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 SEPTEMBER 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.)

4 GREENWAY PLAZA
HOUSTON, TEXAS 77049
(Address of Principal Executive Offices) (Zip Code)

Registrant's Telephone Number, Including Area Code: (832) 676-2600

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 November 8,
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
September 30, 2002, and for the quarters and nine months ended September 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 April 2002 acquisition of the Texas and New Mexico assets,
which we refer to as 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 points on our system 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 assets for impairment.
It also changes the accounting for discontinued operations such that we can no
longer accrue the estimate for future
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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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operating losses but report them as they are incurred. We applied SFAS No. 144
in accounting for our Prince assets, which met all the requirements to be
treated as an asset held for sale, in April 2002. See Note 3, Prince Assets
Disposition, for further information.

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, including El Paso Corporation's remaining interests in the Chaco
cryogenic natural gas processing plant; 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. As part of this transaction, El Paso
Corporation will be required to repurchase the Chaco processing plant from us
for $77 million in October 2021, and at that time, we will have the right to
lease the plant from El Paso Corporation for a period of ten years with the
option to renew the lease annually thereafter. The purchase price of $782
million 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 other third-party approvals and consents,
obtaining satisfactory results from ongoing due diligence and obtaining
financing satisfactory to us. We expect to close the transaction in the fourth
quarter of 2002. Ultimately, we expect to finance our acquisition of the San
Juan assets through long-term debt and equity.

The equity component of the proposed acquisition contemplates us issuing to
El Paso Corporation up to $350 million of our Series C units, a new class of our
limited partner interests. The potential $350 million Series C issuance will be
reduced by the proceeds from any common unit issuance we may consummate before
the closing of the San Juan assets acquisition.

The Series C units will be similar to our existing common units, except
that the Series C units will be non-voting. After April 30, 2003, El Paso
Corporation (or its subsidiaries, as applicable) will have the right to cause us
to propose a vote of our common unitholders as to whether the Series C units
should be converted into common units. If our common unitholders approve the
conversion, then each Series C unit will convert into a common unit. If our
common unitholders do not approve the conversion within 120 days after El Paso
Corporation requests the vote, then the distribution rate for the Series C units
will increase to 105 percent of the common unit distribution rate. Thereafter,
the Series C unit distribution rate would increase on April 30, 2004 to 110
percent of the common unit distribution rate and on April 30, 2005 to 115
percent of the common unit distribution rate. The issue price for the Series C
units will be the greater of $32 per unit or the average market price of a
common unit for the five trading days ending on the business day immediately
preceding the closing date. If the average market price is less than $27, the
San Juan acquisition may be delayed, terminated or renegotiated.

The remaining balance of the purchase price will be paid in cash. We expect
to fund this portion of the purchase price with a $282 million senior secured
acquisition term loan and other long-term debt of $150 million.

In accordance with our procedures for evaluating and valuing material
acquisitions with El Paso Corporation, our Special Conflicts Committee engaged
an independent financial advisor and obtained two separate fairness opinions for
the acquisition of the San Juan assets and the issuance of the Series C units.
The opinions we received stated the transaction and the issuance were both fair
to us and our unitholders.

6

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:

- the EPGT Texas intrastate pipeline system;

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

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

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

- a 50 percent undivided interest in the Channel natural gas pipeline
system located along the Gulf coast of Texas;

- the TPC Offshore natural gas pipeline system located off the Gulf coast
of Texas; 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 acquisition facility.

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. All of the
purchase price has been allocated to the EPN Holding net assets acquired. 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. That appraisal will be the basis of the final allocation of
the purchase price assigned to the assets and liabilities acquired.

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 September 30, 2002
is not provided because the results of operations for the EPN Holding assets are
included in the actual results of operations for the period. The selected pro
forma information does not necessarily represent what our results of operations
actually

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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 for approximately $10 million. 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.

Big Thicket

In August 2002, we acquired the Big Thicket assets, which consist of the
Silsbee compressor station and the Big Thicket gathering system, for
approximately $11 million from BP America Production Company. The Silsbee
compressor station acts as a booster station for a web of area gas gathering
lines. The facility has four 1,200 horsepower gas compressors that boost low
pressure field gas from 45 to 950 pounds of plant inlet pressure. The Big
Thicket gathering system is comprised of approximately 150 miles of 4 to 10 inch
diameter pipe with throughput of approximately 22 MMcf/d.

3. PRINCE ASSETS DISPOSITION

In connection with our April 2002 acquisition of the EPN Holding assets
from El Paso Corporation, we sold our Prince tension leg platform (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 nine
months ended September 30, 2002, were revenues of $6.7 million attributable to
these disposed assets. We did not recognize any revenues related to the Prince
assets during the quarter ended September 30, 2002, as these assets were sold in
April 2002. Included in income from discontinued operations for the quarter and
nine months ended September 30, 2001, was revenues of $1.9 million.

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
gain on the sale of $0.4 million during 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 distributions paid to our common unitholders and
general partner during the nine months ended September 30, 2002:

In October 2002, we declared a cash distribution of $0.675 per common unit,
$29.7 million in aggregate, for the quarter ended September 30, 2002, which we
will pay on November 15, 2002, to holders of record as of October 31, 2002. In
addition, we will pay distributions to our general partner of $12.0 million in
respect of its general partner interest. At the current distribution rates, our
general partner receives approximately 29 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 acquisition facility. 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 April 2002 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
$32.23 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 is being amortized over the vesting
period of the restricted units, which we have estimated to be one year. The
unamortized amount of our total deferred compensation as of September 30, 2002,
was approximately $1.5 million.

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5. PROPERTY, PLANT AND EQUIPMENT

Our property, plant and equipment consisted of the following:

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.

Credit Facility

As of September 30, 2002, we had $569 million outstanding with an average
interest rate of 4.46% under our $600 million credit facility with the total
unused amount available. The credit facility matures in May 2004, is guaranteed
by all of our subsidiaries except for our unrestricted subsidiaries and El Paso
Energy Partners Finance Corporation, and is collateralized by substantially all
of our assets (excluding our unrestricted subsidiaries), and our general
partner's general and administrative services agreement. The credit facility,
together with the EPN Holding acquisition facility, contains covenants that
include restrictions on our and our subsidiaries' ability to incur additional
indebtedness or liens, sell assets, make loans or investments, acquire or be
acquired by other companies and amend some of our contracts, as well as
requiring maintenance of certain financial ratios. As of September 30, 2002, we
are not aware of anything that causes us not to be in compliance with the
financial ratios and covenants contained in our credit facilities.

In October 2002, we amended our $600 million credit facility and the EPN
Holding acquisition facility in connection with our issuance of the senior
secured term loan. The modifications included, among other things, (1) entering
into a new $160 million senior secured term loan maturing in 2007; (2)
designating our credit facility, the EPN Holding acquisition facility, and the
senior secured term loan as "senior secured" indebtedness which is
cross-collateralized on an equal basis with all of the collateral currently
pledged under our credit facility and the EPN Holding acquisition facility; (3)
aligning, effectively, the covenants in our credit facility and the EPN Holding
acquisition facility, including eliminating the restrictions for distributing
cash out of EPN Holding; and (4) terminating the $25 million revolving credit
facility that was formerly part of the EPN Holding acquisition facility. Our new
senior secured term loan and the EPN Holding acquisition facility are discussed
below. We used the $160 million proceeds from the senior secured term loan to
temporarily reduce indebtedness under our $600 million credit facility.

Senior Secured Term Loan

In October 2002, in connection with the amendment of our credit facilities
discussed above, we obtained a $160 million senior secured term loan with a
syndicate of lenders. We may elect that all or a portion of the senior secured
term loan bear interest at either 2.25% plus a variable base rate (equal to the
greater of the prime rate as determined by JP Morgan, the federal funds rate
plus 0.5% or the CD rate as determined by JP Morgan plus 1%); or LIBOR plus
3.5%. We may, at our option, make prepayments in amounts not less

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than $5 million. However, prepayments we make during the first year of the
senior secured term loan require payment of a premium equal to one percent of
the prepayment amount. The senior secured term loan is payable in semi-annual
installments equal to one percent of the aggregate principal amount of the
senior secured term loan for the first nine installments and the remaining
balance at maturity in October 2007. The senior secured term loan is guaranteed
by us and all of our material subsidiaries; and is cross-collateralized with our
credit facility and our EPN Holding acquisition facility, by our general and
administrative agreement, substantially all of our assets and our general
partner's one percent general partner interest in us.

Limited Recourse Financing

EPN Holding acquisition facility -- In connection with our acquisition of
the EPN Holding assets from El Paso Corporation in April 2002, EPN Holding
entered into a $560 million limited recourse acquisition facility with a group
of commercial banks. The acquisition facility provided 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 obligations under the acquisition facility are guaranteed by all
of our material subsidiaries and equity interests. 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. The EPN Holding term loan matures 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 September 30, 2002, the outstanding balance under the term loan was
$160 million bearing interest at a rate of 4.32% and there were no amounts
outstanding under the acquisition facility revolving credit facility.

In October 2002, as a result of amending our $600 million credit facility
discussed above, the EPN Holding acquisition facility covenants were modified
and the related $25 million revolving credit facility was terminated.

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 acquisition facility and the remainder for general partnership
purposes. In August 2002, we filed a registration statement for an offer to
exchange these notes for registered debt securities with identical terms. The
registration statement is currently under review by the SEC.

Other credit facilities

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.

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 September 30,
2002, the remaining $75 million was at an average floating interest rate of
3.38%.

In August 2002, Deepwater Gateway, our joint venture that owns the Marco
Polo TLP, obtained a $155 million project loan at a variable interest rate from
a group of commercial lenders to finance a substantial portion of the cost to
construct the Marco Polo TLP and related facilities. Upon completion of the
construction, the project loan will convert into a term loan, subject to the
terms of the loan agreement. The loan is collateralized by substantially all of
Deepwater Gateway's assets. If Deepwater Gateway defaults on its payment
obligations under the loan, we would be required to pay to the lenders all
distributions we or any of

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our subsidiaries had received from Deepwater Gateway up to $22.5 million. As of
September 30, 2002, Deepwater Gateway had no amounts outstanding under the
project loan and had not paid us or any of our subsidiaries any distributions.
If Deepwater Gateway had amounts outstanding as of September 30, 2002, the
average interest rate would have been 3.56%.

7. COMMITMENTS AND CONTINGENCIES

Legal Proceedings

Grynberg. 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 underreport 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. The plaintiff in this case
seeks royalties that he contends the government should have received had the
volume and heating value of natural gas produced from royalty properties been
differently measured, analyzed, calculated and reported, together with interest,
treble damages, civil penalties, expenses and future injunctive relief to
require the defendants to adopt allegedly appropriate gas measurement practices.
No monetary relief has been specified in this case. 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.

Will Price (formerly Quinque). 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. Quinque has been
dropped as a plaintiff and Will Price has been added. 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
plaintiff in this case seeks certification of a nationwide class of gas working
interest owners and gas royalty owners to recover royalties that the plaintiff
contends these owners should have received had the volume and heating value of
natural gas produced from their properties been differently measured, analyzed,
calculated and reported, together with prejudgment and postjudgment interest,
punitive damages, treble damages, attorney's fees, costs and expenses, and
future injunctive relief to require the defendants to adopt allegedly
appropriate gas measurement practices. No monetary relief has been specified in
this case. Plaintiffs motion for class certification has been filed and we have
filed our response.

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, the subcontractor and Argo agreed upon a settlement in July 2002.
This settlement did not have a material adverse effect on our financial
position, results of operations or cash flow.

Under the terms of our agreement with El Paso Corporation pursuant to which
we acquired 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, Houston Pipe Line Company LP and City of Corpus Christi
discussed below.

During 2000, Leapartners, L.P. filed a suit against El Paso Field Services
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. Briefs have been filed and oral arguments are set for
November 2002.

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 Hidalgo County State District court in
December 1998 and found a breach of

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contract, and held 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. Briefs
have been filed and oral arguments are set for November 2002.

In December 2000, a 30-inch natural gas pipeline jointly owned by El Paso
Energy Intrastate, now owned 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. El Paso Energy Intrastate is the operator of
the pipeline. In December 2000 a lawsuit was filed in the state district court
in Chambers County, Texas by eight plaintiffs, including two homeowners'
insurers. The suits seek recovery for physical pain and suffering, mental
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, El Paso Energy Intrastate has agreed to
assume the defense of and to indemnify Houston Pipe Line Company. In September
2002, an agreement was reached to settle the claims of two plaintiffs (including
one of the insurers). The discovery phase of the lawsuit is proceeding and trial
is expected in early 2003.

The City of Corpus Christi, Texas ("City") is alleging that EPGT Texas and
various Coastal entities owe it monies for past obligations under City
ordinances that propose to tax EPGT Texas on its gross receipts from local
natural gas sales for the use of street rights-of-way. No lawsuit has been filed
to date. Some but not all of the EPGT Texas pipe at issue has been using the
rights-of-way since the 1960's. In addition, the City demands that EPGT Texas
agree to a going-forward consent agreement in order for EPGT Texas pipe and
Coastal to have the right to remain in City rights-of-way.

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 will establish the necessary
accruals. As of September 30, 2002, we had no reserves for our legal matters.

While the outcome of our outstanding legal matters cannot be predicted with
certainty, based on 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

Each of our operating segments is subject to extensive federal, state, and
local laws and regulations governing environmental quality and pollution
control. These laws and regulations are applicable to each segment and 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 September
30, 2002, we had a reserve of approximately $21 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. In addition, we expect to make capital expenditures for environmental
matters of approximately $10 million in the aggregate for the years 2003 through
2007, primarily to comply with clean air regulations.

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
will 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

13

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.

Rates and Regulatory Matters

Marketing Affiliate NOPR. In September 2001, the Federal Energy Regulatory
Commission (FERC) issued a Notice of Proposed Rulemaking (NOPR). The NOPR
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. In December 2001, we filed comments with the
FERC addressing our concerns with the proposed rules. A public hearing was held
in May 2002, providing an opportunity to comment further on the NOPR. Following
the conference, additional comments were filed by us. At this time, we cannot
predict the outcome of the NOPR, but adoption of the regulations in the form
proposed would, at a minimum, place additional administrative and operational
burdens on us.

If the standards of conduct NOPR is adopted by the FERC, we will be
required to functionally separate our HIOS and Petal interstate facilities from
our other entities. Under the proposed rule, we would be required to dedicate
employees to manage and operate our interstate facilities independently from our
other non-jurisdictional facilities. This employee group would be required to
function independently and would be prohibited from communicating non-public
transportation information to affiliates. Separate office facilities and systems
would be necessary because of the requirement to restrict affiliate access to
interstate transportation information. The NOPR also limits the sharing of
employees and officers with non-regulated entities. Because of the loss of
synergies and shared employee restrictions, a disposition of the interstate
facilities may be necessary for us to effectively comply with the rule. At this
time, we cannot predict the outcome of this NOPR.

Negotiated Rate NOI. In July 2002, the FERC issued a Notice of Inquiry
(NOI) that seeks comments regarding its 1996 policy of permitting pipelines to
enter into negotiated rate transactions. The FERC is now reviewing whether or
not a pipeline's "recourse rate" (its cost of service based rate) continues to
safeguard against a pipeline exercising market power, as well as other issues
related to negotiated rate programs.

Cash Management NOPR. In August 2002, the FERC issued a NOPR requiring that
all 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 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. In August 2002 comments were filed. Representatives of companies from
the gas and electric industries participated on a panel and uniformly agreed
that the proposed regulations should be revised substantially and that the
proposed capital balance and investment grade credit rating requirements would
be excessive. At this time, we cannot predict the outcome of this NOPR.

Also in August 2002, FERC's Chief Accountant issued an Accounting Release,
to be effective immediately, providing guidance on how companies should account
for money pool arrangements and the types of documentation that should be
maintained for these arrangements. However, the Accounting Release did not
address the proposed requirements that the FERC regulated entity maintain a
minimum proprietary capital balance of 30 percent and that the entity and its
parent have investment grade credit ratings. Requests for rehearing were filed
in August 2002. The FERC has not yet acted on the rehearing requests.

14

If the cash management NOPR is adopted by the FERC, our HIOS and Petal
interstate facilities will no longer be permitted to participate in a money pool
or cash management program. As a result, more frequent distributions or equity
contributions may be needed in anticipation of monthly cash flow requirements
for those interstate facilities. Also, separate credit facilities and resources
may be required to support the capital and day-to-day activities for the
interstate facilities separate from other of our subsidiaries and our primary
bank accounts.

Other Regulatory Matters. Our HIOS system is also subject to the
jurisdiction of the FERC in accordance with the Natural Gas Act of 1938 and the
Natural Gas Policy Act of 1978. HIOS operates under a separate FERC approved
tariff that governs its operations, terms and conditions of service, and rates.
We are obligated to file a new rate case for our HIOS system no later than
December 31, 2002.

In June 2002, Petal Gas Storage filed with the FERC a certificate
application to add additional gas storage capacity to Petal's storage system.
The filing included a new storage cavern with a working gas capacity of 5 Bcf,
the conversion and enlargement of an existing subsurface brine storage cavern to
a gas storage cavern with a working capacity of 3 Bcf and related surface
facilities, natural gas, water and brine transmission lines.

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.
Falcon Gas Storage also requested late intervention and rehearing of the order.
Falcon asserts that EPGT Texas' imbalance penalties and terms of service
preclude third parties from offering imbalance management services. EPGT Texas'
request for rehearing has been granted and is pending before the FERC.

While the outcome of all of our rates and regulatory matters cannot be
predicted with certainty, based on 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 generally surrounding the energy
sector, the creditworthiness of several industry participants has been called
into question. As a result of these general circumstances, we have established
an internal group to monitor our exposure to and determine, as appropriate,
whether we should request prepayments, letters of credit or other collateral
from our counterparties. If these general conditions worsen and, as a result,
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.

In August 2002, we entered into a derivative financial instrument to hedge
our exposure during 2003 relating to gathering activities for changes in natural
gas prices in the San Juan Basin in anticipation of our proposed acquisition of
the San Juan assets. The derivative is a financial swap on 30,000 MMBtu per day
15

whereby we receive a fixed price of $3.525 per MMBtu and pay a floating price
based on the San Juan index. We are accounting for this derivative under
mark-to-market accounting since it does not qualify for hedge accounting under
SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities. As
of September 30, 2002, the fair value of this derivative was a $1.0 million
liability and we recognized this $1.0 million loss in the margin of our Natural
gas pipelines and plants segment. Once the proposed acquisition of the San Juan
assets is completed, we expect to designate this derivative as a cash flow hedge
under SFAS 133.

At September 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 and 2002 to offset the risk of increasing natural
gas prices. As of September 30, 2002, the fair value of these cash flow hedges
was an asset of approximately $49 thousand. For the nine months ended September
30, 2002, the majority of these cash flow hedges expired and we reclassified a
loss of $1.4 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 nine 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 September
30, 2002, the fair value of these cash flow hedges was a $126 thousand liability
resulting in an unrealized loss of $126 thousand. 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
September 30, 2002, the fair value of its interest rate swap was a liability of
$1.6 million resulting in accumulated other comprehensive loss of $1.6 million.
We included our 36 percent share of this liability of $0.6 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 15 months. Additionally, we have recognized in
income our 36 percent share of Poseidon's realized loss of $0.9 million for the
nine months ended September 30, 2002, or $0.3 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's hedging activity is Credit
Lyonnais. Poseidon does not require collateral and does not anticipate
non-performance by the counterparty. The counterparty for our San Juan hedging
activity is J. Aron and Company, a subsidiary of Goldman Sachs. We do not
require collateral and do not anticipate non-performance by our 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.

16

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 activities 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 nine months ended September 30, 2001, 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 September 30:

QUARTER ENDED SEPTEMBER 30, 2002

QUARTER ENDED SEPTEMBER 30, 2001

- ----------

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

17

NINE MONTHS ENDED SEPTEMBER 30, 2002

NINE MONTHS ENDED SEPTEMBER 30, 2001

- ----------

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

18

RECONCILIATION OF PERFORMANCE CASH FLOWS BY SEGMENT

- ---------------
(1) We finance our activities and evaluate our minority interest at the
consolidated level and therefore we do not allocate interest and debt
expense among our segments.

(2) Performance cash flows (or Adjusted EBITDA) is determined by taking EBIT and
adding or subtracting, as appropriate, cash distributions from
unconsolidated affiliates; depreciation, depletion and amortization;
earnings from unconsolidated affiliates; gains and losses on asset sales;
and other nonrecurring items.

20

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 are as follows:

NINE MONTHS ENDED SEPTEMBER 30, 2002
(IN THOUSANDS)

NINE MONTHS ENDED SEPTEMBER 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 nine months ended September 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.

21

Deepwater Gateway/Marco Polo Project

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 TLP.
The total cost of the project is estimated to be $206 million or approximately
$103 million for our share. As of September 30, 2002, we have contributed $27
million to Deepwater Gateway.

Arizona Gas Storage, L.L.C./Copper Eagle Project

In June 2002, we acquired El Paso Corporation's effective 30 percent
interest in a natural gas storage facility development project located near
Phoenix, Arizona.

11. RELATED PARTY TRANSACTIONS

Our transactions with related parties and affiliates are as follows:

For the quarters ended September 30, 2002 and 2001, revenues received from
related parties consisted of approximately 45% and 35% of our total revenue. For
the nine months ended September 30, 2002 and 2001, revenues received from
related parties consisted of approximately 43% and 26% of our total revenue.

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.

22

Revenues received from related parties

EPN Holding Assets. Our revenues from related parties increased in 2002 as
a result of our EPN Holding transaction in which we acquired gathering,
transportation and processing contracts with affiliates of our general partner.
For the quarter and nine months ended September 30, 2002, we received $21.8
million and $46.1 million from El Paso Merchant Energy North America Company,
$10.2 million and $19.6 million from El Paso Field Services and $1.4 million and
$2.8 million from El Paso Production Company.

Expenses paid to related parties

Cost of natural gas. Our cost of natural gas paid to related parties
increased in 2002 as a result of our EPN Holding transaction in which we
acquired contracts with affiliates of our general partner. For the quarter and
nine months ended September 30, 2002, we had natural gas imbalance settlement
expenses of $0.1 million and $0.3 million from Tennessee Gas Pipeline Company
and $0.1 million for the nine months ended September 30, 2002 from El Paso
Merchant Energy North America Company.

Operating expenses. Our operating expense paid to related parties increased
in 2002 as a result of our EPN Holding transaction in which we acquired
operating agreements with El Paso Field Services. For the quarter and nine
months ended September 30, 2002, we had operating expenses of $6.3 million and
$11.4 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 was
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.

Other Matters

In addition to the related party transactions discussed above, pursuant to
the terms of many of the purchase and sale agreements we have entered into with
various entities controlled directly or indirectly by El Paso Corporation, we
have been indemnified for potential future liabilities, expenses and capital
requirements above a negotiated threshold. Specifically, an indirect subsidiary
of El Paso Corporation has indemnified us for specific litigation matters to the
extent the ultimate resolutions of these matters result in judgments against us.
For a further discussion of these matters see Note 7, Commitments and
Contingencies, Legal Proceedings. Some of our agreements obligate certain
indirect subsidiaries of El Paso Corporation to pay for capital costs related to
maintaining assets which were acquired by us, if such costs exceed negotiated
thresholds. We do not believe these thresholds will be exceeded. We have made no
such claims for reimbursement to date and none are contemplated to be made at
this time.

We have also entered into capital contribution arrangements with regulated
pipelines owned by El Paso Corporation in the past, and will most likely do so
in the future, as part of our normal commercial activities in the Gulf of
Mexico. Regulated pipelines often contribute capital toward the construction
costs of gathering facilities owned by others which are connected to their
pipelines. We have, or plan to have, agreements with ANR Pipeline Company and
Tennessee Gas Pipeline Company under which we will receive a total of
approximately $25 million of capital toward the construction of gathering
pipelines to the Marco Polo, Red Hawk and Medusa discoveries, payable over the
next eighteen months.

23

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 acquisition of 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.

24

At September 30, 2002, and December 31, 2001, our accounts receivable due
from related parties was $46.7 million and $23.0 million. At September 30, 2002
and December 31, 2001, our accounts payable due to related parties was $27.6
million and $10.1 million.

Our accounts receivable due from related parties consisted of the following
as of:

Our accounts payable due to related parties consisted of the following as
of:

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:

25

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 September 30, 2002, our revolving
credit facility is guaranteed by each of our subsidiaries (excluding our EPN
Holding subsidiaries) and is collateralized by our general and administrative
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 jointly, severably, fully and unconditionally guaranteed by all of our
subsidiaries except EPN Holding's subsidiaries. As of September 30, 2002, the
EPN Holding acquisition facility 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. In October 2002, we rearranged our credit facilities and entered
into a $160 million senior secured term loan. As a result of that rearrangement
our credit facility, the EPN Holding acquisition facility and the senior secured
term loan are all guaranteed by all of our material subsidiaries. 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 and nine months ended
September 30, 2002, consisted of our EPN Holding subsidiaries, which own the EPN
Holding assets and the equity interests in EPN Holding, and our subsidiary that
owns our interest in the Copper Eagle project. 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 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 STATEMENTS OF INCOME
FOR THE QUARTER ENDED SEPTEMBER 30, 2002

26

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