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El Paso Energy
Partners Seeks Institutional Investors in Its Pyramid Rather than adding any more of our words on high greed partnerships, we reprint what Platt’s Oilgram has to say about an announcement concerning Strong Sell recommended El Paso Energy Partners (EPN): Volume
80 Number 155
August 14, 2002 EL
PASO PLANS OFFERING TO RAISE $600-MIL FOR MLP New
York - Strained energy merchant El Paso late Aug 12 unveiled a financial
engineering move to raise some $600-mil in much-needed cash from institutional
investors for its fast-growing master limited partnership, El Paso Energy
Partners. El
Paso filed to sell up to 16.9-mil shares for $34.23 each to the public in an
initial public offering in a new company called El Paso Energy Management LLC.
Another 6.1-mil shares would be bought by El Paso itself, providing some
$790-mil in funding to the new company. That
money will be used to buy new payment-in-kind "i-units" in El Paso
Energy Partners, the MLP, which will then use the proceeds, and $391-mil of
borrowings, to fund its pending $782-mil purchase of San Juan Basin midstream
gas assets from parent El Paso. After
taking control of the San Juan assets, El Paso Energy Partners will be the
largest natural gas gatherer, based on miles of pipeline, in Texas and the San
Juan Basin, according to the IPO filing. By
selling common shares in a new company, rather than a public offering of more
MLP units directly, El Paso hopes to tap deep-pockets institutional investment
funds that would otherwise shun retail-oriented MLP units, which have
complicated tax treatment. After
the offering, El Paso will own about 27% of the MLP, including its stake in the
new company and its general partner interest. The new El Paso Energy Management
will own 31% of the MLP, through its i-units. Public MLP unit holders will own
50%. No
date is set for the IPO launch and a symbol is not yet chosen. Lead underwriter
is Goldman Sachs. Energy merchant MLPs have come in for close scrutiny following
Enron's collapse, with some analysts questioning their smoke-and-mirrors
approach and high fees paid to the parent-company general partners (ON 2/25). The
new El Paso deal is similar to a move by Kinder Morgan to create an
institutionally oriented security based on its own Kinder Morgan Energy Partners
MLP (ON 3/1). "I think there's a risk they're reaching a point of
diminishing returns in using this technique," said analyst Kurt Wulff of
McDep Associates. He noted a similar set-up also between Canadian pipeline major
Enbridge and its master limited partnership Enbridge Energy Partners (ON 5/20). El
Paso is "following the trend in the industry," said Wulff. But that
path is not without risks. Kinder Morgan Management, the institutional variant
for Kinder Morgan's MLP, filed last year to raise almost $1-bil in new
securities, but priced a sale of only 12-mil shares Aug 1 at just $27.50 each,
or $330-mil. Unlike
its initial offering early last year, the new "KMR" units are not
convertible to MLP units. El Paso's new institutional MLP offering likewise does
not appear convertible to MLP units, which could limit their resale market, some
analysts have said. "I'm
concerned El Paso's in shaky condition," said Wulff. "They've got to
get money wherever they can." He doubts the offering will meet its more
than $600-mil target. El Paso Aug 8 reported a second-quarter loss of $45-mil, along with spending cuts and asset sales (ON 8/9).-Beth Evans, James Norman |