................ (2,049) (21) (2,070)
------- ---- -------
Members' capital at December 31, 1998................. (1,884) (19) (1,903)
Net income.......................................... 2,923 30 2,953
Distributions to members............................ (4,808) (49) (4,857)
------- ---- -------
Members' capital at December 31, 1999................. (3,769) (38) (3,807)
Net income.......................................... 4,015 41 4,056
Distributions to members............................ (4,712) (48) (4,760)
------- ---- -------
Members' capital at December 31, 2000................. $(4,466) $(45) $(4,511)
======= ==== =======
See accompanying notes.
161
164
DELOS OFFSHORE COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- -------- -------
Cash flows from operating activities
Net income................................................ $ 4,056 $ 2,953 $ 882
Adjustments to reconcile net income to cash provided by
(used in) operating activities
Depreciation........................................... 1,195 1,066 794
Working capital changes
Accounts receivable, trade........................... (550) (57) (223)
Accounts payable, trade.............................. (633) 633 (2,915)
Accrued expenses..................................... -- 130 --
Other noncurrent liabilities......................... -- (38) (4,738)
-------- -------- -------
Net cash provided by (used in) operating
activities...................................... 4,068 4,687 (6,200)
-------- -------- -------
Cash flows from investing activities
Capital expenditures...................................... (43,446) (12,723) (7,854)
Proceeds from sale of asset to affiliate.................. 49,651 -- --
-------- -------- -------
Net cash provided by (used in) investing
activities...................................... 6,205 (12,723) (7,854)
-------- -------- -------
Cash flows from financing activities
Advances from affiliate................................... (5,513) 12,893 16,124
Distributions to members.................................. (4,760) (4,857) (2,070)
-------- -------- -------
Net cash provided by (used in) financing
activities...................................... (10,273) 8,036 14,054
-------- -------- -------
Change in cash and cash equivalents......................... -- -- --
Cash and cash equivalents
Beginning of period....................................... -- -- --
-------- -------- -------
End of period............................................. $ -- $ -- $ --
======== ======== =======
See accompanying notes.
162
165
DELOS OFFSHORE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Delos Offshore Company, L.L.C. is a limited liability company established
in 1997 for the purpose of providing platform services. The East Cameron 373
platform is located at the south end of the central leg of the Stingray system.
The platform serves as the host for Kerr-McGee Corporation's East Cameron Block
373 production and as the landing site for Garden Banks Blocks 108 and 152
production.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or members' capital.
Use of Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts. Interest costs are allocated to us based on the
average balances of our affiliated payables times our managing partner's average
interest rate, which was 9.1% and 9.0% at December 31, 2000 and 1999,
respectively.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded.
Property, Plant and Equipment
Platforms and related facilities are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of the assets which
approximates 30 years. Repair and maintenance costs are expensed as incurred,
while additions, improvements and replacements are capitalized.
163
166
DELOS OFFSHORE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In 1999, we began constructing the Prince TLP, or tension-leg platform, for
El Paso Production Company. In 2000, our managing partner successfully
negotiated a project-finance loan on behalf of Argo, an affiliate of our
managing partner. As a condition of the financing, the asset being constructed
was required to be owned by Argo. As a result, we transferred the asset to Argo
in September 2000 at its cost-to-date of $49.7 million.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for platforms and related facilities.
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation of the disposed assets with any
resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Revenue Recognition
Revenue from platform services is recognized in the period the services are
provided. In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
to provide guidance for revenue recognition issues and disclosure requirements.
SAB No. 101 offers guidelines, examples, and explanations for uncertain matters
relating to the recognition of revenue and became effective for us in the fourth
quarter of 2000. The adoption of SAB No. 101 did not have a material impact on
our financial position, results of operations, or cash flows.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximates their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
164
167
DELOS OFFSHORE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- MAJOR CUSTOMER
We are party to a platform agreement with Kerr-McGee Corporation, which is
our only customer. Under the terms of this agreement, Kerr-McGee is charged a
fee for processing natural gas, condensate, water, and dehydration. Platform
fees and accounts receivable for the years ended December 31, 2000, 1999, and
1998 consist solely of revenues from Kerr-McGee. The loss of Kerr-McGee as a
customer would have a material adverse effect on us.
NOTE 4 -- RELATED PARTY TRANSACTIONS
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged by our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. The management fee totaled $0.3
million, $0.7 million and $1.1 million for the years ended December 31, 2000,
1999 and 1998, respectively. The management agreement expires on June 30, 2002,
and may be terminated thereafter upon 90 days notice by either party. Under the
terms of our managing partners' partnership agreement, our managing partner is
entitled to reimbursement of all reasonable general and administrative expenses
and other reasonable expenses incurred by our managing partner and its
affiliates for, or on our behalf, including, but not limited to, amounts payable
by our managing partner to El Paso under it management agreement.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner
guarantee both the Senior Subordinated Notes and the credit facility.
165
168
DELOS OFFSHORE COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Legal Proceedings
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
166
169
VK DEEPWATER GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
167
170
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of VK Deepwater Gathering Company, L.L.C.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of members'
capital present fairly, in all material respects, the financial position of VK
Deepwater Gathering Company, L.L.C. and its subsidiaries (the "Company") at
December 31, 2000 and 1999, and the results of their operations and their cash
flows for each of the three years in the period ended December 31, 2000 in
conformity with accounting principles generally accepted in the United States of
America. These financial statements are the responsibility of the Company's
management; our responsibility is to express an opinion on these financial
statements based on our audits. We conducted our audits of these statements in
accordance with auditing standards generally accepted in the United States of
America, which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
168
171
VK DEEPWATER GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Cash and cash equivalents................................. $ -- $ 481
Accounts receivable, trade................................ 4,355 4,018
Materials and supplies.................................... 232 232
-------- --------
Total current assets.............................. 4,587 4,731
-------- --------
Property, plant and equipment
Pipelines and equipment................................... 147,203 141,183
Construction work in progress............................. 190 5,237
-------- --------
147,393 146,420
Less: accumulated depreciation............................ 21,526 16,233
-------- --------
Property, plant and equipment, net..................... 125,867 130,187
-------- --------
Total assets...................................... $130,454 $134,918
======== ========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Gas imbalance............................................. $ 4,532 $ 1,425
Advances from affiliate................................... 141,113 147,726
-------- --------
Total current liabilities......................... 145,645 149,151
Commitments and contingencies
Minority interest......................................... -- 1,092
Members' capital.......................................... (15,191) (15,325)
-------- --------
Total liabilities and members' capital............ $130,454 $134,918
======== ========
See accompanying notes.
169
172
VK DEEPWATER GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues.......................................... $26,653 $16,195 $ --
------- ------- -------
Operating expenses
Operation and maintenance................................. 3,084 2,738 1,687
Depreciation.............................................. 5,293 3,147 69
------- ------- -------
8,377 5,885 1,756
------- ------- -------
Operating income (loss)..................................... 18,276 10,310 (1,756)
------- ------- -------
Other income (expense)
Equity investment earnings................................ -- 3,859 9,113
Interest expense.......................................... (9,336) (5,095) (12)
Other income.............................................. 2 49 100
------- ------- -------
(9,334) (1,187) 9,201
------- ------- -------
Minority interest........................................... (82) (109) --
------- ------- -------
Net income.................................................. $ 8,860 $ 9,014 $ 7,445
======= ======= =======
See accompanying notes.
170
173
VK DEEPWATER GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- --------
Members' capital at January 1, 1998.................... $ (6,860) $ (70) $ (6,930)
Net income........................................... 7,370 75 7,445
Distributions to members............................. (11,541) (118) (11,659)
-------- ------- --------
Members' capital at December 31, 1998.................. (11,031) (113) (11,144)
Net income........................................... 8,923 91 9,014
Distributions to members............................. (13,062) (133) (13,195)
-------- ------- --------
Members' capital at December 31, 1999.................. (15,170) (155) (15,325)
Net income (loss).................................... 8,771 89 8,860
Distributions to members............................. (8,638) (88) (8,726)
-------- ------- --------
Members' capital at December 31, 2000.................. $(15,037) $ (154) $(15,191)
======== ======= ========
See accompanying notes.
171
174
VK DEEPWATER GATHERING COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------------
2000 1999 1998
-------- --------- --------
Cash flows from operating activities
Net income................................................ $ 8,860 $ 9,014 $ 7,445
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation........................................... 5,293 3,147 69
Distributed earnings in equity investments
Earnings from equity investments..................... -- (3,859) (9,113)
Distributions from equity investments................ -- 6,350 10,350
Minority interest income............................... 82 109 --
Working capital changes, net of effects of acquisitions
and non-cash transactions:
Accounts receivable, trade........................... (337) (4,018) 53
Materials and supplies............................... -- (232) --
Gas imbalance........................................ 3,105 1,427 --
-------- --------- --------
Net cash provided by operating activities......... 17,003 11,938 8,804
-------- --------- --------
Cash flows from investing activities
Purchase of additional interest in Viosca Knoll Gathering
Company................................................ (973) (80,143) --
Investment in unconsolidated affiliates................... -- (700) --
-------- --------- --------
Net cash used in investing activities............. (973) (80,843) --
-------- --------- --------
Cash flows from financing activities
Advances from affiliate, net.............................. (6,611) 82,581 2,855
Acquisition of minority interest.......................... (1,174) -- --
Distributions to members.................................. (8,726) (13,195) (11,659)
-------- --------- --------
Net cash provided by (used in) financing
activities...................................... (16,511) 69,386 (8,804)
-------- --------- --------
Change in cash and cash equivalents......................... (481) 481 --
Cash and cash equivalents
Beginning of period.................................... 481 -- --
-------- --------- --------
End of period.......................................... $ -- $ 481 $ --
======== ========= ========
Non-Cash Investing Activity
Conversion of equity investment to consolidated
subsidiary................................................ $ -- $ (36,372) $ --
======== ========= ========
See accompanying notes.
172
175
VK DEEPWATER GATHERING COMPANY, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
VK Deepwater Gathering Company, L.L.C. is a limited liability company
formed in 1994 for the purpose of owning and operating an interest in the Viosca
Knoll Gathering Company (Viosca Knoll). Viosca Knoll is a natural gas gathering
system consisting of 125 miles of predominately 20-inch natural gas pipeline and
a 7,000 horsepower compressor. Through June 1999, we held a 50 percent interest
in Viosca Knoll. In June 1999, we acquired an additional 49 percent interest,
and in September 2000, we acquired the remaining one percent interest from a
subsidiary of El Paso Corporation, bringing our total interest in Viosca Knoll
to 100 percent.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or member's capital.
Our consolidated financial statements include the accounts of all
majority-owned, controlled subsidiaries after the elimination of all significant
intercompany accounts and transactions. We account for investments in companies
where we have the ability to exert significant influence over, but not control
over operating and financial policies, using the equity method. During 1999 and
2000, a subsidiary of El Paso Corporation had a one percent ownership interest
in our subsidiary which represents the minority interest in our consolidated
financial statements.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts. Interest costs are allocated to us based on the
average balance of our affiliated payables times our managing partner's average
interest rate, which was 9.1% and 9.0% at December 31, 2000 and 1999,
respectively.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded.
173
176
VK DEEPWATER GATHERING COMPANY, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Gathering pipelines and equipment are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of the assets which
approximate 30 years. Repair and maintenance costs are expensed as incurred,
while additions, improvements and replacements are capitalized.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for gathering pipelines and equipment.
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation of the disposed assets with any
resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Investment in Unconsolidated Affiliates
We account for our investment in companies where we have the ability to
exert significant influence over, but not control over operating and financial
policies, using the equity method with our proportionate share of net income
(loss) of the investee included in the accompanying statements of operations.
Any difference between the carrying amount of the investment and the underlying
equity in net assets of the investee is considered to be goodwill and amortized
on a straight-line basis over the estimated lives of the underlying net assets
of the respective investee.
Revenue Recognition
Revenue from pipeline transportation of hydrocarbons is recognized upon
receipt of the hydrocarbons into the pipeline system. In December 1999, the
Securities and Exchange Commission issued Staff Accounting Bulletin (SAB) No.
101, Revenue Recognition in Financial Statements, to provide guidance for
revenue recognition issues and disclosure requirement. SAB No. 101 offers
guidelines, examples, and explanations for uncertain matters relating to the
recognition of revenue and became effective for us in the fourth quarter of
2000. The adoption of SAB No. 101 did not have a material impact on our
financial position, results of operations, or cash flows.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
174
177
VK DEEPWATER GATHERING COMPANY, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximate their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
NOTE 3 -- ACQUISITIONS
In June 1999, we acquired an additional 49 percent in Viosca Knoll from an
affiliate of El Paso Corporation for consideration totaling $80.6 million. This
was accomplished through a series of transactions effected by our managing
partner. As a result of the acquisition, we began consolidating Viosca Knoll in
June 1999.
Our acquisition was accounted for as a purchase and the purchase price was
assigned to the assets and liabilities acquired based upon their estimated fair
value as of the acquisition date. The following is summary information related
to the acquisition (in thousands):
Fair value of assets acquired.......................... $83,105
Cash acquired.......................................... 434
Fair value of liabilities assumed...................... (2,962)
-------
Total purchase price......................... $80,577
=======
175
178
VK DEEPWATER GATHERING COMPANY, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following selected unaudited pro forma information represents our
consolidated results of operations on a pro forma basis for the years ended
December 31, 1999 and 1998, assuming the Viosca Knoll acquisition had occurred
on January 1, 1998:
1999 1998
------- -------
(IN THOUSANDS, EXCEPT
PER UNIT AMOUNTS)
Revenue..................................................... $16,195 $29,334
Operating income............................................ $ 9,721 $19,411
Net income.................................................. $ 6,612 $19,474
In September 2000, we purchased the remaining one percent of Viosca Knoll
from an affiliate of El Paso Corporation for approximately $2.0 million bringing
our total investment in Viosca Knoll to 100 percent.
NOTE 4 -- EQUITY INVESTMENTS
Through June 1999, we held a 50 percent equity investment in Viosca Knoll,
which was accounted for using the equity method of accounting. Information on
Viosca Knoll is through May 31, 1999. On June 1, 1999, we began consolidating
Viosca Knoll as a result of acquiring an additional 49 percent ownership
interest.
FOR THE YEAR ENDED
DECEMBER 31,
-------------------
1999 1998
-------- --------
(IN THOUSANDS)
Operating results data:
Operating revenues........................................ $12,338 $29,334
Other income.............................................. 31 50
Operating expenses........................................ (925) (3,031)
Depreciation.............................................. (1,752) (3,860)
Other expenses............................................ (1,973) (4,267)
------- -------
Net Income........................................ $ 7,719 $18,226
======= =======
Our share:
Earnings from equity investments.......................... $ 3,860 $ 9,113
======= =======
Allocated distributions................................... $ 6,350 $10,350
======= =======
Financial position data:
Current assets............................................ $ -- $ 5,451
Noncurrent assets......................................... -- 97,758
Current liabilities....................................... -- 1,021
Long-term debt............................................ -- 66,700
Other noncurrent liabilities.............................. -- 340
176
179
VK DEEPWATER GATHERING COMPANY, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- MAJOR CUSTOMERS
Transportation revenues from major customers were as follows (in
thousands):
FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------
2000 1999
-------------------- --------------------
% OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES
------- ---------- ------- ----------
Shell Offshore............................... $11,424 42.7% $ 6,690 41.3%
Amoco Production............................. 3,617 13.5% 2,129 13.1%
ExxonMobil................................... 3,617 13.5% 2,258 13.9%
Synder Oil Corporation....................... -- -- 1,648 10.1%
------- ----- ------- -----
$18,658 69.7% $12,725 78.4%
======= ===== ======= =====
NOTE 6 -- RELATED PARTY TRANSACTIONS
Revenues Received from and Expenses Paid to Related Parties
For the year ended December 31, 2000 and the seven months ended December
31, 1999, Viosca Knoll received approximately $0.6 million and $0.7 million,
respectively, from Flextrend Development Company, L.L.C. for transportation fees
and approximately $0.1 million for both time periods for compression fees. For
the year ended December 31, 2000 and the seven months ended December 31, 1999,
we paid VK-Main Pass Gathering Company, L.L.C. approximately $1.9 million and
$1.2 million, respectively, for expenses and platform access fees related to the
Viosca Knoll 817 platform. We began consolidating Viosca Knoll following our
acquisition of an additional 49 percent ownership interest in June 1999. As a
result, revenues after this period were eliminated in consolidation.
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso Corporation
and our managing partner, a management fee is charged to our managing partner
which is intended to approximate the amount of resources allocated by El Paso
Corporation in providing various operational, financial, accounting and
administrative services on behalf of our managing partner and us. The management
fee was $0.8 million, $0.8 million and $0.9 million for the years ended December
31, 2000, 1999 and 1998. The management agreement expires on June 30, 2002, and
may be terminated thereafter upon 90 days notice by either party. Under the
terms of our managing partners' partnership agreement, our managing partner is
entitled to reimbursement of all reasonable general and administrative expenses
and other reasonable expenses incurred by our managing partner and its
affiliates for, or on our behalf, including, but not limited to, amounts payable
by our managing partner to El Paso Corporation under its management agreement.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates and our one percent non-managing partner,
guarantee both the Senior Subordinated Notes and the credit facility.
177
180
VK DEEPWATER GATHERING COMPANY, L.L.C.
CONSOLIDATED NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Legal Proceedings
We, along with several subsidiaries of El Paso, have been named defendants
in actions brought by Jack Grynberg on behalf of the U.S. Government under the
False Claims Act. Generally, the complaints allege an industry-wide conspiracy
to under report the heating value as well as the volumes of the natural gas
produced from federal and Native American lands, which deprived the U.S.
Government of royalties. (In re: Natural Gas Royalties Qui Tam Litigation, U.S.
District Court for the District of Wyoming.)
We have also been named a defendant in an action styled Quinque Operating
Company, et al v. Gas Pipelines and Their Predecessors, et al filed in 1999 in
the District Court of Stevens County, Kansas. This class action complaint
alleges that the defendants have mismeasured natural gas volumes and heating
content of natural gas on non-federal and non-Native American lands. The Quinque
complaint, once transferred to the same court handling the Grynberg complaint,
has been sent back to the Kansas State Court for further proceedings.
Viosca Knoll is named a defendant in the Samedan Oil Corporation suit in
which the plaintiff alleges that we wrongfully utilized space and facilities on
the platform on Block 261, Main Pass Area, offshore Alabama. We utilize the
space and facilities on the platform under a continuing license agreement with
Snyder Oil Corporation. We have notified Snyder that the suit falls within the
scope of contractual indemnity provisions for with they are liable to us. We
have demanded that they indemnify and defend us against all liability arising
from this suit, as well as pay all costs of our defense.
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
178
181
EL PASO ENERGY PARTNERS OIL TRANSPORT, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
179
182
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of El Paso Energy Partners Oil Transport, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of El Paso Energy Partners Oil
Transport, L.L.C. (the "Company") at December 31, 2000 and 1999, and the results
of its operations and its cash flows for each of the three years in the period
ended December 31, 2000 in conformity with accounting principles generally
accepted in the United States of America. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with auditing standards generally
accepted in the United States of America, which require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
180
183
EL PASO ENERGY PARTNERS OIL TRANSPORT, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Accounts receivable, trade.................................. $ 7 $ --
Accounts receivable, affiliate.............................. 97 104
---- ----
Total assets...................................... $104 $104
==== ====
LIABILITIES AND MEMBERS' CAPITAL
Advances from affiliate..................................... $103 $103
Commitments and contingencies
Members' capital............................................ 1 1
---- ----
Total liabilities and members' capital............ $104 $104
==== ====
See accompanying notes.
181
184
EL PASO ENERGY PARTNERS OIL TRANSPORT, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
--------------------------
2000 1999 1998
------ ------ ------
Operating revenues.......................................... $1,581 $1,261 $1,001
Operation and maintenance expense........................... (1,581) (1,261) (1,001)
------ ------ ------
Net income.................................................. $ -- $ -- $ --
====== ====== ======
See accompanying notes.
182
185
EL PASO ENERGY PARTNERS OIL TRANSPORT, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- -----
Members' capital at January 1, 1998..................... $ 1 $ -- $ 1
Net income............................................ -- -- --
---- ---- ----
Members' capital at December 31, 1998................... 1 -- 1
Net income............................................ -- -- --
---- ---- ----
Members' capital at December 31, 1999................... 1 -- 1
Net income............................................ -- -- --
---- ---- ----
Members' capital at December 31, 2000................... $ 1 $ -- $ 1
==== ==== ====
See accompanying notes.
183
186
EL PASO ENERGY PARTNERS OIL TRANSPORT, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
-------------------------
2000 1999 1998
------ ------- ------
Cash flows from operating activities:
Net income................................................ $-- $ -- $ --
Adjustments to reconcile net income to cash provided by
(used in) operating activities:
Working capital changes:
Accounts receivable, trade........................... (7) 24 (24)
Other current liabilities............................ -- -- 58
--- ----- ----
Net cash provided by (used in) operating
activities...................................... (7) 24 34
--- ----- ----
Cash flows from financing activities:
Advances to (from) affiliate, net......................... 7 (24) (34)
--- ----- ----
Net cash provided by (used in) financing
activities...................................... 7 (24) (34)
--- ----- ----
Change in cash and cash equivalents:........................ -- -- --
Cash and cash equivalents:
Beginning of period....................................... -- -- --
--- ----- ----
End of period............................................. $-- $ -- $ --
=== ===== ====
See accompanying notes.
184
187
EL PASO ENERGY PARTNERS OIL TRANSPORT, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
El Paso Energy Partners Oil Transport, L.L.C., formerly Leviathan Oil
Transport, L.L.C., is a limited liability company established in 1994 for the
purpose of managing and operating the Ship Shoal 332, Garden Banks 72 and Viosca
Knoll 817 platforms, all owned by affiliates. We provide these services at cost.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
of 8,953,764 units.
In connection with a Federal Trade Commission order relating to El Paso
Corporation's merger with The Coastal Corporation, our managing partner sold 50
percent of its interest in the Ship Shoal 332 platform.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include reclassifications that
were made to conform to the current year presentation. Such reclassifications
have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash
185
188
EL PASO ENERGY PARTNERS OIL TRANSPORT, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
generally consists of all cash receipts plus reductions in reserves less all
cash disbursements and net additions to reserves. Our managing partner has broad
discretion to establish reserves. Net income (loss) is allocated to our members
in accordance with their respective membership interests, subject to limitations
on the allocation of losses as defined in our limited liability company
agreement.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximates their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner
guarantee both the Senior Subordinated Notes and the credit facility.
186
189
EL PASO ENERGY PARTNERS OIL TRANSPORT, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Legal Proceedings
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
187
190
POSEIDON PIPELINE COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
188
191
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Poseidon Pipeline Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of Poseidon Pipeline Company, L.L.C.
(the "Company") at December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
189
192
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Accounts receivable, trade................................ $ 70 $ --
Accounts receivable, affiliate............................ 9,615 2,652
-------- -------
Total current assets.............................. 9,685 2,652
-------- -------
Property, plant and equipment
Platforms and related facilities.......................... 2,222 2,222
Less: accumulated depreciation............................ 340 275
-------- -------
Net property, plant and equipment................. 1,882 1,947
Investment in unconsolidated affiliate...................... 38,372 41,830
-------- -------
Total assets...................................... $ 49,939 $46,429
======== =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable, trade................................... $ -- $ 382
Advances from affiliate................................... 67,161 48,793
-------- -------
Total current liabilities......................... 67,161 49,175
Commitments and contingencies
Members' capital............................................ (17,222) (2,746)
-------- -------
Total liabilities and members' capital............ $ 49,939 $46,429
======== =======
See accompanying notes.
190
193
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues.......................................... $ -- $ -- $ --
------- ------- -------
Operating expenses
Operations and maintenance................................ 394 603 764
Depreciation.............................................. 65 73 74
------- ------- -------
459 676 838
------- ------- -------
Operating loss.............................................. (459) (676) (838)
Other income (expense)
Equity investment earnings................................ 12,718 18,887 7,991
Interest expense.......................................... (4,665) (3,838) (3,408)
Other income.............................................. 1,728 91 126
------- ------- -------
9,781 15,140 4,709
------- ------- -------
Net income.................................................. $ 9,322 $14,464 $ 3,871
======= ======= =======
See accompanying notes.
191
194
POSEIDON PIPELINE COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- --------
Members' capital at January 1, 1998.................. $ (3,502) $ (36) $ (3,538)
Net income......................................... 3,832 39 3,871
Distributions to members........................... (4,997) (51) (5,048)
-------- ----- --------
Members' capital at December 31, 1998................ (4,667) (48) (4,715)
Net income......................................... 14,318 146 14,464
Distributions to members........................... (12,369) (126) (12,495)
-------- ----- --------
Members' capital at December 31, 1999................ (2,718) (28) (2,746)
Net income......................................... 9,229 93 9,322
Distributions to members........................... (23,559) (239) (23,798)
-------- ----- --------
Members' capital at December 31, 2000................ $(17,048) $(174) $(17,222)
======== ===== ========
See accompanying notes.
192
195
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------- -------
Cash flows from operating activities
Net income................................................ $ 9,322 $14,464 $ 3,871
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation........................................... 65 73 74
Distributed earnings of equity investments
Earnings from equity investees....................... (12,718) (18,887) (7,991)
Distributions from equity investments................ 13,532 18,191 6,732
Other.................................................. -- -- (46)
Working capital changes
Accounts receivable, trade........................... (70) -- (6)
Accounts payable, trade.............................. (382) 382 --
-------- ------- -------
Net cash provided by operating activities......... 9,749 14,223 2,634
-------- ------- -------
Cash flows from investing activities
Investment in equity investee............................. 2,645 -- --
-------- ------- -------
Net cash provided by investing activities......... 2,645 -- --
-------- ------- -------
Cash flows from financing activities
Advances from affiliate, net.............................. 11,404 (1,728) 2,414
Distributions to members.................................. (23,798) (12,495) (5,048)
-------- ------- -------
Net cash used in financing activities............. (12,394) (14,223) (2,634)
-------- ------- -------
Change in cash and cash equivalents......................... -- -- --
Cash and cash equivalents
Beginning of period....................................... -- -- --
-------- ------- -------
End of period............................................. $ -- $ -- $ --
======== ======= =======
See accompanying notes.
193
196
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Poseidon Pipeline Company, L.L.C. is a limited liability company
established in 1995 for the purpose of providing midstream energy services,
including oil transportation and other related services. Through our 36 percent
interest in the Poseidon Oil Pipeline Company, L.L.C., or Poseidon, we have an
interest in the Poseidon system, which is a major sour crude oil pipeline system
consisting of approximately 280 miles of pipelines and an offshore platform.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts. Interest costs are allocated to us based on the
average balance of our affiliated payables times our managing partner's average
interest rate, which was 9.1% and 9.0% at December 31, 2000 and 1999,
respectively.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded.
Property, Plant and Equipment
Platforms and related facilities are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of the assets which
approximates 30 years. Repair and maintenance costs are expensed as incurred,
while additions, improvements and replacements are capitalized.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for platforms and related facilities.
194
197
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation of the disposed assets with any
resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Investment in Unconsolidated Affiliates
We account for our investment in companies where we have the ability to
exert significant influence over, but not control over operating and financial
policies, using the equity method with our proportionate share of net income
(loss) of the investee included in the accompanying statements of operations.
Any difference between the carrying amount of the investment and the underlying
equity in net assets of the investee is considered to be goodwill and amortized
on a straight-line basis over the estimated lives of the underlying net assets
of the respective investee.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximate their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
195
198
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- EQUITY INVESTMENTS
We hold a 36 percent equity investment in Poseidon, which is accounted for
using the equity method of accounting. As of December 31, 2000, the carrying
amount of our equity investment exceeded the underlying equity in the assets by
approximately $3.1 million. The difference is being amortized on a straight-line
basis over the estimated life of Poseidon's underlying net assets. Summarized
financial information for our investment is as follows:
AS OF OR FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
2000 1999 1998
-------- -------- -------
(IN THOUSANDS)
Operating results data
Operating revenues.................................. $ 66,131 $ 76,160 $44,522
Other income........................................ 639 403 290
Operating expenses.................................. (25,371) (8,774) (4,763)
Depreciation........................................ (10,754) (6,172) (8,846)
Other expenses...................................... (11,683) (9,133) (8,671)
-------- -------- -------
Net income.................................. $ 18,962 $ 52,484 $22,532
======== ======== =======
Our share
Allocated income.................................... $ 6,826 $ 18,894 $ 8,111
Adjustments(1)...................................... 5,892 (7) (120)
-------- -------- -------
Earnings from equity investments.................... $ 12,718 $ 18,887 $ 7,991
======== ======== =======
Allocated distributions............................. $ 13,532 $ 18,191 $ 6,732
======== ======== =======
Financial position data
Current assets...................................... $126,360 $171,720 $43,338
Noncurrent assets................................... 237,996 243,971 233,082
Current liabilities(2).............................. 264,776 159,359 40,134
Long-term debt...................................... -- 150,000 131,000
Other noncurrent liabilities........................ -- 322 --
- ---------------
(1) We record adjustments primarily for differences from estimated year end
earnings reported and actual earnings in the audited annual reports of our
equity investment. For the year ended December 31, 2000, the adjustment of
approximately $5.9 million primarily relates to insurance proceeds we
received or expect to receive to offset our share of the repair costs of
the pipeline damaged in January 2000. (See Note 5).
(2) Current liabilities include the $150 million credit facility which matures
April 2001. (See Note 5).
196
199
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- RELATED PARTY TRANSACTIONS
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. The management fee totaled $0.3
million for each of the years ended December 31, 2000, 1999 and 1998,
respectively. The management agreement expires on June 30, 2002, and may be
terminated thereafter upon 90 days notice by either party. Under the terms of
our managing partners' partnership agreement, our managing partner is entitled
to reimbursement of all reasonable general and administrative expenses and other
reasonable expenses incurred by our managing partner and its affiliates for, or
on our behalf, including, but not limited to, amounts payable by our managing
partner to El Paso under its management agreement.
Transportation Services Agreement
For the years ended December 31, 2000, 1999 and 1998, Poseidon charged
Flextrend Development Company, L.L.C. approximately $0.6 million, $0.9 million,
and $1.4 million, respectively, for transportation services related to
transporting production from the Garden Banks Block 72 and 117 leases.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliate, and our one percent non-managing partner,
guarantee both the Senior Subordinated Notes and the credit facility.
Poseidon has an amended revolving credit facility with a syndicate of
commercial banks to provide up to $150 million for the construction and
expansion of the Poseidon system and for other working capital needs. Poseidon's
ability to borrow money under this facility is subject to certain customary
terms and conditions, including borrowing base limitations. The facility is
collateralized by a substantial portion of Poseidon's assets and matures on
April 30, 2001. Poseidon is working with a syndicated bank group to refinance
the revolving credit facility. As of December 31, 2000 and 1999, Poseidon had
$150 million outstanding under its credit facility. The average interest rate
was 7.9% and 7.8% at December 31, 2000 and 1999, respectively. This facility may
restrict the ability of Poseidon to pay distributions to its owners.
Legal Proceedings
In January 2000, an anchor from a submersible drilling rig in tow damaged a
section of the Poseidon system. The accident resulted in the release of
approximately 2,200 barrels of crude oil in the waters surrounding the system,
and resulted in the shutdown of the system. Poseidon's costs to repair the
damaged pipeline and clean up the crude oil released into the Gulf of Mexico was
approximately $18 million. Poseidon has filed a lawsuit against the rig's owner
for damages to the pipeline. By the end of the first quarter 2000, the pipeline
was repaired and was placed back into service. To date, we have received
insurance proceeds totaling approximately $5.0 million for property damage and
approximately $1.7 million for business interruption. Proceeds for business
interruption have been recorded as other income in the accompanying statement of
operations.
197
200
POSEIDON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
198
201
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
199
202
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Flextrend Development Company, L.L.C.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of Flextrend Development Company,
L.L.C. (the "Company") at December 31, 2000 and 1999, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States of America. These financial statements are the responsibility
of the Company's management; our responsibility is to express an opinion on
these financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
200
203
FLEXTREND DEVELOPMENT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Accounts receivable, trade................................ $ 7,420 $ 2,621
Accounts receivable, affiliate............................ 2,506 2,790
-------- --------
Total current assets.............................. 9,926 5,411
-------- --------
Property, plant and equipment
Oil and natural gas properties............................ 156,222 122,301
Platform and related facilities........................... 7,024 7,024
Construction work in progress............................. -- 33,746
-------- --------
163,248 163,071
Less: accumulated depreciation, depletion and
amortization........................................... 110,792 99,712
-------- --------
Property, plant and equipment, net................ 52,454 63,359
-------- --------
Total assets...................................... $ 62,380 $ 68,770
======== ========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable, trade................................... $ -- $ 478
Advances from affiliate................................... 149,874 129,471
Accrued expenses.......................................... 270 1,881
-------- --------
Total current liabilities......................... 150,144 131,830
Commitments and contingencies
Members' capital............................................ (87,764) (63,060)
-------- --------
Total liabilities and members' capital............ $ 62,380 $ 68,770
======== ========
See accompanying notes.
201
204
FLEXTREND DEVELOPMENT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Operating revenues
Oil and natural gas sales................................. $ 20,119 $ 29,831 $ 31,248
-------- -------- --------
Operating expenses
Operation and maintenance................................. 17,214 18,779 19,548
Depreciation, depletion and amortization.................. 11,280 18,894 22,133
-------- -------- --------
28,494 37,673 41,681
-------- -------- --------
Operating loss.............................................. (8,375) (7,842) (10,433)
Interest expense............................................ (11,569) (11,303) (6,296)
-------- -------- --------
Net loss.................................................... $(19,944) $(19,145) $(16,729)
======== ======== ========
See accompanying notes.
202
205
FLEXTREND DEVELOPMENT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- --------
Members' capital at January 1, 1998.................. $ (6,838) $ (214) $ (7,052)
Net loss........................................... (16,560) (169) (16,729)
Distributions to members........................... (14,443) (147) (14,590)
-------- ------- --------
Members' capital at December 31, 1998................ (37,841) (530) (38,371)
Net loss........................................... (18,952) (193) (19,145)
Distributions to members........................... (5,490) (54) (5,544)
-------- ------- --------
Members' capital at December 31, 1999................ (62,283) (777) (63,060)
Net loss........................................... (19,745) (199) (19,944)
Distributions to members........................... (4,711) (49) (4,760)
-------- ------- --------
Members' capital at December 31, 2000................ $(86,739) $(1,025) $(87,764)
======== ======= ========
See accompanying notes.
203
206
FLEXTREND DEVELOPMENT COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
Cash flows from operating activities
Net loss.................................................. $(19,944) $(19,145) $(16,729)
Adjustments to reconcile net income to cash provided by
(used in) operating activities
Depreciation, depletion and amortization............... 11,280 18,894 22,133
Working capital changes:
Accounts receivable, trade........................... (4,799) (2,353) 311
Other current assets................................. -- 33 12
Accounts payable, trade.............................. (478) 344 (3,141)
Accrued expenses..................................... (1,611) 1,881 --
-------- -------- --------
Net cash provided by (used in) operating
activities...................................... (15,552) (346) 2,586
-------- -------- --------
Cash flows from investing activities
Capital expenditures...................................... (375) (3,367) (38,078)
-------- -------- --------
Net cash used in investing activities............. (375) (3,367) (38,078)
-------- -------- --------
Cash flows from financing activities
Advances from affiliate net............................... 20,687 9,257 50,082
Distributions to members.................................. (4,760) (5,544) (14,590)
-------- -------- --------
Net cash provided by financing activities......... 15,927 3,713 35,492
-------- -------- --------
Change in cash and cash equivalents......................... -- -- --
Cash and cash equivalents
Beginning of period.................................... -- -- --
-------- -------- --------
End of period.......................................... $ -- $ -- $ --
======== ======== ========
See accompanying notes.
204
207
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Flextrend Development Company, L.L.C. is a limited liability company
established in 1995 for the purpose of exploration and production of natural gas
and oil. We have a working interest in four producing properties and an
overriding royalty interest in one producing and one non-producing property.
Additionally, we own one offshore platform.
In November 1999, we entered into an arrangement with El Paso Production to
farmout our working interest in a non-producing property in exchange for an
overriding royalty interest. Under the terms of the farmout agreement, we may
convert our overriding royalty interest in the property into a 30 percent
working interest once El Paso Production recoups the costs associated with its
drilling and completion activities.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include reclassifications that
were made to conform to the current year presentation. Such reclassifications
have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts. Interest costs are allocated to us based on the
average balance of our affiliated payables times our managing partner's average
interest rate, which was 9.1% and 9.0% at December 31, 2000 and 1999,
respectively.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000 and 1999, no allowance for doubtful accounts was
recorded.
Property, Plant and Equipment
Platforms and related facilities are recorded at cost and are depreciated
on a straight-line basis over the estimated useful lives of the assets which
approximates 20 years. We account for our oil and natural gas exploration and
production activities using the successful efforts method of accounting. Under
this method, costs of successful exploratory wells, developmental wells and
acquisitions of mineral leasehold interests are capitalized. Production,
exploratory dry hole and other exploration costs, including geological and
geophysical
205
208
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
costs and delay rentals, are expensed as incurred. Unproved properties are
assessed periodically and any impairment in value is recognized currently as
depreciation, depletion and amortization expense.
Depreciation, depletion, and amortization of the capitalized costs of
producing oil and natural gas properties, consisting principally of tangible and
intangible costs incurred in developing a property and costs of productive
leasehold interests, are computed on the unit-of-production method.
Unit-of-production rates are based on annual estimates of remaining proved
developed reserves or proved reserves, as appropriate, for each property.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions for platforms and related facilities and oil and natural gas
properties.
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation, depletion and amortization of the
disposed assets with any resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Revenue Recognition
Revenue from oil and natural gas sales is recognized upon delivery in the
period of production.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
to provide guidance for revenue recognition issues and disclosure requirement.
SAB No. 101 offers guidelines, examples, and explanations for uncertain matters
relating to the recognition of revenue and became effective for us in the fourth
quarter of 2000. The adoption of SAB No. 101 did not have a material impact on
our financial position, results of operations, or cash flows.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximate their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
206
209
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to our members in accordance
with their respective membership interests, subject to limitations on the
allocation of losses as defined in our limited liability company agreement.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- MAJOR CUSTOMERS
Oil and natural gas sales revenues realized from major customers and their
respective percent of total revenues were as follows (in thousands):
FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
2000 1999 1998
-------------------- -------------------- --------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------- ---------- ------- ---------- ------- ----------
Offshore Gas Marketing, Inc. ...... $15,722 44.7% $29,778 99.8% $31,225 99.9%
Williams Energy Services Co........ 8,947 25.4% -- -- -- --
------- ---- ------- ---- ------- ----
$24,669 70.1% $29,778 99.8% $31,225 99.9%
======= ==== ======= ==== ======= ====
NOTE 4 -- RELATED PARTY TRANSACTIONS
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative
207
210
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
services on behalf of our managing partner and us. The management fee was $0.6
million, $0.9 million and $1.2 million for the years ended December 31, 2000,
1999 and 1998. The management agreement expires on June 30, 2002, and may be
terminated thereafter upon 90 days notice by either party. Under the terms of
our managing partners' partnership agreement, our managing partner is entitled
to reimbursement of all reasonable general and administrative expenses and other
reasonable expenses incurred by our managing partner and its affiliates for, or
on our behalf, including, but not limited to, amounts payable by our managing
partner to El Paso under it management agreement.
Revenues from Related Parties
We receive oil and natural gas sales revenues from Offshore Gas Marketing,
Inc., an indirect subsidiary of El Paso Corporation (See Note 3).
Expenses Paid to Related Parties
For the years ended December 31, 2000, 1999 and 1998, we paid Green Canyon
Pipeline Company, L.L.C. approximately $4.2 million, $4.3 million and $4.7
million, respectively, for platform and processing fees. For the years ended
December 31, 2000, 1999 and 1998, we paid VK-Main Pass Gathering Company, L.L.C.
approximately $6.7 million, $7.0 million and $6.0 million, respectively, for
platform access and processing fees.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Hedging Activities
We hedge a portion of our oil and natural gas production to reduce our
exposure to fluctuations in market prices of oil and natural gas and to meet
certain requirements under our managing partner's revolving credit facility. We
use commodity price swap instruments whereby monthly settlements are based on
differences between the prices specified in the commodity price swap agreement
and the settlement prices of certain future contracts quoted on the New York
Mercantile Exchange, NYMEX, or certain other indices. We settle the commodity
price swap transactions by paying the negative difference or receiving the
positive difference between the applicable settlement price and the price
specified in the contract. The commodity price swap transactions we use differ
from future contracts in that there is no contractual obligation which requires
or allows for the future delivery of the product. The credit risk from our price
swap contracts is derived from the counterparty to the transaction, typically a
major financial institution. We do not require collateral and do not anticipate
non-performance by this counterparty, which does not transact a sufficient
volume of transactions with us to create a significant concentration of credit
risk. Gains or losses on hedging activities and the termination of any hedging
instruments are initially deferred and included as an increase or decrease to
oil and natural gas sales in the period in which the hedged production is sold.
For the years ended December 31, 2000, 1999 and 1998, we recorded a net gain
(loss) of $(15.0) million, $(2.3) million and $2.5 million, respectively, from
such activities.
As of December 31, 1998, we maintained two natural gas sales swap
transactions, one covering the calendar year 1999, and one covering the calendar
year 2000. Each of these swaps carried a notional amount of 10,000 million
british thermal units per day or MMbtu/d. Under these transactions, we receive a
fixed price and pay a variable price based on monthly natural gas futures
contract settlement price as set by NYMEX. In January 1999, we elected to change
the term of our 1999 swap to calendar year 2000. In January 1999 and 2000, under
the terms of this transaction, we fixed our contract price at $1.6686 per
MMbtu/d and $1.8050 per MMbtu/d, respectively, for each swap.
Each of our derivative instruments expired in December 2000 and we have not
entered into any new hedging activities in 2001.
208
211
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Financing Activities
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates and our one percent non-managing partner,
guarantee both the Senior Subordinated Notes and the credit facility.
Legal Proceedings
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
NOTE 6 -- SUPPLEMENTAL OIL AND NATURAL GAS INFORMATION (UNAUDITED):
Oil and Natural Gas Reserves
The following table represents our net interest in estimated quantities of
developed and undeveloped reserves of crude oil, condensate and natural gas and
changes in such quantities at year end 2000, 1999 and 1998. Estimates of our
reserves at December 31, 2000, 1999 and 1998, have been made by the independent
engineering consulting firm, Netherland, Sewell & Associates, Inc. Net proved
reserves are the estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are proved reserve volumes that
can be expected to be recovered through existing wells with existing equipment
and operating methods. Proved undeveloped reserves are proved reserve volumes
that are expected to be recovered from new wells on undrilled acreage or from
existing wells where a significant expenditure is required for recompletion.
Estimates of reserve quantities are based on sound geological and
engineering principles, but, by their very nature, are still estimates that are
subject to substantial upward or downward revision as additional information
regarding producing fields and technology becomes available.
OIL/CONDENSATE NATURAL GAS
MBBLS MMCF
-------------- -----------
(IN THOUSANDS)
Proved reserves -- January 1, 1998......................... 2,119 30,163
Revisions of previous estimates.......................... (33) 1,833
Purchase of reserves in place............................ 32 8,212
Production............................................... (540) (11,324)
----- -------
Proved reserves -- December 31, 1998....................... 1,578 28,884
Revision of previous estimates........................... 251 623
Extension, Discoveries, and other Additions.............. 1 218
Production............................................... (357) (12,211)
----- -------
Proved reserves -- December 31, 1999(1).................... 1,473 17,514
Revision of previous estimates........................... 23 1,171
Production............................................... (295) (7,185)
----- -------
Proved reserves -- December 31, 2000....................... 1,201 11,500
===== =======
- ---------------
(1) Includes our net interest in proved reserves on Garden Banks Block 73
totaling 653 barrels of oil and 218 MMcf of natural gas.
As generally used in the energy industry and in this document, the following
terms have the following meanings:
MBbls = thousand barrels
MMcf = million cubic feet
Mcf = thousand cubic feet
209
212
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
The following are estimates of our total proved developed and proved
undeveloped reserves of oil and natural gas by producing property as of December
31, 2000.
OIL (barrels) NATURAL GAS (Mcf)
------------- -----------------------
PROVED PROVED PROVED
DEVELOPED DEVELOPED UNDEVELOPED
------------- --------- -----------
Garden Banks Block 72............................. 209,008 1,771,981 --
Garden Banks Block 73............................. -- 143,245 --
Garden Banks Block 117............................ 933,823 1,626,785 --
Viosca Knoll Block 817............................ 47,845 4,946,589 2,373,676
West Delta Block 35............................... 10,747 637,645 --
--------- --------- ---------
Total................................... 1,201,423 9,126,245 2,373,676
========= ========= =========
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net revenue therefrom are based upon a number of
variable factors and assumptions, such as historical production from the subject
properties, the assumed effects of regulation by governmental agencies and
assumptions concerning future oil and natural gas prices, future operating costs
and future plugging and abandonment costs, all of which may vary considerably
from actual results. All such estimates are to some degree speculative, and
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net revenue expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The meaningfulness of such estimates is highly dependent upon the assumptions
upon which they are based.
Estimates with respect to proved undeveloped reserves that may be developed
and produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than upon actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves. A significant portion of our reserves is based upon
volumetric calculations.
Future Net Cash Flows
The standardized measure of discounted future net cash flows relating to
our proved oil and natural gas reserves is calculated and presented in
accordance with SFAS No. 69, Disclosures About Oil and Gas Producing Activities.
Accordingly, future cash inflows were determined by applying year-end oil and
natural gas prices, as adjusted for fixed price contracts in effect, to our
estimated share of future production from proved oil and natural gas reserves.
The average prices utilized in the calculation of the standardized measure of
discounted future net cash flows at December 31, 2000, were $23.75 per barrel of
oil and $9.39 per Mcf of natural gas. Actual future prices and costs may be
materially higher or lower. Future production and development costs were
computed by applying year-end costs to future years. As we are not a taxable
entity, no future income taxes were provided. A prescribed 10 percent discount
factor was applied to the future net cash flows.
In our opinion, this standardized measure is not a representative measure
of fair market value, and the standardized measure presented for our proved oil
and natural gas reserves is not representative of the reserve
210
213
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
value. The standardized measure is intended only to assist financial statement
users in making comparisons between companies.
DECEMBER 31,
------------------------------
2000 1999 1998
-------- -------- --------
(IN THOUSANDS)
Future cash inflows.................................. $136,658 $ 69,719 $ 53,299
Future production costs.............................. (15,853) (14,530) (13,412)
Future development costs............................. (11,531) (10,681) (10,566)
-------- -------- --------
Future net cash flows................................ 109,274 44,508 29,321
Annual discount at 10% rate.......................... (19,525) (7,990) (2,649)
-------- -------- --------
Standardized measure of discounted future net cash
flows.............................................. $ 89,749 $ 36,518 $ 26,672
======== ======== ========
Estimated future net cash flows for proved developed and proved undeveloped
reserves as of December 31, 2000, are as follows:
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
--------- ----------- --------
(IN THOUSANDS)
Undiscounted estimated future net cash flows from
proved reserves before income taxes................ $89,776 $19,498 $109,274
======= ======= ========
Present value of estimated future net cash flows from
proved reserves before income taxes, discounted at
10%................................................ $73,705 $16,044 $ 89,749
======= ======= ========
The following are the principal sources of change in the standardized
measure (in thousands):
2000 1999 1998
-------- -------- --------
Beginning of year.................................... $ 36,518 $ 26,672 $ 67,366
Sales and transfers of oil and natural gas
produced, net of production costs............... (33,203) (22,154) (22,131)
Net changes in prices and production costs......... 119,457 29,901 (32,129)
Extensions, discoveries and improved recovery, less
related costs................................... -- 544 --
Oil and natural gas development costs incurred
during the year................................. 172 615 120
Changes in estimated future development costs...... (511) (1,098) (443)
Revisions of previous quantity estimates........... 7,846 5,124 1,920
Purchase of reserves in place...................... -- -- 7,573
Accretion of discount.............................. 3,652 2,666 6,736
Changes in production rates, timing and other...... (44,182) (5,752) (2,340)
-------- -------- --------
End of year.......................................... $ 89,749 $ 36,518 $ 26,672
======== ======== ========
211
214
FLEXTREND DEVELOPMENT COMPANY, L.L.C.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
Development, Exploration, and Acquisition Expenditures
The following table details certain information regarding costs incurred in
our development, exploration, and acquisition activities during the years ended
December 31:
2000 1999 1998
---- ------ -------
(IN THOUSANDS)
Development costs........................................... $172 $3,018 $17,783
Proved acquisitions......................................... -- -- 16,945
Capitalized interest........................................ -- 200 328
---- ------ -------
Total capital expenditures........................ $172 $3,218 $35,056
==== ====== =======
Capitalized Costs
Capitalized costs relating to our natural gas and oil producing activities
and related accumulated depreciation, depletion and amortization were as follows
as of December 31:
2000 1999
-------- --------
(IN THOUSANDS)
Oil and natural gas properties
Proved properties......................................... $ 53,474 $ 41,030
Wells, equipment, and related facilities.................. 102,748 81,271
-------- --------
156,222 122,301
Less accumulated depreciation, depletion and amortization... 101,161 90,677
-------- --------
$ 55,061 $ 31,642
======== ========
212
215
CRYSTAL HOLDING, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FROM INCEPTION (SEPTEMBER 1, 2000) TO DECEMBER 31, 2000
213
216
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Crystal Holding, L.L.C.
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, of cash flows and of members'
capital present fairly, in all material respects, the financial position of
Crystal Holding, L.L.C. and its subsidiaries (the "Company") at December 31,
2000 and the results of their operations and their cash flows for the period
from inception (September 1, 2000) to December 31, 2000 in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement. An audit
includes examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statements, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
214
217
CRYSTAL HOLDING, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS)
DECEMBER 31,
2000
------------
ASSETS
Current assets
Accounts receivable, trade................................ $ 1,223
Gas storage imbalance..................................... 3,748
--------
Total current assets.............................. 4,971
--------
Property, plant and equipment
Natural gas storage facilities............................ 147,294
Construction work in progress............................. 25,320
--------
172,614
Less: accumulated depreciation............................ 1,868
--------
Property, plant and equipment, net..................... 170,746
--------
Total assets...................................... $175,717
========
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Advances from affiliate................................... $171,416
Gas storage imbalance..................................... 1,348
Property taxes payable.................................... 494
Other current liabilities................................. 267
--------
Total current liabilities......................... 173,525
--------
Commitments and contingencies
Members' capital............................................ 2,192
--------
Total liabilities and members' capital............ $175,717
========
See accompanying notes.
215
218
CRYSTAL HOLDING, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS)
FROM INCEPTION
(SEPTEMBER 1, 2000)
TO DECEMBER 31,
2000
-------------------
Natural gas storage revenues................................ $6,182
------
Operating expenses
Cost of sales............................................. 582
Operation and maintenance................................. 1,542
Depreciation.............................................. 1,868
------
3,992
------
Operating income............................................ 2,190
Other income................................................ 1
------
Net income.................................................. $2,191
======
See accompanying notes.
216
219
CRYSTAL HOLDING, L.L.C.
(A LIMITED LIABILITY COMPANY)
STATEMENT OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- ------
Members' capital at inception (September 1, 2000)...... $ 1 $-- $ 1
Net income........................................... 2,191 -- 2,191
------ --- ------
Members' capital at December 31, 2000.................. $2,192 $-- $2,192
====== === ======
See accompanying notes.
217
220
CRYSTAL HOLDING, L.L.C.
(A LIMITED LIABILITY COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
FROM INCEPTION
(SEPTEMBER 1, 2000)
TO DECEMBER 31, 2000
--------------------
Cash flows from operating activities:
Net income................................................ $ 2,191
Adjustments to reconcile net income to cash provided by
operating activities:
Depreciation........................................... 1,868
Working capital changes
Accounts receivable, trade........................... (1,223)
Gas storage imbalance................................ (2,400)
Property taxes payable............................... 494
Other current liabilities............................ 267
--------
Net cash provided by operating activities......... 1,197
--------
Cash flows from investing activities:
Capital expenditures...................................... (2,613)
--------
Net cash used in investing activities............. (2,613)
--------
Cash flows from financing activities:
Advances from affiliate................................... 1,416
--------
Net cash provided by financing activities......... 1,416
--------
Change in cash and cash equivalents:........................ --
Cash and cash equivalents:
Beginning of period....................................... --
--------
End of period............................................. $ --
========
Non cash investing activity:
Acquisition of natural gas storage facilities offset by an
increase in advances from affiliate.................... $170,000
See accompanying notes.
218
221
CRYSTAL HOLDING, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Crystal Holding, L.L.C. is a limited liability company established in 2000
for the purpose of owning natural gas storage facilities located in Mississippi.
Our Petal and Hattiesburg salt dome facilities currently have a natural gas
working capacity of 6.7 billion cubic feet (Bcf) on a combined basis, and are
capable of delivering in excess of 670 million cubic feet per day (MMcf/d) of
natural gas into three interstate pipelines, Koch Gateway Pipeline,
Transcontinental Gas Pipeline, or Transco, and Tennessee Gas Pipeline. A 6.8 Bcf
expansion is underway at these facilities, all of which is contractually
dedicated for the next 20 years to a subsidiary of Southern Company. The
expansion of the storage space and facilities has been approved by the Federal
Energy Regulatory Commission or, FERC, and is currently under construction. Also
currently waiting for FERC approval is a 60 mile pipeline addition which will
provide new interconnects with various customers.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Principles of Consolidation
Our consolidated financial statements are prepared on the accrual basis of
accounting in conformity with accounting principles generally accepted in the
United States and include the accounts of all majority owned, controlled
subsidiaries after the elimination of all significant intercompany accounts and
transactions.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Historically, our managing partner has not demanded
repayment of these amounts.
Allowance for Doubtful Accounts
Collectibility of accounts receivable is reviewed regularly and an
allowance is recorded as necessary, primarily under the specific identification
method. At December 31, 2000, no allowance for doubtful accounts was recorded.
Gas Imbalances
Gas imbalance receivables and payables reflect natural gas volumes owed to
Hattiesburg and Petal, or to their customers and are valued at an average
monthly index. Imbalances will be settled in kind through a fuel gas and
unaccounted for gas tracking mechanism, negotiated cash-outs between parties, or
are subject to a cash-out procedure.
219
222
CRYSTAL HOLDING, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Property, Plant and Equipment
Natural gas storage facilities are recorded at cost and are depreciated on
a straight-line basis over the estimated useful lives of the assets which
approximates 30 years. Repair and maintenance costs are expensed as incurred,
while additions, improvements and replacements are capitalized.
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation of the disposed assets with any
resulting gain of loss reflected in income.
We evaluate impairment of our regulated and non-regulated property, plant
and equipment in accordance with Statement of Financial Accounting Standards, or
SFAS, No. 121, Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of.
Revenue Recognition
Natural gas storage revenues consist primarily of fixed fees for natural
gas storage capacity and are recognized during the month in which the space is
reserved by the customer, regardless of how much space is actually used.
Interruptible revenues, which are generated by providing excess storage
capacity, are variable in nature and are recognized when the service is
provided.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
to provide guidance for revenue recognition issues and disclosure requirements.
SAB No. 101 offers guidelines, examples, and explanations for uncertain matters
relating to the recognition of revenue and became effective for us in the fourth
quarter of 2000. The adoption of SAB No. 101 did not have a material impact on
our financial position, results of operations, or cash flows.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximates their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Environmental Costs
Expenditures for ongoing compliance with environmental regulations that
relate to current operations are expensed or capitalized as appropriate.
Expenditures that relate to an existing condition caused by past operations, and
which do not contribute to current or future revenue generation, are expensed.
Liabilities are recorded when environmental assessments indicate that
remediation efforts are probable and the costs can be reasonably estimated. No
environmental liabilities existed at December 31, 2000 and 1999.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
220
223
CRYSTAL HOLDING, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash as defined
in our limited liability company agreement, to our members in accordance with
their respective membership interest. Available cash generally consists of all
cash receipts plus reductions in reserves less all cash disbursements and net
additions to reserves. Our managing partner has broad discretion to establish
reserves. Net income (loss) is allocated to our members in accordance with their
respective membership interests, subject to limitations on the allocation of
losses as defined in our limited liability company agreement.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments used for hedging
activities. It will require that we measure all derivative instruments at their
fair value, and classify them as either assets or liabilities on our balance
sheet, with a corresponding offset to income, or other comprehensive income,
depending on their designation, their intended use, or their ability to qualify
as hedges under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- MAJOR CUSTOMERS
Natural gas storage revenues realized from major customers and their
respective percent of total revenues were as follows (in thousands):
FROM INCEPTION
(SEPTEMBER 1, 2000)
TO DECEMBER 31, 2000
---------------------
% OF TOTAL
AMOUNT REVENUES
------- -----------
El Paso Merchant Energy..................................... $1,211 19.6%
NGC/Dynegy.................................................. 763 12.3%
------ ----
$1,974 31.9%
====== ====
NOTE 4 -- RELATED PARTY TRANSACTIONS
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and us, a
management fee is charged to us which is intended to approximate the amount of
resources allocated by El Paso in providing various operational, financial,
accounting and administrative services on behalf of us. The management fee was
$1.3 million for the period from inception (September 1, 2000) to December 31,
2000.
221
224
CRYSTAL HOLDING, L.L.C.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Revenues from Related Parties
Our Petal and Hattiesburg salt dome facilities provided interruptible
storage services to El Paso Merchant Energy, an affiliate of our non-managing
partner, during the four month period ended December 31, 2000.
NOTE 5 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner
guarantee both the Senior Subordinated Notes and the credit facility.
Legal Proceedings
We are named a defendant in a suit alleging that our managing partner
acquired us for excessive consideration. Brickell Partners v. William A. Wise et
al. seeks an accounting from us and an award of costs and attorneys fees. We
filed a motion to dismiss and provided opposing counsel with documentation
surrounding the transaction. We believe this case to be without merit.
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
222
225
GREEN CANYON PIPELINE COMPANY, L.P.
(A LIMITED LIABILITY COMPANY)
FINANCIAL STATEMENTS
WITH REPORT OF INDEPENDENT ACCOUNTANTS
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
223
226
REPORT OF INDEPENDENT ACCOUNTANTS
To the Members of Green Canyon Pipeline Company, L.P.:
In our opinion, the accompanying balance sheets and the related statements
of operations, of cash flows and of members' capital present fairly, in all
material respects, the financial position of Green Canyon Pipeline Company, L.P.
(the "Company") at December 31, 2000 and 1999, and the results of its operations
and its cash flows for each of the three years in the period ended December 31,
2000 in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility of the
Company's management; our responsibility is to express an opinion on these
financial statements based on our audits. We conducted our audits of these
statements in accordance with auditing standards generally accepted in the
United States of America, which require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe that our
audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP
Houston, Texas
March 28, 2001
224
227
GREEN CANYON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, DECEMBER 31,
2000 1999
------------ ------------
ASSETS
Current assets
Net accounts receivable, trade............................ $ 8,614 $ 1,077
Notes receivable.......................................... 50 --
Materials and supplies inventory.......................... 159 --
Other current assets...................................... 212 --
------- -------
Total current assets.............................. 9,035 1,077
------- -------
Property, plant and equipment
Pipelines................................................. 42,999 24,579
Platform equipment........................................ 23,773 23,564
Construction work in progress............................. 6,653 206
------- -------
73,425 48,349
Less: accumulated depreciation............................ 15,368 12,145
------- -------
Property, plant and equipment, net................ 58,057 36,204
Investments in unconsolidated affiliates.................... 47 (131)
------- -------
Total assets...................................... $67,139 $37,150
======= =======
LIABILITIES AND MEMBERS' CAPITAL
Current liabilities
Accounts payable, trade................................... $ 3,654 $ 288
Advances from affiliate................................... 27,446 36,015
Accrued expenses.......................................... 6,396 --
Other current liabilities................................. 78 35
------- -------
Total current liabilities......................... 37,574 36,338
Commitments and contingencies
Members' capital............................................ 29,565 812
------- -------
Total liabilities and members' capital............ $67,139 $37,150
======= =======
See accompanying notes.
225
228
GREEN CANYON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF OPERATIONS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
---------------------------
2000 1999 1998
------- ------- -------
Operating revenues
Transportation services................................... $ 3,392 $ 3,889 $ 5,376
Platform access fees...................................... 5,854 4,645 4,721
Natural gas sales......................................... 34,531 -- --
------- ------- -------
43,777 8,534 10,097
------- ------- -------
Operating expenses
Purchased natural gas costs............................... 28,842 -- --
Operation and maintenance................................. 2,054 1,476 2,354
Depreciation.............................................. 3,484 2,681 2,576
------- ------- -------
34,380 4,157 4,930
------- ------- -------
Operating income............................................ 9,397 4,377 5,167
Other income (expense)
Equity investment earnings................................ 21 868 1,304
Interest expense.......................................... (2,819) (2,317) (1,893)
Other income.............................................. 309 -- --
------- ------- -------
(2,489) (1,449) (589)
------- ------- -------
Net income.................................................. $ 6,908 $ 2,928 $ 4,578
======= ======= =======
See accompanying notes.
226
229
GREEN CANYON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF MEMBERS' CAPITAL
(IN THOUSANDS)
EL PASO ENERGY EL PASO ENERGY
PARTNERS, L.P. PARTNERS COMPANY TOTAL
-------------- ---------------- -------
Members' capital at January 1, 1998................... $ 4,902 $ 60 $ 4,962
Net income.......................................... 4,532 46 4,578
Distributions to members............................ (7,478) (76) (7,554)
------- ---- -------
Members' capital at December 31, 1998................. 1,956 30 1,986
Net income.......................................... 2,898 30 2,928
Distributions to members............................ (4,061) (41) (4,102)
------- ---- -------
Members' capital at December 31, 1999................. 793 19 812
Net income.......................................... 6,840 68 6,908
Contribution from member............................ 22,448 -- 22,448
Distributions to members............................ (785) (8) (793)
Other............................................... 190 -- 190
------- ---- -------
Members' capital at December 31, 2000................. $29,486 $ 79 $29,565
------- ---- -------
See accompanying notes.
227
230
GREEN CANYON PIPELINE COMPANY, LLC
(A LIMITED LIABILITY COMPANY)
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEAR ENDED DECEMBER 31,
----------------------------
2000 1999 1998
-------- ------- -------
Cash flows from operating activities:
Net income................................................ $ 6,908 $ 2,928 $ 4,578
Adjustments to reconcile net income to cash provided by
operating activities
Depreciation........................................... 3,484 2,681 2,576
Earnings from equity investments....................... (21) (868) (1,304)
Distributions from equity investments.................. -- 932 1,100
Other.................................................. (309) -- --
Working capital changes, net of effects of acquisitions
and non-cash distributions
Accounts receivable, trade............................. (5,035) (645) 423
Notes receivable....................................... 4 -- --
Materials and supplies inventory....................... 53 -- --
Accounts payable, trade................................ 7,217 283 (409)
Other current liabilities.............................. 43 -- (12)
-------- ------- -------
Net cash provided by operating activities......... 12,344 5,311 6,952
-------- ------- -------
Cash flows from investing activities:
Capital expenditures...................................... (676) (2,137) (645)
Proceeds from sale of equity investment................... -- 808 --
-------- ------- -------
Net cash used in investing activities............. (676) (1,329) (645)
-------- ------- -------
Cash flows from financing activities:
Advances from affiliate, net.............................. (11,065) 120 1,247
Distributions to members.................................. (793) (4,102) (7,554)
Other..................................................... 190 -- --
-------- ------- -------
Net cash provided by (used in) financing
activities...................................... (11,668) (3,982) (6,307)
-------- ------- -------
Change in cash and cash equivalents:........................ -- -- --
Cash and cash equivalents:
Beginning of period.................................... -- -- --
-------- ------- -------
End of period.......................................... $ -- $ -- $ --
======== ======= =======
Non-cash investing activity:
Contribution of EPIA................................... $ 22,448 -- --
See accompanying notes.
228
231
GREEN CANYON PIPELINE COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION AND NATURE OF BUSINESS
Green Canyon Pipeline Company, L.P. is a limited partnership established in
1993 for the purpose of gathering and transporting natural gas. Our system is a
natural gas gathering system consisting of 68 miles of 10 to 20-inch diameter
pipeline, which transports natural gas from the South Marsh Island, Eugene
Island, Garden Banks, and Green Canyon areas in the Gulf of Mexico to
Transcontinental Gas Pipeline Company's, or Transco's, South Lateral in South
Marsh Island Block 106. In March 2000, El Paso Intrastate-Alabama, or EPIA, was
contributed to us by our managing member. EPIA is a natural gas pipeline system
in the coal bed methane producing regions of Alabama. The system consists of
over 450 miles of pipeline. EPIA also provides marketing services through the
purchase and resale of natural gas by purchasing natural gas from regional
producers and others and selling natural gas to local distribution companies and
others.
El Paso Energy Partners, L.P. owns a 99 percent managing partner interest
in us and El Paso Energy Partners Company, an indirect wholly-owned subsidiary
of El Paso Corporation, owns a one percent non-managing interest in us. Our
managing partner changed its name to El Paso Energy Partners, L.P. in December
1999 from Leviathan Gas Pipeline Partners, L.P. El Paso Corporation is Energy
Partners' general partner and owns 27.8 percent of Energy Partners' common units
consisting of 8,953,764 units.
NOTE 2 -- SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Our financial statements are prepared on the accrual basis of accounting in
conformity with accounting principles generally accepted in the United States.
Our financial statements for previous periods include certain reclassifications
that were made to conform to the current year presentation. Such
reclassifications have no impact on reported net income or members' capital.
Cash and Cash Equivalents
We consider short-term investments purchased with an original maturity of
less than three months to be cash equivalents.
Allowance for Doubtful Accounts
We have established an allowance for losses on accounts which may become
uncollectible. Collectibility is reviewed regularly and the allowance is
adjusted as necessary, primarily under the specific identification method. At
December 31, 2000, the allowance was $0.4 million. There was no allowance at
December 31, 1999. Historically, our managing partner has not demanded repayment
of these amounts.
Affiliated Receivables and Payables
Our managing partner collects cash and makes disbursements on our behalf as
part of our operating activities. Additionally, our managing partner may make
advances to us for purposes of our capital investment. Such advances are
classified as current liabilities in the accompanying balance sheets given they
are payable on demand. Interest costs are allocated to us based on the average
balance of our affiliated payables times our managing partner's average interest
rate, which was 9.1% and 9.0% at December 31, 2000 and 1999, respectively.
Property, Plant and Equipment
Gathering pipelines, platforms, and related facilities are recorded at cost
and are depreciated on a straight-line basis over the estimated useful lives of
the assets which approximates 30 years for the gathering
229
232
GREEN CANYON PIPELINE COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
pipelines and 20 years for platforms and related facilities. Repair and
maintenance costs are expensed as incurred, while additions, improvements and
replacements are capitalized.
Estimated dismantlement, restoration and abandonment costs and estimated
residual salvage values are taken into account in determining depreciation
provisions of gathering pipelines, platforms, related facilities and oil and
natural gas properties.
Retirement, sales and disposals of assets are recorded by eliminating the
related costs and accumulated depreciation and amortization of the disposed
assets with any resulting gain of loss reflected in income.
We evaluate impairment of our property, plant and equipment in accordance
with Statement of Financial Accounting Standards, or SFAS, No. 121, Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed
Of.
Investment in Unconsolidated Affiliates
We account for our investment in companies where we have the ability to
exert significant influence over, but not control over operating and financial
policies, using the equity method with our proportionate share of net income
(loss) of the investee included in the accompanying statements of operations.
Any difference between the carrying amount of the investment and the underlying
equity in net assets of the investee is considered to be goodwill and amortized
on a straight-line basis over the estimated lives of the underlying net assets
of the respective investee.
Revenue Recognition
Revenue from pipeline transportation of hydrocarbons is recognized upon
receipt of the hydrocarbons into the pipeline systems. Revenue from platform
access and processing services is recognized in the period the services are
provided. Revenue from natural gas sales is recognized upon delivery.
In December 1999, the Securities and Exchange Commission issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements,
to provide guidance for revenue recognition issues and disclosure requirements.
SAB No. 101 offers guidelines, examples, and explanations for uncertain matters
relating to the recognition of revenue and became effective for us in the fourth
quarter of 2000. The adoption of SAB No. 101 did not have a material impact on
our financial position, results of operations, or cash flows.
Income Taxes
We are organized as a Delaware limited liability company and are treated as
a partnership for income tax purposes, and as a result, our income or loss for
income tax purposes is includable in the tax returns of each member.
Accordingly, no provision for income taxes has been recorded in the accompanying
financial statements.
Fair Value of Financial Instruments
The estimated fair value of all financial instruments approximate their
carrying amounts in the accompanying balance sheets due to the short-term
maturity of these instruments.
Cash Distributions and Income Allocation
We make quarterly distributions of 100 percent of available cash, as
defined in our limited liability company agreement, to our members in accordance
with their respective membership interest. Available cash generally consists of
all cash receipts plus reductions in reserves less all cash disbursements and
net additions to reserves. Our managing partner has broad discretion to
establish reserves. Net income (loss) is allocated to
230
233
GREEN CANYON PIPELINE COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
our members in accordance with their respective membership interests, subject to
limitations on the allocation of losses as defined in our limited liability
company agreement.
Management's Estimates
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Recent Pronouncements
In June of 1998, the Financial Accounting Standards Board, (FASB) issued
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. In
June of 1999, the FASB extended the adoption date of SFAS No. 133 through the
issuance of SFAS No. 137, Deferral of the Effective Date of SFAS 133. In June
2000, the FASB issued SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, which also amended SFAS No. 133.
SFAS No. 133 and its amendments and interpretations, establishes accounting and
reporting standards for derivative instruments, including derivative instruments
embedded in other contracts, and derivative instruments at their fair value, and
classify them as either assets or liabilities on our balance sheet, with a
corresponding offset to income, or other comprehensive income, depending on
their designation, their intended use, or their ability to qualify as hedges
under the standard.
We have adopted SFAS No. 133 beginning January 1, 2001, and have determined
there is no impact on us at this time. However, if we enter into any derivative
contracts, these transactions may have an impact on our financial statements.
NOTE 3 -- CONTRIBUTION FROM MANAGING PARTNER
In March 2000, the El Paso Intrastate-Alabama pipeline system, or EPIA, was
contributed to us by our managing partner. We accounted for the acquisition as a
purchase and assigned the purchase price to the assets and liabilities acquired
based upon the estimated fair value of those assets as of the acquisition date.
The following is summary information related to the acquisition (in thousands):
Fair value of assets acquired............................. $28,261
Fair value of liabilities assumed......................... (1,785)
-------
Net cash paid................................... $26,476
=======
The following information represents our results of operations on a
proforma basis for the years ended December 31, 2000 and 1999, as if we acquired
EPIA on January 1, 1999:
YEAR ENDED
DECEMBER 31,
-----------------
2000 1999
------- -------
(IN THOUSANDS)
Revenue..................................................... $52,260 $36,775
Operating income............................................ $10,340 $ 642
Net income.................................................. $ 7,358 $(3,422)
231
234
GREEN CANYON PIPELINE COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 4 -- EQUITY INVESTMENTS
We hold equity investments, which are accounted for using the equity method
of accounting. We held a 50 percent interest in West Cameron Dehydration through
September 1999. At that time, it was sold to our managing partner, who then
contributed it to Deepwater Holdings, a joint venture with ANR Pipeline Company.
In June 1999, we purchased a 50 percent interest in Gulf Processing Partners.
Summarized financial information for our investments is as follows:
2000 1999 1999
---------- ------------------------ -----------
GULF WEST GULF WEST
PROCESSING CAMERON PROCESSING CAMERON
PARTNERS DEHYDRATION PARTNERS DEHYDRATION
---------- ----------- ---------- -----------
Ownership interest................................ 50.00% 50.00% 50.00% 50.00%
====== ====== ====== ======
(IN THOUSANDS)
Operating results data:
Operating revenues.............................. $ 110 $1,934 $ 35 $2,796
Other income.................................... -- 23 -- 11
Operating expenses.............................. (51) (210) (18) (183)
Depreciation.................................... -- (12) -- (16)
Other expenses.................................. (19) -- -- --
------ ------ ------ ------
Net Income.............................. $ 40 $1,735 $ 17 $2,608
====== ====== ====== ======
Our Share:
Allocated income................................ $ 20 $ 868 $ 8 $1,304
Adjustments..................................... -- -- (8) --
------ ------ ------ ------
Earnings from equity investments................ $ 20 $ 868 $ -- $1,304
====== ====== ====== ======
Allocated distributions......................... $ -- $ 800 $ 132 $1,100
====== ====== ====== ======
Financial position data:
Current assets.................................. $ 111 $ -- $ 376 $ 848
Non-current assets.............................. -- -- -- 647
Current liabilities............................. 27 -- 44 13
Long-term debt.................................. -- -- -- --
Other non-current liabilities................... -- -- -- --
NOTE 5 -- MAJOR CUSTOMERS
Transportation services revenues and platform access fees realized from
major customers and their respective percent of total revenues were as follows:
FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
2000 1999 1998
-------------------- ------------------- -------------------
% OF TOTAL % OF TOTAL % OF TOTAL
AMOUNT REVENUES AMOUNT REVENUES AMOUNT REVENUES
------- ---------- ------ ---------- ------ ----------
Alabama Gas Corporation................ $17,371 39.7% $ -- -- $ -- --
El Paso Merchant Energy................ 4,900 11.2% -- -- -- --
Flextrend Development Company,
L.L.C. .............................. 4,158 9.5% 4,295 50.3% 4,720 46.8%
Texaco Gas Marketing, Inc. ............ -- -- 1,187 13.9% 1,667 16.5%
------- ---- ------ ---- ------ ----
$26,429 60.4% $5,482 64.2% $6,387 63.3%
======= ==== ====== ==== ====== ====
232
235
GREEN CANYON PIPELINE COMPANY, L.P.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 6 -- RELATED PARTY TRANSACTIONS
Revenues Received from Related Parties
EPIA's sales of natural gas and transportation services include
transactions with affiliates of our non-managing partner, including El Paso
Merchant Energy, and Flextrend Development Company, an affiliate of our managing
partner. For the year ended December 31, 2000, EPIA had approximately $4.7
million of natural gas sales and approximately $4.3 million of transportation
services to affiliates.
For the years ended December 31, 2000, 1999 and 1998, we received revenue
of approximately $4.2 million, $4.3 million and $4.7 million, respectively, from
Flextrend Development Company for platform access and processing fees.
Purchased Natural Gas Costs
EPIA's purchases of natural gas include transactions with El Paso Merchant
Energy. For the year 2000, EPIA had approximately $14.3 million in natural gas
purchases from affiliates.
Management Fees
Substantially all of the individuals who perform the day-to-day financial,
administrative, accounting and operational functions for us, as well as those
who are responsible for directing and controlling us, are currently employed by
El Paso Corporation. Under a management agreement between El Paso and our
managing partner, a management fee is charged to our managing partner which is
intended to approximate the amount of resources allocated by El Paso in
providing various operational, financial, accounting and administrative services
on behalf of our managing partner and us. For each of the years ended December
31, 2000, 1999 and 1998, the management fee was $0.3 million, $0.7 million and
$0.5 million, respectively. The management agreement expires on June 30, 2002,
and may be terminated thereafter upon 90 days notice by either party. Under the
terms of our managing partners' agreement our managing partner is entitled to
reimbursement of all reasonable general and administrative expenses and other
reasonable expenses incurred by our managing partner and its affiliates for, or
on our behalf, including, but not limited to, amounts payable by our managing
partner to El Paso under it management agreement.
We also entered into an agreement with El Paso Field Services Company
during 2000 to operate EPIA. For the year ended December 31, 2000, we were
charged a management fee of approximately $2.7 million pursuant to our
management and operations agreements. All fees paid under these contracts
approximate actual costs incurred.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Financing Transactions
Our managing partner has $175 million of Senior Subordinated Notes and a
$500 million revolving credit facility. As a subsidiary of our managing partner,
we, along with our affiliates, and our one percent non-managing partner
guarantee both the Senior Subordinated Notes and the credit facility.
Legal Proceedings
In the ordinary course of business, we are subject to various laws and
regulations. In the opinion of management, compliance with existing laws and
regulations will not materially affect our financial position, results of
operations, or cash flows.
233
236
EL PASO ENERGY PARTNERS, L.P.
EXHIBIT LIST
DECEMBER 31, 2000
Each exhibit identified below is filed as a part of this Annual Report.
Exhibits included in this filing are designated by an asterisk; all exhibits not
so designated are incorporated herein by reference to a prior filing as
indicated. Exhibits designated with a "+" constitute a management contract or
compensatory plan or arrangement required to be filed as an exhibit to this
report pursuant to Item 14(c) of Form 10-K.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 -- Certificate of Limited Partnership of El Paso Energy
Partners (filed as Exhibit 3.1 to our Registration
Statement on Form S-1, File No. 33-55642).
3.2 -- Second Amended and Restated Agreement of Limited
Partnership effective as of August 31, 2000 (titled as
Exhibit 3.8 to our Current Report on Form 8-K dated March
6, 2001).
3.3 -- Amendment Number 3 to the Amended and Restated Agreement
of Limited Partnership of El Paso Energy Partners (filed
as Exhibit 3.2 to our Current Report on Form 8-K dated
March 31, 2000).
3.4 -- Second Amended and Restated Agreement of Limited
Partnership effective as of August 31, 2000 (filed as
Exhibit 3.B to our Current Report on Form 8-K dated March
6, 2001).
4.1 -- A/B Exchange Registration Rights Agreement dated as of
May 27, 1999 among El Paso Energy Partners, L.P., El Paso
Energy Partners Finance Corporation, the Subsidiary
Guarantors, Donaldson, Lufkin & Jenrette Securities
Corporation, and Chase Securities Inc. (filed as Exhibit
4.7 to our Registration Statement on Form S-4, filed on
June 21, 1999, File No. 333-81143).
4.2 -- Indenture dated as of May 27, 1999 among El Paso Energy
Partners, L.P., El Paso Energy Partners Finance
Corporation, the Subsidiary Guarantors and Chase Bank of
Texas, as Trustee (filed as Exhibit 4.1 to our
Registration Statement on Form S-4, filed on June 24,
1999, File No. 333-81143); First Supplemental Indenture
dated as of June 30, 1999 (filed as Exhibit 4.2 to the
Partnership's Amendment No. 1 to Registration Statement
on Form S-4, filed August 27, 1999 File No. 333-81143);
Second Supplemental Indenture dated as of July 27, 1999
(filed as Exhibit 4.3 to our Amendment No. 1 to
Registration Statement on Form S-4, filed August 27,
1999, File No. 333-81143); Third Supplemental Indenture
dated as of March 21, 2000, to the Indenture dated as of
May 27, 1999, among El Paso Energy Partners, L.P., El
Paso Energy Partners Finance Corporation, as the issuers,
and the subsidiaries party thereto, as subsidiary
guarantors, and Chase Bank of Texas, N.A., as trustee
(filed as Exhibit 4.7.1 of our 2000 Second Quarter 10-Q).
4.3* -- Registration Rights Agreement dated as of August 28, 2000
by and between Crystal Gas Storage, Inc. and El Paso
Energy Partners, L.P.
234
237
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 -- First Amended and Restated Management Agreement, dated
June 27, 1994 and effective as of July 1, 1992, between
DeepTech International Inc. and the General Partner
(filed as Exhibit 10.1 to DeepTech's Form 10-K the year
ended December 31, 1994, File No. 0-23934); First
Amendment to First Amended and Restated Management
Agreement between DeepTech and General Partner (filed as
Exhibit 10.76 to DeepTech's Registration Statement on
Form S-1, filed on January 23, 1995, File No. 33-88688);
Second Amendment to First Amended and Restated Management
Agreement between DeepTech and General Partner (filed as
Exhibit 10.18 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, filed on April 1,
1995, File No. 1-11680); Third Amendment to First Amended
and Restated Management Agreement between DeepTech and
General Partner (filed as Exhibit 10.4 to our
Registration Statement on Form S-4, filed on June 21,
1999, File No. 333-81143); Fourth Amendment to First
Amended and Restated Management Agreement between
DeepTech and General Partner (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, filed on August 12, 1997,
File No. 1-11680); Fifth Amendment to First Amended and
Restated Management Agreement between DeepTech and
General Partner (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1997, filed on November 14, 1997, File No.
1-11680); Sixth Amendment to First Amended and Restated
Management Agreement between DeepTech International Inc.
and the General Partner (filed as Exhibit 10.2 to our
Form 10-K the year ended December 31, 1998, filed on
March 30, 1999, File No. 1-11680, the 1998 Form 10-K).
10.2 -- Fourth Amended and Restated Credit Agreement dated June
30, 2000, among El Paso Energy Partners L.P., El Paso
Energy Partners Finance Corporation, Credit Lyonnais, as
Syndication Agent, BankBoston N.A., as Documentation
Agent, the Chase Manhattan Bank, as Administrative Agent,
and, as applicable, the banks and other institutions
parties thereto (filed as Exhibit 10.1 to our Current
Report on Form 8-K dated July 14, 2000).
10.2.1* -- First Amendment to Fourth Amended and Restated Credit
Agreement dated as of January 8, 2001 by and among El
Paso Energy Partners, El Paso Energy Partners Finance
Corporation, El Paso Energy Partners Company, each of the
Subsidiary Guarantors, Credit Lyonnais, as Syndication
Agent, BankBoston, N.A., as Documentation Agent, The
Chase Manhattan Bank, as Administrative Agent, and the
several banks and other financial institutions
signatories thereto.
10.3 -- Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C., a subsidiary of El Paso Energy Partners (filed as
Exhibit 10.1 to our 1998 Third Quarter 10-Q).
10.4 -- Contribution Agreement between El Paso Energy Partners
and El Paso Field Services Company (filed as Exhibit A to
our Schedule 14A (Rule 14A-101) Proxy Statement effective
February 9, 1998).
+10.5 -- El Paso Energy Partners 1998 Unit Option Plan for
Non-Employee Directors Effective as of August 14, 1998
(filed as Exhibit 10.2 to our 1998 Third Quarter Form
10-Q); Amendment No. 1 to the El Paso Energy Partners,
L.P. 1998 Unit Option Plan for Non-Employee Directors
(filed as Exhibit 10.7.1. to our 2000 Second Quarter
10-Q).
+10.6 -- El Paso Energy Partners 1998 Omnibus Compensation Plan,
Amended and Restated, effective as of January 1, 1999
(filed as Exhibit 10.9 to our 1998 10-K, filed on March
29, 1999, File No. 1-11680); Amendment No. 1 to the El
Paso Energy Partner's 1998 Omnibus Compensation Plan
(filed as Exhibit 10.8.1 to our 2000 Second Quarter
10-Q).
235
238
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.7 -- Purchase Agreement dated as of May 24, 1999 among (i)
Leviathan Gas Pipeline Partners, L.P., (ii) Leviathan
Finance Corporation, (iii) Delos Offshore Company,
L.L.C., Ewing Bank Gathering Company, L.L.C., Flextrend
Development Company, L.L.C., Green Canyon Pipe Line
Company, L.L.C., Leviathan Oil Transport Systems, L.L.C.,
Manta Ray Gathering Company, L.L.C., Poseidon Pipeline
Company, L.L.C., Sailfish Pipeline Company, L.L.C.,
Stingray Holding, L.L.C., Delaware Transco Hydrocarbons
Company, L.L.C., Texam Offshore Gas Transmission, L.L.C.,
Transco Offshore Pipeline Company, L.L.C., Tarpon
Transmission Company, Viosca Knoll Gathering Company,
VK-Main Pass Gathering Company, L.L.C., VK Deepwater
Gathering Company, L.L.C. and the Subsidiary Guarantors
from time to time party thereto (collectively, the
"Subsidiary Guarantors"), (iv) Donaldson, Lufkin &
Jenrette Securities Corporation, and (v) Chase Securities
Inc. (filed as Exhibit 1.1 to our Registration Statement
on Form S-4, filed on June 21, 1999, File No. 333-81143).
10.8 -- Purchase and Sale Agreement between Natural Gas Pipeline
Company of America as Seller and us as Buyer dated as of
June 30, 1999 (filed as Exhibit 10.1 to our Current
Report on Form 8-K, filed on July 15, 1999, File No.
1-11680).
10.9 -- Farmout Agreement dated October 25, 1999 by and between
Flextrend Development Company, L.L.C. and El Paso
Production GOM, Inc. (filed as Exhibit 10.15 to our
Current Report on Form 8-K, filed on November 15, 1999,
File No. 1-11680).
10.10 -- Agreement and Plan of Merger dated March 20, 2000, by and
among El Paso Energy Partners, L.P., Green Canyon Pipe
Line Company, L.L.C., El Paso Merchant Energy Holding
Company, and El Paso Intrastate-Alabama, Inc. (filed as
Exhibit 10.13 to our 1999 Form 10-K).
10.11 -- Limited Liability Company Agreement for Poseidon Oil
Pipeline Company, L.L.C. dated February 14, 1996; First
Amendment to the Limited Liability Company Agreement for
Poseidon Oil Pipeline Company, L.L.C. dated February 14,
1996 (filed as Exhibit 10.14 to our 2000 Second Quarter
10-Q).
10.12 -- Limited Liability Company Agreement of Neptune Pipeline
Company, L.L.C. dated January 17, 1997 (filed as Exhibit
10.15 to our 2000 Second Quarter 10-Q).
10.13 -- Limited Liability Company Agreement of Ocean Breeze
Pipeline Company, L.L.C. dated January 17, 1997 (filed as
Exhibit 10.16 to our 2000 Second Quarter 10-Q).
10.14 -- Limited Liability Company Agreement of Nemo Gathering
Company, L.L.C. dated July 26, 1999 (filed as Exhibit
10.17 to our 2000 Second Quarter 10-Q).
10.15 -- Limited Liability Company Agreement of Deepwater
Holdings, L.L.C. dated September 30, 1999 (filed as
Exhibit 10.18 to our 2000 Second Quarter 10-Q).
10.16 -- Purchase and Sale Agreement dated as of September 30,
1999 between Leviathan Deepwater, L.L.C. and ANR Western
Gulf Holdings, L.L.C. (filed as Exhibit 10.19 to our 2000
Second Quarter 10-Q).
10.17 -- Fabrication Agreement dated as of July 16, 1999 by and
between Delos Offshore Company and MODEC International
LLC; Amendment No. 1 to the Fabrication Agreement dated
as of August 31, 1999 by and between Delos Offshore
Company and MODEC International LLC (filed as Exhibit
10.20 to our 2000 Second Quarter 10-Q).
10.18 -- Credit Agreement dated as of August 23, 2000 by and among
Argo, L.L.C., the lenders party thereto, the Chase
Manhattan Bank, as administrative agent, First Union
National Bank, as syndication agent, Bank One, N.A., as
documentation agent, and Chase Securities Inc., as
arranger (filed as Exhibit 10.14 to our Third Quarter
10-Q).
10.19 -- Sponsor Agreement dated as of August 23, 2000, by El Paso
Energy Partners, L.P., and the Chase Manhattan Bank, as
administrative agent. (filed as Exhibit 10.15 to our 2000
Third Quarter 10-Q).
236
239
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.20 -- Agreement and Plan of Merger dated as of August 28, 2000
by and among El Paso Energy Partners, L.P., as Parent, El
Paso Partners Acquisition, L.L.C., Crystal Holding, Inc.,
and Crystal Gas Storage, Inc. (filed as Exhibit 10.16 to
our 2000 Third Quarter 10-Q).
10.21* -- Purchase and Sale Agreement dated as of December 8, 2000
by and among El Paso Energy Partners, Green Canyon Pipe
Line Company, L.P., and Williams Field Services-Gulf
Coast Company, L.P.
10.22* -- Purchase and Sale Agreement dated as of December 8, 2000
by and among Deepwater Holdings, L.L.C., Enterprise
Products Operating L.P., Shell Gas Transmission, LLC and
Starfish Pipeline Company, L.L.C.
10.23* -- Purchase and Sale Agreement dated as of December 8, 2000
by and among El Paso Energy Partners, El Paso Energy
Partners Company and Enterprise Products Operating L.P.
21* -- List of Subsidiaries of El Paso Energy Partners.
23* -- Consent of Independent Accountants.
(b) REPORTS ON FORM 8-K
We filed a Current Report on Form 8-K, dated July 14, 2000, with regard to
our pending acquisition of the natural gas storage businesses of Crystal Gas
Storage, Inc. and the amendment of our senior secured revolving credit facility.
We filed a Current Report on Form 8-K, dated July 20, 2000, reporting
unaudited pro forma condensed combined financial statements reflecting our
pending acquisition of the natural gas storage businesses of Crystal Gas
Storage, Inc.
We filed a Current Report on Form 8-K, dated July 27, 2000, regarding the
underwriting agreement related to our public offering of common units that
closed on July 28, 2000.
We filed a Current Report on Form 8-K dated September 11, 2000, updating
pro forma financial statements relating to the acquisition of the salt dome
natural gas storage business of Crystal Gas Storage Inc.
We filed a Current Report on Form 8-K, dated January 29, 2001, announcing
the divestiture of various Gulf of Mexico assets.
We filed a Current Report on Form 8-K/A dated February 13, 2001, providing
pro forma financial statements relating to the divestiture of various Gulf of
Mexico assets.
We filed a Current Report on Form 8-K dated March 15, 2001, announcing the
purchase of natural gas liquids transportation and fractionation assets.
We filed a Current Report on Form 8-K dated March 21, 2001, providing
additional risk factors relating to our new fractionation and storage
businesses.
We filed a Current Report on Form 8-K dated March 27, 2001, providing the
underwriting agreement for our March 2001 prospectus supplement.
UNDERTAKING
We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph
(4)(iii), to furnish to the Securities and Exchange Commission upon request all
constituent instruments defining the rights of holders of our long-term debt and
our consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not exceed 10
percent of our total consolidated assets.
237
240
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, as amended, El Paso Energy Partners, L.P. has duly caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized on the 30th day of March 2001.
EL PASO ENERGY PARTNERS, L.P.
(Registrant)
By: EL PASO ENERGY PARTNERS COMPANY,
its General Partner
By: /s/ ROBERT G. PHILLIPS
-------------------------------------
Robert G. Phillips
Chief Executive Officer
NAME TITLE DATE
---- ----- ----
/s/ WILLIAM A. WISE Chairman of the Board and Director
- -----------------------------------------------------
William A. Wise
/s/ ROBERT G. PHILLIPS Chief Executive Officer and
- ----------------------------------------------------- Director
Robert G. Phillips
/s/ KEITH B. FORMAN Chief Financial Officer and Vice
- ----------------------------------------------------- President
Keith B. Forman
/s/ JAMES H. LYTAL President and Director
- -----------------------------------------------------
James H. Lytal
/s/ D. MARK LELAND Senior Vice President and
- ----------------------------------------------------- Controller (Chief Accounting
D. Mark Leland Officer)
/s/ H. BRENT AUSTIN Executive Vice President and
- ----------------------------------------------------- Director
H. Brent Austin
/s/ MICHAEL B. BRACY Director
- -----------------------------------------------------
Michael B. Bracy
/s/ H. DOUGLAS CHURCH Director
- -----------------------------------------------------
H. Douglas Church
/s/ MALCOLM WALLOP Director
- -----------------------------------------------------
Malcolm Wallop
238
241
EL PASO ENERGY PARTNERS, L.P.
INDEX TO EXHIBITS
DECEMBER 31, 2000
Each exhibit identified below is filed as a part of this Annual Report.
Exhibits included in this filing are designated by an asterisk; all exhibits not
so designated are incorporated herein by reference to a prior filing as
indicated. Exhibits designated with a "+" constitute a management contract or
compensatory plan or arrangement required to be filed as an exhibit to this
report pursuant to Item 14(c) of Form 10-K.
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
3.1 -- Certificate of Limited Partnership of El Paso Energy
Partners (filed as Exhibit 3.1 to our Registration
Statement on Form S-1, File No. 33-55642).
3.2 -- Second Amended and Restated Agreement of Limited
Partnership effective as of August 31, 2000 (titled as
Exhibit 3.8 to our Current Report on Form 8-K dated March
6, 2001).
3.3 -- Amendment Number 3 to the Amended and Restated Agreement
of Limited Partnership of El Paso Energy Partners (filed
as Exhibit 3.2 to our Current Report on Form 8-K dated
March 31, 2000).
3.4 -- Second Amended and Restated Agreement of Limited
Partnership effective as of August 31, 2000 (filed as
Exhibit 3.B to our Current Report on Form 8-K dated March
6, 2001).
4.1 -- A/B Exchange Registration Rights Agreement dated as of
May 27, 1999 among El Paso Energy Partners, L.P., El Paso
Energy Partners Finance Corporation, the Subsidiary
Guarantors, Donaldson, Lufkin & Jenrette Securities
Corporation, and Chase Securities Inc. (filed as Exhibit
4.7 to our Registration Statement on Form S-4, filed on
June 21, 1999, File No. 333-81143).
4.2 -- Indenture dated as of May 27, 1999 among El Paso Energy
Partners, L.P., El Paso Energy Partners Finance
Corporation, the Subsidiary Guarantors and Chase Bank of
Texas, as Trustee (filed as Exhibit 4.1 to our
Registration Statement on Form S-4, filed on June 24,
1999, File No. 333-81143); First Supplemental Indenture
dated as of June 30, 1999 (filed as Exhibit 4.2 to the
Partnership's Amendment No. 1 to Registration Statement
on Form S-4, filed August 27, 1999 File No. 333-81143);
Second Supplemental Indenture dated as of July 27, 1999
(filed as Exhibit 4.3 to our Amendment No. 1 to
Registration Statement on Form S-4, filed August 27,
1999, File No. 333-81143); Third Supplemental Indenture
dated as of March 21, 2000, to the Indenture dated as of
May 27, 1999, among El Paso Energy Partners, L.P., El
Paso Energy Partners Finance Corporation, as the issuers,
and the subsidiaries party thereto, as subsidiary
guarantors, and Chase Bank of Texas, N.A., as trustee
(filed as Exhibit 4.7.1 of our 2000 Second Quarter 10-Q).
4.3* -- Registration Rights Agreement dated as of August 28, 2000
by and between Crystal Gas Storage, Inc. and El Paso
Energy Partners, L.P.
242
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.1 -- First Amended and Restated Management Agreement, dated
June 27, 1994 and effective as of July 1, 1992, between
DeepTech International Inc. and the General Partner
(filed as Exhibit 10.1 to DeepTech's Form 10-K the year
ended December 31, 1994, File No. 0-23934); First
Amendment to First Amended and Restated Management
Agreement between DeepTech and General Partner (filed as
Exhibit 10.76 to DeepTech's Registration Statement on
Form S-1, filed on January 23, 1995, File No. 33-88688);
Second Amendment to First Amended and Restated Management
Agreement between DeepTech and General Partner (filed as
Exhibit 10.18 to our Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, filed on April 1,
1995, File No. 1-11680); Third Amendment to First Amended
and Restated Management Agreement between DeepTech and
General Partner (filed as Exhibit 10.4 to our
Registration Statement on Form S-4, filed on June 21,
1999, File No. 333-81143); Fourth Amendment to First
Amended and Restated Management Agreement between
DeepTech and General Partner (filed as Exhibit 10.1 to
our Quarterly Report on Form 10-Q for the quarterly
period ended June 30, 1997, filed on August 12, 1997,
File No. 1-11680); Fifth Amendment to First Amended and
Restated Management Agreement between DeepTech and
General Partner (filed as Exhibit 10.1 to our Quarterly
Report on Form 10-Q for the quarterly period ended
September 30, 1997, filed on November 14, 1997, File No.
1-11680); Sixth Amendment to First Amended and Restated
Management Agreement between DeepTech International Inc.
and the General Partner (filed as Exhibit 10.2 to our
Form 10-K the year ended December 31, 1998, filed on
March 30, 1999, File No. 1-11680, the 1998 Form 10-K).
10.2 -- Fourth Amended and Restated Credit Agreement dated June
30, 2000, among El Paso Energy Partners L.P., El Paso
Energy Partners Finance Corporation, Credit Lyonnais, as
Syndication Agent, BankBoston N.A., as Documentation
Agent, the Chase Manhattan Bank, as Administrative Agent,
and, as applicable, the banks and other institutions
parties thereto (filed as Exhibit 10.1 to our Current
Report on Form 8-K dated July 14, 2000).
10.2.1* -- First Amendment to Fourth Amended and Restated Credit
Agreement dated as of January 8, 2001 by and among El
Paso Energy Partners, El Paso Energy Partners Finance
Corporation, El Paso Energy Partners Company, each of the
Subsidiary Guarantors, Credit Lyonnais, as Syndication
Agent, BankBoston, N.A., as Documentation Agent, The
Chase Manhattan Bank, as Administrative Agent, and the
several banks and other financial institutions
signatories thereto.
10.3 -- Redemption Agreement dated February 27, 1998 between
Tatham Offshore, Inc. and Flextrend Development Company,
L.L.C., a subsidiary of El Paso Energy Partners (filed as
Exhibit 10.1 to our 1998 Third Quarter 10-Q).
10.4 -- Contribution Agreement between El Paso Energy Partners
and El Paso Field Services Company (filed as Exhibit A to
our Schedule 14A (Rule 14A-101) Proxy Statement effective
February 9, 1998).
+10.5 -- El Paso Energy Partners 1998 Unit Option Plan for
Non-Employee Directors Effective as of August 14, 1998
(filed as Exhibit 10.2 to our 1998 Third Quarter Form
10-Q); Amendment No. 1 to the El Paso Energy Partners,
L.P. 1998 Unit Option Plan for Non-Employee Directors
(filed as Exhibit 10.7.1. to our 2000 Second Quarter
10-Q).
+10.6 -- El Paso Energy Partners 1998 Omnibus Compensation Plan,
Amended and Restated, effective as of January 1, 1999
(filed as Exhibit 10.9 to our 1998 10-K, filed on March
29, 1999, File No. 1-11680); Amendment No. 1 to the El
Paso Energy Partner's 1998 Omnibus Compensation Plan
(filed as Exhibit 10.8.1 to our 2000 Second Quarter
10-Q).
243
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.7 -- Purchase Agreement dated as of May 24, 1999 among (i)
Leviathan Gas Pipeline Partners, L.P., (ii) Leviathan
Finance Corporation, (iii) Delos Offshore Company,
L.L.C., Ewing Bank Gathering Company, L.L.C., Flextrend
Development Company, L.L.C., Green Canyon Pipe Line
Company, L.L.C., Leviathan Oil Transport Systems, L.L.C.,
Manta Ray Gathering Company, L.L.C., Poseidon Pipeline
Company, L.L.C., Sailfish Pipeline Company, L.L.C.,
Stingray Holding, L.L.C., Delaware Transco Hydrocarbons
Company, L.L.C., Texam Offshore Gas Transmission, L.L.C.,
Transco Offshore Pipeline Company, L.L.C., Tarpon
Transmission Company, Viosca Knoll Gathering Company,
VK-Main Pass Gathering Company, L.L.C., VK Deepwater
Gathering Company, L.L.C. and the Subsidiary Guarantors
from time to time party thereto (collectively, the
"Subsidiary Guarantors"), (iv) Donaldson, Lufkin &
Jenrette Securities Corporation, and (v) Chase Securities
Inc. (filed as Exhibit 1.1 to our Registration Statement
on Form S-4, filed on June 21, 1999, File No. 333-81143).
10.8 -- Purchase and Sale Agreement between Natural Gas Pipeline
Company of America as Seller and us as Buyer dated as of
June 30, 1999 (filed as Exhibit 10.1 to our Current
Report on Form 8-K, filed on July 15, 1999, File No.
1-11680).
10.9 -- Farmout Agreement dated October 25, 1999 by and between
Flextrend Development Company, L.L.C. and El Paso
Production GOM, Inc. (filed as Exhibit 10.15 to our
Current Report on Form 8-K, filed on November 15, 1999,
File No. 1-11680).
10.10 -- Agreement and Plan of Merger dated March 20, 2000, by and
among El Paso Energy Partners, L.P., Green Canyon Pipe
Line Company, L.L.C., El Paso Merchant Energy Holding
Company, and El Paso Intrastate-Alabama, Inc. (filed as
Exhibit 10.13 to our 1999 Form 10-K).
10.11 -- Limited Liability Company Agreement for Poseidon Oil
Pipeline Company, L.L.C. dated February 14, 1996; First
Amendment to the Limited Liability Company Agreement for
Poseidon Oil Pipeline Company, L.L.C. dated February 14,
1996 (filed as Exhibit 10.14 to our 2000 Second Quarter
10-Q).
10.12 -- Limited Liability Company Agreement of Neptune Pipeline
Company, L.L.C. dated January 17, 1997 (filed as Exhibit
10.15 to our 2000 Second Quarter 10-Q).
10.13 -- Limited Liability Company Agreement of Ocean Breeze
Pipeline Company, L.L.C. dated January 17, 1997 (filed as
Exhibit 10.16 to our 2000 Second Quarter 10-Q).
10.14 -- Limited Liability Company Agreement of Nemo Gathering
Company, L.L.C. dated July 26, 1999 (filed as Exhibit
10.17 to our 2000 Second Quarter 10-Q).
10.15 -- Limited Liability Company Agreement of Deepwater
Holdings, L.L.C. dated September 30, 1999 (filed as
Exhibit 10.18 to our 2000 Second Quarter 10-Q).
10.16 -- Purchase and Sale Agreement dated as of September 30,
1999 between Leviathan Deepwater, L.L.C. and ANR Western
Gulf Holdings, L.L.C. (filed as Exhibit 10.19 to our 2000
Second Quarter 10-Q).
10.17 -- Fabrication Agreement dated as of July 16, 1999 by and
between Delos Offshore Company and MODEC International
LLC; Amendment No. 1 to the Fabrication Agreement dated
as of August 31, 1999 by and between Delos Offshore
Company and MODEC International LLC (filed as Exhibit
10.20 to our 2000 Second Quarter 10-Q).
10.18 -- Credit Agreement dated as of August 23, 2000 by and among
Argo, L.L.C., the lenders party thereto, the Chase
Manhattan Bank, as administrative agent, First Union
National Bank, as syndication agent, Bank One, N.A., as
documentation agent, and Chase Securities Inc., as
arranger (filed as Exhibit 10.14 to our Third Quarter
10-Q).
10.19 -- Sponsor Agreement dated as of August 23, 2000, by El Paso
Energy Partners, L.P., and the Chase Manhattan Bank, as
administrative agent. (filed as Exhibit 10.15 to our 2000
Third Quarter 10-Q).
244
EXHIBIT NUMBER DESCRIPTION
-------------- -----------
10.20 -- Agreement and Plan of Merger dated as of August 28, 2000
by and among El Paso Energy Partners, L.P., as Parent, El
Paso Partners Acquisition, L.L.C., Crystal Holding, Inc.,
and Crystal Gas Storage, Inc. (filed as Exhibit 10.16 to
our 2000 Third Quarter 10-Q).
10.21* -- Purchase and Sale Agreement dated as of December 8, 2000
by and among El Paso Energy Partners, Green Canyon Pipe
Line Company, L.P., and Williams Field Services-Gulf
Coast Company, L.P.
10.22* -- Purchase and Sale Agreement dated as of December 8, 2000
by and among Deepwater Holdings, L.L.C., Enterprise
Products Operating L.P., Shell Gas Transmission, LLC and
Starfish Pipeline Company, L.L.C.
10.23* -- Purchase and Sale Agreement dated as of December 8, 2000
by and among El Paso Energy Partners, El Paso Energy
Partners Company and Enterprise Products Operating L.P.
21* -- List of Subsidiaries of El Paso Energy Partners.
23* -- Consent of Independent Accountants.
UNDERTAKING
We hereby undertake, pursuant to Regulation S-K, Item 601(b), paragraph
(4)(iii), to furnish to the Securities and Exchange Commission upon request all
constituent instruments defining the rights of holders of our long-term debt and
our consolidated subsidiaries not filed herewith for the reason that the total
amount of securities authorized under any of such instruments does not exceed 10
percent of our total consolidated assets.