El Paso Energy Partners LP (EPN) claimed earnings and income records for 2002, and Monday, as management laid out its ambitious plans for 2003, it emphasized how it will grow independently and separately from general partner El Paso Corp.

The master limited partnership (MLP) reported adjusted earnings in 2002 of $267 million, with net income of $98 million. Last year, it also doubled the size of its asset base to $3 billion, and improved the cash flow stream with acquisitions in Texas as well as the Permian and San Juan basins.

However, as good as last year was for EPN, “general partner issues had a negative impact on EPN equity and debt valuations in 2002,” explained CEO Robert G. Phillips. “Concerns about conflicts of interest, related-party activities and high general partner splits were highlighted by critics of the MLP sector.”

Phillips said that “peripheral issues” overlooked the strong industry fundamentals and EPN’s five-year performance. However, governance changes to the entire industry and MLP sector will bring more transparency and investor confidence, he said.

To distinguish itself from El Paso Corp., Phillips outlined several actions that the MLP has undertaken, which include early compliance with new governance rules, board independence from the parent corporation, an expanded board that includes five outside and two inside directors, a new governance and compensation committee, financial “experts” on the audit committee; and a special conflicts committee process.

To address rating agency and investor concerns, EPN has set up a “ring-fencing” strategy, which may include a name change, transfer of midstream senior management and employees, reduced related-party activities, and obtaining credit assurance and meeting and offset agreement with El Paso Corp.

Problems aside, EPN said that El Paso Corp. “remains highly committed to the success of the partnership,” and Phillips said that the parent will support the ring-fencing strategy. Because the El Paso investment in EPN is not reflected in El Paso Corp. stock, the parent is considering strategic alternatives to enhance the value of its investment in the partnership, said Phillips. The parent corporation plans to “take steps necessary” as the general partner to improve EPN’s access to capital markets, said Phillips.

Long-term, EPN wants to deliver 15-20% annually to its investors and achieve an investment-grade credit rating. Phillips said the company also wants to maintain its leadership position in the deepwater Gulf of Mexico, but also plans to make “conservatively financed” acquisitions of fee-based midstream assets if they are a good fit.

EPN management believes that the natural gas supply shortage will drive prices and drilling activity this year, said Phillips, and the company’s core supply basins are “well positioned for growth.” With a deepwater trend development on track, he said that an economic recovery would improve the demand and pricing for natural gas liquids. Also, EPN’s “high deliverability storage continues to hold market value.”

In 2003, EPN plans to spend about $290 million in expansion capital and $45 million in sustaining capital, Phillips said. It also is targeting a debt-to-capital level of 60% by year’s end. EPN expects cash flow to increase 57% to $420 million in 2003, and also expects its annual cash distribution to double to 10% from 5% (currently $2.70/unit). Currently, the MLP has $1 billion of growth projects under way, including:

“During 2002, we more than doubled our assets, completing two immediately accretive acquisitions totaling more than $1.5 billion,” said Phillips. “We look forward to 2003 as a time to focus our efforts on three key objectives: optimizing the performance of our recently acquired assets, improving our balance sheet and credit metrics, and evaluating select acquisition opportunities.”

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