August 14, 2002; Kurt Wulff Quoted on El Paso Energy Partners by Beth Evans in Platts Oilgram

plattsOilgram News

Wednesday, August 14, 2002

Volume 80, Number 155

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 about27%of theMLP,including its stake in

the new company and its general partner interest. The new El Paso Energy Management

will own 31% of the MLP, though 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

toMLPunits, 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