S-1 1 h48563sv1.htm FORM S-1 - REGISTRATION STATEMENT sv1
Table of Contents

As filed with the Securities and Exchange Commission on August 31, 2007
Registration No. 333-       
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
 
 
 
Form S-1
 
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
 
 
 
 
El Paso Pipeline Partners, L.P.
(Exact name of registrant as specified in its charter)
 
         
Delaware   4922   76-0568816
(State or other jurisdiction
of incorporation or organization)
  (Primary Standard Industrial
Classification Code Number)
  (I.R.S. Employer
Identification Number)
 
 
 
 
El Paso Building
1001 Louisiana Street
Houston, Texas 77002
(713) 420-2600
(Address, including zip code, and telephone number, including area code, of registrant’s principal executive offices)
 
 
 
 
Robert W. Baker
El Paso Building
1001 Louisiana Street
Houston, Texas 77002
(713) 420-2600
(Name, address, including zip code, and telephone number, including area code, of agent for service)
 
 
 
 
Copies to:
 
     
G. Michael O’Leary
Gislar Donnenberg
Andrews Kurth LLP
600 Travis, Suite 4200
Houston, Texas 77002
(713) 220-4200
  David P. Oelman
Douglas E. McWilliams
Vinson & Elkins LLP
First City Tower
1001 Fannin, Suite 2500
Houston, Texas 77002
(713) 758-2222
 
 
 
 
Approximate date of commencement of proposed sale to the public:  As soon as practicable after this Registration Statement becomes effective.
 
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box.  o
 
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  o
 
If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box.  o
 
 
 
 
CALCULATION OF REGISTRATION FEE
 
             
      Proposed
     
Title of Each Class of
    Maximum Aggregate
    Amount of
Securities to be Registered     Offering Price(2)     Registration Fee
Common units representing limited partner interests
    $603,750,000     $18,536
             
 
(1) Includes 3,750,000 common units which may be sold upon exercise of the underwriters’ option to purchase additional common units.
 
(2) Estimated solely for the purpose of calculating the registration fee pursuant to Rule 457(o) of the Securities Act of 1933.
 
 
 
 
The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
 


Table of Contents

The information in this preliminary prospectus is not complete and may be changed. We may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and it is not soliciting an offer to buy these securities in any jurisdiction where the offer or sale is not permitted.
 
Subject to Completion, dated August 31, 2007
 
PROSPECTUS
(El Paso Pipeline Partners Logo)
25,000,000 Common Units
Representing Limited Partner Interests
 
 
We are offering to sell 25,000,000 common units representing limited partner interests in El Paso Pipeline Partners, L.P. This is the initial public offering of our common units. We currently estimate that the initial public offering price will be between $      and $      per common unit. Prior to this offering, there has been no public market for our common units. We intend to apply to list our common units on the New York Stock Exchange under the symbol “EPB.”
 
Investing in our common units involves risks. Please read “Risk Factors” beginning on page 19.
 
These risks include the following:
 
•  We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to make cash distributions to holders of our common units and subordinated units at the minimum quarterly distribution rate under our cash distribution policy.
 
•  We own 10% minority interests in two of our three primary assets, with the remaining interests in those assets owned by El Paso Corporation or its other subsidiaries. As a result, we will be unable to control the amount of cash we will receive from those operations and we could be required to contribute significant cash to fund our share of their operations.
 
•  Our natural gas transportation and storage systems are subject to regulation by agencies, including the Federal Energy Regulatory Commission, which could have an adverse impact on our ability to establish transportation and storage rates that would allow recovery of the full cost of operating these pipeline systems and storage facilities, including a reasonable return, and our ability to make distributions to you.
 
•  El Paso Corporation controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including El Paso Corporation, have conflicts of interest with us and limited fiduciary duties, and they may favor their own interests to the detriment of our unitholders.
 
•  Affiliates of our general partner, including El Paso Corporation and its other subsidiaries, are not limited in their ability to compete with us and are not obligated to offer us the opportunity to pursue additional assets or businesses, which could limit our commercial activities or our ability to acquire additional assets or businesses.
 
•  If you are not an (1) individual or entity subject to U.S. federal income taxation on the income generated by us or (2) entity who, while not subject to U.S. federal taxation on the income generated by us, has owners that are all subject to such taxation, you will not be entitled to receive distributions or allocations of income or loss on your common units and your common units will be subject to redemption at a price that may be below the then-current market price.
 
•  Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units will trade.
 
•  You will experience immediate and substantial dilution of $16.94 in tangible net book value per common unit.
 
•  You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
 
                 
    Per Common
       
    Unit     Total  
 
Initial public offering price
  $       $    
Underwriting discount(1)
  $           $        
Proceeds to El Paso Pipeline Partners, L.P. (before expenses)
  $       $  
 
 
(1) Excludes an aggregate structuring fee equal to 0.40% of the gross proceeds of this offering, payable to Lehman Brothers Inc. and Tudor, Pickering & Co. Securities, Inc.
 
We have granted the underwriters a 30-day option to purchase up to an additional 3,750,000 common units from us on the same terms and conditions as set forth above if the underwriters sell more than 25,000,000 common units in this offering.
 
Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or passed upon the adequacy or accuracy of this prospectus. Any representation to the contrary is a criminal offense.
 
Lehman Brothers, on behalf of the underwriters, expects to deliver the common units on or about          , 2007.
 
Lehman Brothers Citi Goldman, Sachs & Co.           UBS Investment Bank
 
 
TudorPickering
 
          , 2007


Table of Contents

 
(MAP)
 


Table of Contents

 
TABLE OF CONTENTS
 
         
  1
  1
  5
  6
  6
  7
  8
  8
  9
  14
  19
  19
  33
  41
  45
  46
  47
  48
  48
  49
  53
  56
  56
  60
  66
  66
  67
  69
  71
  71
  71
  72
  72
  75
  76
  76
  79
  81
  84
  84
  85
  87
  90
  92
  95
  95


i


Table of Contents

         
  96
  96
  96
  97
  98
  100
  101
  102
  106
  118
  119
  122
  122
  125
  125
  125
  125
  126
  127
  127
  128
  129
  129
  130
  130
  132
  133
  135
  135
  136
  136
  137
  139
  139
  139
  139
  139
  140
  140
  141
  141
  142
  142
  143
  143
  148
  151
  151
  151
  151


ii


Table of Contents

         
  153
  153
  153
  153
  153
  154
  154
  154
  154
  154
  154
  155
  156
  157
  157
  159
  160
  160
  160
  162
  162
  162
  162
  162
  163
  163
  164
  164
  164
  165
  165
  165
  166
  167
  168
  168
  169
  170
  174
  175
  177
  177
  178
  180
  182
  183
  183
  184
  184
  184
  185
  185
  185


iii


Table of Contents

         
  186
  186
  186
  186
  186
  186
  187
  187
  188
  188
  F-1
  A-1
  B-1
  C-1
  D-1
 Certificate of Limited Partnership
 Certificate of Formation
 Consent of Ernst & Young LLP
 Consent of PricewaterhouseCoopers LLP
 Consent of PricewaterhouseCoopers LLP
 
 
You should rely only on the information contained in this prospectus. We have not, and the underwriters have not, authorized anyone to provide you with different information. If anyone provides you with different or inconsistent information, you should not rely on it. We are not, and the underwriters are not, making an offer to sell these securities in any jurisdiction where an offer or sale is not permitted. You should assume that the information appearing in this prospectus is accurate as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.
 
Until          , 2007 (25 days after the date of this prospectus), all dealers that buy, sell or trade our common units, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers’ obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions.


iv


Table of Contents

 
PROSPECTUS SUMMARY
 
This summary highlights information contained elsewhere in this prospectus. It does not contain all of the information that you should consider before investing in the common units. You should read the entire prospectus carefully, including “Risk Factors” beginning on page 19 and the historical and pro forma financial statements and the notes to those financial statements included elsewhere in this prospectus. Unless indicated otherwise, the information presented in this prospectus assumes (1) an initial public offering price of $      per unit and (2) that the underwriters do not exercise their option to purchase additional units. We include a glossary of some of the terms used in this prospectus as Appendix D. References in this prospectus to “El Paso Pipeline Partners, L.P.,” “we,” “our,” “us” or like terms refer to the businesses that El Paso Corporation is contributing to El Paso Pipeline Partners, L.P. in connection with this offering, including our 10% general partner interest in each of Colorado Interstate Gas Company and Southern Natural Gas Company. When used in the present tense or prospectively, those terms refer to El Paso Pipeline Partners, L.P. and its subsidiaries. References in this prospectus to “El Paso” constitute references to El Paso Corporation and its affiliates (other than us). References to our general partner refer to El Paso Pipeline GP Company, L.L.C. References in this prospectus to CIG and SNG refer to the operations of Colorado Interstate Gas Company and Southern Natural Gas Company after giving effect to certain reorganization transactions discussed elsewhere in this prospectus. Please read “— Formation Transactions and Partnership Structure.”
 
El Paso Pipeline Partners, L.P.
 
Overview
 
We are a growth-oriented Delaware limited partnership formed by El Paso Corporation to own and operate natural gas transportation pipelines, storage and other midstream assets. Our initial assets consist of Wyoming Interstate Company, Ltd., or WIC, a wholly-owned interstate pipeline transportation business primarily located in Wyoming and Colorado and 10% general partner interests in two interstate pipeline transportation businesses: Colorado Interstate Gas Company, or CIG, which is located in the U.S. Rocky Mountains, and Southern Natural Gas Company, or SNG, which is located in the southeastern United States. Combined, these three interstate pipeline businesses consist of approximately 12,300 miles of pipeline and associated storage facilities with aggregate underground working natural gas storage capacity of 89 Bcf. References to “we” and “our” refer to the operations of 100% of WIC, as well as our 10% general partner interests in CIG and SNG. El Paso operates and owns the remaining 90% general partner interests.
 
We intend to utilize the significant experience of El Paso’s management team to execute our growth strategy, including the construction, development and acquisition of additional energy infrastructure assets. El Paso is the largest operator of interstate natural gas pipelines in North America. As of June 30, 2007, El Paso owned or had interests in approximately 43,000 miles of interstate pipeline and 233 Bcf of working natural gas storage capacity that connect many of the major domestic natural gas producing basins to the major domestic consuming markets.
 
Our Assets
 
WIC.  We own 100% of WIC. WIC consists of approximately 700 miles of pipeline with a design capacity of approximately 2.3 Bcf/d. WIC is comprised of a mainline system that extends from western Wyoming to northeast Colorado (the Cheyenne Hub) and several lateral pipeline systems that extend from various interconnections along the WIC mainline into western Colorado and northeast Wyoming and, upon completion of the WIC Kanda lateral, into eastern Utah. WIC is one of the primary interstate natural gas transportation systems providing takeaway capacity from the mature Overthrust Basin and from the growing natural gas production in the Piceance, Uinta, Powder River and Green River Basins to the Cheyenne Hub. The WIC system is able to deliver this natural gas to other downstream market areas through interconnections with other pipeline systems. CIG has been and, after the closing of this offering, will continue to be, the operator of the WIC system pursuant to a service agreement with WIC.
 
In order to capture growing natural gas supplies in the region, we have two major expansion projects in progress on the WIC system with an estimated total cost of approximately $185 million, of which approximately $51 million has been spent as of June 30, 2007. The projects consist of the new Kanda lateral,


1


Table of Contents

which will link the Uinta Basin with the WIC mainline, and the Medicine Bow compression expansion. Both projects will allow full recovery of the cost of service of these projects (including a return on WIC’s investment). In order to serve increasing demand, WIC is evaluating additional expansions to its system.
 
CIG.  We own a 10% general partner interest in and El Paso operates and owns the remaining 90% general partner interest in CIG. CIG consists of approximately 4,000 miles of pipeline with a design capacity of approximately 3.0 Bcf/d. CIG is comprised of several pipelines that deliver natural gas from production areas in the U.S. Rocky Mountains and the Anadarko Basin directly to utilities serving residential and commercial users along the Front Range market of Colorado, which includes Denver, and Wyoming and indirectly to users through multiple interconnections with other pipeline systems transporting natural gas to the midwest, southwest, California and Pacific northwest. CIG also includes approximately 29 Bcf of underground working natural gas storage capacity provided by four storage facilities located in Colorado and Kansas and two natural gas processing plants located in Wyoming and Utah. CIG owns a 50% ownership interest in WYCO Development LLC (WYCO) and operates certain of WYCO’s assets.
 
In order to meet growing Front Range demand, WYCO, a joint venture with an affiliate of Xcel Energy, has two major expansion projects underway at an estimated total cost of approximately $316 million ($158 million net to CIG), of which approximately $9 million has been spent as of June 30, 2007. Long term transportation contracts with shippers on both projects will allow full recovery of the cost of service of these projects (including a return on CIG’s investment). In addition, CIG has an additional expansion project underway at an estimated cost of $13 million. In order to serve increasing demand, CIG is currently evaluating additional expansions to its system.
 
SNG.  We own a 10% general partner interest in and El Paso operates and owns the remaining 90% general partner interest in SNG. SNG consists of approximately 7,600 miles of pipeline with a design capacity of approximately 3.7 Bcf/d. SNG is comprised of pipelines extending from natural gas supply basins in Texas, Louisiana, Mississippi, Alabama and the Gulf of Mexico to market areas in Louisiana, Mississippi, Alabama, Florida, Georgia, South Carolina and Tennessee, including the metropolitan areas of Atlanta and Birmingham. SNG is the principal natural gas transporter to southeastern markets in Alabama, Georgia and South Carolina, which are part of one of the fastest growing natural gas demand regions in the United States. SNG owns and operates the Muldon storage facility in Monroe County, Mississippi, which has approximately 31 Bcf of underground working natural gas storage capacity. SNG also owns a 50% interest in the Bear Creek storage facility (Bear Creek) and operates the facility in Bienville Parish, Louisiana, which has approximately 29 Bcf of underground working natural gas storage capacity committed to SNG. El Paso owns the remaining 50% interest in Bear Creek. The SNG system is also connected to El Paso’s Elba Island LNG terminal near Savannah, Georgia, which supplied approximately 17% of the natural gas transported on the SNG system for the year ended December 31, 2006. This terminal has a peak send-out capacity of approximately 1.2 Bcf/d. In May 2007, SNG placed in-service the Cypress Phase I expansion project consisting of 177 miles of pipeline connecting the Elba Island LNG terminal with markets in Georgia and Florida at a cost of approximately $255 million.
 
In order to serve increasing demand, SNG has four major expansion projects planned with a capital budget totaling approximately $578 million, of which approximately $17 million had been spent as of June 30, 2007.


2


Table of Contents

Throughput.  The following table sets forth the average daily throughput of each of WIC, CIG and SNG for each of the three calendar years ended December 31, 2006, 2005 and 2004 and the twelve months ended June 30, 2007:
 
                                 
    Average Daily Throughput  
    For the Year Ended     For the Twelve
 
    December 31,
    December 31,
    December 31,
    Months Ended
 
Pipeline System
  2004     2005     2006     June 30, 2007  
    (Volumes in BBtu/d)  
 
WIC(1)
    1,214       1,572       1,914       2,039  
CIG(2)
    1,744       1,902       2,008       2,179  
SNG(2)
    2,163       1,984 (3)     2,168       2,192  
 
 
(1) The WIC throughput includes 158 BBtu/d, 174 BBtu/d, 204 BBtu/d and 218 BBtu/d transported by WIC for the CIG system during 2004, 2005, 2006 and the twelve months ended June 30, 2007, respectively.
 
(2) Volumes reflected are 100% of the volumes transported on the CIG system and the SNG system, respectively. We own a 10% general partner interest in these systems.
 
(3) Volumes on the SNG system were negatively impacted in 2005 by moderate weather and Hurricane Katrina.
 
Our Operations
 
Our systems transport and store natural gas for local distribution companies (LDCs), other natural gas distribution and industrial companies, electric generation companies, natural gas producers, other natural gas pipelines and natural gas marketing and trading companies (including, in the case of CIG and SNG, an El Paso marketing affiliate). In addition to serving markets directly connected to our pipeline and storage systems, our pipeline and storage systems have access to customers in numerous regions not directly connected through interconnections with major pipelines. Our systems do not take title to the natural gas transported or stored for our customers, which mitigates our direct commodities price risk. The rates our systems charge are regulated by the Federal Energy Regulatory Commission, or the FERC.
 
Our systems provide a significant portion of our transportation and storage services through firm contracts that obligate our customers to pay a monthly reservation or demand charge, which is a fixed charge owed regardless of the actual pipeline and storage capacity used by a customer. When a customer uses the capacity it has reserved under these contracts, our systems also collect usage charges based on the volume of natural gas actually transported or stored, which enables us to recover the system’s variable costs. These usage charges are typically a small percentage of the total revenues received from firm contracts. Our systems also derive a small portion of their revenues through interruptible contracts under which our customers pay fees based on their actual utilization of assets for transportation and storage services and other related services. Customers who have executed interruptible contracts are not assured capacity or service on the pipeline and storage facilities. To the extent that physical capacity that is contracted for firm service is not being fully utilized, the system can use such capacity for interruptible service.


3


Table of Contents

The table below sets forth certain information regarding the assets, contracts and revenues for each of WIC, CIG and SNG, as of and for the year ended December 31, 2006:
 
                                                 
                            % of
       
                            Physical
    Weighted
 
          Tariff Revenue Composition%(1)     Design
    Average
 
          Firm Contracts           Capacity
    Remaining
 
    Our
    Capacity
    Variable
          Subscribed
    Contract
 
    Ownership
    Reservation
    Usage
    Interruptible
    Under Firm
    Life (in
 
    Interest     Charges(2)     Charges     Contracts     Contracts(3)     Years)(4)  
 
WIC
    100 %     97.8 %     1.8 %     0.4 %     100 %     6.8  
CIG
    10 %     92.3 %     6.0 %     1.7 %     100 %     6.1  
SNG
    10 %     89.0 %     7.0 %     4.0 %     97 %     5.8  
 
 
(1) Excludes liquids transportation revenue, amounts associated with retained fuel and, in the case of CIG, liquids revenue associated with CIG’s processing plants. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — How We Evaluate Our Operations — Operational Fuel and Other Gas Revaluations and Processing Revenues” for a description of fuel retention. The revenues described in this table constituted approximately 99%, 83% and 97% of WIC’s, CIG’s and SNG’s total revenues, respectively, earned during the year ended December 31, 2006 and this composition did not change materially during the six-month period ended June 30, 2007.
 
(2) Approximately 10% and 9% of total capacity reservation revenues for CIG and SNG, respectively, are the result of storage service charges.
 
(3) Contract levels on CIG and WIC include forward haul capacity and back haul capacity.
 
(4) The weighted average remaining contract life is determined by weighting the remaining life of each contract by the amount of revenue that is covered by the contract as of December 31, 2006.
 
We believe that the high percentage of earnings derived from capacity reservation charges mitigates the risk of earnings fluctuations caused by changing supply and demand conditions. For additional information about our contracts, please read “Management’s Discussion and Analysis of Financial Condition and Results and Operations — Future Trends and Outlook” and “Business — Regulatory Environment.”
 
Business Strategies
 
Our primary business objectives are to generate stable cash flows sufficient to make the minimum quarterly cash distribution of $0.28750 to our unitholders and to increase our quarterly cash distributions over time by enhancing the value of our transportation and storage assets by:
 
  •  Delivering excellent customer service;
 
  •  Focusing on increasing utilization, efficiency and cost control in our operations;
 
  •  Pursuing economically attractive organic and greenfield expansion opportunities;
 
  •  Growing our business through strategic asset acquisitions from third parties, El Paso or both; and
 
  •  Maintaining the integrity and ensuring the safety of our pipeline systems and other assets.
 
Competitive Strengths
 
We believe we are well positioned to successfully execute our business strategies because of the following competitive strengths:
 
  •  Our affiliation with El Paso;
 
  •  Our natural gas transportation and storage assets are strategically located to transport natural gas from a number of diverse producing regions to high-demand end-user markets;
 
  •  Our cash flow is relatively stable due to the high percentage of our assets’ revenues obtained from long-term capacity reservation contracts;
 
  •  We have an experienced, knowledgeable management team with a proven track record; and
 
  •  Our high-quality asset base has been well maintained.


4


Table of Contents

 
Our Relationship with El Paso Corporation
 
El Paso is an energy company originally founded in 1928 in El Paso, Texas that primarily operates in the regulated natural gas transportation and exploration and production sectors of the energy industry. El Paso reported 2006 revenues that exceeded $4.2 billion. El Paso reported that its pipeline segment generated approximately $1.2 billion of earnings before interest and taxes (EBIT) in 2006. El Paso’s common stock is traded on the New York Stock Exchange under the symbol “EP.”
 
Following this offering, El Paso will own our 2% general partner interest, all of our incentive distribution rights, a 65.8% limited partner interest in us and the remaining 90% general partner interest in each of CIG and SNG. We will enter into an omnibus agreement with El Paso and our general partner that will govern our relationship with them regarding the provisions of specified services to us, as well as certain reimbursement and indemnification matters. Please read “Certain Relationships and Related Transactions — Omnibus Agreement.”
 
El Paso has a long history of successfully pursuing and completing energy acquisitions and new construction and development projects, having invested a total of $1.4 billion in El Paso’s pipeline segment during the three years ending December 31, 2006 on expansion capital expenditures to grow that segment. In addition, El Paso’s pipeline segment had more than $2 billion of proposed expansion capital projects as of June 30, 2007 that were either under construction, have received a FERC certificate approving the project or have contractual commitments with shippers to construct the project. More than $0.9 billion of these additional expansion capital projects constitute expansion projects of WIC, CIG and SNG that are described elsewhere in this prospectus.
 
As the owner of the 2% general partner interest, all of our incentive distribution rights, and a 65.8% limited partner interest in us, El Paso is motivated to promote and support the successful execution of our business strategies, including utilizing our partnership as a growth vehicle for its natural gas transportation, storage and other energy infrastructure businesses. In addition, we believe El Paso has significant net operating loss carry forwards that provide it with increased flexibility with respect to asset selection for future transfers to us. Accordingly, El Paso has the ability to offer assets to us in the future without incurring substantial cash taxes on the transfer. Although we expect to have the opportunity to make additional acquisitions directly from El Paso in the future, El Paso is under no obligation to make acquisition opportunities available to us. Accordingly, we are unable to predict which, if any, of these acquisition opportunities El Paso may make available to us or whether we will elect to pursue any such opportunity. In addition, through our relationship with El Paso, we will have access to a significant pool of management talent and strong commercial relationships throughout the energy industry. While our relationship with El Paso and its subsidiaries may provide significant benefits, it may also become a source of potential conflicts. For example, El Paso is not restricted from competing with us. El Paso may also acquire, construct or dispose of pipelines, storage facilities or other assets in the future without any obligation to offer us the opportunity to purchase or construct those assets. Please read “Conflicts of Interest and Fiduciary Duties.”
 
Risk Factors
 
An investment in our common units involves risks associated with our business, our partnership structure and the tax characteristics of our common units. You should carefully read the risks under the caption “Risk Factors” that begins on page 19 of this prospectus.


5


Table of Contents

 
Formation Transactions and Partnership Structure
 
At or prior to the closing of this offering the following transactions will occur:
 
  •  El Paso will restructure its ownership of WIC, CIG and SNG, including causing CIG and SNG to convert to general partnerships, causing CIG to transfer to El Paso its ownership of WIC and Colorado Water Supply Company and causing SNG to transfer to El Paso its equity investment in Citrus Corp. and its wholly-owned subsidiaries Southern LNG Inc. and Elba Express Company, LLC and causing CIG and SNG to adjust certain historical notes receivable under the cash management program with El Paso for the effects of this restructuring;
 
  •  El Paso or its subsidiaries will contribute 100% of WIC and 10% of each of CIG and SNG to us or our subsidiaries;
 
  •  We will issue to a subsidiary of El Paso 26,181,049 common units and 24,815,054  subordinated units, representing an aggregate 65.8% limited partner interest in us;
 
  •  We will issue to El Paso Pipeline GP Company, L.L.C., our general partner and a subsidiary of El Paso, a 2% general partner interest in us and all of our incentive distribution rights, which will entitle our general partner to increasing percentages of the cash we distribute in excess of $0.33063 per unit per quarter (115% of the minimum quarterly distribution);
 
  •  We will issue 25,000,000 common units to the public in this offering, representing a 32.2% limited partner interest in us, and will use the proceeds of the offering as described in “Use of Proceeds”;
 
  •  We will enter into a new $750 million credit facility under which we expect to borrow $425 million at the closing of this offering and will use the net proceeds from the funds borrowed as described in “Use of Proceeds”; and
 
  •  We will enter into an omnibus agreement with El Paso, our general partner and certain of their affiliates pursuant to which:
 
  •  we will agree to reimburse El Paso and its affiliates for the payment of certain capital expenditures, operating expenses and for providing various general and administrative services; and
 
  •  El Paso will indemnify us for certain environmental, toxic tort and tax contingencies, title and right-of-way defects and other matters.
 
Management of El Paso Pipeline Partners, L.P.
 
El Paso Pipeline GP Company, L.L.C., our general partner, has sole responsibility for conducting our business and for managing our operations. The board of directors and officers of our general partner will make decisions on our behalf. El Paso will elect all seven members to the board of directors of our general partner, with at least three of these directors meeting independence standards established by the New York Stock Exchange. In addition, some of the executive officers and directors of El Paso also serve as executive officers and directors of our general partner. For more information about these individuals, please read “Management — Directors and Executive Officers of Our General Partner.”
 
As is common with publicly traded limited partnerships and in order to maximize operational flexibility, we will conduct our operations through subsidiaries. We will have one direct operating subsidiary initially, El Paso Pipeline Partners Operating Company, L.L.C., a limited liability company that will conduct business through itself and its subsidiaries.


6


Table of Contents

The following diagram depicts our simplified organizational and ownership structure after giving effect to this offering.
 
Ownership of El Paso Pipeline Partners, L.P.
 
         
Public Common Units
    32.2 %
El Paso Common Units
    33.8 %
El Paso Subordinated Units
    32.0 %
General Partner Interest (1,550,941 general partner units)
    2.0 %
         
Total
    100 %
         
 
(GRAPH)


7


Table of Contents

 
Principal Executive Offices and Internet Address
 
Our principal executive offices are located at the El Paso Building, 1001 Louisiana Street, Houston, Texas 77002 and our telephone number is (713) 420-2600. Our website is located at           and will be activated in connection with the closing of this offering. We expect to make our periodic reports and other information filed with or furnished to the Securities and Exchange Commission (SEC), available, free of charge, through our website, as soon as reasonably practicable after those reports and other information are electronically filed with or furnished to the SEC. Information on our website or any other website is not incorporated by reference into this prospectus and does not constitute a part of this prospectus.
 
Summary of Conflicts of Interest and Fiduciary Duties
 
General
 
Our general partner has a legal duty to manage us in a manner beneficial to our common units and subordinated units. This legal duty originates in statutes and judicial decisions and is commonly referred to as a “fiduciary duty.” However, because our general partner is owned by El Paso, the officers and directors of our general partner have fiduciary duties to manage the business of our general partner in a manner beneficial to El Paso. As a result of this relationship, conflicts of interest may arise in the future between us and holders of our common units and subordinated units, on the one hand, and our general partner and its affiliates, on the other hand. For a more detailed description of the conflicts of interest of our general partner, please read “Risk Factors — Risks Inherent in an Investment in Us” and “Conflicts of Interest and Fiduciary Duties — Conflicts of Interest.”
 
Partnership Agreement Modifications to Fiduciary Duties
 
Our partnership agreement limits the liability and reduces the fiduciary duties of our general partner to holders of our common units and subordinated units. Our partnership agreement also restricts the remedies available to holders of our common units and subordinated units for actions that might otherwise constitute a breach of our general partner’s fiduciary duties owed to holders of our common units and subordinated units. Our partnership agreement also provides that affiliates of our general partner, including El Paso and its other subsidiaries and affiliates, are not restricted from competing with us. By purchasing a common unit, you are treated as having consented to various actions contemplated in the partnership agreement and conflicts of interest that might otherwise be considered a breach of fiduciary or other duties under applicable state law. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties” for a description of the fiduciary duties imposed on our general partner by Delaware law, the material modifications of these duties contained in our partnership agreement and certain legal rights and remedies available to holders of our common units and subordinated units.
 
For a description of our other relationships with our affiliates, please read “Certain Relationships and Related Transactions.”


8


Table of Contents

 
The Offering
 
Common units offered to the public 25,000,000 common units.
 
Common units subject to the underwriters’ option to purchase additional common units If the underwriters exercise their option to purchase additional units in full, we will issue 3,750,000 additional common units to the public and purchase the same number of common units from El Paso.
 
Units outstanding after this offering 51,181,049 common units and 24,815,054 subordinated units, representing 66.0% and 32.0%, respectively, limited partner interests in us. The general partner will own 1,550,941 general partner units and the incentive distribution rights.
 
Use of proceeds We estimate the net proceeds from this offering will be approximately $470 million after deducting $30 million of underwriting discounts and structuring fees. We intend to use the net proceeds of this offering, together with gross proceeds of approximately $425 million to be borrowed under our $750 million revolving credit facility, for the following:
 
• to distribute $890 million to El Paso, in part to reimburse El Paso for capital expenditures incurred prior to this offering related to the assets contributed to us; and
 
• to pay approximately $5 million for expenses associated with this offering, our credit facility and our formation transactions.
 
If the underwriters’ option to purchase additional common units is exercised in full, we will use the net proceeds to redeem from a subsidiary of El Paso a number of common units equal to the number of common units issued upon exercise of the underwriters’ option, at a price per common unit equal to the proceeds per common unit before expenses but after underwriting discounts and structuring fees. Please read “Use of Proceeds.”
 
Cash distributions We will make an initial quarterly distribution of $0.28750 per common unit ($1.15 per common unit on an annualized basis) to the extent we have sufficient cash from operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner and its affiliates. Our ability to pay cash distributions at this minimum quarterly distribution rate is subject to various restrictions and other factors described in more detail under the caption “Our Cash Distribution Policy and Restrictions on Distributions.”
 
We will pay investors in this offering a prorated distribution for the first quarter during which we are a publicly traded partnership. We anticipate that such distribution will cover the period from the closing date of this offering to and including December 31, 2007. We expect to pay this cash distribution on or about February 14, 2008.
 
Our partnership agreement requires us to distribute all of our cash on hand at the end of each quarter, less reserves established by our general partner. We refer to this cash as “available cash,” and we define its meaning in our partnership agreement and in the glossary of terms attached as Appendix D. Our partnership


9


Table of Contents

agreement also requires that we distribute all of our available cash from operating surplus each quarter in the following manner:
 
• first, 98% to the holders of common units and 2% to our general partner, until each common unit has received a minimum quarterly distribution of $0.28750 plus any arrearages from prior quarters;
 
• second, 98% to the holders of subordinated units and 2% to our general partner, until each subordinated unit has received a minimum quarterly distribution of $0.28750; and
 
• third, 98% to all unitholders, pro rata, and 2% to our general partner, until each unit has received a distribution of $0.33063.
 
If cash distributions to our unitholders exceed $0.33063 per unit in any quarter, our general partner will receive, in addition to distributions on its 2% general partner interest, increasing percentages, up to 48%, of the cash we distribute in excess of that amount. We refer to these distributions as “incentive distributions.” Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”
 
The amount of pro forma available cash generated during the year ended December 31, 2006 and the twelve months ended June 30, 2007 would have been sufficient to allow us to pay the full minimum quarterly distribution on all of our common units for such periods but only approximately 14% and 27% of the minimum quarterly distribution on our subordinated units during those periods, respectively. For a calculation of our ability to make distributions to unitholders based on our pro forma results for 2006 and the twelve months ended June 30, 2007, please read “Our Cash Distribution Policy and Restrictions on Distributions — Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2006 and the Twelve Months Ended June 30, 2007.”
 
We believe that, based on the estimates contained and the assumptions listed under the caption “Our Cash Distribution Policy and Restrictions on Distributions — Minimum Estimated Cash Available for Distribution for the Twelve-Month Period Ending December 31, 2008,” we will have sufficient cash available for distribution to make cash distributions for the four quarters ending December 31, 2008 at the minimum quarterly distribution rate of $0.28750 per common unit per quarter ($1.15 per common unit on an annualized basis) on all common units and subordinated units.
 
Subordinated units A subsidiary of El Paso will initially own all of our subordinated units. The principal difference between our common units and subordinated units is that in any quarter during the subordination period, holders of the subordinated units are entitled to receive the minimum quarterly distribution of $0.28750 per unit only after the common units have received the minimum quarterly distribution plus any arrearages in the payment of the minimum quarterly distribution from prior quarters. If we do not pay distributions on our subordinated units, our subordinated units will not accrue arrearages for those unpaid distributions. The subordination period will end on the first business day after we have earned and paid at least $0.28750 on each outstanding limited partner unit and general


10


Table of Contents

partner unit for any three consecutive, non-overlapping four quarter periods ending on or after December 31, 2010. The subordination period also will end upon the removal of our general partner other than for cause if the units held by our general partner and its affiliates are not voted in favor of such removal.
 
When the subordination period ends, all remaining subordinated units will convert into common units on a one-for-one basis, and the common units will no longer be entitled to arrearages. Please read “Provisions of Our Partnership Agreement Related to Cash Distributions — Subordination Period.”
 
Early conversion of subordinated units Alternatively, the subordination period will end on the first business day after we have earned and paid at least $0.43125 (150% of the minimum quarterly distribution) on each outstanding limited partner unit and general partner unit for each quarter in any four quarter period ending on or after December 31, 2008.
 
General Partner’s right to reset the target distribution levels Our general partner has the right, at a time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48%) for each of the prior four consecutive fiscal quarters, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. Following a reset election by our general partner, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to correspondingly higher levels based on the same percentage increases above the reset minimum quarterly distribution amount as in our current target distribution levels.
 
In connection with resetting these target distribution levels, our general partner will be entitled to receive Class B common units. The number of Class B common units to be issued will be equal to that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. The Class B common units will be entitled to the same cash distributions per unit as our common units and will be convertible into an equal number of common units. For a more detailed description of our general partner’s right to reset the target distribution levels upon which the incentive distribution payments are based and the concurrent right of our general partner to receive Class B common units in connection with this reset, please read “Provisions of Our Partnership Agreement Related to Cash Distributions — General Partner’s Right to Reset Incentive Distribution Levels.”
 
Limited voting rights Our general partner will manage and operate us. Unlike the holders of common stock in a corporation, you will have only limited voting rights on matters affecting our business. You will have no right to elect our general partner or its directors on an annual or


11


Table of Contents

other continuing basis. Our general partner may not be removed except by a vote of the holders of at least 662/3% of the outstanding units, including any units owned by our general partner and its affiliates, other than the general partner units, voting together as a single class. Upon consummation of this offering, our general partner and its affiliates will own an aggregate of approximately 67.1% of our common and subordinated units. This will give El Paso the ability to prevent our general partner’s involuntary removal. Please read “The Partnership Agreement — Voting Rights.”
 
Limited call right If at any time our general partner and its affiliates own more than 75% of the outstanding common units, our general partner has the right, but not the obligation, to purchase all, but not less than all, of the remaining common units at a price not less than the then-current market price of the common units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of this limited call right.
 
Eligible Holders and redemption Only Eligible Holders will be entitled to receive distributions or be allocated income or loss from us. Eligible Holders are:
 
• individuals or entities subject to United States federal income taxation on the income generated by us; or
 
• entities that, while not subject to United States federal taxation on the income generated by us, have owners that are all subject to such taxation.
 
We have the right, which we may assign to any of our affiliates, but not the obligation, to redeem all of the common and subordinated units of any holder that is not an Eligible Holder or that has failed to certify or has falsely certified that such holder is an Eligible Holder. The purchase price for such redemption would be equal to the lower of the holder’s purchase price and the then-current market price of the units. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.
 
Please read “Description of the Common Units — Transfer of Common Units” and “The Partnership Agreement — Non-Taxpaying Assignees; Redemption.”
 
Estimated ratio of taxable income to distributions We estimate that if you own the common units you purchase in this offering through the record date for distributions for the period ending December 31, 2010, you will be allocated, on a cumulative basis, an amount of federal taxable income for that period that will be     % or less of the cash distributed to you with respect to that period. For example, if you receive an annual distribution of $     per common unit, we estimate that your average allocable taxable income per year will be no more than $      per common unit. Please read “Material Tax Consequences — Tax Consequences of Unit Ownership — Ratio of Taxable Income to Distributions.”


12


Table of Contents

 
Material tax consequences For a discussion of other material federal income tax consequences that may be relevant to prospective unitholders who are individual citizens or residents of the United States, please read “Material Tax Consequences.”
 
New York Stock Exchange listing We intend to apply to list our common units on the New York Stock Exchange under the symbol “EPB.”


13


Table of Contents

 
Summary Historical and Pro Forma Financial and Operating Data
 
The following table shows (i) summary historical financial and pipeline system data of Wyoming Interstate Company, Ltd. (WIC or the Predecessor), (ii) summary pro forma financial data of El Paso Pipeline Partners, L.P., and (iii) summary pro forma financial and pipeline system data of CIG and SNG, in which we own 10% general partner interests for the periods and as of the dates indicated. The summary historical financial data of WIC as of December 31, 2005 and 2006 and for the years ended December 31, 2004, 2005 and 2006 are derived from the historical audited financial statements of WIC included elsewhere in this prospectus. The summary historical unaudited financial data as of and for the six months ended June 30, 2006 and 2007 of WIC are derived from the historical unaudited condensed financial statements of WIC, appearing elsewhere in this prospectus. The table should be read together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
El Paso Pipeline Partners, L.P.  The summary pro forma financial data of El Paso Pipeline Partners, L.P. for the year ended December 31, 2006, and as of and for the six months ended June 30, 2007 are derived from the unaudited pro forma financial statements of El Paso Pipeline Partners, L.P. included elsewhere in this prospectus. The pro forma adjustments have been prepared as if certain transactions to be effected at the closing of this offering had taken place on June 30, 2007, in the case of the pro forma balance sheet, and as of January 1, 2006, in the case of the pro forma statements of income for the year ended December 31, 2006, and for the six months ended June 30, 2007. These transactions include:
 
  •  El Paso restructuring its ownership of WIC, CIG and SNG, including causing CIG and SNG to convert to general partnerships, causing CIG to transfer to El Paso its ownership of WIC and Colorado Water Supply Company, causing SNG to transfer to El Paso its equity investment in Citrus Corp. and its wholly-owned subsidiaries, Southern LNG Inc. and Elba Express Company, LLC and causing CIG and SNG to adjust certain of their historical notes receivable balances under the cash management program with El Paso for the effects of this restructuring;
 
  •  the contribution by El Paso or its subsidiaries of certain of their assets, including 10% interests in CIG and SNG to us or our subsidiaries;
 
  •  the issuance to a subsidiary of El Paso of 26,181,049 common units and 24,815,054 subordinated units, representing an aggregate 65.8% limited partner interest in us;
 
  •  the issuance to El Paso Pipeline GP Company, L.L.C., our general partner and a subsidiary of El Paso, of a 2% general partner interest in us and all of our incentive distribution rights, which will entitle our general partner to increasing percentages of the cash we distribute in excess of $0.33063 per unit per quarter (115% of the minimum quarterly distribution);
 
  •  the issuance of 25,000,000 common units to the public in this offering, representing a 32.2% limited partner interest in us, and the use of proceeds of the offering as described in “Use of Proceeds”; and
 
  •  the entering into a new $750 million credit facility under which we expect to borrow $425 million at the closing of this offering and using the net proceeds from the funds borrowed as described under the caption “Use of Proceeds.”
 
Investment in CIG and SNG.  The summary unaudited pro forma financial data of CIG and SNG are derived from the unaudited pro forma financial statements of CIG and SNG included elsewhere in this prospectus. The pro forma adjustments have been prepared as if certain transactions that will be effected prior to the closing of this offering related to CIG and SNG had taken place on January 1, 2004. These transactions include the restructurings of CIG and SNG mentioned above.
 


14


Table of Contents

                                                           
    Wyoming Interstate
      El Paso Pipeline
 
    Company, Ltd.
      Partners, L.P.
 
    (Predecessor)       Pro Forma  
                      Six Months
            Six Months
 
                      Ended
      Year Ended
    Ended
 
    Year Ended December 31,     June 30,       December 31,
    June 30,
 
    2004     2005     2006     2006     2007       2006     2007  
    (In millions, except per unit and pipeline system data)  
Statement of Operations Data:
                                                         
Total operating revenues
  $ 73     $ 81     $ 97     $ 46     $ 53       $ 97     $ 53  
Operating expenses:
                                                         
Operation and maintenance
    16       29       14       3       13         14       13  
Depreciation and amortization
    12       12       14       7       8         14       8  
Taxes, other than income taxes
    2       2       2       1       2         2       2  
                                                           
Total operating expenses
    30       43       30       11       23         30       23  
                                                           
Operating income
  $ 43     $ 38     $ 67     $ 35     $ 30       $ 67     $ 30  
                                                           
Earnings from unconsolidated affiliates
                                    29       17  
Other income, net
    1       3       4       4       3         4       3  
Interest and debt expense
    (1 )     (1 )                         (26 )     (13 )
Affiliated interest expense, net
    (2 )     (2 )     (6 )     (3 )     (4 )              
                                                           
Net income
  $ 41     $ 38     $ 65     $ 36     $ 29       $ 74     $ 37  
                                                           
Net income per limited partners’ unit
                                                         
Common units
                                            $ 1.15     $ 0.58  
Subordinated units
                                            $ 0.55     $ 0.28  
                                                           
Balance Sheet Data (at period end):
                                                         
Total assets
          $ 407     $ 465             $ 496               $ 683  
Property, plant and equipment, net
            384       436               476                 476  
Investments in unconsolidated affiliates
                                                185  
Long-term debt including capital lease obligations
            9       8               8                 433  
Total partners’ capital
            272       327               356                 237  
                                                           
Other Financial Data:
                                                         
Adjusted EBITDA
  $ 56     $ 53     $ 85     $ 46     $ 41       $ 102     $ 56  
Cash available for distribution
    53       47       77       42       38         64       38  
                                                           
Pipeline System Data:
                                                         
Transportation capacity (Bcf/d)
    2       2       2       2       2                    
Contracted firm capacity (Bcf/d)
    2       2       2       2       2                    
Transported volumes (Bcf)
    452       583       703       322       367                    
 
                                 
    CIG Pro Forma     SNG Pro Forma  
          Six Months
          Six Months
 
    Year Ended
    Ended
    Year Ended
    Ended
 
    December 31,
    June 30,
    December 31,
    June 30,
 
Unconsolidated Affiliates:
  2006     2007     2006     2007  
    (In millions, except pipeline system data)  
 
Other Financial Information (our 10%):
                               
Adjusted EBITDA
  $ 18     $ 9     $ 29     $ 16  
Cash available for distribution
    9       6       8       9  
                                 
Pipeline System Data (100% basis):
                               
Transportation capacity (Bcf/d)
    3       3       4       4  
Contracted firm capacity (Bcf/d)
    3       3       4       4  
Transported volumes (Bcf)
    712       394       791       403  

15


Table of Contents

Non-GAAP Financial Measures
 
Adjusted EBITDA is defined as net income plus depreciation and amortization expense, interest and debt expense, net of interest income and our 10% share of estimated cash available for distribution from CIG and SNG for the applicable period; less equity in earnings of CIG and SNG. Cash available for distribution is defined as Adjusted EBITDA less cash interest expense, net of interest income, maintenance capital expenditures, other income and incremental general and administrative expense of being a public company.
 
For CIG and SNG, we define Adjusted EBITDA as net income plus interest and debt expense, affiliated interest expense (net of affiliated interest income) and depreciation and amortization expense and cash available for distribution from unconsolidated affiliates less equity in earnings from unconsolidated affiliates. Our equity share of CIG’s and SNG’s Adjusted EBITDA is 10%. Cash available for distribution for CIG and SNG is defined as Adjusted EBITDA plus cash received for affiliated interest income generated from advances under El Paso’s cash management program less cash interest expense, maintenance capital expenditures and other income, net.
 
Our historical cash available for distribution and pro forma cash available for distribution does not reflect changes in working capital balances. Our pro forma cash available for distribution for the year ended December 31, 2006 and the six months ended June 30, 2007 includes our anticipated incremental general and administrative expense of being a publicly traded partnership.
 
Adjusted EBITDA and cash available for distribution are used as supplemental financial measures by management and by external users of our financial statements, such as investors and commercial banks, to assess:
 
  •  the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
 
  •  the ability of our assets to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; and
 
  •  our operating performance and return on invested capital as compared to those of other publicly traded limited partnerships that own energy infrastructure assets, without regard to their financing methods and capital structure.
 
Adjusted EBITDA and cash available for distribution should not be considered alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and cash available for distribution exclude some, but not all, items that affect net income and operating income and these measures may vary among other companies. Therefore, Adjusted EBITDA and cash available for distribution as presented may not be comparable to similarly titled measures of other companies. Furthermore, while cash available for distribution is a measure we use to assess our ability to make distributions to our unitholders, cash available for distribution should not be viewed as indicative of the actual amount of cash that we have available for distributions or that we plan to distribute for a given period.
 


16


Table of Contents

                                                           
    Wyoming Interstate
      El Paso Pipeline Partners, L.P.
 
    Company, Ltd.
      Pro Forma  
    (Predecessor)             Six Months
 
                      Six Months Ended
      Year Ended
    Ended
 
    Year Ended December 31,     June 30,       December 31,
    June 30,
 
    2004     2005     2006    
2006
    2007       2006     2007  
    (In millions)  
 
                                                         
Reconciliation of “Adjusted EBITDA” and “Cash Available for Distribution” to “Net Income”
                                                         
Net income
  $ 41     $ 38     $ 65     $ 36     $ 29       $ 74     $ 37  
Add:
                                                         
Interest and debt expense
    1       1                           26       13  
Affiliated interest expense, net
    2       2       6       3       4                
Depreciation and amortization
    12       12       14       7       8         14       8  
Cash available for distribution from unconsolidated affiliates (pro forma)(1)
                                                         
CIG
                                              9       6  
SNG
                                              8       9  
Less:
                                                         
Earnings from unconsolidated affiliates (pro forma)(1)
                                                         
CIG
                                              12       6  
SNG
                                              17       11  
                                                           
Adjusted EBITDA
  $ 56     $ 53     $ 85     $ 46     $ 41       $ 102     $ 56  
                                                           
Less:
                                                         
Cash interest expense, net
    1       1                           26       13  
Maintenance capital expenditures
    1       1       4             1         4       1  
Other income
    1       4       4       4       2         4       2  
Incremental general and administrative expense of being a public company
                      ——               4       2  
                                                           
Cash available for distribution
  $ 53     $ 47     $ 77     $ 42     $ 38       $ 64     $ 38  
                                                           
                                                           
Reconciliation of “Adjusted EBITDA” to “Net Cash Provided by Operating Activities”
                                                         
Net cash provided by operating activities
  $ 58     $ 59     $ 53     $ 21     $ 38                    
Interest and debt expense
    1       1                                      
Affiliated interest expense, net
    2       2       6       3       4                    
Changes in operating working capital
    1       (6 )     6       6       1                    
Other
    (6 )     (3 )     20       16       (2 )                  
                                                           
Adjusted EBITDA
  $ 56     $ 53     $ 85     $ 46     $ 41                    
                                                           
                                                           
 
 
(1) Amounts have been adjusted for certain asset distributions prior to the offering as further described in the unaudited pro forma consolidated financial statements of CIG and SNG included elsewhere in this prospectus.
 

17


Table of Contents

                 
          Pro Forma
 
    Pro Forma
    Six Months
 
    Year Ended
    Ended
 
    December 31,
    June 30,
 
    2006     2007  
    (In millions)  
Colorado Interstate Gas Company(1)
               
                 
Reconciliation of “Adjusted EBITDA” and “Cash Available for Distribution” to “Net Income”
               
Net income
  $ 118     $ 61  
Add:
               
Interest and debt expense
    47       23  
Depreciation and amortization
    30       15  
Cash available for distribution from unconsolidated affiliate — WYCO
    1       1  
Less:
               
Affiliated interest income, net
    19       10  
Earnings from unconsolidated affiliate — WYCO
    1       1  
                 
Adjusted EBITDA — 100%
  $ 176     $ 89  
                 
Adjusted EBITDA — our 10%
  $ 18     $ 9  
                 
Less:
               
Cash interest expense, net
    47       23  
Maintenance capital expenditures
    52       15  
Other income
    2       2  
Add: Cash received for affiliated interest income, net
    19       10  
                 
Cash available for distribution — 100%
  $ 94     $ 59  
                 
Cash available for distribution — our 10%
  $ 9     $ 6  
                 
                 
Southern Natural Gas Company(1)
               
                 
Reconciliation of “Adjusted EBITDA” and “Cash Available for Distribution” to “Net Income”
               
Net income
  $ 171     $ 111  
Add:
               
Interest and debt expense
    95       44  
Depreciation and amortization
    49       26  
Cash available for distribution from unconsolidated affiliate — Bear Creek
    17        
Less:
               
Affiliated interest income, net
    22       13  
Earnings from unconsolidated affiliate — Bear Creek
    16       8  
                 
Adjusted EBITDA — 100%
  $ 294     $ 160  
                 
Adjusted EBITDA — our 10%
  $ 29     $ 16  
                 
Less:
               
Cash interest expense, net
    94       49  
Maintenance capital expenditures(2)
    135       28  
Other income
    7       9  
Add: Cash received for affiliated interest income, net
    22       13  
                 
Cash available for distribution — 100%
  $ 80     $ 87  
                 
Cash available for distribution — our 10%
  $ 8     $ 9  
                 
                 
 
(1) Amounts have been adjusted for certain asset distributions and other related transactions prior to the offering as further described in the unaudited pro forma consolidated financial statements of CIG and SNG elsewhere in this prospectus.
 
(2) Amounts include capital expenditures related to hurricane repairs of $65 million for the year ended December 31, 2006 and $(6) million for the six months ended June 30, 2007 both net of related insurance recoveries.

18


Table of Contents

 
RISK FACTORS
 
Limited partner interests are inherently different from the capital stock of a corporation, although many of the business risks to which we are subject are similar to those that would be faced by a corporation engaged in a similar business. You should carefully consider the following risk factors together with all of the other information included in this prospectus when evaluating an investment in our common units.
 
If any of the following risks were actually to occur, our business, results of operations and financial condition could be materially adversely affected. In that case, we might not be able to pay distributions on our common units, the trading price of our common units could decline, and you could lose all or part of your investment.
 
The risks referred to herein refer to risks inherent to both our wholly-owned operations through WIC and our general partner interests in CIG and SNG.
 
Risks Inherent in Our Business
 
We may not have sufficient cash from operations following the establishment of cash reserves and payment of fees and expenses, including cost reimbursements to our general partner, to enable us to make cash distributions to holders of our common units and subordinated units at the minimum quarterly distribution rate under our cash distribution policy.
 
In order to make cash distributions at our minimum quarterly distribution rate of $0.28750 per common unit per complete quarter, or $1.15 per unit per year, we will require available cash of approximately $22.3 million per quarter, or $89 million per year, based on the number of common units and subordinated units outstanding immediately after completion of this offering, whether or not the underwriters exercise their option to purchase additional common units. We may not have sufficient available cash from operating surplus each quarter to enable us to make cash distributions at the minimum quarterly distribution rate under our cash distribution policy. The amount of cash we can distribute on our units principally depends upon the amount of cash generated from our operations, which will fluctuate based on, among other things:
 
  •  the rates we charge for our transportation and storage services, the volume of capacity under contract and the volumes of natural gas our customers transport and store;
 
  •  the demand for natural gas in the markets served by our systems and the quantities of natural gas available for transport on our systems;
 
  •  the commodity price of natural gas, which could reduce the quantities of natural gas available for transport if prolonged low natural gas prices cause diminished natural gas exploration and production activity in specific regions of the United States, particularly in the U.S. Rocky Mountains, Mid-Continent, the Gulf Coast and the Gulf of Mexico;
 
  •  legislative or regulatory action affecting the demand for natural gas, the supply of natural gas, the rates we can charge, how we contract for services, our existing contracts, our operating costs and our operating flexibility;
 
  •  the imposition of requirements by state agencies that materially reduce the demand of our customers, such as local distribution companies and power generators, for our pipeline services;
 
  •  the level of our operating and maintenance and general and administrative costs; and
 
  •  the creditworthiness of our shippers; if a shipper files for bankruptcy protection, there is no assurance we will be kept whole for the revenue that would have been realized had the contract been honored for its entire term.
 
In addition, the actual amount of cash we will have available for distribution will depend on other factors, some of which are beyond our control, including:
 
  •  the level of capital expenditures made to complete construction projects;
 
  •  debt service requirements, retirement of debt and other liabilities;
 
  •  fluctuations in working capital needs;
 
  •  our ability to borrow funds and access capital markets;


19


Table of Contents

 
  •  the amount of cash distributed to us by the entities in which we own a minority interest;
 
  •  restrictions on distributions contained in debt agreements; and
 
  •  the amount of cash reserves established by our general partner, which may include reserves for tariff rates that are subject to refund.
 
For a description of additional restrictions and factors that may affect our ability to make cash distributions, please read “Our Cash Distribution Policy and Restrictions on Distributions.”
 
We own 10% minority interests in two of our three primary assets, with the remaining 90% interest in each of those assets owned by El Paso or its other subsidiaries. As a result, we will be unable to control the amount of cash we will receive from those operations and we could be required to contribute significant cash to fund our share of their operations. If we fail to make these contributions we will be subject to specified penalties.
 
We expect our interests in CIG and SNG in the aggregate to initially generate approximately 27% of the cash we distribute to you for the twelve months ending December 31, 2008 and, accordingly, our performance is substantially dependent on their distributions to us. We will own only a 10% general partner interest in each of CIG and SNG, and as of the closing of this offering El Paso or its subsidiaries will own the remaining 90% interest in each. Accordingly, we will be unable to control the amount of cash that CIG and SNG distribute to us and we will be unable to control ongoing operational decisions, including the incurrence of capital expenditures that we may be required to fund. More specifically:
 
  •  we have limited ability to influence decisions with respect to the operation of CIG and SNG, including decisions with respect to incurrence of expenses and distributions to us;
 
  •  CIG and SNG may establish reserves for working capital, maintenance capital expenditures, environmental matters and legal and rate proceedings which would reduce cash otherwise available for distribution to us;
 
  •  CIG and SNG may incur additional indebtedness, and principal and interest payments made on their indebtedness may reduce cash otherwise available for distribution to us; and
 
  •  CIG and SNG may require us to make additional capital contributions to fund working and maintenance capital expenditures, as well as to fund expansion capital expenditures, our funding of which would reduce the amount of cash otherwise available for distribution to you.
 
Our inability to control the operations of each of CIG and SNG may mean that we do not receive the amount of cash we expect to be distributed to us. In addition, decisions could be made by CIG and SNG or regulatory agencies that require us to invest additional capital to fund their operations or capital requirements, which contributions could be material. Our inability to control these decisions may significantly and adversely affect our ability to distribute cash to you. In the event we elect not to make a required capital contribution or are unable to do so, then, at the election of the non-defaulting partner, (i) our partnership interest will be diluted or (ii) we will not receive distributions until we have forgone distributions equal to our portion of the capital call plus a specified premium. For a more complete description of the agreements governing the management and operation of CIG and SNG, please read “Certain Relationships and Related Transactions.”
 
On a pro forma basis we would not have had sufficient cash available for distribution to pay the full minimum quarterly distribution on all units for the year ended December 31, 2006 or the twelve months ended June 30, 2007.
 
The amount of available cash we need to pay the minimum quarterly distribution for four quarters on all of our units to be outstanding immediately after this offering is approximately $89 million. The amount of our pro forma available cash generated during the year ended December 31, 2006 and the twelve months ended June 30, 2007 would have been sufficient to allow us to pay the full minimum quarterly distribution on our common units but only approximately 14% and 27%, respectively, of the minimum quarterly distribution on our subordinated units during those periods. For a calculation of our ability to make distributions to unitholders based on our pro forma results for 2006 and the twelve months ended June 30, 2007, please read “Our Cash Distribution Policy and Restrictions on Distributions.”


20


Table of Contents

The assumptions underlying our minimum estimated cash available for distribution included in “Our Cash Distribution Policy and Restrictions on Distributions” are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those estimated.
 
Our estimate of cash available for distribution set forth in “Our Cash Distribution Policy and Restrictions on Distributions” has been prepared by management. The assumptions underlying this estimate are inherently uncertain and are subject to significant business, economic, financial, regulatory and competitive risks and uncertainties that could cause actual results to differ materially from those assumed. If we do not achieve our anticipated results, we may not be able to pay the full minimum quarterly distribution or any amount on our common units or subordinated units, in which event the market price of our common units may decline materially.
 
Our natural gas transportation and storage systems are subject to regulation by agencies, including the Federal Energy Regulatory Commission, which could have an adverse impact on our ability to establish transportation and storage rates that would allow recovery of the full cost of operating these pipeline systems and storage facilities, including a reasonable return, and our ability to make distributions to you.
 
Our interstate natural gas transportation and storage operations are subject to federal, state and local regulatory authorities. Specifically, our natural gas pipeline systems and our storage facilities and related assets are subject to regulation by FERC, the United States Department of Transportation, the United States Department of the Interior, and various state and local regulatory agencies. Regulatory actions taken by these agencies have the potential to adversely affect our profitability. Federal regulation extends to such matters as:
 
  •  rates, operating terms and conditions of service;
 
  •  the types of services we may offer to our customers;
 
  •  the contracts for service entered into with our customers;
 
  •  construction and abandonment of new facilities;
 
  •  the integrity and safety of our pipeline system and related operations;
 
  •  acquisition, extension or abandonment of services or facilities;
 
  •  accounts and records; and
 
  •  relationships with affiliated companies involved in certain aspects of the natural gas business.
 
Under the Natural Gas Act (NGA), FERC has authority to regulate natural gas companies that provide natural gas pipeline transportation services in interstate commerce. Its authority to regulate those services includes rates charged for services, terms and conditions of service, certification and construction of new facilities, extension or abandonment of services and facilities, maintenance of accounts and records, acquisition and disposition of facilities, initiation and discontinuation of services, and various other matters. Natural gas companies may not charge rates that have been determined not to be just and reasonable by FERC. In addition, FERC prohibits natural gas companies from unduly preferring or unreasonably discriminating against any person with respect to pipeline rates or terms and conditions of service.
 
The rates and terms and conditions for our interstate pipeline and storage services are set forth in FERC-approved tariffs. Pursuant to FERC’s jurisdiction over rates, existing rates may be challenged by complaint and proposed rate increases may be challenged by protest. A successful complaint or protest against our rates could have an adverse impact on our revenues associated with providing transportation and storage services. On July 19, 2007, FERC issued a proposed policy statement addressing the issue of the proxy groups it will use to decide the return on equity of natural gas pipelines. FERC uses a discounted cash flow model that incorporates the use of proxy groups to develop a range of reasonable returns earned on equity interests in companies with corresponding risks. FERC then assigns a rate of return on equity within that range to reflect specific risks of that pipeline when compared to the proxy group companies. The proposed policy statement describes FERC’s intention to allow the use of master limited partnerships in proxy groups, with certain restrictions that could lower the return that would otherwise be allowed. FERC has requested comments on the proposed policy.


21


Table of Contents

Prior to commencing construction of new or existing interstate pipeline and storage facilities, a natural gas company must obtain a certificate authorization from FERC. We have applications pending before FERC for certificate authorization for various expansion projects. Typically, a significant expansion project requires review by a number of governmental agencies, including state agencies, whose cooperation is important in completing the regulatory process on schedule. Any refusal by an agency to issue certificate authorizations or permits for one or more of these projects may mean that we cannot pursue these projects or that they will be constructed in a manner with capital requirements that we do not anticipate. Such refusal or modification could materially and negatively impact the additional revenues expected from these projects.
 
Should we fail to comply with all applicable FERC administered statutes, rules, regulations and orders, we could be subject to substantial penalties and fines. Under the Energy Policy Act of 2005, FERC has civil penalty authority under the NGA to impose penalties for current violations of up to $1,000,000 per day for each violation, to revoke existing certificate authority and to order disgorgement of profits associated with any violation. Please read “Business — Regulatory Environment — FERC Regulation.”
 
Finally, we do not know how future regulations will impact the operation of our natural gas transportation and storage businesses or the effect such regulation could have on our business, financial condition, results of operations and thus our ability to make distributions to you.
 
The outcome of certain proceedings involving FERC policy statements is uncertain and could affect the amount of any allowance (if any) our systems can include for income taxes in establishing their rates for service, which would in turn impact our revenues and/or equity earnings.
 
In May 2005, FERC issued a policy statement permitting the inclusion of an income tax allowance in the cost of service-based rates of a pipeline organized as a tax pass through partnership entity, if the pipeline proves that the ultimate owner of its equity interests has an actual or potential income tax liability on public utility income. The policy statement also provides that whether a pipeline’s owners have such actual or potential income tax liability will be reviewed by FERC on a case-by-case basis. In August 2005, FERC dismissed requests for rehearing of its new policy statement. On December 16, 2005, FERC issued its first significant case-specific review of the income tax allowance issue in another pipeline partnership’s rate case. FERC reaffirmed its new income tax allowance policy and directed the subject pipeline to provide certain evidence necessary for the pipeline to determine its income tax allowance. The new tax allowance policy and the December 16, 2005 order were appealed to the United States Court of Appeals for the District of Columbia Circuit (D.C. Circuit). The D.C. Circuit issued an order on May 29, 2007 in which it denied these appeals and upheld FERC’s new tax allowance policy and the application of that policy in the December 16, 2005 order on all points subject to appeal. The D.C. Circuit denied rehearing of the May 29, 2007 decision on August 20, 2007. Petitions for writ of Certiorari to the United States Supreme Court regarding such decision are due within 90 days of the D.C. Circuit order denying rehearing of the decision.
 
On December 8, 2006, FERC issued another order addressing the income tax allowance in rates. In the new order, FERC refined and reaffirmed prior statements regarding its income tax allowance policy, and notably raised a new issue regarding the implication of the policy statement for publicly traded partnerships. It noted that the tax deferral features of a publicly traded partnership may cause some investors to receive, for some indeterminate duration, cash distributions in excess of their taxable income, which FERC characterized as a “tax savings.” FERC stated that it is concerned that this created an opportunity for those investors to earn an additional return, funded by ratepayers. Responding to this concern, FERC chose to adjust the pipeline’s equity rate of return downward based on the percentage by which the publicly traded partnership’s cash flow exceeded taxable income. On February 7, 2007, the pipeline asked FERC to reconsider this ruling.


22


Table of Contents

The ultimate outcome of these proceedings is not certain and could result in changes to FERC’s treatment of income tax allowances in cost of service. Depending upon how the policy statement on income tax allowances is applied in practice to pipelines organized as pass through entities, these decisions might adversely affect us. Under FERC’s current income tax allowance policy, if the rates of any of our FERC-regulated pipelines are subject to general review in a proceeding before the FERC, we could be required to demonstrate that the equity interest owners incur actual or potential income tax liability on their respective shares of partnership public utility income. While we have established the Eligible Holder certification requirement, we can provide no assurance that such certification will be effective to establish that our unitholders, or our unitholders’ owners, are subject to income taxation on the public utility income generated by us or the applicable tax rate that should apply to such unitholders. If we are unable to do so, FERC could decide to reduce our rates from current levels. We can give no assurance that in the future FERC’s current income tax allowance policy or its application will not be changed.
 
Certain of our systems’ transportation services are subject to long-term, fixed-price “negotiated rate” contracts that are not subject to adjustment, even if our cost to perform such services exceeds the revenues received from such contracts, and, as a result, our costs could exceed our revenues received under such contracts.
 
Under FERC policy, a regulated service provider and a customer may mutually agree to sign a contract for service at a “negotiated rate” which may be above or below the FERC regulated “recourse rate” for that service, and that contract must be filed and accepted by FERC. As of June 30, 2007, approximately 45% of WIC’s contracted firm capacity rights, and approximately 11% of each of CIG’s and SNG’s contracted firm capacity rights were committed under such “negotiated rate” contracts. These “negotiated rate” contracts are not generally subject to adjustment for increased costs which could be produced by inflation or other factors relating to the specific facilities being used to perform the services. Any shortfall of revenue, representing the difference between “recourse rates” (if higher) and negotiated rates, under current FERC policy is generally not recoverable from other shippers. It is possible that costs to perform services under these “negotiated rate” contracts will exceed the negotiated rates. If this occurs, it could decrease the cash flow realized by WIC, CIG and SNG and, therefore, the cash we have available for distribution to our unitholders. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General.”
 
Increased competition from alternative natural gas transportation and storage options and alternative fuel sources could have a significant financial impact on us.
 
Our systems compete primarily with other interstate and intrastate pipelines and storage facilities in the transportation and storage of natural gas. Some of our competitors have greater financial resources and may now, or in the future, have access to greater supplies of natural gas than we do. Some of these competitors may expand or construct transportation and storage systems that would create additional competition for the services we provide to our customers. In addition, future pipeline transportation and storage capacity could be constructed in excess of actual demand, which could reduce the demand for our services, at least in particular supply or market areas we serve, and the rates that we receive for our services. Moreover, El Paso and its affiliates are not limited in their ability to compete with us. Further, natural gas also competes with other forms of energy available to our customers, including electricity, coal and fuel oils.
 
The principal elements of competition among natural gas transportation and storage assets are rates, terms of service, access to natural gas supplies, flexibility and reliability. FERC’s policies promoting competition in natural gas markets are having the effect of increasing the natural gas transportation and storage options for our traditional customer base. As a result, we could experience some “turnback” of firm capacity as existing agreements expire. If WIC, CIG or SNG are unable to remarket this capacity or can remarket it only at substantially discounted rates compared to previous contracts, they may have to bear the costs associated with the turned back capacity. Increased competition could reduce the volumes of natural gas transported or stored by our systems or, in cases where we do not have long-term fixed rate contracts, could force us to lower our transportation or storage rates. Competition could intensify the negative impact of factors that significantly decrease demand for natural gas in the markets served by our pipeline systems, such as competing or alternative forms of energy, a recession or other adverse economic conditions, weather, higher fuel costs and taxes or other governmental or regulatory actions that directly or indirectly increase the cost or limit the use of natural gas. In addition, our competitors could construct new facilities with lower fuel requirements and lower


23


Table of Contents

operating and maintenance costs, than those of our facilities which could reduce the demand for our services. Our ability to renew or replace existing contracts at rates sufficient to maintain current revenues and cash flows could be adversely affected by the activities of our competitors. All of these competitive pressures could have a material adverse effect on our business, financial condition, results of operations, and ability to make distributions to you.
 
Competition from pipelines, including the Rockies Express pipeline, that may be able to provide our shippers with capacity at a lower price could cause us to reduce our rates or otherwise reduce our revenues.
 
We face competition from other pipelines that may be able to provide our shippers with capacity on a more competitive basis or access to consuming markets that would pay a higher price for the shippers’ gas. For example, WIC’s most direct competitor in the U.S. Rocky Mountain region is the Rockies Express Pipeline owned by Rockies Express Pipeline LLC. The Rockies Express Pipeline is being constructed in three phases and the planned terminus is in Clarington, Ohio. The Rockies Express Pipeline could result in significant downward pressure on throughput costs in the U.S. Rocky Mountain region. The Rockies Express Pipeline could also cause prices in U.S. Rocky Mountain natural gas supply basins to increase while prices in WIC’s and CIG’s downstream markets may not increase commensurately, making it more difficult for us to charge full recourse rates under future contracts.
 
Prior to the construction of the first zone of the Rockies Express Pipeline, CIG was WIC’s most direct competitor. CIG and WIC are competitors for lateral expansions to various U.S. Rocky Mountain supply basins. Both CIG and WIC have or will have supply laterals in the Powder River Basin and the Uinta Basin. Since the WIC mainline system and the Wyoming portion of the CIG system parallel each other, a supply lateral can effectively interconnect with either system. WIC and CIG may compete for the same business opportunities. Given that CIG will operate WIC and El Paso will utilize the same personnel to operate both systems, El Paso may in some circumstances favor CIG or other of its affiliates over WIC when directing business opportunities at its sole discretion. Such determinations could benefit El Paso and disadvantage us since we only own 10% of CIG, while El Paso owns the remaining 90%, and we own 100% of WIC.
 
An increase in competition in our key markets could arise from new ventures or expanded operations from existing competitors. For example, plans have recently been announced to construct the White River Hub that connects a gas processing complex in Colorado with up to six interstate pipelines, including the Rockies Express Pipeline, CIG and WIC. As a result, significant competition from the Rockies Express Pipeline, other third-party competitors and CIG could have a material adverse effect on our financial condition, results of operations and ability to make distributions to you.
 
Any significant decrease in supplies of natural gas in our areas of operation could adversely affect our business and operating results and reduce our cash available for distribution to unitholders.
 
All of our businesses are dependent on the continued availability of natural gas production and reserves. Low prices for natural gas or regulatory limitations could adversely affect development of additional reserves and production that is accessible by our pipeline and storage assets. Production from existing wells and natural gas supply basins with access to our pipelines will naturally decline over time without such development. Additionally, the amount of natural gas reserves underlying these wells may also be less than anticipated, and the rate at which production from these reserves declines may be greater than anticipated. Accordingly, to maintain or increase the volume of natural gas transported, or throughput, on our pipelines and cash flows associated with the transportation of gas, our customers must continually obtain new supplies of natural gas.
 
If new supplies of natural gas are not obtained to replace the natural decline in volumes from existing supply basins, the overall volume of natural gas transported and stored on our systems would decline, which could have a material adverse effect on our business financial condition, results of operations and ability to make distributions to you.
 
Our success depends, in part, on factors beyond our control.
 
Most of the natural gas our systems transport and store is owned by third parties. The volume of natural gas we are able to transport and store depends on the actions of those third parties and is beyond our control.


24


Table of Contents

Further, the following factors, most of which are beyond our control, may unfavorably impact our ability to maintain or increase current throughput, to renegotiate existing contracts as they expire or to remarket unsubscribed capacity on our pipeline systems:
 
  •  service area competition;
 
  •  expiration or turn back of significant contracts;
 
  •  changes in regulation and actions of regulatory bodies;
 
  •  weather conditions that impact throughput and storage levels;
 
  •  price competition;
 
  •  drilling activity and availability of natural gas;
 
  •  continued development of additional sources of accessible gas supply;
 
  •  decreased natural gas demand due to various factors, including increases in prices and the increased availability or popularity of alternative energy sources such as coal, fuel oil, wind and hydroelectric power;
 
  •  availability and increased cost of capital to fund ongoing maintenance and growth projects;
 
  •  opposition to energy infrastructure development, especially in environmentally sensitive areas;
 
  •  adverse general economic conditions; and
 
  •  unfavorable movements in natural gas prices in supply and demand areas.
 
The impact of past and future hurricanes could have a material adverse effect on our business, financial condition and results of operations.
 
In 2005, Hurricanes Katrina and Rita caused extensive and catastrophic damage in the offshore, coastal and inland areas located in the Gulf Coast region of the United States, specifically parts of Louisiana, Mississippi and Alabama. A portion of the SNG system is located south of New Orleans in an area severely impacted by Hurricane Katrina and, as a result, SNG incurred significant damage. The total repair costs for SNG resulting from Hurricane Katrina have been currently estimated at approximately $150 million, of which $135 million has already been incurred through June 30, 2007. Of this $150 million, only an estimated $50 million has been or will be recovered through insurance. All or a portion of the unrecovered amount may potentially be recoverable in future SNG rate cases, although the timing and extent of recovery, if any, is unknown. The impact of future hurricanes such as Hurricanes Katrina and Rita could have a material adverse effect on our business, financial condition and results of operations.
 
The revenues of our pipeline businesses are generated under contracts that must be renegotiated periodically.
 
Substantially all of our systems’ revenues are generated under contracts which expire periodically and must be renegotiated and extended or replaced. Generally, the average term of new contracts for existing pipeline capacity has decreased significantly over the past 15 years, and we expect this to be a continuing trend of the industry in the future. If we are unable to extend or replace these contracts when they expire or renegotiate contract terms as favorable as the existing contracts, we could suffer a material reduction in our revenues, earnings and cash flows. In particular, our ability to extend and replace contracts on terms comparable to prior contracts or on any terms at all, could be adversely affected by factors, including:
 
  •  competition by other pipelines, including change in rates or upstream supplies of existing pipeline competitors, as well as the proposed construction by other companies of additional pipeline capacity or LNG terminals in markets served by our interstate pipelines;
 
  •  changes in state regulation of local distribution companies or electric utilities with natural gas-fired generation, which may cause them to negotiate short-term contracts or turn back their capacity when their contracts expire;
 
  •  reduced demand and market conditions in the areas we serve;


25


Table of Contents

 
  •  availability of alternative energy sources or natural gas supply points; and
 
  •  regulatory actions.
 
Fluctuations in energy commodity prices could adversely affect our business.
 
Revenues generated by our systems’ transportation and storage contracts depend on volumes and rates, both of which can be affected by the price of natural gas. Increased natural gas prices could result in a reduction of the volumes transported by our customers, including power companies that may not dispatch natural gas-fired power plants if natural gas prices increase. Increased prices could also result in industrial plant shutdowns or load losses to competitive fuels as well as local distribution companies’ loss of customer base. The success of our transportation and storage operations is subject to continued development of additional gas supplies to offset the natural decline from existing wells connected to our system, which requires the development of additional oil and gas reserves and obtaining additional supplies from interconnecting pipelines, primarily in the Gulf of Mexico and the U.S. Rocky Mountain regions. A decline in energy prices could cause a decrease in these development activities and could cause a decrease in the volume of natural gas available for transportation and storage through our system.
 
Pricing volatility may, in some cases for CIG or WIC, impact the value of under or over recoveries of retained natural gas, as well as imbalances and system encroachments. We obtain in-kind fuel reimbursements from shippers in accordance with each individual tariff or applicable contract terms. We revalue our natural gas imbalances and other gas owed to shippers (such as excess fuel retention) to a market index price and periodically settle these obligations in cash or in-kind pursuant to each individual tariff or balancing contract. Currently, the CIG and WIC tariffs provide that the volumetric difference between fuel retained and fuel burned will be flowed-through or charged to shippers. The CIG tariff provides that all liquid revenue proceeds, including those proceeds associated with CIG’s processing plants, are used to reimburse shrinkage or other system fuel and lost-or-unaccounted-for costs and variations in liquid revenues and variations in shrinkage volumes are included in the reconciliation of retained fuel and burned fuel. CIG must purchase gas volumes from time to time due, in part, to such shrinkage associated with liquid production and such expenses vary with both price and quantity.
 
On the SNG system, we retain a portion of the natural gas received for transportation and storage as provided in SNG’s tariff. This retained natural gas is used as fuel and to replace lost and unaccounted for natural gas. As calculated in a manner set forth in SNG’s tariff, any revenues generated from any excess natural gas retained and not burned are shared with SNG’s customers on an annual basis. Any under recoveries are the responsibility of SNG.
 
If natural gas prices in the supply basins connected to our pipeline system are higher than prices in other natural gas producing regions, our ability to compete with other transporters and our long-term recontracting efforts may be negatively impacted. Furthermore, fluctuations in pricing between supply sources and market areas could negatively impact our transportation revenues. Fluctuations in energy prices are caused by a number of factors, including:
 
  •  regional, domestic and international supply and demand;
 
  •  availability and adequacy of transportation facilities;
 
  •  energy legislation;
 
  •  federal and state taxes, if any, on the transportation and storage of natural gas;
 
  •  abundance of supplies of alternative energy sources; and
 
  •  political unrest among oil producing countries.
 
As a result, significant prolonged changes in natural gas prices could have a material adverse effect on our financial condition, results of operations and ability to make distributions to you.


26


Table of Contents

Our systems depend on certain key customers and producers for a significant portion of their revenues. The loss of any of these key customers could result in a decline in their revenues and cash available to pay distributions.
 
Our systems rely on a limited number of customers for a significant portion of their revenues. Our systems’ four largest natural gas transportation customers for the year ended December 31, 2006:
 
  •  for WIC were Williams Power Company, Inc., Anadarko Petroleum Corporation and its affiliates, CIG and Cantera Gas and affiliates, which accounted for approximately 24%, 15%, 9% and 9% of WIC’s revenues during 2006, respectively;
 
  •  for CIG were Public Service Company of Colorado, Colorado Springs Utilities, Anadarko Petroleum Corporation and its affiliates and Pioneer Natural Resources USA, which accounted for approximately 30%, 9%, 7% and 7% of CIG’s revenues during 2006, respectively; and
 
  •  for SNG were Atlanta Gas Light Company, SCANA Corporation, Alagasco, and Southern Company Services, which accounted for approximately 31%, 11%, 11% and 8% of SNG’s revenues during 2006, respectively.
 
These customers accounted for approximately 57%, 53% and 61% of the operating revenues for WIC, CIG and SNG, respectively, for the year ended December 31, 2006. The loss of all or even a portion of the contracted volumes of these customers, as a result of competition, creditworthiness, inability to negotiate extension, or replacements of contracts or otherwise, could have a material adverse effect on our financial condition, results of operations and our ability to make distributions to you.
 
If third-party pipelines and other facilities interconnected to our pipelines and facilities become unavailable to transport natural gas, our revenues and cash available to pay distributions could be adversely affected.
 
We depend upon third party pipelines and other facilities that provide delivery options to and from our pipeline and storage facilities for the benefit of our customers. For example, WIC connects at upstream locations with the Overthrust, Rockies Express and the TransColorado pipelines, and with various gathering pipeline systems in the Piceance, Wind River and Powder River Basins and interconnects at the Cheyenne Hub with the Trailblazer and the KMI interstate pipelines and the Public Service Company of Colorado intrastate pipeline facilities. CIG has similar connections to upstream and downstream pipeline facilities. SNG also relies on third party deliveries for supply, including El Paso’s Elba Island LNG terminal, Tennessee Gas Pipeline Company (TGP), ANR Pipeline, Trunkline and Columbia Gulf. Because we do not own these third party pipelines or facilities, their continuing operation is not within our control. If these or any other pipeline connection were to become unavailable for current or future volumes of natural gas due to repairs, damage to the facility, lack of capacity or any other reason, our ability to operate efficiently and continue shipping natural gas to end markets could be restricted, thereby reducing our revenues. Although short-term interruption of upstream (supply) or downstream (take away) pipelines would not significantly affect our revenues since a substantial portion of our revenues are derived from capacity or demand charges, a prolonged or permanent interruption at any key pipeline interconnect could impair our ability in the future to contract for firm transportation services, which could have a material adverse effect on our business, results of operations, financial condition and our ability to make distributions to you.
 
Neither CIG nor SNG is prohibited from incurring indebtedness, which may affect our ability to make distributions to you.
 
We own only a 10% general partner interest in each of CIG and SNG. Neither CIG nor SNG is prohibited by the terms of their respective general partnership agreements from incurring indebtedness. As of June 30, 2007, CIG and SNG had approximately $0.7 billion and approximately $1.2 billion principal amount of indebtedness outstanding, respectively. Subsequent to the closing of this offering, CIG’s and SNG’s indebtedness is expected to be reduced to approximately $0.5 billion and approximately $0.9 billion, respectively as the result of an anticipated repurchase of debt. There is no assurance that El Paso will be successful in executing this program. If either CIG or SNG were to incur significant amounts of additional indebtedness or be unable to reduce their existing debt levels, it may inhibit their ability to make distributions to us. Any cash used to make principal or interest payments on any indebtedness of CIG or SNG, unless


27


Table of Contents

financed from other borrowings, would reduce the amount of cash available for distributions to us. An inability by either CIG or SNG to make distributions to us would materially and adversely affect our ability to make distributions to you because we expect distributions we receive from CIG and SNG to represent a significant portion of the cash we distribute to our unitholders.
 
Restrictions in our anticipated credit facility could limit our ability to make distributions to our unitholders.
 
In connection with this offering we anticipate entering into a bank credit facility with a borrowing capacity of up to $750 million to enable us to manage our cash flow obligations. This new credit facility may contain covenants limiting our ability to make distributions to our unitholders. Any such facility may also contain covenants requiring us to maintain certain financial ratios. Our ability to comply with any restrictions and covenants may be affected by events beyond our control, including prevailing economic, financial and industry conditions. If we are unable to comply with these restrictions and covenants, a significant portion of any future indebtedness under a credit facility may become immediately due and payable, and our lenders’ commitment to make further loans to us under a credit facility may terminate. We might not have, or be able to obtain, sufficient funds to make these accelerated payments.
 
Our payment of principal and interest on any future indebtedness will reduce our cash available for distribution on our units. We anticipate that any credit facility will limit our ability to pay distributions to our unitholders during an event of default or if an event of default would result from the distribution.
 
In addition, any future levels of indebtedness may:
 
  •  adversely affect our ability to obtain additional financing for future operations or capital needs;
 
  •  limit our ability to pursue acquisitions and other business opportunities; or
 
  •  make our results of operations more susceptible to adverse economic or operating conditions.
 
Various limitations in any future financing agreements may reduce our ability to incur additional indebtedness, to engage in some transactions or to capitalize on business opportunities.
 
Our relationship with El Paso and its financial condition subjects us to potential risks that are beyond our control.
 
Due to our relationship with El Paso, adverse developments or announcements concerning El Paso or its subsidiaries could adversely affect our financial condition, even if we have not suffered any similar development. The ratings assigned to El Paso’s senior unsecured indebtedness are below investment grade, currently Ba3 by Moody’s Investor Service, BB- by Standard & Poor’s and BB+ by Fitch Ratings. The ratings assigned to both CIG’s and SNG’s senior unsecured indebtedness are currently Baa3 by Moody’s Investor Services and BB by Standard and Poor’s and BBB- by Fitch Ratings. Downgrades of the credit ratings of El Paso, CIG or SNG could increase our cost of capital and collateral requirements, and could impede our access to capital markets.
 
The credit and risk profile of our general partner and its owner, El Paso, could adversely affect our credit ratings and risk profile, which could increase our borrowing costs or hinder our ability to raise capital.
 
The credit and business risk profiles of our general partner and El Paso may be factors considered in credit evaluations of us. This is because our general partner controls our business activities, including our cash distribution policy and acquisition strategy and business risk profile. Another factor that may be considered is the financial condition of El Paso, including the degree of its financial leverage and its dependence on cash flow from the partnership to service its indebtedness.
 
If we were to seek a credit rating in the future, our credit rating may be adversely affected by the leverage of our general partner or El Paso, as credit rating agencies such as Standard & Poor’s Ratings Services and Moody’s Investors Service may consider the leverage and credit profile of El Paso and its affiliates because of their ownership interest in and control of us and the strong operational links between El Paso and us. Any adverse effect on our credit rating would increase our cost of borrowing or hinder our ability to raise financing in the capital markets, which would impair our ability to grow our business and make distributions to unitholders.


28


Table of Contents

If our systems do not successfully complete expansion projects or make and integrate acquisitions that are accretive, our future growth may be limited.
 
A principal focus of our strategy is to continue to grow the cash distributions on our units by expanding our business. Our ability to grow depends on our ability to complete expansion projects and make acquisitions that result in an increase in cash per unit generated from operations. We may be unable to successfully complete accretive expansion projects or acquisitions for any of the following reasons:
 
  •  we are unable to identify attractive expansion projects or acquisition candidates or we are outbid by competitors;
 
  •  El Paso elects not to sell or contribute additional interests in its pipeline systems that it owns to us or to offer attractive expansion projects or acquisition candidates to us;
 
  •  we are unable to obtain necessary rights of way or government approvals;
 
  •  an inability to realize anticipated costs savings and successful integration of the businesses we build or acquire;
 
  •  we are unable to raise financing for such expansion projects or acquisitions on economically acceptable terms;
 
  •  mistaken assumptions about volumes, revenues and costs, including synergies and potential growth;
 
  •  we are unable to secure adequate customer commitments to use the newly expanded or acquired facilities;
 
  •  an inability to complete expansion projects on schedule and within budgeted costs;
 
  •  the assumption of unknown liabilities when making acquisitions for which we are not indemnified or for which our indemnity is inadequate;
 
  •  the diversion of management’s and employees’ attention from other business concerns; or
 
  •  unforeseen difficulties operating in new product areas or new geographic areas.
 
If any expansion project or acquisition eventually proves not to be accretive to our distributable cash flow per unit, our financial position and results of operations could be adversely affected and our ability to make distributions to you may be reduced.
 
The amount of cash we have available for distribution to holders of our common units and subordinated units depends primarily on our cash flow and not solely on profitability, which may prevent us from making cash distributions during periods when we record net income.
 
You should be aware that the amount of cash we have available for distribution depends primarily upon our cash flow, including cash flow from financial reserves and working capital or other borrowings, and not solely on profitability, which will be affected by non-cash items. As a result, we may make cash distributions during periods when we record net losses for financial accounting purposes and may not make cash distributions during periods when we record net earnings for financial accounting purposes.
 
We may incur significant costs and liabilities as a result of pipeline integrity management program testing and any necessary pipeline repairs, or preventative or remedial measures.
 
The United States Department of Transportation, or DOT, has adopted regulations requiring pipeline operators to develop integrity management programs for transportation pipelines located where a leak or rupture could do the most harm in “high consequence areas.” The regulations require operators to:
 
  •  perform ongoing assessments of pipeline integrity;
 
  •  identify and characterize applicable threats to pipeline segments that could impact a high consequence area;
 
  •  improve data collection, integration and analysis;
 
  •  repair and remediate the pipeline as necessary; and
 
  •  implement preventive and mitigating actions.


29


Table of Contents

 
We currently estimate that it will cost approximately $3 million, $16 million (of which $2 million is allocable to our 10% general partner interest in CIG) and $166 million (of which $17 million is allocable to our 10% general partner interest in SNG) to implement pipeline integrity management program testing along certain segments of the WIC, CIG and SNG pipeline systems, respectively, between 2007 and 2012. The estimate for the SNG system includes the cost to modify parts of the system to enable in-line inspection through the use of tools known as “intelligent pigs.” These estimates do not include the costs, if any, of repairs, remediation or preventative or mitigating actions that may be determined to be necessary as a result of the testing program, which could be substantial. Any additional regulatory requirements that are enacted could significantly increase the amount of these expenditures. Additionally, our actual implementation costs may be materially higher than we estimate if the increased industry-wide demand for the associated contractors and service providers causes their rates to materially increase. Should we fail to comply with DOT regulations, we could be subject to penalties and fines. Please read “Business — Safety and Maintenance” for more information.
 
The failure of LNG import terminals to be successfully developed and connected to SNG or connected to pipelines upstream of SNG or the successful development of LNG import terminals outside the areas of SNG’s operations could reduce the demand for our services.
 
Imported LNG is expected to become a more important part of the United States energy market and the FERC has certified 16 new regasification terminals for various locations across the United States including several in southwest Louisiana. SNG cannot predict which, if any, of these projects will be successfully developed and connected to SNG. SNG may not realize expected increases in future natural gas supply available for transportation and storage on its systems due to factors including;
 
  •  new projects may fail to be developed;
 
  •  new projects may not be developed at their announced capacity;
 
  •  development of new projects may be significantly delayed;
 
  •  new projects may be built in locations that are not connected to SNG’s system; or
 
  •  new projects may not influence sources of supply on SNG’s system.
 
Similarly, the development of new, or expansion of existing, LNG facilities outside areas of SNG’s operations, or in an area with a direct connection into the southeastern markets served by SNG, could reduce the need for customers to transport natural gas from the southeastern region, as well as other supply basins connected to SNG’s pipelines. This could reduce the amount of natural gas transported by SNG’s pipelines and the demand for its storage facilities.
 
The relationship between prices in our supply and consuming market areas could be affected by significant changes in LNG delivery patterns, could reduce the value of pipeline capacity, such that SNG could not collect its full recourse rate due to market circumstances.
 
If the expected increase in natural gas supply from imported LNG is not realized in our areas of operation, the future overall volume of natural gas transported and stored on our systems could decline, which could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to you.
 
We do not own all of the land on which our pipelines and facilities are located, which could disrupt our operations.
 
We do not own all of the land on which our pipelines and facilities have been constructed, and we are therefore subject to the possibility of more onerous terms and/or increased costs to retain necessary land use if we do not have valid rights-of-way, if such rights-of-way lapse or terminate or if our facilities are not properly located within the boundaries of such rights-of-way. Although many of these rights are perpetual in nature, we occasionally obtain the rights to construct and operate our pipelines on land owned by third parties and governmental agencies for a specific period of time. Our loss of these rights, through our inability to renew right-of-way contracts or otherwise, could have a material adverse effect on our business, results of operations and financial condition and our ability to make cash distributions to you.


30


Table of Contents

Our operations are subject to operational hazards and unforeseen interruptions for which we may not be adequately insured.
 
Our operations are subject to the inherent risks normally associated with pipeline operations, including:
 
  •  hurricanes, tornadoes, floods, fires, adverse weather conditions and other natural disasters;
 
  •  acts of terrorism;
 
  •  damages to pipelines and pipeline blockages;
 
  •  leakage of natural gas and other hydrocarbons or losses of natural gas as a result of the malfunction of equipment or facilities;
 
  •  operator error;
 
  •  environmental pollution or release of toxic substances;
 
  •  fires, explosions and blowouts;
 
  •  risks related to underwater pipelines in the Gulf of Mexico, which are susceptible to damage from shifting as a result of water currents and mudslides as well as damage from vessels; and
 
  •  risks related to operating in a marine environment.
 
Any of these or any other similar occurrences could result in the disruption of our operations, substantial repair costs, personal injury or loss of life, property damage, damage to the environment or other significant exposure to liability.
 
We do not insure against all potential losses and could be seriously harmed by unexpected liabilities.
 
We are not fully insured against all risks inherent to our business and are not insured against all environmental accidents that might occur. If a significant accident or event occurs that is not fully insured, it could adversely affect our operations and financial condition. In addition, we may not be able to maintain or obtain insurance of the type and amount we desire at reasonable rates. Changes in the insurance markets subsequent to the September 11, 2001 terrorist attacks and Hurricanes Katrina and Rita have made it more difficult for us to obtain certain types of coverage, and we may elect to self insure a portion of our asset portfolio. In addition, we do not maintain business interruption insurance. There can be no assurance that we will be able to obtain the levels or types of insurance we would otherwise have obtained prior to these market changes or that the insurance coverage we do obtain will not contain large deductibles or fail to cover certain hazards or cover all potential losses. The occurrence of any operating risks not fully covered by insurance could have a material adverse effect on our business, financial condition, results of operations and ability to make distributions to our unitholders.
 
Our operations are subject to environmental laws and regulations that may expose us to significant costs and liabilities.
 
Our natural gas transportation, storage and processing activities are subject to stringent and complex federal, state and local environmental laws and regulations. We may incur substantial costs in order to conduct our operations in compliance with these laws and regulations. For instance, we may be required to obtain and maintain permits and approvals issued by various federal, state and local governmental authorities; limit or prevent releases of materials from our operations in accordance with these permits and approvals; and install pollution control equipment. Also, under certain environmental laws and regulations, we may be exposed to potentially substantial liabilities for any pollution or contamination that may result from our operations. Moreover, new, stricter environmental laws, regulations or enforcement policies could be implemented that significantly increase our compliance costs or the cost of any remediation of environmental contamination that may become necessary, and these costs could be material. For instance, the U.S. Congress is actively considering federal legislation to reduce emissions of “greenhouse gases” (including carbon dioxide and methane). Several states of the U.S. have already taken legal measures to reduce emissions of greenhouse gases, and many other nations, not including the U.S., have also already agreed to regulate emissions of greenhouse gases. As a result of the regulation of greenhouse gases in the U.S., we may incur increased compliance costs to (i) operate and maintain our facilities, (ii) install new emission controls on our facilities;


31


Table of Contents

and (iii) administer and manage any greenhouse gas emissions reduction program that may be applicable to our operations. In addition, laws and regulations to reduce emissions of greenhouse gases could affect the consumption of natural gas and consequently, adversely affect the demand for our pipeline services and the rates we are able to collect for those services.
 
Failure to comply with environmental laws or regulations, or the permits issued under them, may result in the assessment of administrative, civil and criminal penalties, the imposition of remedial obligations and the issuance of injunctions limiting or preventing some or all of our operations. In addition, strict, joint and several liability may be imposed under certain environmental laws, which could cause us to become liable for the conduct of others or for consequences of our own actions that were in compliance with all applicable laws at the time those actions were taken. Private parties, including the owners of properties through which our pipeline systems pass, may also have the right to pursue legal actions against us to enforce compliance, as well as to seek damages for non-compliance, with environmental laws and regulations or for personal injury or property damage that may result from environmental and other impacts of our operations. We may not be able to recover some or any of these costs through insurance or increased revenues, which may have a material adverse effect on our profitability. As of June 30, 2007, CIG and SNG had accrued $17 million and $1 million, respectively, for expected remediation costs and associated on-site, offsite and groundwater technical studies and environmental legal costs. WIC had no such accruals. For a further description of these accruals, please read the notes to the historical financial statements of WIC, CIG and SNG included elsewhere in this prospectus. Please also read “Business — Environmental Matters” for more information.
 
If we fail to develop or maintain an effective system of internal controls, we may not be able to report our financial results accurately, or prevent fraud which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.
 
Prior to this offering, our subsidiaries and equity investees were wholly owned by El Paso. We will become subject to the public reporting requirements of the Securities Exchange Act of 1934 upon the completion of this offering. We produce our financial statements in accordance with the requirements of GAAP, but our internal accounting controls may not currently meet all standards applicable to companies with publicly traded securities. Effective internal controls are necessary for us to provide reliable financial reports to prevent fraud and to operate successfully as a publicly traded partnership. Our efforts to develop and maintain our internal controls may not be successful, and we may be unable to maintain adequate controls over our financial processes and reporting in the future, including compliance with the obligations under Section 404 of the Sarbanes-Oxley Act of 2002, which we refer to as Section 404. For example, Section 404 will require us, among other things, annually to review and report on, and our independent registered public accounting firm annually to attest to, our internal control over financial reporting. Any failure to develop or maintain effective controls, or difficulties encountered in their implementation or other effective improvement of our internal controls could harm our operating results or cause us to fail to meet our reporting obligations. Ineffective internal controls subject us to regulatory scrutiny and a loss of confidence in our reported financial information, which could have an adverse effect on our business and would likely have a negative effect on the trading price of our common units.
 
We are exposed to the credit risk of our customers and our credit risk management may not be adequate to protect against such risk.
 
We are subject to the risk of loss resulting from nonpayment and/or nonperformance by our customers. Our credit procedures and policies may not be adequate to fully eliminate customer credit risk. If we fail to adequately assess the creditworthiness of existing or future customers, unanticipated deterioration in their creditworthiness and any resulting increase in nonpayment and/or nonperformance by them and inability to re-market the capacity could have a material adverse effect on our business, results of operations, financial condition and ability to make cash distributions to you. We may not be able to effectively re-market capacity during and after insolvency proceedings involving a shipper.


32


Table of Contents

 
Risks Inherent in an Investment in Us
 
El Paso controls our general partner, which has sole responsibility for conducting our business and managing our operations. Our general partner and its affiliates, including El Paso, have conflicts of interest with us and limited fiduciary duties, and they may favor their own interests to the detriment of our unitholders.
 
Following this offering, El Paso will own and control our general partner, and will appoint all of the directors of our general partner. Some of our general partner’s directors, and some of its executive officers, are directors or officers of El Paso or its affiliates. Although our general partner has a fiduciary duty to manage us in a manner beneficial to us and our unitholders, the directors and officers of our general partner have a fiduciary duty to manage our general partner in a manner beneficial to El Paso. Therefore, conflicts of interest may arise between El Paso and its affiliates, including our general partner, on the one hand, and us and our unitholders, on the other hand. In resolving these conflicts of interest, our general partner may favor its own interests and the interests of its affiliates over the interests of our unitholders. These conflicts include the following situations:
 
  •  neither our partnership agreement nor any other agreement requires El Paso to pursue a business strategy that favors us. El Paso’s directors and officers have a fiduciary duty to make these decisions in the best interests of the owners of El Paso, which may be contrary to our interests;
 
  •  our general partner is allowed to take into account the interests of parties other than us, such as El Paso and its affiliates, in resolving conflicts of interest;
 
  •  El Paso will own the remaining 90% interest in CIG, which transports, and SNG, which transports and stores, natural gas for an El Paso marketing affiliate;
 
  •  El Paso will own a 2% general partner interest, the incentive distribution rights and common and subordinated units representing a combined 65.8% limited partner interest in us, and if a vote of limited partners is required, El Paso will be entitled to vote its units in accordance with its own interests, which may be contrary to our interests;
 
  •  the limited partner interests that El Paso will own initially will permit it to effectively control any votes of our limited partners;
 
  •  El Paso and its affiliates are not limited in their ability to compete with us. Please read “— Affiliates of our general partner, including El Paso and its other subsidiaries, are not limited in their ability to compete with us and are not obligated to offer us the opportunity to pursue additional assets or businesses, which could limit our commercial activities or our ability to acquire additional assets or businesses”;
 
  •  El Paso is not obligated to offer business opportunities to us or to offer, to contribute or sell additional assets or operations to us;
 
  •  El Paso determines the level of capital expenditures at SNG and CIG and thereby impacts the level and timing of contributions we may be required to make to CIG and SNG in connection with such capital expenditures;
 
  •  our general partner may make a determination to receive a quantity of our Class B common units in exchange for resetting the target distribution levels related to its incentive distribution rights without the approval of the conflicts committee of our general partner or our unitholders. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions”;
 
  •  most of the officers and employees of El Paso who provide services to us also will devote significant time to the business of El Paso, and will be compensated by El Paso for the services rendered to it;
 
  •  pursuant to our partnership agreement, our general partner has limited its liability and defined its fiduciary duties in ways that are protective of it as compared to liabilities and duties that would be imposed upon a general partner under Delaware law in the absence of such definition. The partnership agreement also restricts the remedies available to our unitholders for actions that, without the limitations, might constitute breaches of fiduciary duty under Delaware common law. By purchasing common units, unitholders will be deemed to have consented to some actions and conflicts of interest that might otherwise constitute a breach of fiduciary or other duties under applicable law;


33


Table of Contents

 
  •  our general partner determines the amount and timing of asset purchases and sales, borrowings, issuance of additional partnership securities and reserves, each of which can affect the amount of cash that is distributed to unitholders;
 
  •  our general partner determines the amount and timing of any capital expenditures and, based on the applicable facts and circumstances, whether a capital expenditure is classified as a maintenance capital expenditure, which reduces operating surplus, or an expansion capital expenditure or investment capital expenditure, neither of which reduces operating surplus. This determination can affect the amount of cash that is distributed to our unitholders, including distributions on our subordinated units, to our general partner in respect of the incentive distribution rights, as well as the ability of the subordinated units to convert to common units;
 
  •  our general partner determines which costs incurred by it and its affiliates are reimbursable by us;
 
  •  in some instances, our general partner may cause us to borrow funds in order to permit the payment of cash distributions, even if the purpose or effect of the borrowing is to make a distribution on the subordinated units, to make incentive distributions or to accelerate the expiration of the subordination period;
 
  •  our partnership agreement permits us to classify up to $45 million as operating surplus, even if it is generated from asset sales, non-Working Capital Borrowings or other sources the distribution of which would otherwise constitute capital surplus. This cash may be used to fund distributions on our subordinated units, or to our general partner in respect of the general partner interest or the incentive distribution rights.
 
  •  our partnership agreement does not restrict our general partner from causing us to pay it or its affiliates for any services rendered to us or entering into additional contractual arrangements with any of these entities on our behalf;
 
  •  our general partner intends to limit its liability regarding our contractual and other obligations and, in some circumstances, is entitled to be indemnified by us;
 
  •  our general partner is a special purpose entity that has limited assets;
 
  •  our general partner may exercise its limited right to call and purchase common units if it and its affiliates own more than 75% of the common units;
 
  •  our general partner controls the enforcement of obligations owed to us by our general partner and its affiliates; and
 
  •  our general partner decides whether to retain separate counsel, accountants or others to perform services for us.
 
Please read “Conflicts of Interest and Fiduciary Duties.”
 
Affiliates of our general partner, including El Paso and its other subsidiaries, are not limited in their ability to compete with us and are not obligated to offer us the opportunity to pursue additional assets or businesses, which could limit our commercial activities or our ability to acquire additional assets or businesses.
 
Neither our partnership agreement nor the omnibus agreement among us, El Paso and others will prohibit affiliates of our general partner, including El Paso, El Paso Natural Gas Company (EPNG), Cheyenne Plains Gas Pipeline Company, L.L.C. and TGP, from owning assets or engaging in businesses that compete directly or indirectly with us. In addition, El Paso and its affiliates may acquire, construct or dispose of additional transportation or other assets in the future, without any obligation to offer us the opportunity to purchase or construct any of those assets. Each of these entities is a large, established participant in the interstate pipeline and/or storage business, and each may have greater resources than we have, which factors may make it more difficult for us to compete with these entities with respect to commercial activities as well as for acquisition candidates. As a result, competition from these entities could adversely impact our results of operations and cash available for distribution. Please read “Conflicts of Interest and Fiduciary Duties.”


34


Table of Contents

If you are not an Eligible Holder, you will not be entitled to receive distributions or allocations of income or loss on your common units and your common units will be subject to redemption at a price that may be below the then-current market price.
 
In order to improve the likelihood of obtaining favorable recognition of an amount representing an allowance for income taxes when the rates for our services are set by FERC, we have adopted certain requirements regarding those investors who may own our common and subordinated units. Eligible Holders are individuals or entities subject to United States federal income taxation on the income generated by us or entities that, while not subject to United States federal income taxation on the income generated by us, have owners that are all subject to such taxation. Please read “Description of the Common Units — Transfer of Common Units.” If you are not a person who fits the requirements to be an Eligible Holder, you will not receive distributions or allocations of income and loss on your units and you run the risk of having your units redeemed by us at the lower of your purchase price cost and the then-current market price. The redemption price will be paid in cash or by delivery of a promissory note, as determined by our general partner.
 
Holders of our common units have limited voting rights and are not entitled to elect our general partner or its directors, which could reduce the price at which the common units will trade.
 
Unlike the holders of common stock in a corporation, unitholders have only limited voting rights on matters affecting our business and, therefore, limited ability to influence management’s decisions regarding our business. Unitholders will not elect our general partner or its board of directors, and will have no right to elect our general partner or its board of directors on an annual or other continuing basis. The board of directors of our general partner, including the independent directors, will be chosen entirely by its owners and not by the unitholders. Unlike publicly traded corporations, we will not conduct annual meetings of our unitholders to elect directors or conduct other matters routinely conducted at such annual meetings of stockholders. Furthermore, if the unitholders were dissatisfied with the performance of our general partner, they will have little ability to remove our general partner. As a result of these limitations, the price at which the common units will trade could be diminished because of the absence or reduction of a takeover premium in the trading price.
 
You will experience immediate and substantial dilution of $16.94 in tangible net book value per common unit.
 
The estimated initial public offering price of $20.00 per unit exceeds our pro forma net tangible book value of $3.06 per unit. Based on the initial public offering price of $20.00 per unit, you will incur immediate and substantial dilution of $16.94 per common unit. This dilution results primarily because the assets contributed by our general partner and its affiliates are recorded at their historical cost, and not their fair value, in accordance with GAAP. Please read “Dilution.”
 
Cost reimbursements to our general partner and its affiliates for services provided, which will be determined by our general partner, will be substantial and will reduce our cash available for distribution to you.
 
Pursuant to an omnibus agreement we will enter into with El Paso, our general partner and certain of their affiliates upon the closing of this offering, El Paso and its affiliates will receive reimbursement for the payment of operating and capital expenses related to our operations and for the provision of various general and administrative services for our benefit, including costs for rendering administrative staff and support services to us, and overhead allocated to us, which amounts will be determined by our general partner in good faith. Payments for these services will be substantial and will reduce the amount of cash available for distribution to unitholders. Please read “Certain Relationships and Related Transactions — Omnibus Agreement.” In addition, CIG operates WIC pursuant to an operating agreement that will remain in effect after the closing of this offering. Pursuant to that operating agreement, WIC reimburses CIG for the costs incurred to operate and maintain the WIC system. CIG reimburses certain of its affiliates for costs incurred and services it receives (primarily from EPNG and TGP) and receives reimbursements for costs incurred and services it provides to other affiliates (primarily Cheyenne Plains and Young Gas Storage Company Ltd.). Similarly, the El Paso subsidiary that is the operator and general partner of CIG or SNG will be entitled to be reimbursed for the costs incurred to operate and maintain such system. In addition, under Delaware partnership law, our general partner has unlimited liability for our obligations, such as our debts and


35


Table of Contents

environmental liabilities, except for our contractual obligations that are expressly made without recourse to our general partner. To the extent our general partner incurs obligations on our behalf, we are obligated to reimburse or indemnify it. If we are unable or unwilling to reimburse or indemnify our general partner, our general partner may take actions to cause us to make payments of these obligations and liabilities. Any such payments could reduce the amount of cash otherwise available for distribution to our unitholders.
 
Our partnership agreement limits our general partner’s fiduciary duties to holders of our common units and subordinated units and restricts the remedies available to holders of our common units and subordinated units for actions taken by our general partner that might otherwise constitute breaches of fiduciary duty.
 
Our partnership agreement contains provisions that reduce the fiduciary standards to which our general partner would otherwise be held by state fiduciary duty laws. The limitation and definition of these duties is permitted by the Delaware law governing limited partnerships. For example, our partnership agreement:
 
  •  permits our general partner to make a number of decisions in its individual capacity, as opposed to in its capacity as our general partner. This entitles our general partner to consider only the interests and factors that it desires, and it has no duty or obligation to give any consideration to any interest of, or factors affecting, us, our affiliates or any limited partner. Examples include the exercise of its limited call right, the exercise of its rights to transfer or vote the units it owns, the exercise of its registration rights and its determination whether or not to consent to any merger or consolidation of the partnership or amendment to the partnership agreement;
 
  •  provides that our general partner will not have any liability to us or our unitholders for decisions made in its capacity as a general partner so long as it acted in good faith, meaning it believed the decision was in the best interests of our partnership;
 
  •  generally provides that affiliated transactions and resolutions of conflicts of interest not approved by the conflicts committee of the board of directors of our general partner and not involving a vote of unitholders must be on terms no less favorable to us than those generally being provided to or available from unrelated third parties or must be “fair and reasonable” to us, as determined by our general partner in good faith and that, in determining whether a transaction or resolution is “fair and reasonable,” our general partner may consider the totality of the relationships between the parties involved, including other transactions that may be particularly advantageous or beneficial to us;
 
  •  provides that our general partner and its officers and directors will not be liable for monetary damages to us, our limited partners or assignees for any acts or omissions unless there has been a final and non-appealable judgment entered by a court of competent jurisdiction determining that the general partner or those other persons acted in bad faith or engaged in fraud or willful misconduct or, in the case of a criminal matter, acted with knowledge that the conduct was criminal; and
 
  •  provides that in resolving conflicts of interest, it will be presumed that in making its decision the general partner acted in good faith, and in any proceeding brought by or on behalf of any limited partner or us, the person bringing or prosecuting such proceeding will have the burden of overcoming such presumption.
 
In addition, the general partnership agreements of CIG and SNG contain similar provisions that define the fiduciary standards of each partner (a subsidiary of El Paso owns a 90% general partner interest in each, and a subsidiary of the Partnership owns a 10% general partner interest in each) to the other. In addition, the general partnership agreements include provisions that define the fiduciary standards that the members of the management committee of each such partnership appointed by a partner (initially, El Paso will appoint three members, and the Partnership will appoint one member, of each committee) owe to the partners that did not designate such person. In both instances, the defined fiduciary standards are more limited than that would apply under Delaware law in the absence of such definition.
 
By purchasing a common unit, a common unitholder will agree to become bound by the provisions in our partnership agreement and the partnership agreements of CIG and SNG, including the provisions discussed above. Please read “Conflicts of Interest and Fiduciary Duties — Fiduciary Duties.”


36


Table of Contents

Even if unitholders are dissatisfied, they cannot initially remove our general partner without its consent.
 
If you are dissatisfied with the performance of our general partner, you will have little ability to remove our general partner. The vote of the holders of at least 662/3% of all outstanding common and subordinated units voting together as a single class is required to remove our general partner. Following the closing of this offering, our general partner and its affiliates will own 67.1% of our aggregate outstanding common and subordinated units. Accordingly, our unitholders are currently unable to remove our general partner without its consent because affiliates of our general partner own sufficient units to be able to prevent the general partner’s removal. Also, if our general partner is removed without cause during the subordination period and units held by our general partner and its affiliates are not voted in favor of that removal, all remaining subordinated units will automatically be converted into common units and any existing arrearages on the common units will be extinguished. In addition, under certain circumstances the successor general partner may be required to purchase the combined general partner interest and incentive distribution rights of the removed general partner, or alternatively, such interests will be converted into common units. A removal of our general partner under these circumstances would adversely affect the common units by prematurely eliminating their distribution and liquidation preference over the subordinated units, which would otherwise have continued until we had met certain distribution and performance tests.
 
Cause is narrowly defined in our partnership agreement to mean that a court of competent jurisdiction has entered a final, non-appealable judgment finding our general partner liable for actual fraud, gross negligence, or willful or wanton misconduct in its capacity as our general partner. Cause does not include most cases of charges of poor management of the business, so the removal of our general partner because of the unitholders’ dissatisfaction with our general partner’s performance in managing our partnership will most likely result in the termination of the subordination period.
 
Our general partner may elect to cause us to issue Class B common units to it in connection with a resetting of the target distribution levels related to our general partner’s incentive distribution rights without the approval of the conflicts committee of our general partner or holders of our common units and subordinated units. This may result in lower distributions to holders of our common units in certain situations.
 
Our general partner has the right, at a time when there are no subordinated units outstanding and it has received incentive distributions at the highest level to which it is entitled (48%) for each of the prior four consecutive fiscal quarters, to reset the initial cash target distribution levels at higher levels based on the distribution at the time of the exercise of the reset election. Following a reset election by our general partner, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to correspondingly higher levels based on percentage increases above the reset minimum quarterly distribution amount.
 
In connection with resetting these target distribution levels, our general partner will be entitled to receive a number of Class B common units. The Class B common units will be entitled to the same cash distributions per unit as our common units and will be convertible into an equal number of common units. The number of Class B common units to be issued will be equal to that number of common units whose aggregate quarterly cash distributions equaled the average of the distributions to our general partner on the incentive distribution rights in the prior two quarters. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would not be sufficiently accretive to cash distributions per common unit without such conversion; however, it is possible that our general partner could exercise this reset election at a time when it is experiencing, or may be expected to experience, declines in the cash distributions it receives related to its incentive distribution rights and may therefore desire to be issued our Class B common units, which are entitled to receive cash distributions from us on the same priority as our common units, rather than retain the right to receive incentive distributions based on the initial target distribution levels. As a result, a reset election may cause our common unitholders to experience dilution in the amount of cash distributions that they would have otherwise received had we not issued new Class B common units to our general partner in connection with resetting the target distribution levels related to our


37


Table of Contents

general partner incentive distribution rights. Please read “Provisions of Our Partnership Agreement Related to Cash Distributions — General Partner Interest and Incentive Distribution Rights.”
 
The control of our general partner may be transferred to a third party without unitholder consent.
 
Our general partner may transfer its general partner interest to a third party in a merger or in a sale of all or substantially all of its assets without the consent of the unitholders. Furthermore, our partnership agreement does not restrict the ability of the members of our general partner from transferring their member interest in our general partner to a third party. The new owners of our general partner would then be in a position to replace the board of directors and officers of the general partner with their own choices and to control the decisions taken by the board of directors and officers of the general partner. This effectively permits a “change of control” of the partnership without your vote or consent. In addition, pursuant to the omnibus agreement with El Paso, any new owner of the general partner would be required to change our name so that there would be no further reference to El Paso.
 
If we are deemed an “investment company” under the Investment Company Act of 1940, it would adversely affect the price of our common units and could have a material adverse effect on our business.
 
Our initial assets will consist of a 100% ownership interest in WIC, a 10% general partner interest in CIG and a 10% general partner interest in SNG. If a sufficient amount of our assets, such as our ownership interests in CIG or SNG or other assets acquired in the future, are deemed to be “investment securities” within the meaning of the Investment Company Act of 1940, we would either have to register as an investment company under the Investment Company Act, obtain exemptive relief from the Commission or modify our organizational structure or our contract rights to fall outside the definition of an investment company. Although general partner interests are typically not considered securities or “investment securities,” there is a risk that our ownership interests in CIG and SNG could be deemed investment securities. In that event, it is possible that our ownership of these interests, combined with our assets acquired in the future, could result in our being required to register under the Investment Company Act if we were not successful in obtaining exemptive relief or otherwise modifying our organizational structure or applicable contract rights. Registering as an investment company could, among other things, materially limit our ability to engage in transactions with affiliates, including the purchase and sale of certain securities or other property to or from our affiliates, restrict our ability to borrow funds or engage in other transactions involving leverage and require us to add additional directors who are independent of us or our affiliates. The occurrence of some or all of these events would adversely affect the price of our common units and could have a material adverse effect on our business.
 
Moreover, treatment of us as an investment company would prevent our qualification as a partnership for federal income tax purposes in which case we would be treated as a corporation for federal income tax purposes. As a result, we would pay federal income tax on our taxable income at the corporate tax rate, distributions to you would generally be taxed again as corporate distributions and none of our income, gains, losses or deductions would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available for distribution to you would be substantially reduced. Therefore, treatment of us as an investment company would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units. For a discussion of the federal income tax implications if we were treated as a corporation in any taxable year, please read “Material Tax Consequences — Partnership Status.”
 
Increases in interest rates could adversely impact our unit price and our ability to issue additional equity to make acquisitions, incur debt or for other purposes.
 
We cannot predict how interest rates will react to changing market conditions. Interest rates on future credit facilities and debt offerings could be higher than current levels, causing our financing costs to increase accordingly. As with other yield-oriented securities, our unit price is impacted by the level of our cash distributions and implied distribution yield. The distribution yield is often used by investors to compare and rank related yield-oriented securities for investment decision-making purposes. Therefore, changes in interest rates may affect the yield requirements of investors who invest in our units, and a rising interest rate


38


Table of Contents

environment could have an adverse impact on our unit price and our ability to issue additional equity to make acquisitions, to incur debt or for other purposes.
 
We may issue additional units without your approval, which would dilute your existing ownership interests.
 
Our partnership agreement does not limit the number of additional limited partner interests that we may issue at any time without the approval of our unitholders. The issuance by us of additional common units or other equity securities of equal or senior rank will have the following effects:
 
  •  each unitholder’s proportionate ownership interest in us will decrease;
 
  •  the amount of cash available for distribution on each unit may decrease;
 
  •  because a lower percentage of total outstanding units will be subordinated units, the risk that a shortfall in the payment of the minimum quarterly distribution will be borne by our common unitholders will increase;
 
  •  the ratio of taxable income to distributions may increase;
 
  •  the relative voting strength of each previously outstanding unit may be diminished; and
 
  •  the market price of the common units may decline.
 
El Paso and its affiliates may sell units in the public or private markets, which sales could have an adverse impact on the trading price of the common units.
 
After the sale of the common units offered hereby, El Paso and its affiliates will hold an aggregate of 26,181,049 common units and 24,815,054 subordinated units. All of the subordinated units will convert into common units at the end of the subordination period, which could occur as early as the first business day after December 31, 2010, and all of the subordinated units may convert into common units by December 31, 2009 if additional tests are satisfied. The sale of any of these units in the public or private markets could have an adverse impact on the price of the common units or on any trading market that may develop.
 
Our general partner has a limited call right that may require you to sell your common units at an undesirable time or price.
 
If at any time our general partner and its affiliates own more than 75% of the common units, our general partner will have the right, but not the obligation, which it may assign to any of its affiliates or to us, to acquire all, but not less than all, of the common units held by unaffiliated persons at a price not less than their then-current market price. As a result, you may be required to sell your common units at an undesirable time or price and may not receive any return on your investment. You may also incur a tax liability upon a sale of your units. Our general partner is not obligated to obtain a fairness opinion regarding the value of the common units to be repurchased by it upon exercise of the limited call right. There is no restriction in our partnership agreement that prevents our general partner from issuing additional common units and exercising its call right. If our general partner exercised its limited call right, the effect would be to take us private and, if the units were subsequently deregistered, we would not longer be subject to the reporting requirements of the Securities Exchange Act of 1934. At the completion of this offering and assuming no exercise of the underwriters’ option to purchase additional common units, our general partner and its affiliates will own approximately 51.2% of our outstanding common units. At the end of the subordination period, assuming no additional issuances of common units (other than for the conversion of the subordinated units into common units), our general partner and its affiliates will own approximately 67.1% of our aggregate outstanding common units. For additional information about this call right, please read “The Partnership Agreement — Limited Call Right.”
 
Our partnership agreement restricts the voting rights of unitholders owning 20% or more of our common units.
 
Our partnership agreement restricts unitholders’ voting rights by providing that any units held by a person that owns 20% or more of any class of units then outstanding, other than our general partner and its affiliates, their transferees and persons who acquired such units with the prior approval of the board of directors of our


39


Table of Contents

general partner, cannot vote on any matter. The partnership agreement also contains provisions limiting the ability of unitholders to call meetings or to acquire information about our operations, as well as other provisions limiting the unitholders ability to influence the manner or direction of management.
 
Your liability may not be limited if a court finds that unitholder action constitutes control of our business.
 
A general partner of a partnership generally has unlimited liability for the obligations of the partnership, except for those contractual obligations of the partnership that are expressly made without recourse to the general partner. Our partnership is organized under Delaware law and we conduct business in a number of other states. The limitations on the liability of holders of limited partner interests for the obligations of a limited partnership have not been clearly established in some of the other states in which we do business. You could be liable for any and all of our obligations as if you were a general partner if a court or government agency determined that:
 
  •  we were conducting business in a state but had not complied with that particular state’s partnership statute; or
 
  •  your right to act with other unitholders to remove or replace the general partner, to approve some amendments to our partnership agreement or to take other actions under our partnership agreement constitute “control” of our business.
 
For a discussion of the implications of the limitations of liability on a unitholder, please read “The Partnership Agreement — Limited Liability.”
 
Unitholders may have liability to repay distributions that were wrongfully distributed to them.
 
Under certain circumstances, unitholders may have to repay amounts wrongfully returned or distributed to them. Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets. Delaware law provides that for a period of three years from the date of the impermissible distribution, limited partners who received the distribution and who knew at the time of the distribution that it violated Delaware law will be liable to the limited partnership for the distribution amount. Substituted limited partners are liable for the obligations of the assignor to make contributions to the partnership that are known to the substituted limited partner at the time it became a limited partner and for unknown obligations if the liabilities could be determined from the partnership agreement. Liabilities to partners on account of their partnership interest and liabilities that are non-recourse to the partnership are not counted for purposes of determining whether a distribution is permitted.
 
There is no existing market for our common units, and a trading market that will provide you with adequate liquidity may not develop.
 
Prior to the offering, there has been no public market for the common units. After the offering, there will be only 25,000,000 publicly traded common units, assuming no exercise of the underwriters’ option to purchase additional units. We do not know the extent to which investor interest will lead to the development of a trading market or how liquid that market might be. You may not be able to resell your common units at or above the initial public offering price. Additionally, the lack of liquidity may result in wide bid-ask spreads, contribute to significant fluctuations in the market price of the common units and limit the number of investors who are able to buy the common units.
 
We will incur increased costs as a result of being a publicly-traded partnership.
 
We have no history operating as a publicly-traded partnership. As a publicly-traded partnership, we will incur significant legal, accounting and other expenses. In addition, the Sarbanes-Oxley Act of 2002, as well as other rules subsequently implemented by the SEC and the New York Stock Exchange, have required changes in corporate governance practices of publicly-traded entities. We expect these rules and regulations to increase certain of our legal and financial compliance costs and to make activities more time-consuming and costly. For example, as a result of becoming a publicly-traded partnership, we are required to have at least three independent directors, create an audit committee and adopt policies regarding internal controls and disclosure controls and procedures, including the preparation of reports on internal controls over financial reporting. In


40


Table of Contents

addition, we will incur additional costs associated with our publicly-traded company reporting requirements. We also expect these rules and regulations to result in significant expense to obtain director and officer liability insurance. Because of the limitations in coverage for directors, it may be more difficult for our general partner to attract and retain qualified persons to serve on its board of directors or as executive officers. We will incur approximately $4 million of estimated incremental costs associated with being a publicly-traded partnership for purposes of our Statement of Minimum Estimated Cash Available for Distribution included elsewhere in this prospectus; however, it is possible that our actual incremental costs of being a publicly-traded partnership will be higher than we currently estimate.
 
Tax Risks to Common Unitholders
 
In addition to reading the following risk factors, you should read “Material Tax Consequences” for a more complete discussion of the expected material federal income tax consequences of owning and disposing of common units.
 
Our tax treatment depends on our status as a partnership for federal income tax purposes, as well as our not being subject to a material amount of additional entity-level taxation by states. If the Internal Revenue Service were to treat us as a corporation or if we become subject to a material amount of additional entity-level taxation for state tax purposes, then it would substantially reduce the amount of cash available for distribution to our unitholders.
 
The anticipated after-tax economic benefit of an investment in the common units depends largely on our being treated as a partnership for federal income tax purposes. We have not requested, and do not plan to request, a ruling from the Internal Revenue Service, which we refer to as the IRS, on this or any other tax matter affecting us.
 
If we were treated as a corporation for federal income tax purposes, we would pay federal income tax on our taxable income at the corporate tax rate, which is currently a maximum of 35%, and would likely pay state income tax at varying rates. Distributions to you would generally be taxed again as corporate distributions, and no income, gains, losses, deductions or credits would flow through to you. Because a tax would be imposed upon us as a corporation, our cash available to pay distributions to you would be substantially reduced. Thus, treatment of us as a corporation would result in a material reduction in the anticipated cash flow and after-tax return to the unitholders, likely causing a substantial reduction in the value of our common units.
 
Current law may change, causing us to be treated as a corporation for federal income tax purposes or otherwise subjecting us to entity-level taxation. For example, because of widespread state budget deficits, several states are evaluating ways to subject partnerships to entity-level taxation through the imposition of state income, franchise or other forms of taxation. If any state was to impose a tax upon us as an entity, the cash available to pay distributions to you would be reduced. We will, for example, be subject to a new entity-level tax on the portion of our income that is generated in Texas. Specifically, the Texas margin tax will be imposed at a maximum effective rate of 0.7% of our gross income apportioned to Texas. The imposition of such a tax on us by Texas, or any other state, will reduce the cash available for distribution to you.
 
Our partnership agreement provides that if a law is enacted or existing law is modified or interpreted in a manner that subjects us to taxation as a corporation or otherwise subjects us to entity-level taxation for federal, state or local income tax purposes, then the minimum quarterly distribution amount and the target distribution amounts will be adjusted to reflect the impact of that law on us.
 
The tax treatment of publicly traded partnerships or an investment in our common units could be subject to potential legislative, judicial or administrative changes and differing interpretations, possibly on a retroactive basis.
 
The present U.S. federal income tax treatment of publicly traded partnerships, including us, or an investment in our common units may be modified by administrative, legislative or judicial interpretation at any time. For example, in response to certain recent developments, members of Congress are considering substantive changes to the definition of qualifying income under Section 7704(d) of the Internal Revenue Code. It is possible that these efforts could result in changes to the existing U.S. tax laws that affect publicly


41


Table of Contents

traded partnerships, including us. Any modification to the U.S. federal income tax laws and interpretations thereof may or may not be applied retroactively. We are unable to predict whether any of these changes, or other proposals, will ultimately be enacted. Any such changes could negatively impact the value of an investment in our common units.
 
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The IRS may challenge this treatment, which could change the allocation of items of income, gain, loss and deduction among our unitholders.
 
We prorate our items of income, gain, loss and deduction between transferors and transferees of our units each month based upon the ownership of our units on the first day of each month, instead of on the basis of the date a particular unit is transferred. The use of this proration method may not be permitted under existing Treasury Regulations, and, accordingly, our counsel is unable to opine as to the validity of this method. If the IRS were to challenge this method or new Treasury Regulations were issued, we may be required to change the allocation of items of income, gain, loss and deduction among our unitholders. Please read “Material Tax Consequences — Disposition of Common Units — Allocations Between Transferors and Transferees.”
 
An Internal Revenue Service contest of the federal income tax positions we take may adversely affect the market for our common units, and the cost of any Internal Revenue Service contest will reduce our cash available for distribution to our unitholders.
 
We have not requested any ruling from the IRS with respect to our treatment as a partnership for federal income tax purposes or any other matter affecting us. The IRS may adopt positions that differ from our counsel’s conclusions expressed in this prospectus or from the positions we take. It may be necessary to resort to administrative or court proceedings to sustain some or all of our counsel’s conclusions or the positions we take. A court may not agree with some or all of our counsel’s conclusions or the positions we take. Any contest with the IRS may materially and adversely impact the market for our common units and the price at which they trade. In addition, the costs of any contest with the IRS will result in a reduction in cash available to pay distributions to our unitholders and our general partner and thus will be borne indirectly by our unitholders and our general partner.
 
You will be required to pay taxes on your share of our income even if you do not receive any cash distributions from us.
 
Because our unitholders will be treated as partners to whom we will allocate taxable income which could be different in amount than cash we distribute, you will be required to pay federal income taxes and, in some cases, state and local income taxes on your share of our taxable income, whether or not you receive cash distributions from us. You may not receive cash distributions from us equal to your share of our taxable income or even equal to the actual tax liability that results from your share of our taxable income.
 
The tax gain or loss on the disposition of our common units could be different than expected.
 
If you sell your common units, you will recognize gain or loss equal to the difference between the amount realized and your tax basis in those common units. Prior distributions to you in excess of the total net taxable income you were allocated for a common unit, which decreased your tax basis in that common unit, will, in effect, become taxable income to you if the common unit is sold at a price greater than your tax basis in that common unit, even if the price you receive is less than your original cost. A substantial portion of the amount realized, regardless of whether such amount represents gain, may be taxed as ordinary income to you due to potential recapture items, including depreciation recapture. In addition, if you sell your units, you may incur a tax liability in excess of the amount of cash you receive from the sale.
 
Tax-exempt entities and foreign persons face unique tax issues from owning common units that may result in adverse tax consequences to them.
 
Investment in common units by tax-exempt entities, such as individual retirement accounts (known as IRAs) and non-United States persons raises issues unique to them. For example, virtually all of our income allocated to organizations that are exempt from federal income tax, including IRAs and other retirement plans,


42


Table of Contents

will be unrelated business taxable income and will be taxable to them. Distributions to non-United States persons will be reduced by withholding taxes at the highest applicable effective tax rate, and non-United States persons will be required to file United States federal income tax returns and pay tax on their share of our taxable income. If you are a tax-exempt entity or foreign person, you should consult your tax advisor before investing in our common units.
 
We will treat each purchaser of units as having the same tax benefits without regard to the actual common units purchased. The IRS may challenge this treatment, which could adversely affect the value of the common units.
 
Because we cannot match transferors and transferees of common units, we will adopt depreciation and amortization positions that may not conform with all aspects of existing Treasury Regulations. Our counsel is unable to opine as to the validity of such filing positions. A successful IRS challenge to those positions could adversely affect the amount of tax benefits available to you. It also could affect the timing of these tax benefits or the amount of gain from your sale of our common units and could have a negative impact on the value of our common units or result in audit adjustments to your tax returns. Please read “Material Tax Consequences — Uniformity of Units” for a further discussion of the effect of the depreciation and amortization positions we will adopt.
 
We may adopt certain valuation methodologies that may result in a shift of income, gain, loss and deduction between the general partner and the unitholders. The IRS may challenge this treatment, which could adversely affect the value of the common units.
 
When we issue additional units or engage in certain other transactions, we will determine the fair market value of our assets and allocate any unrealized gain or loss attributable to our assets to the capital accounts of our unitholders and our general partner. Our methodology may be viewed as understating the value of our assets. In that case, there may be a shift of income, gain, loss and deduction between certain unitholders and the general partner, which may be unfavorable to such unitholders. Moreover, under our methodologies subsequent purchasers of common units may have a greater portion of their Internal Revenue Code Section 743(b) adjustment allocated to our tangible assets and a lesser portion allocated to our intangible assets. The IRS may challenge our methods, or our allocation of the Section 743(b) adjustment attributable to our tangible and intangible assets, and allocations of income, gain, loss and deduction between the general partner and certain of our unitholders.
 
A successful IRS challenge to these methods or allocations could adversely affect the amount of taxable income or loss being allocated to our unitholders. It also could affect the amount of gain from our unitholders’ sale of common units and could have a negative impact on the value of the common units or result in audit adjustments to our unitholders’ tax returns without the benefit of additional deductions.
 
The sale or exchange of 50% or more of our capital and profits interests during any 12-month period will result in the termination of our partnership for federal income tax purposes.
 
We will be considered to have terminated our partnership for federal income tax purposes if there is a sale or exchange of 50% or more of the total interests in our capital and profits within a twelve-month period. Our termination would, among other things, result in the closing of our taxable year for all unitholders and could result in a deferral of depreciation deductions allowable in computing our taxable income. Please read “Material Tax Consequences — Disposition of Common Units — Constructive Termination” for a discussion of the consequences of our termination for federal income tax purposes.
 
You will likely be subject to state and local taxes and return filing requirements in states where you do not live as a result of investing in our common units.
 
In addition to federal income taxes, you will likely be subject to other taxes, including foreign, state and local taxes, unincorporated business taxes and estate, inheritance, or intangible taxes that are imposed by the various jurisdictions in which we do business or own property, even if you do not live in any of those jurisdictions. You will likely be required to file state and local income tax returns and pay state and local income taxes in some or all of these various jurisdictions. Further, you may be subject to penalties for failure to comply with those requirements. We will initially own property and conduct business in Alabama,


43


Table of Contents

Colorado, Florida, Georgia, Kansas, Kentucky, Louisiana, Mississippi, Montana, New Mexico, Oklahoma, South Carolina, Tennessee, Texas, Utah and Wyoming. Each of these states, other than Florida, Texas and Wyoming, currently imposes a personal income tax on individuals. Most of these states also impose an income tax on corporations and other entities. As we make acquisitions or expand our business, we may own assets or conduct business in additional states that impose an income tax. It is your responsibility to file all federal, state and local tax returns. Our counsel has not rendered an opinion on the state and local tax consequences of an investment in our common units.


44


Table of Contents

 
USE OF PROCEEDS
 
The following table sets forth the estimated sources and uses of the funds we expect to receive from the sale of the common units in this offering and related transactions. The actual sources and uses may differ from those set forth below:
 
                     
Source of Funds
   
Uses of Funds
     
(In millions)  
 
Offering proceeds(1)
  $ 470    
Cash distribution to El Paso(3)
  $ 890  
New revolving credit facility proceeds
    425    
Fees and expenses
    5  
                     
Total sources
  $ 895    
  Total uses
  $ 895  
                     
 
 
(1) We estimate that we will receive net proceeds of approximately $467 million from the sale of the 25,000,000 common units offered by this prospectus, after deducting underwriting discounts and structuring fees of $30 million and offering expenses of $3 million.
 
(2) To be borrowed immediately prior to the closing of this offering. For a description of the proposed terms of our new $750 million revolving credit facility, please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources.”
 
(3) This cash distribution will be made in part to reimburse El Paso for capital expenditures incurred prior to this offering related to the assets contributed to us. If the initial public offering price exceeds the mid-point of the price range set forth on the cover page of this prospectus, we will utilize the excess net proceeds to increase the cash distribution to be paid to El Paso in an amount equal to the increase in net proceeds. If the initial public offering price is less than the mid-point of the price range, we will either increase the amount outstanding under our revolving credit facility or reduce the cash distribution to be paid to El Paso in an amount equal to the reduction in net proceeds.
 
The net proceeds from any exercise of the underwriters’ option to purchase additional common units will be used to redeem from El Paso a number of common units corresponding to the number of common units issued upon such exercise.


45


Table of Contents

 
CAPITALIZATION
 
The following table shows:
 
  •  our historical capitalization as of June 30, 2007;
 
  •  our pro forma capitalization as of June 30, 2007, that reflects the contribution of the 10% general partner interests in CIG and SNG and the settlement of WIC’s note payable; and
 
  •  our pro forma capitalization as of June 30, 2007, as adjusted to reflect:
 
  •  this common unit offering;
 
  •  the borrowings under our $750 million revolving credit facility; and
 
  •  the application of the net proceeds of this common unit offering and the borrowings described above as described under “Use of Proceeds.”
 
This table is derived from and should be read in conjunction with and is qualified in its entirety by reference to, our historical and unaudited pro forma consolidated financial statements and the accompanying notes included elsewhere in this prospectus. You should also read this table in conjunction with “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
 
                         
    As of June 30, 2007  
                Pro Forma
 
    Historical     Pro Forma     As Adjusted  
    (In millions)  
 
Debt:
                       
Note payable to affiliate
  $ 119     $     $  
Revolving borrowings
                425  
Capital lease obligations
    8       8       8  
                         
Total debt
  $ 127     $ 8     $ 433  
                         
Partners’ capital/partner net investment:
                       
Net parent equity
  $ 356     $ 660     $  
Common units — public
                467  
Common units — El Paso
                (114 )
Subordinated units — El Paso
                (109 )
General partner interest — El Paso
                (7 )
                         
Total partners’ capital/parent net investment
    356       660       237  
                         
Total capitalization
  $ 483     $ 668     $ 670  
                         


46


Table of Contents

 
DILUTION
 
Dilution is the amount by which the offering price paid by the purchasers of common units sold in this offering will exceed the pro forma net tangible book value per unit after the offering. Assuming an initial public offering price of $20.00 per common unit, on a pro forma basis as of June 30, 2007, after giving effect to the offering of common units and the application of the related net proceeds, our net tangible book value was $237 million, or $3.06 per common unit. Purchasers of common units in this offering will experience substantial and immediate dilution in net tangible book value per unit for financial accounting purposes, as illustrated in the following table:
 
                 
Assumed initial public offering price per common unit
          $ 20.00  
Net tangible book value per unit before the offering(a)
  $ 12.56          
Decrease in net tangible book value per unit attributable to purchasers in the offering
    (9.50 )        
                 
Less: Pro forma net tangible book value per unit after the offering(b)
            3.06  
                 
Immediate dilution in tangible net book value per common unit to purchasers in the offering(c)
          $ (16.94 )
                 
 
(a) Determined by dividing the number of units and general partner units (26,181,049 common units, 24,815,054 subordinated units and 1,550,941 general partner units) to be issued to subsidiaries of El Paso for its contribution of assets and liabilities to El Paso Pipeline Partners, L.P. into the net tangible book value of the contributed assets and liabilities.
 
(b) Determined by dividing the total number of units and general partner units to be outstanding after the offering (51,181,049 common units, 24,815,054 subordinated units and 1,550,941 general partner units) and the application of the related net proceeds into our pro forma net tangible book value, after giving effect to the application of the expected net proceeds of the offering.
 
(c) If the initial public offering price were to increase or decrease by $1.00 per unit, immediate dilution in net tangible book value per unit would increase by $1.00 or decrease by $1.00, respectively.
 
The following table sets forth the number of units that we will issue and the total consideration contributed to us by the purchasers of common units in this offering and distributed by us to our general partner and its affiliates:
 
                                 
    Units Acquired     Total Consideration  
    Number     Percent     Amount     Percent  
                (In millions)  
 
General Partner and affiliates(1)(2)
    52,547,044       67.8 %   $ (230 )     %(3)
New investors
    25,000,000       32.2 %     467       %(3)
                                 
Total
    77,547,044       100 %   $ 237       100 %
                                 
 
(1) The common and subordinated units and general partner units acquired by our general partner and its affiliates consist of 26,181,049 common units and 24,815,054 subordinated units and 1,550,941 general partner units.
 
(2) The assets contributed by our general partner and its affiliates were recorded at historical cost in accordance with GAAP. The following table shows the investment of El Paso in us after giving effect to this offering and certain distributions to El Paso and other related formation transactions. Please read our unaudited pro forma balance sheet for a more complete presentation of the adjustments associated with this offering and the related formation transactions.
 
         
    (In millions)  
 
Parent net investment
  $ 356  
Plus: Contribution of investment in CIG and SNG
    185  
Less: Distribution to El Paso from the net proceeds of the offering and borrowings under the revolving credit facility
    (890 )
      Settlement of outstanding notes receivable under cash management program
    119  
         
Total consideration paid to El Paso
  $ (230 )
         
 
(3) Percentages are not meaningful due to distribution to El Paso of $890 million in conjunction with the offering.


47


Table of Contents

 
OUR CASH DISTRIBUTION POLICY AND RESTRICTIONS ON DISTRIBUTIONS
 
You should read the following discussion of our cash distribution policy in conjunction with specific assumptions included in this section. For more detailed information regarding the factors and assumptions upon which our cash distribution policy is based, please read “— Assumptions and Considerations” below. In addition, you should read “Forward-Looking Statements” and “Risk Factors” for information regarding statements that do not relate strictly to historical or current facts and certain risks inherent in our business.
 
For additional information regarding our historical and pro forma operating results, you should refer to our historical audited financial statements for the years ended December 31, 2004, 2005 and 2006, and to our historical unaudited financial statements as of June 30, 2007 and for the six months ended June 30, 2006 and 2007; and our unaudited pro forma financial statements for the years ended December 31, 2004, 2005 and 2006 and as of and for the six months ended June 30, 2007 and 2006 included elsewhere in this prospectus.
 
General
 
Rationale for Our Cash Distribution Policy
 
Our cash distribution policy reflects a basic judgment that our unitholders will be better served by our distributing our cash available after expenses and reserves rather than retaining it. Because we believe we will generally finance any capital investments from external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, we believe that our investors are best served by our distributing all of our available cash. Because we are not subject to an entity-level federal income tax, we have more cash to distribute to you than would be the case were we subject to tax. Our cash distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly.
 
Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy
 
There is no guarantee that unitholders will receive quarterly distributions from us. Our distribution policy may be changed at any time and is subject to certain restrictions, including:
 
  •  Our cash distribution policy is subject to restrictions on distributions we may have under our new credit facility. Specifically, the agreement related to our credit facility is expected to contain financial tests and covenants, commensurate with companies of our credit quality, that we must satisfy. Should we be unable to satisfy these restrictions under our credit facility or if we are otherwise in default under our credit facility, we would be prohibited from making cash distributions to you notwithstanding our stated cash distribution policy.
 
  •  Our board of directors will have the authority to establish reserves for the prudent conduct of our business (including reserves for working capital, maintenance capital expenditures, environmental matters and legal and rate proceedings) and for future cash distributions to our unitholders, and the establishment of those reserves could result in a reduction in cash distributions to you from the levels we currently anticipate pursuant to our stated distribution policy.
 
  •  While our partnership agreement requires us to distribute all of our available cash, our partnership agreement, including provisions requiring us to make cash distributions contained therein, may be amended. Although during the subordination period, with certain exceptions, our partnership agreement may not be amended without the approval of the public common unitholders, our partnership agreement can be amended with the approval of a majority of the outstanding common units and any Class B common units issued upon the reset of incentive distribution rights, if any, voting as a class (including common units held by affiliates of El Paso) after the subordination period has ended. At the closing of this offering, subsidiaries of El Paso will own our general partner and approximately 67.1% of our outstanding common units and subordinated units.
 
  •  Even if our cash distribution policy is not modified or revoked, the amount of distributions we pay under our cash distribution policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement.


48


Table of Contents

 
  •  Under Section 17-607 of the Delaware Revised Uniform Limited Partnership Act, we may not make a distribution to you if the distribution would cause our liabilities to exceed the fair value of our assets.
 
  •  We may lack sufficient cash to pay distributions to our unitholders due to increases in our operating or general and administrative expenses, principal and interest payments on our outstanding debt, tax expenses, working capital requirements and anticipated cash needs. Our cash available for distribution to unitholders is directly impacted by our cash expenses necessary to run our business, including capital needs to maintain our pipeline systems, and will be reduced dollar-for-dollar to the extent that such uses of cash increase. Please read “Provisions of our Partnership Agreement Relating to Cash Distributions — Distributions of Available Cash.”
 
  •  We own a 10% general partner interest in CIG and a subsidiary of El Paso owns the remaining 90% interest. CIG is required by the terms of its partnership agreement to make quarterly cash distributions equal to 100% of its available cash, which is defined to include CIG’s cash and cash equivalents on hand at the end of the quarter less any reserves that may be deemed appropriate by the CIG partnership committee for the operation of CIG’s business (including reserves for its future maintenance capital expenditures, environmental matters, legal and rate proceedings and for its anticipated future credit and debt service needs) or for its compliance with law or other agreements. The management committee of CIG, one of the four members of which will be designated by us, will make the determinations related to CIG’s available cash. The partnership agreement of CIG may not be amended without the approval of El Paso and us. Please read “Certain Relationships and Related Transactions — Contracts with Affiliates — CIG Partnership Agreement.”
 
  •  We own a 10% general partner interest in SNG and a subsidiary of El Paso owns the remaining 90% interest. SNG is required by the terms of its partnership agreement to make quarterly cash distributions equal to 100% of its available cash, which is defined to include SNG’s cash and cash equivalents on hand at the end of the quarter less any reserves that may be deemed appropriate by the SNG partnership committee for the operation of SNG’s business (including reserves for its future maintenance capital expenditures, environmental matters, legal and rate proceedings and for its anticipated future credit and debt service needs) or for its compliance with law or other agreements. The management committee of SNG, one of the four members of which will be designated by us, will make the determinations related to SNG’s available cash. The partnership agreement of SNG may not be amended without the approval of El Paso and us. Please read “Certain Relationships and Related Transactions — Contracts with Affiliates — SNG Partnership Agreement.”
 
Our Ability to Grow is Dependent on Our Ability to Access External Expansion Capital
 
We will distribute all of our available cash to our unitholders on a quarterly basis. As a result, we expect that we will rely primarily upon external financing sources, including commercial bank borrowings and the issuance of debt and equity securities, to fund our acquisitions and expansion capital expenditures. To the extent we are unable to finance growth externally, our cash distribution policy will significantly impair our ability to grow. In addition, because we distribute all of our available cash, our growth may not be as fast as businesses that reinvest their available cash to expand ongoing operations. To the extent we issue additional units in connection with any acquisitions or expansion capital expenditures, the payment of distributions on those additional units may increase the risk that we will be unable to maintain or increase our per unit distribution level, which in turn may impact the available cash that we have to distribute on each unit. There are no limitations in our partnership agreement or our credit facility on our ability to issue additional units, including units ranking senior to the common units. The incurrence of additional commercial borrowings or other debt to finance our growth strategy would result in increased interest expense, which in turn may impact the available cash that we have to distribute to our unitholders.
 
Our Minimum Quarterly Distribution Rate
 
Upon completion of this offering, the board of directors of our general partner will adopt a policy pursuant to which we will declare an initial quarterly distribution of $0.28750 per unit per complete quarter, or $1.15 per unit per year, to be paid no later than 45 days after the end of each fiscal quarter (beginning with the quarter ending December 31, 2007). This equates to an aggregate cash distribution of $22.3 million per


49


Table of Contents

quarter or $89 million per year, in each case based on the number of common units, subordinated units and general partner units outstanding immediately after completion of this offering. If the underwriters’ option to purchase additional common units is exercised, we will use the net proceeds from the sale of these additional common units to redeem from a subsidiary of El Paso a number of common units equal to the number of common units issued upon exercise of the underwriters’ option, at a price per common unit equal to the proceeds per common unit before expenses but after underwriting discounts and structuring fees. Accordingly, the exercise of the underwriters’ option will not affect the total amount of units outstanding or the amount of cash needed to pay the minimum quarterly distribution rate on all units. Our ability to make cash distributions at the minimum quarterly distribution rate pursuant to this policy will be subject to the factors described above under the caption “— Limitations on Cash Distributions and Our Ability to Change Our Cash Distribution Policy.”
 
The table below sets forth the assumed number of outstanding common units, subordinated units and general partner units upon the closing of this offering and the aggregate distribution amounts payable on such units during the year following the closing of this offering at our minimum quarterly distribution rate of $0.28750 per common unit per quarter ($1.15 per common unit on an annualized basis).
 
                         
    Number of
    Distributions  
    Units     One Quarter     Four Quarters  
 
Publicly held common units
    25,000,000     $ 7,187,500     $ 28,750,000  
Common units held by El Paso
    26,181,049       7,527,052       30,108,207  
Subordinated units held by El Paso
    24,815,054       7,134,328       28,537,312  
General partner units held by El Paso
    1,550,941       445,895       1,783,582  
                         
Total
    77,547,044     $ 22,294,775     $ 89,179,101  
                         
 
As of the date of this offering, our general partner will be entitled to 2% of all distributions that we make prior to our liquidation. The general partner’s initial 2% interest in these distributions may be reduced if we issue additional units in the future and our general partner does not elect to contribute a proportionate amount of capital to us to maintain its initial 2% general partner interest.
 
The subordination period will generally end if we have earned and paid at least $1.15 (the minimum quarterly distribution on an annualized basis) on each outstanding limited partner unit and general partner unit for any three consecutive, non-overlapping four-quarter periods ending on or after December 31, 2010. Alternatively, if we have earned and paid at least $0.43125 per quarter (150% of the minimum quarterly distribution, which is $1.725 on an annualized basis) on each outstanding limited partner unit and general partner unit for any four consecutive quarters, ending on or after December 31, 2008, the subordination period will terminate automatically. In addition, the subordination period will end if our general partner is removed without cause and the units held by our general partner and its affiliates are not voted in favor of such removal. When the subordination period ends, all remaining subordinated units will convert into an equal number of common units, and the common units will no longer be entitled to arrearages.
 
If distributions on our common units are not paid with respect to any fiscal quarter at the minimum quarterly distribution rate, our unitholders will not be entitled to receive such payments in the future except that during the subordination period, to the extent we have available cash in any future quarter in excess of the amount necessary to make cash distributions to holders of our common units at the minimum quarterly distribution rate, we will use this excess available cash to pay these deficiencies related to prior quarters before any cash distribution is made to holders of subordinated units. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions — Subordination Period.”
 
We do not have a legal obligation to pay distributions at our minimum quarterly distribution rate or at any other rate except as provided in our partnership agreement. Our distribution policy is consistent with the terms of our partnership agreement, which requires that we distribute all of our available cash quarterly. Under our partnership agreement, available cash is defined to generally mean, for each fiscal quarter, cash generated from our business in excess of the amount of reserves our general partner determines is necessary or appropriate to provide for the conduct of our business, to comply with applicable law, any of our debt


50


Table of Contents

instruments or other agreements or to provide for future distributions to our unitholders for any one or more of the upcoming four quarters.
 
Although holders of our common units may pursue judicial action to enforce provisions of our partnership agreement, including those related to requirements to make cash distributions as described above, our partnership agreement provides that any determination made by our general partner in its capacity as our general partner must be made in good faith and that any such determination will not be subject to any other standard imposed by our partnership agreement, the Delaware limited partnership statute or any other law, rule or regulation or at equity. Our partnership agreement provides that, in order for a determination by our general partner to be made in “good faith,” our general partner must believe that the determination is in our best interests. Please read “Provisions of Our Partnership Agreement Relating to Cash Distributions.”
 
Our cash distribution policy, as expressed in our partnership agreement, may not be modified or repealed without amending our partnership agreement; however, the actual amount of our cash distributions for any quarter is subject to fluctuations based on the amount of cash we generate from our business and the amount of reserves our general partner establishes in accordance with our partnership agreement as described above. Our partnership agreement may be amended with the approval of our general partner and holders of a majority of our outstanding common units and any Class B common units issued upon the reset of the incentive distribution rights, voting together as a class. Similarly, the cash distribution policy of CIG and SNG as set forth in their respective partnership agreement cannot be amended without our approval and the approval of our other partner, El Paso.
 
We will pay our distributions on or about the 15th day of each of February, May, August and November to holders of record on or about the 1st day of each such month. If the distribution date does not fall on a business day, we will make the distribution on the business day immediately preceding the indicated distribution date. We will adjust the quarterly distribution for the period from the closing of this offering through December 31, 2007 based on the actual length of the period.
 
In the sections that follow, we present in detail the basis for our belief that we will be able to fully fund our minimum quarterly distribution rate of $0.28750 per unit each quarter through the quarter ending December 31, 2008. In those sections, we present two tables, consisting of:
 
  •  “Unaudited Pro Forma Cash Available for Distribution,” in which we present the amount of cash we would have had available for distribution for our fiscal year ended December 31, 2006 and for the twelve months ended June 30, 2007 derived from our unaudited pro forma financial statements that are included in this prospectus, which unaudited pro forma financial statements are based on the audited historical financial statements of Wyoming Interstate Company, Ltd. for the year ended December 31, 2006 and the unaudited historical financial statements for the twelve months ended June 30, 2007, as adjusted to give pro forma effect to:
 
  •  the contribution of our 10% general partner interests in CIG and SNG;
 
  •  the transactions to be completed as of the closing of this offering, including our incurrence of approximately $425 million of borrowings under our new revolving credit facility; and
 
  •  this offering and the application of the net proceeds as described under “Use of Proceeds.”
 
  •  “Statement of Minimum Estimated Cash Available for Distribution,” in which we demonstrate our anticipated ability to generate the minimum estimated cash available for distribution necessary for us to pay distributions at the minimum quarterly distribution rate on all units for the twelve months ending December 31, 2008.
 
Unaudited Pro Forma Cash Available for Distribution for the Year Ended December 31, 2006 and Twelve Months Ended June 30, 2007
 
If we had completed the transactions contemplated in this prospectus on January 1, 2006, pro forma cash available for distribution for the year ended December 31, 2006 would have been approximately $64 million. If we had completed the transactions contemplated in this prospectus on July 1, 2006, our pro forma cash available for distribution for the twelve months ended June 30, 2007 would have been approximately $68 million. These amounts would have been sufficient to make a cash distribution for 2006 at the minimum


51


Table of Contents

quarterly distribution rate of $0.28750 per unit per quarter (or $1.15 per unit on an annualized basis) on all of the common units but only 14% and 27% of the minimum quarterly distribution on the subordinated units for the year ended December 31, 2006 and the twelve months ended June 30, 2007, respectively.
 
Unaudited pro forma cash available for distribution from operating surplus includes incremental general and administrative expense we will incur as a result of being a publicly traded limited partnership, including costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and director compensation. We expect our incremental general and administrative expense of being a publicly-traded partnership to total approximately $4 million per year. Our incremental general and administrative expense is not reflected in our historical or pro forma net income for 2006 or for the twelve months ended June 30, 2007.
 
The unaudited pro forma financial results for CIG and SNG do not give effect to certain transactions that are included in the assumptions for the minimum estimated cash available for distribution for the twelve-month period ending December 31, 2008. These transactions include the reduction of debt by CIG and SNG anticipated to occur after the closing of this offering, utilizing a portion of notes receivable outstanding under the cash management program remaining at that time. The impact of these transactions will be to reduce affiliated interest income and cash interest expense at both CIG and SNG. We believe the net impact to us of such transactions would not materially impact the unaudited pro forma cash available for distribution for the year ended December 31, 2006 and the twelve months ended June 30, 2007.
 
The following table illustrates, on a pro forma basis, for the year ended December 31, 2006 and for the twelve months ended June 30, 2007 the amount of available cash for distributions to our unitholders, assuming in each case that this offering had been consummated at the beginning of such period. Each of the pro forma adjustments presented below is explained in the footnotes to such adjustments.
 
We based the pro forma adjustments upon currently available information and specific estimates and assumptions. The pro forma amounts below do not purport to present our results of operations had the transactions contemplated in this prospectus actually been completed as of the dates indicated. In addition, cash available to pay distributions is primarily a cash accounting concept, while our pro forma financial statements have been prepared on an accrual basis. As a result, you should view the amount of pro forma cash available for distribution only as a general indication of the amount of cash available to pay distributions that we might have generated had we been formed in earlier periods.


52


Table of Contents

EL PASO PIPELINE PARTNERS, L.P.
UNAUDITED PRO FORMA CASH AVAILABLE FOR DISTRIBUTION
 
                 
          Twelve
 
    Year Ended
    Months Ended
 
    December 31,
    June 30,
 
    2006     2007  
    (In millions, except per unit data)  
 
El Paso Pipeline Partners, L.P.
               
Pro Forma Net Income(a)
  $ 74     $ 70  
Add:
               
Interest and debt expense
    26       26  
Affiliated interest expense, net
           
Depreciation and amortization
    14       15  
Cash available for distributions from unconsolidated affiliates (pro forma)(b)
               
CIG
    9       10  
SNG
    8       15  
Less:
               
Earnings from unconsolidated affiliates (pro forma)(b)(c)
               
CIG
    12       11  
SNG
    17       20  
                 
Pro Forma Adjusted EBITDA
    102       105  
                 
Less:
               
Cash interest expense, net(e)
    26       26  
Maintenance capital expenditures(d)
    4       4  
Other income
    4       3  
Incremental general and administrative expense of being a public company(e)
    4       4  
                 
Pro Forma Cash Available for Distribution
  $ 64     $ 68  
                 
Pro Forma Cash Distributions
               
Minimum annual distribution per unit (based on a minimum quarterly distribution rate of $0.28750 per unit)
  $ 1.15     $ 1.15  
Annual distributions to(h):
               
Public common unitholders
  $ 29     $ 29  
El Paso:
               
Common units
    30       30  
Subordinated units
    28       28  
General partner units
    2       2  
                 
Total distributions to El Paso
    60       60  
                 
Total distributions to our unitholders and general partner at the minimum distribution rate
  $ 89     $ 89  
                 
Shortfall
  $ (25 )   $ (21 )
                 
 
 
(a) Reflects pro forma net income of El Paso Pipeline Partners, L.P. giving pro forma effect to the offering, the contribution to us of a 100% interest in WIC and 10% general partner interests in each of CIG and SNG, and related transactions as further discussed in the unaudited pro forma financial statements of El Paso Pipeline Partners, L.P. included elsewhere in this prospectus.


53


Table of Contents

 
(b) Reflects an adjustment to our EBITDA to reconcile earnings from unconsolidated affiliates to cash available for distribution from CIG and SNG. Pro forma cash available for distribution from CIG and SNG for the year ended December 31, 2006 and for the twelve months ended June 30, 2007, is calculated as follows:
                 
    Pro Forma
    Pro Forma
 
    Year Ended
    Twelve Months
 
    December 31,
    Ended June 30,
 
    2006     2007  
    (In millions)  
 
Colorado Interstate Gas Company
               
Reconciliation of “Adjusted EBITDA” and “Cash Available for Distribution” to “Net Income”
               
Net income
  $ 118     $ 112  
Add:
               
Interest and debt expense
    47       47  
Depreciation and amortization
    30       30  
Cash available for distribution from unconsolidated affiliate — WYCO
    1       2  
Less:
               
Affiliated interest income
    19       19  
Earnings from unconsolidated affiliate — WYCO
    1       2  
                 
Adjusted EBITDA — 100%
  $ 176     $ 170  
                 
Adjusted EBITDA — our 10%
  $ 18     $ 17  
                 
Less:
               
Cash interest expense, net
    47       46  
Maintenance capital expenditures(d)
    52       43  
Other income
    2       3  
Add: Cash received for affiliated interest income
    19       19  
                 
Cash available for distribution — 100%
  $ 94     $ 97  
                 
Cash available for distribution — our 10%
  $ 9     $ 10  
                 
                 
Southern Natural Gas Company
               
Reconciliation of “Adjusted EBITDA” and “Cash Available for Distribution” to “Net Income”
               
Net income
  $ 171     $ 198  
Add:
               
Interest and debt expense
    95       91  
Depreciation and amortization
    49       51  
Cash available for distribution from unconsolidated affiliate — Bear Creek
    17       17  
Less:
               
Affiliated interest income
    22       23  
Earnings from unconsolidated affiliate — Bear Creek
    16       17  
                 
Adjusted EBITDA — 100%
  $ 294     $ 317  
                 
Adjusted EBITDA — our 10%
  $ 29     $ 32  
                 
Less:
               
Cash interest expense, net
  $ 94     $ 95  
Maintenance capital expenditures(d)(g)
    135       84  
Other income
    7       15  
Add: Cash received for affiliated interest income, net
    22       23  
                 
Cash available for distribution — 100%
  $ 80     $ 146  
                 
Cash available for distribution — our 10%
  $ 8     $ 15  
                 


54


Table of Contents

 
(c) Amounts reflected represent CIG and SNG adjusted for certain asset distributions and other transactions prior to the offering as further described in the unaudited pro forma consolidated financial statements of CIG and SNG included elsewhere in this prospectus.
 
(d) Maintenance capital expenditures are capital expenditures made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes and related cash flows.
 
In addition to maintenance capital expenditures, WIC made expansion capital expenditures of $70 million for the year ended December 31, 2006 and $54 million for the twelve months ended June 30, 2007. Our net expansion capital expenditures with respect to CIG, of which we will own a 10% general partner interest, were less than $1 million (or $4 million gross to CIG) for the year ended December 31, 2006 and $2 million (or $16 million gross to CIG) twelve months ended June 30, 2007. Our net expansion capital expenditures with respect to SNG, of which we will own a 10% general partner interest, were $14 million (or $138 million gross to SNG) for the year ended December 31, 2006 and $23 million (or $226 million gross to SNG) twelve months ended June 30, 2007. Expansion capital expenditures are made to acquire additional assets to grow our business, to expand and upgrade our systems and facilities and to construct or acquire similar systems or facilities. These historical expansion capital expenditures were assumed to be funded by cash contributions from our parent, El Paso, and are not included in our pro forma cash available for distribution calculation.
 
(e) Reflects an adjustment to our adjusted EBITDA for estimated incremental cash expenses associated with being a publicly traded limited partnership, including costs associated with annual and quarterly reports to unitholders, tax return and Schedule K-1 preparation and distribution, independent auditor fees, investor relations activities, registrar and transfer agent fees, incremental director and officer liability insurance costs and director compensation.
 
(f) Reflects on a net basis the cash paid for interest expense related to approximately $425 million we expect to borrow under our $750 million credit facility in connection with this offering. We expect the credit facility will have terms and conditions commensurate with companies of our credit quality.
 
(g) Amounts include capital related to hurricane repairs of $65 million for the year ended December 31, 2006 and $2 million for the twelve months ended June 30, 2007, each net of insurance recoveries.
 
(h) The table below sets forth the assumed number of outstanding common units, subordinated units and general partner units upon the closing of this offering and the estimated per unit and aggregate distribution amounts payable on our common units, subordinated units and general partner units for four quarters at our minimum quarterly distribution rate of $0.28750 per common unit per quarter ($1.15 per common unit on an annualized basis).
 
                         
          Distribution for
 
    Number
    Four Quarters  
    of Units     Per Unit     Aggregate  
 
Pro forma distributions on publicly held common units
    25,000,000     $ 1.15     $ 28,750,000  
Pro forma distributions on common units held by El Paso
    26,181,049     $ 1.15       30,108,207  
Pro forma distributions on subordinated units held by El Paso
    24,815,054     $ 1.15       28,537,312  
Pro forma distributions on general partner units
    1,550,941     $ 1.15       1,783,582  
                         
Total
    77,547,044     $ 1.15     $ 89,179,101  
                         


55


Table of Contents

 
Non-GAAP Financial Measures
 
Adjusted EBITDA is defined as net income plus depreciation and amortization expense, interest and debt expense, net of interest income, and our 10% share of estimated cash available for distribution from CIG and SNG for the applicable period; less equity in earnings of CIG and SNG. Cash available for distribution is defined as Adjusted EBITDA less cash interest expense, net of interest income, maintenance capital expenditures, other income, net and incremental general and administrative expense of being a public company.
 
For CIG and SNG, we define Adjusted EBITDA as net income plus interest and debt expense, depreciation and amortization expense and cash available from unconsolidated affiliates less affiliated interest income and equity in earnings from unconsolidated affiliates. Our equity share of CIG’s and SNG’s Adjusted EBITDA is 10%. Cash available for distribution for CIG and SNG is defined as Adjusted EBITDA plus cash received for affiliated interest income generated from advances under El Paso’s cash management program less cash interest expense, maintenance capital expenditures, and other income.
 
Our cash available and pro forma cash available for distribution does not reflect changes in working capital balances. Our pro forma cash available for distribution for the year ended December 31, 2006 and the twelve months ended June 30, 2007 includes our anticipated incremental general and administrative expense of being a publicly traded partnership.
 
Adjusted EBITDA and cash available for distribution are used as supplemental financial measures by management and by external users of our financial statements, such as investors and commercial banks, to assess:
 
  •  the financial performance of our assets without regard to financing methods, capital structure or historical cost basis;
 
  •  the ability of our assets to generate cash sufficient to pay interest on our indebtedness and to make distributions to our partners; and
 
  •  our operating performance and return on invested capital as compared to those of other publicly traded limited partnerships that own energy infrastructure assets, without regard to their financing methods and capital structure.
 
Adjusted EBITDA and cash available for distribution should not be considered alternatives to net income, operating income, net cash provided by operating activities or any other measure of financial performance or liquidity presented in accordance with GAAP. Adjusted EBITDA and cash available for distribution exclude some, but not all, items that affect net income and operating income and these measures may vary among other companies. Therefore, Adjusted EBITDA and cash available for distribution as presented may not be comparable to similarly titled measures of other companies. Furthermore, while cash available for distribution is a measure we use to assess our ability to make distributions to our unitholders, cash available for distribution should not be viewed as indicative of the actual amount of cash that we have available for distributions or that we plan to distribute for a given period.
 
Minimum Estimated Cash Available for Distribution for the Twelve-Month Period Ending December 31, 2008
 
Set forth below is a Statement of Minimum Estimated Cash Available for Distribution that reflects our ability to generate sufficient cash flows to make the minimum quarterly distribution on all of our outstanding limited partner units and general partner units for the twelve months ending December 31, 2008, based on assumptions we believe to be reasonable. These assumptions include adjustments giving effect to this offering, the other transactions described under “Summary — Formation Transactions and Partnership Structure” and the application of the net proceeds from this offering as described under “Use of Proceeds.” Cash available for distribution is defined as Adjusted EBITDA less cash reserves, cash interest expense, net of interest income, maintenance capital expenditures, and other income, net. Adjusted EBITDA is defined as net income plus depreciation and amortization expense, interest and debt expense, net of interest income, and our 10% share of estimated cash available for distribution from CIG and SNG in respect of the applicable period; less equity in earnings of CIG and SNG.


56


Table of Contents

 
Our minimum estimated cash available for distribution reflects our judgment as of the date of this prospectus of conditions we expect to exist and the course of action we expect to take during the twelve months ending December 31, 2008. The assumptions disclosed under “Assumptions and Considerations” below are those that we believe are significant to our ability to generate such minimum estimated cash available for distribution. We believe our actual results of operations and cash flows for the twelve months ending December 31, 2008 will be sufficient to generate our minimum estimated cash available for distribution for such period; however, we can give you no assurance that such minimum estimated cash available for distribution will be achieved. There will likely be differences between our minimum estimated cash available for distribution for the twelve months ending December 31, 2008 and our actual results for such period and those differences could be material. If we fail to generate the minimum estimated cash available for distribution for the twelve months ending December 31, 2008, we may not be able to pay cash distributions on our common units at the initial distribution rate stated in our cash distribution policy for such period.
 
The minimum estimated cash available for distribution required to fund distributions to our unitholders and our general partner at the estimated annual initial rate of $1.15 per unit is $89 million of cash available for distribution. In order to generate $89 million, our Adjusted EBITDA for the twelve months ending December 31, 2008 must be at least $131 million, which includes the annual cash distributions of at least $24 million in the aggregate for such twelve-month period that we expect to receive from our 10% general partner interests in CIG and SNG. As set forth in the table below and as further explained under “— Assumptions and Considerations,” we believe our operations will produce minimum estimated cash available for distribution of $89 million for the twelve months ending December 31, 2008.
 
We do not as a matter of course make public projections as to future operations, earnings or other results. However, management has prepared the minimum estimated cash available for distribution and assumptions set forth below to substantiate our belief that we will have sufficient cash available to make the minimum quarterly distribution to our unitholders for the twelve months ending December 31, 2008. The accompanying prospective financial information was not prepared with a view toward complying with the guidelines established by the American Institute of Certified Public Accountants with respect to prospective financial information, but, in the view of our management, was prepared on a reasonable basis, reflects the best currently available estimates and judgments and presents, to the best of management’s knowledge and belief, the assumptions on which we base our belief that we can generate the minimum estimated cash available for distribution necessary for us to have sufficient cash available for distribution to pay the full minimum quarterly distribution to all of our unitholders and our general partner for the twelve months ending December 31, 2008. However, this information is not fact and should not be relied upon as being necessarily indicative of future results, and readers of this prospectus are cautioned not to place undue reliance on the prospective financial information. Neither our independent auditors, nor any other independent accountants, have compiled, examined or performed any procedures with respect to the prospective financial information contained herein, nor have they expressed any opinion or any other form of assurance on such information or its achievability, and assume no responsibility for, the prospective financial information. The accountants’ reports included in this prospectus relate to historical financial information. They do not extend to prospective financial information and should not be read to do so.
 
When considering the minimum estimated cash available for distribution set forth below you should keep in mind the risk factors and other cautionary statements under “Risk Factors.” Any of the risks discussed in this prospectus could cause our actual results of operations to vary significantly from those supporting such minimum estimated available cash.
 
We are providing the minimum estimated cash available for distribution and related assumptions for the twelve months ending December 31, 2008 to supplement our pro forma and historical financial statements in support of our belief that we will have sufficient available cash to allow us to pay cash distributions on all of our outstanding common and subordinated units and our general partner units for each quarter in the twelve-month period ending December 31, 2008 at our stated minimum quarterly distribution rate. Please read below under “Assumptions and Considerations” for further information as to the assumptions we have made for the preparation of the minimum estimated cash available for distribution set forth below.


57


Table of Contents

 
Since we expect to pay quarterly distributions in respect of the twelve months ending December 31, 2008 at the annual rate of $1.15 per unit, actual payments of distributions on the common units, subordinated units and the general partner units that we expect to be outstanding during that period are estimated to be $89 million. The expected aggregate amount of cash distributions would total approximately $22.3 million per quarter for this period. As described in “Our Cash Distribution Policy and Restrictions on Distributions,” we will pay quarterly distributions within 45 days after the close of each quarter.
 
We do not undertake any obligation to release publicly the results of any future revisions we may make to the assumptions used in generating our minimum estimated cash available for distribution for the twelve months ending December 31, 2008 or to update those assumptions to reflect events or circumstances after the date of this prospectus. Therefore, you are cautioned not to place undue reliance on this information.


58


Table of Contents

EL PASO PIPELINE PARTNERS, L.P.
 
Statement of Minimum Estimated Cash Available for Distribution
for the Twelve Months Ending December 31, 2008
 
         
    Twelve Months Ending
 
    December 31, 2008  
    (In millions,
 
    except per unit data)  
 
Operating revenues
  $ 139  
Operating expenses:
       
Operation and maintenance(1)
    29  
Depreciation and amortization
    24  
Taxes, other than income taxes
    5  
         
Total operating expenses
    58  
         
Operating income
    81  
         
Other income(2)
    2  
Earnings from unconsolidated affiliate — CIG(3)
    10  
Earnings from unconsolidated affiliate — SNG(3)
    19  
Interest and debt expense, net(4)
    (30 )
         
Net income
    82  
         
Adjustments to reconcile net income to Adjusted EBITDA:
       
Add:
       
Depreciation and amortization
    24  
Interest and debt expense, net(4)
    30  
Estimated cash distributions from unconsolidated affiliate — CIG(3)(5)
    8  
Estimated cash distributions from unconsolidated affiliate — SNG(3)(5)
    16  
Less:
       
Earnings from unconsolidated affiliate — CIG(3)
    10  
Earnings from unconsolidated affiliate — SNG(3)
    19  
         
Adjusted EBITDA
    131  
         
Less:
       
Cash reserve(6)
    4  
Cash interest expense, net(4)
    31  
Maintenance capital expenditures
    4  
Other income, net(7)
    3  
         
Minimum estimated cash available for distribution
  $ 89  
         
Minimum annual distribution per unit (based on a minimum quarterly distribution rate of $0.28750 per unit)
  $ 1.15  
Annual distributions to:
       
Public common unitholders
  $ 29  
El Paso:
       
Common units
    30  
Subordinated units
    28  
General partner units
    2  
         
Total distributions to El Paso
    60  
         
Total distributions to our unitholders and general partner at the minimum distribution rate
  $ 89  
         
 
 
(1) Includes operation, maintenance and general and administrative expenses of $9 million allocated from El Paso and its affiliates and $4 million of incremental general and administrative expenses that will result from our being a publicly traded limited partnership.
 
(2) Consists primarily of AFUDC equity income. AFUDC, or Allowance for Funds Used During Construction, and it is a non-cash accounting convention of regulated industries that represents the estimated return on funds used to finance construction.


59


Table of Contents

 
(3) Each of CIG and SNG are non-consolidated entities in which we own a 10% general partner interest and our earnings from those unconsolidated affiliates is included on our unaudited pro forma consolidated statement of income included elsewhere in this prospectus. Because our earnings from unconsolidated affiliates from each of CIG and SNG are not necessarily reflective of the amount of cash we would expect to receive from those entities, it is included in our net income but subtracted in connection with our calculation of Adjusted EBITDA. To give effect to CIG’s and SNG’s expected cash contribution to us during the twelve months ending December 31, 2008, our estimate of the cash that we expect to receive from those entities is included in our Adjusted EBITDA.
 
(4) We expect to be a party to a $750 million credit facility under which we expect to borrow approximately $425 million in debt upon the closing of this offering. We expect the credit facility will have terms and conditions commensurate with companies of our credit quality. Interest and debt expense, net, includes accrued interest expense, amortization of capitalized financing costs, and AFUDC debt, and is net of interest income. Cash interest expense, net represents cash interest expense, net of interest income.
 
(5) Under the terms of their partnership agreements, each of CIG and SNG must distribute on or before the end of the month following each quarter to their partners on a quarterly basis 100% of their available cash, which is generally defined as cash on hand at the end of the applicable quarter, less any reserves determined to be appropriate by the management committee. As a result, we estimate that we will receive 10% of the available cash of each CIG and SNG, for the twelve months ending December 31, 2008. Since we will designate only one of the members of the management committee of each CIG and SNG, we will not be able to control the amount of cash distributions that we will receive from these entities. Please see “Risk Factors” for a more detailed discussion of this risk.
 
(6) Represents a discretionary reserve to be used for reinvestment and other general partnership purposes.
 
(7) Consists of AFUDC equity income and costs associated with leasing a compressor station near Douglas, Wyoming from WYCO.
 
Assumptions and Considerations
 
General
 
We believe that our estimated minimum cash available for distribution for the twelve months ending December 31, 2008 will not be less than $89 million. This amount of estimated minimum cash available for distribution is approximately $21 million more than the pro forma cash available for distribution we generated for the twelve months ended June 30, 2007. As we discuss in further detail below, we believe that increased income primarily from our Kanda lateral and Medicine Bow expansion projects will result in our generating higher cash available for distribution for the twelve months ending December 31, 2008. The assumptions and estimates we have made to support our ability to generate the minimum estimated cash available for distribution are set forth below.
 
El Paso Pipeline Partners, L.P.
 
Our Operating Revenue
 
  •  We estimate that we will generate approximately $139 million in total revenues for the twelve months ending December 31, 2008. Substantially all of these revenues are expected to be generated from capacity reservation charges relating to the WIC system. We estimate that $1 million, or 1%, of these revenues will be charges based on actual utilization and interruptible transportation service. WIC generated $104 million in operating revenues for the twelve months ended June 30, 2007.
 
  •  The expected $35 million increase in our revenues from the twelve months ended June 30, 2007, compared to the twelve months ending December 31, 2008 is primarily due to increased revenues of $8 million associated with continued ramp-up volumes on the Piceance lateral, placed in-service in the first quarter of 2006, $23 million of revenues attributable to the Kanda lateral and related compression project, which is expected to be placed in-service in January 2008, and $3 million of revenues attributable to the Medicine Bow compression expansion, which is expected to be placed in-service in July 2008.


60


Table of Contents

 
Our Expenses
 
  •  We estimate operation and maintenance expenses will be approximately $29 million for the twelve months ending December 31, 2008, as compared to operation and maintenance expenses of $24 million for the twelve months ending June 30, 2007. The increase primarily results from approximately $4 million of incremental general and administrative expenses resulting from our being a publicly traded limited partnership, an increase of $3 million in operation and maintenance expenses primarily related to transportation service acquired on Questar Overthrust Pipeline Company and expansion projects. This increase is partially offset by a $3 million decrease in fuel imbalance, revaluation and related gas balance items. We have assumed that our operation and maintenance expenses are not impacted during the forecast period by the revaluation of natural gas imbalances and other gas owed to shippers.
 
  •  We estimate our depreciation and amortization expense for the twelve months ending December 31, 2008 for the WIC system will be approximately $24 million, as compared to $15 million of depreciation and amortization expense for the twelve months ended June 30, 2007. The increase in estimated depreciation and amortization expense for the twelve months ending December 31, 2008 is primarily due to the Kanda lateral and related compression and the Medicine Bow compression expansions. Estimated depreciation and amortization expense is based on currently effective FERC approved depreciation rates and the depreciation rates expected to be approved by FERC for future projects.
 
  •  We estimate taxes, other than income taxes, for the twelve months ending December 31, 2008 will be approximately $5 million as compared to $3 million for the twelve months ended June 30, 2007. The increase is primarily attributable to the Kanda lateral and related compression and the Medicine Bow compression expansions.
 
Our Capital Expenditures and Capital Contributions to Unconsolidated Affiliates
 
  •  We estimate that our maintenance capital expenditures will be approximately $4 million for the twelve months ending December 31, 2008. This level is consistent with $4 million for the twelve months ended June 30, 2007.
 
  •  We estimate that our expansion capital expenditures will be approximately $20 million for the twelve months ending December 31, 2008. Our expansion capital expenditures were approximately $54 million for the twelve months ended June 30, 2007, and consisted of the Kanda lateral pipeline and other projects. For the twelve months ending December 31, 2008, the majority of our expansion capital expenditures are the estimated costs to complete and place in-service the Medicine Bow compression and the Kanda lateral and related compression projects. The Kanda lateral pipeline and the Medicine Bow compression projects are expected to be placed into service in January 2008 and in July 2008, respectively.
 
  •  We estimate that our required capital contributions to CIG and SNG will be approximately $16 million for the twelve months ending December 31, 2008. These capital contributions to CIG and SNG will be to fund our proportionate 10% share of expansion capital expenditures at CIG and SNG. We have assumed that all maintenance capital expenditures of CIG and SNG will be funded by their internally generated cash flows. In connection with the closing of this offering, we will acquire a 10% general partner interest in CIG and a 10% general partner interest in SNG. Historically, we did not have investments in unconsolidated affiliates.
 
Our Financing
 
  •  We estimate that at the closing of this offering we will borrow $425 million in debt under our new $750 million credit facility. We estimate that the revolving borrowings will bear a variable average interest rate of 6.2%.
 
  •  We estimate our capital expenditures and capital contribution requirements will total approximately $36 million and will be initially funded through borrowings under our new credit facility at a variable average interest rate of 6.2%.


61


Table of Contents

 
Our Regulatory, Industry and Economic Factors
 
  •  We assume there will not be any new federal, state or local regulations of portions of the energy industry in which we operate, or any new interpretations of existing regulations, that will be materially adverse to our business during the twelve months ending December 31, 2008.
 
  •  We assume there will not be any major adverse changes in the portions of the energy industry in which we operate or in general economic conditions during the twelve months ending December 31, 2008.
 
  •  We assume that industry, insurance and overall economic conditions will not change substantially during the twelve months ending December 31, 2008.
 
Our Cash Distributions from our Unconsolidated Affiliates, CIG and SNG
 
  •  Our estimate reflects estimated cash distributions to us relating to our 10% general partner interest in CIG and our 10% general partner interest in SNG in respect of the twelve months ending December 31, 2008. Under the terms of their partnership agreements, each of CIG and SNG must distribute on or before the end of the month following each quarter to their partners 100% of their available cash, which is generally defined as cash on hand at the end of the applicable quarter, less any reserves determined to be appropriate by the management committee. As a result, we estimate that we will receive 10% of the available cash of each of CIG and SNG, for the twelve months ending December 31, 2008. We estimate receiving cash distributions of approximately $8 million from CIG and approximately $16 million from SNG in respect of the twelve months ending December 31, 2008. Distributions that we receive from CIG and SNG after the end of a quarter will be included in our determination of available cash for such quarter.
 
CIG System
 
We account for our 10% general partner interest in CIG under the equity-method for financial reporting purposes. The following table compares available cash for distribution from CIG, including our 10% share, for the twelve-month periods ending December 31, 2008 and June 30, 2007. The results for CIG for the twelve months ended June 30, 2007 are pro forma for certain formation related transactions and the distribution of certain entities and assets (primarily consisting of CIG’s wholly owned subsidiaries, WIC and Colorado Water Supply Company) to El Paso.
 
                 
    Twelve Months Ending  
    June 30,
    December 31,
 
    2007     2008  
    (In millions)  
 
Net Income
  $ 112     $ 100  
Adjustments to reconcile net income to Adjusted EBITDA:
               
Add:
               
Depreciation and amortization
    30       36  
Interest and debt expense
    47       39  
Estimated cash available for distribution from unconsolidated affiliate — WYCO
    2       6  
Less:
               
Earnings from unconsolidated affiliate — WYCO
    2       12  
Interest and other income
    19       7  
                 
Adjusted EBITDA
    170       162  
Add:
               
Interest and other income
    19       7  
Less:
               
Cash interest expense
    46       39  
Maintenance capital expenditures
    43       49  
Other income
    3       4  
                 
Estimated cash available for distribution from CIG — 100%
  $ 97     $ 77  
                 
Estimated cash available for distribution from CIG — our 10%
  $ 10     $ 8  
                 


62


Table of Contents

The primary assumptions for CIG’s forecasted results for the twelve months ending December 31, 2008 are:
 
  •  Adjusted EBITDA — Relative to the twelve months ended June 30, 2007, we estimate Adjusted EBITDA will decrease by $8 million. This is partly due to higher operation and maintenance expense and taxes, other than income taxes. Also, our off-system markets and the Rocky Mountain region experienced colder than normal weather resulting in higher revenues for the twelve months ended June 30, 2007. We did not project these higher weather-related revenues to continue in the forecast period. The resulting reductions in Adjusted EBITDA are partially offset by increased revenue from expansion projects coming online and increased earnings from WYCO.
 
  •  Interest and Other Income — We estimate a $12 million decrease in interest income and other primarily attributable to an expected decrease, subsequent to this offering, in the notes receivable outstanding under the cash management program between CIG and El Paso. As of June 30, 2007, prior to its restructuring adjustments, CIG had notes receivable from El Paso of $841 million with an average interest rate of 6.1% under the cash management program at the time of the offering. Prior to the closing of this offering, El Paso will reduce CIG’s note receivable to a balance of $335 million through a dividend and other transactions. Subsequent to this offering, CIG intends to repurchase $225 million of debt with an average interest rate of 6.6% using cash proceeds from the retirement of additional notes receivable outstanding under the cash management program with El Paso.
 
  •  Cash Interest Expense — We estimate a $7 million decrease in cash interest expense that will result from the reduction in debt outstanding at CIG as discussed above partly offset by increased interest expense associated with the capital lease for the High Plains pipeline.
 
  •  Maintenance Capital Expenditures — We estimate a $6 million increase in maintenance capital expenditures associated with initiatives to improve the reliability and useful life of the CIG pipeline system.
 
Growth Capital Expenditures.  For the twelve months ending December 31, 2008, we estimate that CIG’s net cash expansion capital expenditures will be approximately $98 million, comprised of $3 million for 100% owned projects and $95 million for capital contributions to the WYCO joint venture. CIG’s net cash expansion capital expenditures were $16 million for the twelve months ended June 30, 2007. The capital expenditures associated with the WYCO joint venture are related to the High Plains pipeline expected to be in service in the fall of 2008 and the Totem gas storage field expected to be in service in 2009. We expect CIG to fund its net cash expansion capital expenditures with proportionate capital contributions by El Paso and us. Our 10% share of CIG’s net cash expansion capital expenditures for the twelve months ending December 31, 2008 are estimated to be $10 million, which we expect to fund initially through borrowings under our revolving credit facility.
 
SNG System
 
We account for our 10% general partner interest in SNG under the equity-method for financial reporting purposes. The following table compares available cash for distribution from SNG, including our 10% share, for the twelve month periods ending December 31, 2008 and June 30, 2007. The results for SNG for the twelve months ended June 30, 2007 are pro forma for certain formation related transactions and the


63


Table of Contents

distribution of certain entities and assets (primarily consisting of SNG’s 50% interest in Citrus Corp. and SNG’s wholly owned subsidiaries, Southern LNG Inc. and Elba Express Company, LLC) to El Paso.
 
                 
    Twelve Months Ending  
    June 30,
    December 31,
 
    2007     2008  
    (In millions)  
 
Net Income
  $ 198     $ 192  
Adjustments to reconcile net income to Adjusted EBITDA:
               
Add:
               
Depreciation and amortization
    51       57  
Interest and debt expense
    91       63  
Estimated cash available for distribution from unconsolidated affiliate — Bear Creek
    17       15  
Less:
               
Earnings from unconsolidated affiliate — Bear Creek
    17       12  
Interest income
    23       4  
                 
Adjusted EBITDA
    317       311  
Add:
               
Interest income
    23       4  
Less:
               
Cash interest expense
    95       61  
Maintenance capital expenditures
    84       90  
Other non-cash income
    15       4  
                 
Estimated cash available for distribution from SNG — 100%
  $ 146     $ 160  
                 
Estimated cash available for distribution from SNG — our 10%
  $ 15     $ 16  
                 
 
The primary assumptions for SNG’s forecasted results for the twelve months ending December 31, 2008 are:
 
  •  Adjusted EBITDA - We estimate a $6 million decrease in Adjusted EBITDA primarily due to higher operating costs associated with our pipeline integrity program, expiring transportation contracts not expected to be renewed offset partially by the effects of the Cypress Phase I project being in-service for a full-year. The Cypress pipeline was placed into service in May 2007.
 
  •  Interest Income - We estimate a $19 million decrease in interest income associated with the reduction in the notes receivable outstanding under the cash management program between SNG and El Paso in connection with the planned repurchase of SNG debt expected to be made subsequent to this offering as mentioned above. As of June 30, 2007, prior to the restructuring adjustments, SNG had notes receivable from El Paso of $412 million with an average interest rate of 6.1% under the cash management program. Prior to the closing of this offering, through a series of transactions, El Paso will decrease SNG’s notes receivable to a balance of $376 million.
 
  •  Cash Interest Expense - We estimate a $34 million decrease in cash interest expense, which is largely attributable to the planned repurchase of $289 million of SNG debt with an average interest rate of 7.1% after the closing of this offering and the maturity of $48 million of 6.7% SNG debt in October 2007. Subsequent to this offering, SNG intends to use cash proceeds from the retirement of notes receivable outstanding under the cash management program with El Paso to repurchase the debt. In addition, interest expense decreased as a result of El Paso’s repurchases in March 2007 of $400 million of 8.875% notes due March 2010 and $52 million of 6.70% notes due October 2007. This decrease was partly offset by the concurrent issuance of $500 million of 5.90% notes due in April 2017. Since we will designate only one of the members of the management committee of SNG, we will not be able to control the timing of, or whether SNG repurchases any or all, of the debt that SNG intends to repurchase.


64


Table of Contents

 
  •  Maintenance Capital Expenditures - We estimate a $6 million increase in maintenance capital expenditures that is attributable to projects to improve the reliability of the SNG system.
 
Growth Capital Expenditures.  As a result of SNG’s ongoing expansion projects, we estimate that SNG’s net cash expansion capital expenditures will be approximately $62 million for the twelve months ended December 31, 2008, as compared to $226 million for the twelve months ending June 30, 2007. These capital expenditures are primarily related to the first phase of the Southeast Supply Header, the Cypress Phase II project and the Elba-to-Macon pipeline expansion projects. SNG is expected to have a substantial increase in growth-related capital expenditures in 2009 and 2010 as it continues to construct the Southeast Supply Header pipeline, the South System III expansion and Cypress Phase III projects. We expect SNG to fund its net cash expansion capital expenditures with proportionate capital contributions by El Paso and us. We estimate that our 10% share of SNG’s net cash expansion capital expenditures for the twelve months ending December 31, 2008 will be $6 million, which we expect to fund initially through borrowings under our revolving credit facility.
 
Payments of Distributions on Common Units, Subordinated Units and the General Partner Units
 
Distributions on common units, subordinated units and general partner units for the twelve months ending December 31, 2008 are estimated to be $89 million in the aggregate, assuming we distribute the $0.28750 minimum quarterly distribution in respect of each quarter during such period. Quarterly distributions will be paid within 45 days after the close of each quarter.
 
While we believe that these assumptions are reasonable based upon management’s current expectations concerning future events, they are inherently uncertain and are subject to significant business, economic, regulatory and competitive risks and uncertainties, including those described in “Risk Factors,” that could cause actual results to differ materially from those we anticipate. If our assumptions are not realized, the actual cash available for distribution that we generate could be substantially less than that currently expected and could, therefore, be insufficient to permit us to make the full minimum quarterly distribution on all units, in which event the market price of the common units may decline materially.


65


Table of Contents

 
PROVISIONS OF OUR PARTNERSHIP AGREEMENT RELATING TO CASH DISTRIBUTIONS
 
Set forth below is a summary of the significant provisions of our partnership agreement that relate to cash distributions.
 
Distributions of Available Cash
 
General
 
Our partnership agreement requires that, within 45 days after the end of each quarter, beginning with the quarter ending December 31, 2007, we distribute all of our available cash to unitholders of record on the applicable record date.
 
Definition of Available Cash
 
Available cash, for any quarter, consists of all cash on hand at the end of that quarter:
 
  •  less the amount of cash reserves established by our general partner to:
 
  •  provide for the proper conduct of our business, including necessary maintenance capital expenditures;
 
  •  comply with applicable law, any of our debt instruments or other agreements; or
 
  •  provide funds for distributions to our unitholders and to our general partner for any one or more of the next four quarters;
 
  •  plus, all cash on hand on the date of determination resulting from cash received after the end of that quarter in respect of our ownership interests in CIG and SNG and attributable to their operations during that quarter; and
 
  •  plus, if our general partner so determines, all or a portion of cash on hand on the date of determination of available cash for the quarter resulting from Working Capital Borrowings made subsequent to the end of such quarter.
 
Working Capital Borrowings are generally borrowings that are made under a credit facility or another arrangement, are used solely for working capital purposes or to pay distributions to unitholders and are intended to be repaid within 12 months.
 
Intent to Distribute Minimum Quarterly Distribution
 
We will distribute to the holders of common units and subordinated units on a quarterly basis at least the minimum quarterly distribution of $0.28750 per unit, or $1.15 per year, to the extent we have sufficient cash from our operations after establishment of cash reserves and payment of fees and expenses, including payments to our general partner. However, there is no guarantee that we will pay the minimum quarterly distribution on the units in any quarter. Even if our cash distribution policy is not modified or revoked, the amount of distributions paid under our policy and the decision to make any distribution is determined by our general partner, taking into consideration the terms of our partnership agreement. We will be prohibited from making any distributions to unitholders if it would cause an event of default, or an event of default is existing, under our credit agreement. Please read “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Liquidity and Capital Resources” for a discussion of the restrictions to be included in our credit agreement that may restrict our ability to make distributions.
 
General Partner Interest and Incentive Distribution Rights
 
Initially, our general partner will be entitled to 2% of all quarterly distributions since inception that we make prior to our liquidation. This general partner interest will be represented by 1,550,941 general partner units. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its current general partner interest. The general partner’s initial 2% interest in these distributions will be reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us to maintain its 2% general partner interest.
 
Our general partner also currently holds incentive distribution rights that entitle it to receive increasing percentages, up to a maximum of 50%, of the cash we distribute from operating surplus (as defined below) in excess of $0.33060 per unit per quarter. The maximum distribution of 50% includes distributions paid to our


66


Table of Contents

general partner on its 2% general partner interest and assumes that our general partner maintains its general partner interest at 2%. The maximum distribution of 50% does not include any distributions that our general partner or its affiliates may receive on common or subordinated units that they own. Please read “— General Partner Interest and Incentive Distribution Rights” for additional information.
 
Operating Surplus and Capital Surplus
 
General
 
All cash distributed to unitholders will be characterized as either “operating surplus” or “capital surplus.” Our partnership agreement requires that we distribute available cash from operating surplus differently than available cash from capital surplus.
 
Operating Surplus
 
We define operating surplus in the partnership agreement and for any period it generally means:
 
  •  $45 million (as described below); plus
 
  •  all of our cash receipts after the closing of this offering (other than pursuant to the next bullet), excluding cash from interim capital transactions (as defined below); plus
 
  •  all of our cash receipts after the end of a quarter but before the date of determination resulting from cash distributions paid on our ownership interest in CIG, SNG or similar persons (excluding any such amounts constituting either (i) cash proceeds from the balance of notes receivable outstanding as of the closing of this offering under cash management agreements between El Paso and CIG, SNG or such other person, or (ii) the proceeds from interim capital transactions at CIG, SNG or such other person); plus
 
  •  Working Capital Borrowings made after the end of a quarter but before the date of determination of operating surplus for the quarter; plus
 
  •  cash distributions paid on equity issued to finance all or a portion of the construction, acquisition or improvement (such as equipment or facilities) in respect of the period beginning on the date that we enter into a binding obligation to commence the construction, acquisition or improvement of a capital improvement or replacement of a capital asset and ending on the earlier to occur of the date the capital improvement or capital asset commences commercial service or the date that it is abandoned or disposed of; less
 
  •  our Operating Expenditures (as defined below) after the closing of this offering, including maintenance capital expenditures (including capital contributions to CIG, SNG or similar persons to be used by them for maintenance capital expenditures); less
 
  •  the amount of cash reserves established by our general partner to provide funds for future Operating Expenditures; less
 
  •  all Working Capital Borrowings not repaid within twelve months after having been incurred.
 
As described above, operating surplus does not reflect actual cash on hand that is available for distribution to our unitholders. For example, it includes a provision that will enable us, if we choose, to distribute as operating surplus up to $45 million of cash we receive in the future from non-operating sources such as asset sales, issuances of securities and long-term borrowings that would otherwise be distributed as capital surplus. In addition, the effect of including, as described above, certain cash distributions on equity securities in operating surplus would be to increase operating surplus by the amount of any such cash distributions. As a result, we may also distribute as operating surplus up to the amount of any such cash distributions we receive from non-operating sources.
 
If a Working Capital Borrowing, which increases operating surplus, is not repaid during the twelve-month period following the borrowing, it will be deemed repaid at the end of such period, thus decreasing operating surplus at such time. When such Working Capital Borrowing is in fact repaid, it will not be treated as a further reduction to operating surplus because operating surplus will have been previously reduced by the deemed repayment.


67


Table of Contents

We define Operating Expenditures in the partnership agreement, and it generally means all of our expenditures, including, but not limited to, taxes, payments to our general partner, reimbursement of expenses incurred by our general partner or its affiliates on our behalf, non-pro rata purchases of units, interest payments, payments made in the ordinary course of business under interest rate swap agreements and commodity hedge contracts, repayments of Working Capital Borrowings and maintenance capital expenditures, provided that Operating Expenditures will not include:
 
  •  repayment of Working Capital Borrowings deducted from operating surplus pursuant to the last bullet point of the definition of operating surplus above when such repayment actually occurs;
 
  •  payments (including prepayments and prepayment penalties) of principal of and premium on indebtedness, other than Working Capital Borrowings;
 
  •  expansion capital expenditures;
 
  •  investment capital expenditures, including additional capital contributions to CIG, SNG or similar persons to be used by CIG, SNG or similar persons for investment capital expenditures;
 
  •  payment of transaction expenses relating to interim capital transactions (as defined below);
 
  •  distributions to our partners (including distributions in respect of our Class B units and incentive distribution rights); or
 
  •  non-pro rata purchases of units of any class made with the proceeds of an interim capital transaction.
 
Maintenance capital expenditures represent capital expenditures made to replace partially or fully depreciated assets, to maintain the existing operating capacity of our assets and to extend their useful lives, or other capital expenditures that are incurred in maintaining existing system volumes or our asset base. Costs for repairs and minor renewals to maintain facilities in operating condition and that do not extend the useful life of existing assets will be treated as operations and maintenance expenses as we incur them. Maintenance capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued to finance all or any portion of the construction, improvement or development of a replacement asset that is paid in respect of the period that begins when we enter into a binding commitment or commence constructing or developing a replacement asset and ending on the earlier to occur of the date any such replacement asset commences commercial service or the date it is abandoned or disposed of (which will include any such amounts included in the account known as the allowance for funds used during construction (AFUDC) maintained by WIC in accordance with FERC regulations). Maintenance capital expenditures will include contributions made by us to CIG, SNG or similar persons to be used by them for maintenance capital expenditures. Capital expenditures made solely for investment purposes will not be considered maintenance capital expenditures.
 
Expansion capital expenditures are those capital expenditures made to increase the long-term operating capacity of our assets or our asset base whether through construction or acquisition. Examples of expansion capital expenditures include the acquisition of equipment, or the construction, development or acquisition of additional pipeline, compression equipment or storage capacity, to the extent such capital expenditures are expected to expand for the long-term either our operating capacity or asset base. Expansion capital expenditures will also include interest (and related fees) on debt incurred and distributions on equity issued to finance all or any portion of the construction of such a capital improvement in respect of the period that commences when we enter into a binding obligation to commence construction of a capital improvement and ending on the date such capital improvement commences commercial service or the date that it is abandoned or disposed of (which will include any such amounts included in the account known as the allowance for funds used during construction (AFUDC) maintained by WIC in accordance with FERC regulations). Expansion capital expenditures will include contributions made by us to CIG, SNG or similar persons to be used by them for expansion capital expenditures. Capital expenditures made solely for investment purposes will not be considered expansion capital expenditures.
 
Investment capital expenditures are those capital expenditures that are neither maintenance capital expenditures nor expansion capital expenditures. Investment capital expenditures largely will consist of capital expenditures made for investment purposes. Examples of investment capital expenditures include traditional capital expenditures for investment purposes, such as purchases of securities, as well as other capital


68


Table of Contents

expenditures that might be made in lieu of such traditional investment capital expenditures, such as the acquisition of a capital asset for investment purposes or development of facilities that are in excess of the maintenance of our existing operating capacity or operating income, but which are not expected to expand for the long-term our operating capacity or asset base. Investment capital expenditures will include contributions made by us to CIG, SNG or similar persons to be used by them for investment capital expenditures.
 
As described above, none of our investment capital expenditures or expansion capital expenditures will be subtracted from operating surplus. Because investment capital expenditures and expansion capital expenditures include interest payments (and related fees) on debt incurred and distributions on equity issued to finance all of the portion of the construction, replacement or improvement of a capital asset (such as additional pipelines, compression equipment or storage capacity) in respect of the period that begins when we enter into a binding obligation to commence construction of a capital improvement and ending on the earlier to occur of the date any such capital asset commences commercial service or the date that it is abandoned or disposed of, such interest payments and equity distributions are also not subtracted from operating surplus.
 
Pursuant to our partnership agreement, capital expenditures that are made in part for maintenance capital purposes and in part for investment capital or expansion capital purposes will be allocated as maintenance capital expenditures, investment capital expenditures or expansion capital expenditure by our general partner, with the concurrence of our conflicts committee.
 
Capital Surplus
 
We also define capital surplus in the partnership agreement and in “— Characterization of Cash Distributions” below, and it will generally be generated only by the following, which we call “interim capital transactions”:
 
  •  borrowings other than Working Capital Borrowings;
 
  •  sales of our equity and debt securities; and
 
  •  sales or other dispositions of assets for cash, other than inventory, accounts receivable and other current assets sold in the ordinary course of business or as part of normal retirement or replacement of assets.
 
  •  the termination of interest rate swap agreements or commodity hedge contracts prior to the termination date specified therein;
 
  •  capital contributions received by us or, in the case of any partially owned entity such as CIG, CIG’s interest in WYCO or SNG, from the unaffiliated partner(s) or other owner(s) of such entity; and
 
  •  corporate reorganizations or restructurings.
 
Characterization of Cash Distributions
 
Our partnership agreement requires that we treat all available cash distributed as coming from operating surplus until the sum of all available cash distributed since the closing of this offering equals the operating surplus as of the most recent date of determination of available cash. Our partnership agreement requires that we treat any amount distributed in excess of operating surplus, regardless of its source, as capital surplus. As reflected above, operating surplus includes $45 million, which does not reflect actual cash on hand that is available for distribution to our unitholders. Rather, it is a provision that will enable us, if we choose, to distribute as operating surplus up to this amount of cash we receive in the future from interim capital transactions, that would otherwise be distributed as capital surplus. We do not anticipate that we will make any distributions from capital surplus. The characterization of cash distributions as operating surplus versus capital surplus does not result in a different impact to unitholders for federal tax purposes. Please read “Material Tax Consequences — Tax Consequences of Unit Ownership — Treatment of Distributions” for a discussion of the tax treatment of cash distributions.
 
Subordination Period
 
General
 
Our partnership agreement provides that, during the subordination period (which we define below and in Appendix D), the common units will have the right to receive distributions of available cash from operating


69


Table of Contents

surplus each quarter in an amount equal to $0.28750 per common unit, which amount is defined in our partnership agreement as the minimum quarterly distribution, plus any arrearages in the payment of the minimum quarterly distribution on the common units from prior quarters, before any distributions of available cash from operating surplus may be made on the subordinated units. Furthermore, no arrearages will be paid on the subordinated units. The practical effect of the subordinated units is to increase the likelihood that during the subordination period there will be available cash to be distributed on the common units.
 
Subordination Period
 
The subordination period will extend until the first business day of any quarter beginning after December 31, 2010 that each of the following tests are met:
 
  •  distributions of available cash from operating surplus on each of the outstanding common units, subordinated units and general partner units equaled or exceeded the minimum quarterly distribution for each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date;
 
  •  the “adjusted operating surplus” (as defined below) generated during each of the three consecutive, non-overlapping four-quarter periods immediately preceding that date equaled or exceeded the sum of the minimum quarterly distributions on all of the outstanding common units, subordinated units and general partner units during those periods on a fully diluted basis; and
 
  •  there are no arrearages in payment of the minimum quarterly distribution on the common units.
 
Early Conversion of Subordinated Units
 
Notwithstanding the foregoing, the subordination period will automatically terminate and all of the subordinated units will convert into common units on a one-for-one basis on the first business day following the distribution of available cash to partners in respect of any quarter ending on or after December 31, 2008 that each of the following occurs:
 
  •  distributions of available cash from operating surplus on each outstanding common unit, subordinated unit and general partner unit equaled or exceeded $0.43125 per quarter (150% of the minimum quarterly distribution) for each quarter in the four-quarter period immediately preceding the date;
 
  •  the “adjusted operating surplus” (as defined below) generated during each quarter in the four-quarter period immediately preceding the date equaled or exceeded $0.43125 (150% of the minimum quarterly distribution) on all of the outstanding common units, subordinated units and general partner units during that period on a fully diluted basis; and
 
  •  there are no arrearages in payment of the minimum quarterly distribution on the common units.
 
Expiration of the Subordination Period
 
When the subordination period expires, each outstanding subordinated unit will convert into one common unit and will then participate pro rata with the other common units in distributions of available cash. In addition, if the unitholders remove our general partner other than for cause and units held by the general partner and its affiliates are not voted in favor of such removal:
 
  •  the subordination period will end and each subordinated unit will immediately convert into one common unit;
 
  •  any existing arrearages in payment of the minimum quarterly distribution on the common units will be extinguished; and
 
  •  the general partner will have the right to convert its general partner units and its incentive distribution rights into common units or to receive cash in exchange for those interests.
 
Because El Paso will own a controlling number of our common units, it is unlikely that our general partner will be removed.
 
Adjusted Operating Surplus
 
Adjusted operating surplus is intended to reflect the cash generated from operations during a particular period and therefore excludes the $45 million “basket” included as a component of operating surplus and net


70


Table of Contents

drawdowns of reserves of cash generated in prior periods. We define adjusted operating surplus in the partnership agreement and for any period it generally means:
 
  •  operating surplus generated with respect to that period (excluding any amounts attributable to the item described in the first bullet point under the caption “— Operating Surplus and Capital Surplus — Operating Surplus” above); less
 
  •  any net increase in Working Capital Borrowings with respect to that period; less
 
  •  any net decrease in cash reserves for Operating Expenditures with respect to that period not relating to an Operating Expenditure made with respect to that period; plus
 
  •  any net decrease made in subsequent periods in cash reserves for Operating Expenditures initially established with respect to that period to the extent such decrease results in a reduction in adjusted operating surplus in subsequent periods pursuant to the following bullet point; plus
 
  •  any net decrease in Working Capital Borrowings with respect to that period; plus
 
  •  any net increase in cash reserves for Operating Expenditures with respect to that period required by any debt instrument for the repayment of principal, interest or premium.
 
Distributions of Available Cash from Operating Surplus during the Subordination Period
 
Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter during the subordination period in the following manner:
 
  •  first, 98% to the common unitholders, pro rata, and 2% to the general partner, until we distribute for each outstanding common unit an amount equal to the minimum quarterly distribution for that quarter;
 
  •  second, 98% to the common unitholders, pro rata, and 2% to the general partner, until we distribute for each outstanding common unit an amount equal to any arrearages in payment of the minimum quarterly distribution on the common units for any prior quarters during the subordination period;
 
  •  third, 98% to the subordinated unitholders, pro rata, and 2% to the general partner, until we distribute for each subordinated unit an amount equal to the minimum quarterly distribution for that quarter; and
 
  •  thereafter, in the manner described in “General Partner Interest and Incentive Distribution Rights” below.
 
The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.
 
Distributions of Available Cash from Operating Surplus after the Subordination Period
 
Our partnership agreement requires that we make distributions of available cash from operating surplus for any quarter after the subordination period in the following manner:
 
  •  first, 98% to all unitholders, pro rata, and 2% to the general partner, until we distribute for each outstanding unit an amount equal to the minimum quarterly distribution for that quarter; and
 
  •  thereafter, in the manner described in “General Partner Interest and Incentive Distribution Rights” below.
 
The preceding discussion is based on the assumptions that our general partner maintains its 2% general partner interest and that we do not issue additional classes of equity securities.
 
General Partner Interest and Incentive Distribution Rights
 
Our partnership agreement provides that our general partner initially will be entitled to 2% of all distributions that we make prior to our liquidation. Our general partner has the right, but not the obligation, to contribute a proportionate amount of capital to us to maintain its 2% general partner interest if we issue additional units. Our general partner’s 2% interest, and the percentage of our cash distributions to which it is entitled, will be proportionately reduced if we issue additional units in the future and our general partner does not contribute a proportionate amount of capital to us in order to maintain its 2% general partner interest. Our general partner will be entitled to make a capital contribution in order to maintain its 2% general partner interest in the form of the contribution to us of common units based on the current market value of the contributed common units.


71


Table of Contents

Incentive distribution rights represent the right to receive an increasing percentage (13%, 23% and 48%) of quarterly distributions of available cash from operating surplus after the minimum quarterly distribution and the target distribution levels have been achieved. Our general partner currently holds the incentive distribution rights, but may transfer these rights separately from its general partner interest, subject to restrictions in the partnership agreement.
 
The following discussion assumes that the general partner maintains its 2% general partner interest and continues to own the incentive distribution rights.
 
If for any quarter:
 
  •  we have distributed available cash from operating surplus to the common and subordinated unitholders in an amount equal to the minimum quarterly distribution; and
 
  •  we have distributed available cash from operating surplus on outstanding common units in an amount necessary to eliminate any cumulative arrearages in payment of the minimum quarterly distribution;
 
then, our partnership agreement requires that we distribute any additional available cash from operating surplus for that quarter among the unitholders and the general partner in the following manner:
 
  •  first, 98% to all unitholders, pro rata, and 2% to the general partner, until each unitholder receives a total of $0.33063 per unit for that quarter (the “first target distribution”);
 
  •  second, 85% to all unitholders, pro rata, and 15% to the general partner, until each unitholder receives a total of $0.35938 per unit for that quarter (the “second target distribution”);
 
  •  third, 75% to all unitholders, pro rata, and 25% to the general partner, until each unitholder receives a total of $0.43125 per unit for that quarter (the “third target distribution”); and
 
  •  thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.
 
Percentage Allocations of Available Cash from Operating Surplus
 
The following table illustrates the percentage allocations of available cash from operating surplus between the unitholders and our general partner based on the specified target distribution levels. The amounts set forth under “Marginal Percentage Interest in Distributions” are the percentage interests of our general partner and the unitholders in any available cash from operating surplus we distribute up to and including the corresponding amount in the column “Total Quarterly Distribution Per Unit,” until available cash from operating surplus we distribute reaches the next target distribution level, if any. The percentage interests shown for the unitholders and the general partner for the minimum quarterly distribution are also applicable to quarterly distribution amounts that are less than the minimum quarterly distribution. The percentage interests set forth below for our general partner include its 2% general partner interest and assume our general partner has contributed any additional capital to maintain its 2% general partner interest and has not transferred its incentive distribution rights.
 
                     
        Marginal Percentage
 
    Total Quarterly
  Interest in Distribution  
    Distribution per Unit
        General
 
    Target Amount   Unitholders     Partner  
 
Minimum Quarterly Distribution
  $0.28750     98 %     2 %
First Target Distribution
  above $0.28750     98 %     2 %
    up to $0.33063                
Second Target Distribution
  above $0.33063     85 %     15 %
    up to $0.35938                
Third Target Distribution
  above $0.35938     75 %     25 %
    up to $0.43125                
Thereafter
  above $0.43125     50 %     50 %
 
General Partner’s Right to Reset Incentive Distribution Levels
 
Our general partner, as the holder of our incentive distribution rights, has the right under our partnership agreement to elect to relinquish the right to receive incentive distribution payments based on the initial cash


72


Table of Contents

target distribution levels and to reset, at higher levels, the minimum quarterly distribution amount and cash target distribution levels upon which the incentive distribution payments to our general partner would be set. Our general partner’s right to reset the minimum quarterly distribution amount and the target distribution levels upon which the incentive distributions payable to our general partner are based may be exercised, without approval of our unitholders or the conflicts committee of our general partner, at any time when there are no subordinated units outstanding and we have made cash distributions to the holders of the incentive distribution rights at the highest level of incentive distribution for each of the prior four consecutive fiscal quarters. The reset minimum quarterly distribution amount and target distribution levels will be higher than the minimum quarterly distribution amount and the target distribution levels prior to the reset such that our general partner will not receive any incentive distributions under the reset target distribution levels until cash distributions per unit following this event increase as described below. We anticipate that our general partner would exercise this reset right in order to facilitate acquisitions or internal growth projects that would otherwise not be sufficiently accretive to cash distributions per common unit, taking into account the existing levels of incentive distribution payments being made to our general partner.
 
In connection with the resetting of the minimum quarterly distribution amount and the target distribution levels and the corresponding relinquishment by our general partner of incentive distribution payments based on the target cash distributions prior to the reset, our general partner will be entitled to receive a number of newly issued Class B common units and general partner units based on a predetermined formula described below that takes into account the “cash parity” value of the average cash distributions related to the incentive distribution rights received by our general partner for the two quarters prior to the reset event as compared to the average cash distributions per common unit during this period.
 
The number of Class B common units that our general partner would be entitled to receive from us in connection with a resetting of the minimum quarterly distribution amount and the target distribution levels then in effect would be equal to (x) the average amount of cash distributions received by our general partner in respect of its incentive distribution rights during the two consecutive fiscal quarters ended immediately prior to the date of such reset election divided by (y) the average of the amount of cash distributed per common unit during each of these two quarters. Each Class B common unit will be convertible into one common unit at the election of the holder of the Class B common unit at any time following the first anniversary of the issuance of these Class B common units. The issuance of the Class B common units will be conditioned upon approval of the listing or admission for trading of the common units into which the Class B common units are convertible by the national securities exchange on which the common units are then listed or admitted for trading. Each Class B common unit will receive the same level of distribution as a common unit on a pari passu basis with other unitholders. Our general partner will also receive from us an additional amount of general partner units in order to maintain the general partner’s ownership interest in us relative to the issuance of the common units.
 
Following a reset election by our general partner, the minimum quarterly distribution amount will be reset to an amount equal to the average cash distribution amount per common unit for the two fiscal quarters immediately preceding the reset election (such amount is referred to as the “reset minimum quarterly distribution”) and the target distribution levels will be reset to be correspondingly higher such that we would distribute all of our available cash from operating surplus for each quarter thereafter as follows:
 
  •  first, 98% to all unitholders, pro rata, and 2% to the general partner, until each unitholder receives an amount equal to 115% of the reset minimum quarter distribution for that quarter;
 
  •  second, 85% to all unitholders, pro rata, and 15% to the general partner, until each unitholder receives an amount per unit equal to 125% of the reset minimum quarterly distribution for that quarter;
 
  •  third, 75% to all unitholders, pro rata, and 25% to the general partner, until each unitholder receives an amount per unit equal to 150% of the reset minimum quarterly distribution for that quarter; and
 
  •  thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.


73


Table of Contents

 
The following table illustrates the percentage allocation of available cash from operating surplus between the unitholders and our general partner at various cash distribution levels pursuant to the cash distribution provision of our partnership agreement in effect at the closing of this offering as well as following a hypothetical reset of the minimum quarterly distribution and target distribution levels based on the assumption that the average quarterly cash distribution amount per common unit during the two fiscal quarters immediately preceding the reset election was $0.60.
 
                             
        Marginal Percentage
    Quarterly
 
    Quarterly Distribution
  Interest in Distribution     Distribution
 
    per Unit
        General
    per Unit following
 
    Prior to Reset   Unitholders     Partner     Hypothetical Reset  
 
Minimum Quarterly Distribution
  $0.28750     98 %     2 %     $0.60000  
First Target Distribution
  above $0.28750     98 %     2 %     above $0.60000  
    up to $0.33063                     up to $0.69000  
Second Target Distribution
  above $0.33063     85 %     15 %     above $0.69000 (1)
    up to $0.35938                     up to $0.75000  
Third Target Distribution
  above $0.35938     75 %     25 %     above $0.75000 (2)
    up to $0.43125                     up to $0.90000  
Thereafter
  above $0.43125     50 %     50 %     above $0.90000 (3)
 
 
(1) This amount is 115% of the hypothetical reset minimum quarterly distribution.
 
(2) This amount is 125% of the hypothetical reset minimum quarterly distribution.
 
(3) This amount is 150% of the hypothetical reset minimum quarterly distribution.
 
The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the general partner, including in respect of incentive distribution rights, or IDRs, based on an average of the amounts distributed per quarter for the two quarters immediately prior to the reset. The following table assumes that immediately prior to the reset there are 75,996,103 common units and 1,550,941 general partner units, representing a 2% general partner interest, outstanding, and that the average distribution to each common unit is $0.60 for the two quarters prior to the reset. The assumed number of outstanding units assumes the conversion of all subordinated units into common units and no additional unit issuances.
 
                                                         
                General Partner Cash Distributions
       
    Quarterly
    Common
    Prior to Reset        
    Distribution
    Unitholders Cash
          2% General
                   
    per Unit
    Distributions
    Class B
    Partner
                Total
 
    Prior to Reset     Prior to Reset     Units     Interest     IDRs     Total     Distributions  
 
Minimum Quarterly Distribution
    $0.28750     $ 21,848,880     $     $ 445,896     $     $ 445,896     $ 22,294,776  
First Target Distribution
    above $0.28750       3,277,332             66,884             66,884       3,344,216  
      up to $0.33063                                                  
Second Target Distribution
    above $0.33063       2,184,888             51,409       334,159       385,568       2,570,456  
      up to $0.35938                                                  
Third Target Distribution
    above $0.35938       5,462,220             145,659       1,675,081       1,820,740       7,282,960  
      up to $0.43125                                                  
Thereafter
    above $0.43125       12,824,342             512,974       12,311,369       12,824,343       25,648,685  
                                                         
            $ 45,597,662     $ —          $ 1,222,822     $ 14,320,609     $ 15,543,431     $ 61,141,093  
                                                         


74


Table of Contents

The following table illustrates the total amount of available cash from operating surplus that would be distributed to the unitholders and the general partner, including in respect of IDRs, with respect to the quarter in which the reset occurs. The table reflects that as a result of the reset there are 75,996,103 common units, 23,867,681 Class B common units issued as a result of the reset and 2,038,036 general partner units, outstanding, and that the average distribution to each common unit is $0.60000 for the two quarters prior to the reset. The number of Class B common units issued as a result of the reset was calculated by dividing (x) $14,320,609 as the average of the amounts received by the general partner in respect of its incentive distribution rights, or IDRs, for the two quarters prior to the reset as shown in the table above by (y) the $0.60000 of available cash from operating surplus distributed to each common unit as the average distributed per common unit for the two quarters prior to the reset.
 
                                                         
                General Partner Cash Distributions After Reset        
                Class B
                         
    Quarterly
    Common
    Units
                         
    Distribution
    Unitholders Cash
    Issued as a
    2% General
                   
    per Unit
    Distributions
    Result of
    Partner
                Total
 
    After Reset     After Reset     the Reset     Interest     IDRs     Total     Distributions  
 
Minimum Quarterly Distribution
    $0.60000     $ 45,597,662     $ 14,320,609     $ 1,222,822     $     $ 15,543,431     $ 61,141,093  
First Target Distribution
    above $0.60000                                      
      up to $0.69000                                                  
Second Target Distribution
    above $0.69000                                      
      up to $0.75000                                                  
Third Target Distribution
    above $0.75000                                      
      up to $0.90000                                                  
Thereafter
    above $0.90000                                      
                                                         
            $ 45,597,662     $ 14,320,609     $ 1,222,822     $     $ 15,543,431     $ 61,141,093  
                                                         
 
Our general partner will be entitled to cause the minimum quarterly distribution amount and the target distribution levels to be reset on more than one occasion, provided that it may not make a reset election except at a time when it has received incentive distributions for the prior four consecutive fiscal quarters based on the highest level of incentive distributions that it is entitled to receive under our partnership agreement.
 
Distributions from Capital Surplus
 
How Distributions from Capital Surplus Will Be Made
 
Our partnership agreement requires that we make distributions of available cash from capital surplus, if any, in the following manner:
 
  •  first, 98% to all unitholders, pro rata, and 2% to the general partner, until we distribute for each common unit that was issued in this offering an amount of available cash from capital surplus equal to the initial public offering price;
 
  •  second, 98% to the common unitholders, pro rata, and 2% to the general partner, until we distribute for each common unit an amount of available cash from capital surplus equal to any unpaid arrearages in payment of the minimum quarterly distribution on the common units; and
 
  •  thereafter, we will make all distributions of available cash from capital surplus as if they were from operating surplus.
 
Effect of a Distribution from Capital Surplus
 
Our partnership agreement treats a distribution of capital surplus as the repayment of the initial unit price from this initial public offering, which is a return of capital. The initial public offering price less any distributions of capital surplus per unit is referred to as the “unrecovered initial unit price.” Each time a distribution of capital surplus is made, the minimum quarterly distribution and the target distribution levels will be reduced in the same proportion as the corresponding reduction in the unrecovered initial unit price. Because distributions of capital surplus will reduce the minimum quarterly distribution, after any of these distributions are made, it may be easier for the general partner to receive incentive distributions and for the


75


Table of Contents

subordinated units to convert into common units. However, any distribution of capital surplus before the unrecovered initial unit price is reduced to zero cannot be applied to the payment of the minimum quarterly distribution or any arrearages.
 
Once we distribute capital surplus on a unit issued in this offering in an amount equal to the initial unit price, our partnership agreement specifies that the minimum quarterly distribution and the target distribution levels will be reduced to zero. Our partnership agreement specifies that we then make all future distributions from operating surplus, with 50% being paid to the holders of units and 50% to the general partner. The percentage interests shown for our general partner include its 2% general partner interest and assume the general partner has not transferred the incentive distribution rights.
 
Adjustment to the Minimum Quarterly Distribution and Target Distribution Levels
 
In addition to adjusting the minimum quarterly distribution and target distribution levels to reflect a distribution of capital surplus, if we combine our units into fewer units or subdivide our units into a greater number of units, our partnership agreement specifies that the following items will be proportionately adjusted:
 
  •  the minimum quarterly distribution;
 
  •  target distribution levels;
 
  •  the unrecovered initial unit price;
 
  •  the number of common units into which a subordinated unit is convertible; and
 
  •  the number of GP units.
 
For example, if a two-for-one split of the common units should occur, the minimum quarterly distribution, the target distribution levels and the unrecovered initial unit price would each be reduced to 50% of its initial level and each subordinated unit would be convertible into two common units. The two-for-one split would also result in the number of GP units evidencing the general partner interest being doubled. Our partnership agreement provides that we not make any adjustment by reason of the issuance of additional units for cash or property.
 
In addition, if legislation is enacted or if existing law is modified or interpreted by a governmental taxing authority, so that we become taxable as a corporation or otherwise subject to taxation as an entity for federal, state or local income tax purposes, our partnership agreement specifies that the general partner may reduce the minimum quarterly distribution and the target distribution levels for each quarter by multiplying each distribution level by a fraction, the numerator of which is available cash for that quarter and the denominator of which is the sum of available cash for that quarter plus the general partner’s estimate of our aggregate liability for the quarter for such income taxes payable by reason of such legislation or interpretation. To the extent that the actual tax liability differs from the estimated tax liability for any quarter, the difference will be accounted for in subsequent quarters.
 
Distributions of Cash Upon Liquidation
 
General
 
If we dissolve in accordance with the partnership agreement, we will sell or otherwise dispose of our assets in a process called liquidation. We will first apply the proceeds of liquidation to the payment of our creditors. We will distribute any remaining proceeds to the unitholders and the general partner, in accordance with their capital account balances, as adjusted to reflect any gain or loss upon the sale or other disposition of our assets in liquidation.
 
The allocations of gain and loss upon liquidation are intended, to the extent possible, to entitle the holders of outstanding common units to a preference over the holders of outstanding subordinated units upon our liquidation, to the extent required to permit common unitholders to receive their unrecovered initial unit price plus the minimum quarterly distribution for the quarter during which liquidation occurs plus any unpaid arrearages in payment of the minimum quarterly distribution on the common units. However, there may not be sufficient gain upon our liquidation to enable the holders of common units to fully recover all of these amounts, even though there may be cash available for distribution to the holders of subordinated units. Any


76


Table of Contents

further net gain recognized upon liquidation will be allocated in a manner that takes into account the incentive distribution rights of the general partner.
 
Manner of Adjustments for Gain
 
The manner of the adjustment for gain is set forth in the partnership agreement. If our liquidation occurs before the end of the subordination period, we will allocate any gain to the partners in the following manner:
 
  •  first, to the general partner and the holders of units who have negative balances in their capital accounts to the extent of and in proportion to those negative balances;
 
  •  second, 98% to the common unitholders, pro rata, and 2% to the general partner, until the capital account for each common unit is equal to the sum of: (1) the unrecovered initial unit price; (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs; and (3) any unpaid arrearages in payment of the minimum quarterly distribution;
 
  •  third, 98% to the Class B common unitholders, pro rata, and 2% to the general partner, until the capital account for each Class B common unit is equal to the sum of: (1) the unrecovered initial unit price; and (2) the amount for the minimum quarterly distribution for the quarter during which our liquidation occurs;
 
  •  fourth, 98% to the subordinated unitholders, pro rata, and 2% to the general partner until the capital account for each subordinated unit is equal to the sum of: (1) the unrecovered initial unit price; and (2) the amount of the minimum quarterly distribution for the quarter during which our liquidation occurs;
 
  •  fifth, 98% to all unitholders, pro rata, and 2% to the general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the first target distribution per unit over the minimum quarterly distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the minimum quarterly distribution per unit that we distributed 98% to the unitholders, pro rata, and 2% to the general partner, for each quarter of our existence;
 
  •  sixth, 85% to all unitholders, pro rata, and 15% to the general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the second target distribution per unit over the first target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the first target distribution per unit that we distributed 85% to the unitholders, pro rata, and 15% to the general partner for each quarter of our existence;
 
  •  seventh, 75% to all unitholders, pro rata, and 25% to the general partner, until we allocate under this paragraph an amount per unit equal to: (1) the sum of the excess of the third target distribution per unit over the second target distribution per unit for each quarter of our existence; less (2) the cumulative amount per unit of any distributions of available cash from operating surplus in excess of the second target distribution per unit that we distributed 75% to the unitholders, pro rata, and 25% to the general partner for each quarter of our existence; and
 
  •  thereafter, 50% to all unitholders, pro rata, and 50% to the general partner.
 
The percentage interests set forth above for our general partner include its 2% general partner interest and assume the general partner has not transferred the incentive distribution rights.
 
If the liquidation occurs after the end of the subordination period, the distinction between common units and subordinated units will disappear, so that clause (3) of the second bullet point above and all of the fourth bullet point above will no longer be applicable.


77


Table of Contents

Manner of Adjustments for Losses
 
If our liquidation occurs before the end of the subordination period, we will generally allocate any loss to the general partner and the unitholders in the following manner:
 
  •  first, 98% to holders of subordinated units in proportion to the positive balances in their capital accounts and 2% to the general partner, until the capital accounts of the subordinated unitholders have been reduced to zero;
 
  •  second, 98% to the holders of Class B common units in proportion to the positive balances in their capital accounts and 2% to the general partner, until the capital accounts of the Class B common unitholders have been reduced to zero;
 
  •  third, 98% to the holders of common units in prop