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Robert G. Phillips. President. Midstream M&A Overview. Arthur Andersen Energy Symposium November 28, 2000. Cautionary Statement Regarding Forward-looking Statements.

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Robert g phillips

Robert G. Phillips

President

Midstream M&A Overview

Arthur Andersen Energy Symposium

November 28, 2000


Cautionary statement regarding forward looking statements

Cautionary Statement Regarding Forward-looking Statements

This presentation includes forward-looking statements and projections, made in reliance on the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The companies have made every reasonable effort to ensure that the information and assumptions on which these statements and projections are based are current, reasonable, and complete. However, a variety of factors could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this presentation, including, without limitation, oil and gas prices; general economic and weather conditions in geographic regions or markets served by El Paso Energy and Coastal and their affiliates, or where operations of the companies and their affiliates are located; inability to realize anticipated synergies and cost savings on a timely basis; difficulty in integration of operations; and competition. While the companies make these statements and projections in good faith, neither company nor its management can guarantee that the anticipated future results will be achieved. Reference should be made to the companies’ (and their affiliates’) Securities and Exchange Commission filings for additional important factors that may affect actual results.


Industry fundamentals

Industry Fundamentals


Strong industry fundamentals

Strong Industry Fundamentals

Growth Driven by New Natural Gas Demand

  • Demand for natural gas to increase to 31 Tcf by 2015

  • 250,000 MW announced generation projects

  • 2.3 percent annual demand growth (1.5 percent power demand only)

  • Creates summer season peak demand

Natural Gas Demand

Tcf/y

Source: National Petroleum Council


Strong industry fundamentals1

Strong Industry Fundamentals

Growth Driven by Supply Buildup

  • US gas production declines at 24% per year

  • Need 10-25 Bcf/d each year new supply

  • Capital expenditure requirements per year:

    • $30 billion—E&P

    • $10 billion—Midstream

    • $3 billion—Gas transmission

  • Focus on GOM, Rockies, South Texas, WCSB, and frontier areas

Natural Gas Supply

25

An unprecedented levelof growth to reach 30 Tcf

20

Bcf/d

15

10

5

Strong demand pressure from power under any scenario

0

1998

2000

2002

2004

2006

2008

2010

Source: CERA


Strong industry fundamentals2

Strong Industry Fundamentals

Strong Prices Promote Growth in Midstream

  • Supplies will remain tight through winter 2000/2001

  • Supply response will appear by mid-2001

  • Technology and infrastructure key to Deepwater GOM and frontier areas

  • High growth potential in gathering, processing, treating, storage for gas, crude and natural gas liquids

Crude and NGL Prices

Natural Gas Prices

$/MMBtu

$/Gallon

Crude Oil

Ethane

Propane

Natural Gas


Midstream segment

Midstream Segment


Old vs new midstream

Old vs. New Midstream

  • Old Midstream Services— gathering and processing in the field for delivery to transmission systems

  • New Midstream Services— gas gathering, compression, EFM and Internet based scheduling, treating, processing, fractionation, gas and gas liquids transportation, storage, offshore platforms, production handling, FPSO’s and wholesale marketing of natural gas, crude oil, natural gas liquids and refined products


Midstream segment overview

Midstream Segment Overview

  • Major component of the natural gas value chain

  • Midstream currently enjoying record profitability/free cash flow driven by high commodity prices and consolidation

  • Largely fee based businesses except for processing

  • Significant M&A activity in past few years


Competitive landscape

Competitive Landscape

  • Natural gas and NGL segment consolidating

  • Tremendous economies of scale

  • Strategic growth via acquisition and organic infrastructure opportunities

  • MLPs used as new financing tool


New midstream majors

New Midstream “Majors”

  • Duke Energy Field Services

  • El Paso Field Services

  • Williams Field Services

  • Kinder Morgan Energy Partners

  • Enterprise Products Partners LP


Midstream m a analysis

Midstream M&A Analysis


U s midstream m a volume

U.S. Midstream M&A Volume

$ Billions

3.5

2.2

3.3

17

16.1

0.55

13.1

5.7

Source: Chase Securities Inc. and J.S. Herold


Precedent transactions

Precedent Transactions

Midstream

Transaction

Value

($MM)

Transaction

Value/

EBITDA

Announced

Date

Buyers

Sellers

09/25/00

08/03/00

01/30/00

12/17/99

07/08/99

04/20/99

11/22/98

08/10/98

11/24/97

10/20/97

Enterprise Products Partners, L.P.

The Williams Companies, Inc.

El Paso Field Services

Duke Energy Field Services

Kinder Morgan, Inc.

Enterprise Products Partners, L.P.

Duke Energy Field Services

El Paso Field Services

The Williams Companies, Inc.

Kinder Morgan, Inc.

Acadian Gas, LLC.

Transcanada Pipelines, Ltd.

PG & E Corp./GTT

Phillips Petroleum Co./GPM

KN Energy, In.

Royal Dutch Shell, Inc.

Union Pacific Resources Corp.

Leviathan Gas Pipeline Partners

MAPCO, Inc.

Santa Fe Pacific Pipelines Partners

$ 226.0

540.0

840.0

6,000.0

598.9

421.6

1,350.0

420.0

3,517.0

$1,421.4

8.5x

N/A

8.4

10.0

13.0

N/A

8.2

N/A

10.9

11.3

Multiple Summary

Mean = 9.6High = 13.0

Median = 10.0Low = 8.2

Source: J.S. Herold


Midstream transaction multiples

Midstream Transaction Multiples

4Q 1996 to Present ($ Millions)

25

20

Kinder Morgan–Santa Fe

Kinder Morgan–KN

15

ENT–Acadian

(LTM EBITDA Multiple)

Duke–Phillips

10

Williams–MAPCO

Duke–UPR

El Paso–PGE/GTT

5

0

9/00

10/97

11/97

11/98

7/99

12/99

1/00

Announcement Date

Source: John S. Herold, Inc.


Midstream m a case studies

Midstream M&A Case Studies


Duke gpm

Duke/GPM

Transaction Profile

Transaction

Value

($MM)

Transaction

Value/

EBITDA

Announced

Date

Deal

Level

Buyers

Sellers

12/17/99

Duke Energy Field Services

GPM

JV

$6,000

10.0x

Rationale

Creates the largest midstream company in the industry. Joint venture

takes advantage of economies of scale in Permian, Anadarko and

Mid-Continent areas. Planned IPO last summer was withdrawn.

Duke Energy Field Services has 57,000 miles of pipeline, interests in

83 processing plants with 7.9 Bcf/d capacity producing 415,000 Bbls/d of

natural gas liquids. Assumed GP interest in TEPPCO Partners LP in

March 2000.


Williams transcanada

Williams/TransCanada

Transaction Profile

Transaction

Value

($MM)

Transaction

Value/

EBITDA

Announced

Date

Deal

Level

Buyers

Sellers

08/3/00

The Williams Companies

Transcanada Pipeline, Ltd

Acquisition

$540

NA

Rationale

To increase gas processing and NGL presence in the rapidly

growing Western Canadian market. Leverage off previous Mapco acquisition. The purchased assets included approximately 6 bcf/d of gas processing capacity, 225,000 bbl/d of NGL production capacity, more than 5 MMbbl of NGL storage capacity, and an NGL pipeline system. Expected to IPO a MLP entity in the near future.


Kinder morgan kn energy

Kinder Morgan/KN Energy

Transaction Profile

Transaction

Value

($MM)

Transaction

Value/

EBITDA

Announced

Date

Deal

Level

Buyers

Sellers

07/08/99

KN Energy, Inc.

Kinder Morgan, Inc.

Acquisition

$599

13.0x

Rationale

Combination creates large natural gas pipeline and refined products pipeline entity in Midwest and Western US. Unique corporate structure allows Kinder Morgan to transfer desirable assets into Kinder Morgan Energy Partners, its MLP. The combined entity operates over 30,000 miles of natural gas and products pipelines, gathering, processing and treating facilities for gas, NGL’s and refined products and numerous bulk terminal facilities.


Enterprise shell

Enterprise/Shell

Transaction Profile

Transaction

Value

($MM)

Transaction

Value/

EBITDA

Announced

Date

Deal

Level

Buyers

Sellers

07/01/00

04/20/99

Enterprise Products Partners L.P.

Enterprise Products Partners L.P.

Shell / Acadian

Shell / Tejas

Acquisition

Acquisition

$200.0

421.6

8.5x

NA

Rationale

To form a fully integrated Gulf Coast natural gas and NGL business. Through the Tejas acquisition, EPD expanded its significant NGL business including fractionation and storage at Mont Belvieu with interests in 11 gas processing plants (3.1 Bcf/d), 4 NGL fractionation facilities (131 MBbl/d), four NGL storage facilities (8.8 MM Bbls), and 2,100 miles of NGL pipelines. In the Acadian acquisition, EPD increased its gas gathering and transportation activities in Louisiana.


El paso field services

El Paso Field Services


Epfs gtt cfs

EPFS/GTT/CFS

Transaction Profile

Transaction

Value

($MM)

Transaction

Value/

EBITDA

Announced

Date

Deal

Level

Buyers

Sellers

01/31/00

01/15/00

El Paso Field Services

El Paso Field Services

PG&E / GTT

Coastal/CFS

Acquisition

Merger

$840

8.4x

Rationale

El Paso acquired GTT to expand gathering and processing presence in South Texas and Gulf Coast and bolster NGL fractionation and liquids pipeline operations. The purchased assets include 8,500 miles of pipeline with throughput capacity of 2.8 Bcf/d, 9 gas processing plants with capacity of 1.5 Bcf/d yielding 90,000 Bbls/d NGL production and gas storage with capacity of 7.2 Bcf/d. After the Coastal merger, Coastal Field Services will be integrated into EPFS creating the 2nd largest midstream company in the industry.


Combined midstream assets

Combined Midstream Assets

Geographic Diversity and Commercial Balance

Rocky

Mountain

Mid-Continent

San Juan

Gathering

Plants

E. TX / N. LA

Black Warrior

El Paso

Coastal

GTT

Offshore

Storage

Permian

Gulf of Mexico


Size and scope of combination

Size and Scope of Combination

2nd Largest Midstream Player in U.S.

EPFS

GTT

Coastal

Total

Pipeline volumes (Bcf/d)

Processing volumes (Bcf/d)

NGL production (MBbls/d)

Miles of pipeline

Processing plants

4.1

1.1

63

11,000

11

2.8

1.5

90

9,000

9

1.0

1.5

55

4,000

15

7.9

4.1

208

24,000

35


Drivers for growth

Drivers for Growth

  • Leading asset position in the fastest growing producing areas:

    • San Juan Basin

    • Gulf of Mexico

    • South Texas

    • Rockies

  • Large E&P affiliate expands opportunity set

  • Significant integration savings and revenue enhancements

  • Leverage MLP with asset transfers


Epn corporate structure

El Paso Energy owns 30% of the Partnership

EPN is El Paso Energy’s primary vehicle for acquiring and developing midstream assets

GP interest incentivized to grow distributions

EPN Corporate Structure

El Paso Energy Partners Relationship to El Paso Energy

El Paso Energy

Corporation

100%

General

Partner

30.3% (including General Partner interest)

EPN

(Partnership)

Market Equity$0.7 bn

Debt 0.5

Enterprise Value$1.2 bn

Public LP

Unitholders

69.7%


Master limited partnerships

Master Limited Partnerships


Mlps midstream majors

MLPs & Midstream “Majors”

Master Limited Partnerships

  • Duke - TEPPCO Partners

  • El Paso Energy Partners

  • Enterprise Product Partners

  • Kinder Morgan Energy Partners

  • Williams Energy Partners


Mlp performance overview

MLP Performance Overview

October 31, 2000

YTD

Return

10/31/00

Unit Price

Current

Distribution

10/31/00

Yield

El Paso Energy Partners

Enterprise Products Partners

Kinder Morgan Energy Partners

TEPPCO Partners

S&P 500 Index

47.5%

51.1

22.4

31.7

<1.8%>

$25.88

$25.81

$47.50

$23.44

$2.20

$2.10

$3.40

$2.10

8.5%

8.1%

7.2%

9.0%


Ideal mlp assets

Ideal MLP Assets

  • Predictable cash flow

    • No commodity price/volume exposure

    • Low maintenance capital requirements

    • Stable financial history

  • Focused on free cash flow generating capability not earnings

  • Immediately accretive to LP distributions

  • Leveragability; minimize equity dilution


Key mlp advantages

Key MLP Advantages

  • Corporate finance tool to monetize assets

  • Tax efficient structure

  • Maintain operating control of key assets

  • Provides off-balance sheet financing

  • Free up corporate debt capacity

  • Lower cost of capital—acquisition edge


Final remarks

Final Remarks

  • Forecasted commodity prices ensure significant growth in midstream segment

  • Capital returns count. MLPs provide financial advantage

  • In mature markets there is room for only a handful of major players


Robert g phillips1

Robert G. Phillips

President

Midstream M&A Overview

Arthur Andersen Energy Symposium

November 28, 2000


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