El Paso Corp. and its publicly owned master limited partnership, El Paso Energy Partners LP (EPN), have entered into a letter of intent for EPN to acquire about 10,677 miles of natural gas transportation assets in Texas for $750 million. El Paso Corp. is selling EPN its EPGT-Texas intrastate pipeline, gathering systems in the Permian Basin and an interest in the Indian Basin gas plant in southeast New Mexico. The transaction is expected to close in the first quarter of 2002.

The assets include the 9,400-mile EPGT-Texas intrastate pipeline, which has an operating capacity of nearly 5 Bcf/d. EPGT deliveries averaged 3.5 million Dth/d in 2001. EPN also will acquire the 1,300-mile Permian Basin gathering systems with a capacity of 465 MMcf/d and average net 2001 throughput of 341,000 Dth/d, and a 42.3% non-operated interest in the Indian Basin gas processing and treating plant and associated gathering lines. The transaction is part of a plan announced by El Paso Corp. in December to strengthen its balance sheet and eliminate debt (see NGI, Dec. 17, 2001).

As part of the transaction, EPN will transfer its Prince Tension Leg Platform (TLP) and 9% overriding royalty interest in the Prince Field to El Paso Production Co., a business unit of El Paso Corp. and the field operator. EPN will retain third-party marketing rights for remaining platform capacity and an option to repurchase the platform at the end of the Prince Field reserve life.

EPN said the sales price is about eight times the expected cash flow from the assets, as measured by earnings before interest, taxes, depreciation and amortization (EBITDA). EPN will pay to El Paso Corp. approximately $560 million in cash and $190 million in kind, consisting of the Prince TLP and related field royalty interest. Subject to the closing of the transaction, EPN’s board of directors has authorized a $0.10 per unit distribution increase, which will raise the annual distribution to $2.60 per common unit ($0.65 per quarter).

Robert G. Phillips, EPN’s CEO, said the transaction would increase the company’s cash distribution four times, or about 13% in one year. “These increases are due to the more than $1.5 billion of midstream asset acquisitions, including this transaction, made from El Paso Corp. since it became the general partner in 1998, as well as growing contributions from our Gulf of Mexico assets.” Phillips, who said the transaction was EPN’s “largest and most important to date,” said the buy will enhance the partnership’s onshore asset base.

Going forward, Phillips said EPN plans to continue to develop greenfield transportation infrastructure and platform projects in the Gulf of Mexico, such as its recently announced Cameron Highway Oil Pipeline. He added that EPN plans to continue to pursue acquisitions that are immediately accretive to cash flow. The midstream assets will be financed by EPN through permanent debt and equity financing.

Master limited partnerships, like EPN’s, are considered by many investment bankers and major pipeline companies to be a smart method of growing a pipeline business because they avoid a significant tax burden, and more of the cash generated falls to the public unit holders. Unlike off-balance sheet deals that mask debt, master limited partnerships sell units of the partnership company to stockholders, and the financial details are completely visible. Several other major energy companies also have taken advantage of the tax benefits involved, most notably Kinder Morgan Inc., whose Kinder Morgan Energy Partners LP has fueled the company’s growth in the past year.

The EPN partnership distributes income to its unit holders, and it said last week it would distribute an extra 10 cents per unit, raising it to $2.60 per unit during 2002. EPN owns interests in natural gas and crude oil gas pipeline systems, gas storage facilities and in other assets in the Gulf of Mexico. EPN is financing the deal with El Paso Corp. by issuing fresh equity and by raising debt, but noted that the long-term goal is to reduce its overall debt-capital ratio to about 50%.

On news of the transaction, Moody’s Investors Service revised the partnership’s outlook to stable from positive while noting that the company would be taking on new debt to finance the acquisition. The revision is not a downgrade. Moody’s cautioned that EPN’s “rating may be pressured if debt is not reduced in a timely manner.”

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