AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JULY 21, 1998
REGISTRATION NO. 333-52537
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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AMENDMENT NO. 2
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
----------------
ENTERPRISE PRODUCTS PARTNERS L.P.
(NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 211112 76-0568219
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
GARY L. MILLER
2727 NORTH LOOP WEST 2727 NORTH LOOP WEST
HOUSTON, TX 77008 HOUSTON, TX 77008
(713) 880-6500 (713) 880-6500
(ADDRESS, INCLUDING ZIP CODE, AND (NAME, ADDRESS, INCLUDING ZIP CODE,
TELEPHONE NUMBER, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S INCLUDING AREA CODE, OF AGENT FOR
PRINCIPAL EXECUTIVE OFFICES) SERVICE)
COPIES TO:
VINSON & ELKINS L.L.P. BAKER & BOTTS, L.L.P.
1001 FANNIN ONE SHELL PLAZA
HOUSTON, TX 77002-6760 HOUSTON, TX 77002
(713) 758-2222 (713) 229-1234
ATTN: ALAN P. BADEN ATTN: JOSHUA DAVIDSON
----------------
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 registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [_]
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. [_]
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. [_]
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. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
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.
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++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Subject to Completion, dated July 21, 1998
PROSPECTUS
[LOGO OF ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE
PRODUCTS 11,250,000 COMMON UNITS
PARTNERS L.P.
APPEARS HERE] REPRESENTING LIMITED PARTNER INTERESTS
------------
The Common Units offered hereby represent limited partner interests in
Enterprise Products Partners L.P., a Delaware limited partnership ("Enterprise"
or the "Company"). The Company was recently formed to acquire, own and operate
substantially all of the natural gas liquids ("NGLs"), isomerization, MTBE and
propylene processing and distribution assets of Enterprise Products Company
("EPCO").
The Company will distribute to its partners, on a quarterly basis, all of its
Available Cash, which is generally all cash on hand at the end of a quarter, as
adjusted for reserves. The General Partner has broad discretion in making cash
disbursements and establishing reserves. The Company intends, to the extent
there is sufficient Available Cash from Operating Surplus (as defined,
generally cash on hand at closing plus cash receipts less operating expenses,
debt service, maintenance capital expenditures and cash reserves), to
distribute to each holder of common units representing limited partner
interests ("Common Units") at least $0.45 per Common Unit per quarter (the
"Minimum Quarterly Distribution") or $1.80 per Common Unit on an annualized
basis. See "Cash Distribution Policy."
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PURCHASERS OF COMMON UNITS SHOULD CONSIDER EACH OF THE FACTORS
DESCRIBED UNDER "RISK FACTORS," STARTING ON PAGE 23 OF THIS PROSPECTUS, IN
EVALUATING AN INVESTMENT IN THE COMPANY, INCLUDING, BUT NOT LIMITED TO, THE
FOLLOWING:
. THE MINIMUM QUARTERLY DISTRIBUTION IS NOT GUARANTEED, AND THE ACTUAL
AMOUNT OF DISTRIBUTIONS WILL DEPEND ON THE COMPANY'S FUTURE OPERATING
PERFORMANCE, TERMS OF THE COMPANY'S INDEBTEDNESS AND OTHER MATTERS WITHIN
THE DISCRETION OF THE GENERAL PARTNER.
. HOLDERS OF COMMON UNITS WILL HAVE LIMITED VOTING RIGHTS. EPCO WILL HAVE
SUFFICIENT VOTES TO PREVENT REMOVAL OF THE GENERAL PARTNER.
. THE COMPANY'S REVENUES AND PROFITABILITY ARE AFFECTED BY VARIOUS FACTORS
BEYOND THE COMPANY'S CONTROL, INCLUDING THE DEMAND AND MARKET PRICES FOR
NGL PRODUCTS, MTBE AND PROPYLENE.
. CONFLICTS OF INTEREST MAY ARISE BETWEEN THE GENERAL PARTNER AND ITS
AFFILIATES, ON THE ONE HAND, AND THE COMPANY AND THE UNITHOLDERS, ON THE
OTHER. THE PARTNERSHIP AGREEMENT CONTAINS CERTAIN PROVISIONS THAT LIMIT
THE LIABILITY AND REDUCE THE FIDUCIARY DUTIES OF THE GENERAL PARTNER TO
THE UNITHOLDERS.
. THE FEDERAL INCOME TAX BENEFITS OF OWNING COMMON UNITS DEPEND ON THE
CLASSIFICATION OF THE COMPANY AS A PARTNERSHIP FOR FEDERAL INCOME TAX
PURPOSES. THE COMPANY WILL NOT OBTAIN A RULING FROM THE IRS.
------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
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Underwriting
Price to Discounts and Proceeds to
Public Commissions(1) Company (2)
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Per Common Unit........................ $ $ $
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Total (3).............................. $ $ $
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(1) The Company, the Operating Partnership, the General Partner and EPCO have
agreed to indemnify the Underwriters against certain liabilities, including
liabilities under the Securities Act of 1933, as amended. See
"Underwriting."
(2) Before deducting expenses payable by the Company estimated at $2.2 million.
(3) The Company has granted the Underwriters a 30-day option to purchase up to
1,687,500 additional Common Units on the same terms and conditions as set
forth above, solely to cover over-allotments, if any. See "Underwriting."
If such option is exercised in full, the total Price to Public,
Underwriting Discounts and Commissions and Proceeds to Company will be
$ , $ and $ , respectively.
------------
The Common Units offered by this Prospectus are offered by the Underwriters
subject to prior sale, to withdrawal, cancellation or modification of the offer
without notice, to delivery to and acceptance by the Underwriters and to
certain further conditions. It is expected that delivery of the Common Units
will be made at the offices of Lehman Brothers Inc., New York, New York, on or
about , 1998.
------------
LEHMAN BROTHERS
A.G. EDWARDS & SONS, INC.
MERRILL LYNCH & CO.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
SALOMON SMITH BARNEY
DAIN RAUSCHER WESSELS RAYMOND JAMES & ASSOCIATES, INC.
A DIVISION OF DAIN
RAUSCHER
INCORPORATED
, 1998
[MAPS]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE COMMON UNITS.
SUCH TRANSACTIONS MAY INCLUDE THE PURCHASE OF COMMON UNITS FOLLOWING THE
PRICING OF THE OFFERING TO COVER A SYNDICATE SHORT POSITION IN THE COMMON
UNITS OR FOR THE PURPOSE OF MAINTAINING THE PRICE OF THE COMMON UNITS AND THE
IMPOSITION OF PENALTY BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
BEF(R) and Belvieu Environmental Fuels(R) are registered United States
trademarks of Belvieu Environmental Fuels. This Prospectus also contains
additional trademarks and servicemarks of the Company and its affiliates.
ii
Prior to this offering, there has not been a public market for the Common
Units. It is estimated that the initial public offering price will be between
$21.25 and $23.25 per Common Unit. See "Underwriting" for information relating
to the factors to be considered in determining the initial public offering
price. The Common Units have been approved for listing on the New York Stock
Exchange ("NYSE"), subject to official notice of issuance, under the symbol
"EPD."
To enhance the Company's ability to pay the Minimum Quarterly Distribution
on the Common Units during the Subordination Period (as defined, generally the
time during which distributions with respect to the Subordinated Units are
subordinated to distributions on the Common Units), which will generally
extend at least through June 30, 2003, each holder of Common Units will be
entitled to receive the Minimum Quarterly Distribution, plus any arrearages
thereon, before any distributions are made on the subordinated limited partner
interests (the "Subordinated Units"). Upon expiration of the Subordination
Period, all Subordinated Units will convert into Common Units on a one-for-one
basis and will thereafter participate pro rata with the other Common Units in
distributions of Available Cash. Under certain circumstances, up to 50% of the
Subordinated Units may convert into Common Units prior to the expiration of
the Subordination Period. See "Cash Distribution Policy."
The Common Units offered hereby will represent an aggregate 16.6% interest
in the Company and Enterprise Products Operating L.P., a Delaware limited
partnership, which, upon consummation of the transactions described herein,
will become the Company's subsidiary operating partnership (in such capacity,
the "Operating Partnership"). The general partner of the Company and the
Operating Partnership will be Enterprise Products GP, LLC (the "General
Partner"), a newly-formed Delaware limited liability company. The General
Partner will own an aggregate 2% interest in the Company and the Operating
Partnership. In addition, a wholly-owned subsidiary of EPCO will own
34,004,974 Common Units and 21,269,838 Subordinated Units, representing a
50.1% interest and 31.3% interest, respectively, in the Company and the
Operating Partnership on a combined basis. The Common Units and the
Subordinated Units are collectively referred to herein as the "Units." Holders
of the Common Units and the Subordinated Units are collectively referred to
herein as "Unitholders."
The Company will furnish or make available to record holders of Common Units
(i) within 120 days after the close of each fiscal year, an annual report
containing audited financial statements and a report thereon by its
independent public accountants and (ii) within 90 days after the close of each
quarter (other than the fourth quarter), a quarterly report containing
unaudited summary financial information. The Company will also furnish each
Unitholder with tax information within 90 days after the close of each
calendar year.
iii
TABLE OF CONTENTS
PROSPECTUS SUMMARY......................................................... 1
Enterprise Products Partners L.P.......................................... 1
Summary Historical and Pro Forma Financial and Operating Data............. 5
Summary of Risk Factors................................................... 7
Cash Available for Distribution........................................... 11
Company Structure and Management.......................................... 12
The Offering.............................................................. 14
Summary of Tax Considerations............................................. 20
FORWARD-LOOKING STATEMENTS................................................. 23
RISK FACTORS............................................................... 23
Risks Inherent in an Investment in the Company............................ 23
Risks Inherent in the Company's Business.................................. 27
Conflicts of Interest and Fiduciary Responsibilities...................... 30
Tax Risks................................................................. 32
THE TRANSACTIONS........................................................... 36
General................................................................... 36
Retained Assets and Liabilities........................................... 36
EPCO Agreement............................................................ 36
Bank Credit Facility...................................................... 37
USE OF PROCEEDS............................................................ 38
CAPITALIZATION............................................................. 40
DILUTION................................................................... 41
CASH DISTRIBUTION POLICY................................................... 42
General................................................................... 42
Quarterly Distributions of Available Cash................................. 43
Distributions from Operating Surplus during Subordination Period.......... 43
Distributions from Operating Surplus after Subordination Period........... 45
Incentive Distributions--Hypothetical Annualized Yield.................... 45
Distributions from Capital Surplus........................................ 46
Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels................................................................... 47
Distributions of Cash upon Liquidation.................................... 47
CASH AVAILABLE FOR DISTRIBUTION............................................ 50
SELECTED HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA............. 52
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS................................................. 54
General................................................................... 54
Results of Operations..................................................... 57
First Quarter 1998 Compared with First Quarter 1997....................... 57
Year Ended December 31, 1997 Compared to Year Ended December 31, 1996...... 58
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995...... 59
Liquidity and Capital Resources............................................ 60
Year 2000 Issues........................................................... 62
Accounting Standards....................................................... 62
Quantitative and Qualitative Market Risk Disclosures....................... 63
BUSINESS AND PROPERTIES..................................................... 64
General.................................................................... 64
Competitive Strengths...................................................... 65
Business Strategy.......................................................... 66
NGL Fractionation.......................................................... 67
Isomerization.............................................................. 72
MTBE Production............................................................ 75
Propylene Fractionation.................................................... 77
Other Businesses........................................................... 79
Competition................................................................ 81
Regulatory Matters......................................................... 82
Title to Properties........................................................ 87
Employees.................................................................. 88
Litigation................................................................. 88
MANAGEMENT.................................................................. 89
Company Management......................................................... 89
Directors, Executive Officers and Key Employees of the General Partner..... 89
Executive Compensation..................................................... 91
Compensation of Directors.................................................. 91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.............. 92
RELATIONSHIPS WITH EPCO AND RELATED PARTY TRANSACTIONS...................... 93
Ownership Interests of EPCO and its Affiliates in the Company.............. 93
Related Party Agreements Giving Effect to the Transactions................. 93
Related Party Transactions................................................. 93
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES........................ 94
Conflicts of Interest...................................................... 94
Fiduciary and Other Duties................................................. 96
DESCRIPTION OF THE COMMON UNITS............................................. 99
The Units.................................................................. 99
Transfer Agent and Registrar............................................... 99
Transfer of Common Units................................................... 99
THE PARTNERSHIP AGREEMENT................................................... 101
Organization and Duration.................................................. 101
Purpose.................................................................... 101
Power of Attorney.......................................................... 101
iv
Capital Contributions...................................................... 101
Limited Liability.......................................................... 102
Issuance of Additional Securities.......................................... 102
Amendment of Partnership Agreement......................................... 103
Merger, Sale or Other Disposition of Assets................................ 104
Termination and Dissolution................................................ 105
Liquidation and Distribution of Proceeds................................... 105
Withdrawal or Removal of
the General Partner....................................................... 105
Transfer of General Partner Interest....................................... 106
Change of Management Provisions............................................ 107
Limited Call Right......................................................... 107
Meetings; Voting........................................................... 107
Status as Limited Partner or Assignee...................................... 108
Non-citizen Assignees; Redemption.......................................... 108
Indemnification............................................................ 109
Books and Reports.......................................................... 109
Right to Inspect Company Books and Records................................. 110
Registration Rights........................................................ 110
UNITS ELIGIBLE FOR FUTURE SALE.............................................. 111
TAX CONSIDERATIONS.......................................................... 113
Legal Opinions and Advice.................................................. 113
Tax Rates and Changes in Federal Income Tax Laws........................... 114
Partnership Status......................................................... 114
Limited Partner Status.................................................... 116
Tax Consequences of Unit Ownership........................................ 116
Allocation of Company Income, Gain, Loss, Deduction and Credit............ 118
Tax Treatment of Operations............................................... 119
Disposition of Common Units............................................... 122
Uniformity of Units....................................................... 124
Tax-Exempt Organizations and Certain Other Investors...................... 124
Administrative Matters.................................................... 125
State, Local and Other Tax Considerations................................. 128
INVESTMENT IN THE COMPANY BY EMPLOYEE BENEFIT PLANS........................ 129
UNDERWRITING............................................................... 130
VALIDITY OF THE COMMON UNITS............................................... 133
EXPERTS.................................................................... 133
AVAILABLE INFORMATION...................................................... 133
INDEX TO COMBINED FINANCIAL STATEMENTS .................................... F-1
APPENDIX A--Form of Amended and Restated Agreement of Limited Partnership
of Enterprise Products Partners L.P. ..................................... A-1
APPENDIX B--Form of Application for Transfer of Common Units............... B-1
APPENDIX C--Glossary of Terms.............................................. C-1
APPENDIX D--Pro Forma Available Cash from Operating Surplus................ D-1
v
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and historical and pro forma
financial data appearing elsewhere in this Prospectus. The transactions related
to the formation of the Company, this offering and the other transactions to
occur in connection with this offering are referred to in this Prospectus as
the "Transactions." See "The Transactions." Unless otherwise specified, the
information in this Prospectus assumes that the Transactions have been
consummated and that the Underwriters' over-allotment option has not been
exercised. Except as the context otherwise requires, references to, or
descriptions of, assets and operations of the Company in this Prospectus
include the assets and operations of the Operating Partnership and its
subsidiary entities as well as the predecessors of the Company and references
to percentage ownership of the Company reflect the approximate effective
ownership interest in the Company and the Operating Partnership on a combined
basis. References herein to average daily production and average daily
production capacity at the Company's facilities are based on calendar days. A
glossary of certain terms used in this Prospectus is included as Appendix C to
this Prospectus.
ENTERPRISE PRODUCTS PARTNERS L.P.
THE COMPANY
The Company is a leading integrated provider of processing and transportation
services to producers of NGLs and consumers of NGL products. The Company (i)
fractionates for a processing fee mixed NGLs produced as by-products of oil and
natural gas production into their component products: ethane, propane,
isobutane, normal butane and natural gasoline ("NGL products"); (ii) converts
normal butane to isobutane through the process of isomerization; (iii) produces
MTBE from isobutane and methanol; and (iv) transports NGL products to end users
by pipeline and railcar. The Company also separates high purity propylene from
refinery-sourced propane/propylene mix and transports high purity propylene to
plastics manufacturers by pipeline. Products processed by the Company generally
are used as feedstocks in petrochemical manufacturing, in the production of
motor gasoline and as fuel for residential and commercial heating. In 1997, on
a pro forma basis, the Company had revenues, combined EBITDA and EBITDA in
unconsolidated affiliates and net income of $1.0 billion, $119.4 million and
$87.0 million, respectively.
The Company's processing operations are concentrated in Mont Belvieu, Texas,
which is the hub of the domestic NGL industry and is adjacent to the largest
concentration of refineries and petrochemical plants in the United States. The
facilities operated by the Company at Mont Belvieu include: (i) one of the
largest NGL fractionation facilities in the United States with an average
production capacity of 210,000 barrels per day; (ii) the largest butane
isomerization complex in the United States with an average isobutane production
capacity of 116,000 barrels per day; (iii) one of the largest MTBE production
facilities in the United States with an average production capacity of 14,800
barrels per day; and (iv) two propylene fractionation units with an average
combined production capacity of 30,000 barrels per day. The Company owns all of
the assets at its Mont Belvieu facility except for the NGL fractionation
facility, in which it owns an effective 37.0% economic interest; one of the
propylene fractionation units, in which it owns a 54.6% interest and controls
the remaining interest through a long-term lease; the MTBE plant, in which it
owns a 33 1/3% economic interest; and one of its three isomerization units and
one deisobutanizer which are held under long-term leases with purchase options.
The Company also owns and operates approximately 35 million barrels of storage
capacity at Mont Belvieu and elsewhere that are an integral part of its
processing operations, a network of approximately 500 miles of pipelines along
the Gulf Coast and an NGL fractionation facility in Petal, Mississippi with an
average production capacity of 7,000 barrels per day. The Company also leases
and operates one of only two commercial NGL import/export terminals on the Gulf
Coast.
The Company's operating margins are derived from services provided to tolling
customers and from merchant activities. Over the past five years, volumes from
toll processing operations and merchant activities
1
accounted for an average of approximately 77% and 23% of the Company's total
sales volumes, respectively. In its toll processing operations, the Company
does not take title to the product and is simply paid a fee based on volumes
processed. The Company's profitability from toll processing operations depends
primarily on the volumes of NGLs and refinery-sourced propane/propylene mix
processed and transported and the level of associated fees charged to its
customers. The profitability of the Company's toll processing operations is
largely unaffected by short-term fluctuations in the prices for oil, natural
gas or NGLs. In its merchant activities, the Company takes title to feedstock
products and sells processed end products. The Company's profitability from
merchant activities is dependent on the prices of its feedstocks and end
products, which typically vary on a seasonal basis. In its merchant activities,
the Company generally seeks to reduce commodity price exposure by matching the
timing and price of its feedstock purchases with sales of end products.
The Company has expanded rapidly since its inception in 1968, primarily
through internal growth and the formation of joint ventures. During the four
years ended December 31, 1997, the Company's EBITDA and its EBITDA in
unconsolidated affiliates increased on a combined basis at a compound annual
rate of 19.2%. This growth reflects the increased demand for NGL processing due
to increased domestic natural gas production and crude oil refining and
increased demand for processed NGLs in the petrochemical industry. Over the
last six years the Company has increased its NGL fractionation capacity by
approximately 27%, built a third isomerization unit that increased its
isobutane production capacity by approximately 60%, increased deisobutanizer
capacity by approximately 54%, constructed a second propylene fractionation
unit which approximately doubled production capacity and made its investment in
the MTBE facility at Mont Belvieu. The Company believes that the demand for its
services will continue to increase, principally as a result of expected
increases in natural gas production, particularly in the Gulf of Mexico, and
generally increasing domestic and worldwide petrochemical production.
Accordingly, the Company has initiated several new projects, including three
that are currently in construction.
COMPETITIVE STRENGTHS
The Company believes that it is well positioned to compete in the NGL
processing industry and that its most significant competitive strengths are:
. Strategic Location. The Company's operations are strategically located on
the Gulf Coast, the most significant marketplace for domestic and
imported NGLs due to the availability of processing, storage and import
facilities, pipeline distribution systems and petrochemical and refinery
end-product demand. The Company can access domestic NGL supplies from the
Gulf of Mexico, East Texas/Louisiana, Mid-Continent, West Texas/New
Mexico and Rocky Mountain regions and can also access imported supplies
via its import/export facility on the Houston ship channel. The Company
supplies NGL products, MTBE and high purity propylene to consumers
located principally in the Gulf Coast, the region with the largest
concentration of petrochemical plants and refineries in the United
States. In 1997, the Gulf Coast accounted for the production of
approximately 55% of domestic NGLs and for approximately 63% of domestic
demand for NGL products.
. Significant Market Position. The Company is a leading participant in each
of its processing businesses. The Company's Mont Belvieu NGL
fractionation facilities account for approximately 35% of the NGL
fractionation capacity at Mont Belvieu and approximately 16% of total
domestic commercial NGL fractionation capacity (excluding capacity at
captive facilities of producers who fractionate their own NGL production,
primarily for internal use). The Company's butane isomerization units
account for more than 70% of the commercial isobutane production capacity
in the United States, and the Company's propylene fractionation units
represent approximately 23% of domestic commercial production capacity
for high purity propylene.
. Large-Scale Integrated Operations. The Company believes that its
operating costs are significantly lower than those of its competitors
because of the efficiencies and integrated design of its Mont Belvieu
2
facilities. The Company engineered its facilities to incorporate
efficient gas turbines, a proprietary heat pump design and cogeneration
technology to reduce energy costs, which are the largest component of
operating costs in NGL processing. Because of its integrated operations,
the Company also is able to profitably use by-products such as
propane/propylene mix, mixed butanes, hydrogen and natural gasoline in
its own plants and distribution systems, resulting in fuel and feedstock
cost reductions and additional sales revenue. Additionally, the Company's
infrastructure, available land and storage assets at Mont Belvieu provide
it with a platform for cost-effective expansion.
. Strategic Relationships with Major Oil, Natural Gas and Petrochemical
Companies. The Company has long-term relationships with many of its
suppliers and customers, including Amoco, ARCO Chemical, Burlington
Resources, Enron, Equistar, Exxon, Huntsman, Mitchell Energy, Mobil,
Montell, Shell, Sun, Texaco, Union Pacific Resources and Williams. The
co-owners of the Mont Belvieu fractionation facility include Burlington
Resources, Texaco and Union Pacific Resources, each of which is a
significant producer of NGLs and accounts for a substantial portion of
the NGLs processed at the facility. The Company's co-owners in the MTBE
production facility are Sun and Mitchell Energy. Sun has contracted to
purchase all of the MTBE produced by the facility through May 2005, and
Sun and Mitchell Energy have each contracted to deliver normal butane to
the Company's isomerization facilities for processing in order to satisfy
their obligations to supply isobutane to the MTBE production facility. In
addition, the Company built its first propylene fractionation unit in
1979 jointly with Montell, which is now a Shell subsidiary. Pursuant to
long-term contracts, Montell has purchased a substantial portion of the
production from this unit since it was built. The Company believes that
its status as an independent operator that generally does not compete
with the petrochemical and refining operations of its customers is an
important contributor to the strength of these long-term relationships.
. Experienced Operator. The Company has historically operated substantially
all of its processing and transportation assets. As one of the leading
integrated providers of NGL-related services, the Company has established
a reputation in the industry as a reliable and cost-effective operator.
By virtue of its successful operating record and substantial
infrastructure, the Company believes it is well positioned to continue to
operate as a large-scale processor of NGLs and other products for its
customers.
. Significant Financial Flexibility. In connection with this offering, the
Company will enter into a $200.0 million bank credit facility that
includes a $50.0 million working capital facility and a $150.0 million
revolving term loan facility. In connection with the closing of this
offering, the Company expects to borrow approximately $89.2 million under
the revolving term loan facility. The Company will also have the ability
to issue new Units, which, combined with its substantial borrowing
capacity, should give the Company the resources to finance strategic
opportunities as they arise. Such opportunities may include new projects,
joint ventures or acquisitions.
. Experienced Management Team. The Company's senior management team
averages more than 30 years of industry experience and more than 18 years
with the Company.
BUSINESS STRATEGY
The Company's business strategy is to manage its operations in a manner that
will enable it to pay the Minimum Quarterly Distribution on all the Units and
to increase the per Unit value of the Company's assets and cash flow. The
Company intends to pursue this strategy principally by:
. Capitalizing on Expected Increases in NGL Production. The Company
believes that production of both oil and natural gas in the Gulf of
Mexico will continue to increase over the next several years. The Company
intends to capitalize on its existing infrastructure, market position,
strategic relationships and financial flexibility to expand its
operations to meet the anticipated increased demand for NGL processing
services. Of particular significance will be production associated with
the development of natural gas fields in Mobile Bay and the Gulf of
Mexico offshore Louisiana, which are expected to produce natural gas with
significantly higher NGL content than typical domestic production. The
3
Company believes that the Gulf Coast is the only major marketplace that
has sufficient storage facilities, pipeline distribution systems and
petrochemical and refining demand to absorb this new NGL production.
. Expanding through Construction of Identified New Facilities. The Company
has entered into a letter of intent to participate in a joint venture to
own a new 60,000 barrel per day NGL fractionation facility (expandable to
100,000 barrels per day) near Baton Rouge, Louisiana that will be
constructed and operated by the Company and will service NGL production
from the Mobile Bay/Pascagoula and Louisiana areas. As part of this
project, the Company has also entered into letters of intent to
participate in the Tri-States and Wilprise NGL pipeline systems, which
will transport NGLs from Mobile Bay to near Baton Rouge. The Company is
participating in a joint venture to own an NGL product refrigeration unit
(the "NGL Product Chiller") that will be constructed and operated by the
Company at its NGL import/export facility. This NGL Product Chiller will
improve the Company's ability to load refrigerated butane and propane
onto tankers for export.
The Company's participation in these new projects is described in the
following table:
ESTIMATED
COST TO THE COMPANY'S
PLANNED START-UP COMPANY OWNERSHIP
PROJECT STATUS DATE (IN MILLIONS) PERCENTAGE
------------------------ --------------- ------------------- ------------- ----------
Baton Rouge
Fractionator........... In construction First Quarter 1999 $20.0 26.5%
Tri-States Pipeline..... In construction First Quarter 1999 10.0 16.7%
Wilprise Pipeline....... In construction Fourth Quarter 1998 8.0 33.3%
NGL Product Chiller..... In design Third Quarter 1999 8.5 50.0%
-----
$46.5
=====
. Investing with Strategic Partners. The Company will continue to pursue
joint investments with oil and natural gas producers that can commit
feedstock volumes to new facilities or with petrochemical companies that
can agree to purchase a significant portion of the offtake from new
facilities. For example, the Company will be partners with Amoco, Exxon
and Williams on the Baton Rouge fractionation facility; with Amoco, Duke,
Koch Industries, Tejas (a Shell subsidiary) and Williams on the Tri-
States pipeline; and with Amoco and Williams on the Wilprise pipeline.
The Company believes that commitments from producers who will commit NGL
volumes to new fractionation facilities and pipelines are central to
establishing the viability of new investments in the NGL processing and
transportation industry.
. Expanding Through Acquisitions. The Company intends to analyze potential
acquisitions, joint ventures or similar transactions with businesses that
operate in complementary markets and geographic regions. In recent years,
major oil and natural gas companies have sold non-strategic assets
including assets in the mid-stream natural gas industry. The Company
believes this trend will continue and further expects independent oil and
natural gas companies to consider similar options.
. Managing Commodity Price Exposure. A substantial portion of the Company's
operations are conducted pursuant to tolling contracts or involve NGL
transportation where the Company does not take title to its customer's
products, but rather processes or transports a raw feedstock for a fee.
When the Company does take title to the products it processes, it
generally attempts to match the timing and price of its feedstock
purchases with those of the sales of end products so as to reduce
exposure to fluctuations in commodity prices.
4
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth for the periods and at the dates indicated,
selected historical and pro forma financial and operating data for the Company.
The selected historical financial data (except for EBITDA of unconsolidated
affiliates) have been derived from the Company's audited financial statements
for the periods indicated. The selected historical income statement data for
each of the three years in the period ended December 31, 1997 and the selected
balance sheet data for each of the two years in the period ended December 31,
1997 should be read in conjunction with the audited financial statements for
such periods included elsewhere in this Prospectus. EBITDA of unconsolidated
affiliates has been derived from the audited financial statements of such
entities for the periods indicated. The selected historical data for the three-
month periods ending March 31, 1997 and 1998 are derived from the Company's
unaudited financial statements included elsewhere in this Prospectus and should
be read in conjunction therewith. In the Company's opinion, each of the
unaudited financial statements include all adjustments, consisting of normal
recurring adjustments, necessary for a fair statement of the results of the
unaudited periods. The selected pro forma financial and operating data of the
Company are derived from the unaudited pro forma consolidated financial
statements included elsewhere in this Prospectus and should be read in
conjunction therewith. See also "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The dollar amounts in the table
below, except per Unit data, are in thousands.
PRO FORMA
PRO FORMA THREE MONTHS THREE MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED MARCH 31, ENDED
-------------------------------------------------- DECEMBER 31, ------------------ MARCH 31,
1993 1994 1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- -------- ---------- ------------ -------- -------- ------------
INCOME STATEMENT DATA:
Revenues............... $551,054 $586,609 $790,080 $999,506 $1,020,281 $1,020,281 $255,652 $190,517 $190,517
Operating costs and
expenses.............. 505,454 533,929 726,207 906,367 937,068 935,968 229,136 181,447 180,827
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Operating margin....... 45,600 52,680 63,873 93,139 83,213 84,313 26,516 9,070 9,690
Selling, general and
administrative
expenses.............. 21,768 17,826 22,250 24,227 23,060 12,000 6,636 5,754 3,000
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Operating income....... 23,832 34,854 41,623 68,912 60,153 72,313 19,880 3,316 6,690
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Interest expense....... (26,131) (25,411) (27,567) (26,310) (25,717) (5,993) (5,967) (6,734) (1,498)
Interest income........ 1,809 2,477 554 2,705 1,934 5,230 587 275 927
Equity in income of
unconsolidated
affiliates:
Mont Belvieu
Associates(1)....... 3,095 7,257 6,167 6,004 6,377 6,377 1,352 1,947 1,947
Belvieu Environmental
Fuels(2)............ -- -- 6,107 9,752 9,305 9,305 1,668 875 875
Gain (loss) on sale of
assets................ -- 4,271 7,948 -- (155) (155) -- -- --
Other income
(expense), net........ 38 45 305 364 793 793 1,065 2 2
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Income before minority
interest.............. 2,643 23,493 35,137 61,427 52,690 87,870 18,585 (319) 8,943
Minority interest(3)... (26) (235) (351) (614) (527) (879) (186) 3 (89)
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Net income............. $ 2,617 $ 23,258 $ 34,786 $ 60,813 $ 52,163 $ 86,991 $ 18,399 $ (316) $ 8,854
======== ======== ======== ======== ========== ========== ======== ======== ========
Net income per
Unit(4)............... $ 1.29 $ 0.13
========== ========
BALANCE SHEET DATA (AT
PERIOD END):
Total assets........... $526,372 $573,348 $610,931 $711,151 $ 697,713 $ 713,979 $697,609 $683,626 $753,168
Long-term debt......... 291,395 268,585 281,656 255,617 230,237 89,200 252,741 227,363 89,200
Combined
equity/Partner's
equity................ 158,001 189,366 198,815 266,021 311,885 559,861 297,440 342,885 551,849
OTHER FINANCIAL DATA:
Cash flows from
Operating Activities.. $ 24,326 $ 49,997 $ 12,212 $ 91,431 $ 57,795 $ -- $ 15,666 $(35,989) $ --
Cash flows from
Investing Activities.. (19,099) (36,944) (9,233) (57,725) (30,982) -- (10,232) (3,648) --
Cash flows from
Financing Activities.. (18,166) (21,973) 11,995 (24,930) (26,551) -- (8,353) (8,234) --
EBITDA(5).............. 46,702 55,430 65,406 87,109 79,882 94,986 25,535 8,219 12,153
EBITDA of
unconsolidated
affiliates(6)......... 4,859 7,198 18,520 25,012 24,372 24,371 5,202 4,825 4,838
OPERATING DATA(7):
Fractionation
Production........... 145 158 158 166 189 189 170 207 207
Volume from tolling
operations.......... 95% 94% 86% 90% 96% 96% 95% 96% 96%
Isomerization
Production........... 66 66 67 71 67 67 58 62 62
Volume from tolling
operations.......... 66% 68% 86% 84% 92% 92% 88% 75% 75%
MTBE
Production........... -- 8 10 13 14 14 14 10 10
Volume from tolling
operations.......... -- -- -- -- -- -- -- -- --
Propylene
Fractionation
Production........... 16 14 16 16 26 26 23 24 24
Volume from tolling
operations.......... 36% 35% 35% 33% 47% 47% 30% 49% 49%
See notes on following page
5
(1) Consists of the Company's 49% economic interest in Mont Belvieu Associates,
a general partnership that owns a 50% undivided interest in the NGL
fractionation facilities operated by the Company at Mont Belvieu. The
Company directly owns an additional 12.5% undivided interest in such NGL
fractionation facilities, giving it an effective 37.0% economic interest in
the facilities. The revenues and costs associated with this 12.5% interest
are included in the Company's revenues and operating costs and expenses.
(2) Consists of the Company's 33 1/3% economic interest in Belvieu
Environmental Fuels ("BEF"), a general partnership that owns the MTBE
facility operated by the Company at Mont Belvieu.
(3) Reflects the General Partner's 1% minority interest in the Operating
Partnership's net income.
(4) Net income per Unit is computed by dividing the limited partners' 99%
interest in net income by the number of Units expected to be outstanding at
the closing of this offering.
(5) EBITDA is defined as net income plus depreciation and amortization and
interest expense less equity in income of unconsolidated affiliates. EBITDA
should not be considered as an alternative to net income, operating income,
cash flow from operations or any other measure of financial performance
presented in accordance with generally accepted accounting principles.
EBITDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution, but provides additional
information for evaluating the Company's ability to make the Minimum
Quarterly Distribution. Management uses EBITDA to assess the viability of
projects and to determine overall rate of returns on alternative investment
opportunities. Because EBITDA excludes some, but not all, items that affect
net income and this measure may vary among companies, the EBITDA data
presented above may not be comparable to similarly titled measures of other
companies.
(6) Represents the Company's pro rata share of net income plus depreciation and
amortization and interest expense of the unconsolidated affiliates. After
the purchase of the Company's pro rata share of bank debt of BEF and Mont
Belvieu Associates, EBITDA of unconsolidated affiliates will closely
approximate the aggregate cash that the Company will receive from its
investment in BEF and Mont Belvieu Associates.
(7) Production volumes represent average daily production in thousands of
barrels per day. Production volume for fractionation includes gross
production volumes for the NGL fractionation facilities in which the
Company owns an effective 37.0% economic interest. Production volume for
MTBE reflects gross production volumes for the BEF facility in which the
Company owns an undivided 33 1/3% economic interest. MTBE production at
the BEF facility began in 1994.
6
SUMMARY OF RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Company will be
subject are similar to those that would be faced by a corporation engaged in a
similar business. Prospective purchasers of the Common Units should consider
the following risk factors in evaluating an investment in the Common Units as
well as the more detailed information described under "Risk Factors" starting
on page 23 of this Prospectus.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
. The Minimum Quarterly Distribution is not guaranteed. The actual amounts
of cash distributions may fluctuate and will depend on the Company's
future operating performance. Cash distributions are dependent primarily
on cash flow, including cash flow from reserves and working capital
borrowings, and not solely on profitability, which is affected by non-
cash items. Therefore, cash distributions might be made during periods
when the Company records losses and might not be made during periods when
the Company records profits. Decisions of the General Partner with
respect to the amount and timing of cash expenditures, borrowings,
issuances of additional Units and reserves will affect the amount of
Available Cash.
. Pro forma Available Cash from Operating Surplus generated during the
twelve months ended March 31, 1998 (as calculated in Appendix D) would
have been sufficient to cover the Minimum Quarterly Distribution for such
period on all of the Common Units, but would have been insufficient by
approximately $18.1 million to cover the Minimum Quarterly Distribution
on all the Subordinated Units and the related distribution on the general
partner interests.
. In establishing the terms of this offering, including the number and
initial public offering price of the Common Units, the number of Common
Units and Subordinated Units to be received by EPCO and the Minimum
Quarterly Distribution, the Company has relied on certain assumptions
concerning its operations. Whether the assumptions are realized is not,
in many cases, within the control of the Company and cannot be predicted
with any degree of certainty. In the event that the Company's assumptions
are not realized, the actual Available Cash from Operating Surplus
generated by the Company could be substantially less than that currently
expected and may be less in any quarter than the Minimum Quarterly
Distribution.
. The General Partner will manage and operate the Company. Holders of
Common Units will have no right to elect the General Partner on an annual
or other continuing basis and will have only limited voting rights on
matters affecting the Company's business. The General Partner may not be
removed except pursuant to the vote of the holders of at least 66 2/3% of
the outstanding Units (including Units owned by the General Partner and
its affiliates). EPCO will own, through a wholly-owned subsidiary, 83.1%
of the combined Common Units and Subordinated Units, giving it the
ability to prevent the General Partner's removal. As a result, holders of
Common Units will have limited influence on matters affecting the
operations of the Company.
. Subject to certain limitations, the Company may issue additional Common
Units and other interests in the Company, the effect of which may be to
dilute the value of the interests of the then-existing holders of Common
Units in the net assets of the Company, dilute the interests of holders
of Common Units in cash distributions by the Company or reduce the
benefits to the holders of the Common Units provided by the subordination
feature of the Subordinated Units.
. The Company's Amended and Restated Agreement of Limited Partnership (the
"Partnership Agreement") contains certain provisions that may have the
effect of discouraging a person or group from attempting to remove the
General Partner or otherwise change the management of the Company. The
effect of these provisions may be to diminish the price at which the
Common Units will trade under certain circumstances.
. Purchasers of Common Units in this offering will experience substantial
and immediate dilution in net tangible book value of $14.12 per Common
Unit from the initial public offering price (assuming an initial public
offering price of $22.25 per Common Unit).
7
. Prior to making any cash distributions on the Common Units, the Company
will reimburse the General Partner and its affiliates for certain
expenses incurred by the General Partner and its affiliates on behalf of
the Company. Such reimbursable expenses will include expenses incurred by
EPCO under an agreement with the General Partner and the Company (the
"EPCO Agreement"), pursuant to which EPCO will manage the business and
affairs of the Company. Pursuant to the EPCO Agreement, EPCO will be
reimbursed at cost for all expenses that it incurs in connection with
managing the business and affairs of the Company, except that EPCO will
not be entitled to be reimbursed for any selling, general and
administrative expenses. In lieu of reimbursement for such selling,
general and administrative expenses, EPCO will be entitled to receive an
annual administrative services fee that will initially equal $12.0
million. The General Partner, with approval and consent of the Audit and
Conflicts Committee of the Board of Directors of the General Partner (the
"Audit and Conflicts Committee"), will have the right to agree to
increases in such administrative services fee of up to 10% each year
during the 10-year term of the EPCO Agreement and may agree to further
increases in such fee in connection with expansions of the Company's
operations through the construction of new facilities or the completion
of acquisitions that require additional management personnel. The
reimbursement by the Company of such expenses and the payment of such fee
could adversely affect the ability of the Company to make cash
distributions to the Unitholders.
. Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be
determined through negotiations between the General Partner and the
representatives of the Underwriters. No assurance can be given as to the
market prices at which the Common Units will trade.
. If at any time not more than 15% of the then-issued and outstanding
Common Units are held by persons other than the General Partner and its
affiliates, the General Partner will have the right, which it may assign
to any of its affiliates or the Company, to acquire all, but not less
than all, of the remaining Common Units held by such unaffiliated persons
at a price generally equal to the then-current market price of the Common
Units. As a consequence, a holder of Common Units may be required to sell
his Common Units at a time when he may not desire to sell them or at a
price that is less than the price he would desire to receive upon such
sale. A holder may also incur a tax liability upon such sale.
. Under certain circumstances, holders of the Common Units could lose their
limited liability and could become liable for amounts improperly
distributed to them by the Company.
. The holders of the Common Units have not been represented by counsel in
connection with this offering, including the preparation of the
Partnership Agreement or the other agreements referred to herein or in
establishing the terms of this offering.
RISKS INHERENT IN THE COMPANY'S BUSINESS
. The Company's revenues and profitability are affected by various factors
beyond the Company's control, including the demand for NGL products, MTBE
and propylene, which are in turn affected by general economic conditions,
petrochemical production, motor gasoline production and regulations
affecting the composition of motor gasoline and by the supply of mixed
NGLs for fractionation, which is in turn affected primarily by the level
of domestic natural gas production, domestic crude oil refining and
imports of mixed butanes. Additionally, to the extent the Company takes
title to products, its profitability can be affected by changes in the
market prices for, and the price differentials between, NGL products.
. The Company currently derives a significant portion of its revenues from
transactions with certain key customers. Although some of these customers
have ownership interests in the facilities whose services
8
they use, the loss of these or other significant customers could
materially adversely affect the Company's results of operations.
. The Company competes with large oil, natural gas and petrochemical
companies, certain of whom have greater financial resources than the
Company.
. The Company has entered into non-binding letters of intent for several
construction projects. There can be no assurance that definitive
agreements for these projects will ultimately be signed, what the terms
of these agreements will be, that the projects will be consummated or, if
consummated, that the projects will be completed on time or within
budget.
. The Company's operations are subject to all operating hazards and risks
normally incidental to processing, storing and transporting and otherwise
providing NGLs, MTBE and propylene for use by third parties. Although the
Company maintains insurance against these risks, there can be no
assurance that such insurance will be adequate to protect the Company and
that such insurance will be available in the future on commercially
reasonable terms.
. The Company's businesses are subject to governmental regulation with
respect to environmental, safety and other regulatory matters.
. The Company believes that its success will depend to a significant extent
upon the efforts and abilities of EPCO's senior management team. The
failure by EPCO to retain the key members of its senior management team
or to implement a succession plan to prepare qualified individuals to
join the senior management team upon the retirement of certain
individuals could adversely affect the financial condition or results of
operations of the Company.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
. The General Partner and its affiliates may have conflicts of interest
with the Company and the Unitholders. The Partnership Agreement contains
certain provisions that limit the liability and reduce the fiduciary
duties of the General Partner to the Unitholders, as well as provisions
that may restrict the remedies available to Unitholders for actions that
might, without such limitations, constitute breaches of fiduciary duty.
Holders of Common Units are deemed to have consented to certain actions
and conflicts of interest that might otherwise be deemed a breach of
fiduciary or other duties under applicable state law.
. Decisions of the General Partner with respect to the amount and timing of
borrowings, cash expenditures, asset sales or acquisitions, the issuance
of additional securities and the creation, reduction or increase of
reserves will affect whether, or the extent to which, there is sufficient
Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distribution Levels on all Units in a given
quarter. In addition, actions by the General Partner may have the effect
of enabling the General Partner or its affiliates to receive
distributions on the Subordinated Units or Incentive Distributions (as
defined, generally the right of the General Partner to receive an
increasing percentage of distributions after the Target Distributions
Levels) or hastening the expiration of the Subordination Period or the
conversion of Subordinated Units into Common Units.
. The Partnership Agreement provides that the General Partner will
generally be restricted from engaging in any business activities other
than those incidental to its ownership of interests in the Company.
Except for the restrictions set forth in the EPCO Agreement, EPCO and its
affiliates (other than the General Partner) will be free to engage in any
type of business or activity whatsoever, including those that may be in
direct competition with the Company. Pursuant to the EPCO Agreement, for
so long as the General Partner is an affiliate of EPCO, EPCO and its
affiliates will be prohibited from engaging in any business or activity
within North America that is of the type conducted by EPCO and its
affiliates as of May 31, 1998 (other than businesses or activities of the
type associated with the Retained Assets), unless EPCO
9
or such affiliate has first presented the opportunity to engage in such
business or activity to the Company and the General Partner (with the
concurrence of the Audit and Conflicts Committee) has elected not to have
the Company pursue such opportunity. There can be no assurance, however,
that there will not be competition between the Company and affiliates of
the General Partner in the future.
TAX RISKS
. The availability to a Common Unitholder of the federal income tax
benefits of an investment in the Company depends on the classification of
the Company as a partnership for federal income tax purposes. Assuming
the accuracy of certain factual matters as to which the General Partner
and the Company have made representations, Vinson & Elkins L.L.P.,
special counsel to the General Partner and the Company, is of the opinion
that, under current law, the Company will be classified as a partnership
for federal income tax purposes.
. No ruling has been requested from the Internal Revenue Service (the
"IRS") with respect to classification of the Company as a partnership for
federal income tax purposes or any other matter affecting the Company.
. A Unitholder will be required to pay income taxes on his allocable share
of the Company's income, whether or not he receives cash distributions
from the Company.
. Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such
persons. For example, much of the taxable income derived from the
ownership of a Common Unit by most organizations exempt from federal
income tax (including individual retirement accounts ("IRAs") and other
retirement plans) will be unrelated business taxable income and, thus,
will be taxable to such a Unitholder.
. In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely-held corporations), losses generated by the
Company will generally only be available to offset future income
generated by the Company and cannot be used to offset income from other
activities, including other passive activities or investments. Passive
losses which are not deductible because they exceed the Unitholder's
income generated by the Company may be deducted in full when the
Unitholder disposes of his entire investment in the Company to an
unrelated party in a fully taxable transaction.
. The General Partner has applied for registration of the Company with the
Secretary of the Treasury as a "tax shelter." No assurance can be given
that the Company will not be audited by the IRS or that tax adjustments
will not be made. Any adjustments in the Company's tax returns will lead
to adjustments in the Unitholders' tax returns and may lead to audits of
the Unitholders' tax returns and adjustments of items unrelated to the
Company.
. A Unitholder likely will be required to file state and local income tax
returns and pay state and local income taxes in some or all of the
various jurisdictions in which the Company does business or owns
property. The Company will initially own property and conduct business in
Alabama, Louisiana, Mississippi and Texas.
See "Risk Factors," "Cash Distribution Policy," "Cash Available for
Distribution," "Conflicts of Interest and Fiduciary Responsibilities," "The
Partnership Agreement" and "Tax Considerations" for a more detailed
description of these and other risk factors and conflicts of interest that
should be considered in evaluating an investment in the Common Units.
10
CASH AVAILABLE FOR DISTRIBUTION
The Company believes that, if its assumptions about operating conditions are
realized, the Company should have sufficient Available Cash from Operating
Surplus (including uncommitted cash on hand and borrowings under its working
capital facility) to enable the Company to distribute the Minimum Quarterly
Distribution on the Common Units and Subordinated Units to be outstanding
immediately after the consummation of this offering, and the related
distribution on the combined 2% interest of the General Partner, with respect
to each of its quarters at least through the quarter ending June 30, 2001. The
Company's belief is based on a number of assumptions, including assumptions
that (i) total operating margins generated from the Company's existing assets
will remain generally consistent with total margins recognized by the Company
in 1997; (ii) the Company's identified new projects will become operational as
scheduled and will result in anticipated levels of operating margins; (iii) the
Company will not experience any significant accidents or business
interruptions, regardless of whether such accidents or interruptions are
covered by insurance; (iv) there will be no regulatory changes that materially
adversely affect the Company's operations; and (v) market conditions in the NGL
industry and general economic conditions will not change substantially.
Although the Company believes such assumptions are within a range of
reasonableness, whether the assumptions are realized is not, in a number of
cases, within the control of the Company and cannot be predicted with any
degree of certainty. If the Company's assumptions are not realized, Available
Cash from Operating Surplus generated by the Company could be substantially
less than that currently expected and could, therefore, be insufficient to
permit the Company to make cash distributions at the levels described above.
For example, as discussed in "Management's Discussion and Analysis of Financial
Condition and Results of Operations--First Quarter 1998 Compared with First
Quarter 1997," the Company's results of operations in the first quarter of 1998
were substantially weaker than the first quarter of 1997 principally as a
result of reduced operating margins in the isomerization and propylene
fractionation businesses. During the second quarter of 1998, the Company has
experienced isomerization operating margins which are comparable to
isomerization margins earned in the second quarter of 1997. However, operating
margins in the propylene business remain weak, and there can be no assurance
that the improvements in the isomerization business will be sustained.
Accordingly, no assurance can be given that distributions of the Minimum
Quarterly Distribution or any other amounts will be made. The Company does not
intend to update the expression of belief set forth above. See "Cash
Distribution Policy."
The approximate amount of Available Cash from Operating Surplus needed to
distribute the Minimum Quarterly Distribution for four quarters on the Common
Units and Subordinated Units to be outstanding immediately after this offering
and the related distribution on the combined 2% interest of the General Partner
is as follows:
OVER-ALLOTMENT OVER-ALLOTMENT
OPTION IS NOT OPTION IS
EXERCISED EXERCISED
-------------- --------------
(IN MILLIONS)
Public Common Units......................... $ 20.3 $ 23.3
EPCO Common Units(1)........................ 61.2 61.2
EPCO Subordinated Units(1).................. 38.3 38.3
General Partner Interest(1)................. 2.4 2.5
------ ------
Total................................... $122.2 $125.3
====== ======
--------
(1) Such distributions will be made by the Company to a
subsidiary of EPCO, which will hold the Common Units
identified as EPCO Common Units and all of the
Subordinated Units, and to the General Partner, which
is also controlled by EPCO.
The amount of pro forma Available Cash from Operating Surplus generated
during 1997 was approximately $122.2 million. Such amount would have been
sufficient to cover the Minimum Quarterly Distribution for 1997 on all of the
Units and the related distribution on the general partner interest. The amount
of pro forma Available Cash from Operating Surplus generated during the twelve
months ended March 31, 1998 was approximately $104.1 million. Such amount would
have been sufficient to cover the Minimum Quarterly Distribution for such
period on all of the Common Units, but would have been insufficient by
approximately $18.1 million to cover the Minimum Quarterly Distribution on all
the Subordinated Units and the related distribution on the general partner
interest. The amounts of pro forma Available Cash from Operating Surplus were
derived in the manner set forth in Appendix D. The pro forma adjustments are
based upon currently available information and certain estimates and
assumptions. The pro forma financial statements do not purport to present the
results of operations of the Company had the Transactions actually been
completed as of the dates indicated. Furthermore, Available
11
Cash from Operating Surplus as defined in the Partnership Agreement is a cash
accounting concept, while the Company's historical and pro forma financial
statements have been prepared on an accrual basis. As a consequence, the amount
of pro forma Available Cash from Operating Surplus shown above should only be
viewed as a general indication of the amount of Available Cash from Operating
Surplus that might in fact have been generated by the Company had it been
formed in earlier periods. For definitions of Available Cash and Operating
Surplus, see the Glossary.
COMPANY STRUCTURE AND MANAGEMENT
The Company is a Delaware limited partnership recently formed to acquire, own
and operate substantially all of the NGL, isomerization, MTBE and propylene
processing and distribution assets of EPCO. The operations of the Company will
be conducted through, and the operating assets will be owned by, the Operating
Partnership and various subsidiary entities. Upon consummation of the
Transactions, the Company will own a 98.9899% limited partner interest in the
Operating Partnership, and the General Partner will own a 1% general partner
interest in the Company and a 1.0101% general partner interest in the Operating
Partnership. The General Partner therefore will own an aggregate 2% interest in
the Company and the Operating Partnership on a combined basis.
The General Partner will be responsible for the management and operation of
the Company's business. In accordance with the Partnership Agreement, the
Company, the General Partner and EPCO will enter into the EPCO Agreement
pursuant to which the senior management and employees of EPCO will continue to
manage and operate the Company's business. Pursuant to the EPCO Agreement, EPCO
will be reimbursed at cost for all expenses that it incurs in connection with
managing the business and affairs of the Company, except that EPCO will not be
entitled to be reimbursed for any selling, general and administrative expenses.
In lieu of reimbursement for such selling, general and administrative expenses,
EPCO will be entitled to receive an annual administrative services fee that
will initially equal $12.0 million. The General Partner, with the approval and
consent of the Audit and Conflicts Committee, will have the right to agree to
increases in such administrative services fee of up to 10% each year during the
10-year term of the EPCO Agreement and may agree to further increases in such
fee in connection with expansions of the Company's operations through the
construction of new facilities or the completion of acquisitions that require
additional management personnel.
Conflicts of interest may arise between the General Partner and its
affiliates, on the one hand, and the Company, the Operating Partnership and the
Unitholders, on the other, including conflicts relating to the compensation of
the directors, officers and employees of EPCO and/or the General Partner,
increases in the administrative services fee in accordance with the EPCO
Agreement and the determination of fees and expenses that are allocable to the
Company. The Audit and Conflicts Committee will consist of two independent
members of the General Partner's Board of Directors that will be available at
the General Partner's discretion to review matters involving conflicts of
interest. See "Management" and "Conflicts of Interest and Fiduciary
Responsibilities."
The Company's principal executive office is located at 2727 North Loop West,
Houston, Texas, 77008, and its telephone number is (713) 880-6500.
The following chart depicts the organization and ownership of the Company and
the Operating Partnership immediately after giving effect to the consummation
of the Transactions, including the sale of the Common Units offered hereby, and
assuming that the Underwriters' over-allotment option is not exercised. The
percentages reflected in the chart represent the approximate ownership interest
in each of the Company and the Operating Partnership individually and not on an
aggregate basis. Except in the chart, the ownership percentages referred to in
this Prospectus reflect the approximate effective ownership interest of the
Unitholders in the Company and the Operating Partnership on a combined basis.
The 2% ownership percentage of the General Partner referred to in this
Prospectus reflects the approximate effective ownership interest of the General
Partner in the Company and the Operating Partnership on a combined basis.
12
LOGO
[Chart appears here]
13
THE OFFERING
Securities Offered.......... 11,250,000 Common Units (12,937,500 Common Units
if the Underwriters' over-allotment option is
exercised in full).
Units to be Outstanding
After the Offering......... 45,254,974 Common Units and 21,269,838
Subordinated Units, representing an aggregate
66.7% and 31.3% limited partner interest in the
Company, respectively. If the Underwriters' over-
allotment option is exercised in full, 1,687,500
additional Common Units will be issued by the
Company, resulting in there being 46,942,474
Common Units and 21,269,838 Subordinated Units
outstanding, representing an aggregate 67.4% and
30.6% limited partner interest in the Company,
respectively.
Distributions of Available
Cash....................... Available Cash will generally be distributed 98%
to Unitholders and 2% to the General Partner
within 45 days after the end of each quarter.
Immediately after this offering, the public
Unitholders will own in the aggregate a 16.6%
limited partner interest in the Company and will
therefore generally be entitled to receive 16.6%
of Available Cash distributed. The remaining
distributions will be made to entities affiliated
with EPCO. If distributions of Available Cash
from Operating Surplus exceed specified target
levels ("Target Distribution Levels") that are in
excess of the Minimum Quarterly Distribution, the
General Partner will receive a percentage of such
excess distributions that will increase to up to
50% of the excess distributions above the highest
Target Distribution Level. See "Cash Distribution
Policy--Incentive Distributions--Hypothetical
Annualized Yield."
Distributions to Common and
Subordinated Unitholders... The Company intends, to the extent there is
sufficient Available Cash from Operating Surplus,
to distribute to each holder of Common Units at
least the Minimum Quarterly Distribution of $0.45
per Common Unit per quarter. The Minimum
Quarterly Distribution is not guaranteed and is
subject to adjustment as described under "Cash
Distribution Policy--Adjustment of Minimum
Quarterly Distribution and Target Distribution
Levels."
The first distribution to the Unitholders will be
made within 45 days after the quarter ending
September 30, 1998. The Minimum Quarterly
Distribution for the period from the closing of
this offering through September 30, 1998 will be
adjusted downward based on the actual length of
such period.
With respect to each quarter during the
Subordination Period, which will generally not
end prior to June 30, 2003, the Common
Unitholders will generally have the right to
receive the Minimum Quarterly Distribution, plus
any arrearages thereon ("Common Unit
Arrearages"), and the General Partner will have
the right to receive the related distribution on
its general partner interest, before any
14
distribution of Available Cash from Operating
Surplus is made to the Subordinated Unitholders.
This subordination feature will enhance the
Company's ability to distribute the Minimum
Quarterly Distribution on the Common Units during
the Subordination Period. Subordinated Units will
not accrue distribution arrearages. Upon
expiration of the Subordination Period, Common
Units will no longer accrue distribution
arrearages. See "Cash Distribution Policy."
Subordination Period........ The Subordination Period will generally extend
from the closing of this offering until the first
day of any quarter beginning after June 30, 2003
when the Conversion Test has been satisfied.
Generally, the Conversion Test will have been
satisfied when the Company has paid from
Operating Surplus, and generated from Adjusted
Operating Surplus, the Minimum Quarterly
Distribution on all Units for the three preceding
four-quarter periods.
Upon expiration of the Subordination Period, all
remaining Subordinated Units will convert into
Common Units on a one-for-one basis and will
thereafter participate pro rata with the other
Common Units in distributions of Available Cash.
See "Cash Distribution Policy--Distributions from
Operating Surplus during Subordination Period."
Early Conversion of
Subordinated Units......... If the Conversion Test has been met for any
quarter ending on or after June 30, 2001, 25% of
the Subordinated Units will convert into Common
Units. If the Conversion Test has been met for
any quarter ending on or after June 30, 2002, an
additional 25% of the Subordinated Units will
convert into Common Units.
The early conversion of the second 25% of
Subordinated Units may not occur until at least
one year following the early conversion of the
first 25% of Subordinated Units. See "Cash
Distribution Policy--Distributions from Operating
Surplus during Subordination Period."
Incentive Distributions..... If quarterly distributions of Available Cash
exceed the Target Distribution Levels, the
General Partner will receive distributions which
are generally equal to 15%, then 25% and then 50%
of the distributions of Available Cash that
exceed such Target Distribution Levels. The
Target Distribution Levels are based on the
amounts of Available Cash from Operating Surplus
distributed with respect to a given quarter that
exceed distributions made with respect to the
Minimum Quarterly Distribution and Common Unit
Arrearages, if any. See "Cash Distribution
Policy--Incentive Distributions--Hypothetical
Annualized Yield." The distributions to the
General Partner described above that are in
excess of its combined 2% interest are referred
to herein as the "Incentive Distributions."
15
Adjustment of Minimum
Quarterly Distribution and
Target Distribution
Levels.....................
The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that the Unitholders
receive distributions of Available Cash from
Capital Surplus or legislation is enacted or
existing law is modified or interpreted by the
relevant governmental authority in a manner that
causes the Company to be treated as an
association taxable as a corporation or otherwise
taxable as an entity for federal, state or local
income tax purposes. Available Cash from Capital
Surplus is any Available Cash distributed since
the commencement of the Company in excess of
cumulative Operating Surplus through the end of
the quarter prior to such distribution. If, as a
result of distributions of Available Cash from
Capital Surplus, the Unitholders receive a full
return of the initial public offering price of
the Common Units and any unpaid Common Unit
Arrearages, the distributions of Available Cash
payable to the General Partner will increase to
50% of all amounts distributed thereafter.
Although there are no restrictions in the
Partnership Agreement on the Company's ability to
distribute Available Cash from Capital Surplus at
any time, the Company does not anticipate that
there will be significant distributions
from Capital Surplus. See "Cash Distribution
Policy--General," "--Distributions from Capital
Surplus" and "--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
Company's Ability to Issue
Additional Units...........
The Partnership Agreement generally authorizes
the Company to issue an unlimited number of
additional limited partner interests and other
equity securities of the Company for such
consideration and on such terms and conditions as
shall be established by the General Partner in
its sole discretion without the approval of the
Unitholders. During the Subordination Period,
however, the Company may not issue equity
securities ranking prior or senior to the Common
Units or an aggregate of more than 22,625,000
Common Units (which number excludes Common Units
issued upon the exercise of the Underwriters'
over-allotment option, upon conversion of
Subordinated Units, pursuant to employee benefit
plans, upon conversion of the general partner
interest as a result of the withdrawal of the
General Partner or in connection with the making
of certain acquisitions or capital improvements
that are accretive on a per Unit basis) or an
equivalent number of securities ranking on a
parity with the Common Units, without the
approval of the holders of at least a Unit
Majority. A Unit Majority means, during the
Subordination Period, at least a majority of the
outstanding Common Units (excluding Common Units
held by the General Partner and its affiliates)
and, after the Subordination Period, at least a
majority of the outstanding Common Units. See
"The Partnership Agreement--Issuance of
Additional Securities."
16
Limited Call Right.......... If at any time not more than 15% of the issued
and outstanding Common Units are held by persons
other than the General Partner and its
affiliates, the General Partner may purchase all
of the remaining Common Units at a price
generally equal to the then current market price
of the Common Units. Following completion of this
offering, persons other than the General Partner
and its affiliates will hold approximately 24.9%
of the outstanding Common Units. See "The
Partnership Agreement--Limited Call Right."
Limited Voting Rights....... Unitholders will not have voting rights except
with respect to the following matters, for which
the Partnership Agreement in most cases requires
the approval of a Unit Majority: a sale or
exchange of all or substantially all of the
Company's assets, the removal or the withdrawal
of the General Partner, the election of a
successor General Partner, a dissolution or
reconstitution of the Company, a merger of the
Company, issuance of limited partner interests in
certain circumstances, approval of certain
actions of the General Partner (including the
transfer by the General Partner of its general
partner interest under certain circumstances) and
certain amendments to the Partnership Agreement,
including any amendment that would cause the
Company to be treated as an association taxable
as a corporation. After Subordinated Units
convert into Common Units (either upon
termination of the Subordination Period, early
conversion of a portion of the Subordinated Units
or removal of the General Partner without Cause),
holders of such Common Units will vote as a
single class together with the holders of the
other Common Units. Under the Partnership
Agreement, the General Partner generally will be
permitted to effect, without the approval of
Unitholders, amendments to the Partnership
Agreement that do not adversely affect
Unitholders. See "The Partnership Agreement."
Loss of Voting Rights in
Certain Circumstances......
Any person or group (other than the General
Partner and its affiliates) that acquires
beneficial ownership of 20% or more of the Common
Units will lose its voting rights with respect to
all of its Common Units. See "The Partnership
Agreement--Change of Management Provisions."
Removal and Withdrawal of
the General Partner........
Subject to certain conditions, the General
Partner may be removed upon the approval of the
holders of at least 66 2/3% of the outstanding
Units (including Units held by the General
Partner and its affiliates) and the election of a
successor general partner by the vote of the
holders of a Unit Majority. A meeting of holders
of the Common Units may be called only by the
General Partner or by the holders of 20% or more
of the outstanding Common Units. EPCO will own,
through a wholly-owned subsidiary, 83.1% of the
combined Common Units and Subordinated Units,
giving it the ability to prevent the General
Partner's removal. The General Partner has
17
agreed not to voluntarily withdraw as general
partner of the Company and the Operating
Partnership prior to June 30, 2008, subject to
limited exceptions, without obtaining the
approval of at least a majority of the
outstanding Common Units (excluding Common Units
held by the General Partner and its affiliates)
and furnishing an Opinion of Counsel. See "The
Partnership Agreement--Withdrawal or Removal of
the General Partner" and "--Meetings; Voting."
Consequences of Removal of
General Partner in Certain
Circumstances..............
If the General Partner is removed other than for
Cause, (i) the Subordination Period will end and
all outstanding Subordinated Units will
immediately convert into Common Units on a one-
for-one basis, (ii) any existing Common Unit
Arrearages will be extinguished and (iii) the
General Partner will have the right to convert
its general partner interest into Common Units or
to receive cash in exchange for such interests.
See "The Partnership Agreement--Change of
Management Provisions."
Liquidation Preference to
Common Unitholders.........
If the Company liquidates during the
Subordination Period, under certain
circumstances, holders of outstanding Common
Units will be entitled to receive more per Unit
in liquidating distributions than holders of
outstanding Subordinated Units. The per Unit
difference will be dependent upon the amount of
gain or loss recognized by the Company in
liquidating its assets and will be limited to the
Unrecovered Capital of a Common Unit and any
Common Unit Arrearages thereon. Under certain
circumstances there may be insufficient gain for
the holders of Common Units to fully recover all
such amounts, even though there may be cash
available for distribution to holders of
Subordinated Units. Following conversion of the
Subordinated Units into Common Units, all Units
will be treated the same upon liquidation of the
Company. See "Cash Distribution Policy--
Distributions of Cash upon Liquidation."
Use of Proceeds............. The net proceeds to the Company from the sale of
Common Units offered hereby are estimated to be
approximately $232.5 million, assuming an initial
public offering price of $22.25 per Common Unit,
after deducting underwriting discounts and
commissions and other expenses of this offering.
The Company will contribute such net proceeds to
the Operating Partnership, and the Operating
Partnership will use such proceeds, together with
borrowings of $89.2 million under its new bank
credit facility, (i) to repay approximately
$238.2 million of indebtedness assumed by the
Operating Partnership in connection with the
Transactions, (ii) to purchase approximately
$33.8 million of participation interests in the
bank indebtedness of two of the Company's joint
ventures, (iii) to fund the Company's investment
of approximately $46.5 million in new joint
venture projects and (iv) for general partnership
purposes, including the repayment of accrued
interest on debt to be repaid. See "Use of
Proceeds."
18
Listing..................... The Common Units have been approved for listing
on the NYSE, subject to official notice of
issuance.
NYSE Symbol................. "EPD."
19
SUMMARY OF TAX CONSIDERATIONS
The following is a brief summary of certain expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to United States federal income tax laws, is based upon the opinion of
Vinson & Elkins L.L.P., special counsel to the General Partner and the Company
("Counsel"), described in "Tax Considerations." This summary is qualified by
the discussion in "Tax Considerations," particularly the qualifications on the
opinions of Counsel described therein.
The tax consequences of an investment in the Company to a particular investor
will depend in part on the investor's own tax circumstances. Prospective
investors are urged to consult their own tax advisors as to their own tax
circumstances and as to the particular tax consequences to them of the
purchase, ownership and disposition of Common Units, including the
applicability of any federal income, federal estate or gift tax, state, local
and foreign tax laws, changes in applicable tax laws and any pending or
proposed legislation.
PARTNERSHIP STATUS; CASH DISTRIBUTIONS
In the opinion of Counsel, the Company will be classified for federal income
tax purposes as a partnership, and the beneficial owners of Common Units will
generally be considered partners in the Company. Accordingly, the Company will
pay no federal income taxes, and a Common Unitholder will be required to report
on his federal income tax return his share of the Company's income, gains,
losses, deductions and credits. In general, cash distributions to a Common
Unitholder will be taxable only if, and to the extent that, they exceed the
Common Unitholder's tax basis in his Common Units.
COMPANY ALLOCATIONS
In general, income and loss of the Company will be allocated to the General
Partner and the Unitholders for each taxable year in accordance with their
respective percentage interests in the Company, as determined annually and
prorated on a monthly basis and subsequently apportioned among the General
Partner and the Unitholders of record as of the opening of the first business
day of the month to which they relate, even though Unitholders may dispose of
their Units during the month in question. At any time that distributions are
made on the Common Units and not on the Subordinated Units, gross income will
be allocated to the recipients to the extent of such distribution. A Unitholder
will be required to take into account, in determining his federal income tax
liability, his share of income generated by the Company for each taxable year
of the Company ending within or with the Unitholder's taxable year even if cash
distributions are not made to him. As a consequence, a Unitholder's share of
taxable income of the Company (and possibly the income tax payable by him with
respect to such income) may exceed the cash, if any, actually distributed to
him.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Company estimates that a purchaser of Common Units in this offering who
owns them through December 31, 2001, will be allocated, on a cumulative basis,
an amount of federal taxable income for such period that will be less than 20%
of the cash distributed with respect to that period. The Company further
estimates that for taxable years after the taxable year ending December 31,
2001, the taxable income allocable to them will represent a significantly
higher percentage (and could in certain circumstances exceed the amount) of
cash distributed to the Unitholders. These estimates are based upon the
assumption that the gross income from operations will approximate the amount
required to make the Minimum Quarterly Distribution with respect to all Units
and other assumptions with respect to capital expenditures, cash flow and
anticipated cash distributions. These estimates and assumptions are subject to,
among other things, numerous business, economic, regulatory, competitive and
political uncertainties which are beyond the control of the Company. Further,
the estimates are based on current tax law and certain tax reporting positions
that the Company intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The
20
actual percentages could be higher or lower than as described above and any
differences could be material. See "Tax Considerations--Tax Consequences of
Unit Ownership--Ratio of Taxable Income to Distributions."
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for a Common Unit purchased in this offering
generally will be the amount paid for the Common Unit. A Unitholder's basis
generally will be increased by his share of Company income and any increase in
his share of Company non-recourse liabilities and decreased by his share of
Company losses and distributions and any decrease in his share of Company non-
recourse liabilities.
LIMITATIONS ON DEDUCTIBILITY OF COMPANY LOSSES
A Unitholder may deduct his share of Company losses only to the extent that
such losses do not exceed his tax basis in his Common Units or, in the case of
taxpayers subject to the "at risk" rules (such as individuals), the amount the
Unitholder is at risk with respect to the Company's activities, if less than
such tax basis. In the case of taxpayers subject to the passive loss rules
(generally, individuals and closely held corporations), any Company losses will
only be available to offset future income generated by the Company and cannot
be used to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be fully
deducted when the Unitholder disposes of all of his Common Units in a taxable
transaction with an unrelated party.
SECTION 754 ELECTION
The Company intends to make the election provided for by Section 754 of the
Internal Revenue Code of 1986, as amended (the "Code"), which will generally
result in a Unitholder being allocated income and deductions calculated by
reference to the portion of his purchase price attributable to each asset of
the Company.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize a gain or loss equal to
the difference between the amount realized and the adjusted tax basis of those
Common Units. Thus, distributions of cash from the Company to a Unitholder in
excess of the income allocated to him will, in effect, become taxable income if
he sells the Common Units at a price greater than his adjusted tax basis even
if the price is less than his original cost. A portion of the amount realized
(whether or not representing gain) may be taxable as ordinary income.
CHANGES IN FEDERAL INCOME TAX LAWS
Legislation enacted as part of the Taxpayer Relief Act of 1997 (the "TRA of
1997") alters the tax reporting system and the deficiency collection system
applicable to large partnerships that elect to have such provisions apply and
makes certain additional changes to the treatment of large partnerships. The
legislation contained in the TRA of 1997 generally is intended to simplify the
administration of the tax rules governing large partnerships. It is not
expected that the Company will elect to have these provisions apply because of
the cost of their application.
The TRA of 1997 also affects the taxation of certain financial products and
securities, including partnership interests, by treating a taxpayer as having
sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or otherwise terminated at its fair market
value) if the taxpayer or related persons enter into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an offsetting
notional principal contract or a futures or forward contract with respect to a
partnership interest, the taxpayer will be treated as having sold such position
if the taxpayer or a related party then acquires the partnership interest or
substantially identical property. The Secretary of Treasury is also
21
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial product or
security.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local income taxes, unincorporated business
taxes, and estate, inheritance or intangible taxes that are imposed by the
various jurisdictions in which a Unitholder resides or in which the Company
does business or owns property. Although an analysis of those various taxes is
not presented here, each prospective Unitholder should consider the potential
impact of such taxes on his investment in the Company. The Company initially
will own property and conduct business in Alabama, Louisiana, Mississippi and
Texas. In certain states, tax losses may not produce a tax benefit in the year
incurred (if, for example, the Company has no income from sources within that
state) and also may not be available to offset income in subsequent taxable
years. Some states may require the Company, or the Company may elect, to
withhold a percentage of income from amounts to be distributed to a Unitholder.
Withholding, the amount of which may be more or less than a particular
Unitholder's income tax liability owed to the state, may not relieve the
nonresident Unitholder from the obligation to file an income tax return.
Amounts withheld may be treated as if distributed to Unitholders for purposes
of determining the amounts distributed by the Company. Based on current law and
its estimate of future Company operations, the Company anticipates that any
amounts required to be withheld will not be material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Company. Accordingly, each prospective Unitholder
should consult, and must rely upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all federal, state and local tax returns that may be required of such
Unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in the Company.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Common Units by tax-exempt organizations (including IRAs and
other retirement plans), regulated investment companies (mutual funds) and
foreign persons raises issues unique to such persons. Much of the income
allocated to a Unitholder that is a tax-exempt organization will be unrelated
business taxable income and, thus, will be taxable to such Unitholder; no
significant amount of the Company's gross income will be qualifying income for
purposes of determining whether a Unitholder will qualify as a regulated
investment company; and a Unitholder who is a nonresident alien, foreign
corporation or other foreign person will be regarded as being engaged in a
trade or business in the United States as a result of ownership of a Common
Unit and, thus, will be required to file federal income tax returns and to pay
tax on such Unitholder's share of Company taxable income. Furthermore,
distributions to foreign Unitholders will be subject to federal income tax
withholding. See "Tax Considerations--Uniformity of Units" and "--Tax-Exempt
Organizations and Certain Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Company is not subject to
this registration requirement. Nevertheless, the General Partner has applied
for registration of the Company as a tax shelter with the Secretary of the
Treasury. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN
INVESTMENT IN THE COMPANY OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED,
EXAMINED OR APPROVED BY THE IRS. See "Tax Considerations--Administrative
Matters--Registration as a Tax Shelter."
22
FORWARD-LOOKING STATEMENTS
This Prospectus contains forward-looking statements and information that are
based on the beliefs of the Company and the General Partner, as well as
assumptions made by, and information currently available to, the Company and
the General Partner. All statements, other than statements of historical fact,
included in this Prospectus are forward-looking statements, including, but not
limited to, statements identified by the words "anticipate," "believe,"
"estimate," "expect," "plan," "intend," "forecast," "will," "could," "may" and
"targeted" and similar expressions and statements regarding the Company's
business strategy and plans and objectives of management of the Company for
future operations. Such statements reflect the current views of the Company
and the General Partner with respect to future events, based on what they
believe are reasonable assumptions; however, such statements are subject to
certain risks, uncertainties and assumptions including but not limited to the
risk factors described in this Prospectus. If one or more these risks or
uncertainties materialize, or if underlying assumptions prove incorrect,
actual results may vary materially from those in the forward-looking
statements. The Company does not intend to update these forward-looking
statements and information.
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Company will be
subject are similar to those that would be faced by a corporation engaged in a
similar business. Prospective purchasers of the Common Units should consider
the following risk factors in evaluating an investment in the Common Units.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
Cash Distributions Are Not Guaranteed and May Fluctuate with Company
Performance and May Be Limited by the Bank Credit Facility
Although the Company will distribute all of its Available Cash, there can be
no assurance regarding the amounts of Available Cash to be generated by the
Company and the Company cannot guarantee that the Minimum Quarterly
Distribution will be paid. The actual amounts of cash distributions may
fluctuate and will depend upon numerous factors, including cash flow generated
by operations, required principal and interest payments on the Company's debt,
the costs of acquisitions (including related debt service payments),
restrictions contained in the Company's debt instruments, issuances of debt
and equity securities by the Company, fluctuations in working capital, capital
expenditures, adjustments in reserves, prevailing economic conditions and
financial, business and other factors, a number of which will be beyond the
control of the Company and the General Partner. Cash distributions are
dependent primarily on cash flow, including cash flow from reserves and
working capital borrowings, and not solely on profitability, which is affected
by non-cash items. Therefore, cash distributions might be made during periods
when the Company records losses and might not be made during periods when the
Company records profits. In addition, the Company will be prohibited from
making cash distributions during an event of default under its bank credit
facility. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources."
The amount of Available Cash from Operating Surplus needed to distribute the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated Units to be outstanding immediately after this offering and on
the combined 2% interest of the General Partner is approximately $122.2
million ($81.5 million for Common Units, $38.3 million for the Subordinated
Units and $2.4 million for the combined 2% interest of the General Partner).
If the Underwriters' over-allotment option is exercised in full, such amounts
will be $84.5 million for the Common Units, $38.3 million for the Subordinated
Units and $2.5 million for the combined 2% interest of the General Partner, or
an aggregate of approximately $125.3 million. The amount of pro forma
Available Cash from Operating Surplus generated during the twelve months ended
March 31, 1998 was approximately $104.1 million. Such amount would have been
sufficient to cover the Minimum Quarterly Distribution for such period on all
of the Common Units, but would have been insufficient by approximately
23
$18.1 million to cover the Minimum Quarterly Distribution on all the
Subordinated Units and the related distribution on the general partner
interest. See "Cash Available for Distribution" and, for the calculation of
pro forma Available Cash from Operating Surplus, Appendix D.
The Partnership Agreement gives the General Partner broad discretion in
establishing reserves for the proper conduct of the Company's business that
will affect the amount of Available Cash. Because certain portions of the
business of the Company are seasonal, the General Partner may make additions
to reserves during certain quarters in order to fund operating expenses,
interest and principal payments and cash distributions to partners with
respect to other quarters. The effect of the establishment of such operating
reserves is to increase the likelihood that the Minimum Quarterly Distribution
will be paid in any given quarter but to decrease the likelihood that any
amount in excess of the Minimum Quarterly Distribution will be paid in such
quarter. As a result of these and other factors, there can be no assurance
regarding the actual levels of cash distributions to Unitholders by the
Company.
The Company's Assumptions Concerning Future Operations May Not Be Realized
In establishing the terms of this offering, including the number and initial
public offering price of the Common Units, the number of Common Units and
Subordinated Units to be received by EPCO and the Minimum Quarterly
Distribution, the Company has relied on certain assumptions concerning its
operations, including assumptions that (i) total operating margins generated
from the Company's existing assets will remain generally consistent with total
margins recognized by the Company in 1997; (ii) the Company's identified new
projects will become operational as scheduled and will result in anticipated
levels of operating margins; (iii) the Company will not experience any
significant accidents or business interruptions, regardless of whether such
accidents or interruptions are covered by insurance; (iv) there will be no
regulatory changes that materially adversely affect the Company's operations;
and (v) market and overall economic conditions will not change substantially.
Whether the assumptions are realized is not, in many cases, within the control
of the Company and cannot be predicted with any degree of certainty. In the
event that the Company's assumptions are not realized, the actual Available
Cash from Operating Surplus generated by the Company could be substantially
less than that currently expected and may be less in any quarter than the
Minimum Quarterly Distribution. See "Cash Available for Distribution."
Unitholders Will Have Limited Voting Rights and Limited Influence on Company
Management
The General Partner will manage and operate the Company. Unlike the holders
of common stock in a corporation, holders of Common Units will have only
limited voting rights on matters affecting the Company's business. Holders of
Common Units will have no right to elect the General Partner on an annual or
other continuing basis, and the General Partner may not be removed except
pursuant to the vote of the holders of at least 66 2/3% of the outstanding
Units (including Units owned by the General Partner and its affiliates) and
upon the election of a successor general partner by the vote of the holders of
at least a Unit Majority. EPCO will own, through a wholly-owned subsidiary,
83.1% of the combined Common Units and Subordinated Units, giving it the
ability to prevent the General Partner's removal. In addition, all of the
other matters requiring the approval of the Common Unitholders during the
Subordination Period must first be proposed by the General Partner and
submitted to the Unitholders for a vote. The Partnership Agreement also
contains provisions limiting the ability of Unitholders to call meetings of
Unitholders or to acquire information about the Company's operations as well
as other provisions limiting the Unitholders' ability to influence the manner
or direction of management. As a result, holders of Common Units will have
limited influence on matters affecting the operations of the Company. See "The
Partnership Agreement--Meetings; Voting."
The Company May Issue Additional Common Units thereby Diluting Existing
Unitholders' Interests
During the Subordination Period, the General Partner has broad discretion,
without the approval of Unitholders, to cause the Company to issue up to an
additional 22,625,000 Common Units (which number is subject to adjustment in
the event of a combination or subdivision of Common Units and excludes Common
24
Units issued upon the exercise of the Underwriters' over-allotment option,
upon conversion of Subordinated Units, pursuant to employee benefit plans,
upon conversion of the general partner interest as a result of the withdrawal
of the General Partner or in connection with the making of certain
acquisitions or capital improvements that are accretive on a per Unit basis)
or an equivalent number of securities ranking on a parity with the Common
Units. The issuance during the Subordination Period of Common Units or parity
units in excess of the foregoing would require the approval of a Unit
Majority. After the end of the Subordination Period, the Company may issue an
unlimited number of limited partner interests of any type (including interests
ranking prior or senior to the Common Units) without the approval of
Unitholders. Based on the circumstances of each case, the issuance of
additional Common Units or securities ranking senior to or on a parity with
the Common Units may dilute the value of the interests of the then-existing
holders of Common Units in the net assets of the Company, dilute the interests
of holders of Common Units in cash distributions by the Company and reduce the
benefits to the holders of the Common Units provided by the subordination
feature of the Subordinated Units. The Partnership Agreement does not give the
holders of Common Units the right to approve the issuance by the Company of
equity securities ranking junior to the Common Units at any time.
Issuance of Additional Common Units, Including Upon Conversion of
Subordinated Units, Will Increase Risk that the Company Will Be Unable to
Pay Full Minimum Quarterly Distribution on All Common Units
The capability of the Company to pay the full Minimum Quarterly Distribution
on all Common Units may be reduced as a result of any increase in the number
of outstanding Common Units, whether as a result of conversion of Subordinated
Units, exercise of the Underwriters' over-allotment option or future issuances
of Common Units. Any of these actions will increase the percentage of the
aggregate Minimum Quarterly Distribution payable to the Common Unitholders and
decrease the percentage of the aggregate Minimum Quarterly Distribution
payable to the Subordinated Unitholders, which will in turn have the effect of
(i) reducing the amount of support provided by the subordination feature of
the Subordinated Units and (ii) increasing the risk that the Company will be
unable to pay the Minimum Quarterly Distribution in full on all the Common
Units.
Unitholders Will Have Difficulty in Removing the General Partner or Otherwise
Changing Management
Following this offering, EPCO, through a wholly-owned subsidiary, will own
83.1% of the combined Common Units and Subordinated Units, giving it the
ability to prevent the removal of the General Partner. In addition, the
Partnership Agreement contains certain provisions that may have the effect of
discouraging a person or group from attempting to remove the General Partner
or otherwise change the management of the Company. If the General Partner is
removed as general partner of the Company under circumstances where Cause does
not exist and Units held by the General Partner and its affiliates are not
voted in favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
general partner interest into Common Units or to receive cash in exchange for
such interest. Further, if any person or group (other than the General Partner
or its affiliates) acquires beneficial ownership of 20% or more of any class
of Units then outstanding, such person or group will lose voting rights with
respect to all of its Units. In addition, the Company has substantial latitude
in issuing equity securities without Unitholder approval. The effect of these
and other provisions may be to diminish the price at which the Common Units
will trade under certain circumstances. See "The Partnership Agreement--
Withdrawal or Removal of the General Partner" and "--Change of Management
Provisions."
Purchasers of Common Units Will Experience Dilution
Purchasers of Common Units in this offering will experience substantial and
immediate dilution in net tangible book value of $14.12 per Common Unit from
the initial public offering price (assuming an initial public offering price
of $22.25 per Common Unit). See "Dilution."
25
Cost Reimbursements and Fees Due to the General Partner and its Affiliates
May Be Substantial
Prior to making any cash distributions on the Common Units, the Company will
reimburse the General Partner and its affiliates for certain expenses incurred
by the General Partner and its affiliates on behalf of the Company. Such
reimbursable expenses will include expenses incurred by EPCO under the EPCO
Agreement, pursuant to which EPCO will manage the business and affairs of the
Company. Pursuant to the EPCO Agreement, EPCO will be reimbursed at cost for
all expenses that it incurs in connection with managing the business and
affairs of the Company, except that EPCO will not be entitled to be reimbursed
for any selling, general and administrative expenses. In lieu of reimbursement
for such selling, general and administrative expenses, EPCO will be entitled
to receive an annual administrative services fee that will initially equal
$12.0 million. The General Partner, with approval and consent of the Audit and
Conflicts Committee, will have the right to agree to increases in such
administrative services fee of up to 10% each year during the 10-year term of
the EPCO Agreement and may agree to further increases in such fee in
connection with expansions of the Company's operations through the
construction of new facilities or the completion of acquisitions that require
additional management personnel. The reimbursement by the Company of such
expenses and the payment of such fee could adversely affect the ability of the
Company to make cash distributions to the Unitholders.
No Prior Public Market for Common Units
Prior to this offering, there has been no public market for the Common
Units. The initial public offering price for the Common Units will be
determined through negotiations between the General Partner and the
representatives of the Underwriters. For a description of the factors to be
considered in determining the initial public offering price, see
"Underwriting." No assurance can be given as to the market prices at which the
Common Units will trade. The Common Units have been approved for listing on
the NYSE, subject to official notice of issuance, under the symbol "EPD."
The General Partner Will Have a Limited Call Right with Respect to the Common
Units
If at any time not more than 15% of the then-issued and outstanding Common
Units are held by persons other than the General Partner and its affiliates,
the General Partner will have the right, which it may assign to any of its
affiliates or the Company, to acquire all, but not less than all, of the
remaining Common Units held by such unaffiliated persons at a price generally
equal to the then-current market price of Common Units. As a consequence, a
holder of Common Units may be required to sell his Common Units at a time when
he may not desire to sell them or at a price that is less than the price he
would desire to receive upon such sale. A holder may also incur a tax
liability upon such sale. Following completion of this offering, persons other
than the General Partner and its affiliates will hold approximately 24.9% of
the outstanding Common Units. See "The Partnership Agreement--Limited Call
Right."
Unitholders May Not Have Limited Liability in Certain Circumstances;
Liability for Return of Certain Distributions
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 states. If it were determined that the Company had been conducting
business in any state without compliance with the applicable limited
partnership statute, or that the right or the exercise of the right by the
Unitholders as a group to remove the General Partner, to approve certain
amendments to the Partnership Agreement or to take other action pursuant to
the Partnership Agreement constituted participation in the "control" of the
Company's business, then the Unitholders could be held liable in certain
circumstances for the Company's obligations to the same extent as a general
partner. In addition, under certain circumstances a Unitholder may be liable
to the Company for the amount of a distribution for a period of three years
from the date of the distribution. See "The Partnership Agreement--Limited
Liability" for a discussion of the limitations on liability and the
implications thereof to a Unitholder.
26
Holders of Common Units Have Not Been Represented by Counsel
The holders of Common Units have not been represented by counsel in
connection with this offering, including the preparation of the Partnership
Agreement or the other agreements referred to herein or in establishing the
terms of this offering.
RISKS INHERENT IN THE COMPANY'S BUSINESS
The Profitability of the Company's Operations Depends Upon the Demand and
Prices for the Company's Products
Products processed by the Company are principally used as feedstocks in
petrochemical manufacturing and in the production of motor gasoline and, to a
lesser extent, as fuel for residential and commercial heating. A reduction in
demand for the Company's products by the petrochemical, refining or heating
industries, whether because of general economic conditions, reduced demand by
consumers for the end products made with NGL products, increased competition
from petroleum-based products due to pricing differences, regulations
affecting the content of motor gasoline or other reasons, could have a
material adverse effect on the Company's results of operations. Additionally,
to the extent the Company takes title to products, its profitability can be
affected by changes in the market prices for, and the price differentials
between, NGL products.
Ethane. Ethane is primarily used in the petrochemical industry as feedstock
for ethylene, one of the basic building blocks for a wide range of plastics
and other chemical products. Although ethane is typically separated from the
natural gas stream at gas processing plants, if natural gas prices increase
significantly in relation to NGL product prices or if the demand for ethylene
falls, it may be more profitable for natural gas producers to leave the ethane
in the natural gas stream to be burned as fuel than to extract the ethane from
the mixed NGL stream for sale as an ethylene feedstock thereby reducing the
volume of NGLs for fractionation. The Company has experienced periods in the
past when natural gas producers have retained ethane in the natural gas stream
and may experience such periods in the future. Although the Company's results
of operations have not been materially adversely affected in the past on such
occasions, there can be no assurance that similar decisions by natural gas
producers in the future would not have a material adverse effect on the
Company's results of operations.
Propane. Propane is used both as a petrochemical feedstock in the production
of ethylene and propylene and as a heating, engine and industrial fuel. The
demand for propane as a heating fuel is significantly affected by weather
conditions. The volume of propane sold is at its highest during the six-month
peak heating season of October through March. Demand for the Company's propane
may be reduced during periods of warmer-than-normal weather.
Isobutane. Isobutane is predominantly used in refineries to produce
alkylates to enhance octane levels and in the production of MTBE, which is
used in motor gasoline. Accordingly, any action that reduces demand for motor
gasoline in general or MTBE in particular would similarly reduce demand for
isobutane. Further, the Company purchases almost all of the normal butane
feedstock that it isomerizes into isobutane for its non-tolling customers in
the spot and import markets. It is generally profitable for the Company to
isomerize normal butane into isobutane when the prevailing price of isobutane
exceeds the prevailing price of normal butane by approximately 2.0 cents per
gallon. On those occasions where the spread between isobutane and normal
butane is narrow, the Company may find it more economical to purchase
isobutane on the spot market for delivery to customers than to process the
normal butane in its inventory. The Company frequently retains the normal
butane in its inventory until pricing differentials improve or until product
prices increase. However, if the price of normal butane declines, the
Company's inventory may decline in value. During periods in which isobutane
spreads are narrow or inventory values are high relative to current prices for
normal butane or isobutane, the Company's operating margin from selling
isobutane will be reduced. The Company's operating margin for isomerization in
the first quarter of 1998 was materially adversely affected by lower isobutane
prices and lower isobutane spreads. There can be no assurance that
fluctuations in the price of isobutane and normal butane will not have a
material adverse effect on the Company's results of operations.
27
MTBE. The production of MTBE is driven by oxygenated fuels programs enacted
under the federal Clean Air Act Amendments of 1990 and other legislation. Any
changes to these programs that enable localities to opt out of these programs,
lessen the requirements for oxygenates or favor the use of non-isobutane based
oxygenated fuels would reduce the demand for MTBE and could have a material
adverse effect on the Company's results of operations. Legislation has been
introduced in the California legislature to ban the use of MTBE based on
allegations by several public advocacy and protest groups that MTBE
contaminates water supplies, causes health problems and has not been as
beneficial in reducing air pollution as originally contemplated. In addition,
legislation to amend the federal Clean Air Act of 1990 has been introduced in
Congress to exempt California from the federal oxygenate requirement for
reformulated motor gasoline. If this legislation is enacted, refineries could
eliminate or reduce the amount of MTBE from motor gasoline sold in California
so long as certain other minimum standards are met. No assurance can be given
as to whether any such federal legislation will ultimately be adopted or
whether Congress would override any California legislation. Many of the public
advocacy and protest groups that have been campaigning for legislation to
exempt California from the federal oxygenate requirement are also supporting a
nationwide ban on the use of MTBE and other oxygenates, but no legislation to
implement a nationwide ban has been introduced in Congress to date.
Propylene. Propylene is sold to petrochemical companies for a variety of
uses, principally for the production of polypropylene. Propylene is subject to
rapid and material price fluctuations. Any downturn in the domestic or
international economy could cause reduced demand for, and an oversupply of,
propylene, which could cause a reduction in the volumes of propylene produced
by the Company and expose the Company's investment in inventories of
propane/propylene mix to pricing risk due to requirements for short-term price
discounts in the spot or short-term propylene markets. During the fourth
quarter of 1997 and the first quarter of 1998, the Company's results of
operations have been adversely affected by weak propylene demand and lower
propylene prices. There can be no assurance that a continuation of the current
price environment for propylene or future fluctuations in the price of
propylene will not have a material adverse effect on the Company's results of
operations.
The Profitability of the Company's Operations Depends Upon the Availability
of a Supply of NGL Feedstock
The Company's profitability is materially impacted by the volume of NGLs
processed at the Company's facilities. A material decrease in natural gas
production or crude oil refining, as a result of depressed commodity prices or
otherwise, or a decrease in imports of mixed butanes, could result in a
decline in the volume of NGLs delivered to the Company's facilities for
processing, thereby reducing revenue and operating income. The Company
believes that even in a depressed natural gas price environment, provided
demand for and prices of NGL products remained strong, producers would, to a
certain extent, continue to produce the natural gas, separate the methane,
reinject the methane into the gas reservoir and have the NGLs processed into
NGL products. There can be no assurance, however, that depressed natural gas
prices would not result in producers shutting in natural gas wells, in which
case NGL production would decline significantly, which could have a material
adverse effect on the Company's results of operations.
The Company Depends on Certain Key Customers and Contracts
The Company currently derives a significant portion of its revenues from
contracts with certain key customers. The loss of these or other significant
customers could materially adversely affect the Company's results of
operations. The Company's contract with ARCO Chemical, which accounted for
42.9% of the Company's isomerization volumes in 1997, expires in November
1999. Although the Company and ARCO Chemical are currently negotiating the
terms of a renewal contract, there can be no assurance that the parties will
reach agreement on the terms of a new contract or what the terms of such a
contract may be. The Company's unconsolidated affiliate, BEF, has an agreement
with Sun pursuant to which Sun is required to purchase all of BEF's MTBE
production through May 2005. The price currently paid by Sun is the higher of
a contractually fixed floor price or a market price for the first 193,450,000
gallons of production per contract year, subject to quarterly adjustments on
certain excess volumes, and market prices on the remaining production per
contract year until May 31, 2000. The market price is currently significantly
lower than the floor price. Beginning June 1, 2000
28
and continuing through the termination of the agreement in May 2005, the price
for all production will be a market-based negotiated price. If the floor price
remains higher than the market price, this provision could significantly
reduce the amount the Company receives from BEF, which could have a material
adverse effect on the Company's results of operations. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General," "Business and Properties--MTBE Production--The Company's MTBE
Customers and Contracts" and Note 3 of Notes to Combined Financial Statements.
The Company Experiences Significant Competition
The Company's competitors include large oil, natural gas and petrochemical
companies, some of whom have greater financial resources and access to NGL
supplies than the Company. The Company's NGL fractionation facilities at Mont
Belvieu compete for volumes of mixed NGLs with three other fractionators at
Mont Belvieu. In addition, certain major producers fractionate NGLs for their
own account in captive facilities. The Mont Belvieu fractionation facilities
also compete on a more limited basis with two fractionators in Conway, Kansas
and a number of decentralized, smaller fractionation facilities in Louisiana.
In recent years, the Conway market has occasionally experienced higher posted
prices for NGL products than prices at Mont Belvieu causing customers to shift
certain volumes to the Conway market for fractionation. The Company also
competes with large, integrated energy and petrochemical companies in its
isomerization, MTBE and propylene businesses. See "Business and Properties--
Competition." The Company's customers who are significant producers or
consumers of NGLs may develop their own processing facilities in lieu of using
the Company's services or co-investing with the Company in new projects. In
addition, certain of the Company's competitors may have advantages in
competing for acquisitions or other new business opportunities because of
their financial resources and access to NGL supplies.
The Company's New Construction Projects May Not be Completed
The Company has entered into non-binding letters of intent to participate in
the construction and operation of an NGL fractionation facility near Baton
Rouge, Louisiana and to participate in the construction of the Tri-States and
Wilprise NGL pipeline systems. The Company is also participating in a joint
venture to construct and operate the NGL Product Chiller at its NGL
import/export facility. There can be no assurances that definitive agreements
for the fractionator and pipeline projects will ultimately be signed, what the
terms of these agreements will be or that the projects will ultimately be
completed. Moreover, completion dates and construction costs of the projects
are subject to certain factors beyond the Company's control, such as inclement
weather conditions, labor disputes, permitting and approval requirements and
shortages of materials. There can be no assurance that these new projects, if
completed, will be completed on time or within budget.
The Company is Subject to Operating and Litigation Risks Which May Not Be
Covered by Insurance
The Company's operations are subject to all operating hazards and risks
normally incidental to processing, storing and transporting, and otherwise
providing for use by third parties, NGLs, propane/propylene mix and MTBE. As a
result, the Company may be a defendant in various legal proceedings and
litigation arising in the ordinary course of business. The Company maintains
insurance policies with insurers in such amounts and with such coverages and
deductibles as the General Partner believes are reasonable and prudent. There
can be no assurance, however, that such insurance will be adequate to protect
the Company from all material expenses related to potential future claims for
personal and property damage and that such levels of insurance will be
available in the future on commercially reasonable terms.
The Company's Businesses are Subject to Governmental Regulation With Respect
to Environmental, Safety and Other Regulatory Matters
The business of the Company is subject to the jurisdiction of governmental
agencies with respect to a wide range of environmental, safety and other
regulatory matters. Although the Company believes that it is in
29
compliance in all material respects with all applicable environmental laws and
regulations, the Company could be adversely affected by increased costs due to
more strict pollution control requirements or liabilities resulting from non-
compliance with required operating or other regulatory permits. New
environmental regulations might adversely impact the Company's products and
activities, including processing, storage and transportation. Federal and
state agencies also could impose additional safety requirements, any of which
could affect profitability. In addition, there are risks of accidental
releases or spills associated with the Company's operations, and there can be
no assurance that material costs and liabilities will not be incurred,
including those relating to claims for damages to property and persons.
The Company Depends Upon Its Key Personnel
The Company believes that its success has been dependent to a significant
extent upon the efforts and abilities of EPCO's senior management team and in
particular Dan Duncan, Chairman of the Board (age 65) and O.S. Andras,
President and Chief Executive Officer (age 62). The failure by EPCO to retain
the key members of its senior management team, or to implement a succession
plan to prepare qualified individuals to join the senior management team upon
the retirement of Mr. Duncan and Mr. Andras, could materially adversely affect
the financial condition or results of operations of the Company. The Company
does not have employment contracts with any of its key personnel and does not
maintain any life insurance for such persons.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
The General Partner will make all decisions relating to the management of
the Company. EPCO owns 95% of the issued and outstanding equity interests of
the General Partner and upon the closing of this offering, a wholly-owned
subsidiary of EPCO will own Common Units and Subordinated Units representing a
combined 81.4% limited partner interest in the Company. Certain conflicts of
interest exist and may arise in the future as a result of the relationships
between the General Partner, EPCO and their affiliates, on the one hand, and
the Company and the Unitholders not affiliated with the General Partner, on
the other hand. The directors and officers of the General Partner have
fiduciary duties to manage the General Partner, including its investments in
its subsidiaries and affiliates, in a manner beneficial to its members. At the
same time, the General Partner has a fiduciary duty to manage the Company in a
manner beneficial to the Company and the Unitholders. The Partnership
Agreement contains provisions that allow the General Partner to take into
account the interests of parties in addition to the Company in resolving
conflicts of interest, thereby limiting its fiduciary duty to the Unitholders,
as well as provisions that may restrict the remedies available to Unitholders
for actions taken that might, without such limitations, constitute breaches of
fiduciary duty. The duty of the directors and officers of the General Partner
to its members may, therefore, come into conflict with the duties of the
General Partner to the Company and the Unitholders. Conflicts of interest
might arise with respect to the following matters, among others:
(i) Decisions of the General Partner with respect to the amount and
timing of cash expenditures, borrowings, asset sales or acquisitions,
issuances of additional partnership securities and the creation, reduction
or increase of reserves in any quarter will affect whether, or the extent
to which, there is sufficient Available Cash from Operating Surplus to meet
the Minimum Quarterly Distribution and Target Distribution Levels on all
Units in a given quarter. In addition, actions by the General Partner may
have the effect of enabling the General Partner and its affiliates to
receive distributions on the Subordinated Units or Incentive Distributions
or hastening the expiration of the Subordination Period or the conversion
of Subordinated Units into Common Units.
(ii) The Company will not have any employees and will rely solely on
employees of EPCO.
(iii) Under the terms of the Partnership Agreement, the Company will
reimburse the General Partner and its affiliates for costs incurred in
managing and operating the Company, including certain costs incurred
pursuant to the EPCO Agreement.
(iv) Whenever possible, the General Partner intends to limit the
Company's liability under contractual arrangements to all or particular
assets of the Company, with the other party thereto to have no recourse
against the General Partner or its assets.
30
(v) Any agreements between the Company, on the one hand, and the General
Partner and its affiliates, on the other, will not grant to the holders of
Common Units, separate and apart from the Company, the right to enforce the
obligations of the General Partner and such affiliates in favor of the
Company. Therefore, the General Partner, in its capacity as the general
partner of the Company, will be primarily responsible for enforcing such
obligations.
(vi) Under the terms of the Partnership Agreement, the General Partner is
not restricted from causing the Company to pay the General Partner or its
affiliates for any services rendered on terms that are fair and reasonable
to the Company or entering into additional contractual arrangements with
any of such entities on behalf of the Company, although there will be
certain limits on the fees that can be paid to EPCO pursuant to the EPCO
Agreement. Neither the Partnership Agreement nor any of the other
agreements, contracts and arrangements between the Company, on the one
hand, and the General Partner and its affiliates, on the other, are or will
be the result of arm's-length negotiations.
(vii) The General Partner may exercise its right to call for and purchase
Common Units as provided in the Partnership Agreement or assign such right
to one of its affiliates or to the Company.
(viii) The Common Unitholders have not been represented by counsel in
connection with this offering, and the attorneys, independent public
accountants and others who have performed services for the Company in
connection with this offering have been retained by the General Partner,
its affiliates and the Company (and may continue to be so retained
following this offering).
(ix) The Partnership Agreement provides that the General Partner will
generally be restricted from engaging in any business activities other than
those incidental to its ownership of interests in the Company. On the other
hand, except for the restrictions set forth in the EPCO Agreement, EPCO and
its affiliates (other than the General Partner) will be free to engage in
any type of business or activity whatsoever, including those that may be in
direct competition with the Company. Pursuant to the EPCO Agreement, for so
long as the General Partner is an affiliate of EPCO, EPCO and its
affiliates will be prohibited from engaging in any business or activity
within North America that is of the type conducted by EPCO and its
affiliates as of May 31, 1998 (other than businesses or activities of the
type associated with the Retained Assets), unless EPCO or such affiliate
has first presented the opportunity to engage in such business or activity
to the Company, the General Partner has elected not to have the Company
pursue such opportunity and the Audit and Conflicts Committee has approved
such decision.
Unless provided for otherwise in a partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its limited partners
the highest duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Partnership
Agreement expressly permits the General Partner to resolve conflicts of
interest between itself or its affiliates, on the one hand, and the Company or
the Unitholders, on the other, and to consider, in resolving such conflicts of
interest, the interests of other parties in addition to the interests of the
Unitholders. In addition, the Partnership Agreement provides that a purchaser
of Common Units is deemed to have consented to certain conflicts of interest
and actions of the General Partner and its affiliates that might otherwise be
prohibited, including those described in clauses (i)-(ix) above, and to have
agreed that such conflicts of interest and actions do not constitute a breach
by the General Partner of any duty stated or implied by law or equity. The
General Partner will not be in breach of its obligations under the Partnership
Agreement or its duties to the Company or the Unitholders if the resolution of
such conflict is fair and reasonable to the Company. The latitude given in the
Partnership Agreement to the General Partner in resolving conflicts of
interest may significantly limit the ability of a Unitholder to challenge what
might otherwise be a breach of fiduciary duty.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to the Company, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and such other persons acted in good faith.
In addition, the Company is required to indemnify the General Partner, its
31
affiliates and their respective officers, directors, employees, agents and
trustees to the fullest extent permitted by law against liabilities, costs and
expenses incurred by the General Partner or such other persons, if the General
Partner or such persons acted in good faith and in a manner they reasonably
believed to be in, or (in the case of a person other than the General Partner)
not opposed to, the best interests of the Company and, with respect to any
criminal proceedings, had no reasonable cause to believe the conduct was
unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been
tested in a court of law, and the General Partner has not obtained an opinion
of counsel covering the provisions set forth in the Partnership Agreement that
purport to waive or restrict the fiduciary duties of the General Partner that
would be in effect under common law were it not for the Partnership Agreement.
See "Conflicts of Interest and Fiduciary Responsibilities--Conflicts of
Interest."
TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
Tax Treatment is Dependent on Partnership Status
The availability to a Common Unitholder of the federal income tax benefits
of an investment in the Company depends on the classification of the Company
as a partnership for federal income tax purposes. Assuming the accuracy of
certain factual matters as to which the General Partner and the Company have
made representations, Counsel is of the opinion that, under current law, the
Company will be classified as a partnership for federal income tax purposes.
No ruling from the IRS as to classification of the Company as a partnership
has been or is expected to be requested. Instead, the Company intends to rely
on such opinion of Counsel (which is not binding on the IRS). Based on the
representations of the Company and the General Partner and a review of
applicable legal authorities, Counsel is of the opinion that at least 90% of
the Company's gross income is income derived from the exploration,
development, mining or production, processing, refining, transportation or
marketing of any mineral or natural resource or other items of "qualifying
income," within the meaning of Section 7704 of the Code. Whether the Company
will continue to be classified as a partnership in part depends, therefore, on
the Company's ability to meet this qualifying income test in the future. See
"Tax Considerations--Partnership Status."
If the Company were classified as an association taxable as a corporation
for federal income tax purposes, the Company would pay tax on its income at
corporate rates (currently a 35% federal rate), distributions would generally
be taxed again to the Unitholders as corporate distributions, and no income,
gains, losses, deductions or credits would flow through to the Unitholders.
Because a tax would be imposed upon the Company as an entity, the cash
available for distribution to the holders of Common Units would be
substantially reduced. Treatment of the Company as an association taxable as a
corporation or otherwise as a taxable entity would result in a material
reduction in the anticipated cash flow and after-tax return to the holders of
Common Units and, thus, would likely result in a substantial reduction in the
market value of the Common Units. See "Tax Considerations--Partnership
Status."
There can be no assurance that the law will not be changed so as to cause
the Company to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The Partnership Agreement provides that, if a law is enacted or
existing law is modified or interpreted in a manner that subjects the Company
to taxation as a corporation or otherwise subjects the Company to entity-level
taxation for federal, state or local income tax purposes, certain provisions
of the Partnership Agreement will be subject to change, including a decrease
in the Minimum Quarterly Distribution and the Target Distribution Levels to
reflect the impact of such law on the Company. See "Cash Distribution Policy--
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels."
32
No IRS Ruling With Respect to Tax Consequences
No ruling has been requested from the IRS with respect to classification of
the Company as a partnership for federal income tax purposes, whether the
Company's operations generate "qualifying income" under Section 7704 of the
Code or any other matter affecting the Company. Accordingly, the IRS may adopt
positions that differ from Counsel's conclusions expressed herein. It may be
necessary to resort to administrative or court proceedings in an effort to
sustain some or all of Counsel's conclusions, and some or all of such
conclusions ultimately may not be sustained. Any such contest with the IRS may
materially and adversely impact the market for the Common Units and the prices
at which Common Units trade. In addition, the costs of any contest with the
IRS will be borne directly or indirectly by some or all of the Unitholders and
the General Partner.
Tax Liability Exceeding Cash Distributions
A Unitholder will be required to pay federal income taxes and, in certain
cases, state and local income taxes on his allocable share of the Company's
income, whether or not he receives cash distributions from the Company. There
is no assurance that a Unitholder will receive cash distributions equal to his
allocable share of taxable income from the Company or even the tax liability
to him resulting from that income. Further, a holder of Common Units may incur
a tax liability, in excess of the amount of cash received, upon the sale of
his Common Units. See "Tax Considerations--Tax Consequences of Unit Ownership"
and "--Disposition of Common Units."
Ownership of Common Units by Tax-Exempt Organizations and Certain Other
Investors
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
For example, much of the taxable income derived from the ownership of a Common
Unit by most organizations exempt from federal income tax (including IRAs and
other retirement plans) will be unrelated business taxable income and, thus,
will be taxable to such a Unitholder. See "Tax Considerations--Uniformity of
Units" and "--Tax-Exempt Organizations and Certain Other Investors."
Limitation on Deductibility of Losses
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), losses generated by the Company,
if any, will only be available to offset future income generated by the
Company and cannot be used to offset income from other activities, including
other passive activities or investments. Passive losses that are not
deductible because they exceed the Unitholder's income generated by the
Company may be deducted in full when the Unitholder disposes of his entire
investment in the Company to an unrelated party in a fully taxable
transaction. Net passive income from the Company may be offset by unused
Company losses carried over from prior years, but not by losses from other
passive activities, including losses from other publicly-traded partnerships.
See "Tax Considerations--Tax Consequences of Unit Ownership--Limitations on
Deductibility of Company Losses."
Tax Shelter Registration; Potential IRS Audit
The Company has applied for registration with the Secretary of the Treasury
as a "tax shelter." No assurance can be given that the Company will not be
audited by the IRS or that tax adjustments will not be made. The rights of a
Unitholder owning less than a 1% interest in the Company to participate in the
income tax audit process are very limited. Further, any adjustments in the
Company's tax returns will lead to adjustments in the Unitholders' tax returns
and may lead to audits of Unitholders' tax returns and adjustments of items
unrelated to the Company. Each Unitholder would bear the cost of any expenses
incurred in connection with an examination of such Unitholder's personal tax
return. Registration as a tax shelter may increase the risk of an audit.
33
Possible Loss of Tax Benefits Relating to Non-uniformity of Common Units and
Nonconforming Depreciation Conventions
Because the Company cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units
to a purchaser of Common Units must be maintained. To maintain uniformity and
for other reasons, the Company will adopt certain depreciation and
amortization conventions that do not conform with all aspects of certain
proposed and final Treasury regulations. A successful challenge to those
conventions by the IRS could adversely affect the amount of tax benefits
available to a purchaser of Common Units and could have a negative impact on
the value of the Common Units. See "Tax Considerations--Uniformity of Units."
State, Local and Other Tax Considerations
In addition to federal income taxes, Unitholders will likely be subject to
other taxes, such as state and local taxes, unincorporated business taxes and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which the Company does business or owns property. A
Unitholder will likely be required to file state and local income tax returns
and pay state and local income taxes in some or all of the various
jurisdictions in which the Company does business or owns property and may be
subject to penalties for failure to comply with those requirements. The
Company will initially own property and conduct business in Alabama,
Louisiana, Mississippi and Texas. It is the responsibility of each Unitholder
to file all United States federal, state and local tax returns that may be
required of such Unitholder. Counsel has not rendered an opinion on the state
or local tax consequences of an investment in the Company. See "Tax
Considerations--State, Local and Other Tax Considerations."
Changes in Federal Income Tax Laws
The TRA of 1997 alters the tax reporting system and the deficiency
collection system applicable to large partnerships that elect to have the
provisions apply and makes certain additional changes to the treatment of
large partnerships. The legislation contained in the TRA of 1997 is generally
intended to simplify the administration of the tax rules governing large
partnerships. See "Tax Considerations--Tax Consequences of Unit Ownership." It
is not expected that the Company will elect to have these provisions apply
because of the cost of their application.
The TRA of 1997 also affects the taxation of certain financial products,
including partnership interests, by treating a taxpayer as having sold an
"appreciated" partnership interest (one in which gain would be recognized if
it were sold, assigned or otherwise terminated at its fair market value) if
the taxpayer or related persons enter into a short sale, an offsetting
notional principal contract or a futures or forward contract with respect to
the partnership interest or substantially identical property. Moreover, if a
taxpayer has previously entered into a short sale, an offsetting notional
principal contract or a futures or forward contract with respect to a
partnership interest, the taxpayer will be treated as having sold such
position if the taxpayer or a related party then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is
also authorized to issue regulations that treat a taxpayer that enters in
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
See "Tax Considerations--Disposition of Common Units."
Tax Gain or Loss on Disposition of Common Units
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Company
nonrecourse liabilities) and his adjusted tax basis in such Common Units
(which also includes his share of Company nonrecourse liabilities). Thus,
prior Company distributions in excess of cumulative net taxable income in
respect of a Common Unit that decreased a Unitholder's adjusted tax basis in
such Common Unit will, in effect, become taxable income if the Common Unit is
sold at a price greater than the Unitholder's adjusted tax basis in such
Common Unit, even if the price is
34
less than his original cost. A portion of the amount realized (whether or not
representing gain) may be ordinary income. Furthermore, should the IRS
successfully contest certain conventions to be used by the Company, a
Unitholder could realize more gain on the sale of Units than would be the case
under such conventions without the benefit of decreased income in prior years.
Reporting of Company Tax Information and Risk of Audits
The Company will furnish each holder of Common Units with a Schedule K-1
that sets forth his share of Company income, gains, losses, deductions and
credits. In preparing these schedules, the Company will use various accounting
and reporting conventions and adopt various depreciation and amortization
methods. There is no assurance that these schedules will yield a result that
conforms to statutory or regulatory requirements or to administrative
pronouncements of the IRS. Further, the Company's tax return may be audited,
and any such audit could result in an audit of a Unitholder's individual tax
return as well as increased liabilities for taxes because of adjustments
resulting from such audit.
35
THE TRANSACTIONS
GENERAL
In connection with this offering, the Company has or will become the owner
of all of EPCO's businesses and assets, except for the Retained Assets (as
defined below). In addition, the Company has or will assume certain of the
liabilities associated with such businesses and assets and will issue Common
Units and Subordinated Units to a wholly-owned subsidiary of EPCO. The Company
will issue the Common Units offered hereby and will contribute the net
proceeds from such offering to the Operating Partnership. The Operating
Partnership will use the net proceeds from such offering in the manner
described below under "Use of Proceeds." Following this offering, a wholly-
owned subsidiary of EPCO will own 34,004,974 Common Units and 21,269,838
Subordinated Units, representing a 50.1% limited partner interest and a 31.3%
limited partner interest, respectively, in the Company and the Operating
Partnership on a combined basis. In addition, the General Partner will own a
combined 2% general partner interest in the Company and the Operating
Partnership.
RETAINED ASSETS AND LIABILITIES
EPCO and its affiliates will retain ownership of, and will not contribute to
the Company, (i) all of the assets and liabilities associated with its
trucking operations, (ii) EPCO's general partnership interest in Mont Belvieu
Associates and any related management rights of EPCO as a general partner and
a 1% economic interest in such partnership, (iii) EPCO's general partnership
interest in BEF and any related management rights of EPCO as a general
partner, (iv) EPCO's interest in a Canadian company that markets NGL products,
(v) EPCO's interests in American Enterprise Insurance, Ltd., a wholly-owned
Bermuda captive insurance company, (vi) EPCO's interest as "lessee" under the
Retained Leases (as defined below) and (vii) certain other immaterial
properties, assets and interests (such retained assets and interests being
herein referred to as the "Retained Assets"). The Retained Assets are not
material to the profitability of the businesses currently conducted by EPCO.
The Company and EPCO have entered into a transportation agreement so that the
Company will have access to the trucking assets and operations necessary to
conduct its business. In addition, EPCO will retain all liabilities with
respect to, and the Company will not assume any liabilities with respect to,
(i) certain bank indebtedness; (ii) the Retained Leases; and (iii) all
litigation to which EPCO or any of its affiliates are parties that is pending
upon the closing of the Transactions. The Retained Leases include operating
leases relating to (i) an isomerization unit, (ii) one deisobutanizer tower,
(iii) two cogeneration units and (iv) 100 railcars. EPCO will assign its
rights to purchase the facilities and equipment covered by the Retained Leases
to the Company.
EPCO AGREEMENT
In connection with the Transactions, EPCO, the General Partner and the
Company will enter into the EPCO Agreement pursuant to which (i) EPCO will
agree to manage the business and affairs of the Company and the Operating
Partnership; (ii) EPCO will agree to employ the operating personnel involved
in the Company's business for which EPCO will be reimbursed by the Company at
cost; (iii) the Company and the Operating Partnership will agree to
participate as named insureds in EPCO's current insurance program, and costs
will be allocated among the parties on the basis of formulas set forth in the
agreement; (iv) EPCO will agree to grant an irrevocable, non-exclusive
worldwide license to all of the trademarks and tradenames used in its business
to the Company; (v) EPCO will agree to indemnify the Company against any
losses resulting from certain lawsuits; and (vi) EPCO will agree to sublease
all of the equipment which it holds pursuant to the Retained Leases to the
Company for $1 per year and assign its purchase options under such leases to
the Company. Pursuant to the EPCO Agreement, EPCO will be reimbursed at cost
for all expenses that it incurs in connection with managing the business and
affairs of the Company, except that EPCO will not be entitled to be reimbursed
for any selling, general and administrative expenses. In lieu of reimbursement
for such selling, general and administrative expenses, EPCO will be entitled
to receive an annual administrative services fee that will initially equal
$12.0 million. The General Partner, with the approval and consent of the Audit
and Conflicts Committee, will have the right to agree to increases in such
administrative services fee of up to 10% each year during the 10-year term of
36
the EPCO Agreement and may agree to further increases in such fee in
connection with expansions of the Company's operations through the
construction of new facilities or the completion of acquisitions that require
additional management personnel.
BANK CREDIT FACILITY
In connection with this offering, the Company will enter into a $200.0
million bank credit facility that includes a $50.0 million working capital
facility and a $150.0 million revolving term loan facility. In connection with
the closing of this offering, the Company expects to borrow approximately
$89.2 million under the revolving term loan facility. For additional
information regarding the terms of the bank credit facility, see "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
Liquidity and Capital Resources--Bank Credit Facility."
37
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Units offered hereby
will be approximately $232.5 million (assuming an initial public offering
price of $22.25 per Common Unit), after deducting underwriting discounts and
commissions and estimated offering expenses. The Company will contribute such
proceeds to the Operating Partnership, which will use such proceeds, together
with borrowings of $89.2 million under its new bank credit facility, (i) to
repay approximately $238.2 million of indebtedness (including related make-
whole amounts) assumed by the Operating Partnership in connection with the
Transactions, (ii) to purchase approximately $33.8 million of participation
interests in the indebtedness of two of the Company's joint ventures (the
"Loan Participations"), (iii) to fund the Company's investment of
approximately $46.5 million in new joint venture projects and (iv) for general
partnership purposes, including the payment of accrued interest on the
indebtedness to be repaid.
The following table describes the sources and uses of funds from the
Transactions as of July 1, 1998:
AMOUNT
SOURCE OF FUNDS (IN MILLIONS)
--------------- -------------
Sale of Common Units.......................................... $250.3
Borrowings under Bank Credit Facility......................... 89.2
------
Total....................................................... $339.5
======
USE OF FUNDS
------------
Repay Secured Notes........................................... $ 52.5
Repay Senior Notes............................................ 162.5
Repay Subordinated Notes...................................... 3.0
Pay Make-Whole Amounts........................................ 20.2
Purchase Participation Interest in Bank Indebtedness of
Belvieu Environmental Fuels.................................. 26.1
Purchase Participation Interest in Bank Indebtedness of Mont
Belvieu Associates........................................... 7.7
Investments in New Projects................................... 46.5
Underwriting Commissions and Offering Expenses................ 17.8
General Partnership Purposes and Accrued Interest............. 3.2
------
Total....................................................... $339.5
======
The Secured Notes consist of five separate series of secured notes with
interest rates ranging from 8.82% to 12.10% per annum. Each series requires
the payment of annual installments of principal. The Secured Notes have due
dates ranging from January 31, 1999 to July 1, 2004. The Senior Notes consist
of seven separate series of senior notes with interest rates ranging from
8.04% to 12.10% per annum. Each series requires the payment of annual
installments of principal. The Senior Notes have due dates ranging from May
15, 1999 to September 28, 2007. The Subordinated Notes consist of one series
of notes due April 30, 2000. The Subordinated Notes bear interest at the rate
of 9.30% per annum plus contingent interest based on the operating income of
EPCO. The Company is required to pay a "make-whole amount" to the holders of
the Secured Notes and the Senior Notes if the Company elects to redeem such
debt prior to its maturity. The "make-whole amounts" are based on an implied
return to maturity for early redemption.
The Loan Participations consist of interests in the bank debt of Mont
Belvieu Associates and BEF. The Company will acquire a 60% participation
interest in the Mont Belvieu Associates loan. This loan had an outstanding
principal amount as of July 1, 1998 of $12.8 million, requires payment of
monthly installments of principal and interest, bears interest at a floating
rate per annum of LIBOR plus 0.75% and is due on December 31, 2001. The
Company will also acquire a 33 1/3% participation interest in the BEF loan.
This loan had an outstanding principal amount as of July 1, 1998 of $78.3
million, requires payment of quarterly installments of principal and interest,
bears interest at the floating rate per annum of LIBOR plus 0.875% and is due
on May 31, 2000. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources--
Distributions from Unconsolidated Affiliates; Loan Participations."
38
The Operating Partnership will use approximately $46.5 million of the
proceeds from this offering to finance the Company's new projects which
include the Baton Rouge Fractionator, Tri-States Pipeline, Wilprise Pipeline
and the NGL Product Chiller. See "Business and Properties--NGL Fractionation"
and "--Other Businesses."
The Company will use any proceeds from the exercise of the Underwriters'
over-allotment option to repay indebtedness under its bank credit facility.
39
CAPITALIZATION
The following table sets forth: (i) the capitalization of the Company as of
March 31, 1998, (ii) the pro forma adjustments required to reflect the
Transactions, including the sale of the Common Units offered hereby (assuming
an initial public offering price of $22.25 per Common Unit) and the
application of the net proceeds therefrom as described in "Use of Proceeds,"
and (iii) the pro forma capitalization of the Company as of March 31, 1998
after giving effect thereto. The table should be read together with the
historical and pro forma financial statements and notes thereto included
elsewhere in this Prospectus.
AS OF MARCH 31, 1998
----------------------------------
PRO FORMA
ADJUSTMENTS PRO FORMA
HISTORICAL (UNAUDITED) (UNAUDITED)
---------- ----------- -----------
(IN THOUSANDS)
Long-term debt (including current portion):
Secured Notes............................. $ 62,521 $(62,521) $ --
Senior Notes.............................. 160,345 (160,345) --
Subordinated Notes........................ 4,497 (4,497) --
Bank credit facility...................... -- 89,200 89,200
-------- -------- --------
Total indebtedness...................... 227,363 (138,163) 89,200
-------- -------- --------
Minority interest........................... 3,147 2,427 5,574
-------- -------- --------
Combined equity............................. 342,885 (342,885) --
Partners' equity:
Common Units.............................. -- 425,539 425,539
Subordinated Units........................ -- 120,736 120,736
General partner interest.................. -- 5,574 5,574
-------- -------- --------
Total partners' and combined equity..... 342,885 208,964 551,849
-------- -------- --------
Total capitalization.................... $573,395 $ 73,228 $646,623
======== ======== ========
40
DILUTION
On a pro forma basis as of March 31, 1998, after giving effect to the
Transactions, the net tangible book value was $551.8 million or $8.13 per
Common Unit. Purchasers of Common Units in this offering will experience
substantial and immediate dilution in net tangible book value per Common Unit
for financial accounting purposes, as illustrated in the following table:
Assumed initial public offering price per Common Unit.............. $22.25
Net tangible book value per Unit before the offering (a)(b)........ 6.04
Increase in net tangible book value per Common Unit attributable to
new investors..................................................... 2.09
----
Less: Pro forma net tangible book value per Common Unit after the
offering (b)(c)................................................... 8.13
------
Immediate dilution in net tangible book value per Common Unit to
new investors..................................................... $14.12
======
- --------
(a) Determined by dividing the number of Units (34,004,974 Common Units and
21,269,838 Subordinated Units and the combined 2% interest of the General
Partner having a dilutive effect equivalent to 1,357,649 Units) to be
issued to EPCO and the General Partner for the contribution of the assets
of EPCO to the Company into the net tangible book value of the contributed
assets and liabilities.
(b) The net tangible book value does not include amounts attributable to
unamortized debt costs.
(c) Determined by dividing the total number of Units (45,254,974 Common Units,
21,269,838 Subordinated Units and the combined 2% interest of the General
Partner having a dilutive effect equivalent to 1,357,649 Units) to be
outstanding after the offering made hereby, into the pro forma net
tangible book value of the Company allocable to such Units, after giving
effect to the application of the net proceeds of this offering.
The following table sets forth the number of Units issued by the Company and
the total consideration contributed by the General Partner and its affiliates
in respect of their Units and by purchasers of Common Units in this offering
upon the consummation of the Transactions:
UNITS ACQUIRED TOTAL CONSIDERATION
------------------ --------------------
NUMBER PERCENT AMOUNTS PERCENT
---------- ------- ------------ -------
General Partner and its affiliates(a)... 56,632,461 83.4% $341,937,000 57.7%
New Investors........................... 11,250,000 16.6 250,312,500 42.3
---------- ----- ------------ -----
67,882,461 100.0% $592,249,500 100.0%
========== ===== ============ =====
- --------
(a) After giving effect to the Transactions, EPCO will own an aggregate of
55,274,812 Common Units and Subordinated Units and the General Partner
will own the combined 2% interest in the Company having a dilutive effect
equivalent to 1,357,649 Units. Total consideration for EPCO and the
General Partner represents the book value (excluding amounts attributable
to unamortized debt costs) at March 31, 1998 of $341.9 million.
41
CASH DISTRIBUTION POLICY
GENERAL
The Company will distribute to its partners, on a quarterly basis, all of
its Available Cash in the manner described herein. Available Cash is defined
in the Glossary and generally means, with respect to any quarter of the
Company, all cash on hand at the end of such quarter less the amount of cash
reserves that is necessary or appropriate in the reasonable discretion of the
General Partner to (i) provide for the proper conduct of the Company's
business, (ii) comply with applicable law or any Company debt instrument or
other agreement or (iii) provide funds for distributions to Unitholders and
the General Partner in respect of any one or more of the next four quarters.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to Unitholders relative to the General Partner, and under certain
circumstances it determines whether holders of Subordinated Units receive any
distributions. See "--Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Glossary and refers generally to (a) the
sum of (i) the cash balance of the Company on the date the Transactions close
(excluding $46.5 million expected to be spent from the proceeds of this
offering on new projects), (ii) all cash receipts of the Company from its
operations since the closing of the Transactions (excluding cash receipts from
Interim Capital Transactions, except for up to $60 million of such cash
receipts from Interim Capital Transactions that the General Partner designates
as Operating Surplus), less (b) the sum of (i) all Company operating expenses,
(ii) debt service payments (including reserves therefor but not including
payments required in connection with the sale of assets or any refinancing
with the proceeds of new indebtedness or an equity offering), (iii)
maintenance capital expenditures and (iv) reserves established for future
Company operations, in each case since the closing of the Transactions.
Capital Surplus is also defined in the Glossary and will generally be
generated only by borrowings (other than borrowings for working capital
purposes), sales of debt and equity securities and sales or other dispositions
of assets for cash (other than inventory, accounts receivable and other assets
all as disposed of in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Company is from Operating Surplus or from Capital Surplus,
all Available Cash distributed by the Company from any source will be treated
as distributed from Operating Surplus until the sum of all Available Cash
distributed since the commencement of the Company equals the Operating Surplus
as of the end of the quarter prior to such distribution. Any Available Cash in
excess of such amount (irrespective of its source) will be deemed to be from
Capital Surplus and distributed accordingly.
If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to the initial public
offering price of the Common Units (the "Initial Unit Price"), plus any Common
Unit Arrearages, the distinction between Operating Surplus and Capital Surplus
will cease, and all distributions of Available Cash will be treated as if they
were from Operating Surplus. The Company does not anticipate that there will
be significant distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the Company, and
the rights of holders of such interests to participate in distributions to
partners differ from the rights of the holders of Common Units. For any given
quarter, any Available Cash will be distributed to the General Partner and to
the holders of Common Units, and may also be distributed to the holders of
Subordinated Units depending upon the amount of Available Cash for the
quarter, the amount of Common Unit Arrearages, if any, and other factors
discussed below.
The Incentive Distributions represent the right of the General Partner to
receive an increasing percentage of quarterly distributions of Available Cash
from Operating Surplus after the Target Distribution Levels have been
achieved. The Target Distribution Levels are based on the amounts of Available
Cash from Operating Surplus distributed in excess of the payments made with
respect to the Minimum Quarterly Distribution and Common Unit Arrearages, if
any, and the related 2% distribution to the General Partner.
42
Subject to the limitations described under "The Partnership Agreement--
Issuance of Additional Securities," the Company has the authority to issue
additional Common Units or other equity securities of the Company for such
consideration and on such terms and conditions as are established by the
General Partner in its sole discretion and without the approval of the
Unitholders. It is possible that the Company will fund acquisitions of assets
or other capital projects through the issuance of additional Common Units or
other equity securities of the Company. Holders of any additional Common Units
issued by the Company will be entitled to share equally with the then-existing
holders of Common Units in distributions of Available Cash by the Company. In
addition, the issuance of additional Partnership Interests may dilute the
value of the interests of the then-existing holders of Common Units in the net
assets of the Company. The General Partner will be required to make an
additional capital contribution to the Company or the Operating Partnership
(including in connection with the exercise of the over-allotment option) in
connection with the issuance of additional Partnership Interests.
The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partner and the holders of
Common Units and the circumstances under which holders of Subordinated Units
are entitled to receive cash distributions and the amounts thereof. For a
discussion of Available Cash from Operating Surplus on a pro forma basis, see
"Cash Available for Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Company will make distributions to its partners with respect to each
quarter of the Company prior to its liquidation in an amount equal to 100% of
its Available Cash for such quarter. The Company expects to make distributions
of all Available Cash within approximately 45 days after the end of each
quarter, commencing with the quarter ending September 30, 1998, to holders of
record on the applicable record date. The Minimum Quarterly Distribution and
the Target Distribution Levels for the period from the closing of this
offering through September 30, 1998 will be adjusted downward based on the
actual length of such period. The Minimum Quarterly Distribution and the
Target Distribution Levels are also subject to certain other adjustments as
described below under "--Distributions from Capital Surplus" and "--Adjustment
of Minimum Quarterly Distribution and Target Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Company's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon
expiration of the Subordination Period, all Subordinated Units will be
converted on a one-for-one basis into Common Units and will participate pro
rata with all other Common Units in future distributions of Available Cash.
Under certain circumstances, up to 50% of the Subordinated Units may convert
into Common Units prior to the expiration of the Subordination Period. Common
Units will not accrue arrearages with respect to distributions for any quarter
after the Subordination Period, and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend from the closing of this
offering until the first day of any quarter beginning after June 30, 2003 in
respect of which (i) distributions of Available Cash from Operating Surplus on
the Common Units and the Subordinated Units with respect to each of the three
consecutive, non-overlapping, four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all
of the outstanding Common Units and Subordinated Units during such periods,
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping, four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all
of the Common Units and Subordinated Units that were outstanding during such
period on a fully diluted
43
basis and the related distribution on the general partner interests in the
Company and the Operating Partnership and (iii) there are no outstanding
Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any
quarter ending on or after (a) June 30, 2001 with respect to one-quarter of
the Subordinated Units (5,317,460 Subordinated Units), and (b) June 30, 2002
with respect to one-quarter of the Subordinated Units (5,317,460 Subordinated
Units), in respect of which (i) distributions of Available Cash from Operating
Surplus on the Common Units and the Subordinated Units with respect to each of
the three consecutive, non-overlapping, four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the three consecutive, non-overlapping, four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
outstanding during such period on a fully diluted basis and the related
distribution on the general partner interests in the Company and the Operating
Partnership and (iii) there are no outstanding Common Unit Arrearages;
provided, however, that the early conversion of the second one-quarter of
Subordinated Units may not occur until at least one year following the early
conversion of the first one-quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will
thereafter participate, pro rata, with the other Common Units in distributions
of Available Cash. In addition, if the General Partner is removed as the
general partner of the Company under circumstances where Cause does not exist
and Units held by the General Partner and its affiliates are not voted in
favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
general partner interest into Common Units or to receive cash in exchange for
such interests.
Adjusted Operating Surplus for any period generally means Operating Surplus
generated during such period, less (a) any net increase in working capital
borrowings during such period and (b) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash
reserves for Operating Expenditures during such period required by any debt
instrument for the repayment of principal, interest or premium. Operating
Surplus generated during a period is equal to the difference between (i) the
Operating Surplus determined at the end of such period and (ii) the Operating
Surplus determined at the beginning of such period.
Distributions by the Company of Available Cash from Operating Surplus with
respect to any quarter during the Subordination Period will be made in the
following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any Common Unit Arrearages accrued and
unpaid with respect to any prior quarters during the Subordination Period;
third, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Subordinated Unit an amount equal to the Minimum Quarterly
Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions--
Hypothetical Annualized Yield" below.
44
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the
percentage interest in distributions from the Company and the Operating
Partnership of the General Partner (exclusive of its or any of its affiliates'
interests as holders of Common Units or Subordinated Units). The General
Partner will own a 1% general partner interest in the Company and a 1.0101%
general partner interest in the Operating Partnership. With respect to any
Common Unit, the term "Common Unit Arrearages" refers to the amount by which
the Minimum Quarterly Distribution in any quarter during the Subordination
Period exceeds the distribution of Available Cash from Operating Surplus
actually made for such quarter on a Common Unit issued in this offering,
cumulative for such quarter and all prior quarters during the Subordination
Period. Common Unit Arrearages will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Company of Available Cash from Operating Surplus with
respect to any quarter after the Subordination Period will be made in the
following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter; and
thereafter, in the manner described in "--Incentive Distributions--
Hypothetical Annualized Yield" below.
INCENTIVE DISTRIBUTIONS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to
the Minimum Quarterly Distribution on all Units and to the Common Unitholders
in an amount equal to any unpaid Common Unit Arrearages, then any additional
Available Cash from Operating Surplus in respect of such quarter will be
distributed 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 the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.506
for such quarter in respect of each outstanding Unit (the "First Target
Distribution");
second, 85% to all Unitholders, pro rata, and 15% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.617
for such quarter in respect of each outstanding Unit (the "Second Target
Distribution");
third, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until the Unitholders have received (in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.784
for such quarter in respect of each outstanding Unit (the "Third Target
Distribution"); and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
The distributions to the General Partner set forth above that are in excess
of its aggregate 2% general partner interest represent the Incentive
Distributions.
The following table illustrates the percentage allocation of the additional
Available Cash from Operating Surplus between the Unitholders and the General
Partner up to the various Target Distribution Levels and a hypothetical
annualized percentage yield to be realized by a Unitholder at each Target
Distribution Level. For purposes of the following table, the annualized
percentage yield is calculated on a pretax basis assuming that (i)
45
the Common Unit was purchased at an amount equal to an assumed initial public
offering price of $22.25 per Common Unit and (ii) the Company distributed each
quarter during the first year following the investment the amount set forth
under the column "Total Quarterly Distribution Target Amount." The
calculations are also based on the assumption that the quarterly distribution
amounts shown do not include any Common Unit Arrearages. The amounts set forth
under "Marginal Percentage Interest in Distributions" are the percentage
interests of the General Partner and the Unitholders in any Available Cash
from Operating Surplus distributed up to and including the corresponding
amount in the column "Total Quarterly Distribution Target Amount," until
Available Cash distributed 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.
MARGINAL PERCENTAGE
TOTAL INTEREST IN
QUARTERLY DISTRIBUTIONS
DISTRIBUTION HYPOTHETICAL -------------------
TARGET ANNUALIZED GENERAL
AMOUNT YIELD UNITHOLDERS PARTNER
------------ ------------ ----------- -------
Minimum Quarterly Distribution.... $0.450 8.09% 98% 2%
First Target Distribution......... $0.506 9.09% 98% 2%
Second Target Distribution........ $0.617 11.09% 85% 15%
Third Target Distribution......... $0.784 14.09% 75% 25%
Thereafter........................ above $0.784 above 14.09% 50% 50%
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Company of Available Cash from Capital Surplus will be
made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Company has distributed, in respect of each outstanding Common
Unit issued in this offering, Available Cash from Capital Surplus in an
aggregate amount per Common Unit equal to the Initial Unit Price;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the Company has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any unpaid Common Unit Arrearages with respect to
such Common Unit; and
thereafter, all distributions of Available Cash from Capital Surplus will
be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution
Levels will be adjusted downward by multiplying each such amount by a
fraction, the numerator of which is the Unrecovered Capital (as defined in the
Glossary) of the Common Units immediately after giving effect to such
repayment and the denominator of which is the Unrecovered Capital of the
Common Units immediately prior to such repayment. This adjustment to the
Minimum Quarterly Distribution may make it more likely that Subordinated Units
will be converted into Common Units (whether pursuant to the termination of
the Subordination Period or to the provisions permitting early conversion of
some Subordinated Units) and may accelerate the dates at which such
conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), the Minimum Quarterly Distribution and each of the
Target Distribution Levels will have been reduced to zero for subsequent
quarters. Thereafter, all distributions of Available Cash from all sources
will be treated as if they were from Operating Surplus. Because the Minimum
Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partner will be entitled thereafter to receive
50% of all distributions of Available Cash in its capacity
46
as General Partner (in addition to any distributions to which it or its
affiliates may be entitled as holders of Units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels,
the Unrecovered Capital, the number of additional Common Units issuable during
the Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts
calculated on a per Unit basis will be proportionately adjusted upward or
downward, as appropriate, in the event of any combination or subdivision of
Common Units (whether effected by a distribution payable in Common Units or
otherwise), but not by reason of the issuance of additional Common Units for
cash or property. For example, in the event of a two-for-one split of the
Common Units (assuming no prior adjustments), the Minimum Quarterly
Distribution, each of the Target Distribution Levels and the Unrecovered
Capital of the Common Units would each be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Company to become taxable as a corporation or otherwise subjects the Company
to taxation as an entity for federal, state or local income tax purposes. In
such event, the Minimum Quarterly Distribution and the Target Distribution
Levels would be reduced to an amount equal to the product of (i) the Minimum
Quarterly Distribution and each of the Target Distribution Levels,
respectively, multiplied by (ii) one minus the sum of (x) the maximum
effective federal income tax rate to which the Company is then subject as an
entity plus (y) any increase that results from such legislation in the
effective overall state and local income tax rate to which the Company is
subject as an entity for the taxable year in which such event occurs (after
taking into account the benefit of any deduction allowable for federal income
tax purposes with respect to the payment of state and local income taxes). For
example, assuming the Company was not previously subject to state and local
income tax, if the Company were to become taxable as an entity for federal
income tax purposes and the Company became subject to a maximum marginal
federal, and effective state and local, income tax rate of 38%, then the
Minimum Quarterly Distribution and the Target Distribution Levels would each
be reduced to 62% of the amount thereof immediately prior to such adjustment.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Company, assets will be sold or otherwise disposed of from time to time and
the partners' capital account balances will be adjusted to reflect any
resulting gain or loss. The proceeds of such liquidation will, first, be
applied to the payment of creditors of the Company in the order of priority
provided in the Partnership Agreement and by law and, thereafter, be
distributed to the Unitholders and the General Partner in accordance with
their respective capital account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses 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 the liquidation of the Company, to the extent required to permit
Common Unitholders to receive their Unrecovered Capital plus any unpaid Common
Unit Arrearages. Thus, net losses recognized upon liquidation of the Company
will be allocated to the holders of the Subordinated Units to the extent of
their capital account balances before any loss is allocated to the holders of
the Common Units, and net gains recognized upon liquidation will be allocated
first to restore negative balances in the capital account of the General
Partner and any Unitholders and then to the Common Unitholders until their
capital account balances equal their Unrecovered Capital plus unpaid Common
Unit
47
Arrearages. However, no assurance can be given that there will be sufficient
gain upon liquidation of the Company to enable the holders of Common Units to
fully recover all of such amounts, even though there may be cash available
after such allocation for distribution to the holders of Subordinated Units.
The manner of such adjustment is as provided in the Partnership Agreement,
the form of which is included as Appendix A to this Prospectus. If the
liquidation of the Company occurs before the end of the Subordination Period,
any net gain (or unrealized gain attributable to assets distributed in kind)
will be allocated to the partners as follows:
first, to the General Partner and the holders of Units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the capital account for each Common Unit is equal to
the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
the amount of the Minimum Quarterly Distribution for the quarter during
which liquidation of the Company occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
third, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partner, until the capital account for each Subordinated Unit is
equal to the sum of (i) the Unrecovered Capital in respect of such
Subordinated Unit and (ii) the amount of the Minimum Quarterly Distribution
for the quarter during which the liquidation of the Company occurs;
fourth, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been allocated under this paragraph fourth an amount per
Unit equal to (a) the sum of the excess of the First Target Distribution
per Unit over the Minimum Quarterly Distribution per Unit for each quarter
of the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Minimum Quarterly Distribution per Unit that were distributed 98% to the
Unitholders, pro rata, and 2% to the General Partner for each quarter of
the Company's existence;
fifth, 85% to the Unitholders, pro rata, and 15% to the General Partner,
until there has been allocated under this paragraph fifth an amount per
Unit equal to (a) the sum of the excess of the Second Target Distribution
per Unit over the First Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution per Unit that were distributed 85% to the
Unitholders, pro rata, and 15% to the General Partner for each quarter of
the Company's existence;
sixth, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until there has been allocated under this paragraph sixth an amount per
Unit equal to (a) the sum of the excess of the Third Target Distribution
per Unit over the Second Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution per Unit that were distributed 75% to the
Unitholders, pro rata, and 25% to the General Partner for each quarter of
the Company's existence; and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses
(ii) and (iii) of paragraph second above and all of paragraph third above will
no longer be applicable.
Upon liquidation of the Company, any loss will generally be allocated to the
General Partner and the Unitholders as follows:
first, 98% to holders of Subordinated Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the holders of the Subordinated
Units have been reduced to zero;
48
second, 98% to the holders of Common Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the Common Unitholders have been
reduced to zero; and
thereafter, 100% to the General Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph first above will no longer be applicable.
In addition, interim adjustments to capital accounts will be made at the
time the Company issues additional partnership interests in the Company or
makes distributions of property. Such adjustments will be based on the fair
market value of the partnership interests or the property distributed and any
gain or loss resulting therefrom will be allocated to the Unitholders and the
General Partner in the same manner as gain or loss is allocated upon
liquidation. In the event that positive interim adjustments are made to the
capital accounts, any subsequent negative adjustments to the capital accounts
resulting from the issuance of additional partnership interests in the
Company, distributions of property by the Company, or upon liquidation of the
Company, will be allocated in a manner which results, to the extent possible,
in the capital account balances of the General Partner equaling the amount
which would have been the General Partner's capital account balances if no
prior positive adjustments to the capital accounts had been made.
49
CASH AVAILABLE FOR DISTRIBUTION
The Company believes that, if its assumptions about operating conditions are
realized, the Company should have sufficient Available Cash from Operating
Surplus (including uncommitted cash on hand and borrowings under its working
capital facility) to enable the Company to distribute the Minimum Quarterly
Distribution on the Common Units and Subordinated Units to be outstanding
immediately after the consummation of this offering, and the related
distribution on the combined 2% interest of the General Partner, with respect
to each of its quarters at least through the quarter ending June 30, 2001. The
Company's belief is based on a number of assumptions, including assumptions
that (i) total operating margins generated from the Company's existing assets
will remain generally consistent with total margins recognized by the Company
in 1997; (ii) the Company's identified new projects will become operational as
scheduled and will result in anticipated levels of operating margins; (iii)
the Company will not experience any significant accidents or business
interruptions, regardless of whether such accidents or interruptions are
covered by insurance; (iv) there will be no regulatory changes that materially
adversely affect the Company's operations; and (v) market conditions in the
NGL industry and general economic conditions will not change substantially.
Although the Company believes such assumptions are within a range of
reasonableness, whether the assumptions are realized is not, in a number of
cases, within the control of the Company and cannot be predicted with any
degree of certainty. If the Company's assumptions are not realized, Available
Cash from Operating Surplus generated by the Company could be substantially
less than that currently expected and could, therefore, be insufficient to
permit the Company to make cash distributions at the levels described above.
For example, as discussed in "Management's Discussion and Analysis of
Financial Condition and Results of Operations--First Quarter 1998 Compared
with First Quarter 1997," the Company's results of operations in the first
quarter of 1998 were substantially weaker than the first quarter of 1997
principally as a result of reduced operating margins in the isomerization and
propylene fractionation businesses. During the second quarter of 1998, the
Company has experienced isomerization operating margins which are comparable
to isomerization margins earned in the second quarter of 1997. However,
operating margins in the propylene business remain weak, and there can be no
assurance that the improvements in the isomerization business will be
sustained. Accordingly, no assurance can be given that distributions of the
Minimum Quarterly Distribution or any other amounts will be made. The Company
does not intend to update the expression of belief set forth above. See "Cash
Distribution Policy."
The approximate amount of Available Cash from Operating Surplus needed to
distribute the Minimum Quarterly Distribution for four quarters on the Common
Units and Subordinated Units to be outstanding immediately after this offering
and the related distribution on the combined 2% interest of the General
Partner is as follows:
OVER-ALLOTMENT OVER-ALLOTMENT
OPTION IS NOT OPTION IS
EXERCISED EXERCISED
-------------- --------------
(IN MILLIONS)
Public Common Units......................... $ 20.3 $ 23.3
EPCO Common Units(1)........................ 61.2 61.2
EPCO Subordinated Units(1).................. 38.3 38.3
General Partner Interest(1)................. 2.4 2.5
------ ------
Total................................... $122.2 $125.3
====== ======
--------
(1) Such distributions will be made by the Company to a
subsidiary of EPCO, which will hold the Common Units
identified as EPCO Common Units and all of the
Subordinated Units, and to the General Partner, which is
also controlled by EPCO.
The amount of pro forma Available Cash from Operating Surplus generated
during 1997 was approximately $122.2 million. Such amount would have been
sufficient to cover the Minimum Quarterly Distribution for 1997 on all of the
Units and the related distribution on the general partner interest. The amount
of pro forma Available Cash from Operating Surplus generated during the twelve
months ended March 31, 1998 was approximately $104.1 million. Such amount
would have been sufficient to cover the Minimum Quarterly Distribution for
such period on all of the Common Units, but would have been insufficient by
approximately $18.1 million to cover the Minimum Quarterly Distribution on all
the Subordinated Units and the related distribution on the general partner
interest. The amounts of pro forma Available Cash from Operating Surplus were
derived in the manner set forth in Appendix D. The pro forma adjustments are
based upon currently available information and certain estimates and
assumptions. The pro forma financial statements do not purport to present the
results of operations of the Company had the Transactions actually been
completed as of the dates indicated. Furthermore, Available
50
Cash from Operating Surplus as defined in the Partnership Agreement is a cash
accounting concept, while the Company's historical and pro forma financial
statements have been prepared on an accrual basis. As a consequence, the
amount of pro forma Available Cash from Operating Surplus shown above should
only be viewed as a general indication of the amount of Available Cash from
Operating Surplus that might in fact have been generated by the Company had it
been formed in earlier periods. For definitions of Available Cash and
Operating Surplus, see the Glossary.
51
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth for the periods and at the dates indicated,
selected historical and pro forma financial and operating data for the
Company. The selected historical financial data (except for EBITDA of
unconsolidated affiliates) have been derived from the Company's audited
financial statements for the periods indicated. The selected historical income
statement data for each of the three years in the period ended December 31,
1997 and the selected balance sheet data for each of the two years in the
period ended December 31, 1997 should be read in conjunction with the audited
financial statements for such periods included elsewhere in this Prospectus.
EBITDA of unconsolidated affiliates has been derived from the audited
financial statements of such entities for the periods indicated. The selected
historical data for the three-month periods ending March 31, 1997 and 1998 are
derived from the Company's unaudited financial statements included elsewhere
in this Prospectus and should be read in conjunction therewith. In the
Company's opinion, each of the unaudited financial statements include all
adjustments, consisting of normal recurring adjustments, necessary for a fair
statement of the results of the unaudited periods. The selected pro forma
financial and operating data of the Company are derived from the unaudited pro
forma consolidated financial statements included elsewhere in this Prospectus
and should be read in conjunction therewith. See also "Management's Discussion
and Analysis of Financial Condition and Results of Operations." The dollar
amounts in the table below, except per Unit data, are in thousands.
PRO FORMA
PRO FORMA THREE MONTHS THREE MONTHS
YEAR ENDED DECEMBER 31, YEAR ENDED ENDED MARCH 31, ENDED
-------------------------------------------------- DECEMBER 31, ------------------ MARCH 31,
1993 1994 1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- -------- ---------- ------------ -------- -------- ------------
INCOME STATEMENT DATA:
Revenues............... $551,054 $586,609 $790,080 $999,506 $1,020,281 $1,020,281 $255,652 $190,517 $190,517
Operating costs and
expenses.............. 505,454 533,929 726,207 906,367 937,068 935,968 229,136 181,447 180,827
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Operating margin....... 45,600 52,680 63,873 93,139 83,213 84,313 26,516 9,070 9,690
Selling, general and
administrative
expenses.............. 21,768 17,826 22,250 24,227 23,060 12,000 6,636 5,754 3,000
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Operating income....... 23,832 34,854 41,623 68,912 60,153 72,313 19,880 3,316 6,690
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Interest expense....... (26,131) (25,411) (27,567) (26,310) (25,717) (5,993) (5,967) (6,734) (1,498)
Interest income........ 1,809 2,477 554 2,705 1,934 5,230 587 275 927
Equity in income of
unconsolidated
affiliates:
Mont Belvieu
Associates(1)....... 3,095 7,257 6,167 6,004 6,377 6,377 1,352 1,947 1,947
Belvieu Environmental
Fuels(2)............ -- -- 6,107 9,752 9,305 9,305 1,668 875 875
Gain (loss) on sale of
assets................ -- 4,271 7,948 -- (155) (155) -- -- --
Other income
(expense), net........ 38 45 305 364 793 793 1,065 2 2
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Income before minority
interest.............. 2,643 23,493 35,137 61,427 52,690 87,870 18,585 (319) 8,943
Minority interest(3)... (26) (235) (351) (614) (527) (879) (186) 3 (89)
-------- -------- -------- -------- ---------- ---------- -------- -------- --------
Net income............. $ 2,617 $ 23,258 $ 34,786 $ 60,813 $ 52,163 $ 86,991 $ 18,399 $ (316) $ 8,854
======== ======== ======== ======== ========== ========== ======== ======== ========
Net income per
Unit(4)............... $ 1.29 $ 0.13
========== ========
BALANCE SHEET DATA (AT
PERIOD END):
Total assets........... $526,372 $573,348 $610,931 $711,151 $ 697,713 $ 713,979 $697,609 $683,626 $753,168
Long-term debt......... 291,395 268,585 281,656 255,617 230,237 89,200 252,741 227,363 89,200
Combined
equity/Partner's
equity................ 158,001 189,366 198,815 266,021 311,885 559,861 297,440 342,885 551,849
OTHER FINANCIAL DATA:
Cash flows from
Operating Activities.. $ 24,326 $ 49,997 $ 12,212 $ 91,431 $ 57,795 $ -- $ 15,666 $(35,989) $ --
Cash flows from
Investing Activities.. (19,099) (36,944) (9,233) (57,725) (30,982) -- (10,232) (3,648) --
Cash flows from
Financing Activities.. (18,166) (21,973) 11,995 (24,930) (26,551) -- (8,353) (8,234) --
EBITDA(5).............. 46,702 55,430 65,406 87,109 79,882 94,986 25,535 8,219 12,153
EBITDA of
unconsolidated
affiliates(6)......... 4,859 7,198 18,520 25,012 24,372 24,371 5,202 4,825 4,838
OPERATING DATA(7):
Fractionation
Production........... 145 158 158 166 189 189 170 207 207
Volume from tolling
operations.......... 95% 94% 86% 90% 96% 96% 95% 96% 96%
Isomerization
Production........... 66 66 67 71 67 67 58 62 62
Volume from tolling
operations.......... 66% 68% 86% 84% 92% 92% 88% 75% 75%
MTBE
Production........... -- 8 10 13 14 14 14 10 10
Volume from tolling
operations.......... -- -- -- -- -- -- -- -- --
Propylene
Fractionation
Production........... 16 14 16 16 26 26 23 24 24
Volume from tolling
operations.......... 36% 35% 35% 33% 47% 47% 30% 49% 49%
See notes on following page
52
(1) Consists of the Company's 49% economic interest in Mont Belvieu
Associates, a general partnership that owns a 50% undivided interest in
the NGL fractionation facilities operated by the Company at Mont Belvieu.
The Company directly owns an additional 12.5% undivided interest in such
NGL fractionation facilities, giving it an effective 37.0% economic
interest in the facilities. The revenues and costs associated with this
12.5% interest are included in the Company's revenues and operating costs
and expenses.
(2) Consists of the Company's 33 1/3% economic interest in BEF, a general
partnership that owns the MTBE facility operated by the Company at Mont
Belvieu.
(3) Reflects the General Partner's 1% minority interest in the Operating
Partnership's net income.
(4) Net income per Unit is computed by dividing the limited partners' 99%
interest in net income by the number of Units expected to be outstanding
at the closing of this offering.
(5) EBITDA is defined as net income plus depreciation and amortization and
interest expense less equity in income of unconsolidated affiliates.
EBITDA should not be considered as an alternative to net income, operating
income, cash flow from operations or any other measure of financial
performance presented in accordance with generally accepted accounting
principles. EBITDA is not intended to represent cash flow and does not
represent the measure of cash available for distribution, but provides
additional information for evaluating the Company's ability to make the
Minimum Quarterly Distribution. Management uses EBITDA to assess the
viability of projects and to determine overall rate of returns on
alternative investment opportunities. Because EBITDA excludes some, but
not all, items that affect net income and this measure may vary among
companies, the EBITDA data presented above may not be comparable to
similarly titled measures of other companies.
(6) Represents the Company's pro rata share of net income plus depreciation
and amortization and interest expense of the unconsolidated affiliates.
After the purchase of the Company's pro rata share of bank debt of BEF and
Mont Belvieu Associates, EBITDA of unconsolidated affiliates will closely
approximate the aggregate cash that the Company will receive from its
investment in BEF and Mont Belvieu Associates.
(7) Production volumes represent average daily production in thousands of
barrels per day. Production volume for fractionation includes gross
production volumes for the NGL fractionation facilities in which the
Company owns an effective 37.0% economic interest. Production volume for
MTBE reflects gross production volumes for the BEF facility in which the
Company owns an undivided 33 1/3% economic interest. MTBE production at
the BEF facility began in 1994.
53
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the historical financial condition and results
of operations of the Company should be read in conjunction with the Company's
historical and pro forma combined financial statements and the notes thereto
included elsewhere in this Prospectus.
GENERAL
The Company is a leading integrated provider of processing and
transportation services to producers of NGLs and consumers of NGL products.
The Company (i) fractionates mixed NGLs produced as by-products of oil and
natural gas production into their component products: ethane, propane,
isobutane, normal butane and natural gasoline; (ii) converts normal butane to
isobutane through the process of isomerization; (iii) produces MTBE from
isobutane and methanol; and (iv) transports NGL products to end users by
pipeline and railcar. The Company also separates high purity propylene from
refinery-sourced propane/propylene mix and transports high purity propylene to
plastics manufacturers by pipeline. Products processed by the Company
generally are used as feedstocks in petrochemical manufacturing, in the
production of motor gasoline and as fuel for residential and commercial
heating.
The Company's processing operations are concentrated at Mont Belvieu, Texas.
The facilities operated by the Company include (i) one of the largest NGL
fractionation facilities in the United States with an average production
capacity of 210,000 barrels per day; (ii) the largest butane isomerization
complex in the United States with an average isobutane production capacity of
116,000 barrels per day; (iii) one of the largest MTBE production facilities
in the United States with an average production capacity of 14,800 barrels per
day; and (iv) two propylene fractionation units with an average combined
production capacity of 30,000 barrels per day. The Company owns all of the
assets at its Mont Belvieu facility except for the fractionation facility, in
which it owns a 37.0% economic interest; one of the propylene fractionation
units, in which it owns a 54.6% interest and leases the remaining interest;
the MTBE plant, in which it owns a 33 1/3% economic interest; and one of its
three isomerization units and one deisobutanizer tower which are held under
long-term leases with purchase options. The Company owns and operates a
network of approximately 500 miles of pipelines along the Gulf Coast and a
fractionation facility in Petal, Mississippi with a capacity of 7,000 barrels
per day. The Company also leases and operates one of only two commercial NGL
import/export terminals on the Gulf Coast. As an integral part of providing
processing and transportation services, the Company also owns and operates NGL
storage wells with approximately 35 million barrels of capacity.
NGL Fractionation
The Company has been involved in the business of fractionating mixed NGLs
since 1970. The Company has expanded throughput capacity over the years in
response to increased demand for its processing services from the joint owners
of its NGL fractionation facilities and other customers. The most recent
capacity expansion was completed in November 1996 and increased capacity by
45,000 barrels per day to the current capacity of 210,000 barrels per day. The
Company's interest in the operations of its NGL fractionation facilities at
Mont Belvieu consists of a directly-owned 12.5% undivided interest and a 49.0%
economic interest in Mont Belvieu Associates, which in turn owns a 50.0%
undivided interest in such facilities. The Company's 12.5% interest is
recorded as part of revenues and expenses, and its effective 24.5% economic
interest is recorded as an equity investment in an unconsolidated subsidiary.
The profitability of this business unit depends on the volume of mixed NGLs
that the Company processes for its toll customers and the level of toll
processing fees charged to its customers. The most significant variable cost
of fractionation is the cost of energy required to operate the units and to
heat the mixed NGLs to effect separation of the NGL products. The Company is
able to reduce its energy costs by capturing excess heat and re-using it in
its operations. Additionally, the Company's NGL fractionation processing
contracts typically contain escalation provisions for cost increases resulting
from increased variable costs, including energy costs.
54
Isomerization
The Company's butane isomerization complex is the largest in the United
States and accounts for more than 70% of domestic commercial isobutane
production capacity. The Company has operated this facility at approximately
60% capacity for the past several years.
The profitability of this business unit depends on the volume of normal
butane that the Company isomerizes into isobutane for its toll processing
customers, the level of toll processing fees charged to its customers and the
margins generated from selling isobutane to merchant customers. The Company's
toll processing customers pay the Company a fee for isomerizing their normal
butane into isobutane. In addition, the Company sells isobutane which it
obtains by isomerizing normal butane into isobutane, fractionating mixed
butane into isobutane and normal butane or purchasing isobutane in the spot
market. The Company determines the optimal source for isobutane to meet sales
obligations based on current and expected market prices for isobutane and
normal butane, volumes of mixed butane held in inventory and estimated costs
of isomerization and mixed butane fractionation.
The Company purchases most of its imported mixed butane between the months
of February and October. During these months, the Company is able to purchase
imported mixed butanes at prices that are often at a discount to posted market
prices. Because of its storage capacity, the Company is able to store these
imports until the summer months when the spread between isobutane and normal
butane typically widens or until winter months when the prices of isobutane
and normal butane typically rise. Should this spread not materialize, or in
the event absolute prices decline, margins generated from selling isobutane to
merchant customers may be negatively affected.
Propylene Fractionation
The Company began its propylene fractionation operations in 1978 with a
single unit and built a second unit in 1997 which approximately doubled its
propylene fractionation capacity. The profitability of this business unit
depends on the volumes of refinery-sourced propane/propylene mix that the
Company processes for its toll customers, the level of toll processing fees
charged to its customers and the margins associated with buying refinery-
sourced propane/propylene mix and selling high purity propylene to meet sales
contracts with non-tolling customers.
The difference between feedstock costs and sales prices typically changes in
periods of rising or falling high purity propylene prices. When the price of
high purity propylene falls, generally as a result of reduced demand from the
petrochemical industry, the market price of refinery-sourced propane/propylene
mix typically declines accordingly. However, the Company's inventory costs for
propane/propylene mix generally increase or decrease at a slower rate than
market prices because the Company uses an average cost method of accounting
for its feedstock inventory. As a result of the Company's sales prices
declining faster than its average inventory costs during times of falling
sales prices, the Company's propylene fractionation margins are reduced. In
times of rising high purity propylene prices, the opposite effect occurs as
the Company's average inventory cost increases at a slower rate than the
market price for end product thereby increasing the Company's propylene
fractionation margins.
Pipelines
The Company operates both interstate and intrastate NGL product and
propylene pipelines. The Company's interstate pipelines are common carriers
and must provide service to any shipper who requests transportation services
at rates regulated by the Federal Energy Regulatory Commission ("FERC"). One
of the Company's intrastate pipelines is a common carrier regulated by the
State of Louisiana. The profitability of this business unit is primarily
dependent on pipeline throughput volumes.
55
Belvieu Environmental Fuels
The Company owns a 33 1/3% economic interest in BEF, which owns the MTBE
production facility that is operated by the Company and located at its Mont
Belvieu complex. The Company's interest in BEF is accounted for using the
equity method. Sun and Mitchell Energy each own a 33 1/3% interest in BEF, and
Sun has entered into a contract with BEF under which Sun is required to take
all of BEF's production of MTBE through May 2005. Under the terms of its
agreement with BEF, through May 2000, Sun will pay the higher of a floor price
(approximately $1.04 per gallon at December 31, 1997) or a market-based price
for the first 193,450,000 gallons per contract year of production (equivalent
to approximately 12,600 barrels per day) from the BEF facility, subject to
quarterly adjustments on certain excess volumes. Sun will pay a market-based
price for volumes produced in excess of 193,450,000 gallons per contract year.
Since the contract year begins on June 1, if the facility produces at full
capacity during the year it will reach 193,450,000 gallons of production near
the end of March, and sales thereafter through the end of May will be at
market-based prices. Generally, the price charged by BEF to Sun for the MTBE
has been above the spot market price for MTBE. During 1997 and the first
quarter of 1998, the average Gulf Coast spot market price for MTBE was $0.83
and $0.68 per gallon, respectively.
Beginning in June 2000, Sun will continue to be obligated to purchase all of
the production from the BEF facility but pricing on all volumes will be
switched to market-based rates. The price of MTBE is affected by the demand
for MTBE as an oxygenation additive for gasoline and the cost of its principal
feedstocks (isobutane and methanol). If the floor price is higher than the
market price in June 2000 and thereafter, the Company's equity income in BEF
could be substantially reduced. See "Risk Factors--Risks Inherent in the
Company's Business--The Profitability of the Company's Operations Depends Upon
the Demand and Prices for the Company's Products--MTBE."
Prepayment Penalties on Extinguishment of Debt
The Company expects to incur a $20.2 million extraordinary loss in
connection with the early extinguishment of debt assumed from EPCO in
connection with the Transactions. The amount of the extraordinary loss is
equal to the make-whole premiums payable in connection with the repayment of
such debt and will be incurred in the quarter in which this offering is
consummated.
Selling, General and Administrative Expenses
In connection with the Transactions, the Company, the General Partner and
EPCO will enter into the EPCO Agreement pursuant to which EPCO will provide
all of the Company's selling, general and administrative services. Pursuant to
the EPCO Agreement, EPCO will be reimbursed at cost for all expenses that it
incurs in connection with managing the business and affairs of the Company,
except that EPCO will not be entitled to be reimbursed for any selling,
general and administrative expenses. In lieu of reimbursement for such
selling, general and administrative expenses, EPCO will be entitled to receive
an annual administrative services fee that will initially equal $12.0 million.
The General Partner, with the approval and consent of the Audit and Conflicts
Committee, will have the right to agree to increases in such administrative
services fee of up to 10% each year during the 10-year term of the EPCO
Agreement and may agree to further increases in such fee in connection with
expansions of the Company's operations through the construction of new
facilities or the completion of acquisitions that require additional
management personnel. As a result of the EPCO Agreement, amounts incurred
historically for selling, general and administrative expenses are not
representative of amounts that will be incurred by the Company in the future.
See "The Transactions--EPCO Agreement" and "Unaudited Pro Forma Condensed
Statements of Operations."
Operating Leases
Pursuant to the Retained Leases, EPCO leases one of its isomerization units,
one deisobutanizer, two cogeneration units and 100 railcars. The Company will
sublease these assets and have an option to purchase them upon the expiration
of the lease terms. See "--Liquidity and Capital Resources--Retained Leases."
EPCO has
56
agreed to lease these assets to the Company for $1 per year in the aggregate
for the remainder of the terms under the Retained Leases. During 1997, EPCO
incurred approximately $13.3 million of expenses relating to the Retained
Leases. As a result of the subleases, the Company's cash payments relating to
the leased facilities and equipment will be eliminated; however, since the
Retained Leases will be held by an affiliate, the full amount of the
associated lease expenses to be paid by EPCO will be recorded as an expense on
the Company's financial statements.
RESULTS OF OPERATIONS
The Company's operating margins by business unit over the past three years
were as follows:
FIRST FIRST
QUARTER QUARTER
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
(IN THOUSANDS)
Operating Margin:
NGL Fractionation..................... $ 2,846 $ 1,982 $ 2,801 $ 547 $ 841
Isomerization......................... 22,351 51,068 38,286 16,808 2,654
Propylene Fractionation............... 17,056 18,260 18,996 4,049 2,012
Pipeline.............................. 9,216 11,270 13,520 3,108 3,275
Storage and Other Plants.............. 12,404 10,559 9,610 2,004 288
------- ------- ------- ------- ------
Total............................... $63,873 $93,139 $83,213 $26,516 $9,070
======= ======= ======= ======= ======
FIRST QUARTER 1998 COMPARED WITH FIRST QUARTER 1997
Revenues; Costs and Expenses
The Company's revenues decreased by 25.5% to $190.5 million in the first
quarter of 1998 from $255.7 million in the first quarter of 1997. The
Company's costs and operating expenses decreased by 20.8% to $181.4 million in
the first quarter of 1998 from $229.1 million for the same period of 1997.
Operating margin decreased by 65.8% to $9.1 million from $26.5 million from
period to period, primarily reflecting reduced operating margins in
isomerization and propylene fractionation.
NGL Fractionation. The Company's operating margin for NGL fractionation
increased by 53.7% to $0.8 million in the first quarter of 1998 from $0.5
million in the first quarter of 1997. Average daily fractionation volumes
increased from 170,000 barrels per day to 207,000 barrels per day from quarter
to quarter, primarily as a result of increased volumes from a joint owner's
new gas processing plant which began operating in April 1997.
Isomerization. The Company's operating margin for isomerization decreased by
84.2% to $2.7 million in the first quarter of 1998 from $16.8 million in the
first quarter of 1997. Isobutane prices were unusually high in the first
quarter of 1997. The Company's margins decreased as a result of the decline in
marketing margins from lower isobutane prices and lower average differentials
between isobutane and normal butane prices from quarter to quarter. In
addition, demand for isobutane declined by approximately 15,000 barrels per
day for approximately one month during the first quarter of 1998 due to a
turnaround at the BEF MTBE facility. The BEF facility is scheduled for a
turnaround approximately every 12-15 months. The decrease in isomerization
operating margins was partially offset by increased processing fees from
increased utilization of the deisobutanizer units as a result of an increase
in the volume of imported mixed butanes.
Propylene Fractionation. The Company's operating margin for propylene
fractionation decreased by 50.3% to $2.0 million in the first quarter of 1998
from $4.0 million in the first quarter of 1997. The decrease in propylene
margins resulted from lower prices for high purity propylene during the first
quarter of 1998 which in turn reflected lower polypropylene prices. As
described above, the Company uses an average cost method of accounting for its
refinery-sourced propane/propylene mix feedstock costs. Accordingly, the
Company's
57
feedstock costs generally increase or decrease at a slower rate than high
purity propylene market prices exacerbating the effect of falling prices on
margins. In contrast, propylene prices were generally increasing during the
first quarter of 1997. The decrease in margins also reflected losses taken on
the sale of excess quantitites of refinery grade propane/propylene mix. These
factors were partially offset by a 30% increase in propylene fractionation
volumes reflecting the start up of the Company's second propylene
fractionation unit in April 1997.
Pipeline. The Company's operating margin for pipeline operations increased
by 5.4% to $3.3 million from $3.1 million from quarter to quarter, reflecting
an 11.2% increase in throughput volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by 12.1% to $5.8
million in the first quarter of 1998 from $6.6 million in the first quarter of
1997, primarily due to the reduced number of employee stock appreciation
rights ("SAR") outstanding. EPCO will retain liability for all outstanding
SARs following completion of this offering.
Interest Expense
Interest expense was $6.7 million in the first quarter of 1998 and $6.0
million in the first quarter of 1997, primarily due to the higher amount of
revolving debt outstanding which offset reductions in term debt.
Equity Income of Unconsolidated Affiliates
Equity income of unconsolidated affiliates decreased by 6.7% to $2.8 million
in the first quarter of 1998 from $3.0 million in the first quarter of 1997.
Equity income of unconsolidated affiliates includes the Company's interests in
BEF and Mont Belvieu Associates. Equity income in BEF declined by 47.1% to
$0.9 million from $1.7 million quarter to quarter as a result of the
turnaround of the BEF facility described above. Equity income of Mont Belvieu
Associates increased by 44.0% to $1.9 million in the first quarter of 1998
from $1.4 million in the first quarter of 1997 because of the increase in NGL
fractionation volume described above.
YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996
Revenues; Costs and Expenses
The Company's revenues increased by 2.1% to $1,020.3 million in 1997
compared to $999.5 million in 1996. The Company's costs and operating expenses
increased by 3.4% to $937.1 million in 1997 compared to $906.4 million in
1996. Operating margin decreased by 10.7% to $83.2 million in 1997 from $93.1
million in 1996.
NGL Fractionation. The Company's operating margin for NGL fractionation
increased by 41.3% to $2.8 million in 1997 from $2.0 million in 1996. The
increase was due primarily to the phase-in of a 45,000 barrel per day
expansion in the capacity of the NGL fractionation facilities at Mont Belvieu
resulting in increased NGL fractionation volumes in the second half of 1997,
principally from the joint owners of the facility, and increases in
fractionation fees as a result of higher natural gas and electricity costs
that resulted in contractual escalations in pricing formulas.
Isomerization. The Company's operating margin for isomerization decreased by
25.0% to $38.3 million in 1997 from $51.1 million in 1996. The Company's
margins were negatively impacted by decreases in marketing margins which
declined as a result of lower isobutane prices after the first quarter of 1997
and a lower average spread between isobutane and normal butane prices.
Isobutane prices were unusually high in the second half of 1996 and the first
quarter of 1997. In addition, isomerization processing margins decreased due
to the loss of a processing contract from a significant customer and lower
utilization of the deisobutanizer units as a result of lower import volume of
mixed butanes.
58
Propylene Fractionation. The Company's operating margin for propylene
fractionation increased by 4.0% to $19.0 million in 1997 from $18.3 million in
1996. Propylene fractionation operating margins were positively affected by an
increase in volumes due to the start up of the Company's second propylene
fractionation unit in April 1997. This increase in volume was largely offset
by price decreases for high purity propylene in the fourth quarter of 1997,
which reflected weaker prices for polypropylene, compared to price increases
for high purity propylene in late 1996. As described above, the Company uses
an average cost method of accounting for its refinery-sourced
propane/propylene mix feedstock costs. Accordingly, the Company's feedstock
costs generally increase or decrease at a slower rate than high purity
propylene market prices.
Pipeline. The Company's operating margin for pipeline operations increased
by 20.0% to $13.5 million in 1997 from $11.3 million in 1996, reflecting an
11.5% increase in throughput volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses decreased by $1.1 million to
$23.1 million in 1997 from $24.2 million in 1996. This decrease was primarily
due to the recognition of compensation expense in 1996 related to employee
SARs. SAR expense declined to $1.1 million in 1997 compared to $2.1 million in
1996. EPCO will retain liability for all outstanding SARs following completion
of this offering.
Interest Expense
Interest expense was $25.7 million in 1997 and $26.3 million in 1996. The
$0.6 million decrease was due to a decrease in the average debt outstanding to
$243.8 million in 1997 from $268.4 million in 1996.
Equity Income of Unconsolidated Affiliates
Equity income of unconsolidated affiliates includes amounts from BEF and
Mont Belvieu Associates. Earnings attributable to BEF were $9.3 million in
1997 and $9.8 million in 1996. Earnings attributable to Mont Belvieu
Associates were $6.4 million in 1997 and $6.0 million in 1996, reflecting
increased NGL fractionation volumes in the second half of 1997.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Revenues; Costs and Expenses
The Company's revenues increased by 26.5% to $999.5 million in 1996 compared
to $790.1 million in 1995. The Company's costs and operating expenses
increased by 24.8% to $906.4 million in 1996 from $726.2 million in 1995.
Operating margin increased by 45.8% to $93.1 million in 1996 from $63.9
million in 1995.
NGL Fractionation. The Company's operating margin for NGL fractionation
decreased by 30.4% to $2.0 million in 1996 from $2.8 million in 1995. Volume
increased from year to year as a result of the 45,000 barrel per day capacity
expansion at the Mont Belvieu facility which was completed in the fourth
quarter of 1996 and increased throughput from certain joint owners of the
fractionation facility. These increases in volumes were offset by increased
depreciation and operating expenses as a result of the expansion.
Isomerization. The Company's operating margin for isomerization increased by
128.5% to $51.1 million in 1996 from $22.4 million in 1995. Margins on sales
of isobutane processed by the Company increased, reflecting an increase in the
average spread between normal butane and isobutane from year to year.
Isomerization marketing margins increased significantly as a result of greater
annual increases in market prices for isobutane in 1996 than in 1995.
Processing fees for mixed butanes increased as a result of increased imports
of mixed butanes.
Propylene Fractionation. The Company's operating margin for propylene
fractionation increased by 7.1% to $18.3 million in 1996 from $17.1 million in
1995. The increase in operating margins reflected a 1.5% increase in volumes
from year to year and increases in high purity propylene prices in late 1996.
59
Pipeline. The Company's operating margin for pipeline operations increased
by 22.3% to $11.3 million in 1996 from $9.2 million in 1995. The increase was
primarily due to a 27.2% increase in throughput volume.
Selling, General and Administrative Expenses
Selling, general and administrative expenses increased by $1.9 million to
$24.2 million in 1996 from $22.3 million in 1995. This increase was primarily
due to higher bonuses paid to key personnel in 1996 as a result of
improvements in operating performance.
Interest Expense
Interest expense was $26.3 million for 1996 and $27.6 million in 1995. The
$1.3 million decrease was due to a decrease in the average debt outstanding to
$268.4 million in 1996 from $281.1 million in 1995.
Equity income of unconsolidated affiliates
Equity income of unconsolidated affiliates was $15.8 million in 1996
compared to $12.3 million in 1995. Earnings attributable to BEF were $9.8
million in 1996 compared to $6.1 million in 1995, reflecting a full year of
operations at the MTBE facility in 1996. Earnings attributable to Mont Belvieu
Associates were $6.0 million in 1996 and $6.2 million in 1995.
Gain on Sale of Assets and Other
Results for 1995 include a $7.9 million gain from the sale of a 12.5%
interest in the Promix fractionation facility.
LIQUIDITY AND CAPITAL RESOURCES
General
At March 31, 1998, the Company had net current assets (excluding short-term
debt and current maturities of long-term debt) of $0.6 million. On a pro forma
basis taking into account the Transactions, the Company had working capital of
$49.8 million at the same date, reflecting the retention of approximately
$46.5 million in cash from the proceeds of this offering to fund new projects
and the repayment of current maturities of long-term debt with the proceeds of
this offering.
Cash flows from operating activities were $12.2 million in 1995, $91.4
million in 1996 and $57.8 million in 1997. Cash flows from operating
activities are affected primarily by net income, depreciation and
amortization, equity income of unconsolidated affiliates and changes in
working capital. Depreciation and amortization increased by $1.9 million in
1997 as a result of capital expenditures in 1996 and 1997 and remained
consistent between 1995 and 1996. The net effect of changes in operating
accounts from year to year is generally the result of timing of NGL sales and
purchases near the end of the year. The cumulative increase resulting from the
net effect of changes in operating accounts over the three years ended
December 31, 1997 was $14.9 million and is due to the general increase in
operations over that period.
Cash flows from financing activities were a $12.0 million inflow in 1995, a
$24.9 million outflow in 1996 and a $26.6 million outflow in 1997. Cash flows
from financing activities were affected primarily from net borrowings of long-
term debt, which were generally used to finance capital expenditures.
Historically, such expenditures have been financed from proceeds of term loans
with insurance companies which were generally at fixed interest rates.
Cash outflows from investing activities were $9.2 million in 1995, $57.7
million in 1996 and $31.0 million in 1997. Cash outflows were primarily
capital expenditures, which aggregated $22.3 million in 1995, $61.0 million in
1996 and $33.6 million in 1997. The Company's capital expenditures were
primarily for new facilities
60
and improvements to processing and transportation systems. Capital
expenditures also include maintenance capital expenditures of approximately
$4.5 million in 1995, $3.4 million in 1996 and $3.7 million in 1997. These
maintenance capital expenditures are in addition to normal annual repairs and
maintenance which are recorded as operating expenses and were approximately
$12.9 million in 1995, $16.2 million in 1996 and $18.6 million in 1997.
Future Capital Expenditures
The Company currently estimates that its capital expenditures for 1998 will
be approximately $56.0 million (including maintenance capital expenditures).
The major portion of the capital expenditures will be for construction of new
projects in Louisiana. The Company expects to finance these expenditures out
of operating cash flows, the proceeds of this offering and borrowings under
its bank credit facility. The Company estimates that its maintenance capital
expenditures will average approximately $5.0 million over each of the next
three years. In addition, the Company estimates that it will expense
approximately $17.1 million for repairs and maintenance in 1998. The Company
expects to finance maintenance capital expenditures and other repair and
maintenance out of operating cash flows.
Distributions from Unconsolidated Affiliates; Loan Participations
Distributions to the Company from Mont Belvieu Associates were $5.0 million
in 1995, $7.2 million in 1996 and $7.3 million in 1997. Prior to the first
quarter of 1998, BEF was prohibited under the terms of its bank indebtedness
from making distributions to its owners. These restrictions lapsed during the
first quarter of 1998 as a result of BEF having repaid 50% of the principal on
such indebtedness, and the Company received its first distribution from BEF in
April 1998. Other investments in or advances to or from the unconsolidated
affiliates for each of the years was not significant to the overall cash flows
of the Company. The Company does not expect any significant cash investments
in or advances to its unconsolidated affiliates in 1998.
In connection with the offering, the Company will purchase participation
interests in a bank loan to Mont Belvieu Associates and a bank loan to BEF.
The Company will acquire an approximate $7.7 million participation interest in
the bank debt of Mont Belvieu Associates, which bears interest at a floating
rate per annum of LIBOR plus 0.75% and matures on December 31, 2001. The
Company will receive monthly principal payments, aggregating approximately
$1.7 million per year, plus interest from Mont Belvieu Associates during the
term of the loan. The Company will receive a final payment of principal of
$1.8 million upon maturity.
The Company will acquire an approximate $26.1 million participation interest
in a bank loan to BEF, which bears interest at a floating rate per annum of
LIBOR plus 0.875% and matures on May 31, 2000. The Company will receive
quarterly principal payments of approximately $3.3 million plus interest from
BEF during the term of the loan.
Bank Credit Facility
In connection with this offering, the Company will enter into a $200.0
million bank credit facility that includes a $50.0 million working capital
facility and a $150.0 million revolving term loan facility. The $150.0 million
revolving term loan facility includes a sublimit of $30.0 million for letters
of credit. In connection with the closing of this offering, the Company
expects to borrow approximately $89.2 million under the revolving term loan
facility.
The Company's obligations under the bank credit facility will be unsecured
general obligations and will be non-recourse to the General Partner.
Borrowings under the bank credit facility will bear interest at either the
bank's prime rate or the Eurodollar rate plus the applicable margin as defined
in the facility. The bank credit facility will expire after two years and all
amounts borrowed thereunder shall be due and payable on such date. There must
be no amount outstanding under the working capital facility for at least 15
consecutive days during each fiscal year.
61
The credit agreement relating to the facility will contain a prohibition on
distributions on, or purchases or redemptions of, Units if any event of
default is continuing. In addition, the bank credit facility will contain
various affirmative and negative covenants applicable to the ability of the
Company to, among other things, (i) incur certain additional indebtedness,
(ii) grant certain liens, (iii) sell assets in excess of certain limitations,
(iv) make investments, (v) engage in transactions with affiliates and (vi)
enter into a merger, consolidation or sale of assets. The bank credit facility
will also require that the Company maintain certain financial ratios relating
to net worth, EBITDA to interest payments and indebtedness to EBITDA.
Retained Leases
EPCO will assign the Company its rights to purchase the facilities and
equipment covered by the Retained Leases. The following table summarizes the
dates on which these purchase options become exercisable and the estimated
purchase prices under the Retained Leases. Certain of the purchase prices are
based on future market values of the leased equipment, in which case the price
indicated is based on the Company's estimates:
PURCHASE OPTION ESTIMATED
FACILITY/EQUIPMENT DATE PURCHASE PRICE
------------------ --------------- --------------
(IN MILLIONS)
Isom II unit.................................. 2004 $23.1
Deisobutanizer................................ 2004 2.8
Cogeneration unit............................. 2001 1.8
Cogeneration unit............................. 2008 3.5
Railcars...................................... 2016 3.1
-----
Total..................................... $34.3
=====
YEAR 2000 ISSUES
The year 2000 issues are related to data processing programs that have date-
sensitive information and that use two digits (rather than four) to define the
applicable year. Any program and hardware that have time-sensitive coding may
recognize a date using "00" as the year 1900 rather than the year 2000. This
error could result in miscalculations or system failure.
Management believes that it has identified all significant areas in which
year 2000 issues may arise within its data processing and other systems and
has developed a comprehensive plan to test these areas and address such
issues. Management expects that most of the coding corrections for the year
2000 problems will be completed during 1998 and that most of the critical
systems will be corrected by January 1, 1999. Although management is
reasonably satisfied that it will be able to resolve its internal year 2000
issues, it cannot be assured that its customers and vendors will adequately
address their year 2000 issues. Management is currently assessing what impact
year 2000 issues might have on its significant customers and vendors. Total
costs to correct year 2000 issues are not expected to be significant.
If the Company, its customers or vendors are unable to resolve such
processing issues, it could result in a material financial risk. Accordingly,
management will continue to devote the necessary resources to resolve all
significant year 2000 issues in a timely manner.
ACCOUNTING STANDARDS
Recent Statements of Financial Accounting Standards ("SFAS") include the
following: (effective for fiscal years beginning after December 15, 1997) SFAS
130, Reporting of Comprehensive Income, SFAS 131, Disclosure about Segments of
an Enterprise and Related Information, and SFAS 132, Employers' Disclosure
about Pensions and Other Postretirement Benefits and (effective for all fiscal
quarters of fiscal years beginning after June 15, 1999) SFAS 133, Accounting
for Derivative Instruments and Hedging Activities. Management is currently
studying these SFAS items for possible impact on the combined financial
statements; however, based upon its preliminary assessment of the SFAS,
management believes that they will not have a significant impact
62
on the Company's financial statements. On April 3, 1998, the American
Institute of Certified Public Accountants issued Statement of Position 98-5,
Reporting on the Costs of Start-Up Activities ("SOP 98-5"). For years
beginning after December 15, 1998, SOP 98-5 generally requires that all start-
up costs of a business activity be charged to expense as incurred and any
start-up cost previously deferred should be written-off as a cumulative effect
of a change in accounting principle. Management is currently studying SOP 98-5
for its possible impact on the combined financial statements. Based upon its
preliminary assessment of SOP 98-5, management believes that SOP 98-5 will not
have a material impact on the combined financial statements except for a $4.5
million non-cash write off at January 1, 1999 of the unamortized balance of
deferred start-up costs of BEF, an unconsolidated affiliate, in which the
Company owns a 33 1/3% economic interest. Such a write-off would cause a $1.5
million reduction in the equity in income of unconsolidated affiliates for
1999 and a corresponding reduction in the Company's investment in
unconsolidated affiliates.
QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURES
The Company is exposed to certain market risks which are inherent in
financial instruments it issues in the normal course of business. The Company
may, but generally does not, enter into derivative financial instrument
transactions in order to manage or reduce market risk. The Company does not
enter into derivative financial instruments for speculative purposes. At
December 31, 1997 and March 31, 1998, the Company had no derivative
instruments in place to cover any potential interest rate, foreign currency or
other financial instrument risk.
63
BUSINESS AND PROPERTIES
GENERAL
The Company is a leading integrated provider of processing and
transportation services to producers of NGLs and consumers of NGL products.
The Company (i) fractionates for a processing fee mixed NGLs produced as by-
products of oil and natural gas production into their component products:
ethane, propane, isobutane, normal butane and natural gasoline; (ii) converts
normal butane to isobutane through the process of isomerization; (iii)
produces MTBE from isobutane and methanol; and (iv) transports NGL products to
end users by pipeline and railcar. The Company also separates high purity
propylene from refinery-sourced propane/propylene mix and transports high
purity propylene to plastics manufacturers by pipeline. Products processed by
the Company generally are used as feedstocks in petrochemical manufacturing,
in the production of motor gasoline and as fuel for residential and commercial
heating. In 1997, on a pro forma basis, the Company had revenues, combined
EBITDA and EBITDA in unconsolidated affiliates and net income of $1.0 billion,
$119.4 million and $87.0 million, respectively.
The Company's processing operations are concentrated in Mont Belvieu, Texas,
which is the hub of the domestic NGL industry and is adjacent to the largest
concentration of refineries and petrochemical plants in the United States. The
facilities operated by the Company at Mont Belvieu include: (i) one of the
largest NGL fractionation facilities in the United States with an average
production capacity of 210,000 barrels per day; (ii) the largest butane
isomerization complex in the United States with an average isobutane
production capacity of 116,000 barrels per day; (iii) one of the largest MTBE
production facilities in the United States with an average production capacity
of 14,800 barrels per day; and (iv) two propylene fractionation units with an
average combined production capacity of 30,000 barrels per day. The Company
owns all of the assets at its Mont Belvieu facility except for the NGL
fractionation facility, in which it owns an effective 37.0% economic interest;
one of the propylene fractionation units, in which it owns a 54.6% interest
and controls the remaining interest through a long-term lease; the MTBE plant,
in which it owns a 33 1/3% economic interest; and one of its three
isomerization units and one deisobutanizer which are held under long-term
leases with purchase options. The Company also owns and operates approximately
35 million barrels of storage capacity at Mont Belvieu and elsewhere that are
an integral part of its processing operations, a network of approximately 500
miles of pipelines along the Gulf Coast and an NGL fractionation facility in
Petal, Mississippi with an average production capacity of 7,000 barrels per
day. The Company also leases and operates one of only two commercial NGL
import/export terminals on the Gulf Coast.
The Company's operating margins are derived from services provided to
tolling customers and from merchant activities. Over the past five years,
volumes from toll processing operations and merchant activities accounted for
an average of approximately 77% and 23% of the Company's total sales volumes,
respectively. In its toll processing operations, the Company does not take
title to the product and is simply paid a fee based on volumes processed. The
Company's profitability from toll processing operations depends primarily on
the volumes of NGLs and refinery-sourced propane/propylene mix processed and
transported and the level of associated fees charged to its customers. The
profitability of the Company's toll processing operations is largely
unaffected by short-term fluctuations in the prices for oil, natural gas or
NGLs. In its merchant activities, the Company takes title to feedstock
products and sells processed end products. The Company's profitability from
merchant activities is dependent on the prices of its feedstocks and end
products, which typically vary on a seasonal basis. In its merchant
activities, the Company generally seeks to reduce commodity price exposure by
matching the timing and price of its feedstock purchases with sales of end
products.
The Company has expanded rapidly since its inception in 1968, primarily
through internal growth and the formation of joint ventures. During the four
years ended December 31, 1997, the Company's EBITDA and its EBITDA in
unconsolidated affiliates increased on a combined basis at a compound annual
rate of 19.2%. This growth reflects the increased demand for NGL processing
due to increased domestic natural gas production and crude oil refining and
increased demand for processed NGLs in the petrochemical industry. Over the
last six years the Company has increased its NGL fractionation capacity by
approximately 27%, built a third isomerization unit that increased its
isobutane production capacity by approximately 60%, increased
64
deisobutanizer capacity by approximately 54%, constructed a second propylene
fractionation unit which approximately doubled production capacity and made
its investment in the MTBE facility at Mont Belvieu. The Company believes that
the demand for its services will continue to increase, principally as a result
of expected increases in natural gas production, particularly in the Gulf of
Mexico, and generally increasing domestic and worldwide petrochemical
production. Accordingly, the Company has initiated several new projects,
including three that are currently in construction.
COMPETITIVE STRENGTHS
The Company believes that it is well positioned to compete in the NGL
processing industry and that its most significant competitive strengths are:
. Strategic Location. The Company's operations are strategically located on
the Gulf Coast, the most significant marketplace for domestic and
imported NGLs due to the availability of processing, storage and import
facilities, pipeline distribution systems and petrochemical and refinery
end-product demand. The Company can access domestic NGL supplies from the
Gulf of Mexico, East Texas/Louisiana, Mid-Continent, West Texas/New
Mexico and Rocky Mountain regions and can also access imported supplies
via its import/export facility on the Houston ship channel. The Company
supplies NGL products, MTBE and high purity propylene to consumers
located principally in the Gulf Coast, the region with the largest
concentration of petrochemical plants and refineries in the United
States. In 1997, the Gulf Coast accounted for the production of
approximately 55% of domestic NGLs and for approximately 63% of domestic
demand for NGL products.
. Significant Market Position. The Company is a leading participant in each
of its processing businesses. The Company's Mont Belvieu NGL
fractionation facilities account for approximately 35% of the NGL
fractionation capacity at Mont Belvieu and approximately 16% of total
domestic commercial NGL fractionation capacity (excluding capacity at
captive facilities of producers who fractionate their own NGL production
primarily for their internal use). The Company's butane isomerization
units account for more than 70% of the commercial isobutane production
capacity in the United States, and the Company's propylene fractionation
units represent approximately 23% of domestic commercial production
capacity for high purity propylene.
. Large-Scale Integrated Operations. The Company believes that its
operating costs are significantly lower than those of its competitors
because of the efficiencies and integrated design of its Mont Belvieu
facilities. The Company engineered its facilities to incorporate
efficient gas turbines, a proprietary heat
pump design and cogeneration technology to reduce energy costs, which are
the largest component of operating costs in NGL processing. Because of
its integrated operations, the Company also is able to profitably use by-
products such as propane/propylene mix, mixed butanes, hydrogen and
natural gasoline in its own plants and distribution systems, resulting in
fuel and feedstock cost reductions and additional sales revenue.
Additionally, the Company's infrastructure, available land and storage
assets at Mont Belvieu provide it with a platform for cost-effective
expansion.
. Strategic Relationships with Major Oil, Natural Gas and Petrochemical
Companies. The Company has long-term relationships with many of its
suppliers and customers, including Amoco, ARCO Chemical, Burlington
Resources, Enron, Equistar, Exxon, Huntsman, Mitchell Energy, Mobil,
Montell, Shell, Sun, Texaco, Union Pacific Resources and Williams. The
co-owners of the Mont Belvieu fractionation facility include Burlington
Resources, Texaco and Union Pacific Resources, each of which is a
significant producer of NGLs and accounts for a substantial portion of
the NGLs processed at the facility. The Company's co-owners in the MTBE
production facility are Sun and Mitchell Energy. Sun has contracted to
purchase all of the MTBE produced by the facility through May 2005, and
Sun and Mitchell Energy have each contracted to deliver normal butane to
the Company's isomerization facilities for processing in order to satisfy
their obligations to supply isobutane to the MTBE production facility. In
addition, the Company built its first propylene fractionation unit in
1979 jointly with Montell, which is now a Shell subsidiary. Pursuant to
long-term contracts, Montell has purchased a substantial portion of the
production from this unit since it was built. The Company believes that
its status as an
65
independent operator that generally does not compete with the
petrochemical and refining operations of its customers is an important
contributor to the strength of these long-term relationships.
. Experienced Operator. The Company has historically operated substantially
all of its processing and transportation assets. As one of the leading
integrated providers of NGL-related services, the Company has established
a reputation in the industry as a reliable and cost-effective operator.
By virtue of its successful operating record and substantial
infrastructure, the Company believes it is well positioned to continue to
operate as a large-scale processor of NGLs and other products for its
customers.
. Significant Financial Flexibility. In connection with this offering, the
Company will enter into a $200.0 million bank credit facility that
includes a $50.0 million working capital facility and a $150.0 million
revolving term loan facility. In connection with the closing of this
offering, the Company expects to borrow approximately $89.2 million under
the revolving term loan facility. The Company will also have the ability
to issue new Units, which, combined with its substantial borrowing
capacity, should give the Company the resources to finance strategic
opportunities as they arise. Such opportunities may include new projects,
joint ventures or acquisitions.
. Experienced Management Team. The Company's senior management team
averages more than 30 years of industry experience and more than 18 years
with the Company.
BUSINESS STRATEGY
The Company's business strategy is to manage its operations in a manner that
will enable it to pay the Minimum Quarterly Distribution on all the Units and
to increase the per Unit value of the Company's assets and cash flow. The
Company intends to pursue this strategy principally by:
. Capitalizing on Expected Increases in NGL Production. The Company
believes that production of both oil and natural gas in the Gulf of
Mexico will continue to increase over the next several years. The Company
intends to capitalize on its existing infrastructure, market position,
strategic relationships and financial flexibility to expand its
operations to meet the anticipated increased demand for NGL processing
services. Of particular significance will be production associated with
the development of natural gas fields in Mobile Bay and the Gulf of
Mexico offshore Louisiana, which are expected to produce natural gas with
significantly higher NGL content than typical domestic production. The
Company believes that the Gulf Coast is the only major marketplace that
has sufficient storage facilities, pipeline distribution systems and
petrochemical and refining demand to absorb this new NGL production.
. Expanding through Construction of Identified New Facilities. The Company
has entered into a letter of intent to participate in a joint venture to
own a new 60,000 barrel per day NGL fractionation facility (expandable to
100,000 barrels per day) near Baton Rouge, Louisiana that will be
constructed and operated by the Company and will service NGL production
from the Mobile Bay/Pascagoula and Louisiana areas. As part of this
project, the Company has also entered into letters of intent to
participate in the Tri-States and Wilprise NGL pipeline systems, which
will transport NGLs from Mobile Bay to near Baton Rouge. The Company is
participating in a joint venture to own the NGL Product Chiller that will
be constructed and operated by the Company at its NGL import/export
facility. This chiller will improve the Company's ability to load
refrigerated butane and propane onto tankers for export.
The Company's participation in these new projects is described in the
following table:
ESTIMATED
COST TO THE COMPANY'S
PLANNED START-UP COMPANY OWNERSHIP
PROJECT STATUS DATE (IN MILLIONS) PERCENTAGE
------------------------ --------------- ------------------- ------------- ----------
Baton Rouge
Fractionator........... In construction First Quarter 1999 $20.0 26.5%
Tri-States Pipeline..... In construction First Quarter 1999 10.0 16.7%
Wilprise Pipeline....... In construction Fourth Quarter 1998 8.0 33.3%
NGL Product Chiller..... In design Third Quarter 1999 8.5 50.0%
-----
$46.5
=====
66
. Investing with Strategic Partners. The Company will continue to pursue
joint investments with oil and natural gas producers that can commit
feedstock volumes to new facilities or with petrochemical companies that
can agree to purchase a significant portion of the offtake from new
facilities. For example, the Company will be partners with Amoco, Exxon
and Williams on the Baton Rouge fractionation facility; with Amoco, Duke,
Koch Industries, Tejas (a Shell subsidiary) and Williams on the Tri-
States pipeline; and with Amoco and Williams on the Wilprise pipeline.
The Company believes that commitments from producers who will commit NGL
volumes to new fractionation facilities and pipelines are central to
establishing the viability of new investments in the NGL processing and
transportation industry.
. Expanding Through Acquisitions. The Company intends to analyze potential
acquisitions, joint ventures or similar transactions with businesses that
operate in complementary markets and geographic regions. In recent years,
major oil and natural gas companies have sold non-strategic assets
including assets in the mid-stream natural gas industry. The Company
believes this trend will continue and further expects independent oil and
natural gas companies to consider similar options.
. Managing Commodity Price Exposure. A substantial portion of the Company's
operations are conducted pursuant to tolling contracts or involve NGL
transportation where the Company does not take title to its customer's
products, but rather processes or transports a raw feedstock for a fee.
When the Company does take title to the products it processes, it
generally attempts to match the timing and price of its feedstock
purchases with those of the sales of end products so as to reduce
exposure to fluctuations in commodity prices.
NGL FRACTIONATION
General
The three principal sources of NGLs fractionated in the United States are
(i) domestic gas processing plants, (ii) domestic crude oil refineries and
(iii) imports of butane and propane mixtures. When produced at the wellhead,
natural gas consists of a mixture of hydrocarbons that must be processed to
remove NGLs and other impurities. Gas processing plants are located near the
production area and separate pipeline quality natural gas (principally
methane) from NGLs and other materials. After being extracted in the field,
mixed NGLs, sometimes referred to as "y-grade" or "raw make," are typically
transported to a centralized facility for fractionation. Crude oil and
condensate production also contain varying amounts of NGLs, which are removed
during the refining process and are either fractionated by refiners or
delivered to NGL fractionation facilities. In 1997, NGLs produced from
domestic gas processing operations accounted for approximately 68% of the NGLs
processed in the United States, compared with 25% from crude oil refining and
7% from imports.
67
Domestic NGL production has increased in recent years, and the Company
believes, based on published industry data and its knowledge of the industry,
that this supply growth will continue over the next several years. The
following tables summarize the total supply of mixed NGLs for fractionation in
the United States over the past ten years and set forth an estimate for
domestic NGL production from gas plants, the primary source of NGLs for the
Company's facilities, through the year 2005:
MIXED NGL SUPPLY
(MILLIONS OF BARRELS)
DOMESTIC PERCENT OF TOTAL
--------------------------- ----------------
GAS PLANTS REFINERIES TOTAL IMPORTS TOTAL DOMESTIC IMPORTS
---------- ---------- ----- ------- ----- -------- -------
1988.......... 593.3 182.6 775.9 80.8 856.7 90.6% 9.4%
1989.......... 564.1 202.2 766.3 68.8 835.1 91.8% 8.2%
1990.......... 568.5 182.2 750.7 71.8 822.5 91.3% 8.7%
1991.......... 605.7 195.6 801.3 62.0 863.3 92.8% 7.2%
1992.......... 620.9 222.1 843.0 57.0 900.0 93.7% 6.3%
1993.......... 631.9 212.1 844.0 67.2 911.2 92.6% 7.4%
1994.......... 631.4 222.6 854.0 80.1 934.1 91.4% 8.6%
1995.......... 643.2 238.8 882.0 70.2 952.2 92.6% 7.4%
1996.......... 670.1 241.4 911.5 77.6 989.1 92.2% 7.8%
1997.......... 672.0 252.0 924.0 68.3 992.3 93.1% 6.9%
- -------
Source: Gas Processors Association
[CHART APPEARS HERE]
- -------
Source: Purvin & Gertz, Inc.
68
The mixed NGLs delivered from gas plants to centralized fractionation
facilities like those operated by the Company at Mont Belvieu are typically
transported by NGL pipelines. The following table lists the primary NGL
pipelines which connect to the Company's fractionation facilities and the
other sources of mixed NGL supply:
AREA OF
SOURCE PARTIES SERVED ORIGINATION
------ -------------- -----------
Black Lake Pipeline.................... Enterprise/Dynegy North Louisiana
Central
Louisiana
East Texas
Chaparral Pipeline..................... Common Carrier West Texas
North Texas
Dean Pipeline.......................... Enterprise* South Texas
Enterprise Import/Export Facility...... Enterprise* Foreign imports
Enterprise Rail/Truck Terminal......... Common Carrier Louisiana/Texas
Houston Ship Channel Pipeline.......... Enterprise* Foreign Imports
Local Refineries
Panola Pipeline........................ Enterprise* East Texas
Seminole Pipeline...................... Common Carrier Rocky Mountains
Mid-Continent
West Texas
West Texas LPG Pipeline................ Common Carrier West Texas
North Texas
East Texas
- --------
* NGLs from these sources are delivered exclusively to the Company's Mont
Belvieu fractionation facilities.
NGL fractionation facilities separate mixed NGL streams into discrete NGL
products: ethane, propane, isobutane, normal butane and natural gasoline.
Ethane is primarily used in the petrochemical industry as feedstock for
ethylene, one of the basic building blocks for a wide range of plastics and
other chemical products. Propane is used both as a petrochemical feedstock in
the production of ethylene and propylene and as a heating fuel, an engine fuel
and an industrial fuel. Isobutane is fractionated from mixed butane (a stream
of normal butane and isobutane in solution) or refined from normal butane
through the process of isomerization, principally for use in refinery
alkylation to enhance the octane content of motor gasoline and in the
production of MTBE, an
oxygenation additive in cleaner burning motor gasoline. Normal butane is used
as a petrochemical feedstock in the production of ethylene and butadiene (a
key ingredient in synthetic rubber), as a blendstock for motor gasoline and to
derive isobutane through isomerization. Natural gasoline, a mixture of
pentanes and heavier hydrocarbons, is used primarily as motor gasoline blend
stock or petrochemical feedstock.
The NGL Fractionation Process
NGLs are fractionated by heating mixed NGL streams and passing them through
a series of distillation towers. Fractionation takes advantage of the
differing boiling points of the various NGL products. As the temperature of
the NGL stream is increased, the lightest (lowest boiling point) NGL product
boils off to the top of the tower where it is condensed and routed to storage.
The mixture from the bottom of the first tower is then moved into the next
tower where the process is repeated, and a different NGL product is separated
and stored. This process is repeated until the NGLs have been separated into
their components: ethane, propane, isobutane, normal butane and natural
gasoline. Since the fractionation process uses large quantities of heat,
energy costs are a major component of the total cost of fractionation. The
Company reduces energy costs by capturing heat from the gas turbines which
drive its compressors and by incorporating supplemental heaters and
cogeneration units into its facilities. This captured heat provides a portion
of the heat necessary to boil the NGL products.
69
The following diagram illustrates the NGL fractionation process:
[CHART APPEARS HERE]
The Company's NGL Fractionation Facilities
At Mont Belvieu, the Company operates one of the largest NGL fractionation
facilities in the United States with an average production capacity of 210,000
barrels per day. Mont Belvieu is approximately 25 miles east of Houston and is
the hub of the domestic NGL industry because of its proximity to the
petrochemical and refinery markets of the Gulf Coast and its location on a
large naturally-occurring salt dome that provides for the underground storage
of significant quantities of NGLs. Excluding NGLs fractionated in facilities
which are captive to certain refineries (non-commercial fractionation),
approximately one-half of all NGLs fractionated in the United States are
fractionated at Mont Belvieu, and the Company's fractionation facilities
account for approximately 35% of total NGL fractionation capacity at Mont
Belvieu.
The Company's Mont Belvieu NGL fractionation facilities include two
fractionation trains. Each train consists of a series of towers and is named
after the point of origin of the NGL pipelines from which the facilities were
originally fed. The West Texas Fractionator was constructed in 1980 with an
average production capacity of 35,000 barrels per day and was expanded to
70,000 barrels per day capacity in 1988 and 115,000 barrels per day capacity
in 1996. The Seminole Fractionator was constructed in 1982 with an average
production capacity of 60,000 barrels per day and was expanded to 95,000
barrels per day capacity in 1985. The individual towers within the
fractionation trains are de-ethanizers, depropanizers, debutanizers and
deisobutanizers ("DIBs"). The two fractionation trains currently include three
de-ethanizers, three depropanizers, three debutanizers and one DIB.
The Company owns an effective 37.0% economic interest in the NGL
fractionation facilities at its Mont Belvieu complex. The remaining interests
are owned by Kinder Morgan (25.0%), Burlington Resources (12.5%), Texaco
(12.5%), Union Pacific Resources (12.5%) and EPCO (0.5%). The Company operates
the facilities pursuant to an operating agreement that extends for their
useful operating life. The Company also owns and operates an NGL fractionation
facility at Petal, Mississippi. The Petal facility has two depropanizers and
two DIBs with an average production capacity of approximately 7,000 barrels
per day. The Petal facility is connected to the Company's Chunchula pipeline
system and serves NGL producers in Mississippi, Alabama and Florida.
In March 1998, the Company announced the execution of a letter of intent
with Amoco, Exxon and Williams to form a joint venture to own a 60,000 barrel
per day NGL fractionation facility near Baton Rouge, Louisiana which will be
constructed and operated by the Company. Construction of the facility is
underway, and the planned start-up date is March 1999. The Company will
operate the facility and hold a 26.5% ownership interest. The letter of intent
provides that Amoco will contract to process all of the NGLs produced at its
Pascagoula gas plant, Williams will agree to process the NGLs produced at its
Mobile Bay gas plant and Exxon will agree to process a sufficient portion of
its Louisiana-area NGLs at the facility to ensure the plant operates at full
capacity. The Amoco and Williams gas plants are currently under construction
and are expected to be completed before the Baton Rouge fractionation facility
is completed. Based upon these preliminary indications, the Company expects
that the entire 60,000 barrels per day of fractionation capacity at the Baton
Rouge facility will be committed for an initial five-year term. The Baton
Rouge fractionation facility and the related pipelines
70
have been designed to permit expansion of the facility to 100,000 barrels per
day capacity for a minimal additional investment.
The Company's NGL Fractionation Customers and Contracts
The Company primarily processes NGLs for a toll processing fee.
Fractionation contracts typically include a base processing fee per gallon
subject to adjustment for changes in natural gas, electricity and labor costs,
which are the principal variable costs in NGL fractionation. NGL producers
generally retain title to, and the pricing risks associated with, the NGL
products.
The Company has long-term fractionation agreements with Burlington
Resources, Texaco and Union Pacific Resources, each of which is a significant
producer of NGLs and a co-owner of the Mont Belvieu NGL fractionation
facility. Pursuant to such agreements, Burlington Resources and Texaco have
agreed, for the terms of these agreements, to deliver a minimum of 39,000
barrels per day of mixed NGLs (150% of their respective 12.5% ownership shares
at full capacity) or all mixed NGLs delivered within 50 miles of Mont Belvieu.
Pursuant to its fractionation agreement, Union Pacific Resources has agreed to
deliver 26,000 barrels per day of mixed NGLs (100% of its 12.5% ownership
share at full capacity) as well as additional barrels that exceed its
commitments to other facilities. Burlington Resources, Texaco and Union
Pacific Resources together accounted for approximately 63% of the Company's
NGL fractionation revenues in 1997. The Company generally enters into
contracts which cover most of the remaining capacity at the facilities for one
to three-year terms with customers such as ARCO Chemical, Aquila, Enron,
Exxon, MAPCO and Marathon/Ashland. These six customers together accounted for
approximately 16% of the Company's NGL fractionation revenues in 1997. The
Company also purchases a small quantity of mixed NGLs from oil and natural gas
producers who prefer to sell at the gas processing plant or the fractionation
facility. The Company resells the separated components of these NGLs in the
spot market or uses them as feedstock for its other operations.
The following table demonstrates the volumes of NGLs at the Mont Belvieu
facility accounted for by the joint owners during 1997:
PRINCIPAL 1997 NGL FRACTIONATION CUSTOMERS
AVERAGE
DAILY 1997 PERCENT OF TOTAL
CUSTOMER NAME VOLUMES VOLUMES 1997 VOLUMES
- ----------------------------------- ---------- ----------- ----------------
(THOUSANDS
OF (MILLIONS
BARRELS) OF BARRELS)
Joint Owners
Burlington Resources............. 48.4 17.7 25.6%
Union Pacific Resources.......... 46.4 16.9 24.5
Texaco........................... 39.3 14.3 20.8
Enterprise....................... 8.9 3.2 4.7
----- ---- ------
Joint Owners Total............... 143.0 52.1 75.6
All Others (14 Processing
Customers)........................ 46.2 16.9 24.4
----- ---- ------
Total Processing................... 189.2 69.0 100.0%
===== ==== ======
71
In each of the last five years, the Mont Belvieu fractionation facilities
have operated at more than 90% capacity. The following table shows the volumes
of mixed NGLs fractionated and the utilization at these facilities over this
period:
MONT BELVIEU NGL FRACTIONATION VOLUMES AND UTILIZATION
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Average daily production volume (thousands of
barrels)............................................. 145 158 158 166 189
Average capacity utilization(a)....................... 91% 95% 95% 97% 92%
Tolling volume as a percentage of total volume ....... 95% 94% 86% 90% 96%
- --------
(a) The Company completed an expansion of the facilities in November 1996,
which increased capacity from 165,000 barrels per day to 210,000 barrels
per day. This increased production capacity was not fully utilized until
mid-1997. Capacity utilization is based on days the facilities are in
operation and may vary from the stated capacity of the facilities.
ISOMERIZATION
General
Isomerization is the process of converting normal butane into mixed butane,
which is subsequently fractionated into isobutane and normal butane. The
demand for commercial isomerization services depends on requirements for
isobutane in excess of naturally occurring isobutane that is produced from
fractionation and refinery operations. The profitability of isomerization
operations is largely dependent upon the differential in the prices of normal
butane and isobutane. The spread between the prevailing prices of normal
butane and isobutane must be sufficient to support the conversion of normal
butane into isobutane by the isomerization process. It is generally
uneconomical to convert normal butane into isobutane when the price spread is
too narrow. Over the last four years, the average monthly price of isobutane
has been as high as 5.46 cents per gallon above the price of normal butane and
has averaged approximately 3 cents per gallon above the price for normal
butane. In certain months, however, the spread between the price of normal
butane and the price of isobutane has been less than two cents or negative. To
satisfy its customers' requirements at these times, the Company has either
purchased isobutane in the market or separated isobutane from mixed butane
held in inventory.
Isobutane is principally supplied by NGL fractionation and commercial
isomerization units, such as those operated by the Company. The principal
sources of demand for isobutane are refineries for alkylation, petrochemical
companies for the production of propylene oxide and MTBE producers. The tables
set forth below indicate historical supply and demand information for
isobutane. Differences in total supply and total demand for each year
represent net increases or decreases in isobutane inventories.
ISOBUTANE HISTORICAL SUPPLY
(THOUSANDS OF BARRELS PER DAY)
DOMESTIC
----------------------------
GAS COMMERCIAL NET TOTAL
PLANTS REFINERIES ISOM UNITS IMPORTS SUPPLY
------ ---------- ---------- ------- ------
1993................................ 106.4 10.7 91.3 16.1 224.5
1994................................ 108.3 11.5 86.1 10.8 216.7
1995................................ 110.8 13.2 82.0 7.4 213.4
1996................................ 111.8 12.3 82.8 7.2 214.1
1997................................ 111.2 12.7 77.2 11.6 212.7
- --------
Source: Petral Consulting Company
72
ISOBUTANE HISTORICAL DEMAND
(THOUSANDS OF BARRELS PER DAY)
REFINERY PROPYLENE TOTAL
PURCHASES OXIDE MTBE OTHER DEMAND
--------- --------- ---- ----- ------
1993...................................... 161.3 33.3 20.5 10.9 226.0
1994...................................... 147.4 33.2 31.8 10.0 222.4
1995...................................... 137.2 38.0 30.5 10.1 215.8
1996...................................... 126.5 44.5 31.5 10.7 213.2
1997...................................... 118.0 49.0 35.1 11.5 213.6
- --------
Source: Petral Consulting Company
The Isomerization Process
Isobutane is a naturally occurring chemical isomer of normal butane, with a
lower boiling point and higher vapor pressure than normal butane. Normal
butane and isobutane generally occur naturally in mixed butane streams at an
approximate ratio of 65% normal butane and 35% isobutane. Isomerization
facilities contain butamer reactors and DIBs. Butamer reactors use a catalytic
reaction process to convert a portion of the normal butane feedstock into
mixed butane, which is a stream of isobutane and normal butane. DIBs then
separate the isobutane from the normal butane through fractionation. The
unconverted normal butane is typically recirculated through the isomerization
units until it has been totally converted into isobutane, but it also can be
sold to third parties.
The following diagram illustrates the isomerization and mixed butane
fractionation processes:
LOGO
[CHART APPEARS HERE]
The Company's Isomerization Facilities
The Company's Mont Belvieu facility includes three butane isomerization
units and eight DIBs which comprise the largest butane isomerization complex
in the United States. The Company's facilities have an average combined
production capacity of 116,000 barrels of isobutane per day and account for
more than 70% of the commercial isobutane production capacity in the United
States. The Company built its first two isomerization units ("Isom I and II")
in 1981, each with a capacity of 13,500 barrels per day. In 1991 and 1992, the
capacity of each of these units was increased to 36,000 barrels per day. The
third isomerization unit ("Isom III") was completed in 1992 with a capacity of
44,000 barrels per day at a cost of $78 million. The Company has the operating
flexibility to switch the process streams from its isomerization units among
different DIB units in order to maximize overall plant efficiency. The Company
is also able to process fluoridic, lower cost butanes from oil refineries,
which it would otherwise be unable to process, by first passing those butanes
through an associated defluorinator.
73
The Company's Isomerization Customers and Contracts
The Company uses its isomerization facilities to refine normal butane for
processing customers or to process isobutane from normal butane to meet sales
contracts. The Company's most significant processing customers typically
operate under term contracts. The Isom I unit has been dedicated to ARCO
Chemical under a processing agreement since the unit was built in 1981. The
current contract has a ten-year term which expires in November 1999. ARCO
Chemical supplies the normal butane feedstock to the Isom I unit from its
refinery and pays the Company a processing fee based on the gallons of
isobutane produced. ARCO Chemical uses the isobutane processed by the Company
to produce propylene oxide and MTBE. ARCO Chemical accounted for approximately
42.9% of the Company's isomerization volumes in 1997. ARCO Chemical and the
Company are currently negotiating the terms of a renewal of the processing
contract.
The Company also has significant isomerization processing contracts with
Huntsman, Sun and Mitchell pursuant to which the customers supply the Company
with normal butane feedstock and pay the Company a processing fee based on the
gallons of isobutane produced. Sun and Mitchell use the isobutane processed
for them by the Company to meet their feedstock obligations as partners in the
BEF MTBE production facility. The Company can also meet its own obligation to
provide isobutane feedstock to the MTBE facility with production from its
isomerization unit. As the following table indicates, processing contracts,
together with volumes processed by the Company to meet its obligations to BEF,
accounted for more than 90% of utilization in 1997:
PRINCIPAL 1997 ISOMERIZATION PROCESSING CUSTOMERS
AVERAGE
DAILY TOTAL 1997 PERCENT OF TOTAL
CUSTOMER NAME VOLUMES VOLUMES VOLUMES
- ---------------------------------------- ---------- ----------- ----------------
(THOUSANDS
OF (MILLIONS
BARRELS) OF BARRELS)
ARCO Chemical........................... 28.7 10.5 42.9%
BEF
Enterprise............................ 5.3 1.9 7.9
Mitchell.............................. 5.0 1.8 7.5
Sun................................... 5.0 1.8 7.5
---- ---- -----
BEF Subtotal........................ 15.3 5.6 22.9
Huntsman................................ 15.0 5.5 22.3
Mobil................................... 2.9 1.1 4.3
---- ---- -----
Total................................... 61.9 22.6 92.4%
==== ==== =====
In addition to its processing contracts, the Company has also entered into
contracts to sell isobutane to Global Octanes, Texas Petrochemicals, Equistar,
Citgo, Crown Central and Texaco. The Company has long-standing business
relationships with Global Octanes and Texas Petrochemicals. The Company has
the only pipeline connection to Global Octanes and the only pipeline
connection to Texas Petrochemicals that is capable of delivering isobutane on
a continuous, as-needed basis. The Company is currently in negotiations to
renew these contracts, both of which expire this year. Prices under these
contracts generally are based on the spot market price for isobutane at Mont
Belvieu. The Company can meet its sales obligations either by (i) purchasing
normal butane in the spot market and isomerizing it, (ii) purchasing mixed
butane on the spot market, including imports, and processing it through a DIB
or (iii) purchasing isobutane in the spot market. When the price differential
between normal butane and isobutane is not substantial enough to justify
isomerization, the Company purchases isobutane and delivers it to its sales
customers who pay market-based prices. Accordingly, the percentage of
isomerization volumes represented by processing customers increases when the
spread between normal butane and isobutane prices is narrow.
74
The following table describes the volumes of isobutane produced and the
utilization at the Company's Mont Belvieu facility during the past five years:
ISOMERIZATION VOLUMES AND UTILIZATION
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Average daily toll processing volume (a)............... 45 45 57 59 62
Average daily production volume (a).................... 66 66 67 71 67
Tolling volume as a percentage of total production..... 66% 68% 86% 84% 92%
Average capacity utilization........................... 57% 57% 58% 61% 57%
Average daily merchant volume (a)(b)................... 39 42 44 52 53
- --------
(a) Thousands of barrels per day.
(b) Average daily merchant volume includes merchant processing volume and
sales of isobutane purchased in the spot market.
Mixed Butane Fractionation
The Company also uses its DIB units to fractionate mixed butane produced
from the Company's NGL fractionation and isomerization facilities and from
imports and other outside sources into isobutane and normal butane. The
operating flexibility provided by its multiple DIBs enables the Company to
take advantage of fluctuations in demand and prices for the different types of
butane. The Company also has DIB capacity available for toll processing of
mixed butane streams for third parties.
Imports are the Company's most significant outside source of mixed butane.
The Company leases and operates an NGL import/export facility on the Houston
ship channel, one of only two commercial facilities on the Gulf Coast capable
of receiving and unloading world-scale NGL tankers. This facility, which is
connected to the Mont Belvieu facility via a pipeline which is part of the
Company's Houston ship channel system, enables the Company to import large
quantities of mixed butane for processing in its DIBs. During 1997, imports,
primarily from Algeria, Mexico and Venezuela, accounted for 81% of the
Company's supply of mixed butane from outside sources. The Company believes
that, because of new projects in Africa and South America and the lack of
storage capacity in the Middle East, NGL import volumes will remain consistent
over the near term.
MTBE PRODUCTION
General
MTBE is produced by reacting methanol with isobutylene, which is derived
from isobutane. MTBE was originally used as an octane enhancer in motor
gasoline, partly in response to the lead phase-down program begun in the mid-
1970s. Following implementation of the Clean Air Act Amendments of 1990, MTBE
became a widely-used oxygenate to enhance the clean burning properties of
motor gasoline. Although oxygen requirements can be obtained by using various
oxygenates such as ethanol, ethyl tertiary butyl ether (ETBE) and tertiary
amyl methyl ether (TAME), MTBE has gained the broadest acceptance due to its
ready availability and history of acceptance by refiners. Additionally, motor
gasoline containing MTBE can be transported through pipelines, which is a
significant competitive advantage over alcohol blends.
Substantially all of the MTBE produced in the United States is used in the
production of oxygenated motor gasoline that is required to be used in carbon
monoxide and ozone non-attainment areas pursuant to the Clean Air Act
Amendments of 1990 and the California oxygenated motor gasoline program.
Demand for MTBE is primarily affected by the demand for motor gasoline in
these areas. Motor gasoline usage in turn is affected by many factors,
including the price of motor gasoline (which is dependent upon crude oil
prices) and general economic conditions. Historically, the spot price for MTBE
has been at a modest premium to gasoline blend values. Future MTBE demand is
highly dependent on environmental regulation, federal legislation and the
actions of individual states. See "Risk Factors--Risks Inherent in the
Company's Business--The Profitability of the Company's Operations Will Depend
Upon the Demand and Prices for the Company's Products--MTBE" for a discussion
of legislation proposed in California to ban MTBE as a gasoline additive,
legislation proposed
75
in Congress to exempt California from the federal oxygenate requirements, and
the efforts of various public advocacy and protest groups to curtail MTBE use
in other states.
The following table sets forth historical supply and demand information for
MTBE:
MTBE
HISTORICAL SUPPLY/DEMAND
(THOUSANDS OF BARRELS PER DAY)
SUPPLY DOMESTIC DEMAND
----------------------------------------- --------------------------------
PERCENT OF
TOTALS
----------------
NET REFORMULATED CO- OCTANES/
PRODUCTION IMPORTS TOTAL DOMESTIC IMPORTS GAS GAS OTHER TOTAL
---------- ------- ----- -------- ------- ------------ ---- -------- -----
1993.................... 135.8 13.0 148.8 91.3% 8.7% 0 95.0 64.6 159.6
1994.................... 143.7 30.9 174.6 82.3 17.7 28.5 68.9 66.8 164.2
1995.................... 163.3 57.7 221.0 73.9 26.1 197.1 23.6 14.0 234.7
1996.................... 185.2 61.9 247.1 75.0 25.0 223.9 6.8 13.1 243.8
1997.................... 197.6 67.6 265.2 74.5 25.5 239.5 1.9 28.7 270.1
- --------
Source: DeWitt & Company Incorporated. Differences in total supply and total
demand for each year represent net increases or decreases in MTBE inventories.
The MTBE Production Process
The primary feedstocks for MTBE production are isobutane and methanol. The
Company produces isobutane for use in the BEF MTBE facility through its mixed
butane fractionation and isomerization processes. At the MTBE facility,
isobutane is dehydrogenated into isobutylene. The isobutylene is then reacted
with purchased methanol to create MTBE. By-products of this process include
propane/propylene mix, which is routed to the Company's propylene
fractionation facilities; hydrogen, which is sold to a third party; and other
mixed NGLs, which can be processed in the Company's NGL fractionation
facilities or sold to third-party refiners.
The following diagram illustrates the MTBE production process:
MTBE PRODUCTION
[CHART APPEARS HERE]
The Company's MTBE Production Facilities
The Company owns a 33 1/3% economic interest in BEF, the joint venture that
owns the MTBE production facility located within the Company's Mont Belvieu
complex. Both Sun and Mitchell Energy own 33 1/3% interests in BEF. The BEF
facility was completed in 1994 at a total cost of $225 million and has an
average MTBE production capacity of 14,800 barrels per day. The Company
operates the facility under a long-term contract.
76
The Company's MTBE Customers and Contracts
Each of the owners of BEF is responsible for supplying one-third of the
facility's isobutane feedstock through June 2004. Sun and Mitchell Energy have
each contracted to supply their respective portions of the feedstock from the
Company's isomerization facilities. The methanol feedstock is purchased from
third parties under long-term contracts and transported to Mont Belvieu by a
dedicated pipeline which is part of the Company's Houston ship channel system.
At the time of the construction of the MTBE facility, BEF entered into a ten-
year agreement with Sun pursuant to which Sun is required to purchase all of
the MTBE production from the facility. Sun has agreed to pay the higher of a
floor price or market price for the first 193,450,000 gallons per year of
production, subject to quarterly adjustments on certain excess volumes, and
market prices on the remaining production per contract year through May 2000.
At the end of 1997, the floor price paid by Sun was $1.0392 per gallon.
Beginning June 1, 2000 through the termination of the contract in May 2005,
the price for all production will be a market-based negotiated price. During
1997 and the first quarter of 1998, the average spot price for MTBE on the
Gulf Coast was approximately $0.83 and $0.68 per gallon, respectively.
The following table shows the production volumes and utilization at BEF's
MTBE facility over the past four years:
MTBE VOLUMES AND UTILIZATION
1994 1995 1996 1997
---- ---- ---- ----
Average daily production volume (thousands of barrels).... 7.8 9.6 13.2 14.4
Average capacity utilization.............................. 70% 65% 89% 97%
PROPYLENE FRACTIONATION
General
Polymer grade, or high purity, propylene is one of three grades of propylene
sold in the United States and is used in the petrochemical industry for the
production of plastics. High purity propylene is typically over 99.5% pure
propylene and is derived by purifying either of the lower grade propylene
feedstocks, refinery grade or chemical grade. Chemical grade propylene is 92-
93% pure propylene and is produced as a by-product of olefin (ethylene)
plants. The supply of chemical grade propylene is insufficient to meet the
demand for high purity propylene; therefore, remaining demand is satisfied by
the purification of refinery grade propylene. Refinery grade propylene, or
propane/propylene mix, is 50-70% pure propylene, with the primary impurity
being propane. Propane/propylene mix is produced in crude oil refinery fluid
catalytic cracking plants and is fractionated to separate propane and other
impurities from the high purity propylene. The fractionation process occurs
either at the crude oil refinery or at a commercial propylene fractionation
facility like the one operated by the Company.
Since 1995, domestic high purity propylene production has remained fairly
constant, aggregating approximately 120,000 barrels per day in 1997.
Polypropylene production accounts for approximately one-half of the demand for
high purity propylene. Polypropylene has a variety of end uses, including
fiber for carpets and upholstery, packaging film and molded plastic parts for
appliance, automotive, houseware and medical products. The alternative use for
propylene in refineries is to produce alkylate for blending into gasoline.
The Propylene Fractionation Process
Refinery grade propane/propylene mix is fractionated in towers similar to
those in which mixed NGLs are fractionated in fractionation units. In
propylene fractionation facilities, propane and mixed butanes are separated
from high purity propylene. The propane is ultimately used in petrochemical
plants or sold in heating/fuel markets. The small amount of mixed butane
produced is typically processed through DIBs and fractionated into isobutane
and normal butane. The high purity propylene is shipped by truck or pipeline
to plastics manufacturers.
77
Like NGL fractionation units, propylene splitters realize energy savings by
using the heat produced by the gas turbine engines which drive the facilities'
compressors.
The following diagram illustrates the propylene fractionation process:
[PROPYLENE FRACTIONATION CHART APPEARS HERE]
The Company's Propylene Facilities
In 1979, the Company, together with Montell (a Shell subsidiary),
constructed its first propylene fractionation unit. The unit, which is also
called a "splitter," had an initial average production capacity of 5,500
barrels per day. The facility has been expanded over the years to a current
average propylene production capacity of 16,500 barrels per day. The Company
owns a 54.6% interest in the splitter, and Montell owns the remaining 45.4%
interest. The Company leases Montell's interest. In response to strong demand,
the Company constructed a second propylene fractionation unit in March 1997 at
a cost of approximately $52 million. The new unit has an average production
capacity of 13,500 barrels per day. The Company is the sole owner of the
second splitter; however, Mobil has an option to purchase a 25.0% interest in
the splitter for approximately $13.75 million for a one-year period ending
September 30, 1999. Together, the splitters have an average production
capacity of 30,000 barrels per day of high purity propylene.
The Company is able to unload barges carrying propane/propylene mix through
its import/export facility on the Houston ship channel. The Company is also
able to receive supplies of propane/propylene mix from its truck and rail
loading facility and from refineries and other propane/propylene mix producers
through its pipeline located along the Houston ship channel.
The Company's Propylene Customers and Contracts
The Company produces high purity propylene both as a toll processor and for
sale pursuant to long-term agreements with market-based pricing and on the
spot market. The Company's most significant toll processing contracts are with
Equistar and Huntsman. Pursuant to those contracts, the Company is guaranteed
certain minimum volumes and paid a processing fee based on the pounds of high
purity propylene processed. The Company also has toll processing contracts
with Chevron and Montell. The Company has several long-term high purity
propylene sales agreements, the most significant of which is with Montell.
Pursuant to the Montell agreement, the Company agrees to sell Montell 700
million pounds, equal to approximately 11,000 barrels per day, of high purity
propylene each year at market-based prices. The Company has supplied Montell
with propylene since the first splitter facility was constructed in 1979. The
contract is currently scheduled to expire on December 31, 2004. Montell has
the option to renew the contract for another 12 years and, at the end of that
renewal period, to renew the contract for another 12 years. To meet its sales
obligations, the Company has entered into several long-term agreements to
purchase propane/propylene mix. The Company's most significant feedstock
contracts are with Crown Central, Mobil, Shell and Valero.
78
PRINCIPAL 1997 PROPYLENE FRACTIONATION CUSTOMERS
AVERAGE
DAILY TOTAL 1997 PERCENT OF TOTAL
CUSTOMER NAME VOLUMES VOLUMES 1997 VOLUMES
- ----------------------------------------- ---------- ---------- ----------------
(THOUSANDS (MILLIONS
OF OF
BARRELS) BARRELS)
Processing Customers:
Montell................................ 1.4 0.5 5.3%
Equistar............................... 5.8 2.1 22.1
Huntsman............................... 3.0 1.1 11.6
Chevron................................ 1.9 0.7 7.4
Shell.................................. 0.3 0.1 1.0
---- --- -----
Total Processing..................... 12.4 4.5 47.4
---- --- -----
Sales Customers:
Montell................................ 11.0 4.0 42.1
Huntsman............................... 0.8 0.3 3.2
Other.................................. 1.8 0.7 7.3
---- --- -----
Total Sales.......................... 13.6 5.0 52.6
---- --- -----
Total.................................... 26.0 9.5 100.0%
==== === =====
The following table shows the volumes of propylene produced and utilization
at the Company's facilities over the past five years:
PROPYLENE FRACTIONATION VOLUMES AND UTILIZATION
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995 1996 1997
---- ---- ---- ---- ----
Average daily production volume (thousands of
barrels)............................................. 16 14 16 16 26
Average capacity utilization (a)...................... 98% 84% 100% 100% 93%
Tolling volumes as a percentage of total volume....... 36% 35% 35% 33% 47%
- --------
(a) The Company began operating its second splitter in March 1997 resulting in
an increase in capacity to 30,000 barrels per day. During the last six
months of 1997, average daily production volume was 29,000 barrels per
day.
OTHER BUSINESSES
Storage
NGLs, NGL products, propane/propylene mix and other light hydrocarbons must
be pressurized or refrigerated for storage or transportation in a liquid
state. Above-ground storage of these materials in
refrigerated or pressurized containers is uneconomical in the quantities
required for efficient processing and industrial consumption. For this reason,
such materials are typically stored in underground caverns, or wells, within
salt domes or salt beds. These salt formations provide a medium which is
impervious to the stored products and can contain large quantities of
hydrocarbons in a safer manner and at a significantly lower per-unit cost than
any above-ground alternative. Brine is used to displace the stored products
and to maintain pressure in the well as product volumes fluctuate. The Company
owns nine storage wells at Mont Belvieu with an aggregate capacity of
approximately 20 million barrels. The Company also owns NGL storage caverns in
Breaux Bridge, Louisiana and Petal, Mississippi with additional capacity of 15
million barrels.
Several of the wells at Mont Belvieu are used to store mixed NGLs and
propane/propylene mix that have been delivered for processing. Such storage
allows the Company to mix various batches of feedstock and maintain a
sufficient supply and stable composition of feedstock to the processing
facilities. The Company stores certain fractionated products for its customers
when they are unable to take immediate delivery. These products
79
include propane, isobutane, normal butane, mixed butane and high purity
propylene. The Company's storage and product handling facilities and pipeline
systems also enable it to unload feedstocks and load processed products on
marine tankers at maximum rates. Some of the Company's processing contracts
allow for a short period of free storage (typically 30 days or less) and
impose fees based on volumes stored for longer periods.
Pipelines
The Company owns and operates a network of approximately 500 miles of NGL,
NGL products and propylene pipelines in the Gulf Coast area.
The following table identifies the Company's primary pipeline assets:
COMPANY
OWNERSHIP
PIPELINE SYSTEM LOCATION MILES FUNCTION PERCENTAGE
- ------------------------ ------------------- ----- --------------------------------- ----------
Houston ship channel.... Mont Belvieu to 175 Delivers NGLs to Mont Belvieu and 100%
Port of Houston NGL products to refineries and
petrochemical companies
Sorrento................ Near Baton Rouge to 140 Delivers NGL products to 100%
near New Orleans refineries and petrochemical
companies and Dixie Pipeline
Chunchula............... Alabama/Florida 117 Delivers NGLs to Petal 100%
border to Petal, fractionator
Mississippi
Lake Charles/Bayport 134 Delivers high purity propylene 50%
Propylene Pipeline..... Mont Belvieu to from Mont Belvieu to Montell's
Lake Charles, Lake Charles and Bayport
Louisiana and propylene plants and to
Bayport, Texas Aristech's LaPorte facility and
receives refinery grade propylene
from Mobil at Beaumont
The Houston ship channel distribution system and the Sorrento system are bi-
directional for maximum operating flexibility, market responsiveness and
transportation efficiency. These systems transport feedstocks to the Company's
facilities for processing and deliver products to petrochemical plants and
refineries. The Houston ship channel distribution system has an aggregate
length of approximately 175 miles and extends west from Mont Belvieu, along
the Houston ship channel to Pierce Junction south of Houston. The Houston ship
channel system includes (i) a combination 6-inch and 8-inch propane/propylene
mix pipeline; (ii) a combination 8-inch and 10-inch isobutane pipeline; (iii)
an 8-inch methanol pipeline; and (iv) a combination 12-inch and 16-inch NGL
import/export pipeline. The Houston ship channel distribution system serves
the refinery and petrochemical industry concentrated along the Houston ship
channel and connects the Mont Belvieu facilities to a number of the Company's
major customers and suppliers.
The Sorrento system comprises two pipeline subsystems aggregating 140 miles
in length that originate from Sorrento, Louisiana and serve the major
refineries and petrochemical companies on the Mississippi River from near
Baton Rouge, Louisiana to near New Orleans, Louisiana. One subsystem is used
for transporting propane, and one is used for transporting butane and natural
gasoline. Propane received in the Sorrento system can be delivered to
petrochemical plants or into the Dixie Pipeline. Butane from Mont Belvieu can
be received from the Dixie Pipeline at the Company's Breaux Bridge storage
facility, transported through the Company's pipeline and delivered to
refineries located along the Sorrento system.
The Chunchula system originates at the Alabama-Florida border and extends
west to the Company's NGL storage and fractionation facility in Petal,
Mississippi. The Company owns and operates this 117-mile, 6-inch line
consisting of the Chunchula Pipeline and the Jay Extension that gathers NGLs
from the Chunchula, Jay and Hatters Pond Fields in Florida and Alabama for
delivery to the Company's facility in Petal, Mississippi for processing or
storage and further distribution.
The Company operates a 134-mile propylene pipeline system which is used to
distribute high purity propylene from Mont Belvieu to Montell's polypropylene
plants in Lake Charles, Louisiana and Bayport, Texas
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and Aristech's facility in LaPorte, Texas. A segment of the pipeline is
jointly owned by the Company and Montell, and another segment of the pipeline
is jointly leased from Mobil.
The Company recently announced its intention to participate in the
construction of two new pipeline projects which will support its Baton Rouge
NGL fractionator joint venture. The Tri-States Pipeline, a joint venture with
Amoco, Duke, Koch, Williams and Tejas (a Shell subsidiary), will extend
approximately 169 miles from Mobile Bay, Alabama to near Kenner, Louisiana.
The Wilprise Pipeline, a joint venture with Williams and Amoco, will extend
approximately 30 miles from Kenner to Sorrento, Louisiana. Both pipelines will
transport mixed NGLs from Mobile Bay to fractionation facilities. At Kenner,
some shippers will be able to choose between shipment to fractionation
facilities in a competing system in South Louisiana or to fractionation
facilities at Baton Rouge using the Wilprise Pipeline and another pipeline
linking Sorrento to Baton Rouge.
Houston Ship Channel Import/Export Facility; Rail Cars and Facilities
The Company leases and operates an NGL import/export facility at the
Oiltanking Houston marine terminal on the Houston ship channel. The
import/export facility is connected to Mont Belvieu via the Company's 16-inch
bi-directional import/export pipeline. This pipeline enables NGL tankers to be
offloaded at their maximum (10,000 barrels per hour) unloading rate, thus
minimizing laytime and maximizing facility usage. An 8-inch methanol pipeline
which is part of the Houston ship channel distribution system also extends
from the facility to Mont Belvieu and enables methanol to be delivered by ship
and then transferred to the MTBE facility. The Company is also participating
in a joint venture that will install at the import/export facility the NGL
Product Chiller for cooling NGL products for loading into refrigerated marine
tankers. The chiller will speed the loading of vessels and enable the
throughput of the facility to be increased accordingly.
The Company utilizes a fleet of approximately 350 rail cars under short and
long-term leases used to deliver feedstocks to Mont Belvieu and transport NGL
products throughout the United States. The Company also has rail
loading/unloading facilities at Mont Belvieu, Texas, Breaux Bridge, Louisiana,
and Petal, Mississippi to serve its own and customers' rail shipments.
COMPETITION
The consumption of NGL products in the United States can be separated among
four distinct markets. Petrochemical production provides the largest end-use
market, followed by motor gasoline production, residential and commercial
heating and agricultural uses. There are other hydrocarbon alternatives,
primarily refined petroleum products, which can be substituted for NGL
products in most end uses. In some uses, such as residential and commercial
heating, a substitution of other hydrocarbon products for NGL products would
require a significant expense or delay, but for other uses, such as the
production of motor gasoline, ethylene, industrial fuels and petrochemical
feedstocks, such a substitution can be made without significant delay or
expense.
Because certain NGL products compete with other refined petroleum products
in the fuel and petrochemical feedstock markets, NGL product prices are set by
or in competition with refined petroleum products. Increased production and
importation of NGLs and NGL products in the United States may decrease NGL
product prices in relation to refined petroleum alternatives and thereby
increase consumption of NGL products as NGL products are substituted for other
more expensive refined petroleum products. Conversely, a decrease in the
production and importation of NGLs and NGL products could increase NGL
products prices in relation to refined petroleum product prices and thereby
decrease consumption of NGLs. However, because of the relationship of crude
oil and natural gas production to NGL production, the Company believes that
any imbalance in the prices of NGLs and NGL products and alternative products
would be temporary.
Although competition for NGL product fractionation services is based
primarily on the fractionation fee, the ability of a fractionator to obtain
and distribute product is a function of the existence of the necessary
pipelines and transportation facilities. A fractionator connected to an
extensive transportation and distribution
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system has direct access to a larger market than its competitors. Overall, the
Company believes that it provides a broader range of services than any of its
competitors at Mont Belvieu. In addition, the Company believes that its joint
venture relationships enable it to contract for the long-term utilization of a
significant amount of its fractionation facilities with major producers and
consumers of NGLs or NGL products.
The Company's Mont Belvieu fractionation facility competes for volumes of
mixed NGLs with three other fractionators at Mont Belvieu: a joint venture
between Dynegy and Amoco (205,000 barrels per day capacity); Gulf Coast
Fractionators, a joint venture of Conoco, Mitchell Energy and Dynegy (110,000
barrels per day capacity); and a joint venture between Koch Industries and
Union Pacific Resources (110,000 barrels per day capacity). The Koch
Industries/Union Pacific Resources fractionator is scheduled for expansion to
a capacity of 200,000 barrels per day in 1999. Mobil operates a fractionation
facility (60,000 barrels per day capacity) in Hull, Texas that is connected to
Mont Belvieu by pipeline and Phillips Petroleum operates a fractionation
facility (70,000 barrels per day capacity) in Sweeny, Texas that is connected
to Mont Belvieu by pipeline. Mobil and Phillips use their facilities primarily
to process their own NGL production but at certain times compete with the
fractionators at Mont Belvieu. The Company's fractionation facilities also
compete on a more limited basis with two fractionators in Conway, Kansas:
MAPCO (107,000 barrels per day capacity) and Koch Industries (200,000 barrels
per day capacity) and with a number of decentralized, smaller fractionation
facilities in Louisiana, the most significant of which are Promix at
Napoleonville (55,000 barrels per day capacity), Texaco/MAPCO at Paradis
(45,000 barrels per day capacity) and TransCanada at Eunice and Riverside
(45,000 barrels per day combined capacity). In recent years, the Conway market
has experienced excess capacity and prices for NGL products that are generally
lower than prices at Mont Belvieu, although prices in Conway tend to
strengthen along with demand for propane in winter months. Finally, a number
of producers operate smaller-scale fractionation facilities at individual
field processing facilities.
In the isomerization market, the Company competes primarily with Koch
Industries at Conway, Kansas; Enron at Riverside, Louisiana; and Conoco at
Wingate, New Mexico. Enron and Valero also produce isobutane, primarily for
internal production of MTBE. Competitive factors affecting isomerization
operations include the price differential between normal butane and isobutane
as well as the fees charged for isomerization services, long-term contracts,
the availability of merchant capacity, the ability to produce a higher purity
isobutane product and storage and transportation support.
BEF competes with a number of MTBE producers, including a number of refiners
who produce MTBE for internal consumption in the manufacture of reformulated
motor gasoline. Competitive factors affecting MTBE production include
production costs, long-term contracts, the availability of merchant capacity
and federal and state environmental regulations relating to the content of
motor gasoline.
The Company competes with numerous producers of high purity propylene, which
include many of the major refiners on the Gulf Coast. The Company and Ultramar
Diamond Shamrock are the primary domestic commercial producers of high purity
propylene from refinery-sourced propane/propylene mix. High purity propylene
is also produced as a by-product from steam crackers used in ethylene
production.
Certain of the Company's competitors are major oil and natural gas companies
and other large integrated pipeline or energy companies which have greater
financial resources than the Company. The Company believes that its
independence from the major producers of NGLs and petrochemical companies is
often an advantage in its dealings with its customers, but the Company's
continued success will depend upon its ability to maintain strong
relationships with the primary producers of NGLs and consumers of NGL
products, particularly in the form of long-term contracts and joint venture
relationships.
REGULATORY MATTERS
Interstate Common Carrier Pipeline Regulation
The Company's Chunchula and Lake Charles/Bayport pipelines are interstate
common carrier oil pipelines subject to regulation by FERC under the October
1, 1977 version of the Interstate Commerce Act ("ICA").
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Standards for Terms of Service and Rates. As interstate common carriers, the
Chunchula and Lake Charles/Bayport pipelines provide service to any shipper
who requests transportation services, provided that the products tendered for
transportation satisfy the conditions and specifications contained in the
applicable tariff. The ICA requires the Company to maintain tariffs on file
with the FERC that set forth the rates the Company charges for providing
transportation services on the interstate common carrier pipelines as well as
the rules and regulations governing these services.
The ICA gives the FERC authority to regulate the rates the Company charges
for service on the interstate common carrier pipelines. The ICA requires,
among other things, that such rates be "just and reasonable" and
nondiscriminatory. The ICA permits interested persons to challenge proposed
new or changed rates and authorizes the FERC to suspend the effectiveness of
such rates for a period of up to seven months and to investigate such rates.
If, upon completion of an investigation, the FERC finds that the new or
changed rate is unlawful, it is authorized to require the carrier to refund
the revenues in excess of the prior tariff collected during the pendency of
the investigation. The FERC may also investigate, upon complaint or on its own
motion, rates that are already in effect and may order a carrier to change its
rates prospectively. Upon an appropriate showing, a shipper may obtain
reparations for damages sustained for a period of up to two years prior to the
filing of a complaint.
On October 24, 1992, Congress passed the Energy Policy Act of 1992 ("Energy
Policy Act"). The Energy Policy Act deemed petroleum pipeline rates that were
in effect for the 365-day period ending on the date of enactment or that were
in effect on the 365th day preceding enactment and had not been subject to
complaint, protest or investigation during the 365-day period to be just and
reasonable under the ICA (i.e., "grandfathered"). The Energy Policy Act also
limited the circumstances under which a complaint can be made against such
grandfathered rates. In order to challenge grandfathered rates, a party would
have to show that it was previously contractually barred from challenging the
rates or that the economic circumstances or the nature of the service
underlying the rate had substantially changed or that the rate was unduly
discriminatory or preferential. These grandfathering provisions and the
circumstances under which they may be challenged have received only limited
attention from the FERC, causing a degree of uncertainty as to their
application and scope.
The Energy Policy Act required the FERC to issue rules establishing a
simplified and generally applicable ratemaking methodology for petroleum
pipelines, and to streamline procedures in petroleum pipeline proceedings. The
FERC responded to this mandate by issuing Order No. 561, which, among other
things, adopted a new indexing rate methodology for petroleum pipelines. Under
the new regulations, which became effective January 1, 1995, petroleum
pipelines are able to change their rates within prescribed ceiling levels that
are tied to an inflation index. Rate increases made within the ceiling levels
will be subject to protest, but such protests must show that the portion of
the rate increase resulting from application of the index is substantially in
excess of the pipeline's increase in costs. If the indexing methodology
results in a reduced ceiling level that is lower than a pipeline's filed rate,
Order No. 561 requires the pipeline to reduce its rate to comply with the
lower ceiling. Under Order No. 561, a pipeline must as a general rule utilize
the indexing methodology to change its rates. The FERC, however, retained
cost-of-service ratemaking, market-based rates, and settlement as alternatives
to the indexing approach, which alternatives may be used in certain specified
circumstances.
The Company believes that the rates it charges for transportation service on
its interstate pipelines have been grandfathered under the Energy Policy Act
and are thus considered just and reasonable under the ICA. As discussed above,
however, because of the uncertainty related to the application of the Energy
Policy Act's grandfathering provisions to the Company's rates as well as the
novelty and uncertainty related to the FERC's new indexing methodology, the
Company is unable to predict what rates it will be allowed to charge in the
future for service on its interstate common carrier pipelines. Furthermore,
because rates charged for transportation must be competitive with those
charged by other transporters, the rates set forth in the Company's tariffs
will be determined based on competitive factors in addition to regulatory
considerations.
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Allowance for Income Taxes in Cost of Service. In a 1995 decision regarding
Lakehead Pipe Line Company ("Lakehead"), FERC ruled that an interstate
pipeline owned by a limited partnership could not include in its cost of
service an allowance for income taxes with respect to income attributable to
limited partnership interests held by individuals. On request in 1996, FERC
clarified that, in order to avoid any effect of a "curative allocation" of
income from individual partners to the corporate partner, an allowance for
income taxes paid by corporate partners must be based on income as reflected
on the pipeline's books for earning and distribution rather than as reported
for income tax purposes. Subsequent appeals of these rulings were resolved by
a 1997 settlement among the parties and were never adjudicated. The effect of
this policy on the Company is uncertain. The Company's rates are set using the
indexing method and have been grandfathered. It is possible that a party might
challenge the Company's grandfathered rates on the basis that the creation of
the Company constituted a substantial change in circumstances, potentially
lifting the grandfathering protection. Alternatively, a party might contend
that, in light of the Lakehead ruling and creation of the Company, the
Company's rates are not just and reasonable. While it is not possible to
predict the likelihood that such challenges would succeed at FERC, if such
challenges were to be raised and succeed, application of the Lakehead ruling
would reduce the Company's permissible income tax allowance in any cost of
service, and rates, to the extent income is attributable to partnership
interests held by individual partners rather than corporations.
Intrastate Common Carrier Regulation
The Company's Houston ship channel pipeline is an intrastate private carrier
not subject to rate regulations. The Sorrento pipeline is an intrastate common
carrier pipeline that transports NGL products and is subject to various
Louisiana state laws and regulations that affect the terms of service and
rates for such services. In addition, the Louisiana Public Service Commission
("LPSC") asserts the right to review any transfer of ownership of an
intrastate common carrier pipeline operating within Louisiana to determine if
the transfer is in the public interest. The Company has obtained the approval
of the LPSC for the change in the form of ownership of the Sorrento pipeline.
Other State and Local Regulation
The Company's activities are subject to various state and local laws and
regulations, as well as orders of regulatory bodies pursuant thereto,
governing a wide variety of matters, including marketing, production, pricing,
community right-to-know, protection of the environment, safety and other
matters.
Cogeneration
The Company cogenerates electricity for internal consumption and heat for a
process-related hot oil system at Mont Belvieu. If this electricity were sold
to third parties, the Company's Mont Belvieu cogeneration facilities could be
certified as qualifying facilities under the Public Utility Regulatory Policy
Act of 1978 ("PURPA"). Subject to compliance with certain conditions under
PURPA, this certification would exempt the Company from most of the
regulations applicable to electric utilities under the Federal Power Act and
the Public Utility Holding Company Act, as well as from most state laws and
regulations concerning the rates, finances, or organization of electric
utilities. However, since such electric power is consumed entirely by the
Company's plant facilities, the Company's cogeneration activities are not
subject to public utility regulation under federal or Texas law.
Environmental Matters
General. The operations of the Company are subject to federal, state and
local laws and regulations relating to release of pollutants into the
environment or otherwise relating to protection of the environment. The
Company believes that its operations and facilities are in general compliance
with applicable environmental regulations.
84
However, risks of process upsets, accidental releases or spills are associated
with the Company's operations and there can be no assurance that significant
costs and liabilities will not be incurred, including those relating to claims
for damage to property and persons.
The clear trend in environmental regulation is to place more restrictions
and limitations on activities that may affect the environment, such as
emissions of pollutants, generation and disposal of wastes and use and
handling of chemical substances. The usual remedy for failure to comply with
these laws and regulations is the assessment of administrative, civil and, in
some instances, criminal penalties or, in rare circumstances, injunctions. The
Company believes that the cost of compliance with environmental laws and
regulations will not have a material adverse effect on the results of
operations or financial position of the Company. However, it is possible that
the costs of compliance with environmental laws and regulations will continue
to increase, and thus there can be no assurance as to the amount or timing of
future expenditures for environmental compliance or remediation, and actual
future expenditures may be different from the amounts currently anticipated.
In the event of future increases in costs, the Company may be unable to pass
on those increases to its customers. The Company will attempt to anticipate
future regulatory requirements that might be imposed and plan accordingly in
order to remain in compliance with changing environmental laws and regulations
and to minimize the costs of such compliance.
Solid Waste. The Company currently owns or leases, and has in the past owned
or leased, properties that have been used over the years for NGL processing,
treatment, transportation and storage and for oil and natural gas exploration
and production activities. Solid waste disposal practices within the NGL
industry and other oil and natural gas related industries have improved over
the years with the passage and implementation of various environmental laws
and regulations. Nevertheless, a possibility exists that hydrocarbons and
other solid wastes may have been disposed of on or under various properties
owned by or leased by the Company during the operating history of those
facilities. In addition, a small number of these properties may have been
operated by third parties over whom the Company had no control as to such
entities' handling of hydrocarbons or other wastes and the manner in which
such substances may have been disposed of or released. State and federal laws
applicable to oil and natural gas wastes and properties have gradually become
more strict and, pursuant to such laws and regulations, the Company could be
required to remove or remediate previously disposed wastes or property
contamination including groundwater contamination. The Company does not
believe that there presently exists significant surface and subsurface
contamination of the Company properties by hydrocarbons or other solid wastes.
The Company generates both hazardous and nonhazardous solid wastes which are
subject to requirements of the federal Resource Conservation and Recovery Act
("RCRA") and comparable state statutes. From time to time, the Environmental
Protection Agency ("EPA") has considered making changes in nonhazardous waste
standards that would result in stricter disposal requirements for such wastes.
Furthermore, it is possible that some wastes generated by the Company that are
currently classified as nonhazardous may in the future be designated as
"hazardous wastes," resulting in the wastes being subject to more rigorous and
costly disposal requirements. Such changes in the regulations may result in
additional capital expenditures or operating expenses by the Company.
Superfund. The Comprehensive Environmental Response, Compensation and
Liability Act ("CERCLA"), also known as the "Superfund" law, and similar state
laws, impose liability without regard to fault or the legality of the original
conduct, on certain classes of persons, including the owner or operator of a
site and companies that disposed or arranged for the disposal of the hazardous
substances found at the site. CERCLA also authorizes the EPA and, in some
cases, third parties to take actions in response to threats to the public
health or the environment and to seek to recover from the responsible classes
of persons the costs they incur. Although "petroleum" is excluded from
CERCLA's definition of a "hazardous substance," in the course of its ordinary
operations the Company will generate wastes that may fall within the
definition of a "hazardous substance." The Company may be responsible under
CERCLA for all or part of the costs required to clean up sites at which such
wastes have been disposed. The Company has not received any notification that
it may be potentially responsible for cleanup costs under CERCLA.
85
Clean Air Act--General. The operations of the Company are subject to the
Clean Air Act and comparable state statutes. Amendments to the Clean Air Act
were adopted in 1990 and contain provisions that may result in the imposition
of certain pollution control requirements with respect to air emissions from
the operations of the pipelines and the processing and storage facilities. For
example, the Mont Belvieu processing and storage facility is located in the
Houston-Galveston ozone non-attainment area, which is categorized as a
"severe" area and, therefore, is subject to more restrictive regulations for
the issuance of air permits for new or modified facilities. The Houston-
Galveston area is among nine areas in the country in this "severe" category.
One of the other consequences of this non-attainment status is the potential
imposition of lower limits on the emissions of certain pollutants,
particularly oxides of nitrogen which are produced through combustion, as in
the gas turbines at the Mont Belvieu processing facility. Regulations imposing
these new requirements on existing facilities will not be promulgated until
the end of 2000, and, therefore, it is not possible at this time to assess the
impact these requirements may have on the Company's operations. Failure to
comply with these air statutes or the implementing regulations may lead to the
assessment of administrative, civil or criminal penalties, and/or result in
the limitation or cessation of construction or operation of certain air
emission sources. As part of the regular overall evaluation of its current
operations, the Company is updating certain of its operating permits. The
Company believes that its operations, including its processing facilities,
pipelines and storage facilities, are in substantial compliance with
applicable air requirements.
Clean Air Act--Fuels. To implement the Clean Air Act Amendments of 1990, the
EPA, in November 1992, began requiring the use of motor gasoline containing
2.7% oxygen by weight during winter months in carbon monoxide non-attainment
areas largely in the western half of the United States (approximately 25
metropolitan areas). Since January 1995, the EPA has required the use of motor
gasoline containing 2.0% oxygen by weight throughout the year in extreme and
severe ozone non-attainment areas (nine metropolitan areas). The production of
MTBE is driven by the compliance with the requirements of these oxygenated
fuels programs. Any changes to these programs that enable localities to opt
out of these programs, lessen the requirements for oxygenates or favor the use
of non-isobutane based oxygenated fuels would reduce demand for the Company's
MTBE and could have a material adverse effect on the Company's results of
operations. Several public advocacy and protest groups active in California
and other states have asserted that MTBE contaminates water supplies, causes
health problems and has not been as beneficial as originally contemplated in
reducing air pollution. In California, state authorities negotiated an
agreement with the EPA to implement a program requiring oxygenated motor
gasoline at 2.0% for the whole state, rather than 2.7% only in selected areas.
In addition, legislation to amend the Clean Air Act has been introduced in
Congress to exempt California from the federal oxygenate requirements for
reformulated motor gasoline. If this legislation is enacted, refiners could
eliminate or reduce the amount of MTBE from motor gasoline sold in California
so long as certain other minimum standards are met. This federal legislation
is opposed by both the federal Department of Energy and the EPA. Many of the
public advocacy and protest groups that have been campaigning for legislation
to exempt California from the federal oxygenate requirement are also
supporting a nationwide ban on the use of MTBE and other oxygenates, but no
legislation to implement a nationwide ban has been introduced in Congress to
date.
Clean Water Act. The Federal Water Pollution Control Act, also known as the
Clean Water Act, and similar state laws require containment of potential
discharges of contaminants into federal and state waters. Regulations
promulgated pursuant to these laws require that entities such as the Company
that discharge into federal and state waters obtain National Pollutant
Discharge Elimination System ("NPDES") and/or state permits authorizing these
discharges. The Clean Water Act and analogous state laws provide penalties for
releases of unauthorized contaminants into the water and impose substantial
liability for the costs of removing spills from such waters. In addition, the
Clean Water Act and analogous state laws require that individual permits or
coverage under general permits be obtained by covered facilities for
discharges of stormwater runoff. The Company believes that it will be able to
obtain, or be included under, these Clean Water Act permits and that
compliance with the conditions of such permits will not have a material effect
on the Company.
Underground Storage Requirements. The Company currently owns and operates
underground storage caverns that have been created in naturally occurring salt
domes in Texas, Louisiana and Mississippi. These
86
storage caverns are used to store NGLs, NGL products, propane/propylene mix
and propylene. Surface brine pits and brine disposal wells are used in the
operation of the storage caverns. All of these facilities are subject to
strict environmental regulation by state authorities under the Texas Natural
Resources Code and similar statutes in Louisiana and Mississippi. Regulations
implemented under such statutes address the operation, maintenance and/or
abandonment of such underground storage facilities, pits and disposal wells,
and require that permits be obtained. Failure to comply with the governing
statutes or the implementing regulations may lead to the assessment of
administrative, civil or criminal penalties. The Company believes that its
salt dome storage operations, including the caverns, brine pits and brine
disposal wells, are in substantial compliance with applicable statutes.
Safety Regulation
The Company's pipelines are subject to regulation by the U.S. Department of
Transportation under the Hazardous Liquid Pipeline Safety Act, as amended
("HLPSA"), relating to the design, installation, testing, construction,
operation, replacement and management of pipeline facilities. The HLPSA covers
crude oil, carbon dioxide, NGL and petroleum products pipelines and requires
any entity which owns or operates pipeline facilities to comply with the
regulations under the HLPSA, to permit access to and allow copying of records
and to make certain reports and provide information as required by the
Secretary of Transportation. The Company believes that its pipeline operations
are in substantial compliance with applicable HLPSA requirements; however, due
to the possibility of new or amended laws and regulations or reinterpretation
of existing laws and regulations, there can be no assurance that future
compliance with the HLPSA will not have a material adverse effect on the
Company's results of operations or financial position.
The workplaces associated with the processing and storage facilities and the
pipelines operated by the Company are also subject to the requirements of the
federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes. The Company believes that it has operated in substantial compliance
with OSHA requirements, including general industry standards, record keeping
requirements and monitoring of occupational exposure to regulated substances.
In general, the Company expects expenditures will increase in the future to
comply with likely higher industry and regulatory safety standards such as
those described above. Such expenditures cannot be accurately estimated at
this time, although the Company does not expect that such expenditures will
have a material adverse effect on the Company.
TITLE TO PROPERTIES
EPCO has transferred or will transfer (by operation of law or otherwise) all
of its properties other than the Retained Assets to the Company without
warranty prior to the consummation of this offering. Real property that has
been or will be transferred by EPCO to the Company falls into two basic
categories: (a) parcels which EPCO owns in fee, such as land at the Mont
Belvieu complex and Petal fractionation and storage facility, and (b) parcels
where EPCO's interest derives from leases, easements, rights-of-way, permits
or licenses from landowners or governmental authorities permitting the use of
such land for EPCO's operations. The fee sites upon which major facilities are
located have been owned by EPCO or its predecessors in title for many years
without any material challenge known to EPCO relating to title to the land
upon which the assets are located, and EPCO believes it has satisfactory title
to such fee sites. EPCO has no knowledge of any challenge to the underlying
fee title of any material lease, easement, right-of-way or license held by it
or to its title to any material lease, easement, right-of-way, permit or
lease, and EPCO believes that it has satisfactory title to all of its material
leases, easements, rights-of-way and licenses.
Some of the leases, easements, rights-of-way, permits and licenses to be
transferred to the Company require the consent of the grantor of such rights,
which in certain instances is a governmental entity. EPCO expects to obtain,
prior to the closing of this offering, third-party consents, permits and
authorizations which will be sufficient to enable EPCO to transfer to the
Company the assets necessary to enable the Company to operate its
87
business in all material respects as described in this Prospectus. With
respect to any material consents, permits or authorizations which have not
been obtained prior to closing of this offering, the closing of this offering
will not occur unless reasonable bases exist that permit the General Partner
to conclude that such consents, permits, or authorizations will be obtained
within a reasonable period following the closing, or the failure to obtain
such consents, permits or authorizations will have no material adverse effect
on the operation of the Company's business. If any such consents are not so
obtained, EPCO will enter into other agreements, or take such other action as
it deems necessary, in order to ensure that the Company has the assets and
concomitant rights necessary to enable it to operate the Company's business in
all material respects as described in this Prospectus. In addition, if all
desired consents to assignment have not been obtained prior to the closing,
the Company may decide to acquire the easements, licenses or authorizations
for which consent to assignment has not been obtained through the power of
eminent domain in the states and with respect to the pipelines where such
rights is available to the Company as described below.
The Company has been advised by counsel in the States of Alabama, Louisiana,
Mississippi and Texas that the Company will have the power of eminent domain
in such states with respect to the Chunchula pipeline system and the Lake
Charles/Bayport propylene pipeline system following the transfer of such
pipelines to the Company, assuming the Company meets certain requirements,
which differ from state to state. While there can be no assurance, the Company
believes it will meet such requirements in such states.
EPCO or its affiliates initially may continue to hold record title to
portions of certain assets until the Company has had time to make the
appropriate filings in the jurisdictions in which such assets are located and
to obtain any consents and approvals that are not obtained prior to transfer.
Such consents and approvals would include those required by federal and state
agencies or political subdivisions. In some cases, EPCO or its affiliates may,
where required consents or approvals have not been obtained, temporarily hold
record title to property as nominee for the benefit of the Company and in
other cases may, on the basis of expense and difficulty associated with the
conveyance of title, cause its affiliates to retain title, as nominees for the
benefit of the Company, until a future date. It is anticipated that there will
be no material change in the tax treatment of the Company or the Common Units
resulting from the holding by EPCO or its affiliates of title to any part of
such assets subject to future conveyance or as nominee for the benefit of the
Company. No legal opinion has been obtained with regard to the risk, if any,
of the holding by EPCO or its affiliates of record title to some portion of
such assets as nominee for the benefit of the Company.
EMPLOYEES
At March 31, 1998, EPCO employed approximately 500 employees in the
operations to be owned and operated by the Company, none of whom were members
of a union.
LITIGATION
EPCO has been, in the ordinary course of business, involved in a number of
legal and administrative proceedings, none of which has had a material adverse
effect on EPCO's results of operation or financial condition. All of EPCO's
current legal and administrative proceedings will be retained by EPCO and will
not be assumed by the Company.
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MANAGEMENT
COMPANY MANAGEMENT
The General Partner will manage and operate the activities of the Company.
Unitholders will not directly or indirectly participate in the management or
operation of the Company or have actual or apparent authority to enter into
contracts on behalf of, or to otherwise bind, the Company. Notwithstanding any
limitation on its obligations or duties, the General Partner will be liable,
as the general partner of the Company, for all debts of the Company (to the
extent not paid by the Company), except to the extent that indebtedness or
other obligations incurred by the Company are made specifically non-recourse
to the General Partner. Whenever possible, the General Partner intends to make
any such indebtedness or other obligations non-recourse to the General
Partner.
At least two of the members of the Board of Directors of the General Partner
who are neither officers, employees or security holders of the General Partner
nor directors, officers, employees or security holders of any affiliate of the
General Partner will serve on the Audit and Conflicts Committee, which will
have the authority to review specific matters as to which the Board of
Directors believes there may be a conflict of interests in order to determine
if the resolution of such conflict proposed by the General Partner is fair and
reasonable to the Company. Any matters approved by the Audit and Conflicts
Committee will be conclusively deemed to be fair and reasonable to the
Company, approved by all partners of the Company and not a breach by the
General Partner or its Board of Directors of any duties they may owe the
Company or the Unitholders. See "Conflicts of Interest and Fiduciary
Responsibilities--Fiduciary and Other Duties." In addition, the Audit and
Conflicts Committee will review the external financial reporting of the
Company, will recommend engagement of the Company's independent public
accountants, will review the Company's procedures for internal auditing and
the adequacy of the Company's internal accounting controls and will approve
any increases in the administrative service fee payable under the EPCO
Agreement.
As is commonly the case with publicly-traded limited partnerships, the
Company will not directly employ any of the persons responsible for managing
or operating the Company. In general, the current management of EPCO, the sole
member of the General Partner, will manage and operate the Company's business
pursuant to the EPCO Agreement.
DIRECTORS, EXECUTIVE OFFICERS AND KEY EMPLOYEES OF THE GENERAL PARTNER
Set forth below is the name, age as of the date of this Prospectus, and
position of each of the directors and executive officers of the General
Partner as they will exist at the closing of the Offering. Each director and
officer is elected for a one-year term.
NAME AGE POSITION WITH GENERAL PARTNER
---- --- -----------------------------
Dan L. Duncan........... 65 Chairman of the Board and Director
O.S. Andras............. 62 President, Chief Executive Officer and Director
Randa L. Duncan......... 36 Group Executive Vice President and Director
Albert W. Bell.......... 59 Executive Vice President, Business Management
Gary L. Miller.......... 49 Executive Vice President, Chief Financial
Officer, Treasurer and Director
William D. Ray.......... 62 Executive Vice President, Marketing and Supply
Charles E. Crain........ 64 Senior Vice President, Operations
Michael R. Johnson...... 53 General Counsel and Secretary
Dr. Ralph S. 57 Director
Cunningham(1)..........
Lee W. Marshall, Sr.(1). 65 Director
- --------
(1) Member of the Audit and Conflicts Committee
89
Dan L. Duncan will serve as Chairman of the Board and a Director of the
General Partner. Mr. Duncan joined EPCO in 1969 and has served as Chairman of
the Board of EPCO since 1979. He served as President of EPCO from 1970 to 1979
and Chief Executive Officer from 1982 to 1985.
O. S. Andras will serve as President, Chief Executive Officer and a Director
of the General Partner. Mr. Andras has served as President and Chief Executive
Officer of EPCO since 1996. Mr Andras served as President and Chief Operating
Officer of EPCO from 1982 to 1996 and Executive Vice President of EPCO from
1981 to 1982. Before joining EPCO, he was employed by The Dow Chemical Company
in various capacities from 1960 to 1981, including Director of Hydrocarbons.
Mr. Andras also serves as a director of Tetra Technologies, Inc.
Randa L. Duncan will serve as Group Executive Vice President and a director
of the General Partner. Ms. Duncan has served as Group Executive Vice
President of EPCO since 1994. Before joining EPCO, she was an attorney with
the firms of Butler & Binion from 1988 to 1991 and Brown, Sims, Wise and White
from 1991 until 1994. Ms. Duncan is the daughter of Dan L. Duncan.
Albert W. Bell will serve as Executive Vice President, Business Management
of the General Partner. Mr. Bell has served as Executive Vice President,
Business Management of EPCO since 1994. Mr. Bell joined EPCO in 1980 as
President of its Canadian subsidiary. Mr. Bell transferred to EPCO in Houston
in 1988 as Vice President, Business Development and was promoted to Senior
Vice President, Business Management in 1992. Prior to joining EPCO, he was
employed by Continental Emsco Supply Company, Ltd. and Amoco Canada Petroleum
Company, Ltd.
Gary L. Miller will serve as Executive Vice President, Chief Financial
Officer, Treasurer and Director of the General Partner. Mr. Miller has served
as Executive Vice President, Chief Financial Officer and Treasurer of EPCO
since 1990. He served as Senior Vice President, Controller and Treasurer of
EPCO from 1988 to 1990. From 1983 to 1988 he served as Vice President,
Treasurer and Controller of EPCO. Before joining EPCO, he was employed by
Wanda Petroleum, where he was Assistant Controller from 1977 to 1980.
William D. Ray will serve as Executive Vice President, Marketing and Supply
of the General Partner. Mr. Ray has served as EPCO's Executive Vice President,
Marketing and Supply since 1985. Mr. Ray served as Vice President, Supply and
Distribution of EPCO from 1971 to 1973 and as EPCO's Senior Vice President,
Supply, Marketing and Distribution from 1973 to 1979. Prior to joining EPCO in
1971, Mr. Ray was employed by Wanda Petroleum from 1958 to 1969 and Koch
Industries as Vice President, Marketing and Supply from 1969 to 1971.
Charles E. Crain will serve as Senior Vice President, Operations of the
General Partner and has served as Senior Vice President, Operations of EPCO
since 1991. Mr. Crain joined EPCO in 1980 as Vice President, Process
Operations. Prior to joining EPCO, Mr. Crain held positions with Shell Oil
Company, Air Products & Chemicals and Tenneco Chemicals.
Michael R. Johnson will serve as General Counsel and Secretary of the
General Partner and has served as General Counsel and Secretary of EPCO since
1982. Mr. Johnson joined EPCO as Senior Attorney in 1979. Before joining EPCO,
Mr. Johnson was employed by the Internal Revenue Service for six years and
spent two years in private practice in Tyler, Texas. Mr. Johnson also worked
for the Department of Energy on the regional counsel staff of the Office of
Special Counsel.
Ralph S. Cunningham will serve as a Director of the General Partner. Dr.
Cunningham retired in 1997 from Citgo Petroleum Corporation, where he had
served as President and Chief Executive Officer since 1995. Dr. Cunningham
served as Vice Chairman of Huntsman Corporation from 1994 until 1995 and as
President of Texaco Chemical Company from 1990 through 1994. Prior to joining
Texaco Chemical Company, Dr. Cunningham held various executive positions with
Clark Oil & Refining and Tenneco. He started his career in Exxon's refinery
operations. He holds Ph.D., M.S. and B.S. degrees in Chemical Engineering. Dr.
Cunningham serves as a director of Huntsman Corporation and Agrium, Inc. and
served as a director of EPCO from 1987 to 1997.
90
Lee W. Marshall, Sr. will serve as a Director of the General Partner. Mr.
Marshall has been the Chief Executive Officer and principal stockholder of
Bison International, Inc., and Bison Resources, LLC since 1991. Previously,
Mr. Marshall was Executive Vice President and Chief Financial Officer of
Wolverine Exploration Company and held senior management positions with Union
Pacific Resources and Tenneco Oil.
EXECUTIVE COMPENSATION
The Company and the General Partner were formed in April 1998. Accordingly,
the General Partner paid no compensation to its directors and officers with
respect to 1997, and none of EPCO's management compensation or benefits with
respect to its officers and directors were allocated to the Company.
COMPENSATION OF DIRECTORS
No additional remuneration will be paid to employees of EPCO or the General
Partner who also serve as directors of the General Partner. Each independent
director will receive $24,000 annually, for which they will each agree to
participate in four regular meetings of the Board of Directors and four Audit
and Conflicts Committee meetings. Each non-employee director will receive $500
for each additional meeting in which he participates. In addition, each non-
employee director will be reimbursed for his out-of-pocket expenses in
connection with attending meetings of the Board of Directors or committees
thereof. Each director will be fully indemnified by the Company for his
actions associated with being a director to the extent permitted under
Delaware law.
91
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth the beneficial ownership of Units that will be
issued upon the consummation of the Transactions and held by beneficial owners
of 5% or more of the Units, by directors of the General Partner and by all
directors and executive officers of the General Partner as a group.
PERCENTAGE PERCENTAGE OF PERCENTAGE
COMMON UNITS OF COMMON SUBORDINATED SUBORDINATED OF TOTAL
TO BE UNITS TO BE UNITS TO BE UNITS TO BE UNITS TO BE
BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY BENEFICIALLY
NAME OF BENEFICIAL OWNER OWNED OWNED OWNED OWNED OWNED
- ------------------------ ------------ ------------ ------------ ------------- ------------
Enterprise Products
Company(1)............. 34,004,974 75.1% 21,269,838 100.0% 83.1%
Dan L. Duncan(1)........ 34,004,974 75.1% 21,269,838 100.0% 83.1%
O.S. Andras............. -- -- -- -- --
Randa L. Duncan......... -- -- -- -- --
Gary L. Miller.......... -- -- -- -- --
Dr. Ralph S. Cunningham. -- -- -- -- --
Lee W. Marshall......... -- -- -- -- --
All directors and
executive officers as a
group (10 persons)..... 34,004,974 75.1% 21,269,838 100.0% 83.1%
- --------
(1) EPCO will hold the Units through its wholly-owned subsidiary EPC Partners
II, Inc. Mr. Duncan owns 57.1% of the voting stock of EPCO and,
accordingly, exercises sole voting and dispositive power with respect to
the Units held by EPCO. The remaining shares of EPCO capital stock are held
primarily by trusts for the benefit of members of Mr. Duncan's family,
including Randa L. Duncan, a director and executive officer of the Company.
The address of EPCO is 2727 North Loop West, Houston, Texas 77008.
92
RELATIONSHIPS WITH EPCO AND RELATED PARTY TRANSACTIONS
OWNERSHIP INTERESTS OF EPCO AND ITS AFFILIATES IN THE COMPANY
After this offering, a wholly owned subsidiary of EPCO will own 34,004,974
Common Units and 21,269,838 Subordinated Units, representing a 50.1% interest
and a 31.3% interest, respectively, in the Company and the Operating
Partnership on a combined basis. In addition, the General Partner will own a
combined 2% interest in the Company and the Operating Partnership.
RELATED PARTY AGREEMENTS GIVING EFFECT TO THE TRANSACTIONS
In connection with the Transactions, the Company, the Operating Partnership,
the General Partner, EPCO and certain other parties have or will enter into
various documents and agreements that will generally govern the Transactions,
including the transfer of certain assets to and the assumption of certain
liabilities by the Operating Partnership. Such documents and agreements will
not be the result of arm's-length negotiations, and there can be no assurance
that it, or that any of the transactions provided for therein, will be
effected on terms at least as favorable to the parties to such agreement as
could have been obtained from unaffiliated third parties. All of the
transaction expenses incurred in connection with the Transactions, including
the expenses associated with transferring assets into the Operating
Partnership, will be paid from the proceeds of this offering.
RELATED PARTY TRANSACTIONS
The Company will have extensive ongoing relationships with EPCO and its
affiliates. These relationships will include the following:
(i) All management, administrative and operating functions for the
Company will be performed by officers and employees of EPCO pursuant to the
terms of the EPCO Agreement. Under the EPCO Agreement, EPCO will also
employ the operating personnel involved in the Company's business and be
reimbursed at cost (see "The Transactions--EPCO Agreement").
(ii) EPCO is and will continue as operator of the plants and facilities
owned by BEF and Mont Belvieu Associates and in connection therewith will
charge such entities for actual salary costs and related fringe benefits.
As operator of such facilities, EPCO also is entitled to be reimbursed for
the cost of providing certain administrative services to such entities,
which costs totaled $1.1 million in the aggregate for each of the years
ended December 31, 1995, 1996 and 1997.
(iii) Although EPCO transferred a 49% economic interest in Mont Belvieu
Associates to the Company, the Company will not be a partner in such
partnership. EPCO will retain a 1% economic interest in such partnership
and, except for the economic rights transferred by EPCO to the Company,
will continue to hold all rights as a partner under the partnership
agreement for Mont Belvieu Associates, including the right to participate
in the management and conduct of the business and affairs of such entity.
(iv) Although EPCO transferred all of its economic interest in BEF to the
Company, the Company will not be a partner in BEF. EPCO will continue to
hold all rights as a partner in BEF, including the right to participate in
the management and conduct of the business and affairs of such entity.
(v) EPCO and the Company will enter into an agreement pursuant to which
EPCO will provide trucking services to the Company.
(vi) EPCO will retain the Retained Leases and will, pursuant to the terms
of the EPCO Agreement, sublease all of the facilities covered by the
Retained Leases to the Company for $1 per year and will assign its purchase
options under the Retained Leases to the Company.
(vii) Pursuant to the EPCO Agreement, the Company and the Operating
Partnership will participate as named insureds in EPCO's current insurance
program, and costs attributable thereto will be allocated among the parties
on the basis of formulas set forth in such agreement.
(viii) Pursuant to the EPCO Agreement, EPCO will license certain
trademarks and tradenames to the Company and will indemnify the Company for
certain lawsuits.
(ix) In the normal course of its business, the Company will also engage
in transactions with BEF, Mont Belvieu Associates and other subsidiaries
and divisions of EPCO. These transactions include the buying and selling of
NGL products and the transportation of NGL products by truck.
For a description of certain historical related party transactions between
EPCO, the Company and their affiliates, see Note 6 of Notes to Combined
Financial Statements.
93
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
The General Partner will make all decisions relating to the management of
the Company. EPCO owns all of the issued and outstanding equity interests of
the General Partner and upon the closing of this offering, a wholly-owned
subsidiary of EPCO will own Common Units and Subordinated Units representing a
combined 81.4% limited partner interest in the Company. Certain conflicts of
interest exist and may arise in the future as a result of the relationships
between the General Partner, EPCO and their affiliates, on the one hand, and
the Company and the Unitholders not affiliated with the General Partner, on
the other hand. The directors and officers of the General Partner have
fiduciary duties to manage the General Partner, including its investments in
its subsidiaries and affiliates, in a manner beneficial to its sole member,
EPCO. At the same time, the General Partner has a fiduciary duty to manage the
Company in a manner beneficial to the Company and the Unitholders. The
Partnership Agreement contains provisions that allow the General Partner to
take into account the interests of parties in addition to the Company in
resolving conflicts of interest, thereby limiting its fiduciary duty to the
Unitholders, as well as provisions that may restrict the remedies available to
Unitholders for actions taken that might, without such limitations, constitute
breaches of fiduciary duty. The duty of the directors and officers of the
General Partner to its sole member may, therefore, come into conflict with the
duties of the General Partner to the Company and the Unitholders. The Audit
and Conflicts Committee of the Board of Directors of the General Partner will,
at the request of the General Partner, review (and is one of the means of
resolving) conflicts of interest that may arise between the General Partner,
EPCO or their affiliates, on the one hand, and the Company and the Unitholders
not affiliated with the General Partner, on the other. See "Management--
Company Management."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Act that allow the fiduciary duties of a
general partner to be waived or restricted by a partnership agreement have not
been resolved in a court of law, and the General Partner has not obtained an
opinion of counsel covering the provisions set forth in the Partnership
Agreement that purport to waive or restrict fiduciary duties of the General
Partner. Unitholders should consult their own legal counsel concerning the
fiduciary responsibilities of the General Partner and its officers and
directors and the remedies available to the Unitholders.
Conflicts of interest could arise with respect to the situations described
below, among others:
Certain Actions Taken by the General Partner May Affect the Amount of Cash
Available for Distribution to Unitholders or Accelerate the Conversion of
Subordinated Units
Decisions of the General Partner with respect to the amount and timing of
cash expenditures, borrowings, asset sales or acquisitions, issuances of
additional partnership securities and the creation, reduction or increase of
reserves in any quarter will affect whether, or the extent to which, there is
sufficient Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distributions Levels on all Units in such quarter or
in subsequent quarters. The Partnership Agreement provides that any borrowings
by the Company or the approval thereof by the General Partner shall not
constitute a breach of any duty owed by the General Partner to the Company or
the Unitholders, including borrowings that have the purpose or effect,
directly or indirectly, of enabling the General Partner and its affiliates to
receive distributions on the Subordinated Units or the Incentive Distributions
or hasten the expiration of the Subordination Period or the conversion of the
Subordinated Units into Common Units. The Partnership Agreement provides that
the Company and the Operating Partnership may borrow funds from the General
Partner and its affiliates. The General Partner and its affiliates may not
borrow funds from the Company or the Operating Partnership. Furthermore, any
actions taken by the General Partner consistent with the standards of
reasonable discretion set forth in the definitions of Available Cash,
Operating Surplus and Capital Surplus will be deemed not to constitute a
breach of any duty of the General Partner to the Company or the Unitholders.
94
The Company Will Not Have Any Employees and Will Rely on the Employees of the
General Partner and Its Affiliates.
The Company will not have any employees and will rely solely on employees of
EPCO and its affiliates, including the General Partner. EPCO and its
affiliates other than the General Partner will or may conduct business and
activities of their own in which the Company will have no economic interest.
Although such separate activities of EPCO and its affiliates are immaterial in
relation to the activities of the Company, there could be competition between
the Company and EPCO for the time and effort of employees who provide services
to the General Partner. The officers and employees of EPCO will be devoting
substantially all of their time toward the business of the Company; however,
such officers and employees will not be required to spend any specified
percentage or amount of their time on the business of the Company and will be
free to spend time on business of EPCO unrelated to the business of the
Company.
The Company Will Reimburse the General Partner and Its Affiliates for Certain
Expenses
Under the terms of the Partnership Agreement, the General Partner and its
affiliates will be reimbursed by the Company for certain expenses incurred on
behalf of the Company, including costs incurred pursuant to the EPCO
Agreement. The Partnership Agreement provides that the General Partner will
determine the expenses that are allocable to the Company in any reasonable
manner determined by the General Partner in its sole discretion. See "The
Transactions--EPCO Agreement."
The General Partner Intends to Limit Its Liability with Respect to the
Company's Obligations
Whenever possible, the General Partner intends to limit the Company's
liability under contractual arrangements to all or particular assets of the
Company, with the other party thereto having no recourse against the General
Partner or its assets. The Partnership Agreement provides that any action by
the General Partner in so limiting the liability of the General Partner or
that of the Company will not be deemed to be a breach of the General Partner's
fiduciary duties, even if the Company could have obtained more favorable terms
without such limitation on liability.
Common Unitholders Will Have No Right to Enforce Obligations of the General
Partner and Its Affiliates Under Agreements with the Company
Any agreements between the Company, on the one hand, and the General Partner
and its affiliates, on the other, will not grant to the Unitholders, separate
and apart from the Company, the right to enforce the obligations of the
General Partner and such affiliates in favor of the Company. Therefore, the
General Partner, in its capacity as general partner of the Company, will be
primarily responsible for enforcing such obligations.
Contracts Between the Company, on the One Hand, and the General Partner and
Its Affiliates, on the Other, Will Not be the Result of Arm's-Length
Negotiations
Under the terms of the Partnership Agreement, the General Partner is not
restricted from causing the Company to pay the General Partner or its
affiliates for any services rendered on terms that are fair and reasonable to
the Company or entering into additional contractual arrangements with any of
such entities on behalf of the Company, although there will be certain limits
on the fees that can be paid to EPCO pursuant to the EPCO Agreement. Neither
the Partnership Agreement nor any of the other agreements, contracts and
arrangements between the Company, on the one hand, and the General Partner and
its affiliates, on the other, are or will be the result of arm's-length
negotiations. All of such transactions entered into after the sale of the
Common Units offered in this offering are to be on terms which are fair and
reasonable to the Company, provided that any transaction shall be deemed fair
and reasonable if (i) such transaction is approved by the Audit and Conflicts
Committee, (ii) its terms are no less favorable to the Company than those
generally being provided to or available from unrelated third parties or (iii)
taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Company), the transaction is fair to the Company. The
General Partner and its affiliates will have no obligation to permit the
Company to use any facilities or assets of the General Partner and such
affiliates, except as may be provided in contracts entered into from time to
time specifically dealing with such use, nor shall there be any obligation of
the General Partner and its affiliates to enter into any such contracts.
95
Common Units Are Subject to the General Partner's Limited Call Right
The General Partner may exercise its right to call and purchase Common Units
as provided in the Partnership Agreement or assign such right to one of its
affiliates or to the Company. The General Partner may use its own discretion,
free of fiduciary duty restrictions, in determining whether to exercise such
right. As a consequence, a Common Unitholder may have his Common Units
purchased from him even though he may not desire to sell them, and the price
paid may be less than the amount the holder would desire to receive upon sale
of his Common Units. For a description of such right, see "The Partnership
Agreement--Limited Call Right."
The Company May Retain Separate Counsel for Itself or for the Holders of
Common Units; Advisors Retained by the Company for this Offering Have Not
Been Retained to Act for Holders of Common Units
The Common Unitholders have not been represented by counsel in connection
with the preparation of the Partnership Agreement or other agreements referred
to herein or in establishing the terms of this offering. The attorneys,
independent public accountants and others who have performed services for the
Company in connection with this offering have been retained by the General
Partner, its affiliates and the Company and may continue to be retained by the
General Partner, its affiliates and the Company after this offering.
Attorneys, independent public accountants and others who will perform services
for the Company in the future will be selected by the General Partner or the
Audit and Conflicts Committee and may also perform services for the General
Partner and its affiliates. The Company may retain separate counsel for itself
or the holders of Common Units in the event of a conflict of interest arising
between the General Partner and its affiliates, on the one hand, and the
Company or the holders of Common Units, on the other, after the sale of the
Common Units offered hereby, depending on the nature of such conflict, but it
does not intend to do so in most cases.
The General Partner's Affiliates May Compete with the Company Under Certain
Circumstances
The General Partner may not engage in any business or activity or incur any
debts or liabilities except in connection with or incidental to (i) its
performance of its obligations as a general partner of the Company or one or
more affiliates of the Company, (ii) the acquiring, owning or disposing of
debt or equity securities of the Company or such affiliates and (iii)
permitting its employees to perform services for its affiliates. On the other
hand, except for certain restrictions set forth in the EPCO Agreement, EPCO
and its affiliates (other than the General Partner) will be free to engage in
any type of business or activity whatsoever, including those that may be in
direct competition with the Company. Pursuant to the EPCO Agreement, for so
long as the General Partner is an affiliate of EPCO, EPCO and its affiliates
will be prohibited from engaging in any business or activity within North
America that is of the type conducted by EPCO and its affiliates as of May 31,
1998 (other than businesses or activities of the type associated with the
Retained Assets), unless EPCO or such affiliate has first presented the
opportunity to engage in such business or activity to the Company, the General
Partner has elected not to have the Company pursue such opportunity and the
Audit and Conflicts Committee approves such decision. Except for the continued
ownership and operation by EPCO and its affiliates of the Retained Assets, it
is not currently contemplated that EPCO and its affiliates will own or operate
any assets or conduct any activities that are material relative to the assets
and operations of the Company. Notwithstanding such fact, conflicts of
interest may arise between affiliates of the General Partner on the one hand,
and the Company, on the other, and there can be no assurance that there will
not be competition between the Company and affiliates of the General Partner.
FIDUCIARY AND OTHER DUTIES
The General Partner will be accountable to the Company and the Unitholders
as a fiduciary. Consequently, the General Partner must exercise good faith and
integrity in handling the assets and affairs of the Company. In contrast to
the relatively well-developed law concerning fiduciary duties owed by officers
and directors to the shareholders of a corporation, the law concerning the
duties owed by a general partner to other partners and to partnerships is
relatively undeveloped. Neither the Delaware Revised Uniform Limited
Partnership Act (the "Delaware Act") nor case law defines with particularity
the fiduciary duties owed by a general partner to limited partners or a
limited partnership, but the Delaware Act provides that Delaware limited
partnerships may, in their
96
partnership agreements, restrict or expand the fiduciary duties that might
otherwise be applied by a court in analyzing the standard of duty owed by a
general partner to limited partners and the partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in
the absence of a provision in a partnership agreement providing otherwise,
would generally prohibit a general partner of a Delaware limited partnership
from taking any action or engaging in any transaction as to which it has a
conflict of interest. In order to induce the General Partner to manage the
business of the Company, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions intended to have the effect of
restricting the fiduciary duties that might otherwise be owed by the General
Partner to the Company and its partners and waiving or consenting to conduct
by the General Partner and its affiliates that might otherwise raise issues as
to compliance with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited partner
of the Company, a holder of Common Units is required to agree to be bound by
the provisions thereof, including the provisions discussed above. This is in
accordance with the policy of the Delaware Act favoring the principle of
freedom of contract and the enforceability of partnership agreements. The
failure of a limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against such person.
The Partnership Agreement provides that whenever a conflict arises between
the General Partner or its affiliates, on the one hand, and the Company or any
other partner, on the other, the General Partner shall resolve such conflict.
The General Partner in general shall not be in breach of its obligations under
the Partnership Agreement or its duties to the Company or the Unitholders if
the resolution of such conflict is fair and reasonable to the Company, and any
resolution shall conclusively be deemed to be fair and reasonable to the
Company if such resolution is (i) approved by the Audit and Conflicts
Committee (although no party is obligated to seek such approval and the
General Partner may adopt a resolution or course of action that has not
received such approval), (ii) on terms no less favorable to the Company than
those generally being provided to or available from unrelated third parties or
(iii) fair to the Company, taking into account the totality of the
relationships between the parties involved (including other transactions that
may be particularly favorable or advantageous to the Company). In resolving
such conflict, the General Partner may (unless the resolution is specifically
provided for in the Partnership Agreement) consider the relative interests of
the parties involved in such conflict or affected by such action, any
customary or accepted industry practices or historical dealings with a
particular person or entity and, if applicable, generally accepted accounting
practices or principles and such other factors as it deems relevant. Thus,
unlike the strict duty of a fiduciary who must act solely in the best
interests of his beneficiary, the Partnership Agreement permits the General
Partner to consider the interests of all parties to a conflict of interest,
including the interests of the General Partner. In connection with the
resolution of any conflict that arises, unless the General Partner has acted
in bad faith, the action taken by the General Partner shall not constitute a
breach of the Partnership Agreement, any other agreement or any standard of
care or duty imposed by the Delaware Act or other applicable law. The Company
also provides that in certain circumstances the General Partner may act in its
sole discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself and all other similarly situated limited partners (a class action)
to recover damages from a general partner for violations of its fiduciary
duties to the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by
law, as required to permit the General Partner and its officers and directors
to act under the Partnership Agreement or any other agreement contemplated
therein and to make any decisions pursuant to the authority prescribed in the
Partnership Agreement, so long as such action is reasonably believed by the
General Partner to be in, or not inconsistent with, the best interests of the
Company. Further, the Partnership Agreement
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provides that the General Partner and its officers and directors will not be
liable for monetary damages to the Company, the limited partners or assignees
for errors of judgment or for any acts or omissions if the General Partner and
such other persons acted in good faith.
In addition, under the terms of the Partnership Agreement, the Company is
required to indemnify the General Partner and its officers, directors,
employees, affiliates, partners, members, agents and trustees, to the fullest
extent permitted by law, against liabilities, costs and expenses incurred by
the General Partner or such other persons, if the General Partner or such
persons acted in good faith and in a manner they reasonably believed to be in,
or not opposed to, the best interests of the Company and, with respect to any
criminal proceedings, had no reasonable cause to believe their conduct was
unlawful. See "The Partnership Agreement--Indemnification." Thus, the General
Partner could be indemnified for its negligent acts if it meets such
requirements concerning good faith and the best interests of the Company.
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DESCRIPTION OF THE COMMON UNITS
Upon consummation of this offering, the Common Units will be registered
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations promulgated thereunder, and the Company will be
subject to the reporting and certain other requirements of the Exchange Act.
The Company will be required to file periodic reports containing financial and
other information with the Securities and Exchange Commission (the
"Commission").
Purchasers of Common Units in this offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) who wish
to become Unitholders of record will be required to execute Transfer
Applications, the form of which is included as Appendix B to this Prospectus,
before the purchase or transfer of such Common Units will be registered on the
records of the Transfer Agent and before cash distributions or federal income
tax allocations can be made to the purchaser or transferee. The Company will
be entitled to treat the nominee holder of a Common Unit as the absolute owner
thereof, and the beneficial owner's rights will be limited solely to those
that it has against the nominee holder as a result of or by reason of any
understanding or agreement between such beneficial owner and nominee holder.
THE UNITS
The Common Units and the Subordinated Units represent limited partner
interests in the Company, which entitle the holders thereof to participate in
Company distributions and exercise the rights or privileges available to
limited partners under the Partnership Agreement. For a description of the
relative rights and preferences of holders of Common Units and Subordinated
Units in and to Company distributions, together with a description of the
circumstances under which Subordinated Units may convert into Common Units,
see "Cash Distribution Policy." For a description of the rights and privileges
of limited partners under the Partnership Agreement, see "The Partnership
Agreement."
TRANSFER AGENT AND REGISTRAR
Duties
ChaseMellon Shareholder Services, LLC will serve as registrar and transfer
agent (the "Transfer Agent") for the Common Units and will receive a fee from
the Company for serving in such capacities. All fees charged by the Transfer
Agent for transfers of Common Units will be borne by the Company and not by
the holders of Common Units, except that fees similar to those customarily
paid by stockholders for surety bond premiums to replace lost or stolen
certificates, taxes and other governmental charges, special charges for
services requested by a holder of a Common Unit and other similar fees or
charges will be borne by the affected holder. There will be no charge to
holders for disbursements of the Company's cash distributions. The Company
will indemnify the Transfer Agent, its agents and each of their respective
shareholders, directors, officers and employees against all claims and losses
that may arise out of acts performed or omitted in respect of its activities
as such, except for any liability due to any negligence, gross negligence, bad
faith or intentional misconduct of the indemnified person or entity.
Resignation or Removal
The Transfer Agent may at any time resign, by notice to the Company, or be
removed by the Company, such resignation or removal to become effective upon
the appointment by the Company of a successor transfer agent and registrar and
its acceptance of such appointment. If no successor has been appointed and
accepted such appointment within 30 days after notice of such resignation or
removal, the General Partner is authorized to act as the transfer agent and
registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
Until a Common Unit has been transferred on the books of the Company, the
Company and the Transfer Agent, notwithstanding any notice to the contrary,
may treat the record holder thereof as the absolute owner for
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all purposes, except as otherwise required by law or stock exchange
regulations. The transfer of the Common Units to persons that purchase
directly from the Underwriters will be accomplished through the completion,
execution and delivery of a Transfer Application by such investor in
connection with such Common Units. Any subsequent transfers of a Common Unit
will not be recorded by the Transfer Agent or recognized by the Company unless
the transferee executes and delivers a Transfer Application. By executing and
delivering a Transfer Application (the form of which is set forth as Appendix
B to this Prospectus and which is also set forth on the reverse side of the
certificates representing the Common Units), the transferee of Common Units
(i) becomes the record holder of such Common Units and shall constitute an
assignee until admitted into the Company as a substitute limited partner, (ii)
automatically requests admission as a substituted limited partner in the
Company, (iii) agrees to be bound by the terms and conditions of, and
executes, the Partnership Agreement, (iv) represents that such transferee has
the capacity, power and authority to enter into the Partnership Agreement, (v)
grants powers of attorney to officers of the General Partner and any
liquidator of the Company as specified in the Partnership Agreement and (vi)
makes the consents and waivers contained in the Partnership Agreement. An
assignee will become a substituted limited partner of the Company in respect
of the transferred Common Units upon the consent of the General Partner and
the recordation of the name of the assignee on the books and records of the
Company. Such consent may be withheld in the sole discretion of the General
Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission
as a substituted limited partner in the Company in respect of the transferred
Common Units. A purchaser or transferee of Common Units who does not execute
and deliver a Transfer Application obtains only (a) the right to assign the
Common Units to a purchaser or other transferee and (b) the right to transfer
the right to seek admission as a substituted limited partner in the Company
with respect to the transferred Common Units. Thus, a purchaser or transferee
of Common Units who does not execute and deliver a Transfer Application will
not receive cash distributions or federal income tax allocations unless the
Common Units are held in a nominee or "street name" account and the nominee or
broker has executed and delivered a Transfer Application with respect to such
Common Units, and may not receive certain federal income tax information or
reports furnished to record holders of Common Units. The transferor of Common
Units will have a duty to provide such transferee with all information that
may be necessary to obtain registration of the transfer of the Common Units,
but a transferee agrees, by acceptance of the certificate representing Common
Units, that the transferor will not have a duty to insure the execution of the
Transfer Application by the transferee and will have no liability or
responsibility if such transferee neglects to or chooses not to execute and
forward the Transfer Application to the Transfer Agent. See "The Partnership
Agreement--Status as Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreement. The form of the Partnership Agreement for the Company
is included in this Prospectus as Appendix A. The form of Partnership
Agreement for the Operating Partnership (the "Operating Partnership
Agreement") is included as an exhibit to the Registration Statement of which
this Prospectus constitutes a part. The Company will provide prospective
investors with a copy of the form of the Operating Partnership Agreement upon
request at no charge. The discussions presented herein and below of the
material provisions of the Partnership Agreement are qualified in their
entirety by reference to the Partnership Agreement for the Company and the
Operating Partnership Agreement for the Operating Partnership. The Company
will be a 98.9899% limited partner of the Operating Partnership, which will
own the Company's business. The General Partner will serve as the general
partner of the Company and the general partner of the Operating Partnership,
owning an aggregate 2% interest in the Company and the Operating Partnership
on a combined basis. The General Partner will manage and operate the Company's
business. Unless the context otherwise requires, references herein to the
"Partnership Agreement" constitute references to the Partnership Agreement and
the Operating Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of Common
Units, see "Description of the Common Units--Transfer of Common Units." With
regard to distributions of Available Cash, see "Cash Distribution Policy."
With regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
the Prospectus and the Partnership Agreement carefully.
ORGANIZATION AND DURATION
The Company and the Operating Partnership were organized in April 1998 as
Delaware limited partnerships. The Company and the Operating Partnership will
dissolve on December 31, 2088, unless sooner dissolved pursuant to the terms
of the Partnership Agreement.
PURPOSE
The purpose of the Company under the Partnership Agreement is limited to
serving as the limited partner of the Operating Partnership and engaging in
any business activity that may be engaged in by the Operating Partnership. The
Operating Partnership Agreement provides that the Operating Partnership may,
directly or indirectly, engage in (i) any activity engaged in by EPCO or its
affiliates immediately prior to this offering, (ii) any other activity
approved by the General Partner or (iii) any activity that enhances the
operations of an activity that is described in (i) or (ii) above. Although the
General Partner has the ability under the Partnership Agreement to cause the
Company and the Operating Partnership to engage in activities other than those
conducted by EPCO and its affiliates immediately prior to this offering, the
General Partner has no current intention of doing so, and the Partnership
Agreement requires the General Partner to determine in good faith that such
activities are not likely to result in the Partnership being treated as an
association taxable as a corporation for federal income tax purposes. The
General Partner is authorized in general to perform all acts deemed necessary
to carry out such purposes and to conduct the business of the Company.
POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants
to the General Partner and, if a liquidator of the Company has been appointed,
such liquidator, a power of attorney to, among other things, execute and file
certain documents required in connection with the qualification, continuance
or dissolution of the Company or the amendment of the Partnership Agreement in
accordance with the terms thereof and to make consents and waivers contained
in the Partnership Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Company, see "The Transactions." The Unitholders are not obligated to make
additional capital contributions to the Company, except as described below
under "--Limited Liability."
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LIMITED LIABILITY
Assuming that a Limited Partner does not participate in the control of the
business of the Company within the meaning of the Delaware Act and that such
Limited Partner otherwise acts in conformity with the provisions of the
Partnership Agreement, such Limited Partner's liability under the Delaware Act
will be limited, subject to certain possible exceptions, to the amount of
capital he is obligated to contribute to the Company in respect of his Common
Units plus his share of any undistributed profits and assets of the Company.
If it were determined, however, that the right or exercise of the right by the
Limited Partners as a group to remove or replace the General Partner, to
approve certain amendments to the Partnership Agreement or to take other
action pursuant to the Partnership Agreement constituted "participation in the
control" of the Company's business for the purposes of the Delaware Act, then
the Limited Partners could be held personally liable for the Company's
obligations under the laws of the State of Delaware to the same extent as the
General Partner with respect to persons who transact business with the Company
reasonably believing, based on the Limited Partner's conduct, that the Limited
Partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific
property of the partnership, exceed the fair value of the assets of the
limited partnership. For the purpose of determining the fair value of the
assets of a limited partnership, the Delaware Act provides that the fair value
of property subject to liability for which recourse of creditors is limited
shall be included in the assets of the limited partnership only to the extent
that the fair value of that property exceeds that nonrecourse liability. The
Delaware Act provides that a limited partner who receives such a distribution
and knew at the time of the distribution that the distribution was in
violation of the Delaware Act shall be liable to the limited partnership for
the amount of the distribution for three years from the date of the
distribution. Under the Delaware Act, an assignee who becomes a substituted
limited partner of a limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except the assignee is not
obligated for liabilities unknown to him at the time he became a limited
partner and which could not be ascertained from the partnership agreement.
The Operating Partnership will initially conduct business in the states of
Texas, Louisiana, Mississippi and Alabama. Maintenance of limited liability
may require compliance with legal requirements in such jurisdictions in which
the Operating Partnership conducts business, including qualifying the
Operating Partnership to do business there. Limitations on the liability of
limited partners for the obligations of a limited partnership have not been
clearly established in many jurisdictions. If it were determined that the
Company was, by virtue of its interest as a limited partner in the Operating
Partnership or otherwise, conducting business in any state without compliance
with the applicable limited partnership statute, or that the right or exercise
of the right by the Limited Partners as a group to remove or replace the
General Partner, to approve certain amendments to the Partnership Agreement,
or to take other action pursuant to the Partnership Agreement constituted
"participation in the control" of the Company's business for the purposes of
the statutes of any relevant jurisdiction, then the Limited Partners could be
held personally liable for the Company's obligations under the law of such
jurisdiction to the same extent as the General Partner under certain
circumstances. The Company will operate in such manner as the General Partner
deems reasonable and necessary or appropriate to preserve the limited
liability of the Limited Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Company to issue an unlimited
number of additional limited partner interests and other equity securities of
the Company for such consideration and on such terms and conditions as are
established by the General Partner in its sole discretion without the approval
of any Limited Partners; provided that, during the Subordination Period,
except as provided in the next sentence below, the Company may not issue
equity securities of the Company ranking prior or senior to the Common Units
or an aggregate of more than 22,625,000 additional Common Units (which number
shall be subject to adjustment in
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the event of a combination or subdivision of Common Units and shall exclude
Common Units issued upon the exercise of the Underwriters' over-allotment
option, upon conversion of Subordinated Units, pursuant to employee benefit
plans, upon conversion of the general partner interests as a result of a
withdrawal of the General Partner or in connection with the making of certain
acquisitions or capital improvements as described below) or an equivalent
number of securities ranking on a parity with the Common Units, in either case
without the approval of the holders of at least a Unit Majority. During the
Subordination Period, the Company may also issue an unlimited number of
additional Common Units or parity securities without the approval of the
Unitholders: if such issuance occurs (A) in connection with an Acquisition or
a Capital Improvement or (B) within 365 days of, and the net proceeds from
such issuance are used to repay debt incurred in connection with, an
Acquisition or a Capital Improvement, in each case where such Acquisition or
Capital Improvement involves assets that, if acquired by the Company as of the
date that is one year prior to the first day of the quarter in which such
transaction is to be effected, would have resulted in an increase in (1) the
amount of Adjusted Operating Surplus generated by the Company on a per-Unit
basis (for all outstanding Units) with respect to each of the four most
recently completed quarters (on a pro forma basis) as compared to (2) the
actual amount of Adjusted Operating Surplus generated by the Company on a per-
Unit basis (for all outstanding Units) (excluding Adjusted Operating Surplus
attributable to the Acquisition or Capital Improvement) with respect to each
of such four most recently completed quarters. In accordance with Delaware law
and the provisions of the Partnership Agreement, the Company may also issue
additional partnership interests that, in the sole discretion of the General
Partner, may have special voting rights to which the Common Units are not
entitled.
Upon issuance of additional Partnership Securities (including pursuant to
the over-allotment option), the General Partner will be required to make
additional capital contributions to the extent necessary to maintain its 2%
interest in the Company and Operating Partnership. Moreover, the General
Partner will have the right, which it may from time to time assign in whole or
in part to any of its affiliates, to purchase Common Units, Subordinated Units
or other equity securities of the Company from the Company whenever, and on
the same terms that, the Company issues such securities or rights to persons
other than the General Partner and its affiliates, to the extent necessary to
maintain the percentage interest of the General Partner and its affiliates in
the Company (including interests represented by Subordinated Units) that
existed immediately prior to each such issuance. The holders of Common Units
will not have preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Company.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment (other than certain
amendments discussed below), the General Partner is required to seek written
approval of the holders of the number of Units required to approve such
amendment or call a meeting of the Limited Partners to consider and vote upon
the proposed amendment, except as described below. Proposed amendments (unless
otherwise specified) must be approved by holders of a Unit Majority, except
that no amendment may be made which would (i) enlarge the obligations of any
Limited Partner without its consent, unless approved by at least a majority of
the type or class of Units so affected, (ii) enlarge the obligations of,
restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable by the Company to the
General Partner or any of its affiliates without its consent, which consent
may be given or withheld in its sole discretion, (iii) change the term of the
Company, (iv) provide that the Company is not dissolved upon the expiration of
its term or upon an election to dissolve the Company by the General Partner
that is approved by holders of a Unit Majority or (v) give any person the
right to dissolve the Company other than the General Partner, who has the
right to dissolve the Company with the approval of holders of a Unit Majority.
The provision of the Partnership Agreement preventing the amendments having
the effects described in clauses (i)-(v) above can be amended upon the
approval of the holders of at least 90% of the Common Units and Subordinated
Units voting as a single class.
The General Partner may generally make amendments to the Partnership
Agreement without the approval of any Limited Partner or assignee to reflect
(i) a change in the name of the Company, the location of the
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principal place of business of the Company, the registered agent of the
Company or the registered office of the Company, (ii) admission, substitution,
withdrawal or removal of partners in accordance with the Partnership
Agreement, (iii) a change that, in the discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the Company
as a limited partnership or a partnership in which the limited partners have
limited liability under the laws of any state or to ensure that neither the
Company nor the Operating Partnership will be treated as an association
taxable as a corporation or otherwise taxed as an entity for federal income
tax purposes, (iv) an amendment that is necessary, in the opinion of counsel
to the Company, to prevent the Company, or the General Partner or its
directors, officers, agents or trustees, from in any manner being subjected to
the provisions of the Investment Company Act of 1940, as amended, the
Investment Advisors Act of 1940, as amended, or "plan asset" regulations
adopted under the Employee Retirement Income Security Act of 1974, as amended,
whether or not substantially similar to plan asset regulations currently
applied or proposed, (v) subject to the limitations on the issuance of
additional Common Units or other limited or general partner interests
described above, an amendment that, in the discretion of the General Partner,
is necessary or advisable in connection with the authorization of additional
limited or general partner interests, (vi) any amendment expressly permitted
in the Partnership Agreement to be made by the General Partner acting alone,
(vii) an amendment effected, necessitated or contemplated by a merger
agreement that has been approved pursuant to the terms of the Partnership
Agreement, (viii) any amendment that, in the discretion of the General
Partner, is necessary or advisable in connection with the formation by the
Company of, or its investment in, any corporation, partnership or other entity
(other than the Operating Partnership) as otherwise permitted by the
Partnership Agreement, (ix) a change in the fiscal year and/or taxable year of
the Company and changes related thereto, and (x) any other amendments
substantially similar to any of the foregoing.
In addition to the General Partner's right to amend the Partnership
Agreement as described above, the General Partner may make amendments to the
Partnership Agreement without the approval of any Limited Partner or assignee
if such amendments, in the discretion of the General Partner, (i) do not
adversely affect the Limited Partners in any material respect, (ii) are
necessary or advisable to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation of any
federal or state agency or judicial authority or contained in any federal or
state statute, (iii) are necessary or advisable to facilitate the trading of
the Common Units (including the division of any class or classes of
outstanding Partnership Securities into different classes to facilitate
uniformity of tax consequences within such classes of Partnership Securities)
or to comply with any rule, regulation, guideline or requirement of any
securities exchange on which the Common Units are or will be listed for
trading, compliance with any of which the General Partner deems to be in the
best interests of the Company and the Limited Partners, (iv) are necessary or
advisable in connection with any action taken by the General Partner relating
to splits or combinations of Units pursuant to the provisions of the
Partnership Agreement or (v) are required to effect the intent expressed in
this Prospectus or the intent of the Partnership Agreement or contemplated by
the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel (as
defined below under "--Termination and Dissolution") in the event of the
amendments described in the two immediately preceding paragraphs. No other
amendments to the Partnership Agreement will become effective without the
approval of holders of at least 90% of the Units unless the Company obtains an
opinion of counsel to the effect that such amendment will not affect the
limited liability under applicable law of any limited partner in the Company
or any member of the Operating Partnership.
Any amendment that would have a material adverse effect on the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type
or class of Units so affected. Any amendment that reduces the voting
percentage required to take any action is required to be approved by the
affirmative vote of limited partners constituting not less than the voting
requirement sought to be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The General Partner is generally prohibited, without the prior approval of
holders of a Unit Majority, from causing the Company to, among other things,
sell, exchange or otherwise dispose of all or substantially all of its
104
assets in a single transaction or a series of related transactions (including
by way of merger, consolidation or other combination) or approving on behalf
of the Company the sale, exchange or other disposition of all or substantially
all of the assets of the Operating Partnership; provided that the General
Partner may mortgage, pledge, hypothecate or grant a security interest in all
or substantially all of the Company's assets without such approval. The
General Partner may also sell all or substantially all of the Company's assets
pursuant to a foreclosure or other realization upon the foregoing encumbrances
without such approval. Furthermore, provided that certain conditions are
satisfied, the General Partner may merge the Company or any member of the
Partnership Group into, or convey some or all of the Partnership Group's
assets to, a newly-formed entity if the sole purpose of such merger or
conveyance is to effect a mere change in the legal form of the Company into
another limited liability entity. The Unitholders are not entitled to
dissenters' rights of appraisal under the Partnership Agreement or applicable
Delaware law in the event of a merger or consolidation of the Company, a sale
of substantially all of the Company's assets or any other transaction or
event.
TERMINATION AND DISSOLUTION
The Company will continue until December 31, 2088, unless sooner terminated
pursuant to the Partnership Agreement. The Company will be dissolved upon (i)
the election of the General Partner to dissolve the Company, if approved by
the holders of a Unit Majority, (ii) the sale, exchange or other disposition
of all or substantially all of the assets and properties of the Company and
the Operating Partnership, (iii) the entry of a decree of judicial dissolution
of the Company or (iv) the withdrawal or removal of the General Partner or any
other event that results in its ceasing to be the General Partner (other than
by reason of a transfer of its general partner interest in accordance with the
Partnership Agreement or withdrawal or removal following approval and
admission of a successor). Upon a dissolution pursuant to clause (iv), the
holders of a Unit Majority may also elect, within certain time limitations, to
reconstitute the Company and continue its business on the same terms and
conditions set forth in the Partnership Agreement by forming a new limited
partnership on terms identical to those set forth in the Partnership Agreement
and having as general partner an entity approved by the holders of a Unit
Majority subject to receipt by the Company of an opinion of counsel to the
effect that (x) such action would not result in the loss of limited liability
of any Limited Partner and (y) neither the Company, the reconstituted limited
partnership nor the Operating Partnership would be treated as an association
taxable as a corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of such right to continue (herein, an
"Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Company, unless the Company is reconstituted and
continued as a new limited partnership, the person authorized to wind up the
affairs of the Company (the "Liquidator") will, acting with all of the powers
of the General Partner that such Liquidator deems necessary or desirable in
its good faith judgment in connection therewith, liquidate the Company's
assets and apply the proceeds of the liquidation as provided in "Cash
Distribution Policy--Distributions of Cash Upon Liquidation." Under certain
circumstances and subject to certain limitations, the Liquidator may defer
liquidation or distribution of the Company's assets for a reasonable period of
time or distribute assets to partners in kind if it determines that a sale
would be impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to withdraw voluntarily as a general
partner of the Company or the Operating Partnership prior to June 30, 2008
(with limited exceptions described below), without obtaining the approval of
the holders of at least a majority of the outstanding Common Units (excluding
Common Units held by the General Partner and its affiliates) and furnishing an
Opinion of Counsel. On or after June 30, 2008, the General Partner may
withdraw as the General Partner (without first obtaining approval from any
Unitholder) by giving 90 days' written notice, and such withdrawal will not
constitute a violation of the Partnership Agreement. Notwithstanding the
foregoing, the General Partner may withdraw without Unitholder approval upon
90 days'
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notice to the Limited Partners if at least 50% of the outstanding Common Units
are held or controlled by one person and its affiliates (other than the
General Partner and its affiliates). In addition, the Partnership Agreement
permits the General Partner (in certain limited instances) to sell or
otherwise transfer all of its general partner interest in the Company without
the approval of the Unitholders. See "--Transfer of General Partner Interest."
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interest in the Company), the holders of a Unit Majority may
select a successor to such withdrawing General Partner. If such a successor is
not elected, or is elected but an Opinion of Counsel cannot be obtained, the
Company will be dissolved, wound up and liquidated, unless within 180 days
after such withdrawal the holders of a Unit Majority agree in writing to
continue the business of the Company and to appoint a successor General
Partner. See "--Termination and Dissolution."
The General Partner may not be removed unless such removal is approved by
the vote of the holders of not less than 66 2/3% of the outstanding Units
(including Units held by the General Partner and its affiliates) and the
Company receives an Opinion of Counsel. Following this offering, EPCO, through
a wholly-owned subsidiary, will own 83.1% of the combined Common Units and
Subordinated Units, giving it the ability to prevent the removal of the
General Partner. Any such removal is also subject to the approval of a
successor general partner by the vote of the holders of not less than a Unit
Majority. The Partnership Agreement also provides that if the General Partner
is removed as general partner of the Company under circumstances where Cause
does not exist and Units held by the General Partner and its affiliates are
not voted in favor of such removal (i) the Subordination Period will end and
all outstanding Subordinated Units will immediately convert into Common Units
on a one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
general partner interest into Common Units or to receive cash in exchange for
such interests.
Withdrawal or removal of the General Partner as a general partner of the
Company also constitutes withdrawal or removal, as the case may be, of the
General Partner as the general partner of the Operating Partnership.
In the event of removal of the General Partner under circumstances where
Cause exists or withdrawal of the General Partner where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interests of the departing General
Partner (the "Departing Partner") in the Company and the Operating Partnership
for a cash payment equal to the fair market value of such interests. Under all
other circumstances where the General Partner withdraws or is removed by the
Limited Partners, the Departing Partner will have the option to require the
successor general partner to purchase such interests of the Departing Partner
for such amount. In each case, such fair market value will be determined by
agreement between the Departing Partner and the successor general partner, or
if no agreement is reached, by an independent investment banking firm or other
independent expert selected by the Departing Partner and the successor general
partner (or if no expert can be agreed upon, by an expert chosen by agreement
of the experts selected by each of them). In addition, the Company will be
required to reimburse the Departing Partner for all amounts due the Departing
Partner, including, without limitation, all employee-related liabilities,
including severance liabilities, incurred in connection with the termination
of any employees employed by the Departing Partner for the benefit of the
Company.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing
Partner's general partner interests in the Company and the Operating
Partnership will automatically convert into Common Units equal to the fair
market value of such interests as determined by an investment banking firm or
other independent expert selected in the manner described in the preceding
paragraph.
TRANSFER OF GENERAL PARTNER INTEREST
Except for a transfer by the General Partner of all, but not less than all,
of its general partner interest in the Company and the Operating Partnership
to (a) an affiliate of the General Partner or (b) another person in
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connection with the merger or consolidation of the General Partner with or
into another person or the transfer by such General Partner of all or
substantially all of its assets to another person, the General Partner may not
transfer all or any part of its general partner interest in the Company or the
Operating Partnership to another person prior to June 30, 2008, without the
approval of the holders of at least a majority of the outstanding Common Units
(excluding Common Units held by the General Partner and its affiliates);
provided that, in each case, such transferee assumes the rights and duties of
the General Partner to whose interest such transferee has succeeded, agrees to
be bound by the provisions of the Partnership Agreement, furnishes an Opinion
of Counsel and agrees to acquire all (or the appropriate portion thereof, as
applicable) of the General Partner's interest in the Operating Partnership and
agrees to be bound by the provisions of the Operating Partnership Agreement.
The General Partner and its affiliates shall have the right at any time,
however, to transfer their Subordinated Units to one or more persons without
Unitholder approval. At any time, the members of the General Partner may sell
or transfer all or part of their interest in the General Partner to an
affiliate or a third party without the approval of the Unitholders.
CHANGE OF MANAGEMENT PROVISIONS
The Partnership Agreement contains certain provisions that are intended to
discourage a person or group from attempting to remove the General Partner as
general partner of the Company or otherwise change the management of the
Company. If any person or group other than the General Partner and its
affiliates acquires beneficial ownership of 20% or more of any class of Units,
such person or group loses voting rights with respect to all of its Units. The
Partnership Agreement also provides that if the General Partner is removed as
a general partner of the Company under circumstances where Cause does not
exist and Units held by the General Partner and its affiliates are not voted
in favor of such removal, (i) the Subordination Period will end and all
outstanding Subordinated Units will immediately convert into Common Units on a
one-for-one basis, (ii) any existing Common Unit Arrearages will be
extinguished and (iii) the General Partner will have the right to convert its
partner interests into Common Units or to receive cash in exchange for such
interests.
LIMITED CALL RIGHT
If at any time not more than 15% of the then-issued and outstanding limited
partner interests of any class (including Common Units) are held by persons
other than the General Partner and its affiliates, the General Partner will
have the right, which it may assign in whole or in part to any of its
affiliates or to the Company, to acquire all, but not less than all, of the
remaining limited partner interests of such class held by such unaffiliated
persons as of a record date to be selected by the General Partner, on at least
10 but not more than 60 days' notice. The purchase price in the event of such
a purchase shall be the greater of (i) the highest price paid by the General
Partner or any of its affiliates for any limited partner interests of such
class purchased within the 90 days preceding the date on which the General
Partner first mails notice of its election to purchase such limited partner
interests, and (ii) the Current Market Price as of the date three days prior
to the date such notice is mailed. As a consequence of the General Partner's
right to purchase outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests purchased even though
he may not desire to sell them, or the price paid may be less than the amount
the holder would desire to receive upon the sale of his limited partner
interests. The tax consequences to a Unitholder of the exercise of this call
right are the same as a sale by such Unitholder of his Common Units in the
market. See "Tax Considerations--Disposition of Common Units."
MEETINGS; VOTING
Except as described below with respect to a Person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Company and to
act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to Common Units that are owned by an
assignee who is a record holder but who has not yet been admitted as a limited
partner, the
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General Partner shall be deemed to be the limited partner with respect thereto
and shall, in exercising the voting rights in respect of such Common Units on
any matter, vote such Common Units at the written direction of such record
holder. Absent such direction, such Common Units will not be voted (except
that, in the case of Common Units held by the General Partner on behalf of
Non-citizen Assignees (as defined below), the General Partner shall distribute
the votes in respect of such Common Units in the same ratios as the votes of
limited partners in respect of other Units are cast).
The General Partner does not anticipate that any meeting of Unitholders will
be called in the foreseeable future. Any action that is required or permitted
to be taken by the Unitholders may be taken either at a meeting of the
Unitholders or without a meeting if consents in writing setting forth the
action so taken are signed by holders of such number of Units as would be
necessary to authorize or take such action at a meeting of all of the
Unitholders. Meetings of the Unitholders of the Company may be called by the
General Partner or by Unitholders owning at least 20% of the outstanding Units
of the class for which a meeting is proposed. Unitholders may vote either in
person or by proxy at meetings. The holders of a majority of the outstanding
Units of the class or classes for which a meeting has been called represented
in person or by proxy shall constitute a quorum at a meeting of Unitholders of
such class or classes, unless any such action by the Unitholders requires
approval by holders of a greater percentage of such Units, in which case the
quorum shall be such greater percentage.
Each record holder of a Unit has a vote according to his percentage interest
in the Company, although additional limited partner interests having special
voting rights could be issued by the Company. See "--Issuance of Additional
Securities." However, if at any time any person or group (other than the
General Partner and its affiliates) acquires, in the aggregate, beneficial
ownership of 20% or more of any class of Units then outstanding, such person
or group will lose voting rights with respect to all of its Units and such
Units may not be voted on any matter and will not be considered to be
outstanding when sending notices of a meeting of Unitholders, calculating
required votes, determining the presence of a quorum or for other similar
Partnership purposes. The Partnership Agreement provides that Common Units
held in nominee or street name account will be voted by the broker (or other
nominee) pursuant to the instruction of the beneficial owner unless the
arrangement between the beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Common Units (whether or not such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the Company or
by the Transfer Agent at the request of the Company.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability," the Common Units will
be fully paid, and Unitholders will not be required to make additional
contributions to the Company.
An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted Limited
Partner in the Company, is entitled to an interest in the Company equivalent
to that of a Limited Partner with respect to the right to share in allocations
and distributions from the Company, including liquidating distributions. The
General Partner will vote and exercise other powers attributable to Common
Units owned by an assignee who has not become a substitute Limited Partner at
the written direction of such assignee. See "--Meetings; Voting." Transferees
who do not execute and deliver a Transfer Application will be treated neither
as assignees nor as record holders of Common Units, and will not receive cash
distributions, federal income tax allocations or reports furnished to record
holders of Common Units. See "Description of the Common Units--Transfer of
Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Company is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the General Partner,
create a substantial risk of cancellation or forfeiture of any property in
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which the Company has an interest because of the nationality, citizenship or
other related status of any Limited Partner or assignee, the Company may
redeem the Units held by such Limited Partner or assignee at their Current
Market Price. In order to avoid any such cancellation or forfeiture, the
General Partner may require each Limited Partner or assignee to furnish
information about his nationality, citizenship or related status. If a Limited
Partner or assignee fails to furnish information about such nationality,
citizenship or other related status within 30 days after a request for such
information or the General Partner determines after receipt of such
information that the Limited Partner or assignee is not an eligible citizen,
such Limited Partner or assignee may be treated as a non-citizen assignee
("Non-citizen Assignee"). In addition to other limitations on the rights of an
assignee who is not a substituted Limited Partner, a Non-citizen Assignee does
not have the right to direct the voting of his Units and may not receive
distributions in kind upon liquidation of the Company.
INDEMNIFICATION
The Partnership Agreement provides that the Company will indemnify (i) the
General Partner, (ii) any Departing Partner, (iii) any Person who is or was an
affiliate of a General Partner or any Departing Partner, (iv) any Person who
is or was a member, partner, officer, director, employee, agent or trustee of
a General Partner or any Departing Partner or any affiliate of a General
Partner or any Departing Partner, or (v) any Person who is or was serving at
the request of a General Partner or any Departing Partner or any affiliate of
any such person, any affiliate of a General Partner or any Departing Partner
as an officer, director, employee, member, partner, agent, fiduciary or
trustee of another Person ("Indemnitees"), to the fullest extent permitted by
law, from and against any and all losses, claims, damages, liabilities (joint
or several), expenses (including, without limitation, legal fees and
expenses), judgments, fines, penalties, interest, settlements and other
amounts arising from any and all claims, demands, actions, suits or
proceedings, whether civil, criminal, administrative or investigative, in
which any Indemnitee may be involved, or is threatened to be involved, as a
party or otherwise, by reason of its status as an Indemnitee; provided that in
each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in or not opposed to the best interests
of the Company and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful. Any indemnification under these
provisions will be only out of the assets of the Company, and the General
Partner shall not be personally liable for, or have any obligation to
contribute or lend funds or assets to the Company to enable it to effectuate,
such indemnification. The Company is authorized to purchase (or to reimburse
the General Partner or its affiliates for the cost of) insurance against
liabilities asserted against and expenses incurred by such persons in
connection with the Company's activities, regardless of whether the Company
would have the power to indemnify such person against such liabilities under
the provisions described above.
BOOKS AND REPORTS
The General Partner is required to keep appropriate books of the business of
the Company at the principal offices of the Company. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax and financial reporting purposes, the fiscal year of the Company is
the calendar year.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the General Partner will furnish or make available to
each record holder of Units (as of a record date selected by the General
Partner) an annual report containing audited financial statements of the
Company for the past fiscal year, prepared in accordance with generally
accepted accounting principles. As soon as practicable, but in no event later
than 90 days after the close of each quarter (except the last quarter of each
fiscal year), the General Partner will furnish or make available to each
record holder of Units (as of a record date selected by the General Partner) a
report containing unaudited financial statements of the Company with respect
to such quarter and such other information as may be required by law.
The Company will furnish each record holder of a Unit information reasonably
required for tax reporting purposes within 90 days after the close of each
calendar year. Such information is expected to be furnished in summary form so
that certain complex calculations normally required of partners can be
avoided. The
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Company's ability to furnish such summary information to Unitholders will
depend on the cooperation of such Unitholders in supplying certain information
to the Company. Every Unitholder (without regard to whether he supplies such
information to the Company) will receive information to assist him in
determining his federal and state tax liability and filing his federal and
state income tax returns.
RIGHT TO INSPECT COMPANY BOOKS AND RECORDS
The Partnership Agreement provides that a Limited Partner can for a purpose
reasonably related to such Limited Partner's interest as a limited partner,
upon reasonable demand and at his own expense, have furnished to him (i) a
current list of the name and last known address of each partner, (ii) a copy
of the Company's tax returns, (iii) information as to the amount of cash, and
a description and statement of the agreed value of any other property or
services, contributed or to be contributed by each partner and the date on
which each became a partner, (iv) copies of the Partnership Agreement, the
certificate of limited partnership of the Company, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Company's business and financial
condition, and (vi) such other information regarding the affairs of the
Company as is just and reasonable. The Company may, and intends to, keep
confidential from the Limited Partners trade secrets or other information the
disclosure of which the Company believes in good faith is not in the best
interests of the Company or which the Company is required by law or by
agreements with third parties to keep confidential.
REGISTRATION RIGHTS
Pursuant to the terms of the Partnership Agreement and subject to certain
limitations described therein, the Company has agreed to register for resale
under the Securities Act and applicable state securities laws any Common Units
or other securities of the Company (including Subordinated Units) proposed to
be sold by the General Partner or any of its affiliates if an exemption from
such registration requirements is not otherwise available for such proposed
transaction. The Company is obligated to pay all expenses incidental to such
registration, excluding underwriting discounts and commissions. See "Units
Eligible for Future Sale."
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the Common Units offered hereby, EPCO will hold 34,004,974
Common Units and 21,269,838 Subordinated Units (all of which will convert into
Common Units at the end of the Subordination Period and some of which may
convert earlier). The sale of these Units could have an adverse impact on the
price of the Common Units or on any trading market that may develop.
The Common Units sold in this offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any Common Units owned by an "affiliate" of the Company (as that term is
defined in the rules and regulations under the Securities Act) may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer in a public offering to be sold into the market in an
amount that does not exceed, during any three-month period, the greater of (i)
1% of the total number of such securities outstanding or (ii) the average
weekly reported trading volume of the Common Units for the four calendar weeks
prior to such sale. Sales under Rule 144 are also subject to certain manner of
sale provisions, notice requirements and the availability of current public
information about the Company. A person who is not deemed to have been an
affiliate of the Company at any time during the three months preceding a sale,
and who has beneficially owned his Common Units for at least one year would be
entitled to sell such Common Units under Rule 144 without regard to the public
information requirements, volume limitations, manner of sale provisions or
notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Company may not issue
equity securities of the Company ranking prior or senior to the Common Units
or an aggregate of more than 22,625,000 additional Common Units (which number
is subject to adjustment in the event of a combination or subdivision of the
Common Units and shall exclude Common Units issued upon exercise of the
Underwriters' over-allotment option, upon conversion of Subordinated Units,
pursuant to employee benefit plans, upon conversion of the General Partner
interests as a result of a withdrawal of the General Partner or in connection
with making certain acquisitions or capital improvements that are accretive on
a per Unit basis), or an equivalent amount of securities ranking on a parity
with the Common Units, without the approval of the holders of at least a Unit
Majority. The Partnership Agreement provides that, after the Subordination
Period, the Company may issue an unlimited number of limited partner interests
of any type without a vote of the Unitholders. The Partnership Agreement does
not impose any restriction on the Company's ability to issue equity securities
ranking junior to the Common Units at any time. Any issuance of additional
Common Units or certain other equity securities would result in a
corresponding decrease in the proportionate ownership interest in the Company
represented by, and could adversely affect the cash distributions to and
market price of, Common Units then outstanding. See "The Partnership
Agreement--Issuance of Additional Securities."
Pursuant to the Partnership Agreement, the General Partner and its
affiliates will have the right, upon the terms and subject to the conditions
therein, to cause the Company to register under the Securities Act and state
laws the offer and sale of any Units or other Partnership Securities that they
hold. Subject to the terms and conditions of the Partnership Agreement, such
registration rights allow the General Partner and its affiliates or its
assignees holding any Units to require registration of any such Units and to
include any such Units in a registration by the Company of other Units,
including Units offered by the Company or by any Unitholder. Such registration
rights will continue in effect for two years following any withdrawal or
removal of the General Partner as a general partner of the Company. In
connection with any such registration, the Company will indemnify each
Unitholder participating in such registration and its officers, directors and
controlling persons from and against any liabilities under the Securities Act
or any state securities laws arising from the registration statement or
prospectus.
The Company, the Operating Partnership, the General Partner, EPCO, the
subsidiary of EPCO which holds Units and the officers and directors of the
General Partner have agreed that they will not, without the prior written
consent of Lehman Brothers Inc., during the 180 days following the date of
this Prospectus, (i) offer for sale, sell, pledge or otherwise dispose of (or
enter into any transaction or device which is designed to, or could be
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expected to, result in the disposition by any person at any time in the future
of) any Common Units or any securities that are convertible into, or
exercisable or exchangeable for, or that represent the right to receive,
Common Units or any securities that are senior to or pari passu with the
Common Units, or (ii) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits
or rights of ownership of such Common Units.
Under certain circumstances, Units sold by EPCO and its affiliates in a
subsequent offering may be required to be registered as a second class of
Units in order to insure the fungibility of such securities.
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TAX CONSIDERATIONS
This section is a summary of material federal income tax considerations that
may be relevant to prospective Unitholders and, to the extent set forth below
under "--Legal Opinions and Advice," expresses the opinion of Counsel, insofar
as it relates to matters of law and legal conclusions. This section is based
upon current provisions of the Code, existing and proposed Treasury
regulations thereunder and current administrative rulings and court decisions,
all of which are subject to change at any time. Subsequent changes in such
authorities may cause the tax consequences to vary substantially from the
consequences described below. Unless the context otherwise requires,
references in this section to the Company are references to both the Company
and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Company or the Unitholders. Moreover,
the discussion focuses on Unitholders who are individual citizens or residents
of the United States and has only limited application to corporations,
estates, trusts, non-resident aliens or other Unitholders subject to
specialized tax treatment (such as tax-exempt institutions, foreign persons,
IRAs, REITs or mutual funds). Prospective investors are urged to consult their
own tax advisors as to the particular tax consequences to them of the
acquisition, ownership and disposition of an investment in Common Units,
including the applicability of any federal income, federal estate or gift tax,
state, local and foreign tax laws, changes in applicable tax laws and any
pending or proposed legislation.
LEGAL OPINIONS AND ADVICE
Counsel is of the opinion that, based on the accuracy of the representations
and subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) the Company and the Operating
Partnership will each be treated as a partnership, and (ii) owners of Common
Units (with certain exceptions, as described in "--Limited Partner Status"
below) will be treated as partners of the Company (but not the Operating
Partnership). In addition, all statements as to matters of law and legal
conclusions contained in this section, unless otherwise noted, reflect the
opinion of Counsel.
No ruling has been or will be requested from the IRS with respect to the
classification of the Company as a partnership for federal income tax
purposes, whether the Company's operations generate "qualifying income" under
Section 7704 of the Code or any other matter affecting the Company or
prospective Unitholders. An opinion of counsel represents only that counsel's
best legal judgment and does not bind the IRS or the courts. Thus, no
assurance can be provided that the opinions and statements set forth herein
would be sustained by a court if contested by the IRS. Any such contest with
the IRS may materially and adversely impact the market for the Common Units
and the prices at which Common Units trade. In addition, the costs of any
contest with the IRS will be borne directly or indirectly by the Unitholders
and the General Partner. Furthermore, no assurance can be given that the
treatment of the Company or an investment therein will not be significantly
modified by future legislative or administrative changes or court decisions.
Any such modification may or may not be retroactively applied.
For the reasons hereinafter described, Counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a short seller to
cover a short sale of Common Units (see "--Tax Treatment of Operations--
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units
in separate transactions must maintain a single aggregate adjusted tax basis
in his Common Units (see "--Disposition of Common Units--Recognition of Gain
or Loss"), (iii) whether the Company's monthly convention for allocating
taxable income and losses is permitted under existing Treasury Regulations
(see "--Disposition of Common Units--Allocations Between Transferors and
Transferees"), and (iv) whether the Company's method for depreciating Section
743 adjustments is sustainable (see "--Tax Treatment of Operations--Section
754 Election").
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TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $271,050 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of the
threshold. Pursuant to the TRA of 1997, in general, net capital gains of an
individual are subject to a maximum 20% tax rate if the asset is held for 18
months at the time of disposition and 28% if the asset is held for more than
one year but not 18 months at the time of disposition.
The TRA of 1997 alters the tax reporting system and the deficiency
collection system applicable to large partnerships that elect to have the
provisions apply and makes certain additional changes to the treatment of
large partnerships, such as the Company. Certain of the proposed changes are
discussed later in this section. The legislation contained in the TRA of 1997
is generally intended to simplify the administration of the tax rules
governing large partnerships such as the Company. It is not expected that the
Company will elect to have these provisions apply because of the cost of their
application.
The TRA of 1997 affects the taxation of certain financial products and
securities, including partnership interests, by treating a taxpayer as having
sold an "appreciated" partnership interest (one in which gain would be
recognized if it were sold, assigned or otherwise terminated at its fair
market value) if the taxpayer or related persons enter into a short sale of an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest or substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to a partnership interest, the taxpayer will be treated as having sold
such position if the taxpayer or a related party then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is
also authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial product or
security.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his
allocable share of items of income, gain, loss, deduction and credit of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner generally are not taxable unless the amount of any cash distributed is
in excess of the partner's adjusted basis in his partnership interest.
An entity generally will be classified as a partnership rather than as a
corporation for federal income tax purposes if the entity (i) is treated as a
partnership under Treasury regulations, effective January 1, 1997, relating to
entity classification (the "Check-the-Box Regulations") and (ii) is not a
"publicly traded partnership" taxed as a corporation under Section 7704 of the
Code. In general, under the Check-the-Box Regulations, an unincorporated
domestic entity with at least two members may elect to be classified either as
an association taxable as a corporation or as a partnership. If such an entity
fails to make any election, it will be treated as a partnership for federal
income tax purposes.
To be taxed as a partnership for federal income tax purposes, the Company,
in addition to qualifying as a partnership under the Check-the-Box
Regulations, must not be taxed as a corporation under Section 7704 of the Code
dealing with publicly-traded partnerships. The Company constitutes a
"publicly-traded partnership" within the meaning of Section 7704 of the Code.
Section 7704 of the Code provides that publicly-traded partnerships will, as a
general rule, be taxed as corporations. However, an exception (the "Qualifying
Income Exception") exists with respect to publicly-traded partnerships of
which 90% or more of the gross income for every taxable year consists of
"qualifying income." Qualifying income includes interest (from other than a
financial business), dividends and income and gains from the exploration,
development, mining or production, processing, refining, transportation and
marketing of any mineral or natural resource. In the instant case, the
Company's gross income that is derived from the processing or refining of
ethane, propane, MTBE, isobutane, natural gasoline, propylene and the
transportation of NGLs is qualifying income. Based upon the factual
representations of the Company and the General Partner and a review of the
applicable legal authorities, Counsel is of the opinion that at least 90% of
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the Company's gross income is income derived from the exploration,
development, mining or production, processing, refining, transportation or
marketing of any mineral or natural resource or other items of qualifying
income. The Company estimates that less than 1% of its gross income for each
taxable year will not constitute qualifying income.
If the Company fails to meet the Qualifying Income Exception (other than a
failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Company will be treated as if
it had transferred all of its assets (subject to liabilities) to a newly
formed corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in
the Company. This contribution and liquidation should be tax-free to
Unitholders and the Company, so long as the Company, at that time, does not
have liabilities in excess of the tax basis of its assets. Thereafter, the
Company would be treated as a corporation for federal income tax purposes.
If the Company or the Operating Partnership were treated as an association
taxable as a corporation in any taxable year, either as a result of a failure
to meet the Qualifying Income Exception or otherwise, its items of income,
gain, loss and deduction would be reflected only on its tax return rather than
being passed through to the Unitholders, and its net income would be taxed to
the Company or the Operating Partnership at corporate rates. In addition, any
distribution made to a Unitholder would be treated as either taxable dividend
income (to the extent of the Company's current or accumulated earnings and
profits) or (in the absence of earnings and profits) a nontaxable return of
capital (to the extent of the Unitholder's tax basis in his Common Units) or
taxable capital gain (after the Unitholder's tax basis in the Common Units is
reduced to zero). Accordingly, treatment of either the Company or the
Operating Partnership as an association taxable as a corporation would result
in a material reduction in a Unitholder's cash flow and after-tax return and,
thus, would likely result in a substantial reduction of the value of the
Units.
No ruling has been or will be sought from the IRS as to the status of the
Company or the Operating Partnership as a partnership for federal income tax
purposes. Instead the Company has relied on the opinion of Counsel that, based
upon the Code, the Treasury regulations promulgated thereunder, published
revenue rulings and court decisions, the Company and the Operating Partnership
will each be classified as a partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the Company and the General Partner. Such factual
matters are as follows:
(a) Neither the Company nor the Operating Partnership will elect to be
treated as an association or corporation;
(b) The Company will be operated in accordance with (i) all applicable
partnership statutes, (ii) the Partnership Agreement, and (iii) the
description thereof in this Prospectus;
(c) The Operating Partnership will be operated in accordance with (i) all
applicable partnership statutes, (ii) the Operating Partnership Agreement,
and (iii) the description of its business contained herein;
(d) For each taxable year, more than 90% of the gross income of the
Company will be income from sources that Counsel has heretofore opined or
may hereafter opine is qualifying income within the meaning of Section
7704(d) of the Code; and
(e) The General Partner will at all times act independently of the
limited partners.
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The discussion below is based on the assumption that the Company and the
Operating Partnership will be classified as a partnership for federal income
tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Company will be treated
as partners of the Company for federal income tax purposes. Counsel is also of
the opinion that (a) assignees who have executed and delivered Transfer
Applications and are awaiting admission as limited partners and (b)
Unitholders whose Common Units are held in street name or by a nominee and who
have the right to direct the nominee in the exercise of all substantive rights
attendant to the ownership of their Common Units will be treated as partners
of the Company for federal income tax purposes. As there is no direct
authority addressing assignees of Common Units who are entitled to execute and
deliver Transfer Applications and thereby become entitled to direct the
exercise of attendant rights, but who fail to execute and deliver Transfer
Applications, Counsel's opinion does not extend to these persons. Income,
gain, deductions, losses or credit would not appear to be reportable by a
Unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by such a Unitholder would therefore be fully taxable
as ordinary income. These holders should consult their own tax advisors with
respect to their status as partners in the Company for federal income tax
purposes. Furthermore, a purchaser or other transferee of Common Units who
does not execute and deliver a Transfer Application may not receive certain
federal income tax information or reports furnished to record holders of
Common Units unless the Common Units are held in a nominee or street name
account and the nominee or broker has executed and delivered a Transfer
Application with respect to such Common Units.
A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as
a partner with respect to such Common Units for federal income tax purposes.
See "--Tax Treatment of Operations--Treatment of Short Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income
No federal income tax will be paid by the Company. Instead, each Unitholder
will be required to report on his income tax return his allocable share of the
income, gains, losses, deductions and credits of the Company without regard to
whether corresponding cash distributions are received by such Unitholder.
Consequently, a Unitholder may be allocated income from the Company even if he
has not received a cash distribution. Each Unitholder will be required to
include in income his allocable share of Company income, gain, loss, deduction
and credit for the taxable year of the Company ending with or within the
taxable year of the Unitholder.
Treatment of Company Distributions
Distributions by the Company to a Unitholder generally will not be taxable
to the Unitholder for federal income tax purposes to the extent of his tax
basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the Common Units, taxable
in accordance with the rules described under "--Disposition of Common Units"
below. Any reduction in a Unitholder's share of the Company's liabilities for
which no partner, including the General Partner, bears the economic risk of
loss ("nonrecourse liabilities") will be treated as a distribution of cash to
that Unitholder. To the extent that distributions by the Company cause a
Unitholder's "at risk" amount to be less than zero at the end of any taxable
year, he must recapture any losses deducted in previous years. See "--
Limitations on Deductibility of Company Losses."
A decrease in a Unitholder's percentage interest in the Company because of
the issuance by the Company of additional Common Units will decrease such
Unitholder's share of nonrecourse liabilities of the Company, and thus will
result in a corresponding deemed distribution of cash. A non-pro rata
distribution of money or property may result in ordinary income to a
Unitholder, regardless of his tax basis in his Common Units, if such
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distribution reduces the Unitholder's share of the Company's "unrealized
receivables" (including depreciation recapture) and/or substantially
appreciated "inventory items" (both as defined in Section 751 of the Code)
(collectively, "Section 751 Assets"). To that extent, the Unitholder will be
treated as having been distributed his proportionate share of the Section 751
Assets and having exchanged such assets with the Company in return for the
non-pro rata portion of the actual distribution made to him. This latter
deemed exchange will generally result in the Unitholder's realization of
ordinary income under Section 751(b) of the Code. Such income will equal the
excess of (1) the non-pro rata portion of such distribution over (2) the
Unitholder's tax basis for the share of such Section 751 Assets deemed
relinquished in the exchange.
Ratio of Taxable Income to Distributions
The Company estimates that a purchaser of Common Units in this offering who
holds such Common Units from the date of the closing of this offering through
December 31, 2001, will be allocated, on a cumulative basis, an amount of
federal taxable income for such period that will be less than 20% of the cash
distributed with respect to that period. The Company further estimates that
for taxable years after the taxable year ending December 31, 2001, the taxable
income allocable to the Unitholders will constitute a significantly higher
percentage of cash distributed to Unitholders. The foregoing estimates are
based upon the assumption that gross income from operations will approximate
the amount required to make the Minimum Quarterly Distribution with respect to
all Units and other assumptions with respect to capital expenditures, cash
flow and anticipated cash distributions. These estimates and assumptions are
subject to, among other things, numerous business, economic, regulatory,
competitive and political uncertainties beyond the control of the Company.
Further, the estimates are based on current tax law and certain tax reporting
positions that the Company intends to adopt and with which the IRS could
disagree. Accordingly, no assurance can be given that the estimates will prove
to be correct. The actual percentage could be higher or lower, and any such
differences could be material and could materially affect the value of the
Common Units.
Basis of Common Units
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of the Company's nonrecourse
liabilities. That basis will be increased by his share of Company income and
by any increases in his share of Company nonrecourse liabilities. That basis
will be decreased (but not below zero) by distributions from the Company, by
the Unitholder's share of Company losses, by any decrease in his share of
Company nonrecourse liabilities and by his share of expenditures of the
Company that are not deductible in computing its taxable income and are not
required to be capitalized. A limited partner will have no share of Company
debt which is recourse to the General Partner, but will have a share,
generally based on his share of profits, of Company debt which is not recourse
to any partner. See "--Disposition of Common Units--Recognition of Gain or
Loss."
Limitations on Deductibility of Company Losses
The deduction by a Unitholder of his share of Company losses will be limited
to the tax basis in his Units and, in the case of an individual Unitholder or
a corporate Unitholder (if more than 50% of the value of its stock is owned
directly or indirectly by or for five or fewer individuals or certain tax-
exempt organizations), to the amount for which the Unitholder is considered to
be "at risk" with respect to the Company's activities, if that is less than
the Unitholder's tax basis. A Unitholder must recapture losses deducted in
previous years to the extent that Company distributions cause the Unitholder's
at risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a Unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that the Unitholder's tax
basis or at risk amount (whichever is the limiting factor) is subsequently
increased. Upon the taxable disposition of a Unit, any gain recognized by a
Unitholder can be offset by losses that were previously suspended by the at
risk limitation but may not be offset by losses suspended by the basis
limitation. Any excess loss (above such gain) previously suspended by the at
risk or basis limitations is no longer utilizable.
In general, a Unitholder will be at risk to the extent of the tax basis of
his Units, excluding any portion of that basis attributable to his share of
Company nonrecourse liabilities, reduced by any amount of money the
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Unitholder borrows to acquire or hold his Units if the lender of such borrowed
funds owns an interest in the Company, is related to such a person or can look
only to Units for repayment. A Unitholder's at risk amount will increase or
decrease as the tax basis of the Unitholder's Units increases or decreases
(other than tax basis increases or decreases attributable to increases or
decreases in his share of Company nonrecourse liabilities).
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely-held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly-traded partnership. Consequently, any
passive losses generated by the Company will only be available to offset
future income generated by the Company and will not be available to offset
income from other passive activities or investments (including other publicly-
traded partnerships) or salary or active business income. Passive losses which
are not deductible because they exceed a Unitholder's income generated by the
Company may be deducted in full when he disposes of his entire investment in
the Company in a fully taxable transaction to an unrelated party. The passive
activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation.
A Unitholder's share of net income from the Company may be offset by any
suspended passive losses from the Company, but it may not be offset by any
other current or carryover losses from other passive activities, including
those attributable to other publicly-traded partnerships.
Limitations on Interest Deductions
Generally, a non-corporate taxpayer's "investment interest" may be deducted
only to the extent of the taxpayer's "net investment income." Any investment
interest that is not deductible solely by reason of this limitation may be
carried forward to later taxable years and treated as investment interest in
such later years. In general, investment interest is any interest paid or
accrued on debt incurred or continued to purchase or carry property held for
investment, and net investment income includes gross income and certain net
gain from property held for investment, reduced by expenses that are directly
connected with the production of such income and gains. The IRS has announced
that Treasury regulations will be issued which characterize net passive income
from a publicly-traded partnership as investment income for purposes of the
limitations on the deductibility of investment interest.
To the extent that interest is attributable to a passive activity (which may
include interest incurred or deemed to have been incurred by a Unitholder to
acquire or carry his Units and a Unitholder's share of interest incurred by
the Company in connection with its operations), it is treated as a passive
activity deduction and is subject to limitation under the passive loss
limitation discussed above and not under the investment interest limitation.
In addition, the effect of the investment interest limitation on a particular
Unitholder will depend on such Unitholder's personal tax situation.
Accordingly, each Unitholder should consult with his tax advisor.
ALLOCATION OF COMPANY INCOME, GAIN, LOSS, DEDUCTION AND CREDIT
In general, if the Company has a net profit, items of income, gain, loss,
deduction and credit will be allocated among the General Partner and the
Unitholders in accordance with their respective percentage interests in the
Company. At any time that distributions are made to the Common Units and not
to the Subordinated Units, or that Incentive Distributions are made to the
General Partner, gross income will be allocated to the recipients to the
extent of such distributions. If the Company has a net loss, items of income,
gain, loss, deduction and credit will generally be allocated first, to the
General Partner and the Unitholders in accordance with their respective
Percentage Interests to the extent of their positive capital accounts (as
maintained under the Partnership Agreement) and, second, to the General
Partner.
As required by Section 704(c) of the Code and as permitted by Regulations
thereunder, certain items of Company income, gain, loss and deduction will be
allocated to account for the difference between the tax basis
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and fair market value of property contributed to the Company by the General
Partner or its affiliates ("Contributed Property"). The effect of these
allocations to a Unitholder will be essentially the same as if the tax basis
of the Contributed Property were equal to their fair market value at the time
of contribution. In addition, certain items of recapture income will be
allocated to the extent possible to the partner allocated the deduction or
curative allocation giving rise to the treatment of such gain as recapture
income in order to minimize the recognition of ordinary income by some
Unitholders. Finally, although the Company does not expect that its operations
will result in the creation of negative capital accounts, if negative capital
accounts nevertheless result, items of Company income and gain will be
allocated in an amount and manner sufficient to eliminate the negative balance
as quickly as possible.
Section 704(b) of the Code, and the regulations promulgated thereunder,
provide that an allocation of items of partnership income, gain, loss,
deduction or credit, other than an allocation required by Section 704(c) of
the Code to eliminate the difference between a partner's "book" capital
account (credited with the fair market value of Contributed Property) and
"tax" capital account (credited with the tax basis of Contributed Property)
(the "Book-Tax Disparity"), will generally be given effect for federal income
tax purposes in determining a partner's distributive share of an item of
income, gain, loss, deduction or credit only if the allocation has substantial
economic effect. In any other case, a partner's distributive share of an item
will be determined on the basis of the partner's interest in the partnership,
which will be determined by taking into account all the facts and
circumstances, including the partner's relative contributions to the
partnership, the interests of the partners in economic profits and losses, the
interest of the partners in cash flow and other nonliquidating distributions
and rights of the partners to distributions of capital upon liquidation.
Counsel is of the opinion that allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a
Unitholder's distributive share of an item of income, gain, loss or deduction.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year
The Company will use the year ending December 31 as its taxable year and
will adopt the accrual method of accounting for federal income tax purposes.
Each Unitholder will be required to include in income his allocable share of
Company income, gain, loss, deduction and credit for the taxable year of the
Company ending within or with the taxable year of the Unitholder. In addition,
a Unitholder who has a taxable year ending on a date other than December 31
and who disposes of all of his Units following the close of the Company's
taxable year but before the close of his taxable year must include his
allocable share of Company income, gain, loss, deduction and credit in income
for his taxable year with the result that he will be required to report in
income for his taxable year his distributive share of more than one year of
Company income, gain, loss, deduction and credit. See "--Disposition of Common
Units--Allocations Between Transferors and Transferees."
Initial Tax Basis, Depreciation and Amortization
The tax basis of the various assets of the Company will be used for purposes
of computing depreciation and cost recovery deductions and, ultimately, gain
or loss on the disposition of such assets. The Company assets will initially
have an aggregate tax basis equal to the tax basis of the assets in the
possession of EPCO immediately prior to the formation of the Company. The
federal income tax burden associated with the difference between the fair
market value of property held by the Company and the tax basis established for
such property will be borne by the General Partner and EPCO. See "--Allocation
of Company Income, Gain, Loss, Deduction and Credit."
To the extent allowable, the Company may elect to use the depreciation and
cost recovery methods that will result in the largest depreciation deductions
in the early years of the Company. The Company will not be entitled to any
amortization deductions with respect to any goodwill conveyed to the Company
on formation. It is estimated that approximately 60% of the fair market value
of the assets conveyed to the Company upon
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formation consist of non-amortizable goodwill. Property subsequently acquired
or constructed by the Company may be depreciated using accelerated methods
permitted by the Code.
If the Company disposes of depreciable property by sale, foreclosure or
otherwise, all or a portion of any gain (determined by reference to the amount
of depreciation previously deducted and the nature of the property) may be
subject to the recapture rules and taxed as ordinary income rather than
capital gain. Similarly, a partner who has taken cost recovery or depreciation
deductions with respect to property owned by the Company may be required to
recapture such deductions as ordinary income upon a sale of his interest in
the Company. See "--Allocation of Company Income, Gain, Loss, Deduction and
Credit" and "--Disposition of Common Units--Recognition of Gain or Loss."
Costs incurred in organizing the Company may be amortized over any period
selected by the Company not shorter than 60 months. The costs incurred in
promoting the issuance of Units (i.e. syndication expenses) must be
capitalized and cannot be deducted currently, ratably or upon termination of
the Company. Substantially all of the costs incurred in connection with this
offering will be classified as syndication expenses, which may not be
amortized.
Section 754 Election
The Company intends to make the election permitted by Section 754 of the
Code. That election is irrevocable without the consent of the IRS. The
election will generally permit the Company to adjust a Common Unit purchaser's
(other than a Common Unit purchaser that purchases Common Units from the
Company) tax basis in the Company's assets ("inside basis") pursuant to
Section 743(b) of the Code to reflect his purchase price. The Section 743(b)
adjustment belongs to the purchaser and not to other partners. (For purposes
of this discussion, a partner's inside basis in the Company's assets will be
considered to have two components: (1) his share of the Company's tax basis in
such assets ("common basis") and (2) his Section 743(b) adjustment to that
basis.)
Proposed Treasury Regulation Section 1.168-2(n) generally requires the
Section 743(b) adjustment attributable to an increase in the basis of recovery
property to be depreciated as if the total amount of such adjustment were
attributable to newly-acquired recovery property placed in service when the
purchaser acquires the Unit. Similarly, Proposed Treasury Regulation Section
1.197-2(g)(3) generally requires that the Section 743(b) adjustment
attributable to an increase in the basis of an amortizable Section 197
intangible should be treated as a newly-acquired asset placed in service when
the purchaser acquires the Unit. Under Treasury Regulation Section 1.167(c)-
1(a)(6), a Section 743(b) adjustment attributable to property subject to
depreciation under Section 167 of the Code, rather than cost recovery
deductions under Section 168, is generally required to be depreciated using
either the straight-line method or the 150% declining balance method. The
depreciation and amortization methods and useful lives associated with the
Section 743(b) adjustment, therefore, may differ from the methods and useful
lives generally used to depreciate the common basis in such properties.
Pursuant to the Partnership Agreement, the Company is authorized to adopt a
convention to preserve the uniformity of Units even if such convention is not
consistent with Proposed Treasury Regulation Section 1.168-2(n), Proposed
Treasury Regulation Section 1.197-2(g)(3) or Treasury Regulation Sections
1.167(c)-1(a)(6). See "--Uniformity of Units."
Although Counsel is unable to opine and expresses no opinion as to the
validity of such an approach, the Company intends to depreciate the portion of
a Section 743(b) adjustment attributable to unrealized appreciation in the
value of Contributed Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the common
basis of such property, despite its inconsistency with Proposed Treasury
Regulation Section 1.168-2(n), Proposed Treasury Regulation 1.197-2(g)(3) or
Treasury Regulation Section 1.167(c)-1(a)(6). If the Company determines that
such position cannot reasonably be taken, the Company may adopt a depreciation
or amortization convention under which all purchasers acquiring Units in the
same month would receive depreciation or
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amortization, whether attributable to common basis or Section 743(b)
adjustment, based upon the same applicable rate as if they had purchased a
direct interest in the Company's assets. Such an aggregate approach may result
in lower annual depreciation or amortization deductions than would otherwise
be allowable to certain Unitholders. See "--Uniformity of Units."
A Section 754 election is advantageous if the transferee's tax basis in his
Units is higher than such Units' share of the aggregate tax basis to the
Company of the Company's assets immediately prior to the transfer. In such a
case, as a result of the election, the transferee would have a higher tax
basis in his share of the Company's assets for purposes of calculating, among
other items, his depreciation deductions and his share of any gain or loss on
a sale of the Company's assets. Conversely, a Section 754 election is
disadvantageous if the transferee's tax basis in such Units is lower than such
Unit's share of the aggregate tax basis of the Company's assets immediately
prior to the transfer. Thus, the fair market value of the Units may be
affected either favorably or adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Company on the basis of certain assumptions as to the value of
Company assets and other matters. There is no assurance that the
determinations made by the Company will not be successfully challenged by the
IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to
be made, and should, in the Company's opinion, the expense of compliance
exceed the benefit of the election, the Company may seek permission from the
IRS to revoke the Section 754 election for the Company. If such permission is
granted, a subsequent purchaser of Units may be allocated more income than he
would have been allocated had the election not been revoked.
Alternative Minimum Tax
Although it is not expected that the Company will generate significant tax
preference items or adjustments, each Unitholder will be required to take into
account his distributive share of any items of Company income, gain,
deduction, loss or credit for purposes of the alternative minimum tax. The
minimum tax rate for noncorporate taxpayers is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption amount and 28%
on any additional alternative minimum taxable income. Prospective Unitholders
should consult with their tax advisors as to the impact of an investment in
Units on their liability for the alternative minimum tax.
Valuation of Company Property and Basis of Properties
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Company of the relative fair
market values, and determinations of the initial tax bases, of the assets of
the Company. Although the Company may from time to time consult with
professional appraisers with respect to valuation matters, many of the
relative fair market value estimates will be made by the Company. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss, deductions or credit previously
reported by Unitholders might change, and Unitholders might be required to
adjust their tax liability for prior years.
Treatment of Short Sales
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those
Units. If so, he would no longer be a partner with respect to those Units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period, any Company income, gain,
deduction, loss or credit with respect to those Units would not be reportable
by the Unitholder, any cash distributions received by the Unitholder with
respect to those Units would be fully taxable and all of such distributions
would appear to be treated as ordinary income. Unitholders desiring to assure
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their status as partners and avoid the risk of gain recognition should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their Units.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold.
A Unitholder's amount realized will be measured by the sum of the cash or the
fair market value of other property received plus his share of Company
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Company nonrecourse liabilities, the gain recognized on the sale of
Units could result in a tax liability in excess of any cash received from such
sale.
Prior Company distributions in excess of cumulative net taxable income in
respect of a Common Unit that decreased a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold
at a price greater than the Unitholder's tax basis in such Common Unit, even
if the price is less than his original cost.
Gain or loss recognized by a Unitholder (other than a "dealer" in Units) on
the sale or exchange of a Unit will generally be taxable as capital gain or
loss. Capital gain recognized on the sale of Units held for more than 18
months will generally be taxed at a maximum rate of 20%. A portion of this
gain or loss (which could be substantial), however, will be separately
computed and taxed as ordinary income or loss under Section 751 of the Code to
the extent attributable to assets giving rise to depreciation recapture or
other "unrealized receivables" or to "inventory items" owned by the Company.
The term "unrealized receivables" includes potential recapture items,
including depreciation recapture. Ordinary income attributable to unrealized
receivables, inventory items and depreciation recapture may exceed net taxable
gain realized upon the sale of the Unit and may be recognized even if there is
a net taxable loss realized on the sale of the Unit. Thus, a Unitholder may
recognize both ordinary income and a capital loss upon a disposition of Units.
Net capital loss may offset no more than $3,000 of ordinary income in the case
of individuals and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions at different prices must combine those interests and
maintain a single adjusted tax basis. Upon a sale or other disposition of less
than all of such interests, a portion of that tax basis must be allocated to
the interests sold using an "equitable apportionment" method. The ruling is
unclear as to how the holding period of these interests is determined once
they are combined. If this ruling is applicable to the holders of Common
Units, a Common Unitholder will be unable to select high or low basis Common
Units to sell as would be the case with corporate stock. It is not clear
whether the ruling applies to the Company because, similar to corporate stock,
interests in the Company are evidenced by separate certificates. Accordingly,
Counsel is unable to opine as to the effect such ruling will have on the
Unitholders. A Unitholder considering the purchase of additional Common Units
or a sale of Common Units purchased in separate transactions should consult
his tax advisor as to the possible consequences of such ruling.
Allocations Between Transferors and Transferees
In general, the Company's taxable income and losses will be determined
annually, will be prorated on a monthly basis and will be subsequently
apportioned among the Unitholders in proportion to the number of Units owned
by each of them as of the opening of the principal national securities
exchange on which the Common Units are then traded on the first business day
of the month (the "Allocation Date"). However, gain or loss realized on a sale
or other disposition of Company assets, other than in the ordinary course of
business, will be allocated among the Unitholders on the Allocation Date in
the month in which that gain or loss is recognized. As a result, a Unitholder
transferring Common Units in the open market may be allocated income, gain,
loss and deduction accrued after the date of transfer.
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The use of this method may not be permitted under existing Treasury
regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Company might be reallocated among
the Unitholders. The Company is authorized to revise its method of allocation
between transferors and transferees (as well as among partners whose interests
otherwise vary during a taxable period) to conform to a method permitted under
future Treasury regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect
to such quarter will be allocated items of Company income, gain, loss,
deductions and credit attributable to such quarter but will not be entitled to
receive that cash distribution.
Notification Requirements
A Unitholder who sells or exchanges Units is required to notify the Company
in writing of that sale or exchange within 30 days after the sale or exchange
and in any event by no later than January 15 of the year following the
calendar year in which the sale or exchange occurred. The Company is required
to notify the IRS of that transaction and to furnish certain information to
the transferor and transferee. However, these reporting requirements do not
apply with respect to a sale by an individual who is a citizen of the United
States and who effects the sale or exchange through a broker. Additionally, a
transferee of a Unit will be required to furnish a statement to the IRS, filed
with its income tax return for the taxable year in which the sale or exchange
occurred, that sets forth the amount of the consideration paid for the Unit.
Failure to satisfy these reporting obligations may lead to the imposition of
substantial penalties.
Constructive Termination
The Company and the Operating Partnership will be considered to have been
terminated if there is a sale or exchange of 50% or more of the total
interests in Company capital and profits within a 12-month period. Under the
TRA of 1997, electing large partnerships do not terminate by reason of the
sale or exchange of interests in the partnership. A termination of the Company
will cause a termination of the Operating Partnership. A termination of the
Company will result in the closing of the Company's taxable year for all
Unitholders. In the case of a Unitholder reporting on a taxable year other
than a fiscal year ending December 31, the closing of the Company's taxable
year may result in more than 12 months' taxable income or loss of the Company
being includable in his taxable income for the year of termination. New tax
elections required to be made by the Company, including a new election under
Section 754 of the Code, must be made subsequent to a termination, and a
termination could result in a deferral of Company deductions for depreciation.
A termination could also result in penalties if the Company were unable to
determine that the termination had occurred. Moreover, a termination might
either accelerate the application of, or subject the Company to, any tax
legislation enacted prior to the termination.
Under regulations, a termination of the Company would result in a deemed
transfer by the Company of its assets to a new partnership in exchange for an
interest in the new partnership followed by a deemed distribution of interests
in the new partnership to the Unitholders in liquidation of the Company.
Entity-Level Collections
If the Company is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Company is authorized to pay those taxes
from Company funds. Such payment, if made, will be treated as a distribution
of cash to the partner on whose behalf the payment was made. If the payment is
made on behalf of a person whose identity cannot be determined, the Company is
authorized to treat the payment as a distribution to current Unitholders. The
123
Company is authorized to amend the Partnership Agreement in the manner
necessary to maintain uniformity of intrinsic tax characteristics of Units and
to adjust subsequent distributions, so that after giving effect to such
distributions, the priority and characterization of distributions otherwise
applicable under the Partnership Agreement is maintained as nearly as is
practicable. Payments by the Company as described above could give rise to an
overpayment of tax on behalf of an individual partner in which event the
partner could file a claim for credit or refund.
UNIFORMITY OF UNITS
Because the Company cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance
with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Proposed Treasury Regulation Section 1.168-2(n),
Proposed Treasury Regulation Section 1.197-2(g)(3) or Treasury Regulation
Section 1.167(c)-1(a)(6). Any non-uniformity could have a negative impact on
the value of the Units. See "--Tax Treatment of Operations--Section 754
Election."
The Company intends to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of contributed property
or adjusted property (to the extent of any unamortized Book-Tax Disparity)
using a rate of depreciation or amortization derived from the depreciation or
amortization method and useful life applied to the common basis of such
property despite its inconsistency with Proposed Treasury Regulation Section
1.168-2(n), Proposed Treasury Regulation Section 1.197-2(g)(3) or Treasury
Regulation Section 1.167(c)-1(a)(6). See "--Tax Treatment of Operations--
Section 754 Election." If the Company determines that such a position cannot
reasonably be taken, the Company may adopt a depreciation and amortization
convention under which all purchasers acquiring Units in the same month would
receive depreciation and amortization deductions, whether attributable to
common basis or Section 743(b) basis, based upon the same applicable rate as
if they had purchased a direct interest in the Company's property. If such an
aggregate approach is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to certain
Unitholders and risk the loss of depreciation and amortization deductions not
taken in the year that such deductions are otherwise allowable. This
convention will not be adopted if the Company determines that the loss of
depreciation and amortization deductions will have a material adverse effect
on the Unitholders. If the Company chooses not to utilize this aggregate
method, the Company may use any other reasonable depreciation and amortization
convention to preserve the uniformity of the intrinsic tax characteristics of
any Units that would not have a material adverse effect on the Unitholders.
The IRS may challenge any method of depreciating the Section 743(b) adjustment
described in this paragraph. If such a challenge were sustained, the
uniformity of Units might be affected, and the gain from the sale of Units
might be increased without the benefit of additional deductions. See "--
Disposition of Common Units--Recognition of Gain or Loss."
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and,
as described below, may have substantially adverse tax consequences. Employee
benefit plans and most other organizations exempt from federal income tax
(including IRAs and other retirement plans) are subject to federal income tax
on unrelated business taxable income. Much of the taxable income derived by
such an organization from the ownership of a Unit will be unrelated business
taxable income and thus will be taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, payments with respect to
securities loans, gains from the sale of stocks or securities or foreign
currency or certain related sources. It is not anticipated that any
significant amount of the Company's gross income will include that type of
income.
124
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Company income, gain, loss,
deduction or credit and pay federal income tax at regular rates on any net
income or gain. Generally, a partnership is required to pay a withholding tax
on the portion of the partnership's income which is effectively connected with
the conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been
made to such partners. However, under rules applicable to publicly-traded
partnerships, the Company will withhold (currently at the rate of 39.6%) on
actual cash distributions made quarterly to foreign Unitholders. Each foreign
Unitholder must obtain a taxpayer identification number from the IRS and
submit that number to the Transfer Agent of the Company on a Form W-8 in order
to obtain credit for the taxes withheld. A change in applicable law may
require the Company to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Company's income and gain (as
adjusted for changes in the foreign corporation's "U.S. net equity") that are
effectively connected with the conduct of a United States trade or business.
That tax may be reduced or eliminated by an income tax treaty between the
United States and the country with respect to which the foreign corporate
Unitholder is a "qualified resident." In addition, such a Unitholder is
subject to special information reporting requirements under Section 6038C of
the Code.
Under a ruling of the IRS a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are regularly traded on an established securities
market at the time of the disposition.
ADMINISTRATIVE MATTERS
Company Information Returns and Audit Procedures
The Company intends to furnish to each Unitholder, within 90 days after the
close of each calendar year, certain tax information, including a Schedule K-
1, which sets forth each Unitholder's share of the Company's income, gain,
loss, deduction and credit for the preceding Company taxable year. In
preparing this information, which will generally not be reviewed by counsel,
the Company will use various accounting and reporting conventions, some of
which have been mentioned in the previous discussion, to determine the
Unitholder's share of income, gain, loss, deduction and credit. There is no
assurance that any of those conventions will yield a result which conforms to
the requirements of the Code, Treasury regulations or administrative
interpretations of the IRS. The Company cannot assure prospective Unitholders
that the IRS will not successfully contend in court that such accounting and
reporting conventions are impermissible. Any such challenge by the IRS could
negatively affect the value of the Units.
The federal income tax information returns filed by the Company may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in
an audit of the Unitholder's own return. Any audit of a Unitholder's return
could result in adjustments of non-Company as well as Company items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit are determined in a partnership
proceeding rather than in separate proceedings with the partners. The Code
provides for one partner to be designated as the "Tax Matters Partner" for
these purposes. The Partnership Agreement appoints the General Partner as the
Tax Matters Partner of the Company.
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The Tax Matters Partner will make certain elections on behalf of the Company
and Unitholders and can extend the statute of limitations for assessment of
tax deficiencies against Unitholders with respect to Company items. The Tax
Matters Partner may bind a Unitholder with less than a 1% profits interest in
the Company to a settlement with the IRS unless that Unitholder elects, by
filing a statement with the IRS, not to give such authority to the Tax Matters
Partner. The Tax Matters Partner may seek judicial review (by which all the
Unitholders are bound) of a final partnership administrative adjustment and,
if the Tax Matters Partner fails to seek judicial review, such review may be
sought by any Unitholder having at least a 1% interest in the profits of the
Company and by the Unitholders having in the aggregate at least a 5% profits
interest. However, only one action for judicial review will go forward, and
each Unitholder with an interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Company's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to
substantial penalties. However, if the Company were to elect to be treated as
a large partnership, Unitholders would be required to treat all Company items
in a manner consistent with the Company's return.
Under the reporting provisions of the TRA of 1997, each partner of an
electing large partnership takes into account separately his share of the
following items, determined at the partnership level: (1) taxable income or
loss from passive loss limitation activities; (2) taxable income or loss from
other activities (such as portfolio income or loss); (3) net capital gains to
the extent allocable to passive loss limitation activities and other
activities; (4) tax exempt interest; (5) a net alternative minimum tax
adjustment separately computed for passive loss limitation activities and
other activities; (6) general credits; (7) low-income housing credit; (8)
rehabilitation credit; (9) foreign income taxes; (10) credit for producing
fuel from a nonconventional source; and (11) any other items the Secretary of
Treasury deems appropriate. Moreover, miscellaneous itemized deductions would
not be passed through to the partners and 30% of such deductions would be
allowed at the partnership level.
The TRA of 1997 also made a number of changes to the tax compliance and
administrative rules relating to electing partnerships. One provision would
require that each partner in a large partnership, such as the Company, take
into account his share of any adjustments to partnership items in the year
such adjustments are made. Under prior law, adjustments relating to
partnership items for a previous taxable year are taken into account by those
persons who were partners in the previous taxable year. Alternatively, under
the TRA of 1997, a partnership could elect to or, in some circumstances, could
be required to directly pay the tax resulting from any such adjustments. In
either case, therefore, Unitholders could bear significant economic burdens
associated with tax adjustments relating to periods predating their
acquisition of Units. It is not expected that the Company will elect to have
the large partnership provisions apply because of the cost of their
application.
Nominee Reporting
Persons who hold an interest in the Company as a nominee for another person
are required to furnish to the Company (a) the name, address and taxpayer
identification number of the beneficial owner and the nominee; (b) whether the
beneficial owner is (i) a person that is not a United States person, (ii) a
foreign government, an international organization or any wholly-owned agency
or instrumentality of either of the foregoing, or (iii) a tax-exempt entity;
(c) the amount and description of Units held, acquired or transferred for the
beneficial owner; and (d) certain information including the dates of
acquisitions and transfers, means of acquisitions and transfers, and
acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on Units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the Company. The
nominee is required to supply the beneficial owner of the Units with the
information furnished to the Company.
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Registration as a Tax Shelter
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
the Company is not subject to the registration requirement on the basis that
it will not constitute a tax shelter. However, the General Partner, as a
principal organizer of the Company, has applied for registration of the
Company as a tax shelter with the Secretary of the Treasury in the absence of
assurance that the Company will not be subject to tax shelter registration and
in light of the substantial penalties which might be imposed if registration
is required and not undertaken. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT
INDICATE THAT AN INVESTMENT IN THE COMPANY OR THE CLAIMED TAX BENEFITS HAVE
BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. The Company must furnish the
registration number to the Unitholders, and a Unitholder who sells or
otherwise transfers a Unit in a subsequent transaction must furnish the
registration number to the transferee. The penalty for failure of the
transferor of a Unit to furnish the registration number to the transferee is
$100 for each such failure. The Unitholders must disclose the tax shelter
registration number of the Company on Form 8271 to be attached to the tax
return on which any income, gain, loss, deduction or credit of the Company is
included. A Unitholder who fails to disclose the tax shelter registration
number on his return, without reasonable cause for that failure, will be
subject to a $250 penalty for each failure. Any penalties discussed herein are
not deductible for federal income tax purposes. Registration as a tax shelter
may increase the risk of an audit.
Accuracy-Related Penalties
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith with respect to
that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally
is reduced if any portion is attributable to a position adopted on the return
(i) with respect to which there is, or was, "substantial authority" or (ii) as
to which there is a reasonable basis and the pertinent facts of such position
are disclosed on the return. Certain more stringent rules apply to "tax
shelters," a term that in this context does not appear to include the Company.
If any Company item of income, gain, loss, deduction or credit included in the
distributive shares of Unitholders might result in such an "understatement" of
income for which no "substantial authority" exists, the Company must disclose
the pertinent facts on its return. In addition, the Company will make a
reasonable effort to furnish sufficient information for Unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
A publicly traded partnership, such as the Company, may encounter situations
in which it is difficult for the partnership to fully and accurately comply
with all federal tax reporting requirements. Ownership of partnership
interests by nominees (e.g., in street name of broker) increases this
difficulty. If a partnership fails to comply with such requirements, certain
penalties could be assessed against the partnership or its partners.
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STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Company does business or owns property. Although an
analysis of those various taxes is not presented here, each prospective
Unitholder should consider the potential impact of such taxes on his
investment in the Company. A Unitholder will be required to file state income
tax returns and to pay state income taxes in some or all of the states in
which the Company does business or owns property and may be subject to
penalties for failure to comply with those requirements. In certain states,
tax losses may not produce a tax benefit in the year incurred (if, for
example, the Company has no income from sources within that state) and also
may not be available to offset income in subsequent taxable years. Some of the
states may require the Company, or the Company may elect, to withhold a
percentage of income from amounts to be distributed to a Unitholder who is not
a resident of the state. Withholding, the amount of which may be greater or
less than a particular Unitholder's income tax liability to the state,
generally does not relieve the non-resident Unitholder from the obligation to
file an income tax return. Amounts withheld may be treated as if distributed
to Unitholders for purposes of determining the amounts distributed by the
Company. See "--Disposition of Common Units--Entity-Level Collections." Based
on current law and its estimate of future Company operations, the General
Partner anticipates that any amounts required to be withheld will not be
material.
It is the responsibility of each Unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities of his
investment in the Company. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all state and local, as well as U.S. federal, tax returns that may be
required of such Unitholder. Counsel has not rendered an opinion on the state
or local tax consequences of an investment in the Company.
128
INVESTMENT IN THE COMPANY BY EMPLOYEE BENEFIT PLANS
An investment in the Company by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of the Employee Retirement Income Security Act of 1974, as amended ("ERISA"),
and restrictions imposed by Section 4975 of the Code. As used herein, the term
"employee benefit plan" includes, but is not limited to, qualified pension,
profit-sharing and stock bonus plans, Keogh plans, simplified employee pension
plans and tax deferred annuities or IRAs established or maintained by an
employer or employee organization. Among other things, consideration should be
given to (a) whether such investment is prudent under Section 404(a)(1)(B) of
ERISA; (b) whether in making such investment, such plan will satisfy the
diversification requirement of Section 404(a)(1)(C) of ERISA; and (c) whether
such investment will result in recognition of unrelated business taxable
income by such plan and, if so, the potential after-tax investment return. See
"Tax Considerations--Uniformity of Units--Tax-Exempt Organizations and Certain
Other Investors." The person with investment discretion with respect to the
assets of an employee benefit plan (a "fiduciary") should determine whether an
investment in the Company is authorized by the appropriate governing
instrument and is a proper investment for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
IRAs that are not considered part of an employee benefit plan) prohibit an
employee benefit plan from engaging in certain transactions involving "plan
assets" with parties that are "parties in interest" under ERISA or
"disqualified persons" under the Code with respect to the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in the Company, be deemed to own
an undivided interest in the assets of the Company, with the result that the
General Partner also would be a fiduciary of such plan and the operations of
the Company would be subject to the regulatory restrictions of ERISA,
including its prohibited transaction rules, as well as the prohibited
transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant
to these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest acquired by employee
benefit plans are publicly offered securities--i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the
federal securities laws, (b) the entity is an "Operating Partnership"--i.e.,
it is primarily engaged in the production or sale of a product or service
other than the investment of capital either directly or through a majority
owned subsidiary or subsidiaries, or (c) there is no significant investment by
benefit plan investors, which is defined to mean that less than 25% of the
value of each class of equity interest (disregarding certain interests held by
the General Partner, its affiliates, and certain other persons) is held by the
employee benefit plans referred to above, IRAs and other employee benefit
plans not subject to ERISA (such as governmental plans). The Company's assets
should not be considered "plan assets" under these regulations because it is
expected that the investment will satisfy the requirements in (a) and (b)
above and may also satisfy the requirements in (c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
129
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement, the form of which is filed as an exhibit to the Registration
Statement of which this Prospectus forms a part, the Underwriters named below
(the "Underwriters"), for whom Lehman Brothers Inc., A.G. Edwards & Sons,
Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, PaineWebber
Incorporated, Prudential Securities Incorporated, Smith Barney Inc., Dain
Rauscher Wessels, a division of Dain Rauscher Incorporated ("Dain Rauscher
Wessels"), and Raymond James & Associates, Inc. are acting as representatives
(the "Representatives"), have severally agreed to purchase from the Company,
and the Company has agreed to sell to each Underwriter, the number of Common
Units set forth opposite the name of such Underwriter below:
NUMBER OF
UNDERWRITERS COMMON UNITS
------------ ------------
Lehman Brothers Inc.............................................
A.G. Edwards & Sons, Inc........................................
Merrill Lynch, Pierce, Fenner & Smith
Incorporated...........................................
PaineWebber Incorporated........................................
Prudential Securities Incorporated..............................
Smith Barney Inc................................................
Dain Rauscher Wessels...........................................
Raymond James & Associates, Inc.................................
----------
Total ...................................................... 11,250,000
==========
The Underwriters propose to offer the Common Units to the public at the
initial public offering price set forth on the cover page of this Prospectus
and to certain dealers at such initial public offering price less a selling
concession not in excess of $ per Common Unit. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per Common
Unit to certain other Underwriters or to certain other brokers or dealers.
After the initial offering of the Common Units to the public, the offering
price and other selling terms may from time to time be changed by the
Representatives.
The Underwriting Agreement provides that the obligations of the Underwriters
to pay for and accept delivery of the Common Units offered hereby are subject
to approval of certain legal maters by counsel and to certain other
conditions, including the condition that no stop order suspending the
effectiveness of the Registration Statement is in effect and no proceedings
for such purpose are pending or threatened by the Commission, and that there
has been no material adverse change or development involving a prospective
material adverse change in the condition of the Company from that set forth in
the Registration Statement otherwise than as set forth or contemplated in this
Prospectus, and that certain certificates, opinions and letters have been
received from the Company and its counsel. The Underwriters are obligated to
take and pay for all Common Units (other than those covered by the
Underwriters' over-allotment option described below) if any such Common Units
are taken.
The Company, the Operating Partnership, the General Partner, EPCO and the
subsidiary of EPCO which holds Units have agreed in the Underwriting Agreement
to indemnify the Underwriters against certain civil liabilities, including
liabilities under the Securities Act, and to contribute to payments that the
Underwriters may be required to make in respect thereof.
The Company has granted to the Underwriters an option to purchase up to an
additional 1,687,500 Common Units, exercisable solely to cover over-
allotments, at the initial public offering price, less the underwriting
130
discounts and commissions shown on the cover page of this Prospectus. Such
option may be exercised at any time until 30 days after the date of the
Underwriting Agreement. To the extent that the option is exercised, each
Underwriter will be committed, subject to certain conditions, to purchase a
number of the additional Common Units that is proportionate to such
Underwriter's initial commitment as indicated on the preceding table.
The Company, the Operating Partnership, the General Partner, EPCO, the
subsidiary of EPCO that will hold Units and the officers and directors of the
General Partner have agreed that they will not, without the prior written
consent of Lehman Brothers Inc., during the 180 days following the date of
this Prospectus, (i) offer for sale, sell, pledge or otherwise dispose of (or
enter into any transaction or device which is designed to, or could be
expected to, result in the disposition by any person at any time in the future
of) any Common Units or any securities that are convertible into, or
exercisable or exchangeable for, or that represent the right to receive,
Common Units or any securities that are senior to or pari passu with the
Common Units, or (ii) enter into any swap or other derivatives transaction
that transfers to another, in whole or in part, any of the economic benefits
or rights of ownership of such Common Units.
The Representatives have informed the Company that the Underwriters do not
intend to confirm sales to accounts over which they exercise discretionary
authority without the prior written approval of the transaction by the
customer.
Until the distribution of the Common Units is completed, the rules of the
Commission may limit the ability of the Underwriters and certain selling group
members to bid for and purchase Common Units. As an exception to these rules,
the Representatives are permitted to engage in certain transactions that
stabilize the price of the Common Units. Such transactions may consist of bids
or purchases for the purpose of pegging, fixing or maintaining the price of
the Common Units.
In addition, if the Representatives over-allot (i.e., if they sell more
Common Units than are set forth on the cover page of this Prospectus), and
thereby create a short position in the Common Units in connection with the
offering, the Representatives may reduce that short position by purchasing
Common Units in the open market. The Representatives may also elect to reduce
any short position by exercising all or part of the over-allotment option
described herein.
The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
Common Units in the open market to reduce the Underwriters' short position or
to stabilize the price of the Common Units, they may reclaim the amount of the
selling concession from the Underwriters and selling group members who sold
those shares as part of the offering.
In general, purchases of a security for the purpose of stabilization or to
reduce a syndicate short position could cause the price of the security to be
higher than it might otherwise be in the absence of such purchases. The
imposition of a penalty bid might have an effect on the price of a security to
the extent that it were to discourage resales of the security by purchasers in
the offering.
Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the
transactions described above may have on the price of the Common Units. In
addition, neither the Company nor any of the Underwriters makes any
representation that the Representatives will engage in such transactions or
that such transactions, once commenced, will not be discontinued without
notice.
Prior to the offering, there has been no public market for the Common Units.
The initial public offering price will be negotiated between the General
Partner and the Representatives. The factors to be considered in determining
the initial public offering price of the Common Units will include the history
of and prospects for the Company's business and the industry in which it
competes, an assessment of the Company's management and the present state of
the Company's development, the past and present revenues, earnings and cash
flows of the Company, the prospects for growth of the Company's revenues,
earnings and cash flows, the current state of the economy in the United
States, the current level of economic activity in the industry in which the
Company
131
competes and in related or comparable industries, and currently prevailing
conditions in the securities markets, including current market valuations of
publicly traded companies which are comparable to the Company. The initial
public offering price set forth on the cover page of this Prospectus should
not, however, be considered an indication of the actual value of the Common
Units. Such price will be subject to change as a result of market conditions
and other factors. There can be no assurance that an active trading market
will develop for the Common Units or that the Common Units will trade in the
public market subsequent to the offering at or above the initial public
offering price.
The Common Units have been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "EPD."
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Common Units offered hereby as interests in a direct participation
program, the offering is being made in compliance with Rule 2810 of the NASD's
Conduct Rules. Investor suitability with respect to the Common Units should be
judged similarly to the suitability with respect to other securities that are
listed for trading on a national securities exchange.
132
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Company by
Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters in connection
with the Common Units offered hereby are being passed upon for the
Underwriters by Baker & Botts, L.L.P., Houston, Texas. Baker & Botts, L.L.P.
performs legal services for the Company and its affiliates from time to time.
EXPERTS
The audited financial statements included in this Prospectus have been
audited by Deloitte & Touche LLP, independent public accountants, as stated in
their reports appearing herein, and are included in reliance upon the reports
of such firm given upon their authority as experts in accounting and auditing.
AVAILABLE INFORMATION
The Company has not previously been subject to the informational
requirements of the Exchange Act. The Company has filed with the Commission a
Registration Statement on Form S-1 (the "Registration Statement") under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Common Units offered hereby. This Prospectus, which constitutes a part of the
Registration Statement, does not contain all of the information set forth in
the Registration Statement, certain items of which are contained in exhibits
and schedules to the Registration Statement as permitted by the rules and
regulations of the Commission. For further information with respect to the
Company and the Common Units offered hereby, reference is made to the
Registration Statement, including the exhibits and schedules thereto.
Statements made in this Prospectus concerning the contents of any contract,
agreement or other document are not necessarily complete; with respect to each
such contract, agreement or other document filed as an exhibit to the
Registration Statement, reference is made to the exhibit for a more complete
description of the matter involved, and each such statement is qualified in
its entirety by such reference. The Registration Statement and the exhibits
and schedules thereto filed with the Commission by the Company may be
inspected and copied at the public reference facilities maintained by the
Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and at the regional offices of the Commission located at 7 World Trade Center,
Suite 1300, New York, New York 10048 and 500 West Madison Street, Chicago,
Illinois 60661. Copies of such material can also be obtained upon written
request from the Public Reference Section of the Commission at Judiciary
Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates or
from the Commission's Web site on the Internet at http://www.sec.gov.
133
INDEX TO COMBINED FINANCIAL STATEMENTS
PAGE
----
Unaudited Pro Forma Condensed Combined Financial Information:
Pro Forma Condensed Balance Sheet, March 31, 1998....................... F-3
Notes to Unaudited Pro Forma Condensed Balance Sheet.................... F-4
Pro Forma Condensed Statement of Operations for the Three Months Ended
March 31, 1998......................................................... F-5
Notes to Unaudited Pro Forma Condensed Statement of Operations for the
Three Months Ended March 31, 1998...................................... F-6
Pro Forma Condensed Statement of Operations for the Year Ended December
31, 1997............................................................... F-7
Notes to Unaudited Pro Forma Condensed Statement of Operations for the
Year Ended
December 31, 1997...................................................... F-8
Enterprise Products Partners L.P.:
Independent Auditors' Report............................................ F-9
Combined Balance Sheets, December 31, 1996 and 1997..................... F-10
Statements of Combined Operations for the Years Ended December 31, 1995,
1996 and 1997.......................................................... F-11
Statements of Combined Cash Flows for the Years Ended December 31, 1995,
1996 and 1997.......................................................... F-12
Statements of Combined Equity for the Years Ended December 31, 1995,
1996 and 1997.......................................................... F-13
Notes to Combined Financial Statements.................................. F-14
Enterprise Products GP, LLC:
Independent Auditors' Report............................................ F-23
Balance Sheet, May 11, 1998............................................. F-24
Note to Balance Sheet, as of May 11, 1998............................... F-25
Enterprise Products Partners L.P. Unaudited Combined Financial
Information:
Combined Balance Sheets, December 31, 1997 and March 31, 1998........... F-26
Statements of Combined Operations for the Three Months Ended March 31,
1997 and 1998.......................................................... F-27
Statements of Combined Cash Flows for the Three Months Ended March 31,
1997 and 1998.......................................................... F-28
Statements of Combined Equity for the Three Months Ended March 31, 1997
and 1998............................................................... F-29
Notes to Unaudited Combined Financial Statements........................ F-30
F-1
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL INFORMATION
The following unaudited pro forma condensed financial information for the
Company gives effect to the Transactions, including the public offering and
sale of the Common Units, borrowings under the new bank credit facility and
the application of the net proceeds therefrom as described in "Use of
Proceeds." The information presented is derived from, should be read in
conjunction with, and is qualified in its entirety by reference to the
historical combined financial statements, and notes thereto, of the Company
appearing elsewhere in this Prospectus.
The unaudited pro forma condensed balance sheet was prepared as if the
Transactions had occurred on March 31, 1998. The unaudited pro forma condensed
statement of operations for the year ended December 31, 1997 and for the three
months ended March 31, 1998 was prepared as if the Transactions had occurred
on January 1, 1997. See "The Transactions."
The pro forma adjustments are based upon currently available information and
certain estimates and assumptions, and therefore, the actual adjustments may
differ from the unaudited pro forma adjustments. However, management believes
that the assumptions provide a reasonable basis for presenting the significant
effects of the Transactions as contemplated and that the unaudited pro forma
adjustments give appropriate effect to those assumptions and are properly
applied in the unaudited pro forma financial statements. The unaudited pro
forma condensed balance sheet and statement of operations are not necessarily
indicative of the financial position or results of operations of the Company
as they might have been if the Transactions had actually occurred on the dates
indicated above. Likewise, the unaudited pro forma information is not
necessarily indicative of future financial position or future results of
operations of the Company.
F-2
PRO FORMA CONDENSED BALANCE SHEET
MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
PRO FORMA
----------------------
AS
HISTORICAL ADJUSTMENTS ADJUSTED
ASSETS ---------- ------------- --------
CURRENT ASSETS
Cash and cash equivalents.................... $ 2,386 $ 232,513 (a) $ 44,896
(231,049)(b)
(20,174)(c)
9,882 (e)
(37,862)(f)
89,200 (i)
Restricted cash.............................. 9,882 (9,882)(e)
Accounts and notes receivable--trade......... 69,734 69,734
Inventories.................................. 21,076 21,076
Prepaid and other current assets............. 7,710 (146)(d) 7,564
Current maturity of notes receivable from
unconsolidated subsidiaries................. -- 13,037 (f) 13,037
-------- --------
Total current assets....................... 110,788 156,307
PROPERTY, PLANT AND EQUIPMENT, Net........... 511,084 511,084
NOTES RECEIVABLE FROM UNCONSOLIDATED
AFFILIATES.................................. 24,825 (f) 24,825
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED
AFFILIATES.................................. 60,410 60,410
OTHER ASSETS................................. 1,344 (802)(d) 542
-------- --------
TOTAL.................................... $683,626 $753,168
======== ========
LIABILITIES AND EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt......... $ 23,473 (23,473)(b) $ --
Accounts payable--trade...................... 55,515 55,515
Accrued gas payables......................... 38,305 38,305
Accrued expenses............................. 4,684 4,684
Other current liabilities.................... 11,727 (3,686)(b) 8,041
-------- --------
Total current liabilities.................. 133,704 106,545
MINORITY INTEREST............................ 3,147 2,427 (g) 5,574
LONG-TERM DEBT............................... 203,890 (203,890)(b) 89,200
89,200 (i)
COMBINED EQUITY.............................. 342,885 (20,174)(c) --
(948)(d)
(2,427)(g)
(319,336)(h)
Partners' equity
Common Units............................... -- 232,513 (a) 425,539
193,026 (h)
Subordinated Units......................... -- 120,736 (h) 120,736
General partner interest................... -- 5,574 (h) 5,574
-------- --------
TOTAL.................................... $683,626 $753,168
======== ========
See notes on following page
F-3
NOTES TO UNAUDITED PRO FORMA CONDENSED BALANCE SHEET
(a) Reflects the net cash proceeds of $232.5 million from the sale of
11,250,000 Common Units at an offering price of $22.25 per Common Unit,
after deducting underwriting discounts and commissions and estimated
offering expenses of $17.8 million.
(b) Reflects the repayment of $227.4 million of debt assumed from EPCO and
related accrued interest of $3.7 million.
(c) Reflects the payment of $20.2 million for make-whole payments required as
a result of the repayment of the debt assumed from EPCO.
(d) Reflects the write-off of unamortized debt cost included in prepaid and
other current assets and other assets as a result of the repayment of debt
assumed from EPCO.
(e) Reflects the reclassification of restricted cash to cash and cash
equivalents as a result of the elimination of the requirement to restrict
certain cash under EPCO's debt agreements due to repayment of all debt
assumed from EPCO.
(f) Reflects the purchase of $37.9 million of participation interests in bank
notes of its unconsolidated affiliates, BEF and Mont Belvieu Associates.
(g) Reflects the increase in the 1% minority interest of the Operating
Partnership held by the General Partner as a result of the above described
adjustments.
(h) Reflects the reclassification of EPCO's combined equity to the components
of partners' equity of the Company.
(i) Reflects the anticipated borrowing of $89.2 million under the revolving
bank credit facility.
F-4
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
PRO FORMA
---------------------
AS
HISTORICAL ADJUSTMENT ADJUSTED
---------- ---------- --------
REVENUES..................................... $190,517 $190,517
-------- --------
COST AND EXPENSES
Operating costs and expenses................. 181,447 (620)(a) 180,827
Selling, general and administrative expenses. 5,754 (2,754)(a) 3,000
-------- --------
Total........................................ 187,201 183,827
-------- --------
OPERATING INCOME............................. 3,316 6,690
-------- --------
OTHER INCOME (EXPENSE)
Interest expense............................. (6,734) 6,734 (b) (1,498)
(1,498)(c)
Interest income.............................. 275 652 (d) 927
Equity income in unconsolidated affiliates... 2,822 2,822
Other, net................................... 2 2
-------- --------
Total........................................ (3,635) 2,253
-------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST........................... (319) 8,943
MINORITY INTEREST IN INCOME FROM CONTINUING
OPERATIONS.................................. 3 92 (e) (89)
-------- --------
INCOME FROM CONTINUING OPERATIONS............ $ (316) 8,854
========
GENERAL PARTNER'S INTEREST IN INCOME FROM
CONTINUING OPERATIONS....................... 89
--------
LIMITED PARTNERS' INTEREST IN INCOME FROM
CONTINUING OPERATIONS....................... $ 8,765
========
INCOME FROM CONTINUING OPERATIONS PER UNIT... $ 0.13
========
NUMBER OF UNITS TO BE ISSUED................. 66,525
========
See notes on following page
F-5
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 1998
(a) Reflects the reduction in selling, general and administrative and certain
administrative charges in operating expenses to the amount of the
administrative fee to be paid to EPCO in the first year of the EPCO
Agreement. Pursuant to the EPCO Agreement, EPCO will be reimbursed at cost
for all expenses that it incurs in connection with managing the business
and affairs of the Company, except that EPCO will not be entitled to be
reimbursed for any selling, general and administrative expenses. In lieu
of reimbursement for such selling, general and administrative expenses,
EPCO will be entitled to receive an annual administrative services fee
that will initially equal $12.0 million. The General Partner, with the
approval and consent of the Audit and Conflicts Committee, will have the
right to agree to increases in such administrative services fee of up to
10% each year during the 10-year term of the EPCO Agreement and may agree
to further increases in such fee in connection with expansions of the
Company's operations through the construction of new facilities or the
completion of acquisitions that require additional management personnel.
Based upon its analysis of 1997 selling, general and administrative
expenses, EPCO's management believes that the fee to be paid under the
EPCO Agreement includes all such expenses that the Company would have
incurred, including additional amounts attributable to being a public
company, had the Company operated independently from EPCO.
(b) Reflects the elimination of interest expense due to the repayment of all
debt assumed from EPCO.
(c) Reflects accrual for $1.5 million of interest on $89.2 million of assumed
borrowings under the bank credit facility at 6.47% per annum plus a 0.2%
fee for the unused portion of the $200.0 million bank credit facility.
(d) Reflects interest income earned on the purchase of $37.9 million of
participation interests in bank notes of EPCO's unconsolidated affiliates,
BEF and Mont Belvieu Associates.
(e) Reflects the additional minority interest associated with the pro forma
adjustments for the 1% minority interest of the Operating Partnership held
by the General Partner.
The pro forma condensed statement of operations for the three months ended
March 31, 1998 does not include a pro forma adjustment for the loss expected
to be incurred on the early extinguishment of debt assumed from EPCO. Such
loss, in accordance with generally accepted accounting principles, will be
reported as an extraordinary loss when the debt is repaid. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations--
General--Prepayment Penalties on Extinguishment of Debt."
F-6
PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
PRO FORMA
----------------------
AS
HISTORICAL ADJUSTMENT ADJUSTED
---------- ----------- ----------
REVENUES................................... $1,020,281 $1,020,281
---------- ----------
COST AND EXPENSES
Operating costs and expenses............... 937,068 (1,100)(a) 935,968
Selling, general and administrative
expenses.................................. 23,060 (11,060)(a) 12,000
---------- ----------
Total...................................... 960,128 947,968
---------- ----------
OPERATING INCOME........................... 60,153 72,313
---------- ----------
OTHER INCOME (EXPENSE)
Interest expense........................... (25,717) 25,717 (b) (5,993)
(5,993)(c)
Interest income............................ 1,934 3,296 (d) 5,230
Equity in income of unconsolidated
affiliates................................ 15,682 15,682
Loss on sale of assets..................... (155) (155)
Other income (expense), net................ 793 793
---------- ----------
Total...................................... (7,463) 15,557
---------- ----------
INCOME FROM CONTINUING OPERATIONS BEFORE
MINORITY INTEREST......................... 52,690 87,870
MINORITY INTEREST IN INCOME FROM CONTINUING
OPERATIONS................................ (527) 352 (e) (879)
---------- ----------
INCOME FROM CONTINUING OPERATIONS.......... $ 52,163 86,991
==========
GENERAL PARTNER'S INTEREST IN INCOME FROM
CONTINUING OPERATIONS..................... 870
----------
LIMITED PARTNERS' INTEREST IN INCOME FROM
CONTINUING OPERATIONS..................... $ 86,121
==========
INCOME FROM CONTINUING OPERATIONS PER UNIT. $ 1.29
==========
NUMBER OF UNITS TO BE ISSUED............... 66,525
==========
See notes on following page
F-7
NOTES TO UNAUDITED PRO FORMA CONDENSED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(a) Reflects the reduction in selling, general and administrative and certain
administrative charges in operating expenses to the amount of the
administrative fee to be paid to EPCO in the first year of the EPCO
Agreement. Pursuant to the EPCO Agreement, EPCO will be reimbursed at cost
for all expenses that it incurs in connection with managing the business
and affairs of the Company, except that EPCO will not be entitled to be
reimbursed for any selling, general and administrative expenses. In lieu
of reimbursement for such selling, general and administrative expenses,
EPCO will be entitled to receive an annual administrative services fee
that will initially equal $12.0 million. The General Partner, with the
approval and consent of the Audit and Conflicts Committee, will have the
right to agree to increases in such administrative services fee of up to
10% each year during the 10-year term of the EPCO Agreement and may agree
to further increases in such fee in connection with expansions of the
Company's operations through the construction of new facilities or the
completion of acquisitions that require additional management personnel.
Based upon its analysis of 1997 selling, general and administrative
expenses, EPCO's management believes that the fee to be paid under the
EPCO Agreement includes all such expenses that the Company would have
incurred, including additional amounts attributable to being a public
company, had the Company operated independently from EPCO.
(b) Reflects the elimination of interest expense due to the repayment of all
debt assumed from EPCO.
(c) Reflects accrual of $6.0 million of interest on $89.2 million of assumed
borrowings under the bank credit facility at 6.47% per annum plus a 0.2%
fee for the unused portion of the $200.0 million bank credit facility.
(d) Reflects interest income earned on the purchase of $41.6 million of
participation interests in bank notes of EPCO's unconsolidated affiliates,
BEF and Mont Belvieu Associates.
(e) Reflects the additional minority interest associated with the pro forma
adjustments for the 1% minority interest of the Operating Partnership held
by the General Partner.
The pro forma condensed statement of operations for the year ended December
31, 1997 does not include a pro forma adjustment for the loss expected to be
incurred on the early extinguishment of debt assumed from EPCO. Such loss, in
accordance with generally accepted accounting principles, will be reported as
an extraordinary loss when the debt is repaid. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations--General--
Prepayment Penalties on Extinguishment of Debt."
F-8
INDEPENDENT AUDITORS' REPORT
ENTERPRISE PRODUCTS PARTNERS L.P.:
We have audited the accompanying combined balance sheets of Enterprise
Products Partners L.P. (the "Company"), (as defined in note 1 to the combined
financial statements), as of December 31, 1996 and 1997, and the related
statements of combined operations, combined cash flows and combined equity for
each of the years in the three year period ended December 31, 1997. These
combined financial statements are the responsibility of the management of the
Company. Our responsibility is to express an opinion on these combined
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the financial position of the Company at December 31, 1996
and 1997, and the results of their operations and their cash flows for each of
the years in the three year period ended December 31, 1997 in conformity with
generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
July 8, 1998
F-9
ENTERPRISE PRODUCTS PARTNERS L.P.
COMBINED BALANCE SHEETS
DECEMBER 31, 1996 AND 1997
(DOLLARS IN THOUSANDS)
1996 1997
ASSETS -------- --------
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$3,351 in 1996
and $4,522 in 1997.......................................... $ 28,329 $ 23,463
Accounts receivable--trade................................... 105,557 76,533
Inventories.................................................. 26,264 18,935
Prepaid and other current assets............................. 9,020 8,103
-------- --------
Total current assets......................................... 169,170 127,034
PROPERTY, PLANT AND EQUIPMENT, Net........................... 497,930 513,727
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES..... 42,847 55,875
OTHER ASSETS................................................. 1,204 1,077
-------- --------
TOTAL........................................................ $711,151 $697,713
======== ========
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt......................... $ 15,308 $ 14,903
Accounts payable--trade...................................... 79,911 76,591
Accrued gas payables......................................... 72,623 45,668
Accrued expenses............................................. 14,164 8,638
Other current liabilities.................................... 20,192 21,544
-------- --------
Total current liabilities.................................... 202,198 167,344
LONG-TERM DEBT............................................... 240,309 215,334
MINORITY INTEREST............................................ 2,623 3,150
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY.............................................. 266,021 311,885
-------- --------
TOTAL........................................................ $711,151 $697,713
======== ========
See Notes to Combined Financial Statements.
F-10
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(AMOUNTS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
1995 1996 1997
-------- -------- ----------
REVENUES....................................... $790,080 $999,506 $1,020,281
-------- -------- ----------
COST AND EXPENSES
Operating costs and expenses................... 726,207 906,367 937,068
Selling, general and administrative............ 22,250 24,227 23,060
-------- -------- ----------
Total........................................ 748,457 930,594 960,128
-------- -------- ----------
OPERATING INCOME............................... 41,623 68,912 60,153
-------- -------- ----------
OTHER INCOME (EXPENSE)
Interest expense............................... (27,567) (26,310) (25,717)
Interest income................................ 554 2,705 1,934
Equity in income of unconsolidated affiliates.. 12,274 15,756 15,682
Gain (loss) on sale of assets.................. 7,948 -- (155)
Other, net..................................... 305 364 793
-------- -------- ----------
Total...................................... (6,486) (7,485) (7,463)
-------- -------- ----------
INCOME BEFORE MINORITY INTEREST................ 35,137 61,427 52,690
MINORITY INTEREST.............................. (351) (614) (527)
-------- -------- ----------
NET INCOME..................................... $ 34,786 $ 60,813 $ 52,163
======== ======== ==========
Allocation of net income to:
Limited partner.............................. $ 34,438 $ 60,205 $ 51,641
======== ======== ==========
General partner.............................. $ 348 $ 608 $ 522
======== ======== ==========
Net income per common unit (based upon 55,275
common units to be issued to EPCO)............ $ 0.62 $ 1.09 $ 0.93
======== ======== ==========
See Notes to Combined Financial Statements.
F-11
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
1995 1996 1997
--------- -------- --------
OPERATING ACTIVITIES
Net income..................................... $ 34,786 $ 60,813 $ 52,163
Adjustments to reconcile net income to cash
flows provided from operating activities:
Minority interest............................ 351 614 527
Depreciation and amortization................ 15,327 15,742 17,684
Equity in income of unconsolidated
affiliates.................................. (12,274) (15,756) (15,682)
(Gain) loss on sale of assets................ (7,948) -- 155
Net effect of changes in operating accounts.. (18,030) 30,018 2,948
--------- -------- --------
Operating activities cash flows................ 12,212 91,431 57,795
--------- -------- --------
INVESTING ACTIVITIES
Capital expenditures........................... (22,250) (61,010) (33,636)
Proceeds from sale of assets................... 3,053 25 --
Unconsolidated affiliates:
Investments in and advances to............... 4,946 (3,894) (4,625)
Distributions received....................... 5,018 7,154 7,279
--------- -------- --------
Investing activities cash flows................ (9,233) (57,725) (30,982)
--------- -------- --------
FINANCING ACTIVITIES
Long-term debt:
Borrowings................................... 148,999 24,001 598
Repayments................................... (135,928) (50,040) (25,978)
Net decrease (increase) in restricted cash..... (1,076) 1,109 (1,171)
--------- -------- --------
Financing activities cash flows................ 11,995 (24,930) (26,551)
--------- -------- --------
CASH CONTRIBUTIONS FROM (DISTRIBUTIONS TO)
PARENT........................................ (25,337) 6,393 (6,299)
--------- -------- --------
NET CHANGE IN CASH AND CASH EQUIVALENTS........ (10,363) 15,169 (6,037)
CASH AND CASH EQUIVALENTS, JANUARY 1........... 20,172 9,809 24,978
--------- -------- --------
CASH AND CASH EQUIVALENTS, DECEMBER 31
(Excluding restricted cash of $4,460 in 1995,
$3,351 in 1996
and $4,522 in 1997)........................... $ 9,809 $ 24,978 $ 18,941
========= ======== ========
See Notes to Combined Financial Statements.
F-12
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997
(DOLLARS IN THOUSANDS)
LIMITED GENERAL
PARTNER PARTNER TOTAL
-------- -------- --------
Combined Equity, January 1, 1995................... $187,472 $1,894 $189,366
Net income....................................... 34,438 348 34,786
Cash distributions to parent..................... (25,083) (254) (25,337)
-------- ------ --------
Combined Equity, December 31, 1995................. 196,827 1,988 198,815
Net income....................................... 60,205 608 60,813
Cash contributions from parent................... 6,329 64 6,393
-------- ------ --------
Combined Equity, December 31, 1996................. 263,361 2,660 266,021
Net income....................................... 51,641 522 52,163
Cash distributions to parent..................... (6,236) (63) (6,299)
-------- ------ --------
Combined Equity, December 31, 1997................. $308,766 $3,119 $311,885
======== ====== ========
See Notes to Combined Financial Statements.
F-13
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
1. ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ENTERPRISE PRODUCTS PARTNERS L.P. (the "Company") was formed on April 9,
1998 as a Delaware limited partnership to own and operate the natural gas
liquids ("NGL") business of Enterprise Products Company ("EPCO"). The Company
is the limited partner and owns approximately 99% of Enterprise Products
Operating L.P. (the "Operating Partnership"), which directly or indirectly
owns or leases and operates the NGL facilities. Enterprise Products GP, LLC
(the "General Partner") is the general partner and owns approximately 1% of
the Operating Partnership. Both the Company and the General Partner are
subsidiaries of EPCO.
Prior to their combination, EPCO and its affiliated companies were
controlled by members of a single family, who collectively owned at least 90%
of each of such entities. As of April 30, 1998, the owners of all the
affiliated companies exchanged their ownership interests for shares of EPCO.
Accordingly, each of the affiliated companies became a wholly-owned subsidiary
of EPCO or was merged into EPCO as of April 30, 1998. In accordance with
generally accepted accounting principles, the combination of the affiliated
companies with EPCO was accounted for as a reorganization of entities under
common control in a manner similar to a pooling of interests.
Under terms of a contract, entered into on May 8, 1998, between EPCO and the
Operating Partnership, EPCO will contribute all of its NGL assets to the
Operating Partnership, and the Operating Partnership will assume certain of
EPCO's debt. As a result, the Company will be the successor to the NGL
operations of EPCO.
The accompanying combined financial statements include the historical
accounts and operations of the NGL business of EPCO, including NGL operations
conducted by affiliated companies of EPCO prior to their combination with
EPCO. All intercompany balances and transactions have been eliminated in the
combined financial statements.
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES include entities in
which the Company owns 20% to 50% or has the ability to exercise significant
influence over the entities' operating and financial policies. The equity
method is used to account for such investments.
INVENTORIES, consisting of NGLs and NGL products, are carried at the lower
of average cost or market.
EXCHANGES are movements of NGL products between parties to satisfy timing
and logistical needs of the parties. NGLs and NGL products borrowed from the
Company under such agreements are included in inventories, and NGLs and NGL
products loaned to the Company under such agreements are accrued as a
liability in accrued gas payables. Accrued gas payables also include amounts
due for the purchase of NGL feedstock.
PROPERTY, PLANT AND EQUIPMENT are at cost and are depreciated using the
straight-line method over the asset's estimated useful life. Maintenance,
repairs and minor renewals are charged to operations as incurred. Additions,
improvements and major renewals are capitalized. The cost of assets retired or
sold, together with the related accumulated depreciation, are removed from the
accounts, and any gain or loss on disposition is included in income.
REVENUE is recognized when products are shipped or services are rendered.
USE OF ESTIMATES AND ASSUMPTIONS by management that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period are required for the
preparation of financial statements in conformity with generally accepted
accounting principles. Actual results could differ from these estimates.
FEDERAL INCOME TAXES are generally not provided because the Company and its
predecessors had either elected under provisions of the Internal Revenue Code
to be a Subchapter S Corporation or were entities that were organized as pass-
through entities for federal income tax purposes. As a result, for federal
income taxes, the combined taxable income of the Company, as presented in the
statement of combined operations, are taxed directly to its owners. State
income taxes are not material.
F-14
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
] ENVIRONMENTAL COSTS for remediation are accrued based on estimates of known
remediation requirements. Such accruals are based upon management's best
estimate of the ultimate costs to remediate the site. Ongoing environmental
compliance costs are charged to expense as incurred, and expenditures to
mitigate or prevent future environmental contamination are capitalized.
Environmental costs, accrued environmental liabilities and expenditures to
mitigate or eliminate future environmental contamination for each of the years
in the three-year period ended December 31, 1997 were not significant to the
combined financial statements. The Company's estimated liability for
environmental remediation is not discounted.
CASH FLOWS are computed using the indirect method. For cash flow purposes,
the Company considers all highly liquid debt instruments with an original
maturity of less than three months at the date of purchase to be cash
equivalents. All cash presented as restricted cash in the Company's financial
statements is due to requirements of the Company's debt agreements.
DOLLAR AMOUNTS presented in the tabulations within the notes to the
Company's financial statements are stated in thousands of dollars, unless
otherwise indicated.
RECENT STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS ("SFAS") include the
following: (effective for fiscal years beginning after December 15, 1997) SFAS
130, Reporting of Comprehensive Income, SFAS 131, Disclosure about Segments of
an Enterprise and Related Information and SFAS 132, Employers' Disclosure
about Pensions and Other Postretirement Benefits and (effective for all fiscal
quarters of fiscal years beginning after June 15, 1999) SFAS 133, Accounting
for Derivative Instruments and Hedging Activities. Management is currently
studying these SFAS items for possible impact on the combined financial
statements; however, based upon its preliminary assessment of the SFASs,
management believes that they will not have a significant impact on the
Company's financial statements. On April 3, 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities ("SOP 98-5"). For years beginning after
December 15, 1998, SOP 98-5 generally requires that all start-up costs of a
business activity be charged to expense as incurred and any start-up cost
previously deferred should be written-off as a cumulative effect of a change
in accounting principle. Management is currently studying SOP 98-5 for its
possible impact on the combined financial statements. Based upon its
preliminary assessment of SOP 98-5, management believes that SOP 98-5 will not
have a material impact on the combined financial statements except for a $4.5
million non-cash write-off at January 1, 1999 of the unamortized balance of
deferred start-up costs of Belvieu Environmental Fuels ("BEF"), in which the
Company owns a 33 1/3% economic interest. Such a write-off would cause a $1.5
million reduction in the equity in income of unconsolidated affiliates for
1999 and a corresponding reduction in the Company's investment in
unconsolidated affiliates.
2. PROPERTY, PLANT AND EQUIPMENT
Property, plant and equipment and accumulated depreciation are as follows:
ESTIMATED
USEFUL
LIFE IN
YEARS 1996 1997
--------- -------- --------
Plants and pipelines............................ 5-35 $535,674 $599,047
Underground and other storage facilities........ 5-35 75,396 79,744
Transportation equipment........................ 3-35 1,471 12,393
Land............................................ 11,999 12,783
Construction in progress........................ 58,944 12,627
-------- --------
Total......................................... 683,484 716,594
Less accumulated depreciation................... 185,554 202,867
-------- --------
Property, plant and equipment, net.............. $497,930 $513,727
======== ========
F-15
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
3. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
Investments in unconsolidated affiliates consist primarily of a 33 1/3%
economic interest in BEF and a 49.0% economic interest in Mont Belvieu
Associates. BEF is a general partnership that owns an MTBE production facility
located at Mont Belvieu, Texas, adjacent to other facilities owned and
operated by the Company. Mont Belvieu Associates is a general partnership that
owns a 50.0% interest in an NGL fractionation facility in Texas. The Company
also directly owns an additional 12 1/2% interest in the fractionation
facility that is partially owned by Mont Belvieu Associates. The Company is
the operator for both the BEF and Mont Belvieu Associates plants.
Following is a summary of the Company's investments in and advances to
unconsolidated affiliates and the equity in income of unconsolidated
affiliates:
AT DECEMBER 31,
---------------
1996 1997
------- -------
Investments in and advances to unconsolidated affiliates:
BEF...................................................... $33,291 $41,278
Mont Belvieu Associates.................................. 9,556 11,963
Other.................................................... -- 2,634
------- -------
Total.................................................. $42,847 $55,875
======= =======
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
Equity in income of unconsolidated affiliates:
BEF.............................................. $ 6,107 $ 9,752 $ 9,305
Mont Belvieu Associates.......................... 6,167 6,004 6,377
------- ------- -------
Total.......................................... $12,274 $15,756 $15,682
======= ======= =======
BEF
BEF is owned equally (33 1/3%) by Liquid Energy Fuels Corp. ("Liquid"), SUN
BEF, Inc. ("SUN BEF") and the Company. Mitchell Energy & Development Corp. is
Liquid's ultimate parent company, and Sun Company, Inc. ("Sun") is SUN BEF's
ultimate parent company. Following is condensed financial data for BEF:
AT DECEMBER 31,
-----------------
1996 1997
-------- --------
BALANCE SHEET DATA:
Current assets............................................ $ 32,248 $ 40,848
Property, plant and equipment, net........................ 193,900 182,945
Other assets.............................................. 23,020 18,324
-------- --------
Total assets............................................ $249,168 $242,117
======== ========
Current liabilities....................................... $ 56,141 $ 58,004
Long-term debt............................................ 97,778 58,667
Other liabilities......................................... 671 2,950
Partners' equity.......................................... 94,578 122,496
-------- --------
Total liabilities and partners' equity.................. $249,168 $242,117
======== ========
F-16
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1995 1996 1997
-------- -------- --------
INCOME STATEMENT DATA:
Revenues.......................................... $121,399 $217,438 $233,218
Expenses.......................................... 103,077 188,182 205,300
-------- -------- --------
Net income........................................ $ 18,322 $ 29,256 $ 27,918
======== ======== ========
BEF's owners are required under isobutane supply contracts to provide their
pro rata share of BEF's monthly isobutane requirements. If the MTBE plant's
isobutane requirements exceed 450,000 barrels for any given month, each of the
owners retains the right, but not the obligation, to supply at least one-third
of the additional isobutane needed. The purchase price for the isobutane
(which generally approximates the established market price) is based upon
contracts between the owners.
BEF has a ten-year off-take agreement under which Sun is required to
purchase all of the plant's MTBE production through May 2005. Through May 31,
2000, Sun will pay the higher of a contractual floor price or market price (as
defined within the agreement) for floor production (193,450,000 gallons per
year), and the market price for production in excess of 193,450,000 gallons
per year, subject to quarterly adjustments on certain excess volumes. At floor
production levels, the contractual floor price is a price sufficient to cover
essentially all of BEF's operating costs plus principal and interest payments
on its bank term loan. Market price is: (a) toll fee price (cost of feedstock
plus approximately $0.484 per gallon during the first two contract years
ending May 31, 1997); and (b) at Sun's option, the toll fee price (cost of
feedstock plus approximately $0.534 per gallon) or the U.S. Gulf Coast Posted
Contract Price for the period from June 1, 1997 through May 31, 2000. For
purposes of computing the toll fee price, the feedstock component is based on
the Normal Butane Posted Price for the month plus the average purchase price
paid by BEF to acquire methanol consumed by the facility during the month. In
addition, the floor or market price determined above will be increased $0.03
per gallon in the third and fourth contract years and by about $0.04 per
gallon in the fifth contract year. Beginning June 1, 2000, through the
remainder of the agreement, the price for all production will be based upon a
market-related negotiated price.
The contracted floor price paid by Sun for production in 1995, 1996 and 1997
exceeded the spot market price for MTBE. At December 31, 1997, the floor price
paid for MTBE by Sun was $1.0392 per gallon, compared to an average Gulf Coast
spot market price for MTBE during 1997 of $0.83 per gallon.
Substantially all revenues earned by BEF are from the production of MTBE
which is sold to Sun. This concentration could impact BEF's exposure to credit
risk; however, such risk is reduced since Sun has an equity interest in BEF.
Management believes that BEF is exposed to minimal credit risk. BEF does not
require collateral for its receivables from Sun.
Long-term debt of BEF consists of a $97.8 million five-year, floating
interest rate bank term note payable which is due in equal quarterly
installments of $9.8 million through May 31, 2000. The debt is non-recourse
debt to the partners. BEF has an interest rate cap agreement (based on a LIBOR
rate of 7%) with a notional amount of $31 million at December 31, 1997. The
interest rate cap agreement provides that the notional amount will decrease
$4.5 million each quarter through May 1999. BEF intends to hold the contract
through its expiration date and use it as a means of fixing a portion of the
interest on the term note payable. While the notional amount is used to
express the magnitude of an interest rate cap agreement, the amount subject to
credit risk, in the event of nonperformance by a third party, is substantially
less. Management does not expect any significant impact to its financial
position as a result of nonperformance by a third party. The interest rate cap
did not have a significant effect on the net interest rate that BEF recognized
for 1995, 1996 or 1997.
F-17
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The bank term loan agreement contains restrictive covenants prohibiting or
limiting certain actions of BEF, including partner distributions, and
requiring certain actions by BEF, including the maintenance of specified
levels of leverage, as defined, and approval by the banks of certain
contracts. As a result of the restrictive covenants, no cash was available for
distributions to the partners at December 31, 1997. In addition, the loan
agreement requires BEF to restrict a certain portion of cash to pay for the
plant's turnaround maintenance and long-term debt service. At December 31,
1996 and 1997, cash of $3.3 million and $13.1 million, respectively, was
restricted under terms of the loan agreement. BEF was in compliance with the
restrictive covenants at December 31, 1997. The long-term debt is
collateralized by substantially all of BEF's assets.
MONT BELVIEU ASSOCIATES
Kinder Morgan Natural Gas Liquids Corporation owns 50%, the Company owns 49%
and EPCO owns 1% of Mont Belvieu Associates. Following is the condensed
financial data for Mont Belvieu Associates:
AT DECEMBER 31,
---------------
1996 1997
------- -------
BALANCE SHEET DATA:
Current assets.............................................. $ 6,502 $ 6,125
Property, plant and equipment, net.......................... 45,966 45,774
Other assets................................................ -- 79
------- -------
Total assets............................................ $52,468 $51,978
======= =======
Current liabilities......................................... $ 4,546 $ 4,479
Long-term debt.............................................. 15,022 11,790
Partners' equity............................................ 32,900 35,709
------- -------
Total liabilities and partners' equity.................. $52,468 $51,978
======= =======
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
INCOME STATEMENT DATA:
Revenues............................................. $25,795 $26,954 $33,646
Expenses............................................. 14,971 16,347 23,034
------- ------- -------
Net income....................................... $10,824 $10,607 $10,612
======= ======= =======
Long-term debt of Mont Belvieu Associates represents a $14.4 million bank
term note which is payable over a six-year amortization schedule and a balloon
payment in December 2001. Interest on the bank term note payable bears
interest at LIBOR plus 0.75%. The loan is non-recourse to the partners and is
secured by Mont Belvieu Associates' rights under the operating agreement of
the facility with the joint owners. The bank agreement contains no
restrictions on the payment of distributions to the partners.
All of Mont Belvieu Associates' revenues are derived from NGL fractionation
services to customers in the Gulf Coast area. This concentration could impact
Mont Belvieu Associates' exposure to credit risk inasmuch as these customers
could be affected by similar economic or other conditions. Management,
however, believes that Mont Belvieu Associates is exposed to minimal credit
risk. Mont Belvieu Associates generally does not require collateral for its
receivables.
F-18
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
4. LONG-TERM DEBT
Long-term debt consisted of the following:
AT DECEMBER 31,
-----------------
1996 1997
-------- --------
Insurance Companies:
Secured notes (five separate series), with interest at
8.82% to 12.10%, due in various annual installments
through 2004.............................................. $ 69,555 $ 65,395
Senior notes (seven separate series), with interest at
8.04% to 12.10%, due in various periodic installments
through 2007.............................................. 180,063 160,345
Subordinated note, with interest at 9.3%, due in annual
installments through 2000................................. 5,999 4,497
-------- --------
Total.................................................... 255,617 230,237
Less current maturities of long-term debt.................... 15,308 14,903
-------- --------
Long-term debt............................................... $240,309 $215,334
======== ========
Maturities of long-term debt at December 31, 1997 are as follows: $14.9
million in 1998; $23.5 million in 1999; $61.8 million in 2000; $15.3 million
in 2001; $15.3 million in 2002; and $99.4 million thereafter.
At December 31, 1997, the Company had $20 million of standby letters of
credit available, and approximately $1.0 million of letters of credit were
outstanding under letter of credit agreements with the banks.
The credit agreements with the insurance companies and the banks contain
restrictive covenants prohibiting or limiting certain actions of the Company,
including payment of cash distributions to owners, making of certain
investments and incurring any additional debt. Additionally, the credit
agreements require certain actions by the Company including the maintenance of
specified levels of working capital and tangible net worth, as defined by the
agreements. The Company was in compliance with these restrictive covenants at
December 31, 1997. Based upon the various credit agreements, no cash
distributions could be made from the combined equity at December 31, 1997.
At December 31, 1997, combined equity includes undistributed net earnings of
unconsolidated affiliates of $25.1 million.
5. MAJOR CUSTOMERS
A customer owns a 45.4% undivided interest in a plant and the related
pipeline system and leases such undivided interest in the facility to the
Company. The agreement with the customer expires in 2004. There are two
successive options to extend the term for 12 years each remaining under the
original agreement. Revenues from sales to this customer were approximately
$147.0 million, $114.1 million and $147.6 million for 1995, 1996 and 1997,
respectively.
In addition, the Company has supply and transportation contracts with
another customer. Under the supply contract, the Company sells approximately
450,000 barrels of isobutane per month to the customer. Under the
transportation contract, the Company delivers the product sold at a
transportation fee of approximately 0.75 cents per gallon. The supply and
transportation contracts expires on June 30, 1998. The Company and the
customer are currently negotiating new contracts and have reached an agreement
in principle which is expected to extend the contracts for an additional five
years. Revenues from sales to this customer were approximately $88.6 million,
$113.4 million and $107.3 million for 1995, 1996 and 1997, respectively.
F-19
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS
The Company has no employees. All management, administrative and operating
functions are performed by employees of EPCO. Operating costs and expenses
include charges for EPCO's employees who operate the Company's various
facilities. Such charges are based upon EPCO's actual salary costs and related
fringe benefits. Because the Company's operations constitute the most
significant portion of EPCO's combined operations, selling, general and
administrative expenses reported in the accompanying statement of combined
operations include all such expenses incurred by EPCO less amounts
specifically allocated to other subsidiaries or operating divisions of EPCO.
In connection with the Transactions, EPCO, the General Partner and the
Company will enter into the EPCO Agreement pursuant to which (i) EPCO will
agree to manage the business and affairs of the Company and the Operating
Partnership; (ii) EPCO will agree to employ the operating personnel involved
in the Company's business for which EPCO will be reimbursed by the Company at
cost; (iii) the Company and the Operating Partnership will agree to
participate as named insureds in EPCO's current insurance program, and costs
will be allocated among the parties on the basis of formulas set forth in the
agreement; (iv) EPCO will agree to grant an irrevocable, non-exclusive
worldwide license to all of the trademarks and tradenames used in its business
to the Company; (v) EPCO will agree to indemnify the Company against any
losses resulting from certain lawsuits; and (vi) EPCO will agree to sublease
all of the equipment which it holds pursuant to the Retained Leases to the
Company for $1 per year and assign its purchase options under such leases to
the Company. Pursuant to the EPCO Agreement, EPCO will be reimbursed at cost
for all expenses that it incurs in connection with managing the business and
affairs of the Company, except that EPCO will not be entitled to be reimbursed
for any selling, general and administrative expenses. In lieu of reimbursement
for such selling, general and administrative expenses, EPCO will be entitled
to receive an annual administrative services fee that will initially equal
$12.0 million. The General Partner, with the approval and consent of the Audit
and Conflicts Committee, will have the right to agree to increases in such
administrative services fee of up to 10% each year during the 10-year term of
the EPCO Agreement and may agree to further increases in such fee in
connection with expansions of the Company's operations through the
construction of new facilities or the completion of acquisitions that require
additional management personnel. Based upon its analysis of 1997 selling,
general and administrative expenses, EPCO's management believes that the fee
to be paid under the EPCO Agreement includes all such expenses that the
Company would have incurred, including additional amounts attributable to
being a public company, had the Company operated independently from EPCO.
EPCO also operates BEF's and Mont Belvieu Associates' plants and charges
them for actual salary costs and related fringe benefits. In addition, EPCO
charged BEF and Mont Belvieu Associates $1.1 million for administrative
services for each of the years ended December 31, 1995, 1996 and 1997. Such
administrative charges are based upon contracts between the parties.
EPCO has operating leases covering various assets used by the Company.
Included in selling, general and administrative expenses and operating costs
and expenses on the accompanying statement of combined operations is rental
expense of $23.4 million, $26.3 million and $29.6 million for 1995, 1996 and
1997, respectively, for these leases. Substantially all long-term lease
obligations will be retained by EPCO, who will sublease certain operating
assets to the Company for $1 per year. Rental expense, included in operating
costs and expenses, for such leases was $10.5 million, $11.4 million and $13.3
million for 1995, 1996 and 1997, respectively.
The Company also has transactions in the normal course of business with BEF,
Mont Belvieu Associates and other subsidiaries and divisions of EPCO. Such
transactions include the buying and selling of NGL products and the
transportation of NGL products by truck.
F-20
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Following is a summary of significant transactions with related parties:
FOR THE YEAR ENDED
DECEMBER 31,
-----------------------
1995 1996 1997
------- ------- -------
STATEMENTS OF COMBINED OPERATIONS:
Revenues from NGL products sold to:
Unconsolidated affiliates......................... $25,296 $41,653 $44,392
Other EPCO subsidiaries........................... 7 10,292 19,029
Cost of NGL product purchased from:
Unconsolidated affiliates......................... 3,803 7,339 8,453
Other EPCO subsidiaries........................... 2,013 3,944 6,495
Operating expenses charged for trucking of NGL
products........................................... 9,276 9,114 7,606
AT DECEMBER
31,
-------------
1996 1997
------ ------
COMBINED BALANCE SHEETS:
Accounts receivable--trade.................................... $6,649 $4,442
Accounts payable and accrued expenses......................... 10,209 7,863
7. COMMITMENTS AND CONTINGENCIES
Storage Commitments
The Company stores NGL products for various third parties. Under the terms
of the storage agreements, the Company is generally required to redeliver to
the owner its NGL products upon demand. The Company is insured for any
physical loss of such NGL products due to catastrophic events. At December 31,
1997, NGL products aggregating 190 million gallons were due to be redelivered
to the owners under various storage agreements.
Litigation
EPCO has indemnified the Company against any litigation arising from events
or actions prior to its formation. The Company is sometimes named as a
defendant in litigation relating to its normal business operations. Although
the Company insures itself against various business risks, to the extent
management believes it is prudent, there is no assurance that the nature and
amount of such insurance will be adequate, in every case, to indemnify the
Company against liabilities arising from future legal proceedings as a result
of its ordinary business activity. Management is aware of no significant
litigation, pending or threatened, that would have a significant adverse
effect on the Company's financial position or results of operations.
8. FAIR VALUE OF FINANCIAL INSTRUMENTS
The following disclosure of estimated fair value was determined by the
Company, using available market information and appropriate valuation
methodologies. Considerable judgment, however, is necessary to interpret
market data and develop the related estimates of fair value. Accordingly, the
estimates presented herein are not necessarily indicative of the amounts that
the Company could realize upon disposition of the financial instruments. The
use of different market assumptions and/or estimation methodologies may have a
material effect on the estimated fair value amounts.
CASH AND CASH EQUIVALENTS, ACCOUNTS RECEIVABLE, AND ACCOUNTS PAYABLE AND
ACCRUED EXPENSES are carried at amounts which reasonably approximate their
fair value at year end.
F-21
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
LONG-TERM DEBT'S fair value was estimated based upon the interest rates
currently available to the Company for issuance of debt with similar terms and
maturities less any applicable prepayment penalties for the early retirement
of the existing debt outstanding. Based on such computation, the Company could
replace $127.7 million and $203.6 million (fair value) of its $255.6 million
and $230.2 million (carrying value) of outstanding long-term debt at December
31, 1996 and 1997, respectively.
9. SUPPLEMENTAL CASH FLOWS DISCLOSURE
The net effect of changes in operating assets and liabilities is as follows:
FOR YEAR ENDED DECEMBER
31,
---------------------------
1995 1996 1997
-------- -------- -------
(Increase) decrease in:
Accounts receivable--trade..................... $(31,432) $(34,763) $29,024
Inventories.................................... (1,082) 5,947 7,329
Prepaid and other current assets............... (1,278) 100 917
Other assets................................... 1,050 295 127
Increase (decrease) in:
Accounts payable--trade........................ (1,782) 35,187 (3,320)
Accrued gas payables........................... 13,932 21,650 (26,955)
Accrued expenses............................... (6,480) 6,286 (5,526)
Other current liabilities...................... 9,042 (4,684) 1,352
-------- -------- -------
Net effect of changes in operating accounts...... $(18,030) $ 30,018 $ 2,948
======== ======== =======
Cash payments for interest, net of $1,126, $1,569
and $2,005 capitalized in 1995, 1996 and 1997,
respectively.................................... $ 28,590 $ 32,728 $30,071
======== ======== =======
NON-CASH TRANSACTION: In 1995, the Company received $3.0 million of cash and
a pipeline system with a fair market value of $9.2 million in exchange for a
12.5% interest in a raw make transportation and fractionation facility with a
net book value of approximately $4.0 million.
10. CONCENTRATION OF CREDIT RISK
A substantial portion of the Company's revenues is derived from the
fractionation, isomerization, propylene production, marketing, storage and
transportation of NGLs to various companies in the NGL industry, primarily
located in the United States. Although this concentration could affect the
Company's overall exposure to credit risk since these customers might be
affected by similar economic or other conditions, management believes that the
Company is exposed to minimal credit risk, since the majority of its business
is conducted with major companies within the industry and much of the business
is conducted with companies with whom the Company has joint operations. The
Company generally does not require collateral for its accounts receivables.
F-22
INDEPENDENT AUDITORS' REPORT
ENTERPRISE PRODUCTS GP, LLC:
We have audited the accompanying balance sheet of Enterprise Products GP,
LLC (the "Company") as of May 11, 1998. This financial statement is the
responsibility of the Company's management. Our responsibility is to express
an opinion on this financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall balance sheet
presentation. We believe that our audit of the balance sheet provides a
reasonable basis for our opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of the Company, as of May 11, 1998,
in conformity with generally accepted accounting principles.
Houston, Texas
May 12, 1998
F-23
ENTERPRISE PRODUCTS GP, LLC
BALANCE SHEET
MAY 11, 1998
ASSETS
CASH..................................................................... $1,000
======
MEMBERS' EQUITY
MEMBERS' EQUITY.......................................................... $1,000
======
See Note to Balance Sheet.
F-24
NOTE TO BALANCE SHEET
NATURE OF OPERATIONS
Enterprise Products GP, LLC (the "Company") is a Delaware limited liability
company that was formed on May 1, 1998 to become the general partner of
Enterprise Products Operating L.P. (the "Operating Partnership"). The
Operating Partnership is a limited partnership that was formed to acquire, own
and operate all of the natural gas liquids, isomerization, MTBE and propylene
processing and distribution assets of Enterprise Products Company. The Company
is a subsidiary of Enterprise Products Company.
F-25
ENTERPRISE PRODUCTS PARTNERS L.P.
COMBINED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
MARCH
DECEMBER 31, 31,
1997 1998
ASSETS ------------ --------
CURRENT ASSETS
Cash and cash equivalents, including restricted cash of
$4,522 in 1997 and $9,882 in 1998....................... $ 23,463 $ 12,268
Accounts receivable--trade............................... 76,533 69,734
Inventories.............................................. 18,935 21,076
Prepaid and other current assets......................... 8,103 7,710
-------- --------
Total current assets................................... 127,034 110,788
PROPERTY, PLANT AND EQUIPMENT, Net....................... 513,727 511,084
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES. 55,875 60,410
OTHER ASSETS............................................. 1,077 1,344
-------- --------
TOTAL................................................ $697,713 $683,626
======== ========
LIABILITIES AND COMBINED EQUITY
CURRENT LIABILITIES
Current maturities of long-term debt..................... $ 14,903 $ 23,473
Accounts payable--trade.................................. 76,591 55,515
Accrued gas payables..................................... 45,668 38,305
Accrued expenses......................................... 8,638 4,684
Other current liabilities................................ 21,544 11,727
-------- --------
Total current liabilities.............................. 167,344 133,704
LONG TERM DEBT........................................... 215,334 203,890
MINORITY INTEREST........................................ 3,150 3,147
COMMITMENTS AND CONTINGENCIES
COMBINED EQUITY.......................................... 311,885 342,885
-------- --------
TOTAL................................................ $697,713 $683,626
======== ========
See Notes to Unaudited Combined Financial Statements.
F-26
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED OPERATIONS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
------------------
1997 1998
-------- --------
REVENUES................................................... $255,652 $190,517
-------- --------
COST AND EXPENSES
Operating costs and expenses............................... 229,136 181,447
Selling, general and administrative........................ 6,636 5,754
-------- --------
Total.................................................... 235,772 187,201
-------- --------
OPERATING INCOME........................................... 19,880 3,316
-------- --------
OTHER INCOME (EXPENSE)
Interest expense........................................... (5,967) (6,734)
Interest income............................................ 587 275
Equity income in unconsolidated affiliates................. 3,020 2,822
Other, net................................................. 1,065 2
-------- --------
Total.................................................... (1,295) (3,635)
-------- --------
INCOME BEFORE MINORITY INTEREST............................ 18,585 (319)
MINORITY INTEREST.......................................... (186) 3
-------- --------
NET INCOME................................................. $ 18,399 $ (316)
======== ========
See Notes to Unaudited Combined Financial Statements.
F-27
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS)
THREE MONTHS
ENDED MARCH 31,
----------------
1997 1998
------- -------
OPERATING ACTIVITIES
Net income................................................... $18,399 $ (316)
Adjustments to reconcile net income to cash flow provided
from (used for) operating activities:
Minority Interest.......................................... 186 (3)
Depreciation and amortization.............................. 4,189 4,623
Equity income of unconsolidated affiliates................. (3,020) (2,822)
Gain on sale of assets..................................... (4) --
Net effect of changes in operating accounts................ (4,084) (37,471)
------- -------
Operating activities cash flows.............................. 15,666 (35,989)
------- -------
INVESTING ACTIVITIES
Capital expenditures......................................... (12,864) (1,935)
Proceeds from sale of assets................................. 14 --
Unconsolidated affiliates:
Investment in and advances to.............................. 1,473 (2,958)
Distributions received..................................... 1,145 1,245
------- -------
Investing activities cash flows.............................. (10,232) (3,648)
------- -------
FINANCING ACTIVITIES
Long-term debt repayments.................................... (2,876) (2,874)
Net increase in restricted cash.............................. (5,477) (5,360)
------- -------
Financing activities cash flows.............................. (8,353) (8,234)
------- -------
CASH CONTRIBUTIONS FROM PARENT............................... 13,020 31,316
NET CHANGE IN CASH AND CASH EQUIVALENTS...................... 10,101 (16,555)
CASH AND CASH EQUIVALENTS, JANUARY 1......................... 24,978 18,941
------- -------
CASH AND CASH EQUIVALENTS, MARCH 31, (excluding restricted
cash of $8,828 in 1997 and $9,882 in 1998) ................. $35,079 $ 2,386
======= =======
See Notes to Unaudited Combined Financial Statements.
F-28
ENTERPRISE PRODUCTS PARTNERS L.P.
STATEMENTS OF COMBINED EQUITY
FOR THE THREE MONTHS ENDED MARCH 31, 1997 AND 1998
(UNAUDITED)
(DOLLARS IN THOUSANDS)
LIMITED GENERAL
PARTNER PARTNER TOTAL
-------- ------- --------
Combined Equity, December 31, 1996................. $263,361 $2,660 $266,021
Net income....................................... 18,215 184 18,399
Cash contribution from parent.................... 12,890 130 13,020
-------- ------ --------
Combined Equity, March 31, 1997.................... $294,466 $2,974 $297,440
======== ====== ========
Combined Equity, December 31, 1997................. $308,766 $3,119 $311,885
Net loss......................................... (313) (3) (316)
Cash contribution from parent.................... 31,003 313 31,316
-------- ------ --------
Combined Equity, March 31, 1998.................... $339,456 $3,429 $342,885
======== ====== ========
See Notes to Unaudited Combined Financial Statements.
F-29
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
1. GENERAL
In the opinion of Enterprise Products Partners L.P. ( the "Company"), the
unaudited combined financial statements include all adjustments consisting of
normal recurring accruals necessary for a fair presentation of the Company's
combined financial position as of March 31, 1998 and its combined results of
operations and cash flows for the three month periods ending March 31, 1998
and 1997. Although the Company believes the disclosures in these financial
statements are adequate to make the information presented not misleading,
certain information and footnote disclosures normally included in annual
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to the rules and
regulations of the Securities and Exchange Commission. The results of
operations for the three months ended March 31, 1998 are not necessarily
indicative of the results to be expected for the full year.
DOLLAR AMOUNTS presented in the tabulations within the notes to the combined
financial statements are stated in thousands of dollars, unless otherwise
indicated.
2. INVESTMENTS IN UNCONSOLIDATED AFFILIATES
At March 31, 1998, the Company's unconsolidated affiliates accounted for by
the equity method included a 33 1/3% economic interest in Belvieu
Environmental Fuels ("BEF") which owns an MTBE production facility and a 49%
economic interest in Mont Belvieu Associates which owns a 50% interest in an
NGL fractionation facility. Summarized unaudited income statement information
for the unconsolidated affiliates is presented below:
BEF
FOR THE THREE
MONTHS ENDED
MARCH 31,
---------------
1997 1998
------- -------
INCOME STATEMENT DATA
Revenues..................................................... $58,316 $34,964
Expenses..................................................... 53,312 32,338
------- -------
Net income................................................. $ 5,004 $ 2,626
======= =======
Mont Belvieu Associates
FOR THE THREE
MONTHS ENDED
MARCH 31,
-------------
1997 1998
------ ------
INCOME STATEMENT DATA
Revenues....................................................... $8,228 $8,564
Expenses....................................................... 6,981 5,454
------ ------
Net income................................................... $1,247 $3,110
====== ======
F-30
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
(UNAUDITED)
3. SUPPLEMENTAL CASH FLOWS DISCLOSURE
The net effect of changes in operating assets and liabilities is as follows:
THREE MONTHS
ENDED MARCH 31,
-----------------
1997 1998
------- --------
(Increase) decrease in:
Accounts receivable--trade............................. $27,347 $ 6,799
Inventories............................................ 10,594 (2,141)
Prepaid expenses and other current assets.............. 268 348
Other assets........................................... (21) (267)
Increase (decrease) in:
Accounts payable--trade................................ (21,257) (21,076)
Accrued gas payable.................................... (15,679) (7,363)
Accrued expenses....................................... (7,887) (3,954)
Other current liabilities.............................. (1,825) (9,817)
Other liabilities...................................... 4,376
------- --------
Net effect of changes in operating accounts.............. $(4,084) $(37,471)
======= ========
Cash payments for:
Interest, net of $228, and $207 capitalized in 1997 and
1998.................................................. $ 6,238 $ 7,828
======= ========
4. RECENTLY ISSUED ACCOUNTING STANDARDS
Recent Statements of Financial Accounting Standards ("SFAS") include the
following: (effective for fiscal years beginning after December 15, 1997) SFAS
130, Reporting of Comprehensive Income, SFAS 131, Disclosure about Segments of
an Enterprise and Related Information and SFAS 132, Employers' Disclosure
about Pensions and Other Postretirement Benefits and (effective for all fiscal
quarters of fiscal years beginning after June 15, 1999) SFAS 133, Accounting
for Derivative Instruments and Hedging Activities. Management is currently
studying these SFAS items for possible impact on the combined financial
statements; however, based upon its preliminary assessment of the SFASs,
management believes that they will not have a significant impact on the
Company's financial statements. On April 3, 1998, the American Institute of
Certified Public Accountants issued Statement of Position 98-5, Reporting on
the Costs of Start-Up Activities ("SOP 98-5"). For years beginning after
December 15, 1998, SOP 98-5 generally requires that all start-up costs of a
business activity be charged to expense as incurred and any start-up cost
previously deferred should be written-off as a cumulative effect of a change
in accounting principle. Management is currently studying SOP 98-5 for its
possible impact on the combined financial statements. Based upon its
preliminary assessment of SOP 98-5, management believes that SOP 98-5 will not
have a material impact on the combined financial statements except for a $4.5
million non-cash write-off at January 1, 1999 of the unamortized balance of
deferred start-up costs of Belvieu Environmental Fuels ("BEF"), in which the
Company owns a 33 1/3% economic interest. Such a write-off would cause a $1.5
million reduction in the equity in income of unconsolidated affiliates for
1999 and a corresponding reduction in the Company's investment in
unconsolidated affiliates.
5. SUBSEQUENT EVENT
On April 10, 1998, the Company obtained a $20 million bank promissory note
maturing on December 2, 1998. The note bears interest at various interest
rates based on the bank's prime interest rate, the bank's fixed certificate of
deposit rate or the Eurodollar rate. The Company periodically elects the basis
for the interest rate.
F-31
APPENDIX A
FORM OF AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
ENTERPRISE PRODUCTS PARTNERS L.P.
TABLE OF CONTENTS
ARTICLE I
DEFINITIONS
1.1 Definitions........................................................ A-1
1.2 Construction....................................................... A-1
ARTICLE II
ORGANIZATION
2.1 Formation.......................................................... A-1
2.2 Name............................................................... A-1
2.3 Registered Office; Registered Agent; Principal Office; Other
Offices............................................................ A-1
2.4 Purpose and Business............................................... A-2
2.5 Powers............................................................. A-2
2.6 Power of Attorney.................................................. A-2
2.7 Term............................................................... A-3
2.8 Title to Partnership Assets........................................ A-3
ARTICLE III
RIGHTS OF LIMITED PARTNERS
3.1 Limitation of Liability............................................ A-4
3.2 Management of Business............................................. A-4
3.3 Outside Activities of the Limited Partners......................... A-4
3.4 Rights of Limited Partners......................................... A-4
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
4.1 Certificates....................................................... A-5
4.2 Mutilated, Destroyed, Lost or Stolen Certificates.................. A-5
4.3 Record Holders..................................................... A-6
4.4 Transfer Generally................................................. A-6
4.5 Registration and Transfer of Limited Partner Interests............. A-6
4.6 Transfer of General Partner Interest............................... A-7
4.7 Restrictions on Transfers.......................................... A-7
4.8 Citizenship Certificates; Non-citizen Assignees.................... A-8
4.9 Redemption of Partnership Interests of Non-citizen Assignees....... A-9
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTERESTS
5.1 Organizational Contributions....................................... A-9
5.2 Contributions by the General Partner and its Affiliates............ A-10
5.3 Contributions by the Underwriters.................................. A-10
5.4 Interest and Withdrawal............................................ A-10
5.5 Capital Accounts................................................... A-11
5.6 Issuances of Additional Partnership Securities..................... A-13
5.7 Limitations on Issuance of Additional Partnership Securities....... A-13
5.8 Conversion of Subordinated Units................................... A-14
5.9 Limited Preemptive Right........................................... A-15
5.10 Splits and Combinations............................................ A-16
5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests.. A-16
A-i
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 Allocations for Capital Account Purposes.......................... A-16
6.2 Allocations for Tax Purposes...................................... A-21
6.3 Requirement and Characterization of Distributions; Distributions
to Record Holders................................................. A-23
6.4 Distributions of Available Cash from Operating Surplus............ A-23
6.5 Distributions of Available Cash from Capital Surplus.............. A-24
6.6 Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels............................................... A-25
6.7 Special Provisions Relating to the Holders of Subordinated Units.. A-25
6.8 Entity-Level Taxation............................................. A-25
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 Management........................................................ A-26
7.2 Certificate of Limited Partnership................................ A-27
7.3 Restrictions on General Partner's Authority....................... A-28
7.4 Reimbursement of the General Partner.............................. A-28
7.5 Outside Activities................................................ A-29
7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on
the General Partner............................................... A-30
7.7 Indemnification................................................... A-31
7.8 Liability of Indemnitees.......................................... A-32
7.9 Resolution of Conflicts of Interest............................... A-33
7.10 Other Matters Concerning the General Partner...................... A-34
7.11 Purchase or Sale of Partnership Securities........................ A-34
7.12 Registration Rights of the General Partner and its Affiliates..... A-34
7.13 Reliance by Third Parties......................................... A-36
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 Records and Accounting............................................ A-36
8.2 Fiscal Year....................................................... A-37
8.3 Reports........................................................... A-37
ARTICLE IX
TAX MATTERS
9.1 Tax Returns and Information....................................... A-37
9.2 Tax Elections..................................................... A-37
9.3 Tax Controversies................................................. A-37
9.4 Withholding....................................................... A-38
ARTICLE X
ADMISSION OF PARTNERS
10.1 Admission of Initial Limited Partners............................. A-38
10.2 Admission of Substituted Limited Partner.......................... A-38
10.3 Admission of Successor General Partner............................ A-38
10.4 Admission of Additional Limited Partners.......................... A-39
10.5 Amendment of Agreement and Certificate of Limited Partnership..... A-39
A-ii
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
11.1 Withdrawal of the General Partner................................ A-39
11.2 Removal of the General Partner................................... A-40
11.3 Interest of Departing Partner and Successor General Partner...... A-41
11.4 Termination of Subordination Period, Conversion of Subordinated
Units and Extinguishment of Cumulative Common Unit Arrearages.... A-42
11.5 Withdrawal of Limited Partners................................... A-42
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 Dissolution...................................................... A-42
12.2 Continuation of the Business of the Partnership After
Dissolution...................................................... A-42
12.3 Liquidator....................................................... A-43
12.4 Liquidation...................................................... A-43
12.5 Cancellation of Certificate of Limited Partnership............... A-44
12.6 Return of Contributions.......................................... A-44
12.7 Waiver of Partition.............................................. A-44
12.8 Capital Account Restoration...................................... A-44
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
13.1 Amendment to be Adopted Solely by the General Partner............ A-44
13.2 Amendment Procedures............................................. A-45
13.3 Amendment Requirements........................................... A-45
13.4 Special Meetings................................................. A-46
13.5 Notice of a Meeting.............................................. A-46
13.6 Record Date...................................................... A-46
13.7 Adjournment...................................................... A-47
13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes....... A-47
13.9 Quorum........................................................... A-47
13.10 Conduct of a Meeting............................................. A-47
13.11 Action Without a Meeting......................................... A-48
13.12 Voting and Other Rights.......................................... A-48
ARTICLE XIV
MERGER
14.1 Authority........................................................ A-48
14.2 Procedure for Merger or Consolidation............................ A-49
14.3 Approval by Limited Partners of Merger or Consolidation.......... A-49
14.4 Certificate of Merger............................................ A-50
14.5 Effect of Merger................................................. A-50
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
15.1 Right to Acquire Limited Partner Interests....................... A-50
A-iii
ARTICLE XVI
GENERAL PROVISIONS
16.1 Addresses and Notices.............................................. A-52
16.2 Further Action..................................................... A-52
16.3 Binding Effect..................................................... A-52
16.4 Integration........................................................ A-52
16.5 Creditors.......................................................... A-52
16.6 Waiver............................................................. A-53
16.7 Counterparts....................................................... A-53
16.8 Applicable Law..................................................... A-53
16.9 Invalidity of Provisions........................................... A-53
16.10 Consent of Partners................................................ A-53
A-iv
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF ENTERPRISE PRODUCTS PARTNERS L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ENTERPRISE
PRODUCTS PARTNERS L.P. dated as of , 1998, is entered into by
and among Enterprise Products GP, LLC, a Delaware limited liability company,
as the General Partner, and EPC Partners II, Inc., a Delaware corporation
("EPC Partners II"), as a Limited Partner, together with any other Persons who
become Partners in the Partnership or parties hereto as provided herein. In
consideration of the covenants, conditions and agreements contained herein,
the parties hereto hereby agree as follows:
ARTICLE I
Definitions
1.1 Definitions. The definitions listed on Attachment I shall be for all
purposes, unless otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
1.2 Construction. Unless the context requires otherwise: (a) any pronoun
used in this Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs shall include
the plural and vice versa; (b) references to Articles and Sections refer to
Articles and Sections of this Agreement; and (c) "include" or "includes" means
includes, without limitation, and "including" means including, without
limitation.
ARTICLE II
Organization
2.1 Formation. The Partnership has been previously formed as a limited
partnership pursuant to the provisions of the Delaware Act. The General
Partner and EPC Partners II hereby amend and restate in its entirety the
Agreement of Limited Partnership of Enterprise Products Partners L.P., dated
April 9, 1998, as amended by that certain First Amendment to Agreement of
Limited Partnership of Enterprise Products Partners L.P. dated July , 1998.
Subject to the provisions of this Agreement, the General Partner and EPC
Partners II hereby continue the Partnership as a limited partnership pursuant
to the provisions of the Delaware Act. This amendment and restatement shall
become effective on the date of this Agreement. Except as expressly provided
to the contrary in this Agreement, the rights, duties (including fiduciary
duties), liabilities and obligations of the Partners and the administration,
dissolution and termination of the Partnership shall be governed by the
Delaware Act. All Partnership Interests shall constitute personal property of
the owner thereof for all purposes and a Partner has no interest in specific
Partnership property.
2.2 Name. The name of the Partnership shall be "Enterprise Products Partners
L.P." The Partnership's business may be conducted under any other name or
names deemed necessary or appropriate by the General Partner in its sole
discretion, including the name of the General Partner. The words "Limited
Partnership," "L.P.," "Ltd." or similar words or letters shall be included in
the Partnership's name where necessary for the purpose of complying with the
laws of any jurisdiction that so requires. The General Partner in its
discretion may change the name of the Partnership at any time and from time to
time and shall notify the Limited Partners of such change in the next regular
communication to the Limited Partners.
2.3 Registered Office; Registered Agent; Principal Office; Other Offices.
Unless and until changed by the General Partner, the registered office of the
Partnership in the State of Delaware shall be located at 1209 Orange Street,
New Castle County, Wilmington, Delaware 19801, and the registered agent for
service of process on the Partnership in the State of Delaware at such
registered office shall be The Corporation Trust Company. The principal office
of the Partnership shall be located at 2727 North Loop West, Houston, Texas
77210 or such other place as the General Partner may from time to time
designate by notice to the Limited Partners. The
A-1
Partnership may maintain offices at such other place or places within or
outside the State of Delaware as the General Partner deems necessary or
appropriate. The address of the General Partner shall be 2727 North Loop West,
Houston, Texas 77210 or such other place as the General Partner may from time
to time designate by notice to the Limited Partners.
2.4 Purpose and Business. The purpose and nature of the business to be
conducted by the Partnership shall be:
(a) to serve as a limited partner in the Operating Partnership and any of
its Subsidiary partnerships and, in connection therewith, to exercise all
of the rights and powers conferred upon the Partnership as a limited
partner in such partnerships pursuant to the partnership agreements for
such entities or otherwise;
(b) to engage directly in, or enter into or form any corporation,
partnership, joint venture, limited liability company or other arrangement
to engage indirectly in, any business activity that the Operating
Partnership is permitted to engage in by the Operating Partnership
Agreement and, in connection therewith, to exercise all of the rights and
powers conferred upon the Partnership pursuant to the agreements relating
to such business activity;
(c) to engage directly in, or enter into or form any corporation,
partnership, joint venture, limited liability company or other arrangement
to engage indirectly in, any business activity that is approved by the
General Partner and which lawfully may be conducted by a limited
partnership organized pursuant to the Delaware Act and, in connection
therewith, to exercise all of the rights and powers conferred upon the
Partnership pursuant to the agreements relating to such business activity;
provided, however, that the General Partner determines in good faith, prior
to the conduct of such activity, that the conduct by the Partnership of
such activity is not likely to result in the Partnership being treated as
an association taxable as a corporation for federal income tax purposes;
and
(d) to do anything necessary or appropriate to the foregoing, including
the making of capital contributions or loans to any Group Member.
The General Partner has no obligation or duty to the Partnership, the Limited
Partners or any Assignee to propose or approve, and in its sole discretion may
decline to propose or approve, the conduct by the Partnership of any business.
2.5 Powers. The Partnership shall be empowered to do any and all acts and
things necessary, appropriate, proper, advisable, incidental to or convenient
for the furtherance and accomplishment of the purposes and business described
in Section 2.4 and for the protection and benefit of the Partnership.
2.6 Power of Attorney.
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator (other than the General Partner)
shall have been selected pursuant to Section 12.3, the Liquidator, severally
(and any successor to either thereof by merger, transfer, assignment, election
or otherwise) and each of their authorized officers and attorneys-in-fact, as
the case may be, with full power of substitution, as his true and lawful agent
and attorney-in-fact, with full power and authority in his name, place and
stead, to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates,
A-2
documents and other instruments relating to the determination of the
rights, preferences and privileges of any class or series of Partnership
Securities issued pursuant to Section 5.6; and (F) all certificates,
documents and other instruments (including agreements and a certificate of
merger) relating to a merger or consolidation of the Partnership pursuant
to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner and the Liquidator may exercise the power of attorney made
in this Section 2.6(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing the
General Partner to amend this Agreement except in accordance with Article XIII
or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death,
incompetency, disability, incapacity, dissolution, bankruptcy or termination
of any Limited Partner or Assignee and the transfer of all or any portion of
such Limited Partner's or Assignee's Partnership Interest and shall extend to
such Limited Partner's or Assignee's heirs, successors, assigns and personal
representatives. Each such Limited Partner or Assignee hereby agrees to be
bound by any representation made by the General Partner or the Liquidator
acting in good faith pursuant to such power of attorney; and each such Limited
Partner or Assignee, to the maximum extent permitted by law, hereby waives any
and all defenses that may be available to contest, negate or disaffirm the
action of the General Partner or the Liquidator taken in good faith under such
power of attorney. Each Limited Partner or Assignee shall execute and deliver
to the General Partner or the Liquidator, within 15 days after receipt of the
request therefor, such further designation, powers of attorney and other
instruments as the General Partner or the Liquidator deems necessary to
effectuate this Agreement and the purposes of the Partnership.
2.7 Term. The term of the Partnership commenced upon the filing of the
Certificate of Limited Partnership in accordance with the Delaware Act and
shall continue in existence until the close of Partnership business on
December 31, 2088 or until the earlier termination of the Partnership in
accordance with the provisions of Article XII. The existence of the
Partnership as a separate legal entity shall continue until the cancellation
of the Certificate of Limited Partnership as provided in the Delaware Act.
2.8 Title to Partnership Assets. Title to Partnership assets, whether real,
personal or mixed and whether tangible or intangible, shall be deemed to be
owned by the Partnership as an entity, and no Partner or Assignee,
individually or collectively, shall have any ownership interest in such
Partnership assets or any portion thereof. Title to any or all of the
Partnership assets may be held in the name of the Partnership, the General
Partner, one or more of its Affiliates or one or more nominees, as the General
Partner may determine. The General Partner hereby declares and warrants that
any Partnership assets for which record title is held in the name of the
General Partner or one or more of its Affiliates or one or more nominees shall
be held by the General Partner or such Affiliate or nominee for the use and
benefit of the Partnership in accordance with the provisions of this
Agreement; provided, however, that the General Partner shall use reasonable
efforts to cause record title to such assets (other than those assets in
respect of which the General Partner determines that the expense and
difficulty of conveyancing makes transfer of record title to the Partnership
impracticable) to be vested in the Partnership as soon as reasonably
practicable; provided, further, that, prior to the withdrawal or removal of
the General Partner or as soon thereafter as practicable, the General Partner
shall use reasonable efforts to effect the transfer
A-3
of record title to the Partnership and, prior to any such transfer, will
provide for the use of such assets in a manner satisfactory to the General
Partner. All Partnership assets shall be recorded as the property of the
Partnership in its books and records, irrespective of the name in which record
title to such Partnership assets is held.
ARTICLE III
Rights of Limited Partners
3.1 Limitation of Liability. The Limited Partners and the Assignees shall
have no liability under this Agreement except as expressly provided in this
Agreement or the Delaware Act.
3.2 Management of Business. No Limited Partner or Assignee, in its capacity
as such, shall participate in the operation, management or control (within the
meaning of Section 17-303(a) of the Delaware Act) of the Partnership's
business, transact any business in the Partnership's name or have the power to
sign documents for or otherwise bind the Partnership. Any action taken by any
Affiliate of the General Partner or any officer, director, employee, member,
general partner, agent or trustee of the General Partner or any of its
Affiliates, or any officer, director, employee, member, general partner, agent
or trustee of a Group Member, in its capacity as such, shall not be deemed to
be participation in the control of the business of the Partnership by a
limited partner of the Partnership (within the meaning of Section 17-303(a) of
the Delaware Act) and shall not affect, impair or eliminate the limitations on
the liability of the Limited Partners or Assignees under this Agreement.
3.3 Outside Activities of the Limited Partners. Subject to the provisions of
Section 7.5, which shall continue to be applicable to the Persons referred to
therein, regardless of whether such Persons shall also be Limited Partners or
Assignees, any Limited Partner or Assignee shall be entitled to and may have
business interests and engage in business activities in addition to those
relating to the Partnership, including business interests and activities in
direct competition with the Partnership Group. Neither the Partnership nor any
of the other Partners or Assignees shall have any rights by virtue of this
Agreement in any business ventures of any Limited Partner or Assignee.
3.4 Rights of Limited Partners.
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local income tax returns for each year;
(iii) to have furnished to him a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
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(b) Notwithstanding any other provision of this Agreement, the General
Partner may keep confidential from the Limited Partners and Assignees, for
such period of time as the General Partner deems reasonable, (i) any
information that the General Partner reasonably believes to be in the nature
of trade secrets or (ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any
Group Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
ARTICLE IV
Certificates; Record Holders; Transfer of Partnership Interests;
Redemption of Partnership Interests
4.1 Certificates. Upon the Partnership's issuance of Common Units or
Subordinated Units to any Person, the Partnership shall issue one or more
Certificates in the name of such Person evidencing the number of such Units
being so issued. In addition, (a) upon the General Partner's request, the
Partnership shall issue to it one or more Certificates in the name of the
General Partner evidencing its interests in the Partnership and (b) upon the
request of any Person owning any Partnership Securities, the Partnership shall
issue to such Person one or more certificates evidencing such Partnership
Securities. Certificates shall be executed on behalf of the Partnership by the
Chairman of the Board, President or any Executive Vice President or Vice
President and the Secretary or any Assistant Secretary of the General Partner.
No Common Unit Certificate shall be valid for any purpose until it has been
countersigned by the Transfer Agent. Subject to the requirements of Section
6.7(b), the Partners holding Certificates evidencing Subordinated Units may
exchange such Certificates for Certificates evidencing Common Units on or
after the date on which such Subordinated Units are converted into Common
Units pursuant to the terms of Section 5.8.
4.2 Mutilated, Destroyed, Lost or Stolen Certificates.
(a) If any mutilated Certificate is surrendered to the Transfer Agent, the
appropriate officers of the General Partner on behalf of the Partnership shall
execute, and the Transfer Agent shall countersign and deliver in exchange
therefor, a new Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on behalf of the
Partnership shall execute and deliver, and the Transfer Agent shall
countersign a new Certificate in place of any Certificate previously issued if
the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
Partnership, that a previously issued Certificate has been lost, destroyed
or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the Partnership may reasonably
direct, in its sole discretion, to indemnify the Partnership, the Partners,
the General Partner and the Transfer Agent against any claim that may be
made on account of the alleged loss, destruction or theft of the
Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by
the Certificate is registered before the Partnership, the General Partner or
the Transfer Agent receives such notification, the Limited Partner or Assignee
shall be precluded from making any claim against the Partnership, the General
Partner or the Transfer Agent for such transfer or for a new Certificate.
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(c) As a condition to the issuance of any new Certificate under this Section
4.2, the Partnership may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
4.3 Record Holders. The Partnership shall be entitled to recognize the
Record Holder as the Partner or Assignee with respect to any Partnership
Interest and, accordingly, shall not be bound to recognize any equitable or
other claim to or interest in such Partnership Interest on the part of any
other Person, regardless of whether the Partnership shall have actual or other
notice thereof, except as otherwise provided by law or any applicable rule,
regulation, guideline or requirement of any National Securities Exchange on
which such Partnership Interests are listed for trading. Without limiting the
foregoing, when a Person (such as a broker, dealer, bank, trust company or
clearing corporation or an agent of any of the foregoing) is acting as
nominee, agent or in some other representative capacity for another Person in
acquiring and/or holding Partnership Interests, as between the Partnership on
the one hand, and such other Persons on the other, such representative Person
(a) shall be the Partner or Assignee (as the case may be) of record and
beneficially, (b) must execute and deliver a Transfer Application and (c)
shall be bound by this Agreement and shall have the rights and obligations of
a Partner or Assignee (as the case may be) hereunder and as, and to the
extent, provided for herein.
4.4 Transfer Generally.
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its Partnership Interest as a general partner in the
Partnership to another Person who becomes the General Partner, or by which the
holder of a Limited Partner Interest assigns such Limited Partner Interest to
another Person who is or becomes a Limited Partner or an Assignee, and
includes a sale, assignment, gift, pledge, encumbrance, hypothecation,
mortgage, exchange or any other disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article
IV. Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any member of the General Partner of any or all of the issued
and outstanding member interests of the General Partner.
4.5 Registration and Transfer of Limited Partner Interests.
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests.
The Transfer Agent is hereby appointed registrar and transfer agent for the
purpose of registering Common Units and transfers of such Common Units as
herein provided. The Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are effected in the
manner described in this Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests evidenced by a
Certificate, and subject to the provisions of Section 4.5(b), the appropriate
officers of the General Partner on behalf of the Partnership shall execute and
deliver, and in the case of Common Units, the Transfer Agent shall countersign
and deliver, in the name of the holder or the designated transferee or
transferees, as required pursuant to the holder's instructions, one or more
new Certificates evidencing the same aggregate number and type of Limited
Partner Interests as was evidenced by the Certificate so surrendered.
(b) Except as otherwise provided in Section 4.9, the Partnership shall not
recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and such Certificates are accompanied by a Transfer Application duly
executed by the transferee (or the transferee's attorney-in-fact duly
authorized in writing). No charge shall be imposed by the Partnership for such
transfer; provided, that as a condition to the issuance of any new Certificate
under this Section 4.5, the
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Partnership may require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests
and the admission of any new Limited Partner shall not constitute an amendment
to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested
admission as a Substituted Limited Partner, (ii) agreed to comply with and be
bound by and to have executed this Agreement, (iii) represented and warranted
that such transferee has the right, power and authority and, if an individual,
the capacity to enter into this Agreement, (iv) granted the powers of attorney
set forth in this Agreement and (v) given the consents and approvals and made
the waivers contained in this Agreement.
(f) The General Partner and its Affiliates shall have the right at any time
to transfer its Subordinated Units and Common Units (whether issued upon
conversion of the Subordinated Units or otherwise) to one or more Persons.
4.6 Transfer of General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to June 30, 2008, the General
Partner shall not transfer all or any part of its General Partner Interest to
a Person unless such transfer (i) has been approved by the prior written
consent or vote of the holders of at least a majority of the Outstanding
Common Units (excluding any Common Units held by the General Partner and its
Affiliates) or (ii) is of all, but not less than all, of its General Partner
Interest to (A) an Affiliate of the General Partner or (B) another Person in
connection with the merger or consolidation of the General Partner with or
into another Person or the transfer by the General Partner of all or
substantially all of its assets to another Person.
(b) Subject to Section 4.6(c) below, on or after June 30, 2008, the General
Partner may transfer all or any of its General Partner Interest without
Unitholder approval.
(c) Notwithstanding anything herein to the contrary, no transfer by the
General Partner of all or any part of its General Partner Interest to another
Person shall be permitted unless (i) the transferee agrees to assume the
rights and duties of the General Partner under this Agreement and the
Operating Partnership Agreement and to be bound by the provisions of this
Agreement and the Operating Partnership Agreement, (ii) the Partnership
receives an Opinion of Counsel that such transfer would not result in the loss
of limited liability of any Limited Partner or of any member of the Operating
Partnership or cause the Partnership or the Operating Partnership to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not already so
treated or taxed) and (iii) such transferee also agrees to purchase all (or
the appropriate portion thereof, if applicable) of the partnership interest of
the General Partner as the general partner of each other Group Member. In the
case of a transfer pursuant to and in compliance with this Section 4.6, the
transferee or successor (as the case may be) shall, subject to compliance with
the terms of Section 10.3, be admitted to the Partnership as a General Partner
immediately prior to the transfer of the General Partner Interest, and the
business of the Partnership shall continue without dissolution.
4.7 Restrictions on Transfers.
(a) Except as provided in Section 4.7(d) below, but notwithstanding the
other provisions of this Article IV, no transfer of any Partnership Interests
shall be made if such transfer would (i) violate the then applicable federal
or state securities laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with jurisdiction
over such transfer, (ii) terminate the existence or qualification of the
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Partnership or the Operating Partnership under the laws of the jurisdiction of
its formation, or (iii) cause the Partnership or the Operating Partnership to
be treated as an association taxable as a corporation or otherwise to be taxed
as an entity for federal income tax purposes (to the extent not already so
treated or taxed).
(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or
the Operating Partnership becoming taxable as a corporation or otherwise to be
taxed as an entity for federal income tax purposes. The restrictions may be
imposed by making such amendments to this Agreement as the General Partner may
determine to be necessary or appropriate to impose such restrictions;
provided, however, that any amendment that the General Partner believes, in
the exercise of its reasonable discretion, could result in the delisting or
suspension of trading of any class of Limited Partner Interests on the
principal National Securities Exchange on which such class of Limited Partner
Interests is then traded must be approved, prior to such amendment being
effected, by the holders of at least a majority of the Outstanding Limited
Partner Interests of such class.
(c) The transfer of a Subordinated Unit that has converted into a Common
Unit shall be subject to the restrictions imposed by Section 6.7(b).
(d) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
4.8 Citizenship Certificates; Non-citizen Assignees.
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
General Partner may request any Limited Partner or Assignee to furnish to the
General Partner, within 30 days after receipt of such request, an executed
Citizenship Certification or such other information concerning his
nationality, citizenship or other related status (or, if the Limited Partner
or Assignee is a nominee holding for the account of another Person, the
nationality, citizenship or other related status of such Person) as the
General Partner may request. If a Limited Partner or Assignee fails to furnish
to the General Partner within the aforementioned 30-day period such
Citizenship Certification or other requested information or if upon receipt of
such Citizenship Certification or other requested information the General
Partner determines, with the advice of counsel, that a Limited Partner or
Assignee is not an Eligible Citizen, the Partnership Interests owned by such
Limited Partner or Assignee shall be subject to redemption in accordance with
the provisions of Section 4.9. In addition, the General Partner may require
that the status of any such Limited Partner or Assignee be changed to that of
a Non-citizen Assignee and, thereupon, the General Partner shall be
substituted for such Non-citizen Assignee as the Limited Partner in respect of
his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Partners (including
without limitation the General Partner) in respect of Limited Partner
Interests other than those of Non-citizen Assignees are cast, either for,
against or abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall
be entitled to the cash equivalent thereof, and the Partnership shall provide
cash in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive
his share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to
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any Limited Partner Interests of such Non-citizen Assignee not redeemed
pursuant to Section 4.9, and upon his admission pursuant to Section 10.2, the
General Partner shall cease to be deemed to be the Limited Partner in respect
of the Non-citizen Assignee's Limited Partner Interests.
4.9 Redemption of Partnership Interests of Non-citizen Assignees.
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.8(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his Partnership
Interests to a Person who is an Eligible Citizen and who furnishes a
Citizenship Certification to the General Partner prior to the date fixed for
redemption as provided below, redeem the Partnership Interest of such Limited
Partner or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable Interests shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Partnership Interests of
the class to be so redeemed multiplied by the number of Partnership
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Interests, duly endorsed in blank or accompanied
by an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Partnership Interests.
(b) The provisions of this Section 4.9 shall also be applicable to
Partnership Interests held by a Limited Partner or Assignee as nominee of a
Person determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.9 shall prevent the recipient of a notice of
redemption from transferring his Partnership Interest before the redemption
date if such transfer is otherwise permitted under this Agreement. Upon
receipt of notice of such a transfer, the General Partner shall withdraw the
notice of redemption, provided the transferee of such Partnership Interest
certifies to the satisfaction of the General Partner in a Citizenship
Certification delivered in connection with the Transfer Application that he is
an Eligible Citizen. If the transferee fails to make such certification, such
redemption shall be effected from the transferee on the original redemption
date.
ARTICLE V
Capital Contributions and Issuance of Partnership Interests
5.1 Prior Contributions. Prior to the date hereof, the General Partner made
certain Capital Contributions to the Partnership in exchange for an interest
in the Partnership and has been admitted as the General Partner of the
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Partnership, and EPC Partners II made certain Capital Contributions to the
Partnership in exchange for an interest in the Partnership and has been
admitted as a Limited Partner of the Partnership.
5.2 Continuation of General Partner and Limited Partner Interests on Closing
Date; Contributions by the General Partner.
(a) On the Closing Date, the Partnership Interest of the General Partner in
the Partnership shall be continued, subject to all of the rights, privileges
and duties of the General Partner under this Agreement.
(b) On the Closing Date, the Partnership Interest of EPC Partners II in the
Partnership shall be converted into 34,004,974 Common Units and 21,269,838
Subordinated Units.
(c) Upon the issuance of any additional Limited Partner Interests by the
Partnership (other than the issuance of the 11,250,000 Common Units issued on
the Closing Date in the Initial Offering but including the issuance of Common
Units upon the exercise of the Over-Allotment Option), the General Partner
shall be required to make additional Capital Contributions equal to 1/99th of
any amount contributed to the Partnership in exchange for such additional
Limited Partner Interests. Except as set forth in the immediately preceding
sentence and Article XII, the General Partner shall not be obligated to make
any additional Capital Contributions to the Partnership.
5.3 Contributions by the Underwriters.
(a) On the Closing Date and pursuant to the Underwriting Agreement, each
Underwriter shall contribute to the Partnership cash in an amount equal to the
Issue Price per Initial Common Unit, multiplied by the number of Common Units
specified in the Underwriting Agreement to be purchased by such Underwriter at
the Closing Date. In exchange for such Capital Contributions by the
Underwriters, the Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount equal to the
quotient obtained by dividing (i) the cash contribution to the Partnership by
or on behalf of such Underwriter by (ii) the Issue Price per Initial Common
Unit.
(b) Upon the exercise of the Over-Allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option
Closing Date. In exchange for such Capital Contributions by the Underwriters,
the Partnership shall issue Common Units to each Underwriter on whose behalf
such Capital Contribution is made in an amount equal to the quotient obtained
by dividing (i) the cash contributions to the Partnership by or on behalf of
such Underwriter by (ii) the Issue Price per Initial Common Unit.
(c) No Limited Partner Partnership Interests will be issued or issuable as
of or at the Closing Date other than (i) the Common Units issuable pursuant to
subparagraph (a) hereof in aggregate number equal to 11,250,000, (ii) the
"Option Units" as such term is used in the Underwriting Agreement in aggregate
number up to 1,687,500 issuable upon exercise of the Over-Allotment Option
pursuant to subparagraph (b) hereof, and (iii) the 34,004,974 Common Units and
21,269,838 Subordinated Units issuable to EPC Partners II pursuant to Section
5.2(b).
5.4 Interest and Withdrawal. No interest shall be paid by the Partnership on
Capital Contributions. No Partner or Assignee shall be entitled to the
withdrawal or return of its Capital Contribution, except to the extent, if
any, that distributions made pursuant to this Agreement or upon termination of
the Partnership may be considered as such by law and then only to the extent
provided for in this Agreement. Except to the extent expressly provided in
this Agreement, no Partner or Assignee shall have priority over any other
Partner or Assignee either as to the return of Capital Contributions or as to
profits, losses or distributions. Any such return shall be a compromise to
which all Partners and Assignees agree within the meaning of 17-502(b) of the
Delaware Act.
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5.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a beneficial owner
of Partnership Interests held by a nominee in any case in which the nominee
has furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion) owning a Partnership Interest a separate
Capital Account with respect to such Partnership Interest in accordance with
the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital
Account shall be increased by (i) the amount of all Capital Contributions made
to the Partnership with respect to such Partnership Interest pursuant to this
Agreement and (ii) all items of Partnership income and gain (including,
without limitation, income and gain exempt from tax) computed in accordance
with Section 5.5(b) and allocated with respect to such Partnership Interest
pursuant to Section 6.1, and decreased by (A) the amount of cash or Net Agreed
Value of all actual and deemed distributions of cash or property made with
respect to such Partnership Interest pursuant to this Agreement and (B) all
items of Partnership deduction and loss computed in accordance with Section
5.5(b) and allocated with respect to such Partnership Interest pursuant to
Section 6.1.
(b) For purposes of computing the amount of any item of income, gain, loss
or deduction which is to be allocated pursuant to Article VI and is to be
reflected in the Partners' Capital Accounts, the determination, recognition
and classification of any such item shall be the same as its determination,
recognition and classification for federal income tax purposes (including,
without limitation, any method of depreciation, cost recovery or amortization
used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Operating Partnership
Agreement) of all property owned by the Operating Partnership.
(ii) All fees and other expenses incurred by the Partnership to promote
the sale of (or to sell) a Partnership Interest that can neither be
deducted nor amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item of deduction
at the time such fees and other expenses are incurred and shall be
allocated among the Partners pursuant to Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m), to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost
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recovery or amortization deductions shall be determined using any
reasonable method that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred.
(ii) Immediately prior to the transfer of a Subordinated Unit or of a
Subordinated Unit that has converted into a Common Unit pursuant to Section
5.8 by a holder thereof (other than a transfer to an Affiliate unless the
General Partner elects to have this subparagraph 5.5(c)(ii) apply), the
Capital Account maintained for such Person with respect to its Subordinated
Units or converted Subordinated Units will (A) first, be allocated to the
Subordinated Units or converted Subordinated Units to be transferred in an
amount equal to the product of (1) the number of such Subordinated Units or
converted Subordinated Units to be transferred and (2) the Per Unit Capital
Amount for a Common Unit, and (B) second, any remaining balance in such
Capital Account will be retained by the transferor, regardless of whether it
has retained any Subordinated Units or converted Subordinated Units. Following
any such allocation, the transferor's Capital Account, if any, maintained with
respect to the retained Subordinated Units or converted Subordinated Units, if
any, will have a balance equal to the amount allocated under clause (B)
hereinabove, and the transferee's Capital Account established with respect to
the transferred Subordinated Units or converted Subordinated Units will have a
balance equal to the amount allocated under clause (A) hereinabove.
(d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
on an issuance of additional Partnership Interests for cash or Contributed
Property or the conversion of the General Partner's Combined Interest to
Common Units pursuant to Section 11.3(c), the Capital Account of all Partners
and the Carrying Value of each Partnership property immediately prior to such
issuance shall be adjusted upward or downward to reflect any Unrealized Gain
or Unrealized Loss attributable to such Partnership property, as if such
Unrealized Gain or Unrealized Loss had been recognized on an actual sale of
each such property immediately prior to such issuance and had been allocated
to the Partners at such time pursuant to Section 6.1 in the same manner as any
item of gain or loss actually recognized during such period would have been
allocated. In determining such Unrealized Gain or Unrealized Loss, the
aggregate cash amount and fair market value of all Partnership assets
(including, without limitation, cash or cash equivalents) immediately prior to
the issuance of additional Partnership Interests shall be determined by the
General Partner using such reasonable method of valuation as it may adopt;
provided, however, that the General Partner, in arriving at such valuation,
must take fully into account the fair market value of the Partnership
Interests of all Partners at such time. The General Partner shall allocate
such aggregate value among the assets of the Partnership (in such manner as it
determines in its discretion to be reasonable) to arrive at a fair market
value for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of
all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately
prior to such distribution for an amount equal to its fair market value, and
had been allocated to the Partners, at such time, pursuant to Section 6.1 in
the same manner as any item of gain or loss actually recognized during such
period would have been allocated. In determining such
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Unrealized Gain or Unrealized Loss the aggregate cash amount and fair market
value of all Partnership assets (including, without limitation, cash or cash
equivalents) immediately prior to a distribution shall (A) in the case of an
actual distribution which is not made pursuant to Section 12.4 or in the case
of a deemed contribution and/or distribution occurring as a result of a
termination of the Partnership pursuant to Section 708 of the Code, be
determined and allocated in the same manner as that provided in Section
5.5(d)(i) or (B) in the case of a liquidating distribution pursuant to Section
12.4, be determined and allocated by the Liquidator using such reasonable
method of valuation as it may adopt.
5.6 Issuances of Additional Partnership Securities.
(a) Subject to Section 5.7, the Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights relating to
the Partnership Securities for any Partnership purpose at any time and from
time to time to such Persons for such consideration and on such terms and
conditions as shall be established by the General Partner in its sole
discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes,
or one or more series of any such classes, with such designations,
preferences, rights, powers and duties (which may be senior to existing
classes and series of Partnership Securities), as shall be fixed by the
General Partner in the exercise of its sole discretion, including (i) the
right to share Partnership profits and losses or items thereof; (ii) the right
to share in Partnership distributions; (iii) the rights upon dissolution and
liquidation of the Partnership; (iv) whether, and the terms and conditions
upon which, the Partnership may redeem the Partnership Security; (v) whether
such Partnership Security is issued with the privilege of conversion or
exchange and, if so, the terms and conditions of such conversion or exchange;
(vi) the terms and conditions upon which each Partnership Security will be
issued, evidenced by certificates and assigned or transferred; and (vii) the
right, if any, of each such Partnership Security to vote on Partnership
matters, including matters relating to the relative rights, preferences and
privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant to this
Section 5.6, (ii) the conversion of the General Partner Interest into Units
pursuant to the terms of this Agreement, (iii) the admission of Additional
Limited Partners and (iv) all additional issuances of Partnership Securities.
The General Partner is further authorized and directed to specify the relative
rights, powers and duties of the holders of the Units or other Partnership
Securities being so issued. The General Partner shall do all things necessary
to comply with the Delaware Act and is authorized and directed to do all
things it deems to be necessary or advisable in connection with any future
issuance of Partnership Securities or in connection with the conversion of the
General Partner Interest into Units pursuant to the terms of this Agreement,
including compliance with any statute, rule, regulation or guideline of any
federal, state or other governmental agency or any National Securities
Exchange on which the Units or other Partnership Securities are listed for
trading.
5.7 Limitations on Issuance of Additional Partnership Securities. The
issuance of Partnership Securities pursuant to Section 5.6 shall be subject to
the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights
relating to) an aggregate of more than 22,625,000 additional Parity Units
without the prior approval of the holders of a Unit Majority. In applying
this limitation, there shall be excluded Common Units and other Parity
Units issued (i) in connection with the exercise of the Over-Allotment
Option, (ii) in accordance with Sections 5.7(b) and 5.7(c), (iii) upon
conversion of Subordinated Units pursuant to Section 5.8, (iv) upon
conversion of the General Partner Interest pursuant to Section 11.3(c), (v)
pursuant to the employee benefit plans of the General Partner, EPC, the
Partnership or any other Group Member and (vi) in the event of a
combination or subdivision of Common Units.
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(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the approval of
the Unitholders if such issuance occurs (i) in connection with an
Acquisition or a Capital Improvement or (ii) within 365 days of an
Acquisition or a Capital Improvement where the net proceeds from such
issuance are used to repay debt incurred in connection with such
Acquisition or Capital Improvement, in each case where such Acquisition or
Capital Improvement involves assets that, if acquired by the Partnership as
of the date that is one year prior to the first day of the Quarter in which
such Acquisition is to be consummated or such Capital Improvement is to be
completed, would have resulted, on a pro forma basis, in an increase in:
(A) the amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all outstanding Units) with
respect to each of the four most recently completed Quarters (on a pro
forma basis), as compared to
(B) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis (for all outstanding Units) (excluding
Adjusted Operating Surplus attributable to the Acquisition or Capital
Improvement) with respect to each of such four most recently completed
Quarters.
If the issuance of Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing
Date, then Adjusted Operating Surplus as used in clauses (A) (subject to
the succeeding sentence) and (B) above will be calculated (i) for each
Quarter, if any, that commenced after the closing of this offering for
which actual results of operations are available, based on the actual
Adjusted Operating Surplus of the Partnership generated with respect to
such Quarter and (ii) for each other Quarter, on a pro forma basis not
inconsistent with the procedures, as applicable, set forth in Appendix D to
the Registration Statement. Furthermore, the amount in clause (A) shall be
determined on a pro forma basis assuming that (1) all of the Parity Units
to be issued in connection with (or as a part of but within 365 days of)
such Acquisition or Capital Improvement had been issued and outstanding,
(2) all indebtedness for borrowed money to be incurred or assumed in
connection with such Acquisition or Capital Improvement (other than any
such indebtedness that is to be repaid with the proceeds of such issuance)
had been incurred or assumed, in each case as of the commencement of such
four-Quarter period, (3) the personnel expenses that would have been
incurred by the Partnership in the operation of the acquired assets are the
personnel expenses for employees to be retained by the Partnership in the
operation of the acquired assets, and (4) the non-personnel costs and
expenses are computed on the same basis as those incurred by the
Partnership in the operation of the Partnership's business at similarly
situated Partnership facilities.
(c) During the Subordination Period, the Partnership shall not issue (and
shall not issue any options, rights, warrants or appreciation rights
relating to) additional Partnership Securities having rights to
distributions or in liquidation ranking prior or senior to the Common
Units, without the prior approval of the holders of a Unit Majority.
(d) No fractional Units shall be issued by the Partnership.
5.8 Conversion of Subordinated Units.
(a) A total of 5,317,460 of the Outstanding Subordinated Units will convert
into Common Units on a one-for-one basis on the first day after the Record
Date for distribution in respect of any Quarter ending on or after June 30,
2001, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units with respect to each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units and Subordinated Units that were Outstanding
during
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such periods on a fully diluted basis (i.e., taking into account for
purposes of such determination all Outstanding Common Units, all
Outstanding Subordinated Units, all Common Units and Subordinated Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of
the Quarter immediately following the Quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that
have as of the date of determination, been earned by but not yet issued to
management of the Partnership in respect of incentive compensation), plus
the related distribution on the General Partner Interest and on the general
partner interest in the Operating Partnership; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero.
(b) An additional 5,317,460 of the Outstanding Subordinated Units will
convert into Common Units on a one-for-one basis on the first day after the
Record Date for distribution in respect of any Quarter ending on or after June
30, 2002, in respect of which:
(i) distributions under Section 6.4 in respect of all Outstanding Common
Units and Subordinated Units with respect to each of the three consecutive,
non-overlapping four-Quarter periods immediately preceding such date
equaled or exceeded the sum of the Minimum Quarterly Distribution on all of
the Outstanding Common Units and Subordinated Units during such periods;
(ii) the Adjusted Operating Surplus generated during each of the three
consecutive, non-overlapping four-Quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution
on all of the Common Units and Subordinated Units that were outstanding
during such periods on a fully diluted basis (i.e., taking into account for
purposes of such determination all Outstanding Common Units, all
Outstanding Subordinated Units, all Common Units and Subordinated Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of
the Quarter immediately following the Quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that
have as of the date of determination, been earned by but not yet issued to
management of the Partnership in respect of incentive compensation), plus
the related distribution on the General Partner Interest and on the general
partner interest in the Operating Partnership; and
(iii) the Cumulative Common Unit Arrearage on all of the Common Units is
zero;
provided, however, that the conversion of Subordinated Units pursuant to this
Section 5.8(b) may not occur until at least one year following the conversion
of Subordinated Units pursuant to Section 5.8(a).
(c) In the event that less than all of the Outstanding Subordinated Units
shall convert into Common Units pursuant to Section 5.8(a) or 5.8(b) at a time
when there shall be more than one holder of Subordinated Units, then, unless
all of the holders of Subordinated Units shall agree to a different
allocation, the Subordinated Units that are to be converted into Common Units
shall be allocated among the holders of Subordinated Units pro rata based on
the number of Subordinated Units held by each such holder.
(d) Any Subordinated Units that are not converted into Common Units pursuant
to Sections 5.8(a) and (b) shall convert into Common Units on a one-for-one
basis on the first day following the Record Date for distributions in respect
of the final Quarter of the Subordination Period.
(e) Notwithstanding any other provision of this Agreement, all the then
Outstanding Subordinated Units will automatically convert into Common Units on
a one-for-one basis as set forth in, and pursuant to the terms of, Section
11.4.
(f) A Subordinated Unit that has converted into a Common Unit shall be
subject to the provisions of Section 6.7(b).
5.9 Limited Preemptive Right. Except as provided in this Section 5.9 and in
Section 5.2, no Person shall have any preemptive, preferential or other
similar right with respect to the issuance of any Partnership Security,
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whether unissued, held in the treasury or hereafter created. The General
Partner shall have the right, which it may from time to time assign in whole
or in part to any of its Affiliates, to purchase Partnership Securities from
the Partnership whenever, and on the same terms that, the Partnership issues
Partnership Securities to Persons other than the General Partner and its
Affiliates, to the extent necessary to maintain the Percentage Interests of
the General Partner and its Affiliates equal to that which existed immediately
prior to the issuance of such Partnership Securities.
5.10 Splits and Combinations.
(a) Subject to Sections 5.10(d), 6.6 and 6.8 (dealing with adjustments of
distribution levels), the Partnership may make a Pro Rata distribution of
Partnership Securities to all Record Holders or may effect a subdivision or
combination of Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the Partnership as before
such event, and any amounts calculated on a per Unit basis (including any
Common Unit Arrearage or Cumulative Common Unit Arrearage) or stated as a
number of Units (including the number of Subordinated Units that may convert
prior to the end of the Subordination Period and the number of additional
Parity Units that may be issued pursuant to Section 5.7 without a Unitholder
vote) are proportionately adjusted retroactive to the beginning of the
Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and
shall send notice thereof at least 20 days prior to such Record Date to each
Record Holder as of a date not less than 10 days prior to the date of such
notice. The General Partner also may cause a firm of independent public
accountants selected by it to calculate the number of Partnership Securities
to be held by each Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be entitled to rely on
any certificate provided by such firm as conclusive evidence of the accuracy
of such calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such
changes. If any such combination results in a smaller total number of
Partnership Securities Outstanding, the Partnership shall require, as a
condition to the delivery to a Record Holder of such new Certificate, the
surrender of any Certificate held by such Record Holder immediately prior to
such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(d) and this Section 5.10(d), each fractional
Unit shall be rounded to the nearest whole Unit (and a 0.5 Unit shall be
rounded to the next higher Unit).
5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests. All
Limited Partner Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid and non-assessable Limited
Partner Interests in the Partnership, except as such non-assessability may be
affected by Section 17-607 of the Delaware Act.
ARTICLE VI
Allocations and Distributions
6.1 Allocations for Capital Account Purposes. For purposes of maintaining
the Capital Accounts and in determining the rights of the Partners among
themselves, the Partnership's items of income, gain, loss and deduction
(computed in accordance with Section 5.5(b)) shall be allocated among the
Partners in each taxable year (or portion thereof) as provided herein below.
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(a) Net Income. After giving effect to the special allocations set forth in
Section 6.1(d), Net Income for each taxable year and all items of income,
gain, loss and deduction taken into account in computing Net Income for such
taxable year shall be allocated as follows:
(i) First, 100% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(iii) for all previous taxable years;
(ii) Second, 1% to the General Partner in an amount equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Income allocated to such Partners pursuant to this Section 6.1(a)(ii)
for the current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to such Partners pursuant to Section
6.1(b)(ii) for all previous taxable years; and
(iii) Third, the balance, if any, 100% to the General Partner and the
Unitholders in accordance with their respective Percentage Interests.
(b) Net Losses. After giving effect to the special allocations set forth in
Section 6.1(d), Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net Losses for such
taxable period shall be allocated as follows:
(i) First, 1% to the General Partner and 99% to the Unitholders, in
accordance with their respective Percentage Interests, until the aggregate
Net Losses allocated pursuant to this Section 6.1(b)(i) for the current
taxable year and all previous taxable years is equal to the aggregate Net
Income allocated to such Partners pursuant to Section 6.1(a)(iii) for all
previous taxable years; provided that the Net Losses shall not be allocated
pursuant to this Section 6.1(b)(i) to the extent that such allocation would
cause any Unitholder to have a deficit balance in its Adjusted Capital
Account at the end of such taxable year (or increase any existing deficit
balance in its Adjusted Capital Account);
(ii) Second, 1% to the General Partner and 99% to the Unitholders in
accordance with their respective Percentage Interests; provided, that Net
Losses shall not be allocated pursuant to this Section 6.1(b)(ii) to the
extent that such allocation would cause any Unitholder to have a deficit
balance in its Adjusted Capital Account at the end of such taxable year (or
increase any existing deficit balance in its Adjusted Capital Account);
(iii) Third, the balance, if any, 100% to the General Partner.
(c) Net Termination Gains and Losses. After giving effect to the special
allocations set forth in Section 6.1(d), all items of income, gain, loss and
deduction taken into account in computing Net Termination Gain or Net
Termination Loss for such taxable period shall be allocated in the same manner
as such Net Termination Gain or Net Termination Loss is allocated hereunder.
All allocations under this Section 6.1(c) shall be made after Capital Account
balances have been adjusted by all other allocations provided under this
Section 6.1 and after all distributions of Available Cash provided under
Sections 6.4 and 6.5 have been made; provided, however, that solely for
purposes of this Section 6.1(c), Capital Accounts shall not be adjusted for
distributions made pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Gain shall be allocated
among the Partners in the following manner (and the Capital Accounts of the
Partners shall be increased by the amount so allocated in each of the
following subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
(A) First, to each Partner having a deficit balance in its Capital
Account, in the proportion that such deficit balance bears to the total
deficit balances in the Capital Accounts of all Partners, until each
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such Partner has been allocated Net Termination Gain equal to any such
deficit balance in its Capital Account;
(B) Second, 99% to all Unitholders holding Common Units, in
proportion to their relative Percentage Interests, and 1% to the
General Partner until the Capital Account in respect of each Common
Unit then Outstanding is equal to the sum of (1) its Unrecovered
Capital plus (2) the Minimum Quarterly Distribution for the Quarter
during which the Liquidation Date occurs, reduced by any distribution
pursuant to Section 6.4(a)(i) or (b)(i) with respect to such Common
Unit for such Quarter (the amount determined pursuant to this clause
(2) is hereinafter defined as the "Unpaid MQD"), plus (3) any then
existing Cumulative Common Unit Arrearage;
(C) Third, if such Net Termination Gain is recognized (or is deemed
to be recognized) prior to the expiration of the Subordination Period,
99% to all Unitholders holding Subordinated Units, in proportion to
their relative Percentage Interests, and 1% to the General Partner
until the Capital Account in respect of each Subordinated Unit then
Outstanding equals the sum of (1) its Unrecovered Capital, determined
for the taxable year (or portion thereof) to which this allocation of
gain relates, plus (2) the Minimum Quarterly Distribution for the
Quarter during which the Liquidation Date occurs, reduced by any
distribution pursuant to Section 6.4(a)(iii) with respect to such
Subordinated Unit for such Quarter;
(D) Fourth, 99% to all Unitholders, in accordance with their relative
Percentage Interests, and 1% to the General Partner until the Capital
Account in respect of each Common Unit then Outstanding is equal to the
sum of (1) its Unrecovered Capital, plus (2) the Unpaid MQD, plus (3)
any then existing Cumulative Common Unit Arrearage, plus (4) the excess
of (aa) the First Target Distribution less the Minimum Quarterly
Distribution for each Quarter of the Partnership's existence over (bb)
the cumulative per Unit amount of any distributions of Operating
Surplus that was distributed pursuant to Sections 6.4(a)(iv) and
6.4(b)(ii) (the sum of (1) plus (2) plus (3) plus (4) is hereinafter
defined as the "First Liquidation Target Amount");
(E) Fifth, 85.8673% to all Unitholders, in accordance with their
relative Percentage Interests, and 14.1327% to the General Partner
until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the First Liquidation Target
Amount, plus (2) the excess of (aa) the Second Target Distribution less
the First Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Operating Surplus that was distributed pursuant to Sections
6.4(a)(v) and 6.4(b)(iii) (the sum of (1) plus (2) is hereinafter
defined as the "Second Liquidation Target Amount");
(F) Sixth, 75.7653% to all Unitholders, in accordance with their
relative Percentage Interests, and 24.2347% to the General Partner
until the Capital Account in respect of each Common Unit then
Outstanding is equal to the sum of (1) the Second Liquidation Target
Amount, plus (2) the excess of (aa) the Third Target Distribution less
the Second Target Distribution for each Quarter of the Partnership's
existence over (bb) the cumulative per Unit amount of any distributions
of Operating Surplus that was distributed pursuant to Sections
6.4(a)(vi) and 6.4(b)(iv); and
(G) Finally, any remaining amount 50.5102% to all Unitholders, in
accordance with their relative Percentage Interests, and 49.4898% to
the General Partner.
(ii) If a Net Termination Loss is recognized (or deemed recognized
pursuant to Section 5.5(d)), such Net Termination Loss shall be allocated
among the Partners in the following manner:
(A) First, if such Net Termination Loss is recognized (or is deemed
to be recognized) prior to the conversion of the last Outstanding
Subordinated Unit, 99% to the Unitholders holding Subordinated Units,
in proportion to their relative Percentage Interests, and 1% to the
General Partner until the Capital Account in respect of each
Subordinated Unit then Outstanding has been reduced to zero;
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(B) Second, 99% to all Unitholders holding Common Units, in
proportion to their relative Percentage Interests, and 1% to the
General Partner until the Capital Account in respect of each Common
Unit then Outstanding has been reduced to zero; and
(C) Third, the balance, if any, 100% to the General Partner.
(d) Special Allocations. Notwithstanding any other provision of this Section
6.1, the following special allocations shall be made for such taxable period:
(i) Partnership Minimum Gain Chargeback. Notwithstanding any other
provision of this Section 6.1, if there is a net decrease in Partnership
Minimum Gain during any Partnership taxable period, each Partner shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(f)(6), 1.704-2(g)(2) and 1.704-
2(j)(2)(i), or any successor provision. For purposes of this Section
6.1(d), each Partner's Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required hereunder shall
be effected, prior to the application of any other allocations pursuant to
this Section 6.1(d) with respect to such taxable period (other than an
allocation pursuant to Sections 6.1(d)(vi) and 6.1(d)(vii)). This Section
6.1(d)(i) is intended to comply with the Partnership Minimum Gain
chargeback requirement in Treasury Regulation Section 1.704-2(f) and shall
be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum Gain. Notwithstanding
the other provisions of this Section 6.1 (other than Section 6.1(d)(i)),
except as provided in Treasury Regulation Section 1.704-2(i)(4), if there
is a net decrease in Partner Nonrecourse Debt Minimum Gain during any
Partnership taxable period, any Partner with a share of Partner Nonrecourse
Debt Minimum Gain at the beginning of such taxable period shall be
allocated items of Partnership income and gain for such period (and, if
necessary, subsequent periods) in the manner and amounts provided in
Treasury Regulation Sections 1.704-2(i)(4) and 1.704-2(j)(2)(ii), or any
successor provisions. For purposes of this Section 6.1(d), each Partner's
Adjusted Capital Account balance shall be determined, and the allocation of
income or gain required hereunder shall be effected, prior to the
application of any other allocations pursuant to this Section 6.1(d), other
than Section 6.1(d)(i) and other than an allocation pursuant to Sections
6.1(d)(vi) and 6.1(d)(vii), with respect to such taxable period. This
Section 6.1(d)(ii) is intended to comply with the chargeback of items of
income and gain requirement in Treasury Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Priority Allocations.
(A) If the amount of cash or the Net Agreed Value of any property
distributed (except cash or property distributed pursuant to Section
12.4) to any Unitholder with respect to its Units for a taxable year is
greater (on a per Unit basis) than the amount of cash or the Net Agreed
Value of property distributed to the other Unitholders with respect to
their Units (on a per Unit basis), then (1) each Unitholder receiving
such greater cash or property distribution shall be allocated gross
income in an amount equal to the product of (aa) the amount by which
the distribution (on a per Unit basis) to such Unitholder exceeds the
distribution (on a per Unit basis) to the Unitholders receiving the
smallest distribution and (bb) the number of Units owned by the
Unitholder receiving the greater distribution; and (2) the General
Partner shall be allocated gross income in an aggregate amount equal to
1/99 of the sum of the amounts allocated in clause (1) above.
(B) After the application of Section 6.1(d)(iii)(A), all or any
portion of the remaining items of Partnership gross income or gain for
the taxable period, if any, shall be allocated 100% to the General
Partner, until the aggregate amount of such items allocated to the
General Partner pursuant to this paragraph 6.1(d)(iii)(B) for the
current taxable year and all previous taxable years is equal to the
cumulative amount of all Incentive Distributions made to the General
Partner from the Closing Date to a date 45 days after the end of the
current taxable year.
(iv) Qualified Income Offset. In the event any Partner unexpectedly
receives any adjustments, allocations or distributions described in
Treasury Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
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1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of Partnership
income and gain shall be specially allocated to such Partner in an amount
and manner sufficient to eliminate, to the extent required by the Treasury
Regulations promulgated under Section 704(b) of the Code, the deficit
balance, if any, in its Adjusted Capital Account created by such
adjustments, allocations or distributions as quickly as possible unless
such deficit balance is otherwise eliminated pursuant to Section 6.1(d)(i)
or (ii).
(v) Gross Income Allocations. In the event any Partner has a deficit
balance in its Capital Account at the end of any Partnership taxable period
in excess of the sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the amount such
Partner is deemed obligated to restore pursuant to Treasury Regulation
Sections 1.704-2(g) and 1.704-2(i)(5), such Partner shall be specially
allocated items of Partnership gross income and gain in the amount of such
excess as quickly as possible; provided, that an allocation pursuant to
this Section 6.1(d)(v) shall be made only if and to the extent that such
Partner would have a deficit balance in its Capital Account as adjusted
after all other allocations provided for in this Section 6.1 have been
tentatively made as if this Section 6.1(d)(v) were not in this Agreement.
(vi) Nonrecourse Deductions. Nonrecourse Deductions for any taxable
period shall be allocated to the Partners in accordance with their
respective Percentage Interests. If the General Partner determines in its
good faith discretion that the Partnership's Nonrecourse Deductions must be
allocated in a different ratio to satisfy the safe harbor requirements of
the Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy
such requirements.
(vii) Partner Nonrecourse Deductions. Partner Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Partner that bears the
Economic Risk of Loss with respect to the Partner Nonrecourse Debt to which
such Partner Nonrecourse Deductions are attributable in accordance with
Treasury Regulation Section 1.704-2(i). If more than one Partner bears the
Economic Risk of Loss with respect to a Partner Nonrecourse Debt, such
Partner Nonrecourse Deductions attributable thereto shall be allocated
between or among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(viii) Nonrecourse Liabilities. For purposes of Treasury Regulation
Section 1.752-3(a)(3), the Partners agree that Nonrecourse Liabilities of
the Partnership in excess of the sum of (A) the amount of Partnership
Minimum Gain and (B) the total amount of Nonrecourse Built-in Gain shall be
allocated among the Partners in accordance with their respective Percentage
Interests.
(ix) Code Section 754 Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to Section 734(b) or
743(b) of the Code is required, pursuant to Treasury Regulation Section
1.704-1(b)(2)(iv)(m), to be taken into account in determining Capital
Accounts, the amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the basis of the
asset) or loss (if the adjustment decreases such basis), and such item of
gain or loss shall be specially allocated to the Partners in a manner
consistent with the manner in which their Capital Accounts are required to
be adjusted pursuant to such Section of the Treasury Regulations.
(x) Economic Uniformity. At the election of the General Partner with
respect to any taxable period ending upon, or after, the termination of the
Subordination Period, all or a portion of the remaining items of
Partnership gross income or gain for such taxable period, after taking into
account allocations pursuant to Section 6.1(d)(iii), shall be allocated
100% to each Partner holding Subordinated Units that are Outstanding as of
the termination of the Subordination Period ("Final Subordinated Units") in
the proportion of the number of Final Subordinated Units held by such
Partner to the total number of Final Subordinated Units then Outstanding,
until each such Partner has been allocated an amount of gross income or
gain which increases the Capital Account maintained with respect to such
Final Subordinated Units to an amount equal to the product of (A) the
number of Final Subordinated Units held by such Partner and (B) the Per
Unit Capital Amount for a Common Unit. The purpose of this allocation is to
establish uniformity between the Capital Accounts underlying Final
Subordinated Units and the Capital Accounts underlying Common Units held by
Persons other than the General Partner and its Affiliates immediately prior
to the conversion of such
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Final Subordinated Units into Common Units. This allocation method for
establishing such economic uniformity will only be available to the General
Partner if the method for allocating the Capital Account maintained with
respect to the Subordinated Units between the transferred and retained
Subordinated Units pursuant to Section 5.5(c)(ii) does not otherwise
provide such economic uniformity to the Final Subordinated Units.
(xi) Curative Allocation.
(A) Notwithstanding any other provision of this Section 6.1, other
than the Required Allocations, the Required Allocations shall be taken
into account in making the Agreed Allocations so that, to the extent
possible, the net amount of items of income, gain, loss and deduction
allocated to each Partner pursuant to the Required Allocations and the
Agreed Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under the
Agreed Allocations had the Required Allocations and the related
Curative Allocation not otherwise been provided in this Section 6.1.
Notwithstanding the preceding sentence, Required Allocations relating
to (1) Nonrecourse Deductions shall not be taken into account except to
the extent that there has been a decrease in Partnership Minimum Gain
and (2) Partner Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in Partner
Nonrecourse Debt Minimum Gain. Allocations pursuant to this Section
6.1(d)(xi)(A) shall only be made with respect to Required Allocations
to the extent the General Partner reasonably determines that such
allocations will otherwise be inconsistent with the economic agreement
among the Partners. Further, allocations pursuant to this Section
6.1(d)(xi)(A) shall be deferred with respect to allocations pursuant to
clauses (1) and (2) hereof to the extent the General Partner reasonably
determines that such allocations are likely to be offset by subsequent
Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(d)(xi)(A) in whatever order is most likely to minimize the economic
distortions that might otherwise result from the Required Allocations,
and (2) divide all allocations pursuant to Section 6.1(d)(xi)(A) among
the Partners in a manner that is likely to minimize such economic
distortions.
6.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income tax purposes,
each item of income, gain, loss and deduction shall be allocated among the
Partners in the same manner as its correlative item of "book" income, gain,
loss or deduction is allocated pursuant to Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities attributable to a
Contributed Property or Adjusted Property, items of income, gain, loss,
depreciation, amortization and cost recovery deductions shall be allocated for
federal income tax purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such items attributable
thereto shall be allocated among the Partners in the manner provided under
Section 704(c) of the Code that takes into account the variation between
the Agreed Value of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual Loss
attributable to a Contributed Property shall be allocated among the
Partners in the same manner as its correlative item of "book" gain or loss
is allocated pursuant to Section 6.1.
(ii) (A) In the case of an Adjusted Property, such items shall (1) first,
be allocated among the Partners in a manner consistent with the principles
of Section 704(c) of the Code to take into account the Unrealized Gain or
Unrealized Loss attributable to such property and the allocations thereof
pursuant to Section 5.5(d)(i) or 5.5(d)(ii), and (2) second, in the event
such property was originally a Contributed Property, be allocated among the
Partners in a manner consistent with Section 6.2(b)(i)(A); and (B) any item
of Residual Gain or Residual Loss attributable to an Adjusted Property
shall be allocated among the Partners in the same manner as its correlative
item of "book" gain or loss is allocated pursuant to Section 6.1.
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(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i) adopt
such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii) amend the provisions of
this Agreement as appropriate (A) to reflect the proposal or promulgation of
Treasury Regulations under Section 704(b) or Section 704(c) of the Code or (B)
otherwise to preserve or achieve uniformity of the Limited Partner Interests
(or any class or classes thereof). The General Partner may adopt such
conventions, make such allocations and make such amendments to this Agreement
as provided in this Section 6.2(c) only if such conventions, allocations or
amendments would not have a material adverse effect on the Partners, the
holders of any class or classes of Limited Partner Interests issued and
Outstanding or the Partnership, and if such allocations are consistent with
the principles of Section 704 of the Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate
derived from the depreciation or amortization method and useful life applied
to the Partnership's common basis of such property, despite any inconsistency
of such approach with Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-l(a)(6) or Proposed Treasury Regulation
Section 1.197-2(g)(3). If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt
depreciation and amortization conventions under which all purchasers acquiring
Limited Partner Interests in the same month would receive depreciation and
amortization deductions, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's property. If the General
Partner chooses not to utilize such aggregate method, the General Partner may
use any other reasonable depreciation and amortization conventions to preserve
the uniformity of the intrinsic tax characteristics of any Limited Partner
Interests that would not have material adverse effect on the Limited Partners
or the Record Holders of any class or classes of Limited Partner Interests.
(e) Any gain allocated to the Partners upon the sale or other taxable
disposition of any Partnership asset shall, to the extent possible, after
taking into account other required allocations of gain pursuant to this
Section 6.2, be characterized as Recapture Income in the same proportions and
to the same extent as such Partners (or their predecessors in interest) have
been allocated any deductions directly or indirectly giving rise to the
treatment of such gains as Recapture Income.
(f) All items of income, gain, loss, deduction and credit recognized by the
Partnership for federal income tax purposes and allocated to the Partners in
accordance with the provisions hereof shall be determined without regard to
any election under Section 754 of the Code which may be made by the
Partnership; provided, however, that such allocations, once made, shall be
adjusted as necessary or appropriate to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred Partnership Interest, shall for federal income tax purposes,
be determined on an annual basis and prorated on a monthly basis and shall be
allocated to the Partners as of the opening of the principal National
Securities Exchange on which the Common Units are then traded on the first
Business Day of each month; provided, however, that such items for the period
beginning on the Closing Date and ending on the last day of the month in which
the Option Closing Date or the expiration of the Over-allotment Option occurs
shall be allocated to the Partners as of the opening of the Nasdaq National
Market on the first Business Day of the next succeeding month; and provided,
further, that gain or loss on a sale or other disposition of any assets of the
Partnership other than in the ordinary course of business shall be allocated
to the Partners as of the opening of the Nasdaq National Market (or such other
National Securities Exchange on which the Common Units are then primarily
traded) on the first Business Day
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of the month in which such gain or loss is recognized for federal income tax
purposes. The General Partner may revise, alter or otherwise modify such
methods of allocation as it determines necessary, to the extent permitted or
required by Section 706 of the Code and the regulations or rulings promulgated
thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee
has furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
6.3 Requirement and Characterization of Distributions; Distributions to
Record Holders.
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on September 30, 1998, an amount equal to 100% of Available
Cash with respect to such Quarter shall, subject to Section 17-607 of the
Delaware Act, be distributed in accordance with this Article VI by the
Partnership to the Partners as of the Record Date selected by the General
Partner in its reasonable discretion. All amounts of Available Cash
distributed by the Partnership on any date from any source shall be deemed to
be Operating Surplus until the sum of all amounts of Available Cash
theretofore distributed by the Partnership to the Partners pursuant to Section
6.4 equals the Operating Surplus from the Closing Date through the close of
the immediately preceding Quarter. Any remaining amounts of Available Cash
distributed by the Partnership on such date shall, except as otherwise
provided in Section 6.5, be deemed to be "Capital Surplus." All distributions
required to be made under this Agreement shall be made subject to Section 17-
607 of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the event of the dissolution and
liquidation of the Partnership, all receipts received during or after the
Quarter in which the Liquidation Date occurs, other than from borrowings
described in (a)(ii)(A) of the definition of Available Cash, shall be applied
and distributed solely in accordance with, and subject to the terms and
conditions of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners, as a distribution of Available Cash to such
Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in
such payment by reason of an assignment or otherwise.
6.4 Distributions of Available Cash from Operating Surplus.
(a) During Subordination Period. Available Cash with respect to any Quarter
within the Subordination Period that is deemed to be Operating Surplus
pursuant to the provisions of Section 6.3 or 6.5 shall, subject to Section 17-
607 of the Delaware Act, be distributed as follows, except as otherwise
required by Section 5.6(b) in respect of additional Partnership Securities
issued pursuant thereto:
(i) First, 99% to the Unitholders holding Common Units, Pro Rata, and 1%
to the General Partner until there has been distributed in respect of each
Common Unit then Outstanding an amount equal to the Minimum Quarterly
Distribution for such Quarter;
(ii) Second, 99% to the Unitholders holding Common Units, Pro Rata, and
1% to the General Partner until there has been distributed in respect of
each Common Unit then Outstanding an amount equal to the Cumulative Common
Unit Arrearage existing with respect to such Quarter;
(iii) Third, 99% to the Unitholders holding Subordinated Units, Pro Rata,
and 1% to the General Partner until there has been distributed in respect
of each Subordinated Unit then Outstanding an amount equal to the Minimum
Quarterly Distribution for such Quarter;
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(iv) Fourth, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(v) Fifth, 85.8673% to all Unitholders, Pro Rata, and 14.1327% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(vi) Sixth, 75.7653% to all Unitholders, Pro Rata, and 24.2347% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(vii) Thereafter, 50.5102% to all Unitholders, Pro Rata, and 49.4898% to
the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a),
the distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(a)(vii).
(b) After Subordination Period. Available Cash with respect to any Quarter
after the Subordination Period that is deemed to be Operating Surplus pursuant
to the provisions of Section 6.3 or 6.5, subject to Section 17-607 of the
Delaware Act, shall be distributed as follows, except as otherwise required by
Section 5.6(b) in respect of additional Partnership Securities issued pursuant
thereto:
(i) First, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the Minimum Quarterly Distribution for such
Quarter;
(ii) Second, 99% to all Unitholders, Pro Rata, and 1% to the General
Partner until there has been distributed in respect of each Unit then
Outstanding an amount equal to the excess of the First Target Distribution
over the Minimum Quarterly Distribution for such Quarter;
(iii) Third, 85.8673% to all Unitholders, Pro Rata, and 14.1327% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Second Target
Distribution over the First Target Distribution for such Quarter;
(iv) Fourth, 75.7653% to all Unitholders, Pro Rata, and 24.2347% to the
General Partner until there has been distributed in respect of each Unit
then Outstanding an amount equal to the excess of the Third Target
Distribution over the Second Target Distribution for such Quarter; and
(v) Thereafter, 50.5102% to all Unitholders, Pro Rata, and 49.4898% to
the General Partner;
provided, however, if the Minimum Quarterly Distribution, the First Target
Distribution, the Second Target Distribution and the Third Target Distribution
have been reduced to zero pursuant to the second sentence of Section 6.6(a),
the distribution of Available Cash that is deemed to be Operating Surplus with
respect to any Quarter will be made solely in accordance with Section
6.4(b)(v).
6.5 Distributions of Available Cash from Capital Surplus. Available Cash
that is deemed to be Capital Surplus pursuant to the provisions of Section
6.3(a) shall, subject to Section 17-607 of the Delaware Act, be distributed,
unless the provisions of Section 6.3 require otherwise, 99% to all
Unitholders, Pro Rata, and 1% to the General Partner until a hypothetical
holder of a Common Unit acquired on the Closing Date has received with respect
to such Common Unit, during the period since the Closing Date through such
date, distributions of Available Cash that are deemed to be Capital Surplus in
an aggregate amount equal to the Initial Unit Price. Available Cash that is
deemed to be Capital Surplus shall then be distributed 99% to all Unitholders
holding Common Units, Pro Rata, and 1% to the General Partner until there has
been distributed in respect of each Common Unit then Outstanding an amount
equal to the Cumulative Common Unit Arrearage. Thereafter, all Available Cash
shall be distributed as if it were Operating Surplus and shall be distributed
in accordance with Section 6.4.
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6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution
Levels.
(a) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution, Third Target Distribution, Common Unit Arrearages and
Cumulative Common Unit Arrearages shall be proportionately adjusted in the
event of any distribution, combination or subdivision (whether effected by a
distribution payable in Units or otherwise) of Units or other Partnership
Securities in accordance with Section 5.10. In the event of a distribution of
Available Cash that is deemed to be from Capital Surplus, the then applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution shall be adjusted proportionately
downward to equal the product obtained by multiplying the otherwise applicable
Minimum Quarterly Distribution, First Target Distribution, Second Target
Distribution and Third Target Distribution, as the case may be, by a fraction
of which the numerator is the Unrecovered Capital of the Common Units
immediately after giving effect to such distribution and of which the
denominator is the Unrecovered Capital of the Common Units immediately prior
to giving effect to such distribution.
(b) The Minimum Quarterly Distribution, First Target Distribution, Second
Target Distribution and Third Target Distribution shall also be subject to
adjustment pursuant to Section 6.8.
6.7 Special Provisions Relating to the Holders of Subordinated Units.
(a) Except with respect to the right to vote on or approve matters requiring
the vote or approval of a percentage of the holders of Outstanding Common
Units and the right to participate in allocations of income, gain, loss and
deduction and distributions made with respect to Common Units, the holder of a
Subordinated Unit shall have all of the rights and obligations of a Unitholder
holding Common Units hereunder; provided, however, that immediately upon the
conversion of Subordinated Units into Common Units pursuant to Section 5.8,
the Unitholder holding a Subordinated Unit shall possess all of the rights and
obligations of a Unitholder holding Common Units hereunder, including the
right to vote as a Common Unitholder and the right to participate in
allocations of income, gain, loss and deduction and distributions made with
respect to Common Units; provided, however, that such converted Subordinated
Units shall remain subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x)
and 6.7(b).
(b) The Unitholder holding a Subordinated Unit which has converted into a
Common Unit pursuant to Section 5.8 shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer
its converted Subordinated Units to a Person which is not an Affiliate of the
holder until such time as the General Partner determines, based on advice of
counsel, that a converted Subordinated Unit should have, as a substantive
matter, like intrinsic economic and federal income tax characteristics, in all
material respects, to the intrinsic economic and federal income tax
characteristics of an Initial Common Unit. In connection with the condition
imposed by this Section 6.7(b), the General Partner may take whatever
reasonable steps are required to provide economic uniformity to the converted
Subordinated Units in preparation for a transfer of such converted
Subordinated Units, including the application of Sections 5.5(c)(ii) and
6.1(d)(x); provided, however, that no such steps may be taken that would have
a material adverse effect on the Unitholders holding Common Units represented
by Common Unit Certificates.
6.8 Entity-Level Taxation. If legislation is enacted or the interpretation
of existing language is modified by the relevant governmental authority which
causes the Partnership or the Operating Partnership to be treated as an
association taxable as a corporation or otherwise subjects the Partnership or
the Operating Partnership to entity-level taxation for federal income tax
purposes, the then applicable Minimum Quarterly Distribution, First Target
Distribution, Second Target Distribution and Third Target Distribution shall
be adjusted to equal the product obtained by multiplying (a) the amount
thereof by (b) one minus the sum of (i) the highest marginal federal corporate
(or other entity, as applicable) income tax rate of the Partnership or the
Operating Partnership for the taxable year of the Partnership or the Operating
Partnership in which such Quarter occurs (expressed as a percentage) plus (ii)
the effective overall state and local income tax rate (expressed as a
percentage) applicable to the Partnership or the Operating Partnership for the
calendar year next preceding the calendar year in which such Quarter occurs
(after taking into account the benefit of any deduction allowable for federal
income tax purposes with respect to the payment of state and local income
taxes), but only to the extent of the increase in
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such rates resulting from such legislation or interpretation. Such effective
overall state and local income tax rate shall be determined for the taxable
year next preceding the first taxable year during which the Partnership or the
Operating Partnership is taxable for federal income tax purposes as an
association taxable as a corporation or is otherwise subject to entity-level
taxation by determining such rate as if the Partnership or the Operating
Partnership had been subject to such state and local taxes during such
preceding taxable year.
ARTICLE VII
Management and Operation of Business
7.1 Management.
(a) The General Partner shall conduct, direct and manage all activities of
the Partnership. Except as otherwise expressly provided in this Agreement, all
management powers over the business and affairs of the Partnership shall be
exclusively vested in the General Partner, and no Limited Partner or Assignee
shall have any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted a general
partner of a limited partnership under applicable law or which are granted to
the General Partner under any other provision of this Agreement, the General
Partner, subject to Section 7.3, shall have full power and authority to do all
things and on such terms as it, in its sole discretion, may deem necessary or
appropriate to conduct the business of the Partnership, to exercise all powers
set forth in Section 2.5 and to effectuate the purposes set forth in Section
2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group,
subject to Section 7.6(a), the lending of funds to other Persons (including
the Operating Partnership); the repayment of obligations of the Partnership
Group; and the making of capital contributions to any member of the
Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
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(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations or other relationships
(including the acquisition of interests in, and the contributions of
property to, the Operating Partnership from time to time) subject to the
restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.8);
(xiii) unless restricted or prohibited by Section 5.7, the purchase, sale
or other acquisition or disposition of Partnership Securities, or the
issuance of additional options, rights, warrants and appreciation rights
relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the Partnership's
participation in the Operating Partnership as a partner or any other Group
Member as a partner or equity owner, as applicable.
(b) Notwithstanding any other provision of this Agreement, the Operating
Partnership Agreement, the Delaware Act or any applicable law, rule or
regulation, each of the Partners and Assignees and each other Person who may
acquire an interest in Partnership Securities hereby (i) approves, ratifies
and confirms the execution, delivery and performance by the parties thereto of
the Operating Partnership Agreement, the Underwriting Agreement, the EPCO
Agreement, and the other agreements described in or filed as a part of the
Registration Statement that are related to the transactions contemplated by
the Registration Statement; (ii) agrees that the General Partner (on its own
or through any officer of the Partnership) is authorized to execute, deliver
and perform the agreements referred to in clause (i) of this sentence and the
other agreements, acts, transactions and matters described in or contemplated
by the Registration Statement on behalf of the Partnership without any further
act, approval or vote of the Partners or the Assignees or the other Persons
who may acquire an interest in Partnership Securities; and (iii) agrees that
the execution, delivery or performance by the General Partner, any Group
Member or any Affiliate of any of them, of this Agreement or any agreement
authorized or permitted under this Agreement (including the exercise by the
General Partner or any Affiliate of the General Partner of the rights accorded
pursuant to Article XV), shall not constitute a breach by the General Partner
of any duty that the General Partner may owe the Partnership or the Limited
Partners or the Assignees or any other Persons under this Agreement (or any
other agreements) or of any duty stated or implied by law or equity.
7.2 Certificate of Limited Partnership. The General Partner has caused the
Certificate of Limited Partnership to be filed with the Secretary of State of
the State of Delaware as required by the Delaware Act and shall use all
reasonable efforts to cause to be filed such other certificates or documents
as may be determined by the General Partner in its sole discretion to be
reasonable and necessary or appropriate for the formation, continuation,
qualification and operation of a limited partnership (or a partnership in
which the limited partners have limited liability) in the State of Delaware or
any other state in which the Partnership may elect to do business or own
property. To the extent that such action is determined by the General Partner
in its sole discretion to be reasonable and necessary or appropriate, the
General Partner shall file amendments to and restatements of the Certificate
of Limited Partnership and do all things to maintain the Partnership as a
limited partnership (or a partnership or other entity in which the limited
partners have limited liability) under the laws of the State of Delaware or of
any other state in which the Partnership may elect to do business or own
property. Subject to the terms of Section 3.4(a), the General Partner shall
not be required, before or after filing, to deliver or mail a copy of the
Certificate of Limited Partnership, any qualification document or any
amendment thereto to any Limited Partner.
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7.3 Restrictions on General Partner's Authority.
(a) The General Partner may not, without written approval of the specific
act by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of the Outstanding
Limited Partner Interests subsequent to the date of this Agreement, take any
action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it
impossible to carry on the ordinary business of the Partnership; (ii)
possessing Partnership property, or assigning any rights in specific
Partnership property, for other than a Partnership purpose; (iii) admitting a
Person as a Partner; (iv) amending this Agreement in any manner; or (v)
transferring its interest as general partner of the Partnership.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the
Partnership's assets in a single transaction or a series of related
transactions or approve on behalf of the Partnership the sale, exchange or
other disposition of all or substantially all of the assets of the Partnership
or the Operating Partnership, without the approval of holders of a Unit
Majority; provided however that this provision shall not preclude or limit the
General Partner's ability to mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of the assets of the Partnership or the
Operating Partnership and shall not apply to any forced sale of any or all of
the assets of the Partnership or the Operating Partnership pursuant to the
foreclosure of, or other realization upon, any such encumbrance. Without the
approval of holders of a Unit Majority, the General Partner shall not, on
behalf of the Partnership, (i) consent to any amendment to the Operating
Partnership Agreement or, except as expressly permitted by Section 7.9(d),
take any action permitted to be taken by a partner of the Operating
Partnership, in either case, that would have a material adverse effect on the
Partnership as a partner of the Operating Partnership or (ii) except as
permitted under Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to
elect a successor general partner of the Partnership or the Operating
Partnership.
7.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement
or in the Operating Partnership Agreement, the General Partner shall not be
compensated for its services as general partner of the Partnership or any
Group Member.
(b) Subject to any applicable limitations contained in the EPCO Agreement,
the General Partner shall be reimbursed on a monthly basis, or such other
reasonable basis as the General Partner may determine in its sole discretion,
for (i) all direct and indirect expenses it incurs or payments it makes on
behalf of the Partnership (including amounts paid by the General Partner to
EPC under the EPCO Agreement and including salary, bonus, incentive
compensation and other amounts paid to any Person, including Affiliates of the
General Partner, to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the
General Partner in its sole discretion. Reimbursements pursuant to this
Section 7.4 shall be in addition to any reimbursement to the General Partner
as a result of indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote
in respect thereof), may propose and adopt on behalf of the Partnership
employee benefit and incentive plans, employee programs and employee practices
(including plans, programs and practices involving the issuance of Partnership
Securities or options to purchase Partnership Securities), or cause the
Partnership to issue Partnership Securities in connection with, or pursuant
to, any employee benefit plan, employee program or employee practice
maintained or sponsored by the General Partner or any of its Affiliates, in
each case for the benefit of employees of the General Partner, any Group
Member or any Affiliate, or any of them, in respect of services performed,
directly or indirectly, for the benefit of the Partnership Group. The
Partnership agrees to issue and sell to the General Partner or any of its
Affiliates any Partnership Securities
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that the General Partner or such Affiliate is obligated to provide to any
employees pursuant to any such employee benefit plans, employee programs or
employee practices. Expenses incurred by the General Partner in connection
with any such plans, programs and practices (including the net cost to the
General Partner or such Affiliate of Partnership Securities purchased by the
General Partner or such Affiliate from the Partnership to fulfill options or
awards under such plans, programs and practices) shall be reimbursed in
accordance with Section 7.4(b). Any and all obligations of the General Partner
under any employee benefit or incentive plans, employee programs or employee
practices adopted by the General Partner as permitted by this Section 7.4(c)
shall constitute obligations of the General Partner hereunder and shall be
assumed by any successor General Partner approved pursuant to Section 11.1 or
11.2 or the transferee of or successor to all of the General Partner's
Partnership Interest as the General Partner in the Partnership pursuant to
Section 4.6.
7.5 Outside Activities.
(a) After the Closing Date, the General Partner, for so long as it is the
general partner of the Partnership (i) agrees that its sole business will be
to act as the general partner or managing member of the Partnership, the
Operating Partnership, and any other partnership or limited liability company
of which the Partnership or the Operating Partnership is, directly or
indirectly, a partner or managing member and to undertake activities that are
ancillary or related thereto (including being a limited partner in the
partnership), (ii) shall not engage in any business or activity or incur any
debts or liabilities except in connection with or incidental to (A) its
performance as general partner or managing member of one or more Group Members
or as described in or contemplated by the Registration Statement or (B) the
acquiring, owning or disposing of debt or equity securities in any Group
Member and (iii) except to the extent permitted by the EPCO Agreement, shall
not, and shall cause its Affiliates not to, engage in any Restricted Activity.
(b) EPC has entered into the EPCO Agreement with the Partnership and the
Operating Partnership, which agreement sets forth certain restrictions on the
ability of EPC and its Affiliates to engage in Restricted Activities.
(c) Except as specifically restricted by Section 7.5(a) and the EPCO
Agreement, each Indemnitee (other than the General Partner) shall have the
right to engage in businesses of every type and description and other
activities for profit and to engage in and possess an interest in other
business ventures of any and every type or description, whether in businesses
engaged in or anticipated to be engaged in by any Group Member, independently
or with others, including business interests and activities in direct
competition with the business and activities of any Group Member, and none of
the same shall constitute a breach of this Agreement or any duty express or
implied by law to any Group Member or any Partner or Assignee. Neither any
Group Member, any Limited Partner nor any other Person shall have any rights
by virtue of this Agreement, the Operating Partnership Agreement or the
partnership relationship established hereby or thereby in any business
ventures of any Indemnitee.
(d) Subject to the terms of the EPCO Agreement and Section 7.5(a), 7.5(b),
and 7.5(c) and the EPCO Agreement, but otherwise notwithstanding anything to
the contrary in this Agreement, (i) the engaging in competitive activities by
any Indemnitees (other than the General Partner) in accordance with the
provisions of this Section 7.5 is hereby approved by the Partnership and all
Partners, (ii) it shall be deemed not to be a breach of the General Partner's
fiduciary duty or any other obligation of any type whatsoever of the General
Partner for the Indemnitees (other than the General Partner) to engage in such
business interests and activities in preference to or to the exclusion of the
Partnership and (iii) the General Partner and the Indemnities shall have no
obligation to present business opportunities to the Partnership.
(e) The General Partner and any of its Affiliates may acquire Partnership
Securities in addition to those acquired on the Closing Date and, except as
otherwise provided in this Agreement, shall be entitled to exercise all rights
of the General Partner or Limited Partner, as applicable, relating to such
Partnership Securities.
(f) The term "Affiliates" when used in Sections 7.5(a) and 7.5(b) with
respect to the General Partner shall not include any Group Member or any
Subsidiary of the Group Member.
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7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the General
Partner.
(a) The General Partner or its Affiliates may lend to any Group Member, and
any Group Member may borrow from the General Partner or any of its Affiliates,
funds needed or desired by the Group Member for such periods of time and in
such amounts as the General Partner may determine; provided, however, that in
any such case the lending party may not charge the borrowing party interest at
a rate greater than the rate that would be charged the borrowing party or
impose terms less favorable to the borrowing party than would be charged or
imposed on the borrowing party by unrelated lenders on comparable loans made
on an arm's-length basis (without reference to the lending party's financial
abilities or guarantees). The borrowing party shall reimburse the lending
party for any costs (other than any additional interest costs) incurred by the
lending party in connection with the borrowing of such funds. For purposes of
this Section 7.6(a) and Section 7.6(b), the term "Group Member" shall include
any Affiliate of a Group Member that is controlled by the Group Member. No
Group Member may lend funds to the General Partner or any of its Affiliates
(other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders
on comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement, in
addition to the EPCO Agreement, with any of its Affiliates to, render services
to a Group Member or to the General Partner in the discharge of its duties as
general partner of the Partnership. Any services rendered to a Group Member by
the General Partner or any of its Affiliates shall be on terms that are fair
and reasonable to the Partnership; provided, however, that the requirements of
this Section 7.6(c) shall be deemed satisfied as to (i) any transaction
approved by Special Approval, (ii) any transaction, the terms of which are no
less favorable to the Partnership Group than those generally being provided to
or available from unrelated third parties or (iii) any transaction that,
taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Partnership Group), is equitable to the Partnership Group.
The provisions of Section 7.4 shall apply to the rendering of services
described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and
applicable law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from, the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 7.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to Sections 5.2 and 5.3 and any other
transactions described in or contemplated by the Registration Statement, (ii)
any transaction approved by Special Approval, (iii) any transaction, the terms
of which are no less favorable to the Partnership than those generally being
provided to or available from unrelated third parties, or (iv) any transaction
that, taking into account the totality of the relationships between the
parties involved (including other transactions that may be particularly
favorable or advantageous to the Partnership), is equitable to the
Partnership. With respect to any contribution of assets to the Partnership in
exchange for Partnership Securities, the Audit and Conflicts Committee, in
determining whether the appropriate number of Partnership Securities are being
issued, may take into account, among other things, the fair market value of
the assets, the liquidated and contingent liabilities assumed, the tax basis
in the assets, the extent to which tax-only allocations to the transferor will
protect the existing partners of the Partnership against a low tax basis, and
such other factors as the Audit and Conflicts Committee deems relevant under
the circumstances.
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(f) The General Partner and its Affiliates will have no obligation to permit
any Group Member to use any facilities or assets of the General Partner and
its Affiliates, except as may be provided in contracts entered into from time
to time specifically dealing with such use, nor shall there be any obligation
on the part of the General Partner or its Affiliates to enter into such
contracts.
(g) Without limitation of Sections 7.6(a) through 7.6(f), and
notwithstanding anything to the contrary in this Agreement, the existence of
the conflicts of interest described in the Registration Statement are hereby
approved by all Partners.
7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to the limitations
expressly provided in this Agreement, all Indemnitees shall be indemnified and
held harmless by the Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including legal fees and
expenses), judgments, fines, penalties, interest, settlements or other amounts
arising from any and all claims, demands, actions, suits or proceedings,
whether civil, criminal, administrative or investigative, in which any
Indemnitee may be involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as a Person of the type described in
clauses (a)--(d) of the definition of the term "Indemnitee"; provided, that in
each case the Indemnitee acted in good faith and in a manner that such
Indemnitee reasonably believed to be in, or (in the case of a Person other
than the General Partner) not opposed to, the best interests of the
Partnership and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful; provided, further, no
indemnification pursuant to this Section 7.7 shall be available to the General
Partner with respect to its obligations incurred pursuant to the Underwriting
Agreement (other than obligations incurred by the General Partner on behalf of
the Partnership or the Operating Partnership). The termination of any action,
suit or proceeding by judgment, order, settlement, conviction or upon a plea
of nolo contendere, or its equivalent, shall not create a presumption that the
Indemnitee acted in a manner contrary to that specified above. Any
indemnification pursuant to this Section 7.7 shall be made only out of the
assets of the Partnership, it being agreed that the General Partner shall not
be personally liable for such indemnification and shall have no obligation to
contribute or loan any monies or property to the Partnership to enable it to
effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if
it shall be determined that the Indemnitee is not entitled to be indemnified
as authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests
entitled to vote on such matter, as a matter of law or otherwise, both as to
actions in the Indemnitee's capacity as a Person of the type described in
clauses (a)--(d) of the definition of the term "Indemnitee", and as to actions
in any other capacity (including any capacity under the Underwriting
Agreement), and shall continue as to an Indemnitee who has ceased to serve in
such capacity and shall inure to the benefit of the heirs, successors, assigns
and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse the General
Partner or its Affiliates for the cost of) insurance, on behalf of the General
Partner, its Affiliates and such other Persons as the General Partner shall
determine, against any liability that may be asserted against or expense that
may be incurred by such Person in connection with the Partnership's activities
or such Person's activities on behalf of the Partnership, regardless of
whether the Partnership would have the power to indemnify such Person against
such liability under the provisions of this Agreement.
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(e) For purposes of this Section 7.7, the Partnership shall be deemed to
have requested an Indemnitee to serve as fiduciary of an employee benefit plan
whenever the performance by it of its duties to the Partnership also imposes
duties on, or otherwise involves services by, it to the plan or participants
or beneficiaries of the plan; excise taxes assessed on an Indemnitee with
respect to an employee benefit plan pursuant to applicable law shall
constitute "fines" within the meaning of Section 7.7(a); and action taken or
omitted by it with respect to any employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is in, or not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership,
nor the obligations of the Partnership to indemnify any such Indemnitee under
and in accordance with the provisions of this Section 7.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
7.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the
Limited Partners, the Assignees or any other Persons who have acquired
interests in the Partnership Securities, for losses sustained or liabilities
incurred as a result of any act or omission if such Indemnitee acted in good
faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents, and the General Partner shall not
be responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) To the extent that, at law or in equity, an Indemnitee has duties
(including fiduciary duties) and liabilities relating thereto to the
Partnership or to the Partners, the General Partner and any other Indemnitee
acting in connection with the Partnership's business or affairs shall not be
liable to the Partnership or to any Partner for its good faith reliance on the
provisions of this Agreement. The provisions of this Agreement, to the extent
that they restrict or otherwise modify the duties and liabilities of an
Indemnitee otherwise existing at law or in equity, are agreed by the Partners
to replace such other duties and liabilities of such Indemnitee.
(d) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors,
officers and employees under this Section 7.8 as in effect immediately prior
to such amendment, modification or repeal with respect to claims arising from
or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
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7.9 Resolution of Conflicts of Interest.
(a) Unless otherwise expressly provided in this Agreement or the Operating
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, the Operating Partnership, any Partner or any Assignee,
on the other, any resolution or course of action by the General Partner or its
Affiliates in respect of such conflict of interest shall be permitted and
deemed approved by all Partners, and shall not constitute a breach of this
Agreement, of the Operating Partnership Agreement, of any agreement
contemplated herein or therein, or of any duty stated or implied by law or
equity, if the resolution or course of action is, or by operation of this
Agreement is deemed to be, fair and reasonable to the Partnership. The General
Partner shall be authorized but not required in connection with its resolution
of such conflict of interest to seek Special Approval of such resolution. Any
conflict of interest and any resolution of such conflict of interest shall be
conclusively deemed fair and reasonable to the Partnership if such conflict of
interest or resolution is (i) approved by Special Approval (as long as the
material facts within the actual knowledge of the officers and directors of
the General Partner and EPC regarding the proposed transaction were disclosed
to the Audit and Conflicts Committee at the time it gave its approval), (ii)
on terms no less favorable to the Partnership than those generally being
provided to or available from unrelated third parties or (iii) fair to the
Partnership, taking into account the totality of the relationships between the
parties involved (including other transactions that may be particularly
favorable or advantageous to the Partnership). The General Partner may also
adopt a resolution or course of action that has not received Special Approval.
The General Partner (including the Audit and Conflicts Committee in connection
with Special Approval) shall be authorized in connection with its
determination of what is "fair and reasonable" to the Partnership and in
connection with its resolution of any conflict of interest to consider (A) the
relative interests of any party to such conflict, agreement, transaction or
situation and the benefits and burdens relating to such interest; (B) any
customary or accepted industry practices and any customary or historical
dealings with a particular Person; (C) any applicable generally accepted
accounting practices or principles; and (D) such additional factors as the
General Partner (including the Audit and Conflicts Committee) determines in
its sole discretion to be relevant, reasonable or appropriate under the
circumstances. Nothing contained in this Agreement, however, is intended to
nor shall it be construed to require the General Partner (including the Audit
and Conflicts Committee) to consider the interests of any Person other than
the Partnership. In the absence of bad faith by the General Partner, the
resolution, action or terms so made, taken or provided by the General Partner
with respect to such matter shall not constitute a breach of this Agreement or
any other agreement contemplated herein or a breach of any standard of care or
duty imposed herein or therein or, to the extent permitted by law, under the
Delaware Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein,
the General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting, the
Partnership, the Operating Partnership, any Limited Partner or any Assignee,
(ii) it may make such decision in its sole discretion (regardless of whether
there is a reference to "sole discretion" or "discretion") unless another
express standard is provided for, or (iii) in "good faith" or under another
express standard, the General Partner or such Affiliate shall act under such
express standard and shall not be subject to any other or different standards
imposed by this Agreement, the Operating Partnership Agreement, any other
agreement contemplated hereby or under the Delaware Act or any other law, rule
or regulation. In addition, any actions taken by the General Partner or such
Affiliate consistent with the standards of "reasonable discretion" set forth
in the definitions of Available Cash or Operating Surplus shall not constitute
a breach of any duty of the General Partner to the Partnership or the Limited
Partners. The General Partner shall have no duty, express or implied, to sell
or otherwise dispose of any asset of the Partnership Group other than in the
ordinary course of business. No borrowing by any Group Member or the approval
thereof by the General Partner shall be deemed to constitute a breach of any
duty of the General Partner to the Partnership or the Limited Partners by
reason of the fact that the purpose or effect of such borrowing is directly or
indirectly to (A) enable
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distributions to the General Partner or its Affiliates (including in their
capacities as Limited Partners) to exceed 1% of the total amount distributed
to all partners or (B) hasten the expiration of the Subordination Period or
the conversion of any Subordinated Units into Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner or member of a Group Member, to approve of actions by
the general partner or managing member of such Group Member similar to those
actions permitted to be taken by the General Partner pursuant to this Section
7.9.
7.10 Other Matters Concerning the General Partner.
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond, debenture
or other paper or document believed by it to be genuine and to have been
signed or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of any of its
powers or obligations hereunder, to act through any of its duly authorized
officers, a duly appointed attorney or attorneys-in-fact or the duly
authorized officers of the Partnership. Each such attorney shall, to the
extent provided by the General Partner in the power of attorney, have full
power and authority to do and perform each and every act and duty that is
permitted or required to be done by the General Partner hereunder.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this Agreement, so long as such action is reasonably
believed by the General Partner to be in, or not inconsistent with, the best
interests of the Partnership.
7.11 Purchase or Sale of Partnership Securities. The General Partner may
cause the Partnership to purchase or otherwise acquire Partnership Securities;
provided that, except as permitted pursuant to Section 4.10, the General
Partner may not cause any Group Member to purchase Subordinated Units during
the Subordination Period. As long as Partnership Securities are held by any
Group Member, such Partnership Securities shall not be considered Outstanding
for any purpose, except as otherwise provided herein. The General Partner or
any Affiliate of the General Partner may also purchase or otherwise acquire
and sell or otherwise dispose of Partnership Securities for its own account,
subject to the provisions of Articles IV and X.
7.12 Registration Rights of the General Partner and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate
of the General Partner at the date hereof notwithstanding that it may later
cease to be an Affiliate of the General Partner) holds Partnership Securities
that it desires to sell and (ii) Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership Securities
(the "Holder") to dispose of the number of Partnership Securities it desires
to sell at the time it desires to do so without registration under the
Securities Act, then upon the request of the General Partner or any of its
Affiliates, the Partnership shall file with the Commission as promptly as
practicable after receiving such request, and use all reasonable efforts to
cause to become effective and remain effective for a period of not less than
six months following its effective date or such shorter period as shall
terminate when all Partnership Securities covered by such registration
statement have been sold, a registration statement under the Securities Act
registering the offering and sale of the number of
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Partnership Securities specified by the Holder; provided, however, that the
Partnership shall not be required to effect more than three registrations
pursuant to this Section 7.12(a); and provided further, however, that if at
the time a request pursuant to this Section 7.12 is submitted to the
Partnership, EPC or its Affiliates requesting registration is an Affiliate of
the General Partner and the Audit and Conflicts Committee determines in its
good faith judgment that a postponement of the requested registration for up
to six months would be in the best interests of the Partnership and its
Partners due to a pending transaction, investigation or other event, the
filing of such registration statement or the effectiveness thereof may be
deferred for up to six months, but not thereafter. In connection with any
registration pursuant to the immediately preceding sentence, the Partnership
shall promptly prepare and file (x) such documents as may be necessary to
register or qualify the securities subject to such registration under the
securities laws of such states as the Holder shall reasonably request;
provided, however, that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Partnership would become subject
to general service of process or to taxation or qualification to do business
as a foreign corporation or partnership doing business in such jurisdiction
solely as a result of such registration, and (y) such documents as may be
necessary to apply for listing or to list the Partnership Securities subject
to such registration on such National Securities Exchange as the Holder shall
reasonably request, and do any and all other acts and things that may
reasonably be necessary or advisable to enable the Holder to consummate a
public sale of such Partnership Securities in such states. Except as set forth
in Section 7.12(c), all costs and expenses of any such registration and
offering (other than the underwriting discounts and commissions) shall be paid
by the Partnership, without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of equity securities of the
Partnership for cash (other than an offering relating solely to an employee
benefit plan), the Partnership shall use all reasonable efforts to include
such number or amount of securities held by the Holder in such registration
statement as the Holder shall request. If the proposed offering pursuant to
this Section 7.12(b) shall be an underwritten offering, then, in the event
that the managing underwriter or managing underwriters of such offering advise
the Partnership and the Holder in writing that in their opinion the inclusion
of all or some of the Holder's Partnership Securities would adversely and
materially affect the success of the offering, the Partnership shall include
in such offering only that number or amount, if any, of securities held by the
Holder which, in the opinion of the managing underwriter or managing
underwriters, will not so adversely and materially affect the offering. Except
as set forth in Section 7.12(c), all costs and expenses of any such
registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters
in form and substance reasonably satisfactory to such underwriters. Further,
in addition to and not in limitation of the Partnership's obligation under
Section 7.7, the Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the Holder, its officers, directors and each
Person who controls the Holder (within the meaning of the Securities Act) and
any agent thereof (collectively, "Indemnified Persons") against any losses,
claims, demands, actions, causes of action, assessments, damages, liabilities
(joint or several), costs and expenses (including interest, penalties and
reasonable attorneys' fees and disbursements), resulting to, imposed upon, or
incurred by the Indemnified Persons, directly or indirectly, under the
Securities Act or otherwise (hereinafter referred to in this Section 7.12(c)
as a "claim" and in the plural as "claims") based upon, arising out of or
resulting from any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which any
Partnership Securities were registered under the Securities Act or any state
securities or Blue Sky laws, in any preliminary prospectus (if used prior to
the effective date of such registration statement), or in any summary or final
prospectus or in any amendment or supplement thereto (if used during the
period the Partnership is required to keep the registration statement
current), or arising out of, based upon or resulting from the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements made therein not misleading;
provided, however, that the Partnership shall not be liable to any Indemnified
Person to the extent that any such claim arises out of, is based upon or
results from an untrue statement or alleged untrue statement or omission or
alleged omission made in such
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registration statement, such preliminary, summary or final prospectus or such
amendment or supplement, in reliance upon and in conformity with written
information furnished to the Partnership by or on behalf of such Indemnified
Person specifically for use in the preparation thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases to be a Partner of the Partnership,
during a period of two years subsequent to the effective date of such
cessation and for so long thereafter as is required for the Holder to sell all
of the Partnership Securities with respect to which it has requested during
such two-year period inclusion in a registration statement otherwise filed or
that a registration statement be filed; provided, however, that the
Partnership shall not be required to file successive registration statements
covering the same Partnership Securities for which registration was demanded
during such two-year period. The provisions of Section 7.12(c) shall continue
in effect thereafter.
(e) Any request to register Partnership Securities pursuant to this Section
7.12 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present
intent to offer such shares for distribution, (iii) describe the nature or
method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
7.13 Reliance by Third Parties.
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General
Partner to act on behalf of and in the name of the Partnership has full power
and authority to encumber, sell or otherwise use in any manner any and all
assets of the Partnership and to enter into any authorized contracts on behalf
of the Partnership, and such Person shall be entitled to deal with the General
Partner or any such officer as if it were the Partnership's sole party in
interest, both legally and beneficially. Each Limited Partner hereby waives
any and all defenses or other remedies that may be available against such
Person to contest, negate or disaffirm any action of the General Partner or
any such officer in connection with any such dealing. In no event shall any
Person dealing with the General Partner or any such officer or its
representatives be obligated to ascertain that the terms of the Agreement have
been complied with or to inquire into the necessity or expedience of any act
or action of the General Partner or any such officer or its representatives.
Each and every certificate, document or other instrument executed on behalf of
the Partnership by the General Partner or any such officer or its
representatives shall be conclusive evidence in favor of any and every Person
relying thereon or claiming thereunder that (i) at the time of the execution
and delivery of such certificate, document or instrument, this Agreement was
in full force and effect, (ii) the Person executing and delivering such
certificate, document or instrument was duly authorized and empowered to do so
for and on behalf of the Partnership and (iii) such certificate, document or
instrument was duly executed and delivered in accordance with the terms and
provisions of this Agreement and is binding upon the Partnership.
ARTICLE VIII
Books, Records, Accounting and Reports
8.1 Records and Accounting. The General Partner shall keep or cause to be
kept at the principal office of the Partnership appropriate books and records
with respect to the Partnership's business, including all books and records
necessary to provide to the Limited Partners any information required to be
provided pursuant to Section 3.4(a). Any books and records maintained by or on
behalf of the Partnership in the regular course of its business, including the
record of the Record Holders and Assignees of Units or other Partnership
Securities, books of account and records of Partnership proceedings, may be
kept on, or be in the form of, computer disks, hard drives, punch cards,
magnetic tape, photographs, micrographics or any other information storage
device; provided, that the books and records so maintained are convertible
into clearly legible written form within a
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reasonable period of time. The books of the Partnership shall be maintained,
for financial reporting purposes, on an accrual basis in accordance with U.S.
GAAP.
8.2 Fiscal Year. The fiscal year of the Partnership shall be a fiscal year
ending December 31.
8.3 Reports.
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed or furnished to each Record Holder of a Unit as of a date
selected by the General Partner in its discretion, an annual report containing
financial statements of the Partnership for such fiscal year of the
Partnership, presented in accordance with U.S. GAAP, including a balance sheet
and statements of operations, Partnership equity and cash flows, such
statements to be audited by a firm of independent public accountants selected
by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each fiscal year, the General
Partner shall cause to be mailed or furnished to each Record Holder of a Unit,
as of a date selected by the General Partner in its discretion, a report
containing unaudited financial statements of the Partnership and such other
information as may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for trading, or as
the General Partner determines to be necessary or appropriate.
ARTICLE IX
Tax Matters
9.1 Tax Returns and Information. The Partnership shall timely file all
returns of the Partnership that are required for federal, state and local
income tax purposes on the basis of the accrual method and a taxable year
ending on December 31. The tax information reasonably required by Record
Holders for federal and state income tax reporting purposes with respect to a
taxable year shall be furnished to them within 90 days of the close of the
calendar year in which the Partnership's taxable year ends. The
classification, realization and recognition of income, gain, losses and
deductions and other items shall be on the accrual method of accounting for
federal income tax purposes.
9.2 Tax Elections.
(a) The Partnership shall make the election under Section 754 of the Code in
accordance with applicable regulations thereunder, subject to the reservation
of the right to seek to revoke any such election upon the General Partner's
determination that such revocation is in the best interests of the Limited
Partners. Notwithstanding any other provision herein contained, for the
purposes of computing the adjustments under Section 743(b) of the Code, the
General Partner shall be authorized (but not required) to adopt a convention
whereby the price paid by a transferee of a Limited Partner Interest that is
traded on any National Securities Exchange will be deemed to be the lowest
quoted closing price of such Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are traded during
the calendar month in which such transfer is deemed to occur pursuant to
Section 6.2(g) without regard to the actual price paid by such transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709
of the Code.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
9.3 Tax Controversies. Subject to the provisions hereof, the General Partner
is designated as the Tax Matters Partner (as defined in the Code) and is
authorized and required to represent the Partnership (at the Partnership's
expense) in connection with all examinations of the Partnership's affairs by
tax authorities, including resulting
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administrative and judicial proceedings, and to expend Partnership funds for
professional services and costs associated therewith. Each Partner agrees to
cooperate with the General Partner and to do or refrain from doing any or all
things reasonably required by the General Partner to conduct such proceedings.
9.4 Withholding. Notwithstanding any other provision of this Agreement, the
General Partner is authorized to take any action that it determines in its
discretion to be necessary or appropriate to cause the Partnership and the
Operating Partnership to comply with any withholding requirements established
under the Code or any other federal, state or local law including, without
limitation, pursuant to Sections 1441, 1442, 1445 and 1446 of the Code. To the
extent that the Partnership is required or elects to withhold and pay over to
any taxing authority any amount resulting from the allocation or distribution
of income to any Partner or Assignee (including, without limitation, by reason
of Section 1446 of the Code), the amount withheld may at the discretion of the
General Partner be treated by the Partnership as a distribution of cash
pursuant to Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
Admission of Partners
10.1 Admission of Initial Limited Partners. Upon the issuance by the
Partnership of Common Units and Subordinated Units to EPC Partners II, as
described in Section 5.2, EPC Partners II shall be deemed to have been
admitted to the Partnership as a Limited Partner in respect of the Units
issued to it. Upon the issuance by the Partnership of Common Units to the
Underwriters as described in Section 5.3 in connection with the Initial
Offering and the execution by each Underwriter of a Transfer Application, the
General Partner shall admit the Underwriters to the Partnership as Initial
Limited Partners in respect of the Common Units purchased by them.
10.2 Admission of Substituted Limited Partner. By transfer of a Limited
Partner Interest in accordance with Article IV, the transferor shall be deemed
to have given the transferee the right to seek admission as a Substituted
Limited Partner subject to the conditions of, and in the manner permitted
under, this Agreement. A transferor of a Certificate representing a Limited
Partner Interest shall, however, only have the authority to convey to a
purchaser or other transferee who does not execute and deliver a Transfer
Application (a) the right to negotiate such Certificate to a purchaser or
other transferee and (b) the right to transfer the right to request admission
as a Substituted Limited Partner to such purchaser or other transferee in
respect of the transferred Limited Partner Interests. Each transferee of a
Limited Partner Interest (including any nominee holder or an agent acquiring
such Limited Partner Interest for the account of another Person) who executes
and delivers a Transfer Application shall, by virtue of such execution and
delivery, be an Assignee and be deemed to have applied to become a Substituted
Limited Partner with respect to the Limited Partner Interests so transferred
to such Person. Such Assignee shall become a Substituted Limited Partner (x)
at such time as the General Partner consents thereto, which consent may be
given or withheld in the General Partner's discretion, and (y) when any such
admission is shown on the books and records of the Partnership. If such
consent is withheld, such transferee shall be an Assignee. An Assignee shall
have an interest in the Partnership equivalent to that of a Limited Partner
with respect to allocations and distributions, including liquidating
distributions, of the Partnership. With respect to voting rights attributable
to Limited Partner Interests that are held by Assignees, the General Partner
shall be deemed to be the Limited Partner with respect thereto and shall, in
exercising the voting rights in respect of such Limited Partner Interests on
any matter, vote such Limited Partner Interests at the written direction of
the Assignee who is the Record Holder of such Limited Partner Interests. If no
such written direction is received, such Limited Partner Interests will not be
voted. An Assignee shall have no other rights of a Limited Partner.
10.3 Admission of Successor General Partner. A successor General Partner
approved pursuant to Section 11.1 or 11.2 or the transferee of or successor to
all of the General Partner's Partnership Interest as general partner in the
Partnership pursuant to Section 4.6 who is proposed to be admitted as a
successor General Partner shall be admitted to the Partnership as the General
Partner, effective immediately prior to the withdrawal or removal of
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he predecessor or transferring General Partner pursuant to Section 11.1 or
11.2 or the transfer of the General Partner's Partnership Interest as a
general partner in the Partnership pursuant to Section 4.6; provided, however,
that no such successor shall be admitted to the Partnership until compliance
with the terms of Section 4.6 has occurred and such successor has executed and
delivered such other documents or instruments as may be required to effect
such admission. Any such successor shall, subject to the terms hereof, carry
on the business of the members of the Partnership Group without dissolution.
10.4 Admission of Additional Limited Partners.
(a) A Person (other than the General Partner, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement shall be admitted to the
Partnership as an Additional Limited Partner only upon furnishing to the
General Partner (i) evidence of acceptance in form satisfactory to the General
Partner of all of the terms and conditions of this Agreement, including the
power of attorney granted in Section 2.6, and (ii) such other documents or
instruments as may be required in the discretion of the General Partner to
effect such Person's admission as an Additional Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's sole discretion. The admission of any Person as an Additional
Limited Partner shall become effective on the date upon which the name of such
Person is recorded as such in the books and records of the Partnership,
following the consent of the General Partner to such admission.
10.5 Amendment of Agreement and Certificate of Limited Partnership. To
effect the admission to the Partnership of any Partner, the General Partner
shall take all steps necessary and appropriate under the Delaware Act to amend
the records of the Partnership to reflect such admission and, if necessary, to
prepare as soon as practicable an amendment to this Agreement and, if required
by law, the General Partner shall prepare and file an amendment to the
Certificate of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted pursuant to
Section 2.6.
ARTICLE XI
Withdrawal or Removal of Partners
11.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal"):
(i) the General Partner voluntarily withdraws from the Partnership by
giving written notice to the other Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as general partner of the
Operating Partnership);
(ii) the General Partner transfers all of its rights as General Partner
pursuant to Section 4.6;
(iii) the General Partner is removed pursuant to Section 11.2;
(iv) the General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition for relief under
Chapter 7 of the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar relief (but
not a reorganization) under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the General Partner in a proceeding of the type described in
clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents to or
acquiesces in the appointment of a trustee (but not a debtor-in-
possession), receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
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(v) a final and non-appealable order of relief under Chapter 7 of the
United States Bankruptcy Code is entered by a court with appropriate
jurisdiction pursuant to a voluntary or involuntary petition by or against
the General Partner; or
(vi) (A) in the event the General Partner is a corporation, a certificate
of dissolution or its equivalent is filed for the General Partner, or 90
days expire after the date of notice to the General Partner of revocation
of its charter without a reinstatement of its charter, under the laws of
its state of incorporation; (B) in the event the General Partner is a
partnership or a limited liability company, the dissolution and
commencement of winding up of the General Partner; (C) in the event the
General Partner is acting in such capacity by virtue of being a trustee of
a trust, the termination of the trust; (D) in the event the General Partner
is a natural person, his death or adjudication of incompetency; and (E)
otherwise in the event of the termination of the General Partner.
If an Event of Withdrawal specified in Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing General Partner shall give notice to
the Limited Partners within 30 days after such occurrence. The Partners hereby
agree that only the Events of Withdrawal described in this Section 11.1 shall
result in the withdrawal of the General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall not constitute a breach of this
Agreement under the following circumstances: (i) at any time during the period
beginning on the Closing Date and ending at 12:00 midnight, Eastern Standard
Time, on December 31, 2008, the General Partner voluntarily withdraws by
giving at least 90 days' advance notice of its intention to withdraw to the
Limited Partners; provided that prior to the effective date of such
withdrawal, the withdrawal is approved by Unitholders holding at least a
majority of the Outstanding Common Units (excluding Common Units held by the
General Partner and its Affiliates) and the General Partner delivers to the
Partnership an Opinion of Counsel ("Withdrawal Opinion of Counsel") that such
withdrawal (following the selection of the successor General Partner) would
not result in the loss of the limited liability of any Limited Partner or of a
member of the Operating Partnership or cause the Partnership or the Operating
Partnership to be treated as an association taxable as a corporation or
otherwise to be taxed as an entity for federal income tax purposes (to the
extent not previously treated as such); (ii) at any time after 12:00 midnight,
Eastern Standard Time, on December 31, 2008, the General Partner voluntarily
withdraws by giving at least 90 days' advance notice to the Unitholders, such
withdrawal to take effect on the date specified in such notice; (iii) at any
time that the General Partner ceases to be the General Partner pursuant to
Section 11.1(a)(ii) or is removed pursuant to Section 11.2; or (iv)
notwithstanding clause (i) of this sentence, at any time that the General
Partner voluntarily withdraws by giving at least 90 days' advance notice of
its intention to withdraw to the Limited Partners, such withdrawal to take
effect on the date specified in the notice, if at the time such notice is
given one Person and its Affiliates (other than the General Partner and its
Affiliates) own beneficially or of record or control at least 50% of the
Outstanding Units. The withdrawal of the General Partner from the Partnership
upon the occurrence of an Event of Withdrawal shall also constitute the
withdrawal of the General Partner as general partner or managing member, as
the case may be, of the other Group Members. If the General Partner gives a
notice of withdrawal pursuant to Section 11.1(a)(i), the holders of a Unit
Majority, may, prior to the effective date of such withdrawal, elect a
successor General Partner. The Person so elected as successor General Partner
shall automatically become the successor general partner or managing member,
as the case may be, of the other Group Members of which the General Partner is
a general partner or managing member. If, prior to the effective date of the
General Partner's withdrawal, a successor is not selected by the Unitholders
as provided herein or the Partnership does not receive a Withdrawal Opinion of
Counsel, the Partnership shall be dissolved in accordance with Section 12.1.
Any successor General Partner elected in accordance with the terms of this
Section 11.1 shall be subject to the provisions of Section 10.3.
11.2 Removal of the General Partner. The General Partner may be removed if
such removal is approved by Unitholders holding at least 66 2/3% of the
Outstanding Units (including Units held by the General Partner and its
Affiliates). Any such action by such holders for removal of the General
Partner must also provide for the election of a successor General Partner by
the Unitholders holding a Unit Majority. Such removal shall be effective
immediately following the admission of a successor General Partner pursuant to
Section 10.3. The removal of the General Partner shall also automatically
constitute the removal of the General Partner as general partner or
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managing member, as the case may be, of the other Group Members of which the
General Partner is a general partner or managing member. If a Person is
elected as a successor General Partner in accordance with the terms of this
Section 11.2, such Person shall, upon admission pursuant to Section 10.3,
automatically become a successor general partner or managing member, as the
case may be, of the other Group Members of which the General Partner is a
general partner or managing member. The right of the holders of Outstanding
Units to remove the General Partner shall not exist or be exercised unless the
Partnership has received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner elected in
accordance with the terms of this Section 11.2 shall be subject to the
provisions of Section 10.3.
11.3 Interest of Departing Partner and Successor General Partner.
(a) In the event of (i) withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement or (ii)
removal of the General Partner by the holders of Outstanding Units under
circumstances where Cause does not exist, if a successor General Partner is
elected in accordance with the terms of Section 11.1 or 11.2, the Departing
Partner shall have the option exercisable prior to the effective date of the
departure of such Departing Partner to require its successor to purchase its
Partnership Interest as a general partner in the Partnership and its
partnership or member interest as the general partner or managing member in
the other Group Members (collectively, the "Combined Interest") in exchange
for an amount in cash equal to the fair market value of such Combined
Interest, such amount to be determined and payable as of the effective date of
its departure or, if there is not agreement as to the fair market value of
such Combined Interest, within ten (10) days after such agreement is reached.
If the General Partner is removed by the Unitholders under circumstances where
Cause exists or if the General Partner withdraws under circumstances where
such withdrawal violates this Agreement or the Operating Partnership
Agreement, and if a successor General Partner is elected in accordance with
the terms of Section 11.1 or 11.2, such successor shall have the option,
exercisable prior to the effective date of the departure of such Departing
Partner, to purchase the Combined Interest for such fair market value of such
Combined Interest. In either event, the Departing Partner shall be entitled to
receive all reimbursements due such Departing Partner pursuant to Section 7.4,
including any employee-related liabilities (including severance liabilities),
incurred in connection with the termination of any employees employed by the
General Partner for the benefit of the Partnership or the other Group Members.
(b) For purposes of this Section 11.3(a), the fair market value of the
Combined Interest shall be determined by agreement between the Departing
Partner and its successor or, failing agreement within 30 days after the
effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such
firms or experts shall mutually select a third independent investment banking
firm or independent expert, which third independent investment banking firm or
other independent expert shall determine the fair market value of the Combined
Interest. In making its determination, such third independent investment
banking firm or other independent expert may consider the then current trading
price of Units on any National Securities Exchange on which Units are then
listed, the value of the Partnership's assets, the rights and obligations of
the Departing Partner and other factors it may deem relevant.
(c) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner (or its transferee) shall become a
Limited Partner and its Combined Interest shall be converted into Common Units
pursuant to a valuation made by an investment banking firm or other
independent expert selected pursuant to Section 11.3(a), without reduction in
such Partnership Interest (but subject to proportionate dilution by reason of
the admission of its successor). Any successor General Partner shall indemnify
the Departing Partner (or its transferee) as to all debts and liabilities of
the Partnership arising on or after the date on which the Departing Partner
(or its transferee) becomes a Limited Partner. For purposes of this Agreement,
conversion of the Combined Interest to Common Units will be characterized as
if the General Partner (or its transferee) contributed its Combined Interest
to the Partnership in exchange for the newly issued Common Units.
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(d) If a successor General Partner is elected in accordance with the terms
of Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in the amount equal to 1/99th of the Net Agreed Value of the
Partnership's assets on such date. In such event, such successor General
Partner shall, subject to the following sentence, be entitled to 1% of all
Partnership allocations and distributions. The successor General Partner shall
cause this Agreement to be amended to reflect that, from and after the date of
such successor General Partner's admission, the successor General Partner's
interest in all Partnership distributions and allocations shall be 1%.
11.4 Termination of Subordination Period, Conversion of Subordinated Units
and Extinguishment of Cumulative Common Unit Arrearages. Notwithstanding any
provision of this Agreement, if the General Partner is removed as general
partner of the Partnership under circumstances where Cause does not exist and
Units held by the General Partner and its Affiliates are not voted in favor of
such removal, (i) the Subordination Period will end and all Outstanding
Subordinated Units will immediately and automatically convert into Common
Units on a one-for-one basis and (ii) all Cumulative Common Unit Arrearages on
the Common Units will be extinguished.
11.5 Withdrawal of Limited Partners. No Limited Partner shall have any right
to withdraw from the Partnership; provided, however, that when a transferee of
a Limited Partner's Limited Partner Interest becomes a Record Holder of the
Limited Partner Interest so transferred, such transferring Limited Partner
shall cease to be a Limited Partner with respect to the Limited Partner
Interest so transferred.
ARTICLE XII
Dissolution and Liquidation
12.1 Dissolution. The Partnership shall not be dissolved by the admission of
Substituted Limited Partners or Additional Limited Partners or by the
admission of a successor General Partner in accordance with the terms of this
Agreement. Upon the removal or withdrawal of the General Partner, if a
successor General Partner is elected pursuant to Section 11.1 or 11.2, the
Partnership shall not be dissolved and such successor General Partner shall
continue the business of the Partnership. The Partnership shall dissolve, and
(subject to Section 12.2) its affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the General Partner as provided in Section
11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 11.1(b) or 11.2
and such successor is admitted to the Partnership pursuant to Section 10.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by the holders of a Unit Majority;
(d) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
12.2 Continuation of the Business of the Partnership After Dissolution. Upon
(a) dissolution of the Partnership following an Event of Withdrawal caused by
the withdrawal or removal of the General Partner as provided in Section
11.1(a)(i) or (iii) and the failure of the Partners to select a successor to
such Departing Partner pursuant to Section 11.1 or 11.2, then within 90 days
thereafter, or (b) dissolution of the Partnership upon an event constituting
an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or (vi), then,
to the maximum extent permitted by law, within 180 days thereafter, the
holders of a Unit Majority may elect to reconstitute the Partnership and
continue its business on the same terms and conditions set forth in this
Agreement by forming a new limited partnership on terms identical to those set
forth in this Agreement and
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having as the successor general partner a Person approved by the holders of a
Unit Majority. Unless such an election is made within the applicable time
period as set forth above, the Partnership shall conduct only activities
necessary to wind up its affairs. If such an election is so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 2.7 unless earlier dissolved in accordance with
this Article XII;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be treated in the
manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and certificate of limited partnership,
and the successor general partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 2.6; provided,
that the right of the holders of a Unit Majority to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership nor the
Operating Partnership would be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal income tax
purposes upon the exercise of such right to continue.
12.3 Liquidator. Upon dissolution of the Partnership, unless the Partnership
is continued under an election to reconstitute and continue the Partnership
pursuant to Section 12.2, the General Partner shall select one or more Persons
to act as Liquidator. The Liquidator (if other than the General Partner) shall
be entitled to receive such compensation for its services as may be approved
by holders of at least a majority of the Outstanding Common Units and
Subordinated Units voting as a single class. The Liquidator (if other than the
General Partner) shall agree not to resign at any time without 15 days' prior
notice and may be removed at any time, with or without cause, by notice of
removal approved by holders of at least a majority of the Outstanding Common
Units and Subordinated Units voting as a single class. Upon dissolution,
removal or resignation of the Liquidator, a successor and substitute
Liquidator (who shall have and succeed to all rights, powers and duties of the
original Liquidator) shall within 30 days thereafter be approved by holders of
at least a majority of the Outstanding Common Units and Subordinated Units
voting as a single class. The right to approve a successor or substitute
Liquidator in the manner provided herein shall be deemed to refer also to any
such successor or substitute Liquidator approved in the manner herein
provided. Except as expressly provided in this Article XII, the Liquidator
approved in the manner provided herein shall have and may exercise, without
further authorization or consent of any of the parties hereto, all of the
powers conferred upon the General Partner under the terms of this Agreement
(but subject to all of the applicable limitations, contractual and otherwise,
upon the exercise of such powers, other than the limitation on sale set forth
in Section 7.3(b)) to the extent necessary or desirable in the good faith
judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding
up and liquidation of the Partnership as provided for herein.
12.4 Liquidation. The Liquidator shall proceed to dispose of the assets of
the Partnership, discharge its liabilities, and otherwise wind up its affairs
in such manner and over such period as the Liquidator determines to be in the
best interest of the Partners, subject to Section 17-804 of the Delaware Act
and the following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property shall
be deemed for purposes of Section 12.4(c) to have received cash equal to
its fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. The Liquidator may, in
its absolute discretion, defer liquidation or distribution of the
Partnership's assets for a reasonable time if it determines that an
immediate sale or distribution of all or some of the Partnership's assets
would be impractical or would cause undue loss to the Partners. The
Liquidator may, in its absolute discretion, distribute the Partnership's
assets, in
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whole or in part, in kind if it determines that a sale would be impractical
or would cause undue loss to the Partners.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise than in respect of their distribution
rights under Article VI. With respect to any liability that is contingent,
conditional or unmatured or is otherwise not yet due and payable, the
Liquidator shall either settle such claim for such amount as it thinks
appropriate or establish a reserve of cash or other assets to provide for
its payment. When paid, any unused portion of the reserve shall be
distributed as additional liquidation proceeds.
(c) Liquidation Distributions. All property and all cash in excess of
that required to discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the extent of,
the positive balances in their respective Capital Accounts, as determined
after taking into account all Capital Account adjustments (other than those
made by reason of distributions pursuant to this Section 12.4(c)) for the
taxable year of the Partnership during which the liquidation of the
Partnership occurs (with such date of occurrence being determined pursuant
to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution
shall be made by the end of such taxable year (or, if later, within 90 days
after said date of such occurrence).
12.5 Cancellation of Certificate of Limited Partnership. Upon the completion
of the distribution of Partnership cash and property as provided in Section
12.4 in connection with the liquidation of the Partnership, the Partnership
shall be terminated and the Certificate of Limited Partnership and all
qualifications of the Partnership as a foreign limited partnership in
jurisdictions other than the State of Delaware shall be canceled and such
other actions as may be necessary to terminate the Partnership shall be taken.
12.6 Return of Contributions. The General Partner shall not be personally
liable for, and shall have no obligation to contribute or loan any monies or
property to the Partnership to enable it to effectuate, the return of the
Capital Contributions of the Limited Partners or Unitholders, or any portion
thereof, it being expressly understood that any such return shall be made
solely from Partnership assets.
12.7 Waiver of Partition. To the maximum extent permitted by law, each
Partner hereby waives any right to partition of the Partnership property.
12.8 Capital Account Restoration. No Partner shall have any obligation to
restore any negative balance in its Capital Account upon liquidation of the
Partnership.
ARTICLE XIII
Amendment of Partnership Agreement; Meetings; Record Date
13.1 Amendment to be Adopted Solely by the General Partner. Each Partner
agrees that the General Partner, without the approval of any Partner or
Assignee, may amend any provision of this Agreement and execute, swear to,
acknowledge, deliver, file and record whatever documents may be required in
connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure
that no Group Member will be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income tax
purposes;
(d) a change that, in the discretion of the General Partner, (i) does not
adversely affect the Limited Partners in any material respect, (ii) is
necessary or advisable to (A) satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or
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judicial authority or contained in any federal or state statute (including
the Delaware Act) or (B) facilitate the trading of the Limited Partner
Interest (including the division of any class or classes of Outstanding
Limited Partner Interest into different classes to facilitate uniformity of
tax consequences within such classes of Limited Partner Interests) or
comply with any rule, regulation, guideline or requirement of any National
Securities Exchange on which the Limited Partner Interests are or will be
listed for trading, compliance with any of which the General Partner
determines in its discretion to be in the best interests of the Partnership
and the Limited Partners, (iii) is necessary or advisable in connection
with action taken by the General Partner pursuant to Section 5.10 or (iv)
is required to effect the intent expressed in the Registration Statement or
the intent of the provisions of this Agreement or is otherwise contemplated
by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the General Partner, are necessary
or advisable as a result of a change in the fiscal year or taxable year of
the Partnership including, if the General Partner shall so determine, a
change in the definition of "Quarter" and the dates on which distributions
are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership, or the General Partner or its directors, officers,
trustees or agents from in any manner being subjected to the provisions of
the Investment Company Act of 1940, as amended, the Investment Advisers Act
of 1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, regardless of whether
such are substantially similar to plan asset regulations currently applied
or proposed by the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity other than the Operating Partnership, in connection with the
conduct by the Partnership of activities permitted by the terms of Section
2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
13.2 Amendment Procedures. Except as provided in Sections 13.1 and 13.3, all
amendments to this Agreement shall be made in accordance with the following
requirements. Amendments to this Agreement may be proposed only by or with the
consent of the General Partner which consent may be given or withheld in its
sole discretion. A proposed amendment shall be effective upon its approval by
the holders of a Unit Majority, unless a greater or different percentage is
required under this Agreement or by Delaware law. Each proposed amendment that
requires the approval of the holders of a specified percentage of Outstanding
Units shall be set forth in a writing that contains the text of the proposed
amendment. If such an amendment is proposed, the General Partner shall seek
the written approval of the requisite percentage of Outstanding Units or call
a meeting of the Unitholders to consider and vote on such proposed amendment.
The General Partner shall notify all Record Holders upon final adoption of any
such proposed amendments.
13.3 Amendment Requirements.
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision
of this Agreement that establishes a percentage of Outstanding Units
(including Units deemed owned by the General Partner) required
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to take any action shall be amended, altered, changed, repealed or rescinded
in any respect that would have the effect of reducing such voting percentage
unless such amendment is approved by the written consent or the affirmative
vote of holders of Outstanding Units whose aggregate Outstanding Units
constitute not less than the voting requirement sought to be reduced.
(b) Notwithstanding the provisions of Sections 13.1 and 13.2, no amendment
to this Agreement may (i) enlarge the obligations of any Limited Partner
without its consent, unless such shall have occurred as a result of an
amendment approved pursuant to Section 13.3(c), (ii) enlarge the obligations
of, restrict in any way any action by or rights of, or reduce in any way the
amounts distributable, reimbursable or otherwise payable to, the General
Partner or any of its Affiliates without its consent, which consent may be
given or withheld in its sole discretion, (iii) change Section 12.1(a) or
12.1(c), or (iv) change the term of the Partnership or, except as set forth in
Section 12.1(c), give any Person the right to dissolve the Partnership.
(c) Except as provided in Section 14.3, and except as otherwise provided,
and without limitation of the General Partner's authority to adopt amendments
to this Agreement as contemplated in Section 13.1, any amendment that would
have a material adverse effect on the rights or preferences of any class of
Partnership Interests in relation to other classes of Partnership Interests
must be approved by the holders of not less than a majority of the Outstanding
Partnership Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 13.1 and except as otherwise provided by
Section 14.3(b), no amendments shall become effective without the approval of
the holders of at least 90% of the Outstanding Common Units and Subordinated
Units voting as a single class unless the Partnership obtains an Opinion of
Counsel to the effect that such amendment will not affect the limited
liability of any Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of at least 90% of the Outstanding
Common Units and Subordinated Units voting as a single class.
13.4 Special Meetings. All acts of Limited Partners to be taken pursuant to
this Agreement shall be taken in the manner provided in this Article XIII.
Special meetings of the Limited Partners may be called by the General Partner
or by Limited Partners owning 20% or more of the Outstanding Limited Partner
Interests of the class or classes for which a meeting is proposed. Limited
Partners shall call a special meeting by delivering to the General Partner one
or more requests in writing stating that the signing Limited Partners wish to
call a special meeting and indicating the general or specific purposes for
which the special meeting is to be called. Within 60 days after receipt of
such a call from Limited Partners or within such greater time as may be
reasonably necessary for the Partnership to comply with any statutes, rules,
regulations, listing agreements or similar requirements governing the holding
of a meeting or the solicitation of proxies for use at such a meeting, the
General Partner shall send a notice of the meeting to the Limited Partners
either directly or indirectly through the Transfer Agent. A meeting shall be
held at a time and place determined by the General Partner on a date not less
than 10 days nor more than 60 days after the mailing of notice of the meeting.
Limited Partners shall not vote on matters that would cause the Limited
Partners to be deemed to be taking part in the management and control of the
business and affairs of the Partnership so as to jeopardize the Limited
Partners' limited liability under the Delaware Act or the law of any other
state in which the Partnership is qualified to do business.
13.5 Notice of a Meeting. Notice of a meeting called pursuant to Section
13.4 shall be given to the Record Holders of the class or classes of Limited
Partner Interests for which a meeting is proposed in writing by mail or other
means of written communication in accordance with Section 16.1. The notice
shall be deemed to have been given at the time when deposited in the mail or
sent by other means of written communication.
13.6 Record Date. For purposes of determining the Limited Partners entitled
to notice of or to vote at a meeting of the Limited Partners or to give
approvals without a meeting as provided in Section 13.11 the General Partner
may set a Record Date, which shall not be less than 10 nor more than 60 days
before (a) the date of the meeting (unless such requirement conflicts with any
rule, regulation, guideline or requirement of any National
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Securities Exchange on which the Limited Partner Interests are listed for
trading, in which case the rule, regulation, guideline or requirement of such
exchange shall govern) or (b) in the event that approvals are sought without a
meeting, the date by which Limited Partners are requested in writing by the
General Partner to give such approvals.
13.7 Adjournment. When a meeting is adjourned to another time or place,
notice need not be given of the adjourned meeting and a new Record Date need
not be fixed, if the time and place thereof are announced at the meeting at
which the adjournment is taken, unless such adjournment shall be for more than
45 days. At the adjourned meeting, the Partnership may transact any business
which might have been transacted at the original meeting. If the adjournment
is for more than 45 days or if a new Record Date is fixed for the adjourned
meeting, a notice of the adjourned meeting shall be given in accordance with
this Article XIII.
13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes. The
transactions of any meeting of Limited Partners, however called and noticed,
and whenever held, shall be as valid as if it had occurred at a meeting duly
held after regular call and notice, if a quorum is present either in person or
by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled
to vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a
waiver of notice of the meeting, except when the Limited Partner does not
approve, at the beginning of the meeting, of the transaction of any business
because the meeting is not lawfully called or convened; and except that
attendance at a meeting is not a waiver of any right to disapprove the
consideration of matters required to be included in the notice of the meeting,
but not so included, if the disapproval is expressly made at the meeting.
13.9 Quorum. The holders of a majority of the Outstanding Limited Partner
Interests of the class or classes for which a meeting has been called
(including Limited Partner Interests deemed owned by the General Partner)
represented in person or by proxy shall constitute a quorum at a meeting of
Limited Partners of such class or classes unless any such action by the
Limited Partners requires approval by holders of a greater percentage of such
Limited Partner Interests, in which case the quorum shall be such greater
percentage. At any meeting of the Limited Partners duly called and held in
accordance with this Agreement at which a quorum is present, the act of
Limited Partners holding Outstanding Limited Partner Interests that in the
aggregate represent a majority of the Outstanding Limited Partner Interests
entitled to vote and be present in person or by proxy at such meeting shall be
deemed to constitute the act of all Limited Partners, unless a greater or
different percentage is required with respect to such action under the
provisions of this Agreement, in which case the act of the Limited Partners
holding Outstanding Limited Partner Interests that in the aggregate represent
at least such greater or different percentage shall be required. The Limited
Partners present at a duly called or held meeting at which a quorum is present
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any
action taken (other than adjournment) is approved by the required percentage
of Outstanding Limited Partner Interests specified in this Agreement
(including Limited Partner Interests deemed owned by the General Partner). In
the absence of a quorum any meeting of Limited Partners may be adjourned from
time to time by the affirmative vote of holders of at least a majority of the
Outstanding Limited Partner Interests entitled to vote at such meeting
(including Limited Partner Interests deemed owned by the General Partner)
represented either in person or by proxy, but no other business may be
transacted, except as provided in Section 13.7.
13.10 Conduct of a Meeting. The General Partner shall have full power and
authority concerning the manner of conducting any meeting of the Limited
Partners or solicitation of approvals in writing, including the determination
of Persons entitled to vote, the existence of a quorum, the satisfaction of
the requirements of Section 13.4, the conduct of voting, the validity and
effect of any proxies and the determination of any controversies, votes or
challenges arising in connection with or during the meeting or voting. The
General Partner shall designate a Person to serve as chairman of any meeting
and shall further designate a Person to take the minutes of any meeting. All
minutes shall be kept with the records of the Partnership maintained by the
General Partner. The General Partner may make such other regulations
consistent with applicable law and this Agreement
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as it may deem advisable concerning the conduct of any meeting of the Limited
Partners or solicitation of approvals in writing, including regulations in
regard to the appointment of proxies, the appointment and duties of inspectors
of votes and approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals in writing.
13.11 Action Without a Meeting. If authorized by the General Partner, any
action that may be taken at a meeting of the Limited Partners may be taken
without a meeting if an approval in writing setting forth the action so taken
is signed by Limited Partners owning not less than the minimum percentage of
the Outstanding Limited Partner Interests (including Limited Partner Interests
deemed owned by the General Partner) that would be necessary to authorize or
take such action at a meeting at which all the Limited Partners were present
and voted (unless such provision conflicts with any rule, regulation,
guideline or requirement of any National Securities Exchange on which the
Limited Partner Interests are listed for trading, in which case the rule,
regulation, guideline or requirement of such exchange shall govern). Prompt
notice of the taking of action without a meeting shall be given to the Limited
Partners who have not approved in writing. The General Partner may specify
that any written ballot submitted to Limited Partners for the purpose of
taking any action without a meeting shall be returned to the Partnership
within the time period, which shall be not less than 20 days, specified by the
General Partner. If a ballot returned to the Partnership does not vote all of
the Limited Partner Interests held by the Limited Partners the Partnership
shall be deemed to have failed to receive a ballot for the Limited Partner
Interests that were not voted. If approval of the taking of any action by the
Limited Partners is solicited by any Person other than by or on behalf of the
General Partner, the written approvals shall have no force and effect unless
and until (a) they are deposited with the Partnership in care of the General
Partner, (b) approvals sufficient to take the action proposed are dated as of
a date not more than 90 days prior to the date sufficient approvals are
deposited with the Partnership and (c) an Opinion of Counsel is delivered to
the General Partner to the effect that the exercise of such right and the
action proposed to be taken with respect to any particular matter (i) will not
cause the Limited Partners to be deemed to be taking part in the management
and control of the business and affairs of the Partnership so as to jeopardize
the Limited Partners' limited liability, and (ii) is otherwise permissible
under the state statutes then governing the rights, duties and liabilities of
the Partnership and the Partners.
13.12 Voting and Other Rights.
(a) Only those Record Holders of the Limited Partner Interests on the Record
Date set pursuant to Section 13.6 (and also subject to the limitations
contained in the definition of "Outstanding") shall be entitled to notice of,
and to vote at, a meeting of Limited Partners or to act with respect to
matters as to which the holders of the Outstanding Limited Partner Interests
have the right to vote or to act. All references in this Agreement to votes
of, or other acts that may be taken by, the Outstanding Limited Partner
Interests shall be deemed to be references to the votes or acts of the Record
Holders of such Outstanding Limited Partner Interests.
(b) With respect to Limited Partner Interests that are held for a Person's
account by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose name such
Limited Partner Interests are registered, such other Person shall, in
exercising the voting rights in respect of such Limited Partner Interests on
any matter, and unless the arrangement between such Persons provides
otherwise, vote such Limited Partner Interests in favor of, and at the
direction of, the Person who is the beneficial owner, and the Partnership
shall be entitled to assume it is so acting without further inquiry. The
provisions of this Section 13.12(b) (as well as all other provisions of this
Agreement) are subject to the provisions of Section 4.3.
ARTICLE XIV
Merger
14.1 Authority. The Partnership may merge or consolidate with one or more
corporations, limited liability companies, business trusts or associations,
real estate investment trusts, common law trusts or unincorporated businesses,
including a general partnership or limited partnership, formed under the laws
of the State of Delaware
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or any other state of the United States of America, pursuant to a written
agreement of merger or consolidation ("Merger Agreement") in accordance with
this Article XIV.
14.2 Procedure for Merger or Consolidation. Merger or consolidation of the
Partnership pursuant to this Article XIV requires the prior approval of the
General Partner. If the General Partner shall determine, in the exercise of
its discretion, to consent to the merger or consolidation, the General Partner
shall approve the Merger Agreement, which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
(b) The name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender
of such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 14.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
14.3 Approval by Limited Partners of Merger or Consolidation.
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of Limited Partners, whether at a special meeting or by
written consent, in either case in accordance with the requirements of Article
XIII. A copy or a summary of the Merger Agreement shall be included in or
enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a
Unit Majority unless the Merger Agreement contains any provision that, if
contained in an amendment to this Agreement, the provisions of this Agreement
or the Delaware Act would require for its approval the vote or consent of a
greater percentage of the Outstanding Limited Partner
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Interests or of any class of Limited Partners, in which case such greater
percentage vote or consent shall be required for approval of the Merger
Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Limited Partners, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation
may be abandoned pursuant to provisions therefor, if any, set forth in the
Merger Agreement.
(d) Notwithstanding anything else contained in this Article XIV or in this
Agreement, the General Partner is permitted, in its discretion and without
Limited Partner approval, to (i) convert the Partnership or any Group Member
to another type of limited liability entity as provided by Section 17-219 of
the Delaware Act or (ii) merge the Partnership or any Group Member into, or
convey all of the Partnership's assets to, another limited liability entity
which shall be newly formed and shall have no assets, liabilities or
operations at the time of such merger or conveyance other than those it
receives from the Partnership or other Group Member, provided that in any such
case (A) the General Partner has received an Opinion of Counsel that the
conversion, merger or conveyance, as the case may be, would not result in the
loss of the limited liability of any Limited Partner or any member in the
Operating Partnership or cause the Partnership or Operating Partnership to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not previously
treated as such), (ii) the sole purpose of such conversion, merger or
conveyance is to effect a mere change in the legal form of the Partnership
into another limited liability entity and iii) the governing instruments of
the new entity provide the Limited Partners with rights and obligations that
are, in all material respects, the same rights and obligations of the Limited
Partners hereunder.
14.4 Certificate of Merger. Upon the required approval by the General
Partner and the Limited Partners of a Merger Agreement, a certificate of
merger shall be executed and filed with the Secretary of State of the State of
Delaware in conformity with the requirements of the Delaware Act.
14.5 Effect of Merger.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities, shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article shall not be
deemed to result in a transfer or assignment of assets or liabilities from one
entity to another.
ARTICLE XV
Right to Acquire Limited Partner Interests
15.1 Right to Acquire Limited Partner Interests.
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 15% of the total Limited Partner Interests of any class then
Outstanding is held by Persons other than the General Partner and its
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Affiliates, the General Partner shall then have the right, which right it may
assign and transfer in whole or in part to the Partnership or any Affiliate of
the General Partner, exercisable in its sole discretion, to purchase all, but
not less than all, of such Limited Partner Interests of such class then
Outstanding held by Persons other than the General Partner and its Affiliates,
at the greater of (x) the Current Market Price as of the date three days prior
to the date that the notice described in Section 15.1(b) is mailed and (y) the
highest price paid by the General Partner or any of its Affiliates for any
such Limited Partner Interest of such class purchased during the 90-day period
preceding the date that the notice described in Section 15.1(b) is mailed. As
used in this Agreement, (i) "Current Market Price" as of any date of any class
of Limited Partner Interests listed or admitted to trading on any National
Securities Exchange means the average of the daily Closing Prices (as
hereinafter defined) per limited partner interest of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately prior to such
date; (ii) "Closing Price" for any day means the last sale price on such day,
regular way, or in case no such sale takes place on such day, the average of
the closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such Limited
Partner Interests of such class are listed or admitted to trading or, if such
Limited Partner Interests of such class are not listed or admitted to trading
on any National Securities Exchange (other than the Nasdaq Stock Market), the
last quoted price on such day or, if not so quoted, the average of the high
bid and low asked prices on such day in the over-the-counter market, as
reported by the Nasdaq Stock Market or such other system then in use, or, if
on any such day such Limited Partner Interests of such class are not quoted by
any such organization, the average of the closing bid and asked prices on such
day as furnished by a professional market maker making a market in such
Limited Partner Interests of such class selected by the General Partner, or if
on any such day no market maker is making a market in such Limited Partner
Interests of such class, the fair value of such Limited Partner Interests on
such day as determined reasonably and in good faith by the General Partner;
and (iii) "Trading Day" means a day on which the principal National Securities
Exchange on which such Limited Partner Interests of any class are listed or
admitted to trading is open for the transaction of business or, if Limited
Partner Interests of a class are not listed or admitted to trading on any
National Securities Exchange, a day on which banking institutions in New York
City generally are open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner Interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "Notice of Election to
Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner Interests of
such class (as of a Record Date selected by the General Partner) at least 10,
but not more than 60, days prior to the Purchase Date. Such Notice of Election
to Purchase shall also be published for a period of at least three consecutive
days in at least two daily newspapers of general circulation printed in the
English language and published in the Borough of Manhattan, New York. The
Notice of Election to Purchase shall specify the Purchase Date and the price
(determined in accordance with Section 15.1(a)) at which Limited Partner
Interests will be purchased and state that the General Partner, its Affiliate
or the Partnership, as the case may be, elects to purchase such Limited
Partner Interests, upon surrender of Certificates representing such Limited
Partner Interests in exchange for payment, at such office or offices of the
Transfer Agent as the Transfer Agent may specify, or as may be required by any
National Securities Exchange on which such Limited Partner Interests are
listed or admitted to trading. Any such Notice of Election to Purchase mailed
to a Record Holder of Limited Partner Interests at his address as reflected in
the records of the Transfer Agent shall be conclusively presumed to have been
given regardless of whether the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the Partnership, as the
case may be, shall deposit with the Transfer Agent cash in an amount
sufficient to pay the aggregate purchase price of all of such Limited Partner
Interests to be purchased in accordance with this Section 15.1. If the Notice
of Election to Purchase shall have been duly given as aforesaid at least 10
days prior to the Purchase Date, and if on or prior to the Purchase Date the
deposit described in the preceding sentence has been made for the benefit of
the holders of Limited Partner Interests subject to purchase as provided
herein, then from and after the Purchase Date, notwithstanding that any
Certificate shall not have been surrendered for purchase, all rights of the
holders of such Limited Partner Interests (including any rights pursuant to
Articles IV, V, VI, and XII) shall thereupon cease, except the right to
receive the purchase price
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(determined in accordance with Section 15.1(a)) for Limited Partner Interests
therefor, without interest, upon surrender to the Transfer Agent of the
Certificates representing such Limited Partner Interests, and such Limited
Partner Interests shall thereupon be deemed to be transferred to the General
Partner, its Affiliate or the Partnership, as the case may be, on the record
books of the Transfer Agent and the Partnership, and the General Partner or
any Affiliate of the General Partner, or the Partnership, as the case may be,
shall be deemed to be the owner of all such Limited Partner Interests from and
after the Purchase Date and shall have all rights as the owner of such Limited
Partner Interests (including all rights as owner of such Limited Partner
Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an Outstanding
Limited Partner Interest subject to purchase as provided in this Section 15.1
may surrender his Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described in Section
15.1(a), therefor, without interest thereon.
ARTICLE XVI
General Provisions
16.1 Addresses and Notices. Any notice, demand, request, report or proxy
materials required or permitted to be given or made to a Partner or Assignee
under this Agreement shall be in writing and shall be deemed given or made
when delivered in person or when sent by first class United States mail or by
other means of written communication to the Partner or Assignee at the address
described below. Any notice, payment or report to be given or made to a
Partner or Assignee hereunder shall be deemed conclusively to have been given
or made, and the obligation to give such notice or report or to make such
payment shall be deemed conclusively to have been fully satisfied, upon
sending of such notice, payment or report to the Record Holder of such
Partnership Securities at his address as shown on the records of the Transfer
Agent or as otherwise shown on the records of the Partnership, regardless of
any claim of any Person who may have an interest in such Partnership
Securities by reason of any assignment or otherwise. An affidavit or
certificate of making of any notice, payment or report in accordance with the
provisions of this Section 16.1 executed by the General Partner, the Transfer
Agent or the mailing organization shall be prima facie evidence of the giving
or making of such notice, payment or report. If any notice, payment or report
addressed to a Record Holder at the address of such Record Holder appearing on
the books and records of the Transfer Agent or the Partnership is returned by
the United States Post Office marked to indicate that the United States Postal
Service is unable to deliver it, such notice, payment or report and any
subsequent notices, payments and reports shall be deemed to have been duly
given or made without further mailing (until such time as such Record Holder
or another Person notifies the Transfer Agent or the Partnership of a change
in his address) if they are available for the Partner or Assignee at the
principal office of the Partnership for a period of one year from the date of
the giving or making of such notice, payment or report to the other Partners
and Assignees. Any notice to the Partnership shall be deemed given if received
by the General Partner at the principal office of the Partnership designated
pursuant to Section 2.3. The General Partner may rely and shall be protected
in relying on any notice or other document from a Partner, Assignee or other
Person if believed by it to be genuine.
16.2 Further Action. The parties shall execute and deliver all documents,
provide all information and take or refrain from taking action as may be
necessary or appropriate to achieve the purposes of this Agreement.
16.3 Binding Effect. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their heirs, executors, administrators,
successors, legal representatives and permitted assigns.
16.4 Integration. This Agreement constitutes the entire agreement among the
parties hereto pertaining to the subject matter hereof and supersedes all
prior agreements and understandings pertaining thereto.
16.5 Creditors. None of the provisions of this Agreement shall be for the
benefit of, or shall be enforceable by, any creditor of the Partnership.
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16.6 Waiver. No failure by any party to insist upon the strict performance
of any covenant, duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall constitute waiver
of any such breach of any other covenant, duty, agreement or condition.
16.7 Counterparts. This Agreement may be executed in counterparts, all of
which together shall constitute an agreement binding on all the parties
hereto, notwithstanding that all such parties are not signatories to the
original or the same counterpart. Each party shall become bound by this
Agreement immediately upon affixing its signature hereto or, in the case of a
Person acquiring a Unit, upon accepting the certificate evidencing such Unit
or executing and delivering a Transfer Application as herein described,
independently of the signature of any other party.
16.8 Applicable Law. This Agreement shall be construed in accordance with
and governed by the laws of the State of Delaware, without regard to the
principles of conflicts of law.
16.9 Invalidity of Provisions. If any provision of this Agreement is or
becomes invalid, illegal or unenforceable in any respect, the validity,
legality and enforceability of the remaining provisions contained herein shall
not be affected thereby.
16.10 Consent of Partners. Each Partner hereby expressly consents and agrees
that, whenever in this Agreement it is specified that an action may be taken
upon the affirmative vote or consent of less than all of the Partners, such
action may be so taken upon the concurrence of less than all of the Partners
and each Partner shall be bound by the results of such action.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENERAL PARTNER:
ENTERPRISE PRODUCTS GP, LLC
By:__________________________________
Name:
Title:
EPC PARTNERS II, INC.
By:__________________________________
Name:
Title:
LIMITED PARTNERS:
All Limited Partners now and
hereafter admitted as Limited
Partners of the Partnership,
pursuant to powers of attorney now
and hereafter executed in favor
of, and granted and delivered to
the General Partner.
By:__________________________________
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ATTACHMENT I
DEFINED TERMS
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or
business of another Person for the purpose of increasing the operating
capacity or revenues of the Partnership Group from the operating capacity or
revenues of the Partnership Group existing immediately prior to such
transaction.
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the
end of such fiscal year, are reasonably expected to be allocated to such
Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code
and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such fiscal year, are reasonably expected
to be made to such Partner in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting increases to
such Partner's Capital Account that are reasonably expected to occur during
(or prior to) the year in which such distributions are reasonably expected to
be made (other than increases as a result of a minimum gain chargeback
pursuant to Section 6.1(d)(i) or 6.1(d)(ii)). The foregoing definition of
Adjusted Capital Account is intended to comply with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(ii)(d) and shall be interpreted consistently
therewith. The "Adjusted Capital Account" of a Partner in respect of a General
Partner Interest, a Common Unit, a Subordinated Unit or any other specified
interest in the Partnership shall be the amount which such Adjusted Capital
Account would be if such General Partner Interest, Common Unit, Subordinated
Unit, or other interest in the Partnership were the only interest in the
Partnership held by a Partner from and after the date on which such General
Partner Interest, Common Unit, Subordinated Unit, or other interest was first
issued.
"Adjusted Operating Surplus" means, with respect to any period, Operating
Surplus generated during such period (a) less (i) any net increase in working
capital borrowings during such period and (ii) any net reduction in cash
reserves for Operating Expenditures during such period not relating to an
Operating Expenditure made during such period, and (b) plus (i) any net
decrease in working capital borrowings during such period and (ii) any net
increase in cash reserves for Operating Expenditures during such period
required by any debt instrument for the repayment of principal, interest or
premium. Adjusted Operating Surplus does not include that portion of Operating
Surplus included in clause (a)(i) or (a)(iii)(A) of the definition of
Operating Surplus.
"Adjusted Property" means any property the Carrying Value of which has been
adjusted pursuant to Section 5.5(d)(i) or 5.5(d)(ii). Once an Adjusted
Property is deemed contributed to a new partnership in exchange for an
interest in the new partnership, followed by the deemed liquidation of the
Partnership for federal income tax purposes upon a termination of the
Partnership pursuant to Treasury Regulation Section 1.708-(b)(1)(iv), such
property shall thereafter constitute a Contributed Property until the Carrying
Value of such property is subsequently adjusted pursuant to Section 5.5(d)(i)
or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question. As used
herein, the term "control" means the possession, direct or indirect, of the
power to direct or cause the direction of the management and policies of a
Person, whether through ownership of voting securities, by contract or
otherwise.
"Aggregate Remaining Net Positive Adjustments" means, as of the end of any
taxable period, the sum of the Remaining Net Positive Adjustments of all the
Partners.
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"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt. The General Partner shall, in its discretion, use such method as it
deems reasonable and appropriate to allocate the aggregate Agreed Value of
Contributed Properties contributed to the Partnership in a single or
integrated transaction among each separate property on a basis proportional to
the fair market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
of Enterprise Products Partners L.P., as it may be amended, supplemented or
restated from time to time.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under
this Agreement and who has executed and delivered a Transfer Application as
required by this Agreement, but who has not been admitted as a Substituted
Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in
which such Person has at least a 20% beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity; and (c) any
relative or spouse of such Person, or any relative of such spouse, who has the
same principal residence as such Person.
"Audit and Conflicts Committee" means a committee of the Board of Directors
of the General Partner composed entirely of two or more directors who are
neither members, officers nor employees of the General Partner nor members,
officers, directors or employees of any Affiliate of the General Partner.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such Quarter, and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such Quarter resulting from (A)
borrowings under the Working Capital Facility made subsequent to the end of
such Quarter or (B) Interim Capital Transactions after the end of such
Quarter designated by the General Partner as Operating Surplus in
accordance with clause (a)(iii)(A) of the definition of Operating Surplus,
less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such Quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any Group Member is a
party or by which it is bound or its assets are subject or (iii) provide
funds for distributions under Section 6.4 or 6.5 in respect of any one or
more of the next four Quarters; provided, however, that the General Partner
may not establish cash reserves pursuant to (iii) above if the effect of
such reserves would be that the Partnership is unable to distribute the
Minimum Quarterly Distribution on all Common Units with respect to such
Quarter; and, provided further, that disbursements made by a Group Member
or cash reserves established, increased or reduced after the end of such
Quarter, but on or before the date of determination of Available Cash with
respect to such Quarter, shall be deemed to have been made, established,
increased or reduced, for purposes of determining Available Cash, within
such Quarter if the General Partner so determines.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Book-Tax Disparity" means with respect to any item of Contributed Property
or Adjusted Property, as of the date of any determination, the difference
between the Carrying Value of such Contributed Property or
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Adjusted Property and the adjusted basis thereof for federal income tax
purposes as of such date. A Partner's share of the Partnership's Book-Tax
Disparities in all of its Contributed Property and Adjusted Property will be
reflected by the difference between such Partner's Capital Account balance as
maintained pursuant to Section 5.5 and the hypothetical balance of such
Partner's Capital Account computed as if it had been maintained strictly in
accordance with federal income tax accounting principles.
"Business Day" means Monday through Friday of each week, except that a legal
holiday recognized as such by the government of the United States of America
or the states of New York or Texas shall not be regarded as a Business Day.
"Capital Account" means the capital account maintained for a Partner
pursuant to Section 5.5. The "Capital Account" of a Partner in respect of a
General Partner Interest, a Common Unit, a Subordinated Unit, or any other
Partnership Interest shall be the amount which such Capital Account would be
if such General Partner Interest, Common Unit, Subordinated Unit, or other
Partnership Interest were the only interest in the Partnership held by a
Partner from and after the date on which such General Partner Interest, Common
Unit, Subordinated Unit, or other Partnership Interest was first issued.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership.
"Capital Improvement" means any (a) addition or improvement to the capital
assets owned by any Group Member or (b) acquisition of existing, or the
construction of new, capital assets, in each case made to increase the
operating capacity or revenues of the Partnership Group from the operating
capacity or revenues of the Partnership Group existing immediately prior to
such addition, improvement, acquisition or construction.
"Capital Surplus" has the meaning assigned to such term in Section 6.3(a).
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all
depreciation, amortization and cost recovery deductions charged to the
Partners' and Assignees' Capital Accounts in respect of such Contributed
Property, and (b) with respect to any other Partnership property, the adjusted
basis of such property for federal income tax purposes, all as of the time of
determination. The Carrying Value of any property shall be adjusted from time
to time in accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect
changes, additions or other adjustments to the Carrying Value for dispositions
and acquisitions of Partnership properties, as deemed appropriate by the
General Partner.
"Cause" means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as general partner
of the Partnership.
"Certificate" means a certificate, substantially in the form of Exhibit A to
this Agreement or in such other form as may be adopted by the General Partner
in its discretion, issued by the Partnership evidencing ownership of one or
more Common Units or a certificate, in such form as may be adopted by the
General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more other Partnership Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State
of Delaware as referenced in Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other
Person) is an Eligible Citizen.
"Claim" has the meaning assigned to such term in Section 7.12(c).
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"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time and as interpreted by the applicable regulations thereunder.
Any reference herein to a specific section or sections of the Code shall be
deemed to include a reference to any corresponding provision of successor law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and of the
General Partner (exclusive of its interest as a holder of a General Partner
Interest) and having the rights and obligations specified with respect to
Common Units in this Agreement. The term "Common Unit" does not refer to a
Subordinated Unit prior to its conversion into a Common Unit pursuant to the
terms hereof.
"Common Unit Arrearage" means, with respect to any Common Unit, whenever
issued, as to any Quarter within the Subordination Period, the excess, if any,
of (a) the Minimum Quarterly Distribution with respect to a Common Unit in
respect of such Quarter over (b) the sum of all Available Cash distributed
with respect to a Common Unit in respect of such Quarter pursuant to Section
6.4(a)(i).
"Contributed Property" means each property or other asset, in such form as
may be permitted by the Delaware Act, but excluding cash, contributed to the
Partnership (or deemed contributed to a new partnership on termination of the
Partnership pursuant to Section 708 of the Code). Once the Carrying Value of a
Contributed Property is adjusted pursuant to Section 5.5(d), such property
shall no longer constitute a Contributed Property, but shall be deemed an
Adjusted Property.
"Cumulative Common Unit Arrearage" means, with respect to any Common Unit,
whenever issued, and as of the end of any Quarter, the excess, if any, of (a)
the sum resulting from adding together the Common Unit Arrearage as to an
Initial Common Unit for each of the Quarters within the Subordination Period
ending on or before the last day of such Quarter over (b) the sum of any
distributions theretofore made pursuant to Section 6.4(a)(ii) and the second
sentence of Section 6.5 with respect to an Initial Common Unit (including any
distributions to be made in respect of the last of such Quarters).
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(d)(xi).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. (S) 17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
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"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes
to do business from time to time, and whose status as a Limited Partner or
Assignee does not or would not subject such Group Member to a significant risk
of cancellation or forfeiture of any of its properties or any interest
therein.
"EPC" means Enterprise Products Company, a Texas Subchapter S corporation.
"EPC Partners II" has the meaning assigned to such term in the introductory
paragraph hereof.
"EPCO Agreement" means the EPCO Agreement dated the Closing Date among EPCO,
the Partnership, the Operating Partnership and the General Partner.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"Existing Capital Commitment Amount" means $46.5 million, which amount
represents the aggregate estimated capital costs to be incurred by the
Partnership Group in connection with the following proposed projects:
ESTIMATED
PROPOSED PROJECT CAPITAL COSTS
---------------- -------------
(i) Baton Rouge Fractionator............................. $20.0 Million
(ii) Tri-State Pipeline................................... $10.0 Million
(iii) Wilprise Pipeline.................................... $ 8.0 Million
(iv) NGL Product Chiller.................................. $ 8.5 Million
-------------
Total................................................ $46.5 Million
each of which is described in greater detail in the Registration Statement;
provided, however, that if for any reason (other than as a result of the
cancellation of such project) the actual capital costs incurred by the
Partnership Group in connection with any of the proposed projects
referenced above is less than the estimated capital cost for such project
as set forth above, the "Existing Capital Commitment Amount" shall be
reduced by the amount of such difference.
"Final Subordinated Units" has the meaning assigned to such term in Section
6.1(d)(x).
"First Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(D).
"First Target Distribution" means $0.506 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on September
30, 1998, it means the product of $0.506 multiplied by a fraction of which the
numerator is the number of days in the period commencing on the Closing Date
and ending on September 30, 1998, and of which the denominator is 92), subject
to adjustment in accordance with Sections 6.6 and 6.9.
"General Partner" means Enterprise Products GP, LLC, a Delaware limited
liability company, and its successors and permitted assigns as general partner
of the Partnership.
"General Partner Interest" means the ownership interest of the General
Partner in the Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may be evidenced
by Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which the General Partner is entitled as
provided in this Agreement, together with all obligations of the General
Partner to comply with the terms and provisions of this Agreement.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation
made to 10 or more Persons) or disposing of any Partnership Securities with
any other Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
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"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
"Incentive Distributions" means any amount of cash distributed to the
General Partner pursuant to Sections 6.4(a)(v), 6.4(a)(vi), 6.4(a)(vii),
6.4(b)(iii), 6.4(b)(iv) or 6.4(b)(v) that exceeds that amount equal to 1% of
the aggregate amount of cash then being distributed pursuant to such
provisions.
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, any Departing Partner and any
Person who is or was an Affiliate of the General Partner or any Departing
Partner, (b) any Person who is or was a member, director, officer, employee,
agent or trustee of a Group Member, (c) any Person who is or was an officer,
member, partner, director, employee, agent or trustee of the General Partner
or any Departing Partner or any Affiliate of the General Partner or any
Departing Partner, or any Affiliate of any such Person and (d) any Person who
is or was serving at the request of the General Partner or any Departing
Partner or any such Affiliate as a director, officer, employee, member,
partner, agent, fiduciary or trustee of another Person; provided, that a
Person shall not be an Indemnitee by reason of providing, on a fee-for-
services basis, trustee, fiduciary or custodial services.
"Initial Common Units" means the Common Units sold in the Initial Offering.
"Initial Limited Partners" means EPC Partners II and the Underwriters, in
each case upon being admitted to the Partnership in accordance with Section
10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"Initial Unit Price" means (a) with respect to the Common Units and the
Subordinated Units, the initial public offering price per Common Unit at which
the Underwriters offered the Common Units to the public for sale as set forth
on the cover page of the prospectus included as part of the Registration
Statement and first issued at or after the time the Registration Statement
first became effective or (b) with respect to any other class or series of
Units, the price per Unit at which such class or series of Units is initially
sold by the Partnership, as determined by the General Partner, in each case
adjusted as the General Partner determines to be appropriate to give effect to
any distribution, subdivision or combination of Units.
"Interim Capital Transactions" means the following transactions if they
occur prior to the Liquidation Date: (a) borrowings, refinancings or
refundings of indebtedness and sales of debt securities (other than borrowings
under the Working Capital Facility and other than for items purchased on open
account in the ordinary course of business) by any Group Member; (b) sales of
equity interests by any Group Member (including Common Units sold to the
underwriters pursuant to the exercise of the Over-Allotment Option); and (c)
sales or other voluntary or involuntary dispositions of any assets of any
Group Member (other than (i) sales or other dispositions of inventory,
accounts receivable and other assets in the ordinary course of business, and
(ii) sales or other dispositions of assets as part of normal retirements or
replacements), in each case prior to the Liquidation Date.
"Issue Price" means the price at which a Unit is purchased from the
Partnership, after taking into account any sales commission or underwriting
discount charged to the Partnership.
"Limited Partner" means, unless the context otherwise requires, (a) each
Initial Limited Partner, each Substituted Limited Partner, each Additional
Limited Partner and any Partner upon the change of its status from General
Partner to Limited Partner pursuant to Section 11.3 or (b) solely for purposes
of Articles V, VI, VII and IX and Sections 12.3 and 12.4, each Assignee.
"Limited Partner Interest" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units,
Subordinated Units, or other Partnership Securities or a combination thereof
or interest therein, and includes any and all benefits to which such Limited
Partner or Assignee is entitled as provided in this Agreement, together with
all obligations of such Limited Partner or Assignee to comply with the terms
and provisions of this Agreement.
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"Liquidation Date" means (a) in the case of an event giving rise to the
dissolution of the Partnership of the type described in clauses (a) and (b) of
the first sentence of Section 12.2, the date on which the applicable time
period during which the holders of Outstanding Units have the right to elect
to reconstitute the Partnership and continue its business has expired without
such an election being made, and (b) in the case of any other event giving
rise to the dissolution of the Partnership, the date on which such event
occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"Minimum Quarterly Distribution" means $0.45 per Unit per Quarter (or with
respect to the period commencing on the Closing Date and ending on September
30, 1998, it means the product of $0.45 multiplied by a fraction of which the
numerator is the number of days in the period commencing on the Closing Date
and ending on September 30, 1998, and of which the denominator is 92), subject
to adjustment in accordance with Sections 6.6 and 6.9.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the
time of distribution, in either case, as determined under Section 752 of the
Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss)
for such taxable year over the Partnership's items of loss and deduction
(other than those items taken into account in the computation of Net
Termination Gain or Net Termination Loss) for such taxable year. The items
included in the calculation of Net Income shall be determined in accordance
with Section 5.5(b) and shall not include any items specially allocated under
Section 6.1(d).
"Net Loss" means, for any taxable year, the excess, if any, of the
Partnership's items of loss and deduction (other than those items taken into
account in the computation of Net Termination Gain or Net Termination Loss)
for such taxable year over the Partnership's items of income and gain (other
than those items taken into account in the computation of Net Termination Gain
or Net Termination Loss) for such taxable year. The items included in the
calculation of Net Loss shall be determined in accordance with Section 5.5(b)
and shall not include any items specially allocated under Section 6.1(d).
"Net Termination Gain" means, for any taxable year, the sum, if positive, of
all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Gain shall be determined in accordance with Section 5.5(b) and
shall not include any items of income, gain or loss specially allocated under
Section 6.1(d).
"Net Termination Loss" means, for any taxable year, the sum, if negative, of
all items of income, gain, loss or deduction recognized by the Partnership
after the Liquidation Date. The items included in the determination of Net
Termination Loss shall be determined in accordance with Section 5.5(b) and
shall not include any items of income, gain or loss specially allocated under
Section 6.1(d).
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"Non-citizen Assignee" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Partnership Interest the General Partner has become the Substituted
Limited Partner, pursuant to Section 4.9.
"Nonrecourse Built-in Gain" means with respect to any Contributed Properties
or Adjusted Properties that are subject to a mortgage or pledge securing a
Nonrecourse Liability, the amount of any taxable gain that would be allocated
to the Partners pursuant to Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a taxable transaction in
full satisfaction of such liabilities and for no other consideration.
"Nonrecourse Deductions" means any and all items of loss, deduction or
expenditures (described in Section 705(a)(2)(B) of the Code) that, in
accordance with the principles of Treasury Regulation Section 1.704-2(b), are
attributable to a Nonrecourse Liability.
"Nonrecourse Liability" has the meaning set forth in Treasury Regulation
Section 1.752-1(a)(2).
"Notice of Election to Purchase" has the meaning assigned to such term in
Section 15.1(b) hereof.
"Operating Expenditures" means all Partnership Group expenditures,
including, but not limited to, taxes, reimbursements of the General Partner,
debt service payments, and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests.
For purposes of the foregoing, at the election and in the reasonable
discretion of the General Partner, any payment of principal or premium
shall be deemed to be refunded or refinanced by any indebtedness incurred
or to be incurred by the Partnership Group within 180 days before or after
such payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to Partners. Where capital expenditures are made in part for
Acquisitions or for Capital Improvements and in part for other purposes,
the General Partner's good faith allocation between the amounts paid for
each shall be conclusive.
"Operating Partnership" means Enterprise Products Operating L.P., a Delaware
limited partnership, and any successors thereto.
"Operating Partnership Agreement" means the Amended and Restated Agreement
of Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time.
"Operating Surplus," means, with respect to any period ending prior to the
Liquidation Date, on a cumulative basis and without duplication:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand as of the close of business on the Closing Date (other than the
Existing Capital Commitment Amount), (ii) all cash receipts of the
Partnership Group for the period beginning on the Closing Date and ending
with the last day of such period, other than cash receipts from Interim
Capital Transactions (except to the extent specified in Section 6.5 and
except as set forth in clause (iii) immediately following), and (iii) as
determined by the General Partner, all or any portion of any cash receipts
of the Partnership Group during such period, or after the end of such
period but on or before the date of determination of Operating Surplus with
respect to such period, that constitute (A) cash receipts from Interim
Capital Transactions, provided that the total amount of cash receipts from
Interim Capital Transactions designated as "Operating Surplus" by the
General Partner pursuant to this clause (iii) since the Closing Date may
not exceed an aggregate amount equal to $60.0 million, and/or (B) cash
receipts from borrowings under the Working Capital Facility, less
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(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided, however, that disbursements made (including
contributions to a Group Member or disbursements on behalf of a Group
Member) or cash reserves established, increased or reduced after the end of
such period but on or before the date of determination of Operating Surplus
with respect to such period shall be deemed to have been made, established,
increased or reduced, for purposes of determining Operating Surplus, within
such period if the General Partner so determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
Quarter in which the Liquidation Date occurs and any subsequent Quarter
shall equal zero.
"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of its Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Option Closing Date" has the meaning assigned to such term in the
Underwriting Agreement.
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than the General
Partner or its Affiliates) beneficially owns 20% or more of any Outstanding
Partnership Securities of any class then Outstanding, all Partnership
Securities owned by such Person or Group shall not be voted on any matter and
shall not be considered to be Outstanding when sending notices of a meeting of
Limited Partners to vote on any matter (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under this Agreement, except that Common Units so owned shall
be considered to be Outstanding for purposes of Section 11.1(b)(iv) (such
Common Units shall not, however, be treated as a separate class of Partnership
Securities for purposes of this Agreement).
"Over-Allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Units having rights to
distributions or in liquidation ranking on a parity with the Common Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner, the Limited Partners and the holders
of Common Units and Subordinated Units.
"Partnership" means Enterprise Products Partners L.P., a Delaware limited
partnership, and any successors thereto.
"Partnership Group" means the Partnership, the Operating Partnership and any
Subsidiary of either such entity, treated as a single consolidated entity.
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"Partnership Interest" means an ownership interest in the Partnership, which
shall include General Partner Interests and Limited Partner Interests.
"Partnership Minimum Gain" means that amount determined in accordance with
the principles of Treasury Regulation Section 1.704-2(d).
"Partnership Security" means any class or series of equity interest in the
Partnership (but excluding any options, rights, warrants and appreciation
rights relating to any equity interest in the Partnership), including, without
limitation, Common Units and Subordinated Units.
"Percentage Interest" means as of the date of such determination (a) as to
the General Partner, 1.0%, (b) as to any Unitholder or Assignee holding Units,
the product obtained by multiplying (i) 99% less the percentage applicable to
clause (c) by (ii) the quotient obtained by dividing (A) the number of Units
held by such Unitholder or Assignee by (B) the total number of all Outstanding
Units, and (c) as to the holders of additional Partnership Securities issued
by the Partnership in accordance with Section 5.6, the percentage established
as a part of such issuance.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Per Unit Capital Amount" means, as of any date of determination, the
Capital Account, stated on a per Unit basis, underlying any Unit held by a
Person other than the General Partner or any Affiliate of the General Partner
who holds Units.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
equally among all designated Units in accordance with their relative
Percentage Interests and (b) when modifying Partners and Assignees,
apportioned among all Partners and Assignees in accordance with their
respective Percentage Interests.
"Purchase Date" means the date determined by the General Partner as the date
for purchase of all Outstanding Units (other than Units owned by the General
Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a fiscal quarter of
the Partnership.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Sections 734 or 743 of the Code)
upon the disposition of any property or asset of the Partnership, which gain
is characterized as ordinary income because it represents the recapture of
deductions previously taken with respect to such property or asset.
"Record Date" means the date established by the General Partner for
determining (a) the identity of the Record Holders entitled to notice of, or
to vote at, any meeting of Limited Partners or entitled to vote by ballot or
give approval of Partnership action in writing without a meeting or entitled
to exercise rights in respect of any lawful action of Limited Partners or (b)
the identity of Record Holders entitled to receive any report or distribution
or to participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a
particular Business Day, or with respect to other Partnership Securities, the
Person in whose name any such other Partnership Security is registered on the
books which the General Partner has caused to be kept as of the opening of
business on such Business Day.
"Redeemable Interests" means any Partnership Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.10.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-52537) as it has been or as it may be amended or
supplemented from time to time, filed by the Partnership with the
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Commission under the Securities Act to register the offering and sale of the
Common Units in the Initial Offering.
"Required Allocations" means (a) any limitation imposed on any allocation of
Net Losses or Net Termination Losses under Section 6.1(b) or 6.1(c)(ii) and
(b) any allocation of an item of income, gain, loss or deduction pursuant to
Section 6.1(d)(i), 6.1(d)(ii), 6.1(d)(iv), 6.1(d)(vi), 6.1(d)(vii) or
6.1(d)(ix).
"Residual Gain" or "Residual Loss" means any item of gain or loss, as the
case may be, of the Partnership recognized for federal income tax purposes
resulting from a sale, exchange or other disposition of a Contributed Property
or Adjusted Property, to the extent such item of gain or loss is not allocated
pursuant to Section 6.2(b)(i)(A) or 6.2(b)(ii)(A), respectively, to eliminate
Book-Tax Disparities.
"Restricted Activities" means the conduct within North America of the types
of businesses and activities engaged in by EPC and its Affiliates as of May
31, 1998; provided, however, that such term shall not include any business or
activities associated with the assets, properties or businesses of EPC and its
Affiliates as of June 2, 1998 (other than the Sorrento Pipeline System). As
used in this defined term, the Partnership Group and any Subsidiary of a Group
Member shall not be considered to be "Affiliates" of EPC.
"Second Liquidation Target Amount" has the meaning assigned to such term in
Section 6.1(c)(i)(E).
"Second Target Distribution" means $0.617 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on September
30, 1998, it means the product of $0.617 multiplied by a fraction of which the
numerator is equal to the number of days in the period commencing on the
Closing Date and ending on September 30, 1998, and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Special Approval" means approval by a majority of the members of the Audit
and Conflicts Committee.
"Subordinated Unit" means a Unit representing a fractional part of the
Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to Subordinated Units in this
Agreement. The term "Subordinated Unit" as used herein does not include a
Common Unit.
"Subordination Period" means the period commencing on the Closing Date and
ending on the first to occur of the following dates:
(a) the first day of any Quarter beginning after June 30, 2003, in
respect of which (i) (A) distributions of Available Cash from Operating
Surplus on each of the Outstanding Common Units and Subordinated Units with
respect to each of the three consecutive, non-overlapping four-Quarter
periods immediately preceding such date equaled or exceeded the sum of the
Minimum Quarterly Distribution on all Outstanding Common Units and
Subordinated Units during such periods and (B) the Adjusted Operating
Surplus generated during each of the three consecutive, non-overlapping
four-Quarter periods immediately preceding such date equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the Common Units
and Subordinated Units that were outstanding during such periods on a fully
diluted basis (i.e., taking into account for purposes of such determination
all Outstanding Common Units, all Outstanding Subordinated Units, all
Common Units and Subordinated Units issuable upon exercise of employee
options that have, as of the date of determination, already vested or are
scheduled to vest prior to the end of the Quarter immediately following the
Quarter with respect to which such determination is made, and all Common
Units and Subordinated Units that have as of the date of determination,
been earned by but not yet issued to management of the Partnership in
respect of incentive compensation), plus the related distribution on the
general partner Interest in the Partnership and on the general partner
interest in the Operating Partnership and (ii) there are no Cumulative
Common Unit Arrearages; and
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(b) the date on which the General Partner is removed as general partner
of the Partnership upon the requisite vote by holders of Outstanding Units
under circumstances where Cause does not exist and Units held by the
General Partner and its Affiliates are not voted in favor of such removal.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the
date of determination, by such Person, by one or more Subsidiaries of such
Person or a combination thereof, (b) a partnership (whether general or
limited) in which such Person or a Subsidiary of such Person is, at the date
of determination, a general or limited partner of such partnership, but only
if more than 50% of the partnership interests of such partnership (considering
all of the partnership interests of the partnership as a single class) is
owned, directly or indirectly, at the date of determination, by such Person,
by one or more Subsidiaries of such Person, or a combination thereof, or (c)
any other Person (other than a corporation or a partnership) in which such
Person, one or more Subsidiaries of such Person, or a combination thereof,
directly or indirectly, at the date of determination, has (i) at least a
majority ownership interest or (ii) the power to elect or direct the election
of a majority of the directors or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all
the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in Section
14.2(b).
"Third Target Distribution" means $0.784 per Unit per Quarter (or, with
respect to the period commencing on the Closing Date and ending on September
30, 1998, it means the product of $0.784 multiplied by a fraction of which the
numerator is equal to the number of days in the period commencing on the
Closing Date and ending on September 30, 1998, and of which the denominator is
92), subject to adjustment in accordance with Sections 6.6 and 6.9.
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"Transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time
to time by the Partnership to act as registrar and transfer agent for the
Common Units and as may be appointed from time to time by the Partnership to
act as registrar and transfer agent for any other Partnership Securities;
provided that if no Transfer Agent is specifically designated for any such
other Partnership Securities, the General Partner shall act in such capacity.
"Transfer Application" means an application and agreement for transfer of
Limited Partner Interests in the form set forth on the back of a Certificate
or in a form substantially to the same effect in a separate instrument.
"Underwriter" means each Person named as an underwriter in Schedule 1 to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated
, 1998, among the Underwriters, the Partnership and certain
other parties, providing for the purchase of Common Units by such
Underwriters.
"Unit" means a Partnership Security that is designated as a "Unit" and shall
include Common Units and Subordinated Units but shall not include a General
Partner Interest; provided, that each Common Unit at any time Outstanding
shall represent the same fractional part of the Partnership Interests of all
Limited Partners holding Common Units as each other Common Unit, and each
Subordinated Unit at any time Outstanding shall represent the same fractional
part of the Partnership Interests of all Limited Partners holding Subordinated
Units as each other Subordinated Units.
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"Unitholders" means the holders of Common Units and Subordinated Units.
"Unit Majority" means, (i) during the Subordination Period, at least a
majority of the Outstanding Common Units, excluding any Common Units held by
the General Partner and its Affiliates, and (ii) following the end of the
Subordination Period, at least a majority of the Outstanding Common Units.
"Unpaid MQD" has the meaning assigned to such term in Section 6.1(c)(i)(B).
"Unrealized Gain" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the fair market value
of such property as of such date (as determined under Section 5.5(d)) over (b)
the Carrying Value of such property as of such date (prior to any adjustment
to be made pursuant to Section 5.5(d) as of such date).
"Unrealized Loss" attributable to any item of Partnership property means, as
of any date of determination, the excess, if any, of (a) the Carrying Value of
such property as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the fair market value of such
property as of such date (as determined under Section 5.5(d)).
"Unrecovered Capital" means at any time, with respect to a Unit, the Initial
Unit Price less the sum of all distributions constituting Capital Surplus
theretofore made in respect of an Initial Common Unit and any distributions of
cash (or the Net Agreed Value of any distributions in kind) in connection with
the dissolution and liquidation of the Partnership theretofore made in respect
of an Initial Common Unit, adjusted as the General Partner determines to be
appropriate to give effect to any distribution, subdivision or combination of
such Units.
"U.S. GAAP" means United States Generally Accepted Accounting Principles
consistently applied.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
"Working Capital Facility" means any working capital credit facility of the
Partnership or the Operating Partnership that requires the outstanding balance
of any working capital borrowings thereunder to be reduced to $0 for at least
fifteen consecutive calendar days each fiscal year.
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APPENDIX B
No transfer of the Common Units evidenced hereby will be registered on the
books of the Company, unless the Certificate evidencing the Common Units to be
transferred is surrendered for registration or transfer and an Application for
Transfer of Common Units has been executed by a transferee either (a) on the
form set forth below or (b) on a separate application that the Company will
furnish on request without charge. A transferor of the Common Units shall have
no duty to the transferee with respect to execution of the transfer
application in order for such transferee to obtain registration of the
transfer of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Amended and
Restated Agreement of Limited Partnership of Enterprise Products Partners L.P.
(the "Company"), as amended, supplemented or restated to the date hereof (the
"Partnership Agreement"), (b) represents and warrants that the Assignee has
all right, power and authority and, if an individual, the capacity necessary
to enter into the Partnership Agreement, (c) appoints the General Partner and,
if a Liquidator shall be appointed, the Liquidator of the Company as the
Assignee's attorney-in-fact to execute, swear to, acknowledge and file any
document, including, without limitation, the Partnership Agreement and any
amendment thereto and the Certificate of Limited Partnership of the Company
and any amendment thereto, necessary or appropriate for the Assignee's
admission as a Substituted Limited Partner and as a party to the Partnership
Agreement, (d) gives the powers of attorney provided for in the Partnership
Agreement and (e) makes the waivers and gives the consents and approvals
contained in the Partnership Agreement. Capitalized terms not defined herein
have the meanings assigned to such terms in the Partnership Agreement.
Date: _______________________________ -------------------------------------
Signature of Assignee
- -------------------------------------
Social Security or other identifying -------------------------------------
number of Assignee Name and Address of Assignee
- -------------------------------------
Purchase Price including
commissions, if any
Type of Entity (check one):
[_] Individual[_] Partnership[_] Corporation
[_] Trust[_] Other (specify) ______________________________________________
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity[_] Non-resident Alien
[_] Foreign Corporation
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Company must withhold tax with respect to certain transfers of
property if a holder of an interest in the Company is a foreign person. To
inform the Company that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
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COMPLETE EITHER A OR B:
A.Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.My U.S. taxpayer identification number (Social Security Number) is ____ .
3.My home address is ____________________________________________________ .
B.Partnership, Corporation or Other Interestholder
1._________________________________________________________ is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2.The interestholder's U.S. employer identification number is ___________ .
3.The interestholder's office address and place of incorporation (if
applicable) is ___________________________________________________________ .
The interestholder agrees to notify the Company within sixty (60) days of
the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Company and that any false statement contained
herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
-------------------------------------
Name of Interestholder
-------------------------------------
Signature and Date
-------------------------------------
Title (if applicable)
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing,
and is holding for the account of any other person, this application
should be completed by an officer thereof or, in the case of a broker
or dealer, by a registered representative who is a member of a
registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or, in the case of any other
nominee holder, a person performing a similar function. If the Assignee
is a broker, dealer, bank, trust company, clearing corporation, other
nominee owner or an agent of any of the foregoing, the above
certification as to any person for whom the Assignee will hold the
Common Units shall be made to the best of the Assignee's knowledge.
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APPENDIX C
GLOSSARY OF TERMS
Acquisition. Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other
form of investment) control over all or a portion of the assets, properties or
business of another person for the purpose of increasing the operating
capacity or revenues of the Partnership Group from the operating capacity or
revenues of the Partnership Group existing immediately prior to such
transaction.
Adjusted Operating Surplus: With respect to any period, Operating Surplus
generated during such period (a) less (i) any net increase in working capital
borrowings during such period and (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and (b) plus (i) any net decrease in
working capital borrowings during such period and (ii) any net increase in
cash reserves for Operating Expenditures during such period required by any
debt instrument for the repayment of principal, interest or premium. Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) or (a)(iii)(A) of the definition of Operating Surplus.
Alkylation: A process whereby a high-octane blending component for gasolines
is derived from a catalytic combination of an isoparaffin and an olefin.
Audit and Conflicts Committee: A committee of the board of directors of the
General Partner composed entirely of two or more directors who are neither
officers, employees or security holders of the General Partner nor officers,
directors, employees or security holders of any affiliate of the General
Partner.
Available Cash: With respect to any quarter prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand at the end of such quarter and (ii) all additional cash and cash
equivalents of the Partnership Group on hand on the date of determination
of Available Cash with respect to such quarter resulting from (A)
borrowings under the Company's working capital facility purposes made
subsequent to the end of such quarter or (B) Interim Capital Transactions
after the end of such Quarter designated by the General Partner as
Operating Surplus in accordance with clause (a)(iii)(A) of the definition
of Operating Surplus, less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership Group (including reserves
for future capital expenditures and for anticipated future credit needs of
the Partnership Group) subsequent to such quarter, (ii) comply with
applicable law or any loan agreement, security agreement, mortgage, debt
instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are
subject, or (iii) provide funds for distributions under Section 6.4 or 6.5
of the Partnership Agreement in respect of any one or more of the next four
quarters; provided, however, that the General Partner may not establish
cash reserves pursuant to (iii) above if the effect of such reserves would
be that the Company is unable to distribute the Minimum Quarterly
Distribution on all Common Units with respect to such quarter; and,
provided further, that disbursements made by a Group Member or cash
reserves established, increased or reduced after the end of such quarter,
but on or before the date of determination of Available Cash with respect
to such quarter shall be deemed to have been made, established, increased
or reduced for purposes of determining Available Cash within such quarter
if the General Partner so determines. Notwithstanding the foregoing,
"Available Cash" with respect to the quarter in which the liquidation of
the Company occurs and any subsequent quarter shall equal zero.
Barrel: One barrel equals 42 U.S. gallons.
Capital Account: The capital account maintained for a partner pursuant to
the Partnership Agreement. The Capital Account of a partner in respect of a
general partner interest, a Common Unit, a Subordinated Unit or any other
Partnership Interest shall be the amount which such Capital Account would be
if such general partner interest, Common Unit, Subordinated Unit, or other
Partnership Interest were the only interest in the Company held by a partner
from and after the date on which such general partner interest, Common Unit,
Subordinated Unit or other Partnership Interest was first issued.
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Capital Improvements. Additions or improvements to the capital assets owned
by any member of the Partnership Group or the acquisition of existing, or the
construction of new, capital assets, in each case made to increase the
operating capacity or revenues of the Partnership Group existing immediately
prior to such addition, improvement, acquisition or construction.
Capital Surplus: All Available Cash distributed by the Company from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Company equals
the Operating Surplus as of the end of the quarter prior to such distribution.
Any excess Available Cash will be deemed to be Capital Surplus.
Cause: Means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as a general
partner of the Company.
CERCLA and Superfund: The Comprehensive Environmental Response, Compensation
and Liability Act of 1980, as amended.
Closing Date: The first date on which Common Units are sold by the Company
to the Underwriters pursuant to the provisions of the Underwriting Agreement.
Code: Internal Revenue Code of 1986, as amended.
Commercial: When used to describe production of NGL products, including
isobutane, or high purity propylene, refers to production in facilities which
process such products for sale to third parties or as a toll processor for
third parties as opposed to production in facilities in which the owner of the
facility consumes all or substantially all of the end product.
Commission: United States Securities and Exchange Commission.
Common Unit Arrearage: The amount by which the Minimum Quarterly
Distribution in respect of a quarter during the Subordination Period exceeds
the distribution of Available Cash from Operating Surplus actually made for
such quarter on a Common Unit, cumulative for such quarter and all prior
quarters during the Subordination Period.
Common Units: A Unit representing a fractional part of the Partnership
Interests of all limited partners and assignees and having the rights and
obligations specified with respect to Common Units in the Partnership
Agreement.
Company: Enterprise Products Partners L.P., a Delaware limited partnership.
Counsel: Vinson & Elkins L.L.P., special counsel to the General Partner and
the Company.
Current Market Price: With respect to any class of Units listed or admitted
to trading on any national securities exchange as of any date, the average of
the daily Closing Prices (as hereinafter defined) for the 20 consecutive
Trading Days (as hereinafter defined) immediately prior to such date. "Closing
Price" for any day means the last sale price on such day, regular way, or in
case no such sale takes place on such day, the average of the closing bid and
asked prices on such day, regular way, in either case as reported in the
principal consolidated transaction reporting system with respect to securities
listed or admitted to trading on the principal national securities exchange
(other than the Nasdaq Stock Market) on which the Units of such class are
listed or admitted to trading or, if the Units of such class are not listed or
admitted to trading on any national securities exchange (other than the Nasdaq
Stock Market), the last quoted price on such day, or, if not so quoted, the
average of the high bid and low asked prices on such day in the over-the-
counter market, as reported by the Nasdaq Stock Market or such other system
then in use, or if on any such day the Units of such class are not quoted by
any such organization, the average of the closing bid and asked prices on such
day as furnished by a professional market maker making a market in the Units
of such class selected by the General Partner, or if on
C-2
any such day no market maker is making a market in the Units of such class,
the fair value of such Units on such day as determined reasonably and in good
faith by the General Partner. "Trading Day" means a day on which the principal
national securities exchange on which Units of any class are listed or
admitted to trading is open for the transaction of business or, if the Units
of a class are not listed or admitted to trading on any national securities
exchange, a day on which banking institutions in New York City generally are
open.
Debutanizer: A fractionation tower which separates butanes from a mixed
stream of NGLs.
De-ethanizer: A fractionation tower which separates ethane from a mixed
stream of NGLs.
Deisobutanizer: A fractionation tower which separates isobutane from a
stream of mixed butane.
Delaware Act: The Delaware Revised Uniform Limited Partnership Act, 6 Del C.
(S)17-101, et seq., as amended, supplemented or restated from time to time,
and any successor to such statute.
Departing Partner: A former General Partner from and after the effective
date of any withdrawal or removal of such former General Partner pursuant to
the Partnership Agreement.
Depropanizer: A fractionation tower which separates propane from a mixed
stream of NGLs.
EBITDA: Net income plus depreciation and amortization and interest expense
less equity in income of unconsolidated affiliates. EBITDA should not be
considered as an alternative to net income, operating income, cash flows from
operating activities or any other measure of financial performance presented
in accordance with generally accepted accounting principles. EBITDA is not
intended to represent cash flow and does not represent the measure of cash
available for distribution, but provides additional information for evaluating
the Company's ability to make the Minimum Quarterly Distribution.
EPA: Environmental Protection Agency.
EPCO: Enterprise Products Company, a Texas corporation.
EPCO Agreement: The agreement entered into in connection with the
Transactions among the Company, the General Partner and EPCO pursuant to which
EPCO will provide all of the Company's selling, general and administrative
services.
ERISA: Employee Retirement Income Security Act of 1974, as amended.
Exchange Act: Securities Exchange Act of 1934, as amended.
FERC: Federal Energy Regulatory Commission.
Fractionation: The process of separating or refining NGLs into their
component products by a process known as fractional distillation.
Fractionation Unit or Fractionator: A processing unit that separates a mixed
stream of NGLs into component products by fractionation.
General Partner: Enterprise Products GP, LLC, and its predecessors,
successors and permitted assigns as general partner of the Partnership.
HLPSA: Federal Hazardous Liquid Pipeline Safety Act.
ICA: Federal Interstate Commerce Act.
Incentive Distributions: The distributions of Available Cash from Operating
Surplus made to the General Partner that are in excess of the General
Partner's aggregate 2% general partner interest.
Initial Unit Price: An amount per Unit equal to the initial public offering
price of the Common Units as set forth on the outside front cover page of this
Prospectus.
Interim Capital Transactions: The following transactions if they occur prior
to liquidation: (a) borrowings, refinancings and refundings of indebtedness
and sales of debt securities (other than borrowings under the Company's
working capital facility and other than for items purchased on open account in
the ordinary course
C-3
of business) by any member of the Partnership Group; (b) sales of equity
interests by any member of the Partnership Group (including Common Units sold
to the Underwriters pursuant to the exercise of their over-allotment option);
and (c) sales or other voluntary or involuntary dispositions of any assets of
any member of the Partnership Group (other than (i) sales or other
dispositions of inventory, accounts receivable and other assets, all in the
ordinary course of business and (ii) sales or other dispositions of assets as
a part of normal retirements or replacements).
IRS: Internal Revenue Service.
Isomerization: The process of converting normal butane to isobutane by
exposing normal butane to a metal catalyst (platinum) in the presence of
hydrogen.
Minimum Quarterly Distribution: $0.45 per Unit with respect to each quarter
or $1.80 per Unit on an annualized basis, subject to adjustment as described
in "Cash Distribution Policy--Adjustment of Minimum Quarterly Distribution and
Target Distribution Levels."
MTBE: Methyl tertiary butyl ether, a motor gasoline octane enhancer produced
from isobutane and methanol.
NGLs: Natural gas liquids, which consist primarily of ethane, propane,
isobutane, normal butane and natural gasoline, and are by-products of the
production of natural gas and the refining of crude oil.
Non-citizen Assignee: A Limited Partner or assignee who (i) fails to furnish
information about nationality, citizenship, residency or other related status
within 30 days after a request by the General Partner for such information, or
(ii) the General Partner determines after receipt of such information is not
an eligible citizen.
Operating Expenditures: All Partnership Group expenditures, including, but
not limited to, taxes, reimbursements of the General Partner, debt service
payments and capital expenditures, subject to the following:
(a) Payments (including prepayments) of principal and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests.
For purposes of the foregoing, at the election and in the reasonable
discretion of the General Partner, any payment of principal or premium
shall be deemed to be refunded or refinanced by any indebtedness incurred
or to be incurred by the Partnership Group within 180 days before or after
such payment to the extent of the principal amount of such indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to partners. Where capital expenditures are made in part for
Acquisitions or Capital Improvements and in part for other purposes, the
General Partner's good faith allocation between the amounts paid for each
shall be conclusive.
Operating Partnership: Enterprise Products Operating L.P., a Delaware
limited partnership, and any successors thereto.
Operating Partnership Agreement: The Amended and Restated Partnership
Agreement of the Operating Partnership, as it may be amended, supplemented or
restated from time to time (the form of which has been filed as an exhibit to
the registration statement of which this Prospectus is a part).
Operating Surplus: As to any period prior to liquidation, on a cumulative
basis and without duplication:
(a) the sum of (i) all cash and cash equivalents of the Partnership Group
on hand as of the close of business of the Closing Date less $46.5 million,
(ii) all cash receipts of the Partnership Group for the period beginning on
the Closing Date and ending with the last day of such period, other than
cash receipts from
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Interim Capital Transactions (except to the extent specified in Section 6.5
of the Partnership Agreement and except as set forth in clause (iii)
immediately following), and (iii) as determined by the General Partner, all
or any portion of any cash receipts of the Partnership Group during such
period, or after the end of such period but on or before the date of
determination of Operating Surplus with respect to such period, that
constitute (A) receipts from Interim Capital Transactions, provided that
the total amount of cash receipts from Interim Capital Transactions
designated as "Operating Surplus" by the General Partner pursuant to this
clause (iii) since the Closing Date may not exceed an aggregate amount
equal to $60.0 million, and/or (B) cash receipts from borrowings under the
Company's working capital facility, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided however, that disbursements made (including
contributions to a member of the Partnership Group or disbursements on
behalf of a member of the Partnership Group) or cash reserves established,
increased or reduced after the end of such period but on or before the date
of determination of Available Cash with respect to such period shall be
deemed to have been made, established, increased or reduced for purposes of
determining Operating Surplus, within such period if the General Partner so
determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
quarter in which the liquidation occurs and any subsequent quarter shall equal
zero.
Opinion of Counsel: A written opinion of counsel, acceptable to the General
Partner in its reasonable discretion, to the effect that the taking of a
particular action will not result in the loss of the limited liability of the
limited partners of the Company.
OSHA: Federal Occupational Safety and Health Act.
Partnership Agreement: The Amended and Restated Agreement of Limited
Partnership of the Company (the form of which is included in this Prospectus
as Appendix A), as it may be amended, restated or supplemented from time to
time. Unless the context requires otherwise, references to the Partnership
Agreement constitute references to the Partnership Agreement of the Company
and to the Operating Partnership Agreement, collectively.
Partnership Group: The Company, the Operating Partnership and any subsidiary
of either such entity, treated as a single consolidated entity.
Partnership Interest: An ownership interest in the Company, which shall
include the general partner interests and limited partner interests.
Partnership Security: Means any class or series of equity interest in the
Company (but excluding any options, rights, warrants and appreciation rights
relating to any equity interest in the Company), including, without
limitation, Common Units and Subordinated Units.
Propylene Fractionation Unit: A processing facility that separates polymer
grade (high purity) propylene from a refinery-sourced propane/propylene mix.
PURPA: Federal Public Utility Regulatory Policy Act of 1978.
RCRA: Federal Resource Conservation and Recovery Act.
Registration Statement: The Registration Statement on Form S-1, as amended
(No. 333-52537), filed by the Company with the Commission, relating to the
Common Units.
Securities Act: The Securities Act of 1933, as amended.
Subordinated Unit: A Unit representing a fractional part of the partnership
interests of all limited partners and assignees and having the rights and
obligations specified with respect to Subordinated Units in the Partnership
Agreement. The term "Subordinated Unit" as used herein does not include a
Common Unit.
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Subordination Period: The Subordination Period will generally extend from
the closing of this offering until the first to occur of: (a) the first day of
any quarter beginning after June 30, 2003 in respect of which (i)
distributions of Available Cash from Operating Surplus on each of the
outstanding Common Units and the Subordinated Units with respect to each of
the three consecutive, non-overlapping, four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated Units
during such periods, (ii) the Adjusted Operating Surplus generated during each
of the three consecutive, non-overlapping, four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the Common Units and Subordinated Units that were
outstanding during such periods on a fully-diluted basis (i.e., taking into
account for purposes of such determination all outstanding Common Units, all
outstanding Subordinated Units, all Common Units and Subordinated Units
issuable upon exercise of employee options that have, as of the date of
determination, already vested or are scheduled to vest prior to the end of the
quarter immediately following the quarter with respect to which such
determination is made, and all Common Units and Subordinated Units that have
as of the date of determination, been earned by but not yet issued to
management of the Company in respect of incentive compensation), plus the
related distribution on the general partner interests in the Company and the
Operating Partnership, and (iii) there are no outstanding Common Unit
Arrearages; and (b) the date on which the General Partner is removed as
general partner of the Company upon the requisite vote by holders of
outstanding Units under circumstances where Cause does not exist and Units
held by the General Partner and its Affiliates are not voted in favor of such
removal.
Target Distribution Levels: See "Cash Distribution Policy--Incentive
Distributions--Hypothetical Annualized Yield."
Transactions: The transactions related to the formation of the Company and
the other transactions to occur in connection with this offering.
Transfer Agent: ChaseMellon Shareholder Services, L.L.C. serving as
registrar and transfer agent for the Common Units.
Transfer Application: An application for transfer of Units in the form set
forth on the back of a certificate, substantially in the form included in this
Prospectus as Appendix B, or in a form substantially to the same effect in a
separate instrument.
Unitholders: Holders of the Common Units and the Subordinated Units,
collectively.
Unit Majority: During the Subordination Period, at least a majority of the
outstanding Common Units, excluding Common Units held by the General Partner
and its affiliates, and, thereafter, at least a majority of the outstanding
Common Units.
Units: The Common Units and the Subordinated Units, collectively.
Unrecovered Capital: At any time, the Initial Unit Price, less the sum of
all distributions theretofore made in respect of an Initial Common Unit
constituting Capital Surplus and any distributions of cash (or the net agreed
value of any distributions in kind) in connection with the dissolution and
liquidation of the Company theretofore made in respect of such Unit, adjusted
as the General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of such Units.
C-6
APPENDIX D
PRO FORMA AVAILABLE CASH FROM OPERATING SURPLUS
The following table shows the calculation of pro forma Available Cash from
Operating Surplus and should be read only in conjunction with "Cash Available
for Distribution," the Company's Combined Financial Statements and the
Company's unaudited pro forma consolidated financial statements.
