EL PASO ENERGY PARTNERS LP - 10-Q Quarterly Report

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

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FORM 10-Q

(MARK ONE)

[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

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 (I.R.S. Employer
of Incorporation or Organization) Identification No.)

EL PASO BUILDING
1001 LOUISIANA STREET
HOUSTON, TEXAS 77002
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (713) 420-2600

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 [ ]

The registrant had 44,030,314 common units outstanding as of August 9,
2002.

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PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

EL PASO ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
(UNAUDITED)

See accompanying notes.

1

EL PASO ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT UNIT AMOUNTS)
(UNAUDITED)

See accompanying notes.

2

EL PASO ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)

See accompanying notes.

3

EL PASO ENERGY PARTNERS, L.P.

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
AND CHANGES IN ACCUMULATED OTHER COMPREHENSIVE INCOME
(IN THOUSANDS)
(UNAUDITED)

COMPREHENSIVE INCOME

ACCUMULATED OTHER COMPREHENSIVE LOSS

See accompanying notes.

4

EL PASO ENERGY PARTNERS, L.P.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

We prepared this Quarterly Report on Form 10-Q under the rules and
regulations of the United States Securities and Exchange Commission (SEC).
Because this is an interim period filing presented using a condensed format, it
does not include all of the disclosures required by generally accepted
accounting principles. You should read it along with our current report on Form
8-K/A dated July 19, 2002, which includes a summary of our significant
accounting policies and other disclosures. The financial statements as of June
30, 2002, and for the quarters and six months ended June 30, 2002 and 2001, are
unaudited. We derived the balance sheet as of December 31, 2001, from the
audited balance sheet filed in our current report on Form 8-K/A dated July 19,
2002. In our opinion, we have made all adjustments, all of which are of a
normal, recurring nature, to fairly present our interim period results. Due to
the seasonal nature of our businesses, information for interim periods may not
indicate the results of operations for the entire year. In addition, prior
period information presented in these financial statements includes
reclassifications which were made to conform to the current period presentation.
These reclassifications have no effect on our previously reported net income or
partners' capital. Additionally, we have reflected the results of operations
from our Prince assets disposition as discontinued operations for all periods
presented. See Note 3 for a further discussion of the Prince assets disposition.

Our accounting policies are consistent with those discussed in our Form
8-K/A dated July 19, 2002, except as discussed below.

Revenues and Cost of Natural Gas

Prior to our acquisition of the EPN Holding assets, our cost of natural gas
consisted primarily of gas purchased at El Paso Intrastate Alabama for resale.
As a result of our acquisition of the EPN Holding assets, we are now incurring
additional cost of natural gas related to system imbalances and for the purchase
of natural gas as part of our producer services activities. As a convenience for
our producers, we may purchase natural gas from them at the wellhead at an index
price less an amount that compensates us for our gathering services. We then
sell this gas into the open market at the same index price. We reflect these
sales in our revenues and the related purchases as cost of natural gas.

Goodwill and Other Intangible Assets

On January 1, 2002, we adopted Statement of Financial Accounting Standards
(SFAS) No. 142, Goodwill and Other Intangible Assets. Our adoption of this
standard did not have a material effect on our financial statements.

Asset Impairments

On January 1, 2002, we adopted SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets. SFAS No. 144 changed the accounting
requirements related to when an asset qualifies as held for sale or as a
discontinued operation and the way in which we evaluate impairments of assets.
We applied SFAS No. 144 in accounting for our Prince assets, which were sold in
April 2002. See Note 3, Prince Assets Disposition, for further information.

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As generally used in the energy industry and in this document, the following
terms have the following meanings:

/d = per day Mcf = thousand cubic feet
Bbl = barrel MDth = thousand dekatherms
MBbls = thousand barrels MMcf = million cubic feet
Bcf = billion cubic feet MMBbls = million barrels
When we refer to cubic feet measurements, all measurements are at 14.73 pounds per square inch.

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2. ACQUISITIONS

Proposed San Juan Assets Acquisition

In July 2002, we entered into a letter of intent with El Paso Corporation,
the indirect parent of our general partner, to acquire for $782 million El Paso
Corporation's natural gas gathering system located in the San Juan Basin of New
Mexico; natural gas liquids (NGL) transportation and fractionation assets
located in Texas; and an oil and natural gas gathering system located in the
deeper water regions of the Gulf of Mexico, referred to collectively as the San
Juan assets. The purchase price is subject to adjustments primarily for working
capital and capital expenditures.

The parties' obligations under the letter of intent are subject to the
satisfaction of specified conditions, including negotiating and executing
definitive agreements, obtaining Hart-Scott-Rodino and other third-party
approvals and consents, obtaining satisfactory results from ongoing due
diligence and obtaining acceptable financing satisfactory to us. We expect to
finance our acquisition of the San Juan assets through long-term debt and equity
financing.

EPN Holding Assets

In April 2002, EPN Holding Company, L.P., our wholly-owned subsidiary,
acquired from El Paso Corporation midstream assets located in Texas and New
Mexico. The acquired assets, which we refer to as the EPN Holding assets,
include:

- Texas pipeline assets, including the EPGT Texas intrastate pipeline
system;

- the Waha gathering and treating system located in the Permian Basin
region of Texas and New Mexico;

- the Carlsbad gathering system located in the Permian Basin region of New
Mexico;

- an approximate 42.3 percent non-operating interest in the Indian Basin
processing and treating facility located in southeastern New Mexico; and

- a leased interest in the Wilson natural gas storage facility located in
Wharton County, Texas.

The $750 million purchase price was adjusted for the assumption of $15
million of working capital related to natural gas imbalances. The net
consideration of $735 million for the EPN Holding assets was comprised of the
following:

- $420 million of cash;

- $119 million of assumed short-term indebtedness payable to El Paso
Corporation, which has been repaid;

- $6 million in common units; and

- $190 million in assets, comprised of our Prince tension leg platform
(TLP) and our nine percent Prince overriding royalty interest.

To finance substantially all of the cash consideration related to this
acquisition, EPN Holding entered into a limited recourse credit agreement with a
syndicate of commercial banks. See Note 6 for a further discussion of the EPN
Holding credit agreement.

We accounted for this acquisition as a purchase. Accordingly, an allocation
of the purchase price has been assigned to the assets and liabilities acquired
based upon their estimated fair value as of the acquisition date. The excess
purchase price of approximately $11 million has been allocated to the EPGT Texas
intrastate pipeline system. Such allocation is based on our internal evaluation
of the assets. An independent appraisal of the fair value of the assets acquired
is expected to be completed by the end of 2002.

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The following selected unaudited pro forma information represents our
consolidated results of operations on a pro forma basis as if we acquired the
EPN Holding assets on January 1, 2001:

The selected pro forma information for the quarter ended June 30, 2002 is
not provided as the proforma results of operations are not materially different
from the actual results of operations for the period. The selected pro forma
information does not necessarily represent what our results of operations
actually would have been if these transactions and events had in fact occurred
when assumed and are not necessarily representative of our results of operations
for any future period.

Hattiesburg Propane Storage

In January 2002, we acquired a 3.3 million barrel propane storage business
and leaching operation located in Hattiesburg, Mississippi from Suburban Propane
Partners, L.P. As part of the transaction, we entered into a long-term propane
storage agreement with Suburban Propane Partners for a portion of the acquired
propane storage capacity. We intend to convert a portion of these assets to
natural gas storage and will integrate them with our adjacent Petal natural gas
storage facility.

3. PRINCE ASSETS DISPOSITION

In connection with our April 2002 acquisition of the EPN Holding assets
from El Paso Corporation, we sold our Prince TLP and our nine percent overriding
royalty interest in the Prince Field to subsidiaries of El Paso Corporation. The
results of operations for these assets have been accounted for as discontinued
operations and have been excluded from continuing operations for all periods in
our statements of income. Accordingly, the segment results in Note 9 reflect
neither the results of operations for the Prince assets nor the related net
assets held for sale. The Prince TLP was previously included in the Platform
services segment and the related royalty interest was included in Other.
Included in income from discontinued operations for the six months ended June
30, 2002, was operating revenues of $6.7 million attributable to those disposed
assets. We did not recognize any operating revenue related to the Prince assets
during the quarter and six months ended June 30, 2001, as these assets were
placed into service in September 2001.

The assets and liabilities related to the Prince assets disposition consist
of the following:

In April 2002, we sold the Prince assets for $190 million and recognized a
loss on the sale of less than $0.1 million which was recorded in the second
quarter of 2002. In conjunction with this transaction, we repaid the related
outstanding $95 million principal balance under our Argo term loan.

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4. PARTNERS' CAPITAL

Cash distributions

The following table reflects our per unit cash distributions to our common
unitholders and the total incentive distributions paid to our general partner
during the six months ended June 30, 2002:

In July 2002, we declared a cash distribution of $0.65 per common unit for
the quarter ended June 30, 2002, which we will pay on August 15, 2002, to
holders of record as of July 31, 2002. In addition, we will pay our general
partner $10.6 million in incentive distributions. At the current distribution
rates, our general partner receives approximately 28 percent of our total cash
distributions for its role as our general partner.

Public offering of common units

In April 2002, we issued 4,083,938 common units, which included 1,083,938
common units purchased by our general partner pursuant to its anti-dilution
right under our partnership agreement at the public offering price of $37.86 per
unit. We used the net cash proceeds of approximately $149 million to reduce
indebtedness under EPN Holding's term loan. Also in April 2002, we issued
approximately 159,000 common units at the then-current market price of $37.74
per unit to a subsidiary of El Paso Corporation as partial consideration for our
acquisition of the EPN Holding assets. In addition, our general partner
contributed approximately $0.6 million in cash to us in order to maintain its
one percent capital account balance.

Other

In the second quarter of 2002, under the 1998 Unit Option Plan for
Non-Employee Directors, we issued 5,429 restricted units with a grant price of
$32.22 per unit. We have reflected the issuance of the restricted units as
deferred compensation and as an increase in common units. This deferred
compensation was approximately $175 thousand and was allocated 1% to our general
partner and 99% to our limited partners and will be amortized over the vesting
period of the restricted units, which we have estimated to be one year. The
unamortized amount of our deferred compensation as of June 30, 2002, was
approximately $1.8 million.

5. PROPERTY, PLANT AND EQUIPMENT

Our property, plant and equipment consisted of the following:

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6. DEBT AND OTHER CREDIT FACILITIES

Shelf registration

In February 2002, our shelf registration statement, as filed with the
Securities and Exchange Commission, covering up to $1 billion of securities
representing limited partnership interests, became effective.

Limited recourse financing

EPN Holding credit agreement -- In connection with the acquisition of the
EPN Holding assets from El Paso Corporation in April 2002, EPN Holding entered
into a $560 million limited recourse credit agreement with a group of commercial
banks. The credit agreement provides for a term loan of $535 million to finance
the acquisition of the EPN Holding assets, and a revolving credit facility of up
to $25 million to finance EPN Holding's working capital. EPN Holding's right to
borrow money from time to time under the revolving credit facility is dependent
on its continued compliance with the conditions and covenants provided in the
credit agreement, including its compliance with various financial ratios.
Subject to specified exceptions, EPN Holding is required to repay the term loan
with any net proceeds received from specified types of events or transactions,
including purchase price adjustment settlements, insurance claim settlements and
our issuance of equity securities and specified debt securities. This credit
agreement limits EPN Holding's ability to pay distributions to us. EPN Holding's
obligations under the credit agreement are guaranteed by substantially all of
its subsidiaries and EPN Holding Company I, L.P. and EPN GP Holding, L.L.C., our
two subsidiaries that own the equity interests in EPN Holding. At the time of
its acquisition, EPN Holding borrowed $535 million ($531 million, net of
issuance costs) under this term loan and had $25 million available under the
revolving credit facility. EPN Holding pays an annual commitment fee of 0.50% on
the average daily amount available under both the revolving credit facility and
the term loan. Both loans mature in April 2005. We used net proceeds of
approximately $149 million from our April 2002 common unit offering, $0.6
million contributed by our general partner to maintain its one percent capital
account balance and $225 million of the proceeds from our May 2002 offering of
8.5% senior subordinated notes to reduce indebtedness under the term loan. As of
June 30, 2002, the outstanding balance under the term loan was $160 million
bearing interest at a rate of 4.49% and the balance outstanding under the
revolving credit facility was $7 million bearing interest at a rate of 4.34%.

Argo term loan -- This loan with a balance of $95 million, including
current maturities, at December 31, 2001, was repaid in full in April 2002 in
connection with the EPN Holding asset acquisition.

Senior Subordinated Notes

In May 2002, we issued $230 million in aggregate principal amount of 8.5%
Senior Subordinated Notes due June 2011. The Senior Subordinated Notes were
issued for $234.6 million (proceeds of approximately $230 million, net of
issuance costs). We used proceeds of $225 million to reduce indebtedness under
our EPN Holding term loan and the remainder for general partnership purposes. In
August 2002, we filed a registration statement for an offer to exchange these
notes for debt securities with identical terms.

Revolving credit facility

As of June 30, 2002, we had $514 million outstanding with an average
interest rate of 3.54% under our $600 million revolving credit facility with the
full unused amount available.

Other credit facility

Poseidon Oil Pipeline Company, L.L.C., an unconsolidated affiliate, is
party to a $185 million credit agreement under which it has outstanding
obligations that may restrict its ability to pay distributions to its owners.

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In January 2002, Poseidon entered into a two-year interest rate swap
agreement to fix the interest rate at 4.99% through January 2004 on $75 million
of the $150 million outstanding on its credit facility. As of June 30, 2002, the
remaining $75 million was at an average floating interest rate of 3.56%.

7. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

In 1997, we, along with several subsidiaries of El Paso Corporation, were
named defendants in actions brought by Jack Grynberg on behalf of the U.S.
Government under the False Claims Act. Generally, these complaints allege an
industry-wide conspiracy to under report the heating value as well as the
volumes of the natural gas produced from federal and Native American lands,
which deprived the U.S. Government of royalties. These matters have been
consolidated for pretrial purposes (In re: Natural Gas Royalties Qui Tam
Litigation, U.S. District Court for the District of Wyoming, filed June 1997).
In May 2001, the court denied the defendants' motions to dismiss.

We have also been named defendants in Quinque Operating Company, et al v.
Gas Pipelines and Their Predecessors, et al, filed in 1999 in the District Court
of Stevens County, Kansas. This class action complaint alleges that the
defendants mismeasured natural gas volumes and heating content of natural gas on
non-federal and non-Native American lands. The Quinque complaint was transferred
to the same court handling the Grynberg complaint and has now been sent back to
Kansas State Court for further proceedings. A motion to dismiss this case is
pending.

Our Argo L.L.C. subsidiary received a claim from its contractor related to
our recently completed Prince TLP. The contractor received a request for
additional payments from its subcontractor as a result of variation orders and
is seeking to pass these costs along to Argo. After negotiations, the contractor
and the subcontractor agreed upon a settlement in July 2002. This settlement
will not have a material adverse effect on our financial position, results of
operations or cash flow.

Under the terms of our agreement to acquire the EPN Holding assets,
subsidiaries of El Paso Corporation have agreed to indemnify us against all
obligations related to existing legal matters at the acquisition date, including
the legal matters involving Leapartners, L.P., City of Edinburg and Houston Pipe
Line Company LP discussed below.

During 2000, Leapartners, L.P. filed a suit against an affiliate of El Paso
Corporation and others in the District Court of Loving County, Texas, alleging a
breach of contract to gather and process gas in areas of western Texas related
to an asset now owned by EPN Holding. In May 2001, the court ruled in favor of
Leapartners and entered a judgment against El Paso Field Services of
approximately $10 million. El Paso Field Services has filed an appeal with the
Eighth Court of Appeals in El Paso, Texas.

Also, EPGT Texas Pipeline L.P., now owned by EPN Holding, is involved in
litigation with the City of Edinburg concerning the City's claim that EPGT Texas
was required to pay pipeline franchise fees under a contract the City had with
Rio Grande Valley Gas Company, which was previously owned by EPGT Texas and is
now owned by Southern Union Gas Company. An adverse judgment against Southern
Union and EPGT Texas was rendered in December 1998 and upheld for breach of
contract, holding both EPGT Texas and Southern Union jointly and severally
liable to the City for approximately $4.7 million. The judgment relies on the
single business enterprise doctrine to impose contractual obligations on EPGT
Texas and Southern Union's entities that were not parties to the contract with
the City. EPGT Texas has appealed this case to the Texas Supreme Court seeking
reversal of the judgment rendered against EPGT Texas. The City seeks a remand to
the trial court of its claim of tortious interference against EPGT Texas. The
briefing before the Texas Supreme Court is complete.

In December 2000, a 30-inch natural gas pipeline jointly owned now by EPN
Holding and Houston Pipe Line Company LP ruptured in Mont Belvieu, Texas, near
Baytown, resulting in substantial property damage and minor physical injury. EPN
Holding is the operator of the pipeline. Lawsuits have been filed in state
district court in Chambers County, Texas. An additional landowner has intervened
in the Chambers County suits, as well as the homeowners' insurers. The suits
seek recovery for physical pain and suffering, mental

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anguish, physical impairment, medical expenses, and property damage. Houston
Pipe Line Company has been added as an additional defendant. In accordance with
the terms of the operating agreement, EPN Holding has agreed to assume the
defense of and to indemnify Houston Pipe Line Company in the litigated cases.
Discovery is proceeding and trial is set for November 2002. As discussed above,
any obligation to Houston Pipe Line Company incurred by EPN Holding is
indemnified by subsidiaries of El Paso Corporation.

In addition to the above matters, we and our subsidiaries and affiliates
are named defendants in numerous lawsuits and governmental proceedings that
arise in the ordinary course of our business.

For each of our outstanding legal matters, we evaluate the merits of the
case, our exposure to the matter, possible legal or settlement strategies and
the likelihood of an unfavorable outcome. If we determine that an unfavorable
outcome is probable and can be estimated, we establish the necessary accruals.
As of June 30, 2002, we had no reserves for our outstanding legal matters.

While the outcome of our outstanding legal matters cannot be predicted with
certainty, based on the information known to date, we do not expect the ultimate
resolution of these matters will have a material adverse effect on our financial
position, results of operations or cash flows. As new information becomes
available or relevant developments occur, we will establish accruals as
appropriate. The impact of these changes may have a material effect on our
results of operations.

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. As of June 30, 2002, we had a reserve of approximately $24 million for
remediation costs expected to be incurred over time associated with mercury
meters. We assumed this liability in connection with our April 2002 acquisition
of the EPN Holding assets.

While the outcome of our outstanding environmental matters cannot be
predicted with certainty, based on the information known to date and our
existing accruals, 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. It is possible that new information or future developments could
require us to reassess our potential exposure related to environmental matters.
It is also possible that other developments, such as increasingly strict
environmental laws and regulations and claims for damages to property,
employees, other persons and the environment resulting from our current or past
operations, could result in substantial costs and liabilities in the future. As
new information becomes available, or relevant developments occur, we will
review our accruals and make any appropriate adjustments. The impact of these
changes may have a material effect on our results of operations.

Regulatory Matters

In September 2001, the Federal Energy Regulatory Commission (FERC) issued a
Notice of Proposed Rulemaking (NOPR) that proposes to apply the standards of
conduct governing the relationship between interstate pipelines and marketing
affiliates to all energy affiliates. Since our High Island Offshore System
(HIOS) and Petal Gas Storage facility are interstate facilities as defined by
the Natural Gas Act, the proposed regulations, if adopted by FERC, would dictate
how HIOS and Petal conduct business and interact with all of our energy
affiliates and El Paso Corporation's energy affiliates. A public hearing was
held on May 21, 2002 at which interested parties were given an opportunity to
comment further on the NOPR. We cannot predict the outcome of the NOPR, but
adoption of the regulations in substantially the form proposed would, at a
minimum, place administrative and operational burdens on us. Further, more
fundamental changes could be required such as a complete organizational
separation or sale of HIOS and Petal.

In July 2002, the FERC issued a Notice of Inquiry (NOI) that seeks comments
regarding its policy, established in 1996, of permitting pipelines to enter into
negotiated rate transactions. The FERC is now undertaking a review of whether
negotiated rates should be capped, whether or not a pipeline's "recourse rate"

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(its cost of service based rate) continues to serve as a viable alternative and
safeguard against the exercise of alleged pipeline market power, as well as
other issues related to its negotiated rate program. Comments are due on
September 25, 2002, with reply comments due on October 25, 2002. We cannot
predict the outcome of this NOI.

In August 2002, the FERC issued a NOPR requiring that all arrangements
concerning the cash management or money pool arrangements between a FERC
regulated subsidiary and a non FERC regulated parent must be in writing, and set
forth: the duties and responsibilities of cash management participants and
administrators; the methods of calculating interest and for allocating interest
income and expenses; and the restrictions on deposits or borrowings by money
pool members. The NOPR also requires certain specified documentation for all
deposits into, borrowings from, interest income from, and interest expenses
related to, these arrangements. Finally, the NOPR proposes that as a condition
of participating in a cash management or money pool arrangement, the FERC
regulated entity must maintain a minimum proprietary capital balance of 30
percent, and the FERC regulated entity and its parent must maintain investment
grade credit ratings. Comments on the NOPR are due on August 22, 2002. We cannot
predict the outcome of this NOPR.

Also in August 2002, FERC's Chief Accountant issued, to be effective
immediately, an Accounting Release providing guidance on how jurisdictional
entities should account for money pool arrangements and the types of
documentation that should be maintained for these arrangements. The Accounting
Release sets forth the documentation requirements set forth in the NOPR for
money pool arrangements, but does not address the requirements in the NOPR that
as a condition for participating in money pool arrangements the FERC regulated
entity must maintain a minimum proprietary capital balance of 30 percent and
that the entity and its parent must have investment grade credit ratings.
Requests for rehearing are due on September 3, 2002.

In December 1999, EPGT Texas filed a petition with the FERC for approval of
its rates for interstate transportation service. In June 2002, the FERC issued
an order that required revisions to EPGT Texas' proposed rates. It also ordered
refunds to customers for the difference, if any, between the originally proposed
levels and the revised rates ordered by the FERC. The changes ordered by the
FERC involve reductions to rate of return, depreciation rates and revisions to
the proposed rate design, including a requirement to separately state rates for
gathering service. We believe the amount of any rate refund would be minimal
since, as provided for in our tariff, we were not charging our customers at the
maximum rate. In July 2002, EPGT Texas requested rehearing on certain issues
raised by the FERC's order, including the ordered changes to rate design and
depreciation rates, and the requirement to separately state a gathering rate.
This request has been granted and is scheduled to be concluded by October 15,
2002.

While the outcome of our rates and regulatory matters cannot be predicted
with certainty, based on the information known to date, we do not expect the
ultimate resolution of these matters will have a material adverse effect on our
financial position, results of operations or cash flows. As new information
becomes available or relevant developments occur, we will review our accruals
and make any appropriate adjustments. The impact of these changes may have a
material effect on our results of operations.

Other Matters

As a result of current circumstances surrounding the energy sector, the
creditworthiness of several industry participants has been called into question.
We have taken actions to mitigate our exposure in this area; however, should
several industry participants file for Chapter 11 bankruptcy protection, it
could have a material adverse effect on our financial position, results of
operations or cash flows.

8. ACCOUNTING FOR HEDGING ACTIVITIES

A majority of our commodity purchases and sales, which relate to sales of
oil and natural gas associated with our production operations, purchases and
sales of natural gas associated with our El Paso Intrastate Alabama (EPIA)
pipeline and sales of liquids associated with our interest in the Indian Basin
processing plant, are at spot market or forward market prices. We use futures,
forward contracts, and swaps to limit our exposure to fluctuations in the
commodity markets and allow for a fixed cash flow stream from these activities.

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At June 30, 2002, in connection with our EPIA operations, we have fixed
price contracts with specific customers for the sale of predetermined volumes of
natural gas for delivery over established periods of time. We entered into cash
flow hedges in 2001 to offset the risk of increasing natural gas prices. As of
June 30, 2002, the fair value of these cash flow hedges is approximately $9
thousand. For the six months ended June 30, 2002, the majority of these cash
flow hedges expired and we reclassified a loss of $1.5 million from accumulated
other comprehensive income to earnings. No ineffectiveness exists in our hedging
relationship because all purchase and sale prices are based on the same index
and volumes as the hedge transaction. We estimate the entire amount will be
reclassified from accumulated other comprehensive income to earnings over the
next twelve months.

Starting in April 2002, in connection with our EPN Holding acquisition, we
have swaps in place for our interest in the Indian Basin processing plant to
hedge the price received for the sale of natural gas liquids. As of June 30,
2002, the fair value of these cash flow hedges was a $0.2 million asset
resulting in an unrealized gain of $0.2 million. We do not expect any
ineffectiveness in our hedging relationship since all sale prices are based on
the same index as the hedge transaction. We estimate the entire amount will be
reclassified from accumulated other comprehensive income to earnings over the
next three months.

In January 2002, Poseidon entered into a two-year interest rate swap
agreement to fix the interest rate on $75 million of its $150 million variable
rate revolving credit facility at 4.99% over the life of the swap. As of June
30, 2002, the fair value of its interest rate swap was a liability of $0.7
million resulting in accumulated other comprehensive loss of $0.7 million. We
included our 36 percent share of this liability of $0.3 million as a reduction
of our investment in Poseidon and as loss in accumulated other comprehensive
income which we estimate will be reclassified to earnings proportionately over
the next 18 months. Additionally, we have recognized in income our 36 percent
share of Poseidon's realized loss of $0.6 million for the six months ended June
30, 2002, or $0.2 million, through our earnings from unconsolidated affiliates.

Our counterparties for EPIA and Indian Basin hedging activities are El Paso
Merchant Energy and El Paso Field Services, affiliates of our general partner.
We do not require collateral and do not anticipate non-performance by our
counterparties. The counterparty for Poseidon hedging activity is Credit
Lyonnais. Poseidon does not require collateral and does not anticipate
non-performance by the counterparty.

9. SEGMENT INFORMATION

In light of our expectation of acquiring additional natural gas pipeline
and processing assets, effective January 1, 2002, we revised and renamed our
business segments to reflect the change in composition of our operations as
discussed below. We have segregated our business activities into four distinct
operating segments:

- Natural gas pipelines and plants;

- Oil and NGL logistics;

- Natural gas storage; and

- Platform services.

In October 2001, we acquired the Chaco processing plant and reflected the
operations of this asset in our Oil and NGL logistics segment. With the change
in our segments, we moved the Chaco processing plant to our Natural gas
pipelines and plants segment. As a result of our sale of the Prince TLP and our
nine percent overriding royalty interest in the Prince Field in April 2002, the
results of operations from these assets are reflected as discontinued operations
in our statements of income for all periods presented. Accordingly, the segment
results reflect neither the results of operations for the Prince assets nor the
related assets held for sale. Beginning in 2002, operations from our oil and
natural gas production are reflected in Other.

We have restated the prior periods, to the extent practicable, in order to
conform to our current business segment presentation. The restated results of
operations for the quarter and six months ended June 30, 2001,

13

are not necessarily indicative of the results which would have been achieved had
the revised business structure been in effect during the period.

Each of 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 using performance cash
flows, or an asset's ability to generate cash flow. Performance cash flows are
used as a supplemental financial measurement in the evaluation of our businesses
and should not be considered as an alternative to net income as an indicator of
our operating performance or as an alternative to cash flows from operating
activities as a measure of liquidity. Performance cash flows may not be a
comparable measurement among different companies. Following are results as of
and for the periods ended June 30:

QUARTER ENDED JUNE 30, 2002

QUARTER ENDED JUNE 30, 2001

- ----------

(1) Represents predominately our oil and natural gas production operations as
well as intersegment eliminations.

14

SIX MONTHS ENDED JUNE 30, 2002

SIX MONTHS ENDED JUNE 30, 2001

- ----------

(1) Represents predominately our oil and natural gas production operations as
well as intersegment eliminations.

Performance cash flows are determined by taking EBIT, and adding or
subtracting as appropriate, cash distributions from unconsolidated affiliates;
depreciation, depletion and amortization; earnings from unconsolidated
affiliates and other items. The schedules below reconcile EBIT to performance
cash flows.

PERFORMANCE CASH FLOWS BY SEGMENT

16

10. INVESTMENTS IN UNCONSOLIDATED AFFILIATES

We hold investments in various affiliates which we account for using the
equity method of accounting. In October 2001, we acquired the remaining 50
percent of Deepwater Holdings L.L.C. that we did not already own. Following this
transaction, Deepwater Holdings has been consolidated in our financial
statements from the acquisition date. Summarized financial information for these
investments is as follows:

SIX MONTHS ENDED JUNE 30, 2002
(IN THOUSANDS)

SIX MONTHS ENDED JUNE 30, 2001
(IN THOUSANDS)

- ----------

(1) We recorded adjustments primarily for differences from estimated year end
earnings reported in our Annual Report on Form 10-K and actual earnings
reported in the audited annual reports of our unconsolidated affiliates. For
the six months ended June 30, 2001, we recorded an additional adjustment
relating to the sale of Stingray Pipeline Company, U-T Offshore System
(UTOS) and West Cameron. The loss on these sales was not allocated
proportionately with Deepwater Holdings' ownership percentages because the
capital contributed by us was a larger amount of capital at the formation
and therefore we were allocated a larger portion of the loss. Our total
share of the loss relating to these sales was approximately $14 million.

(2) Divested Investments includes Manta Ray Offshore Gathering Company, L.L.C.
and Nautilus Pipeline Company L.L.C. In January 2001, we sold our 25.67%
interest in Manta Ray Offshore and our 25.67% interest in Nautilus.

17

In June 2002, we formed Deepwater Gateway, L.L.C., a 50/50 joint venture
with Cal Dive International Inc., to construct and install the Marco Polo
platform. The total cost of the project is estimated to be $206 million or
approximately $103 million for our share. As of June 30, 2002, we have
contributed $12 million to Deepwater Gateway.

11. RELATED PARTY TRANSACTIONS

Our transactions with related parties and affiliates are as follows:

There have been no changes to our related party relationships, except as
described below, from those described in Note 9 of our audited financial
statements filed in our current report on Form 8-K/A dated July 19, 2002.

At June 30, 2002, and December 31, 2001, our accounts receivable due from
related parties was $75.4 million and $22.9 million. At June 30, 2002 and
December 31, 2001, our accounts payable due to related parties was $21.8 million
and $9.9 million.

18

In connection with the sale of our Gulf of Mexico assets in January 2001,
El Paso Corporation agreed to make quarterly payments to us of $2.25 million for
three years beginning March 2001 and $2 million in the first quarter of 2004.
The present value of the amounts due from El Paso Corporation were classified as
follows:

Revenues received from related parties

EPN Holding Assets. In connection with our EPN Holding transaction, we
acquired gathering, transportation and processing contracts with affiliates of
our general partner. For the quarter and six months ended June 30, 2002, we
received $24.2 million from El Paso Merchant Energy North America Company, $9.4
million from El Paso Field Services and $1.4 million from El Paso Production
Company.

Expenses paid to related parties

Cost of natural gas. In connection with our EPN Holding transaction, we
acquired contracts with affiliates of our general partner. For the quarter and
six months ended June 30, 2002, we had natural gas imbalance settlement expenses
of $1.2 million from El Paso Natural Gas Company, $0.2 million from Tennessee
Gas Pipeline Company and $0.2 million from El Paso Merchant Energy North America
Company.

Operating expenses. In connection with our EPN Holding transaction, we
acquired operating agreements with El Paso Field Services. For the quarter and
six months ended June 30, 2002, we had operating expenses of $5.1 million.

Under a general and administrative services agreement between subsidiaries
of El Paso Corporation and us, a fee of approximately $0.8 million per month is
charged to our general partner, and accordingly, to us, which is intended to
approximate the amount of resources allocated by El Paso Corporation and its
affiliates in providing various operational, financial, accounting and
administrative services on behalf of our general partner and us. In April 2002,
in connection with our acquisition of EPN Holding assets, our general and
administrative services agreement was extended to December 31, 2005, and the fee
increased to approximately $1.6 million per month. We believe this fee
approximates the actual costs incurred.

19

The following table provides summary data categorized by our related
parties:

- ----------

(1) We sold our interest in Manta Ray Offshore in January 2001 in connection
with El Paso Corporation's merger with The Coastal Corporation.

(2) In January 2001, Deepwater Holdings sold its Stingray and West Cameron
subsidiaries. In April 2001, Deepwater Holdings sold its UTOS subsidiary. In
October 2001, we acquired the remaining 50 percent of Deepwater Holdings,
and as a result of this transaction, Deepwater Holdings is consolidated in
our financial statements from the acquisition date and our agreement with
Deepwater Holdings terminated.

20

12. GUARANTOR FINANCIAL INFORMATION

On May 1, 2001, we purchased our general partner's 1.01 percent
non-managing interest owned in twelve of our subsidiaries for $8 million. As a
result of this acquisition, all of our subsidiaries, but not our equity
investees, are wholly owned by us. As of June 30, 2002, our revolving credit
facility is guaranteed by each of our subsidiaries (excluding our EPN Holding
subsidiaries) and is collateralized by our management agreement, substantially
all of our assets, and our general partner's one percent general partner
interest. In addition, all of our senior subordinated notes are guaranteed by
all of our subsidiaries except EPN Holding's subsidiaries. The EPN Holding
credit agreement is guaranteed by all of EPN Holding's subsidiaries and by EPN
Holding I, L.P. and EPN GP Holding L.L.C., our unrestricted subsidiaries that
own the equity interests in EPN Holding, and is collateralized by substantially
all of the assets of EPN Holding and the guarantors. We are providing the
following condensed consolidating financial information of us (as the Issuer)
and our subsidiaries as if our current organizational structure were in place
for all periods presented. The consolidating eliminations column on our balance
sheets eliminate our investment in consolidated subsidiaries, intercompany
payables and receivables and other transactions between subsidiaries.

Non-guarantor subsidiaries as of and for the quarter ended June 30, 2002,
consisted of our EPN Holding subsidiaries, which own the EPN Holding assets and
the equity interests in EPN Holding. Non-guarantor subsidiaries for all other
periods consisted of Argo and Argo I which owned the Prince TLP. As a result of
our disposal of the Prince TLP and our related overriding royalty interest to El
Paso Corporation in April 2002, the results of operations and net book value of
these assets are reflected as discontinued operations in our statements of
income and assets held for sale in our balance sheets and Argo and Argo I became
guarantor subsidiaries.

CONDENSED CONSOLIDATING STATEMENT OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2002

21

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE QUARTER ENDED JUNE 30, 2001

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2002

22

CONDENSED CONSOLIDATING STATEMENTS OF INCOME
FOR THE SIX MONTHS ENDED JUNE 30, 2001

23

CONDENSED CONSOLIDATING BALANCE SHEETS
JUNE 30, 2002

24

CONDENSED CONSOLIDATING BALANCE SHEET
DECEMBER 31, 2001

25

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2002

26

CONDENSED CONSOLIDATING STATEMENTS OF CASH FLOW
FOR THE SIX MONTHS ENDED JUNE 30, 2001

27

13. NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

Accounting for Asset Retirement Obligations

In August 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, Accounting for Asset Retirement Obligations. This statement requires
companies to record a liability relating to the retirement and removal costs of
assets used in their business. The liability is discounted to its present value,
and the related asset value is increased by the amount of the resulting
liability. Over the life of the asset, the liability will be accreted to its
future value and eventually extinguished when the asset is taken out of service.
Capitalized retirement and removal costs will be depreciated over the useful
life of the related asset. The provisions of this statement are effective for
fiscal years beginning after June 15, 2002. We are currently evaluating the
effects of this pronouncement.

Reporting Gains and Losses from the Early Extinguishment of Debt

In April 2002, the FASB issued SFAS No. 145, Rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. This statement addresses how to report gains or losses resulting
from the early extinguishment of debt. Previously, any gains or losses were
reported as an extraordinary item. Upon adoption of SFAS No. 145, an entity will
be required to evaluate whether the debt extinguishment is truly extraordinary
in nature, in accordance with Accounting Principles Board Opinion No. 30. If the
entity routinely extinguishes debt early, the gain or loss should be included in
income from continuing operations. This statement is effective for our 2003
year-end reporting.

Accounting for Costs Associated with Exit or Disposal Activities

In July 2002, the FASB issued SFAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities. This statement requires companies to recognize
costs associated with exit or disposal activities when they are incurred rather
than at the date of a commitment to an exit or disposal plan. Examples of costs
covered by this guidance include lease termination costs and certain employee
severance costs that are associated with a restructuring, discontinued
operation, plant closing, or other exit or disposal activity. The provisions of
this Statement are effective for fiscal years beginning after December 31, 2002.
The provisions of this Statement will impact any exit or disposal activities
that we initiate after January 1, 2003.

28

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The information contained in Item 2 updates, and you should read it in
conjunction with, information disclosed in Part II, Items 7, 7A and 8, in our
Annual Report on Form 10-K for the year ended December 31, 2001, in addition to
the interim financial statements and notes presented in Item 1 of this Quarterly
Report on Form 10-Q.

RECENT DEVELOPMENTS

ACQUISITIONS

San Juan Assets

In July 2002, we entered into a letter of intent with El Paso Corporation,
the indirect parent of our general partner, to acquire for $782 million El Paso
Corporation's natural gas gathering system located in the San Juan Basin of New
Mexico; NGL transportation and fractionation assets located in Texas; and an oil
and natural gas gathering system located in the deeper water regions of the Gulf
of Mexico, referred to collectively as the San Juan assets. The purchase price
is subject to adjustments primarily for working capital and capital
expenditures. The following is a description of the San Juan assets:

- The assets located in the San Juan Basin include:

- approximately 5,300 miles of natural gas gathering pipelines, known as
the San Juan gathering system, with capacity of over 1.1 Bcf/d connected
to approximately 9,500 wells producing natural gas from the San Juan
Basin located in northwest New Mexico and southwest Colorado;

- approximately 250,000 horsepower of compression;

- the 58 MMcf/d Rattlesnake CO(2) treating facility;

- a 50% interest in Coyote Gas Treating L.L.C., the owner of a 250 MMcf/d
CO(2) treating facility; and

- the remaining interests in the Chaco cryogenic natural gas processing
plant we do not already own and the price risk management positions
related to this facility's operations.

- The offshore pipeline assets include:

- The Typhoon gas pipeline, a 35-mile, 20-inch natural gas pipeline
originating on the Chevron/BHP "Typhoon" platform in the Green Canyon
area of the Gulf of Mexico extending to the ANR Patterson System in
Eugene Block 371; and

- The Typhoon oil pipeline, a 16-mile, 12-inch oil pipeline originating on
the Chevron/BHP "Typhoon" platform and extending to a platform in Green
Canyon Block 19 with onshore access through various oil pipelines.

- The Texas NGL assets include:

- a 230-mile, 8-inch pipeline with capacity of approximately 35 MBbls/d
extending from Corpus Christi to Pasadena;

- a 162-mile, 4-inch to 6-inch propane pipeline extending from Corpus
Christi to McAllen and Hidalgo truck terminal facilities;

- the Markham butane shuttle, a 138-mile, 8-inch pipeline with capacity of
approximately 20 MBbls/d running between Corpus Christi and a leased
storage facility at Markham with capacity of approximately 3.8 MMBbls;

- a 49-mile, 6-inch pipeline with capacity of approximately 15 MBbls/d
extending from Almeda to Texas City and the Texas City terminal; and

- the Almeda fractionator, a 24 MBbls/d fractionator consisting of two
trains and related leased storage facilities of approximately 9.8
MMBbls.

29

The parties' obligations under the letter of intent are subject to the
satisfaction of specified conditions, including negotiating and executing
definitive agreements, obtaining Hart-Scott-Rodino and other third-party
approvals and consents, obtaining satisfactory results from ongoing due
diligence and obtaining acceptable financing satisfactory to us. We expect to
finance our acquisition of the San Juan assets through long-term debt and equity
financing.

As discussed in our Form 10-K, we have instituted specific procedures for
evaluating and valuing transactions with El Paso Corporation and its
subsidiaries. This acquisition of the San Juan assets was approved by our Board
of Directors. Our Board approved the transaction only after the receipt of a
fairness opinion and after its Special Conflicts Committee's approval.

EPN Holding Assets

In April 2002, EPN Holding acquired from El Paso Corporation midstream
assets located in Texas and New Mexico. The acquired assets include:

- Texas pipeline assets, including the EPGT Texas intrastate pipeline
system;

- the Waha gathering and treating system located in the Permian Basin
region of Texas and New Mexico;

- the Carlsbad gathering system located in the Permian Basin region of New
Mexico;

- an approximate 42.3 percent non-operating interest in the Indian Basin
processing and treating facility located in southeastern New Mexico; and

- a leased interest in the Wilson natural gas storage facility located in
Wharton County, Texas.

The $750 million sales price was adjusted for the assumption of $15 million
of working capital related to natural gas imbalances. The net consideration of
$735 million for the EPN Holding assets was comprised of the following:

- $420 million of cash;

- $119 million of assumed short-term indebtedness payable to El Paso
Corporation, which has been repaid;

- $6 million in common units; and

- $190 million in assets, comprised of our Prince TLP and our nine percent
Prince overriding royalty interest.

To refinance substantially all of the cash consideration related to this
acquisition, EPN Holding entered into a limited recourse credit agreement with a
syndicate of commercial banks. EPN Holding's obligations under the credit
agreement are guaranteed by substantially all of its subsidiaries and EPN
Holding Company I, L.P. and EPN GP Holding, L.L.C., our two subsidiaries that
own the equity interests in EPN Holding. Those obligations are collateralized by
the equity interest in, and substantially all of the assets of, EPN Holding and
its subsidiaries. In addition, the credit agreement limits EPN Holding's ability
to pay distributions to us.

Hattiesburg Storage Facility

In January 2002, we acquired a 3.3 million barrel propane storage business
and leaching operation located in Hattiesburg, Mississippi from Suburban Propane
Partners, L.P. As part of the transaction, we entered into a long-term propane
storage agreement with Suburban Propane Partners for a portion of the acquired
propane storage capacity. We intend to convert a portion of these assets to
natural gas storage and will integrate them with our adjacent Petal natural gas
storage facility.

30

PROJECTS UNDER DEVELOPMENT

Petal Expansion

In the second quarter of 2002, we completed a 5.4 Bcf expansion of our
Petal natural gas storage facility, as well as an approximate 60-mile pipeline
addition that interconnects with the storage facility and offers direct
interconnects with the Southern Natural Gas, Transco, and Destin pipeline
systems. Total cost for the expansion and pipeline addition was approximately
$157 million. We commenced storage services in July 2002 under a 20-year
fixed-fee contract to the Southern Company, one of the largest producers of
electricity in the United States.

Deepwater Gateway

In June 2002, we formed Deepwater Gateway, L.L.C., a 50/50 joint venture
with Cal Dive International Inc., to construct and install the Marco Polo
platform. The total cost of the project is estimated to be $206 million or
approximately $103 million for our share. As of June 30, 2002, we have
contributed $12 million to Deepwater Gateway.

Falcon Nest

In April 2002, we entered into an agreement with Pioneer Natural Resources
Company and Mariner Energy, Inc. under which we will build and operate the
Falcon Nest Platform, a fixed-leg platform and processing facility which will
process natural gas from Pioneer's and Mariner's Falcon Field discoveries
located in the Gulf of Mexico. We expect this platform to have processing
capacity of at least 300 MMcf/d and to place this platform in service in the
first quarter of 2003. We estimate a cost of approximately $53 million to
construct and place the Falcon Nest Platform into service.

Cameron Highway

In February 2002, we announced that we will build and operate the Cameron
Highway Oil Pipeline System, a 380-mile oil pipeline in the Gulf of Mexico.
Cameron Highway will deliver up to 500 MBbl/d of oil from the southern Green
Canyon and western Gulf of Mexico areas to Port Arthur and Texas City, Texas.
The new pipeline is expected to be in service by the third quarter of 2004. We
have entered into agreements with operating subsidiaries of BP p.l.c., BHP
Billiton, and Unocal under which each of them has dedicated production from the
Holstein, Mad Dog, and Atlantis discoveries in the Deepwater Trend in the Gulf
of Mexico to Cameron Highway. The total estimated cost of the project is $450
million. We plan to seek a partner or partners for up to 50 percent of the
interest in the pipeline.

TRANSPORTATION AND STORAGE CONTRACTS

New Texas Natural Gas

In June 2002, we entered into three new natural gas transportation
contracts totaling 246 Bcf per year of firm transportation capacity on our EPGT
Texas intrastate pipeline, as well as a new long-term natural gas storage
contract on our leased Wilson Storage facility.

OTHER MATTERS

As a result of current circumstances surrounding the energy sector, the
creditworthiness of several industry participants has been called into question.
We have taken actions to mitigate our exposure in this area; however, should
several industry participants file for Chapter 11 bankruptcy protection, it
could have a material adverse effect on our financial position, results of
operations or cash flows.

31

SEGMENT RESULTS

In light of our expectation of acquiring additional natural gas pipeline
and processing assets, effective January 1, 2002, we revised and renamed our
business segments to reflect the change in composition of our operations. In
October 2001, we acquired the Chaco plant and reflected the operations of this
asset in our Oil and NGL logistics segment. With the change in our segments, we
moved the Chaco processing plant to our Natural gas pipelines and plants
segment. As a result of our sale of the Prince TLP and our nine percent
overriding interest in the Prince Field in April 2002, the results of operations
from these assets are reflected as discontinued operations in our statements of
income for all periods presented and are not reflected in our segment results
below. Beginning in 2002, operations from our oil and natural gas production are
reflected in Other.

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. The following table presents EBIT by
segment and in total for each of the quarter and six months ended June 30:

EBIT variances are discussed in the segment results below.

32

NATURAL GAS PIPELINES AND PLANTS

Second Quarter Ended June 30, 2002 Compared With Second Quarter Ended June 30,
2001

In connection with our April 2002 EPN Holding asset acquisition, we added
assets to this segment with contracts whereby we may purchase natural gas from
producers at the wellhead for an index price less an amount that compensates us
for gathering services. We then sell the natural gas into the open market at the
same index prices. Accordingly, our operating revenues and costs of natural gas
are impacted by changes in energy commodity prices, while our margin is
unaffected. For these reasons, we believe that gross margin (revenue less cost
of natural gas) provides a more accurate and meaningful basis for analyzing
operating results for the Natural gas pipelines and plants segment.

Natural gas pipelines and plants margin for the quarter ended June 30,
2002, was $59.1 million higher than in the same period in 2001 primarily due to
our April 2002 purchase of the EPN Holding assets from subsidiaries of El Paso
Corporation, our purchase of the Chaco plant in October 2001, and our
consolidation of Deepwater Holdings in October 2001. Excluding the contribution
from these newly acquired assets, margins increased by $0.3 million.

Operating expenses for the quarter ended June 30, 2002, were $30.0 million
higher than the same period in 2001 primarily due to our April 2002 purchase of
the EPN Holding assets, our purchase of the Chaco plant in October 2001, and our
consolidation of Deepwater Holdings. Excluding the operating costs of the newly
acquired assets, operating expenses increased by $0.8 million.

Other income for the quarter ended June 30, 2002, was $1.9 million higher
than the same period in 2001 primarily due to a 2001 loss at Deepwater Holdings
on its sale of UTOS in April 2001. After our acquisition of the remaining
interest in Deepwater Holdings in October 2001, Deepwater Holdings became a
consolidated subsidiary.

Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001

Natural gas pipeline and plants margin for the six months ended June 30,
2002, was $79.2 million higher than the same period in 2001 primarily due to our
April 2002 purchase of the EPN Holding assets from subsidiaries of El Paso
Corporation, our purchase of the Chaco plant in October 2001, and our
consolidation of Deepwater Holdings in October 2001. Excluding the contribution
from these newly acquired assets, margins increased by $0.2 million.

33

Operating expenses for the six months ended June 30, 2002 were $38.8
million higher than the same period in 2001 primarily due to our April 2002
purchase of the EPN Holding assets, our purchase of the Chaco plant in October
2001, and our consolidation of Deepwater Holdings. Excluding the operating costs
of the newly acquired assets, operating expenses increased by $1.1 million.

Other income for the six months ended June 30, 2002, was $4.0 million lower
than the same period in 2001 primarily due to our recognition in 2001 of $22.0
million in additional consideration from El Paso Corporation associated with the
sale of our Gulf of Mexico pipeline assets in 2001, partially offset by net
losses of $7.8 million due to the sale of our interests in the Tarpon and Green
Canyon pipeline assets in January 2001. Further contributing to our decrease in
other income were lower earnings from unconsolidated affiliates of $9.8 million,
which relates to Deepwater Holdings' sale of Stingray, UTOS and the West Cameron
dehydration facility and the sale of our interest in Nautilus and Manta Ray
Offshore during the first six months of 2001.

OIL AND NGL LOGISTICS

Second Quarter Ended June 30, 2002 Compared With Second Quarter Ended June 30,
2001

For the quarter ended June 30, 2002, revenues were $1.3 million higher than
the same period in 2001 primarily due to our acquisitions of the Hattiesburg
propane storage facility in January 2002 and the Anse La Butte NGL storage
facility in December 2001. Also contributing to this increase were higher
volumes on EPN Texas and Allegheny.

Operating expenses for the quarter ended June 30, 2002, were $0.9 million
higher than the same period in 2001 primarily due to our acquisition of the
Hattiesburg propane storage facility in January 2002 and the Anse La Butte NGL
storage facility in December 2001.

Other income for the quarter ended June 30, 2002, was $1.3 million lower
than the same period in 2001 primarily due to a decrease in earnings from
unconsolidated affiliates attributable to lower volumes received by Poseidon.

34

Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001

For the six months ended June 30, 2002, revenues were $5.9 million higher
than the same period in 2001 primarily due to our acquisitions of the EPN Texas
transportation and fractionation assets in February 2001, the Hattiesburg
propane storage facility in January 2002, and the Anse La Butte NGL storage
facility in December 2001. Additionally, higher volumes on Allegheny also
contributed to the increase in revenues.

Operating expenses for the six months ended June 30, 2002, were $3.3
million higher than the same period in 2001 primarily due to our acquisitions of
the EPN Texas transportation and fractionation assets in February 2001, the
Hattiesburg propane storage facility in January 2002, and the Anse La Butte NGL
storage facility in December 2001.

Other income for the six months ended June 30, 2002, was $2.1 million lower
than the same period in 2001 primarily due to a decrease in earnings from
unconsolidated affiliates attributable to lower volumes received by Poseidon.

NATURAL GAS STORAGE

Second Quarter Ended June 30, 2002 Compared With Second Quarter Ended June 30,
2001

For the quarter ended June 30, 2002, revenues were $0.1 million lower than
the same period in 2001 primarily due to lower commodity revenue and lower
interruptible storage services at our Petal and Hattiesburg facilities during
2002. This decrease was partially offset by an increase in revenues attributable
to our acquisition of the Wilson storage facility lease in April 2002.

Expansion of the Petal storage facility was completed during the second
quarter, and we commenced services to the Southern Company in July 2002. We
estimate that Petal's new services to Southern Company will add $6.7 million of
revenues during the remainder of 2002.

Operating expenses for the quarter were $1.6 million higher than the same
period in 2001 primarily due to the acquisition of the Wilson storage facility
lease in April 2002.

Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001

For the six months ended June 30, 2002, revenues were $0.6 million lower
than the same period in 2001 primarily due to lower commodity revenue and
interruptible storage services at our Petal and Hattiesburg facilities during
2002. This decrease was partially offset by an increase in revenues attributable
to our acquisition of the Wilson storage facility lease in April 2002.

Operating expenses for the quarter were $2.3 million higher than the same
period in 2001 primarily due to the acquisition of the Wilson storage facility
lease in April 2002 and a favorable resolution of an imbalance settlement in
2001.

35

PLATFORM SERVICES

Second Quarter Ended June 30, 2002 Compared With Second Quarter Ended June 30,
2001

For the quarter ended June 30, 2002, revenues were $1.1 million higher than
in the same period in 2001 primarily due to retroactive billings for fixed
monthly platform access fees and a retroactive gas dehydration fee on East
Cameron 373. Operating expenses for the same periods were $0.2 million higher
due to higher direct costs.

Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001

For the six months ended June 30, 2002, revenues were $1.6 million higher
than the same period in 2001 primarily due to retroactive billings for fixed
monthly platform access fees and a retroactive gas dehydration fee on East
Cameron 373. Operating expenses for the same periods were $0.6 million lower due
to lower direct costs.

Other loss for the six months ended June 30, 2001 reflects approximately
$3.0 million of losses recognized on the sales of our Gulf of Mexico platform
assets in January 2001, offset by the additional consideration from El Paso
Corporation related to the sale of these assets.

OTHER, NET

Second Quarter Ended June 30, 2002 compared with Second Quarter Ended June 30,
2001

Earnings before interest expense and taxes related to non-segment activity
for the quarter ended June 30, 2002, were $0.6 million lower than the same
period in 2001. The decrease was primarily due to lower natural gas prices as
well as lower volumes attributable to a decrease in natural gas production as a
result of normal decline of existing reserves, partially offset by lower
depletion.

Six Months Ended June 30, 2002 Compared With Six Months Ended June 30, 2001

Earnings before interest expense and taxes related to non-segment activity
for the six months ended June 30, 2002, were $4.5 million lower than the same
period in 2001. The decrease was primarily due to lower natural gas and oil
prices as well as lower volumes attributable to a decrease in natural gas
production as a result of normal decline of existing reserves. The decrease was
partially offset by lower operating expenses and depletion.

36

INTEREST AND DEBT EXPENSE

Interest and debt expense, net of capitalized interest, for the quarter and
six months ended June 30, 2002, was approximately $12.8 million and $13.7
million higher than the same periods in 2001. This increase primarily relates to
the $535 million term loan entered into to purchase the EPN Holding assets in
April 2002 and the $230 million of 8.5% senior subordinated notes issued in May
2002. Capitalized interest for the quarter and six months ended June 30, 2002
was $2.0 million and $3.6 million.

LIQUIDITY AND CAPITAL RESOURCES

CASH FROM OPERATING ACTIVITIES

Net cash provided by operating activities was $61.6 million for the six
months ended June 30, 2002, compared to $57.2 million for the same period in
2001. The increase was attributable to operating cash flows from our
acquisitions of the Chaco plant in October 2001, the remaining 50 percent
interest in Deepwater Holdings that we did not already own in October 2001, and
the EPN Holding assets in April 2002. This increase was partially offset by
lower cash distributions in 2002 from our unconsolidated affiliate Poseidon.

CASH FROM INVESTING ACTIVITIES

Net cash used in investing activities was approximately $643.7 million for
the six months ended June 30, 2002. Our investing activities include our April
2002 purchase of the EPN Holding assets and capital expenditures related to the
expansion of our Petal natural gas storage facility. These expenditures were
partially offset by proceeds of $5.5 million from the sale of our Buffalo
Treating Facility to El Paso Production Company and the sale of our Prince TLP
and nine percent Prince overriding royalty interest to subsidiaries of El Paso
Corporation (reflected as net cash provided by investing activities of
discontinued operations in our statement of cash flows).

CASH FROM FINANCING ACTIVITIES

Net cash provided by financing activities was approximately $587.8 million
for the six months ended June 30, 2002. During 2002, our cash provided by
financing activities included the issuances of long-term debt and common units,
as well as borrowings under our EPN Holding term loan. Cash used in our
financing activities included repayments on our EPN Holding and Argo term loans
and other financing obligations, as well as distributions to our partners.

LIQUIDITY

The following table presents the timing and amounts of our contractual cash
obligations as of June 30, 2002, that we believe could affect our liquidity (in
millions):

For a discussion of our financing arrangements, see Part I, Financial
Information, Note 6.

37

COMMITMENTS AND CONTINGENCIES

See Item 1, Financial Information, Note 7, which is incorporated herein by
reference.

NEW ACCOUNTING PRONOUNCEMENTS NOT YET ADOPTED

See Item I, Financial Information, Note 13, which is incorporated herein by
reference.

38

CAUTIONARY STATEMENT REGARDING
FORWARD-LOOKING STATEMENTS

We have made statements in this document that constitute forward-looking
statements, as that term is defined in the Private Securities Litigation Reform
Act of 1995. These statements are subject to risks and uncertainties.
Forward-looking statements include information concerning possible or assumed
future results of operations. These statements may relate to information or
assumptions about:

- earnings per unit;

- capital and other expenditures;

- cash distributions;

- financing plans;

- capital structure;

- liquidity and cash flow;

- pending legal proceedings and claims, including environmental matters;

- future economic performance;

- operating income;

- cost savings;

- management's plans; and

- goals and objectives for future operations.

Important factors that could cause actual results to differ materially from
estimates or projections contained in forward-looking statements are described
in our Annual Report on Form 10-K for the year ended December 31, 2001, and
other filings with the Securities and Exchange Commission.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

This information updates, and you should read it in conjunction with, our
quantitative and qualitative disclosures about market risks reported in our
Annual Report on Form 10-K for the year ended December 31, 2001, in addition to
information presented in Items 1 and 2 of this Quarterly Report on Form 10-Q and
our Current Reports on Form 8-K and 8-K/A.

During 2001 and 2002, we entered into cash flow hedges in connection with
our EPIA operations. As of June 30, 2002, the fair value of these cash flow
hedges is approximately $9 thousand. During the six months ended June 30, 2002,
the majority of our cash flow hedges expired and we reclassified $1.5 million
from accumulated other comprehensive income to earnings.

Starting in April 2002, in connection with our EPN Holdings acquisition, we
have swaps in place for our interest in the Indian Basin processing plant. As of
June 30, 2002, the fair value of these cash flow hedges was a $0.2 million asset
resulting in an unrealized gain of $0.2 million.

During 2002, Poseidon entered into a two-year interest rate swap agreement.
As of June 30, 2002, the fair value of its interest rate swap was a liability of
$0.7 million resulting in an unrealized loss of $0.7 million. We include our 36
percent share of this liability of $0.3 million as a reduction of our investment
in Poseidon and as an unrealized loss in other comprehensive income.
Additionally, we have recognized in income our 36 percent share of Poseidon's
realized loss of $0.6 million for the six months ended June 30, 2002, or $0.2
million, through our earnings from unconsolidated affiliates.

39

PART II -- OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

See Part I, Financial Information, Note 7, which is incorporated herein by
reference.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS

In connection with the EPN Holding assets acquisition, on April 8, 2002, we
issued 159,000 common units at the then current market value of $37.74 per unit,
to a subsidiary of El Paso Corporation pursuant to a contribution agreement
dated April 1, 2002. The consideration for the issuance was the contribution to
us of certain of the EPN Holding assets. This issuance was exempt from
registration pursuant to Section 4(2) of the Securities Act as a transaction not
involving a public offering.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

None.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Each exhibit identified below is filed as part of this document. Exhibits
not incorporated by reference to a prior filing are designated by a "*"; all
exhibits not so designated are incorporated herein by reference to a prior
filing as indicated. Exhibits designated with a "+" represent a management
contract or compensatory plan or arrangement.

UNDERTAKING

We hereby undertake, pursuant to Regulation S-K Items 601(b), paragraph
(4)(iii), to furnish to the U.S. Securities and Exchange Commission, upon
request, all constituent instruments defining the rights of holders of our
long-term debt not filed herewith for the reason that the total amount of
securities authorized under any such instruments does not exceed 10 percent of
our total consolidated assets.

40

(b) Reports on Form 8-K

We filed a current report on Form 8-K dated April 15, 2002, announcing the
completion of the acquisition of certain Texas and New Mexico midstream assets
from El Paso Corporation.

We filed a current report on Form 8-K dated April 22, 2002, providing
audited financial statements of the Texas and New Mexico midstream assets
acquired from El Paso Corporation.

We filed a current report on Form 8-K dated April 24, 2002, providing the
consents from experts incorporated by reference in our Registration Statement on
Form S-3 (File No. 333-85987).

We filed a current report on Form 8-K dated April 29, 2002, providing the
Underwriting Agreement entered into in connection with our public offering of 3
million common units.

We filed a current report on Form 8-K dated June 5, 2002, providing
unaudited Deepwater Holdings, L.L.C., condensed consolidated financial
statements at September 30, 2001 and for the nine months ended September 30,
2001 and 2000.

We filed a current report on Form 8-K dated July 15, 2002, to conform our
historical financial information as of December 31, 2001 and 2000, and for the
years ended December 31, 2001, 2000 and 1999 to the presentation in our Form
10-Q for the quarterly period ended March 31, 2002, which reflected new names
for our segments, movement of the Chaco processing plant from Oil and NGL
logistics to Natural gas pipelines and plants segment, and discontinued
operations treatment for assets held for sale.

We filed a current report on Form 8-K/A dated July 19, 2002, to include the
signature page inadvertently omitted from our Form 8-K dated July 15, 2002.

We filed a current report on Form 8-K dated July 31, 2002, providing
unaudited financial statements of the Texas and New Mexico midstream assets
acquired from El Paso Corporation at March 31, 2002 and for the three month
periods ended March 31, 2002 and 2001.

We filed a current report on Form 8-K dated August 12, 2002, providing
audited combined financial statements of El Paso Field Services San Juan
Gathering and Processing Businesses, Typhoon Gas Pipeline, Typhoon Oil Pipeline,
and Coastal Liquids Partners NGL Business as of December 31, 2001 and 2000, and
for the years ended December 31, 2001, 2000 and 1999. Also included are the
unaudited combined financial statements for these businesses as of March 31,
2002, and for the three months ended March 31, 2002 and 2001.

We also furnished to the SEC under Item 9, Regulation FD, Current Reports
on Form 8-K. Item 9 Current Reports on Form 8-K are not considered to be "filed
for purposes of Section 18 of the Securities and Exchange Act of 1934 and are
not subject to the liabilities of that section, but are filed to provide full
disclosure under Regulation FD." We filed a current report on Form 8-K dated
July 24, 2002, which was provided for informational purposes.

41

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

EL PASO ENERGY PARTNERS, L.P.

By: EL PASO ENERGY PARTNERS COMPANY,
its General Partner

Date: August 13, 2002 By: /s/ KEITH B. FORMAN
------------------------------------
Keith B. Forman
Vice President and Chief Financial
Officer

Date: August 13, 2002 By: /s/ D. MARK LELAND
------------------------------------
D. Mark Leland
Senior Vice President and Controller
(Principal Accounting Officer)

42

INDEX TO EXHIBITS