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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2002
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________.
Commission file numbers: 1-14323
333-93239-01
ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE PRODUCTS OPERATING L.P.
(Exact name of registrants as specified in their charters)
Delaware 76-0568219
Delaware 76-0568220
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation of organization)
2727 North Loop West, Houston, Texas 77008-1037
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 880-6500
Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the
registrants were required to file such reports), and (2) have been subject to such filing requirements for the
past 90 days.
YES [X] NO [ ]
Limited Partner interests (e.g. Common Units) of Enterprise Products Partners L.P. trade on the New York Stock
Exchange under symbol "EPD". As of August 7, 2002, 131,894,766 Common Units were outstanding. Enterprise
Products Operating L.P. is owned 98.9899% by Enterprise Products Partners L.P. and 1.0101% by the General Partner
of both registrants, Enterprise Products GP, LLC. No common equity securities of Enterprise Products Operating
L.P. are publicly traded.
EXPLANATORY NOTE
This report constitutes a combined report for Enterprise Products Partners L.P. (the "Company") (Commission File
No. 1-14323) and its 98.9899% owned subsidiary, Enterprise Products Operating L.P. (the "Operating
Partnership") (Commission File No. 333-93239-01). Since the Operating Partnership owns substantially all of the
Company's consolidated assets and conducts substantially all of the Company's business and operations, the
information set forth herein, except for Part I, Item 1, constitutes combined information for the Company and the
Operating Partnership. In accordance with Rule 3-10 of Regulation S-X, Part I, Item 1 contains separate
financial statements for the Company and the Operating Partnership.
ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE PRODUCTS OPERATING L.P.
TABLE OF CONTENTS
Page No.
-----------
PART I
Glossary
Item 1. Financial Statements.
Item 1A. Enterprise Products Partners L.P. 1
Item 1B. Enterprise Products Operating L.P. 28
Item 2. Management's Discussion and Analysis of Financial Condition 51
and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk. 74
PART II
Item 6. Exhibits and Reports on Form 8-K. 78
81
Signatures page
Glossary
The following abbreviations, acronyms or terms used in this Form 10-Q are defined below:
Acadian Gas Acadian Gas, LLC and subsidiaries, acquired from Shell in April 2001
BBtu Billion British thermal units, a measure of heating value
BEF Belvieu Environmental Fuels, an equity investment of EPOLP
Belle Rose Belle Rose NGL Pipeline LLC, an equity investment of EPOLP
BPD Barrels per day
BRF Baton Rouge Fractionators LLC, an equity investment of EPOLP
BRPC Baton Rouge Propylene Concentrator, LLC, an equity investment of EPOLP
CEO Chief Executive Officer
CFO Chief Financial Officer
ChevronTexaco ChevronTexaco Corp., its subsidiaries and affiliates
Company Enterprise Products Partners L.P. and its consolidated subsidiaries, including
the Operating Partnership
CPG Cents per gallon
Diamond-Koch Refers to affiliates of Valero Energy Corporation and Koch Industries, Inc.
Dixie Dixie Pipeline Company, an equity investment of EPOLP
E-Oaktree E-Oaktree, LLC, a subsidiary of the Company of whom 98% of its membership
interests were acquired by us from affiliates of Williams in July 2002
EBITDA Earnings before interest, taxes, depreciation and amortization
EPCO Enterprise Products Company, an affiliate of the Company and our ultimate
parent company
EPIK EPIK Terminalling L.P. and EPIK Gas Liquids, LLC, collectively, an equity
investment of EPOLP
EPOLP Enterprise Products Operating L.P., the operating subsidiary of the Company
(also referred to as the "Operating Partnership")
EPU Earnings per Unit
Evangeline Evangeline Gas Pipeline Company, L.P. and Evangeline Gas Corp., collectively,
an equity investment of EPOLP
FASB Financial Accounting Standards Board
FTC U.S. Federal Trade Commission
GAAP Generally Accepted Accounting Principles of the United States of America
General Partner Enterprise Products GP, LLC, the general partner of the Company and the
Operating Partnership
HSC Denotes our Houston Ship Channel pipeline system
IPO Refers to our initial public offering in July 1998
Kinder Morgan Kinder Morgan Operating LP "A"
La Porte La Porte Pipeline Company, L.P. and La Porte GP, LLC, collectively, an equity
investment of the Company
LIBOR London interbank offering rate
Mapletree Mapletree, LLC, a subsidiary of the Company of whom 98% of its membership
interests were acquired by us from affiliates of Williams in July 2002
MBA Mont Belvieu Associates, see "MBA acquisition" below
MBA acquisition Refers to the acquisition of Mont Belvieu Associates' remaining interest in the
Mont Belvieu NGL fractionation facility in 1999
MBFC Mississippi Business Finance Corporation
MBPD Thousand barrels per day
Mid-America Mid-America Pipeline Company, LLC
MMcf/d Million cubic feet per day
MMBtu/d Million British thermal units per day, a measure of heating value
MMBtus Million British thermal units, a measure of heating value
Mont Belvieu Mont Belvieu, Texas
Mont Belvieu III Refers to the propylene fractionation facility acquired from Diamond-Koch
Moody's Moody's Investors Service
MTBE Methyl tertiary butyl ether
Nemo Nemo Gathering Company, LLC, an equity investment of EPOLP
Neptune Neptune Pipeline Company, LLC, an equity investment of EPOLP
NGL or NGLs Natural gas liquid(s)
NYSE New York Stock Exchange
Ocean Breeze Ocean Breeze Pipeline Company, LLC, an equity investment of EPOLP (merged
into Neptune during fourth quarter of 2001)
Operating Partnership Enterprise Products Operating L.P. and its subsidiaries
OTC Olefins Terminal Corporation, an equity investment of the Company
Promix K/D/S Promix LLC, an equity investment of EPOLP
SEC U.S. Securities and Exchange Commission
Seminole Seminole Pipeline Company
SFAS Statement of Financial Accounting Standards issued by the FASB
Shell Shell Oil Company, its subsidiaries and affiliates
S and P Standard and Poor's Rating Services
Starfish Starfish Pipeline Company LLC, an equity investment of EPOLP
TNGL acquisition Refers to the acquisition of Tejas Natural Gas Liquids, LLC, an affiliate of
Shell, in 1999
Tri-States Tri-States NGL Pipeline LLC, an equity investment of EPOLP
VESCO Venice Energy Services Company, LLC, a cost method investment of EPOLP
Williams The Williams Companies, Inc. and subsidiaries
Wilprise Wilprise Pipeline Company, LLC, an equity investment of EPOLP
PART I. FINANCIAL INFORMATION.
Item 1A. CONSOLIDATED FINANCIAL STATEMENTS.
Enterprise Products Partners L.P.
Consolidated Balance Sheets
(Dollars in thousands)
June 30,
2002 December 31,
ASSETS (unaudited) 2001
-------------------------------------
Current Assets
Cash and cash equivalents (includes restricted cash of $5,034 at
June 30, 2002 and $5,752 at December 31, 2001) $ 7,929 $ 137,823
Accounts and notes receivable - trade, net of allowance for doubtful accounts
of $21,098 at June 30, 2002 and $20,642 at December 31, 2001 284,021 256,927
Accounts receivable - affiliates 1,740 4,375
Inventories 153,280 69,443
Prepaid and other current assets 34,089 50,207
-------------------------------------
Total current assets 481,059 518,775
Property, Plant and Equipment, Net 1,570,571 1,306,790
Investments in and Advances to Unconsolidated Affiliates 403,070 398,201
Intangible assets, net of accumulated amortization of $18,235 at
June 30, 2002 and $13,084 at December 31, 2001 249,222 202,226
Goodwill 81,543
Other Assets 6,911 5,201
-------------------------------------
Total $2,792,376 $2,431,193
=====================================
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Accounts payable - trade $70,716 $54,269
Accounts payable - affiliates 21,233 29,885
Accrued gas payables 303,983 233,536
Accrued expenses 12,961 22,460
Accrued interest 24,676 24,302
Other current liabilities 70,672 44,764
-------------------------------------
Total current liabilities 504,241 409,216
Long-Term Debt 1,223,552 855,278
Other Long-Term Liabilities 7,919 8,061
Minority Interest 10,818 11,716
Commitments and Contingencies
Partners' Equity
Common Units (112,954,266 Units outstanding at June 30, 2002
and 102,721,830 at December 31, 2001) 589,504 651,872
Subordinated Units (32,114,804 Units outstanding at June 30, 2002
and 42,819,740 December 31, 2001) 165,818 193,107
Special Units (29,000,000 Units outstanding at June 30, 2002
and December 31, 2001) 296,634 296,634
Treasury Units, at cost (799,700 Common Units
outstanding at June 30, 2002 and 327,200 at December 31, 2001) (16,736) (6,222)
General Partner 10,626 11,531
-------------------------------------
Total Partners' Equity 1,045,846 1,146,922
-------------------------------------
Total $2,792,376 $2,431,193
=====================================
See Notes to Unaudited Consolidated Financial Statements
PAGE 1
Enterprise Products Partners L.P.
Statements of Consolidated Operations
(Dollars in thousands, except per Unit amounts)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
-----------------------------------------------------------
2002 2001 2002 2001
-----------------------------------------------------------
REVENUES
Revenues from consolidated operations $786,257 $959,397 $1,448,311 $1,795,712
Equity income in unconsolidated affiliates 7,068 9,050 16,295 11,061
-----------------------------------------------------------
Total 793,325 968,447 1,464,606 1,806,773
-----------------------------------------------------------
COST AND EXPENSES
Operating costs and expenses 745,621 851,639 1,410,044 1,629,380
Selling, general and administrative 7,740 7,737 15,702 13,905
-----------------------------------------------------------
Total 753,361 859,376 1,425,746 1,643,285
-----------------------------------------------------------
OPERATING INCOME 39,964 109,071 38,860 163,488
OTHER INCOME (EXPENSE)
Interest expense (19,032) (16,331) (37,545) (23,318)
Interest income from unconsolidated affiliates 62 7 92 31
Dividend income from unconsolidated affiliates 1,242 2,196 1,632
Interest income - other 241 1,479 1,575 5,477
Other, net 46 (251) (31) (531)
-----------------------------------------------------------
Other income (expense) (17,441) (15,096) (33,713) (16,709)
-----------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 22,523 93,975 5,147 146,779
MINORITY INTEREST (203) (944) (30) (1,478)
-----------------------------------------------------------
NET INCOME $ 22,320 $ 93,031 $ 5,117 $ 145,301
===========================================================
ALLOCATION OF NET INCOME TO:
Limited partners $ 19,672 $ 91,643 $ 1,223 $ 142,931
===========================================================
General partner $ 2,648 $ 1,388 $ 3,894 $ 2,370
===========================================================
BASIC EARNINGS PER UNIT
Income before minority interest $ 0.14 $ 0.68 $ 0.01 $ 1.07
===========================================================
Net income per Common and Subordinated unit $ 0.14 $ 0.68 $ 0.01 $ 1.06
===========================================================
DILUTED EARNINGS PER UNIT
Income before minority interest $ 0.11 $ 0.55 $ 0.01 $ 0.86
===========================================================
Net income per Common, Subordinated
and Special unit $ 0.11 $ 0.54 $ 0.01 $ 0.85
===========================================================
See Notes to Unaudited Consolidated Financial Statements
PAGE 2
Enterprise Products Partners L.P.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
----------------------------------
2002 2001
----------------------------------
OPERATING ACTIVITIES
Net income $ 5,117 $145,301
Adjustments to reconcile net income to cash flows provided by
(used for) operating activities:
Depreciation and amortization 35,349 23,234
Equity in income of unconsolidated affiliates (16,295) (11,061)
Distributions received from unconsolidated affiliates 29,113 13,212
Leases paid by EPCO 4,534 5,267
Minority interest 30 1,478
Loss (gain) on sale of assets 12 (387)
Changes in fair market value of financial instruments (see Note 13) 19,702 (55,880)
Net effect of changes in operating accounts (32,379) (30,569)
----------------------------------
Operating activities cash flows 45,183 90,595
----------------------------------
INVESTING ACTIVITIES
Capital expenditures (26,755) (57,090)
Proceeds from sale of assets 12 563
Business acquisitions, net of cash received (394,775) (225,665)
Investments in and advances to unconsolidated affiliates (10,137) (115,282)
----------------------------------
Investing activities cash flows (431,655) (397,474)
----------------------------------
FINANCING ACTIVITIES
Long-term debt borrowings 538,000 449,716
Long-term debt repayments (170,000)
Debt issuance costs (418) (3,125)
Cash dividends paid to partners (99,010) (76,112)
Cash dividends paid to minority interest by Operating Partnership (1,014) (783)
Cash contributions from EPCO to minority interest 86 53
Treasury Units purchased (11,066)
Increase in restricted cash 718 (7,321)
----------------------------------
Financing activities cash flows 257,296 362,428
----------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (129,176) 55,549
CASH AND CASH EQUIVALENTS, JANUARY 1 132,071 60,409
----------------------------------
CASH AND CASH EQUIVALENTS, JUNE 30 $ 2,895 $115,958
==================================
See Notes to Unaudited Consolidated Financial Statements
PAGE 3
Enterprise Products Partners L.P.
Notes to Unaudited Consolidated Financial Statements
1.GENERAL
In the opinion of Enterprise Products Partners L.P., the accompanying unaudited consolidated financial statements
include all adjustments consisting of normal recurring accruals necessary for a fair presentation of its
consolidated financial position as of June 30, 2002 and consolidated results of operations and cash flows for the
three and six months ended June 30, 2002 and 2001. Within these footnote disclosures of Enterprise Products
Partners L.P., references to "we", "us", "our" or "the Company" shall mean the consolidated financial statements
of Enterprise Products Partners L.P.
References to "Operating Partnership" shall mean the consolidated financial statements of our primary operating
subsidiary, Enterprise Products Operating L.P., which are included elsewhere in this combined report on Form
10-Q. We own 98.9899% of the Operating Partnership and act as guarantor of certain debt obligations of the
Operating Partnership. Our General Partner, Enterprise Products GP, LLC, owns the remaining 1.0101% of the
Operating Partnership. Essentially all of our assets, liabilities, revenues and expenses are recorded at the
Operating Partnership level in our consolidated financial statements.
Although we believe 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 SEC. These unaudited financial statements should be read in conjunction with our
annual report on Form 10-K (File No. 1-14323) for the year ended December 31, 2001.
The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the
results to be expected for the full year.
Dollar amounts presented within these footnote disclosures are stated in thousands of dollars, unless otherwise
indicated.
Certain abbreviated entity names and other capitalized terms are described within the glossary of this quarterly
report on Form 10-Q.
Two-for-one split of Limited Partner Units
On February 27, 2002, the General Partner approved a two-for-one split for each class of our partnership
Units. The partnership Unit split was accomplished by distributing one additional partnership Unit for each
partnership Unit outstanding to holders of record on April 30, 2002. The Units were distributed on May 15,
2002. All references to number of Units or earnings per Unit contained in this document reflect the Unit split,
unless otherwise indicated.
2. BUSINESS ACQUISITIONS
Acquisition of Diamond-Koch propylene fractionation business in February 2002
In February 2002, we purchased various propylene fractionation assets and certain inventories of refinery grade
propylene, propane, and polymer grade propylene from Diamond-Koch. These include a 66.7% interest in a polymer
grade propylene fractionation facility located in Mont Belvieu, Texas (the "Mont Belvieu III" facility), a 50%
interest in an entity which owns a polymer grade propylene export terminal located on the Houston Ship Channel in
La Porte, Texas, and varying interests in several supporting distribution pipelines and related equipment. Mont
Belvieu III has the capacity to produce approximately 41 MBPD of polymer grade propylene. These assets are part of
our Mont Belvieu propylene fractionation operations, which is part of the Fractionation segment. The purchase
price of $239.0 million was funded by a drawdown on our Multi-Year and 364-Day Credit Facilities (see Note 8).
PAGE 4
Acquisition of Diamond-Koch storage business in January 2002
In January 2002, we purchased various hydrocarbon storage assets from Diamond-Koch. The storage facilities consist
of 30 salt dome storage caverns with a useable capacity of 68 million barrels, local distribution pipelines and
related equipment. The facilities provide storage services for mixed natural gas liquids, ethane, propane,
butanes, natural gasoline and olefins (such as ethylene), polymer grade propylene, chemical grade propylene and
refinery grade propylene.
The facilities are located in Mont Belvieu, Texas and serve the largest petrochemical and refinery complex in the
United States. Collectively, these facilities represent the largest underground storage operation of its kind in
the world. The size and location of the business provide it with a competitive position to increase its services
to expanding Gulf Coast petrochemical complexes. These assets are part of our Mont Belvieu storage operations,
which is part of the Pipelines segment. The purchase price of $129.6 million was funded by utilizing cash on hand.
Allocation of purchase price of Diamond-Koch acquisitions
The Diamond-Koch acquisitions were accounted for under the purchase method of accounting and, accordingly, the
purchase price of each has been allocated to the assets acquired and liabilities assumed based on their estimated
fair values as follows:
Estimated Fair Values at
--------------------------------------------
Feb. 1, 2002 Jan. 1, 2002
Propylene
Fractionation Storage Total
------------------------------------------------------------
Inventories $ 4,994 $ 4,994
Prepaid and other current assets 3,148 $ 890 4,038
Property, plant and equipment 96,772 120,571 217,343
Investments in unconsolidated affiliates 7,550 7,550
Intangible assets (see Note 7) 53,000 8,127 61,127
Goodwill (see Note 7) 73,686 73,686
Current liabilities (107) (107)
------------------------------------------------------------
Total purchase price $239,043 $129,588 $368,631
============================================================
The fair value estimates were developed by independent appraisers using recognized business valuation
techniques. The allocation of the purchase price is preliminary pending the results of a repermitting process
expected to be complete during the fourth quarter of 2002.
The purchase price paid for the propylene fractionation business resulted in $73.7 million in goodwill. The
goodwill primarily represents the value management has attached to future earnings improvements and to the
strategic location of the assets. Earnings from the propylene business are expected to improve substantially from
the last few years with the years 2003 and 2004 projected to be peak years in the petrochemical business
cycle. Additionally, the demand for chemical grade and polymer grade propylene is forecast to grow at an average
of 4.4% per year from 2002 to 2006.
The propylene fractionation assets are located in Mont Belvieu, Texas on the Gulf Coast, the largest natural gas
liquids and petrochemical marketplace in the U.S. The assets have access to substantial supply from major Gulf
Coast and central U.S. producers of refinery grade propylene. The polymer grade products produced at the facility
have competitive advantages because of distribution direct to customers via affiliated pipelines and through an
affiliated export facility.
Acadian Gas post-closing adjustments completed in April 2002
In April 2002, we finalized the post-closing purchase price adjustment associated with our April 2001 acquisition
of Acadian Gas. Acadian Gas was acquired from an affiliate of Shell and is involved in the purchase, sale,
transportation and storage of natural gas in Louisiana. As a result, we paid Shell $18.0 million for various
PAGE 5
working capital items, of which the majority were related to natural gas inventories. The Acadian Gas acquisition
was accounted for under the purchase method of accounting and, accordingly, the final purchase price has been
allocated to the assets acquired and liabilities assumed based on their estimated fair values at April 1, 2001 as
follows:
Current assets $ 83,123
Investments in unconsolidated affiliates 2,723
Property, plant and equipment 232,187
Current liabilities (72,896)
Other long-term liabilities (1,460)
--------------------
Total purchase price $243,677
====================
Pro forma effect of Diamond-Koch and Acadian Gas business acquisitions
As noted earlier, the Acadian Gas acquisition occurred on April 1, 2001. We acquired Diamond-Koch's storage
business on January 1, 2002 and its propylene fractionation business on February 1, 2002. As a result, our actual
fiscal 2002 Statements of Consolidated Operations reflect the Diamond-Koch propylene fractionation business and
the Diamond-Koch storage business from their respective acquisition dates through June 2002 and the results of
Acadian Gas. For the first six months of fiscal 2001, our Statements of Consolidated Operations reflect only three
months of Acadian Gas.
The following table presents unaudited pro forma financial information incorporating the historical
(pre-acquisition) financial results of the propylene fractionation and storage assets we acquired from
Diamond-Koch and those of Acadian Gas that we acquired from Shell. This information is helpful in gauging the
possible impact that these acquisitions might have had on our results of operations had they been completed on
January 1, 2001 as opposed to the actual dates that these acquisitions occurred. The pro forma information is
based upon data currently available to and certain estimates and assumptions made by management and, as a result,
are not necessarily indicative of our financial results had the transactions actually occurred on these
dates. Likewise, the unaudited pro forma information is not necessarily indicative of our future financial results.
Three Months Six Months Ended
Ended June 30, June 30,
-----------------------------
2001 2002 2001
-------------------------------------------------------
Revenues $1,043,671 $1,482,040 $2,195,472
Income before extraordinary item
and minority interest $ 90,424 $ 5,085 $ 147,174
Net income $ 89,517 $ 5,055 $ 145,692
Allocation of net income to
Limited partners $ 88,128 $ 1,161 $ 143,322
General Partner $ 1,389 $ 3,894 $ 2,370
Units used in earnings per Unit calculations
Basic 135,334 145,404 135,334
Diluted 168,334 174,404 168,334
Income per Unit before minority interest
Basic $ 0.66 $ 0.01 $ 1.07
Diluted $ 0.53 $ 0.01 $ 0.86
Net income per Unit
Basic $ 0.65 $ 0.01 $ 1.06
Diluted $ 0.52 $ 0.01 $ 0.85
PAGE 6
Minor acquisitions initiated during the second quarter of 2002
We initiated the purchase of an additional interest in our Mont Belvieu NGL fractionation from ChevronTexaco and
the acquisition of a gas processing plant and NGL fractionator in Louisiana from Western Resources during the
second quarter of 2002. Due to the immaterial nature and incomplete status of these two transactions, our
discussion of each minor purchase is limited to the following:
Acquisition of ChevronTexaco's interest in our Mont Belvieu NGL fractionator. In April 2002, we executed an
agreement with an affiliate of ChevronTexaco to purchase their 12.5% undivided ownership interest in our Mont
Belvieu, Texas NGL fractionator. The purchase price was approximately $8.0 million. The Mont Belvieu facility has a
gross NGL fractionation capacity of 210 MBPD of which 26.2 MBPD was ChevronTexaco's net share. ChevronTexaco was
required to sell their 12.5% interest in a consent order by the FTC as a condition of approving the merger
between Chevron and Texaco. The effective date of the purchase was June 1, 2002.
The other joint owners of the facility (affiliates of Duke Energy Field Services and Burlington Resources Inc.)
have the option to acquire their pro rata share of the ChevronTexaco interest. These preferential purchase rights
expire on September 30, 2002. If the other joint owners fully exercise their option to acquire their share of the
interest, our ownership interest would increase to approximately 71.4% from 62.5% currently. Should the joint
owners decline to exercise their options, we would own 75.0% of the facility. If the other joint owners acquire
any portion of their share of the ChevronTexaco interest, our purchase price will be reduced accordingly. We
expect to complete this transaction during the third quarter of 2002.
Acquisition of gas processing and NGL fractionator assets from Western Gas Resources, Inc. In June 2002, we
executed an agreement to acquire a natural gas processing plant, NGL fractionator and supporting assets
(including contracts) from Western Gas Resources, Inc. for $32.5 million plus certain post-closing purchase price
adjustments. The "Toca Western" facilities are located in St. Bernard Parish, Louisiana near our existing Toca
natural gas processing plant. The gas processing facility has a capacity of 160 MMcf/d and the NGL fractionator
can fractionate up to 14.2 MBPD of NGLs.
This purchase is subject to a preferential purchase right by the other joint owners of our Yscloskey gas
processing facility that expires on September 24, 2002. We are one of the largest owners in the Yscloskey plant
with a 28.2% ownership interest. Should any of the other owners exercise their respective right to acquire their
pro rata interest in the Toca Western facilities, it would reduce the ownership interest we ultimately acquire
and the purchase price we pay. Because of the preferential rights, we expect to close this transaction during the
third quarter of 2002.
3. INVENTORIES
Our inventories are as follows at the dates indicated:
June 30, December 31,
2002 2001
-----------------------------------
Regular trade inventory $70,340 $35,894
Forward-sales inventory 45,960 33,549
Peak Season inventory 20,959
Other 16,021
-----------------------------------
Inventory $153,280 $69,443
===================================
A description of each inventory is as follows:
o Our regular trade (or "working") inventory is comprised of inventories of natural gas, NGLs and
petrochemicals that are available for immediate sale. This inventory is valued at the lower of average
cost or market, with "market" being determined by spot-market related prices.
PAGE 7
o The forward-sales inventory is comprised of segregated NGL volumes dedicated to the fulfillment of
forward sales contracts and is valued at the lower of average cost or market, with "market" being
defined as the weighted-average of the sales prices of the forward sales contracts.
o The peak season inventory is comprised of segregated NGL volumes that are expected to be sold outside of
the current summer-winter season and is valued at the lower of average cost or market, with "market"
being determined by spot-market related prices. These volumes are generally expected to be sold within
the next twelve months, but may be held for longer periods depending on market conditions.
o Other inventories generally consist of segregated NGL volumes set aside for possible short-term use as
fuel on an equivalent MMBtu basis. This inventory is carried at the lower of average cost or market,
with "market" being determined by spot-market related prices. The volumes associated with this inventory
are anticipated to be used and/or sold within the next twelve months.
Due to fluctuating market conditions in the NGL, natural gas and petrochemical industry, we occasionally
recognize lower of average cost or market adjustments when the cost of our inventories exceed their net realizable
value. These non-cash adjustments are charged to operating costs and expenses in the period they are recognized
and affect our segment operating results in the following manner:
o NGL inventory write downs are recorded as a cost of the Processing segment's merchant activities;
o Natural gas inventory write downs are recorded as a cost of the Pipeline segment's Acadian Gas
operations; and
o Petrochemical inventory write downs are recorded as a cost of the Fractionation segment's propylene
fractionation business.
For the second quarter of 2002, we recognized an adjustment of $4.5 million to write down NGL inventories to
their net realizable value. For the second quarter of 2001, we recorded $25.8 million of such write downs:$19.4
million against NGL inventories, $4.9 million against natural gas inventories and $1.5 million against
petrochemical inventories.
For the first six months of 2002, we recognized $4.6 million in NGL inventory write downs. For the same six month
period in 2001, we recorded $27.8 million in lower of average cost or market write downs. The 2001 adjustments
were $21.4 million against NGL inventories, $4.9 million against natural gas inventories and $1.5 million against
petrochemical inventories. To the extent our commodity hedging strategies address inventory-related risks and are
successful, these inventory value adjustments are mitigated (or in some cases, reversed). See Note 13 for a
description of our commodity hedging activities.
4. PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment and accumulated depreciation are as follows at the dates indicated:
Estimated
Useful Life June 30, December 31,
in Years 2002 2001
---------------------------------------------------
Plants and pipelines 5-35 $1,626,739 $1,398,843
Underground and other storage facilities 5-35 241,806 127,900
Transportation equipment 3-35 3,952 3,736
Land 20,014 15,517
Construction in progress 44,003 98,844
-------------------------------------
Total 1,936,514 1,644,840
Less accumulated depreciation 365,943 338,050
-------------------------------------
Property, plant and equipment, net $1,570,571 $1,306,790
=====================================
Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over the
asset's estimated useful life. Maintenance, repairs and minor renewals are charged to operations as incurred. The
PAGE 8
cost of assets retired or sold, together with the related accumulated depreciation, is removed from the accounts,
and any gain or loss on disposition is included in income.
Additions and improvements to and major renewals of existing assets are capitalized and depreciated using the
straight-line method over the estimated useful life of the new equipment or modifications. These expenditures
result in a long-term benefit to the Company. We generally classify improvements and major renewals of existing
assets as sustaining capital expenditures and all other capital spending (on existing and new assets) as
expansion capital expenditures.
Depreciation expense for the three months ended June 30, 2002 and 2001 was $13.8 million and $11.0 million,
respectively. For the six months ended June 30, 2002 and 2001, it was $27.9 million and $20.3 million,
respectively.
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
We own interests in a number of related businesses that are accounted for under the equity or cost method. The
investments in and advances to these unconsolidated affiliates are grouped according the operating segment to
which they relate. For a general discussion of our operating segments, see Note 14.
We acquired three equity method unconsolidated affiliates as part of our acquisition of Diamond-Koch's propylene
fractionation business (see Note 2). We purchased an aggregate 50% interest in La Porte Pipeline Company, L.P.
and La Porte Pipeline GP, L.L.C. (collectively, "La Porte") which together own a private polymer grade propylene
pipeline extending from Mont Belvieu to La Porte, Texas. In addition, we acquired 50% of the outstanding capital
stock of Olefins Terminal Corporation ("OTC") which owns a polymer grade propylene storage facility and related
dock infrastructure (located on the Houston Ship Channel) for loading waterborne propylene vessels. Both the La
Porte and OTC investments are considered an integral part of our Mont Belvieu III propylene fractionation
operations. These investments are classified as part of our Fractionation operating segment.
PAGE 9
The following table shows the aggregate amount of investments in and advances to (and our ownership percentages
in) unconsolidated affiliates at June 30, 2002 and December 31, 2001:
Ownership June 30, December 31,
Percentage 2002 2001
--------------------------------------------------------
Accounted for on equity basis:
Fractionation:
BRF 32.25% $28,687 $29,417
BRPC 30.00% 18,197 18,841
Promix 33.33% 43,513 45,071
La Porte 50.00% 5,814
OTC 50.00% 1,818
Pipeline:
EPIK 50.00% 14,375 14,280
Wilprise 37.35% 8,663 8,834
Tri-States 33.33% 26,448 26,734
Belle Rose 41.67% 11,211 11,624
Dixie 19.88% 37,284 37,558
Starfish 50.00% 23,777 25,352
Neptune 25.67% 77,226 76,880
Nemo 33.92% 12,211 12,189
Evangeline 49.50% 2,657 2,578
Octane Enhancement:
BEF 33.33% 58,189 55,843
Accounted for on cost basis:
Processing:
VESCO 13.10% 33,000 33,000
----------------------------------------
Total $403,070 $398,201
========================================
PAGE 10
The following table shows equity in income (loss) of unconsolidated affiliates for the three and six months ended
June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30, June 30,
Ownership --------------------------------------------------------------------
Percentage 2002 2001 2002 2001
-------------------------------------------------------------------------------------
Fractionation:
BRF 32.25% $ 743 $ 42 $ 1,292 $ 60
BRPC 30.00% 278 252 527 404
Promix 33.33% 996 1,396 2,039 1,789
La Porte 50.00% (173) (265)
OTC 50.00% 128 18
Pipelines:
EPIK 50.00% (54) (172) 1,629 (1,094)
Wilprise 37.35% 320 85 467 (137)
Tri-States 33.33% 365 135 834 100
Belle Rose 41.67% 40 29 114 (60)
Dixie 19.88% (156) 69 561 960
Starfish 50.00% 973 1,022 1,785 1,973
Ocean Breeze 25.67% 12 14
Neptune 25.67% 682 1,095 1,460 1,789
Nemo 33.92% 44 1 22 10
Evangeline 49.50% 5 (149) (71) (149)
Octane Enhancement:
BEF 33.33% 2,877 5,233 5,883 5,402
--------------------------------------------------------------------
Total $7,068 $9,050 $16,295 $11,061
====================================================================
Our initial investment in Promix, La Porte, Dixie, Neptune and Nemo exceeded our share of the historical cost of
the underlying net assets of such entities ("excess cost"). The excess cost of these investments is reflected in
our investments in and advances to unconsolidated affiliates for these entities. The excess cost amounts related
to Promix, La Porte and Nemo are attributable to the tangible plant and pipeline assets of each entity, the
excess cost of which is amortized against equity earnings from these entities in a manner similar to
depreciation. The excess cost of Dixie includes amounts attributable to both goodwill and tangible pipeline
assets, with that portion assigned to the pipeline assets being amortized in a manner similar to depreciation. The
goodwill inherent in Dixie's excess cost is subject to periodic impairment testing and is not amortized. The
following table summarizes our excess cost information:
PAGE 11
Amortization
Unamortized balance at Charged to
Initial --------------------------- Equity Earnings
Excess June 30, December 31, during Amortization
Cost 2002 2001 2002 Period
---------------------------------------------------------------------------------------
Fractionation segment:
Promix $7,955 $6,794 $7,083 $199 20 years
La Porte 873 855 n/a 18 35 years
Pipelines segment:
Dixie
Attributable to pipeline assets 28,448 26,480 26,887 406 35 years
Goodwill 9,246 8,827 8,827 n/a n/a
Neptune 12,768 12,221 12,404 182 35 years
Nemo 727 708 718 10 35 years
The following tables presents summarized income statement information for our unconsolidated investments
accounted for under the equity method (for the periods indicated on a 100% basis).
Summarized Income Statement Data for the Three Months Ended
-------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
----------------------------------------------- ------------------------------------------------
Operating Net Operating Net
Revenues Income Income Revenues Income Income
----------------------------------------------- ------------------------------------------------
Fractionation:
BRF $ 5,750 $ 2,295 $ 2,305 $ 3,802 $ 265 $ 294
BRPC 3,150 923 930 3,400 793 842
Promix 10,819 3,274 3,285 12,340 4,447 4,487
La Porte (301) (306)
OTC 1,421 302 258
Pipeline:
EPIK 1,577 (117) (109) 792 (375) (348)
Wilprise 1,033 855 857 494 224 227
Tri-States 3,680 1,088 1,097 2,321 388 403
Belle Rose 433 95 96 407 13 21
Dixie 6,270 (1,853) (1,191) 8,799 2,001 1,124
Starfish 6,714 2,169 1,943 7,051 2,571 2,299
Ocean Breeze 53 39 39
Neptune 6,926 2,046 2,338 9,362 5,223 5,195
Nemo 887 114 118 (27) 2
Evangeline 35,551 1,030 9 47,609 1,010 (144)
Octane Enhancement:
BEF 58,132 8,570 8,628 76,054 15,509 15,700
----------------------------------------------- ------------------------------------------------
Total $142,343 $20,490 $20,258 $172,484 $32,081 $30,141
=============================================== ================================================
PAGE 12
Summarized Income Statement Data for the Six Months Ended
-------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
----------------------------------------------- ------------------------------------------------
Operating Net Operating Net
Revenues Income Income Revenues Income Income
----------------------------------------------- ------------------------------------------------
Fractionation:
BRF $ 10,355 $ 3,960 $ 4,007 $ 7,825 $ 300 $ 350
BRPC 6,102 1,742 1,758 6,833 1,232 1,347
Promix 20,683 6,683 6,713 21,343 5,888 5,964
La Porte (535) (541)
OTC 1,792 109 37
Pipeline:
EPIK 9,849 3,237 3,257 1,967 (1,782) (1,725)
Wilprise 1,804 1,248 1,251 893 (378) (367)
Tri-States 6,780 2,490 2,503 3,953 262 299
Belle Rose 941 271 273 554 (205) (192)
Dixie 21,398 5,552 3,331 24,036 8,301 4,829
Starfish 13,143 4,105 3,569 13,467 4,390 3,916
Ocean Breeze 87 87 65
Neptune 14,629 5,561 5,645 16,747 8,648 8,581
Nemo 1,282 40 48 (42) 36
Evangeline 61,060 1,880 (170) 47,609 1,010 (144)
Octane Enhancement:
BEF 106,061 17,548 17,648 113,918 15,922 16,207
----------------------------------------------- ------------------------------------------------
Total $275,879 $53,891 $49,329 $259,232 $43,633 $39,166
=============================================== ================================================
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 prohibits the use of the pooling-of-interests method for
business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for
by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to
business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142
was effective for our fiscal year that began January 1, 2002 for all goodwill and other intangible assets
recognized in our consolidated balance sheet at that date, regardless of when those assets were initially
recognized.
At December 31, 2001, our intangible assets were comprised of the values associated with the Shell natural gas
processing agreement and the goodwill related to the 1999 MBA acquisition. In accordance with SFAS No. 141, we
reclassified the MBA goodwill to a separate line item on our consolidated balance sheet apart from the Shell
contract. Based upon SFAS No. 142, the value of the Shell natural gas processing agreement will continue to be
amortized over its remaining contract term of approximately 18 years; however, amortization of the MBA goodwill
will cease. The MBA goodwill will be subject to periodic impairment testing in accordance with SFAS No. 142 due
to its indefinite life. For additional information regarding our intangible assets and goodwill (including
additions to both classes of assets as a result of the Diamond-Koch acquisitions), see Note 7.
In accordance with the transition provisions of SFAS No. 142, we have completed an impairment review of
the December 31, 2001 MBA goodwill balance. Professionals in the business valuation industry were consulted
regarding the assumptions and techniques used in our analysis. As a result of this review, no impairment loss was
indicated. Any subsequent impairment losses stemming from future goodwill impairment studies will be reflected as
a component of operating income in the Statements of Consolidated Operations.
In addition to SFAS No. 141 and No. 142, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", in June 2001. This statement establishes accounting standards for the recognition and measurement of
PAGE 13
a liability for an asset retirement obligation and the associated asset retirement cost. This statement is
effective for our fiscal year beginning January 1, 2003. We are evaluating the provisions of this statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement addresses financial accounting and reporting for the impairment and/or disposal of long-lived
assets. We adopted this statement effective January 1, 2002 and determined that it did not have any significant
impact on our financial statements as of that date.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS
No. 13, and Technical Corrections." The purpose of this statement is to update, clarify and simplify existing
accounting standards. We adopted this statement effective April 30, 2002 and determined that it did not have any
significant impact on our financial statements as of that date.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This standard requires companies to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting
guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)." SFAS No. 146 replaces
Issue 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December
31, 2002. This statement is effective for our fiscal year beginning January 1, 2003. We are evaluating the
provisions of this statement.
7. INTANGIBLE ASSETS AND GOODWILL
Intangible assets
Our recorded intangible assets are comprised of the estimated values assigned to contract rights we own arising
from agreements with customers. According to SFAS No. 141, a contract-based intangible asset with a finite useful
life is amortized over its estimated useful life, which is the period over which the asset is expected to
contribute directly or indirectly to the future cash flows of the entity. It is based on an analysis of all
pertinent factors including (a) the expected use of the asset by the entity, (b) the expected useful life of
related assets (i.e., fractionation facility, storage well, etc.), (c) any legal, regulatory or contractual
provisions, including renewal or extension periods that would not cause substantial costs or modifications to
existing agreements, (d) the effects of obsolescence, demand, competition, and other economic factors and (e) the
level of maintenance required to obtain the expected future cash flows.
The specific, identifiable intangible assets of a business enterprise depend largely upon the nature of its
operations. Potential intangible assets include intellectual property such as technology, patents, trademarks and
trade names, customer contracts and relationships, and non-compete agreements, as well as other intangible
assets. The approach to the valuation of each intangible asset will vary depending upon the nature of the asset,
the business in which it is utilized, and the economic returns it is generating or is expected to generate.
At June 30, 2002, our intangible assets consisted of the Shell natural gas processing agreement that we acquired
as part of the TNGL acquisition in August 1999 and certain propylene fractionation and storage contracts we
acquired in connection with the Diamond-Koch acquisitions in January and February 2002. The value of the Shell
natural gas processing agreement is being amortized on a straight-line basis over its remaining contract term
(currently $11.1 million annually from 2002 through 2019). At June 30, 2002, the unamortized value of the Shell
contract was $188.8 million.
The value of the propylene fractionation and storage contracts acquired from Diamond-Koch is being amortized on a
straight-line basis over the economic life of the assets to which they relate, which is currently estimated at 35
years. Although the majority of these contracts have terms of one to two years, we have assumed that our
relationship with these customers will extend beyond the contractually-stated term primarily based on
PAGE 14
historically low customer contract turnover rates within these operations. At June 30, 2002, the unamortized value
of these contracts was $60.4 million.
Goodwill
At June 30, 2002, the value of goodwill was $81.5 million. Our goodwill is attributable to the excess of the
purchase price over the fair value of assets acquired and is comprised of the following (values as of June 30,
2002):
o $73.7 million associated with the purchase of propylene fractionation assets from Diamond-Koch in
February 2002; and,
o $7.8 million related to the July 1999 purchase of Kinder Morgan's ownership interest in MBA which in
turn owned an interest in our Mont Belvieu NGL fractionation facility.
Since our adoption of SFAS No. 142 on January 1, 2002, our goodwill amounts are no longer amortized. Instead, we
periodically review the reporting units to which the goodwill amounts relate for indications of possible
impairment. If such indicators are present (i.e., loss of a significant customer, economic obsolescence of plant
assets, etc.), the fair value of the reporting unit, including its related goodwill, will be calculated and
compared to its combined book value. Our goodwill amounts are classified as part of the Fractionation segment
since they are related to assets recorded in this operating segment.
The fair value of a reporting unit refers to the amount at which it could be bought or sold in a current
transaction between willing parties. Quoted market prices in active markets are the best evidence of fair value
and are used to the extent they are available. If quoted market prices are not available, an estimate of fair
value is determined based on the best information available to us, including prices of similar assets and the
results of using other valuation techniques such as discounted cash flow analysis and multiples of earnings
approaches. The underlying assumptions in such models rely on information available to us at a given point in
time and are viewed as reasonable and supportable considering available evidence.
If the fair value of the reporting unit exceeds its book value, goodwill is not considered impaired and no
adjustment to earnings would be required. Should the fair value of the reporting unit (including its goodwill) be
less than its book value, a charge to earnings would be recorded to adjust goodwill to its implied fair value.
Pro Forma impact of discontinuation of amortization of goodwill
The following table discloses the unaudited pro forma impact on earnings of discontinuing amortization of the MBA
goodwill (for the three and six months ended June 30, 2001).
Three Months Six Months
Ended June 30, Ended June 30,
---------------------------------------------
2001 2001
---------------------------------------------
Reported net income $93,031 $145,301
Discontinue goodwill amortization 111 222
Adjust minority interest expense (1) (2)
---------------------------------------------
Adjusted net income $93,141 $145,521
=============================================
On a pro forma basis, earnings per Unit (both basic and diluted) were not affected by the discontinuation of
goodwill amortization due to the immaterial nature of the pro forma adjustment.
PAGE 15
8. DEBT OBLIGATIONS
Our debt consisted of the following at:
June 30, December 31,
2002 2001
---------------------------------------
Borrowings under:
Senior Notes A, 8.25% fixed rate, due March 2005 $ 350,000 $350,000
MBFC Loan, 8.70% fixed rate, due March 2010 54,000 54,000
Senior Notes B, 7.50% fixed rate, due February 2011 450,000 450,000
Multi-Year Credit Facility, due November 2005 230,000
364-Day Credit Facility, due November 2002 (a) 138,000
---------------------------------------
Total principal amount 1,222,000 854,000
Unamortized balance of increase in fair value related to
hedging a portion of fixed-rate debt 1,895 1,653
Less unamortized discount on:
Senior Notes A (99) (117)
Senior Notes B (244) (258)
Less current maturities of debt - -
---------------------------------------
Long-term debt $1,223,552 $855,278
=======================================
(a) Under the terms of this facility, the Operating Partnership has the option to convert this facility into a
term loan due November 15, 2003. Management intends to refinance this obligation with a similar obligation at or
before maturity.
The above table does not reflect the $1.26 billion in debt we incurred on July 31, 2002 in connection with the
Mapletree and E-Oaktree acquisitions (see Note 15 for information regarding this subsequent event).
At June 30, 2002, we had a total of $75 million of standby letters of credit capacity under our Multi-Year Credit
Facility of which $9.4 million was outstanding.
Enterprise Products Partners L.P. acts as guarantor of certain of the Operating Partnership's debt
obligations. This parent-subsidiary guaranty provision exists under our Senior Notes, MBFC Loan, Multi-Year and
364-Day Credit Facility.
In April 2002, we increased the amount that we can borrow under the Multi-Year Credit Facility by $20 million and
the 364-Day Credit Facility by $80 million, up to an amount not exceeding $500 million in the aggregate for both
facilities. At June 30, 2002, we had borrowed a total of $368 million under these two facilities.
The indentures under which the Senior Notes and the MBFC Loan were issued contain various restrictive
covenants. We were in compliance with these covenants at June 30, 2002.
On April 24, 2002, certain covenants of our Multi-Year and 364-Day Credit Facilities were amended to allow for
the commodity hedging losses we incurred during the first four months of 2002. As defined within the second
amendment to each of these loan agreements, the changes included allowing us to exclude from the calculation of
Consolidated EBITDA up to $50 million in losses resulting from hedging NGLs that utilized natural gas-based
financial instruments entered into on or prior to April 24, 2002. This exclusion applies to our quarterly
Consolidated EBITDA calculations in which the earnings impact of such specific instruments were recognized. This
provision allows for $45.1 million to be added back to Consolidated EBITDA for the first quarter of 2002 and $4.9
million to be added back for the second quarter of 2002. Due to the rolling four-quarter nature of the
Consolidated EBITDA calculation, this provision will affect our financial covenants through the first quarter of
2003. In addition, the second amendment temporarily raised the maximum ratio allowed under the Consolidated
Indebtedness to Consolidated EBITDA ratio for the rolling-four quarter period ending September 30, 2002 (this
provision was superseded by the third amendment to these loan agreements executed on July 31, 2002, see Note 15
for information regarding this subsequent event).
PAGE 16
We were in compliance with the covenants of our Multi-Year and 364-Day revolving credit agreements at June 30,
2002.
9. CAPITAL STRUCTURE
Conversion of EPCO Subordinated Units to Common Units
As a result of the Company satisfying certain financial tests, 10,704,936 (or 25%) of EPCO's Subordinated Units
converted to Common Units on May 1, 2002. Should the financial criteria continue to be satisfied through the
first quarter of 2003, an additional 25% of the Subordinated Units would undergo an early conversion to Common
Units on May 1, 2003. The remaining 50% of Subordinated Units would convert on August 1, 2003 should the balance
of the conversion requirements be met. Subordinated Units have no voting rights until converted to Common
Units. The conversion(s) will have no impact upon our earnings per unit since the Subordinated Units are already
included in both the basic and fully diluted EPU calculations.
Conversion of Shell Special Units to Common Units
In accordance with existing agreements with Shell, 19.0 million of Shell's non-distribution bearing Special Units
converted to distribution-bearing Common Units on August 1, 2002. The remaining 10.0 million Special Units will
convert to Common Units on a one-for-one basis in August 2003. These conversions have a dilutive impact on basic
EPU.
Treasury Units
During the first quarter of 1999, the Operating Partnership established the EPOLP 1999 Grantor Trust (the
"Trust") to fund future obligations under EPCO's long-term incentive plan (through the exercise of Common Unit
options granted to directors of the General Partner and EPCO employees who participate in the business of the
Operating Partnership). The Common Units purchased by the Trust are accounted for in a manner similar to treasury
stock under the cost method of accounting. At June 30, 2002, the Trust held 427,200 Common Units that are
classified as Treasury Units. The Trust purchased 100,000 Common Units during the first six months of 2002 at a
cost of $2.4 million.
Beginning in July 2000 and later modified in September 2001, the General Partner authorized the Company
(specifically, "Enterprise Products Partners L.P." in this context) and the Trust to repurchase up to 2.0 million
of our publicly-held Common Units (the "Buy-Back Program"). The repurchases will be made during periods of
temporary market weakness at price levels that would be accretive to our remaining Unitholders. Under the terms
of the original Buy-Back Program, Common Units repurchased by the Company were to be retired and Common Units
repurchased by the Trust were to remain outstanding and be accounted for as Treasury Units.
In April 2002, management modified the Buy-Back Program to treat Common Units repurchased by the Company as
Treasury Units. For accounting purposes, Units repurchased by the Company will be held in treasury to fund future
obligations under EPCO's long-term incentive plan (i.e, used for the same intent as that contemplated for the
Common Units repurchased by the Trust). The Company purchased 424,459 Common Units during the first six months of
2002 at a cost of $9.3 million. At June 30, 2002, 677,900 Common Units could be repurchased under the Buy-Back
Program.
During the second quarter of 2002, 51,959 Common Units were reissued from the Company's Treasury Units at their
weighted-average cost of $1.2 million to fulfill our obligations under certain employee Unit option agreements of
EPCO.
Comprehensive Income
We report comprehensive income or loss in our Statements of Consolidated Partners' Equity and Comprehensive
Income. For the six months ended June 30, 2001, the cumulative transition adjustment resulting from the adoption
PAGE 17
of SFAS No. 133, Accounting for Derivative Instruments and Hedging Activities, as amended and interpreted, was
the only item of other comprehensive income for us. There were no differences between net income and comprehensive
income for the same period in 2002. The following table summarizes the activity in other comprehensive income for
the six months ended June 30, 2001.
Comprehensive Income
for the six months ended June 30, 2001
Net Income $145,301
Less: Accumulated Other Comprehensive Loss (9,711)
---------------
Comprehensive Income $135,590
===============
10. EARNINGS PER UNIT
Basic earnings per Unit is computed by dividing net income available to limited partner interests by the
weighted-average number of Common and Subordinated Units outstanding during the period. In general, diluted
earnings per Unit is computed by dividing net income available to limited partner interests by the
weighted-average number of Common, Subordinated and Special Units outstanding during the period. In a period of
operating losses, the Special Units are excluded from the calculation of diluted earnings per Unit due to their
antidilutive effect. The following table reconciles the number of Units used in the calculation of basic earnings
per Unit and diluted earnings per Unit for the three and six months ended June 30, 2002 and 2001.
PAGE 18
Three Months Ended Six Months Ended
---------------------------------- -------------------------------
June 30, June 30,
---------------------------------- -------------------------------
2002 2001 2002 2001
---------------------------------- -------------------------------
Income before minority interest $22,523 $93,975 $ 5,147 $146,779
General partner interest (2,648) (1,388) (3,894) (2,370)
---------------------------------- -------------------------------
Income before minority interest 19,875 92,587 1,253 144,409
available to Limited Partners
Minority interest (203) (944) (30) (1,478)
---------------------------------- -------------------------------
Net income available to Limited Partners $19,672 $91,643 $ 1,223 $142,931
================================== ===============================
BASIC EARNINGS PER UNIT
Numerator
Income before minority interest
Available to Limited Partners $19,875 $92,587 $ 1,253 $144,409
================================== ===============================
Net income available
To Limited Partners $19,672 $91,643 $ 1,223 $142,931
================================== ===============================
Denominator
Common Units outstanding 109,640 92,514 106,192 92,514
Subordinated Units outstanding 35,644 42,820 39,212 42,820
---------------------------------- -------------------------------
Total 145,284 135,334 145,404 135,334
================================== ===============================
Basic Earnings per Unit
Income before minority interest
Available to Limited Partners $ 0.14 $ 0.68 $ 0.01 $ 1.07
================================== ===============================
Net income available
To Limited Partners $ 0.14 $ 0.68 $ 0.01 $ 1.06
================================== ===============================
DILUTED EARNINGS PER UNIT
Numerator
Income before minority interest
available to Limited Partners $19,875 $92,587 $ 1,253 $144,409
================================== ===============================
Net income available
to Limited Partners $19,672 $91,643 $ 1,223 $142,931
================================== ===============================
Denominator
Common Units outstanding 109,640 92,514 106,192 92,514
Subordinated Units outstanding 35,644 42,820 39,212 42,820
Special Units outstanding 29,000 33,000 29,000 33,000
---------------------------------- -------------------------------
Total 174,284 168,334 174,404 168,334
================================== ===============================
Diluted Earnings per Unit
Income before minority interest
available to Limited Partners $ 0.11 $ 0.55 $ 0.01 $ 0.86
================================== ===============================
Net income available
to Limited Partners $ 0.11 $ 0.54 $ 0.01 $ 0.85
================================== ===============================
PAGE 19
11. DISTRIBUTIONS
We intend, to the extent there is sufficient available cash from Operating Surplus, as defined by the Partnership
Agreement, to distribute to each holder of Common Units at least a minimum quarterly distribution of $0.225 per
Common Unit. The minimum quarterly distribution is not guaranteed and is subject to adjustment as set forth in the
Partnership Agreement. Apart from its pro rata share of the quarterly distributions, the General Partner's
interest in quarterly distributions is increased after certain specified target levels are met (the "incentive
distributions").
The distribution paid on February 11, 2002 (based on fourth quarter 2001 results) was $0.3125 per Common and
Subordinated Unit. The distribution paid on May 10, 2002 (based on first quarter 2002 results) was $0.335 per
Common and Subordinated Unit. As a result of these distributions, the General Partner received $3.9 million in
incentive distributions.
The distribution rate declared by the General Partner for the second quarter of 2002 was $0.335 per Common Unit
to Unitholders of record on July 31, 2002. This distribution was paid on August 12, 2002.
12. SUPPLEMENTAL CASH FLOWS DISCLOSURE
The net effect of changes in operating assets and liabilities is as follows:
Six Months Ended
June 30,
----------------------------------
2002 2001
----------------------------------
(Increase) decrease in:
Accounts and notes receivable $(24,455) $ 96,860
Inventories (78,843) 522
Prepaid and other current assets 9,599 (10,831)
Other assets (3,436) (129)
Increase (decrease) in:
Accounts payable 7,795 (55,755)
Accrued gas payable 70,447 (78,008)
Accrued expenses (9,499) (11,232)
Accrued interest 374 14,546
Other current liabilities (4,219) 13,271
Other liabilities (142) 187
----------------------------------
Net effect of changes in operating accounts $(32,379) $(30,569)
==================================
During the first six months of 2002, we completed $394.8 million in business acquisitions of which the purchase
price allocations of each affected various balance sheet accounts. See Note 2 for information regarding the
allocation of the purchase price for these acquisitions.
The $32.5 million purchase price obligation of the Toca Western facilities will not be paid until September
2002. This amount was accrued as additional property, plant and equipment with the offsetting payable amount
recorded under other current liabilities (see Note 2).
We record various financial instruments relating to commodity positions and interest rate swaps at their
respective fair values using mark-to-market accounting. For the six months ended June 30, 2002, we recognized a
net $19.7 million in non-cash changes related to decreases in the fair value of these financial instruments,
primarily in our commodity financial instruments portfolio. For the six months ended June 30, 2001, we recognized
a net $55.9 million in non-cash mark-to-market income from our financial instruments portfolio.
PAGE 20
Cash and cash equivalents at June 30, 2002, per the Statements of Consolidated Cash Flows, excludes $5.0 million
of restricted cash. This restricted cash represents amounts held by a brokerage firm as margin deposits associated
with our financial instruments portfolio and for physical purchase transactions made on the NYMEX exchange.
Of the $9.3 million spent by the Company for Treasury Units during the first six months of 2002, $0.7 million
will not result in cash settlements until July 2002.
13. FINANCIAL INSTRUMENTS
We are exposed to financial market risks, including changes in commodity prices in our natural gas and NGL
businesses and in interest rates with respect to a portion of our debt obligations. We may use financial
instruments (i.e., futures, forwards, swaps, options, and other financial instruments with similar
characteristics) to mitigate the risks of certain identifiable and anticipated transactions, primarily in our
Processing segment. As a matter of policy, we do not use financial instruments for speculative (or trading)
purposes.
Commodity financial instruments
Our Processing and Octane Enhancement segments are directly exposed to commodity price risk through their
respective business operations. The prices of natural gas, NGLs and MTBE are subject to fluctuations in response
to changes in supply, market uncertainty and a variety of additional factors that are beyond our control. In order
to manage the risks associated with our Processing segment, we may enter into swaps, forwards, commodity futures,
options and other commodity financial instruments with similar characteristics that are permitted by contract or
business custom to be settled in cash or with another financial instrument. The primary purpose of these risk
management activities (or hedging strategies) is to hedge exposure to price risks associated with natural gas,
NGL inventories, firm commitments and certain anticipated transactions. We do not hedge our exposure to the MTBE
markets. Also, in our Pipelines segment, we may utilize a limited number of commodity financial instruments to
manage the price we charge certain of our customers for natural gas.
We have adopted a financial commodity and commercial policy to manage our exposure to the risks of our natural
gas and NGL businesses. The objective of these policies is to assist us in achieving our profitability goals while
maintaining a portfolio with an acceptable level of risk, defined as remaining within the position limits
established by the General Partner. Under these policies, we enter into risk management transactions to manage
price risk, basis risk, physical risk or other risks related to our commodity positions on both a short-term
(less than one month) and long-term basis, generally not to exceed 24 months. The General Partner oversees our
hedging strategies associated with physical and financial risks (such as those mentioned previously), approves
specific activities subject to the policies (including authorized products, instruments and markets) and
establishes specific guidelines and procedures for implementing and ensuring compliance with the policies.
We routinely review our outstanding financial instruments in light of current market conditions. If market
conditions warrant, some financial instruments may be closed out in advance of their contractual settlement dates
thus realizing income or loss depending on the specific exposure. When this occurs, we may enter into a new
commodity financial instrument to reestablish the economic hedge to which the closed instrument relates.
Our commodity financial instruments may not qualify for hedge accounting treatment under the specific guidelines
of SFAS No. 133 because of ineffectiveness. A hedge is normally regarded as effective if, among other things, at
inception and throughout the term of the financial instrument, we could expect changes in the fair value of the
hedged item to be almost fully offset by the changes in the fair value of the financial instrument. When
financial instruments do not qualify as effective hedges under the guidelines of SFAS No. 133, changes in the
fair value of these positions are recorded on the balance sheet and in earnings through mark-to-market
accounting. The use of mark-to-market accounting for these ineffective instruments results in a degree of non-cash
earnings volatility that is dependent upon changes in the underlying commodity prices.
We recognized a loss of $50.9 million in the first six months of 2002 from our commodity hedging activities, of
which $45.1 million was attributable to the first quarter of 2002. These losses are treated as an increase in
operating costs and expenses in our Statements of Consolidated Operations. Of this amount, $31.9 million has been
realized (e.g., paid out to counterparties). The remaining $19.0 million represents the negative change in value
PAGE 21
of the open positions between December 31, 2001 and June 30, 2002 (based on market prices at those dates). The
market value of our open positions at June 30, 2002 was $11.1 million payable (a loss).
For the first six months of 2001, we recognized income of $70.3 million from these activities of which $5.6
million was recorded in the first quarter and $64.7 million in the second quarter. Of the $70.3 million recorded
for the first six months of 2001, $52.4 million was attributable to the market value of open positions at June
30, 2001.
Interest rate swaps
Our interest rate exposure results from variable-rate borrowings from commercial banks and fixed-rate borrowings
pursuant to the Company's Senior Notes and MBFC Loan. We manage a portion of our exposure to changes in interest
rates by utilizing interest rate swaps. The objective of holding interest rate swaps is to manage debt service
costs by converting a portion of fixed-rate debt into variable-rate debt or a portion of variable-rate debt into
fixed-rate debt. An interest rate swap, in general, requires one party to pay a fixed-rate on the notional amount
while the other party pays a floating-rate based on the notional amount.
The General Partner oversees the strategies associated with financial risks and approves instruments that are
appropriate for our requirements. At June 30, 2002, we had one interest rate swap outstanding having a notional
amount of $54 million extending through March 2010. Under this agreement, we exchanged a fixed-rate of 8.70% for a
market-based variable-rate. If it elects to do so, the counterparty may terminate this swap in March 2003.
We recognized income of $0.8 million during the first six months of 2002 from our interest rate swaps that is
treated as a reduction of interest expense ($0.7 million recorded in the second quarter of 2002). The fair value
of the interest rate swap at June 30, 2002 was a receivable of $3.1 million. We recognized income of $5.5 million
during the first six months of 2001 from interest rate swaps. The benefit recorded in 2001 was primarily due to
the election of a counterparty to not terminate its interest rate swap in the first quarter of 2001.
14. SEGMENT INFORMATION
Operating segments are components of a business about which separate financial information is available and that
are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate resources to segments.
We have five reportable operating segments: Pipelines, Fractionation, Processing, Octane Enhancement and
Other. The reportable segments are generally organized according to the type of services rendered (or process
employed) and products produced and/or sold, as applicable. The segments are regularly evaluated by the Chief
Executive Officer of the General Partner. Pipelines consists of both liquids and natural gas pipeline systems,
storage and import/export terminal services. Fractionation primarily includes NGL fractionation, isomerization,
and polymer grade propylene fractionation services. Processing includes the natural gas processing business and
its related merchant activities. Octane Enhancement represents our equity interest in BEF, a facility that
produces motor gasoline additives to enhance octane (currently producing MTBE). The Other operating segment
consists of fee-based marketing services and other plant support functions.
We evaluate segment performance based on gross operating margin. Gross operating margin reported for each segment
represents operating income before depreciation and amortization, lease expense obligations retained by EPCO,
gains and losses on the sale of assets and general and administrative expenses. In addition, segment gross
operating margin is exclusive of interest expense, interest income (from unconsolidated affiliates or others),
dividend income from unconsolidated affiliates, minority interest, extraordinary charges and other income and
expense transactions.
Gross operating margin by segment includes intersegment and intrasegment revenues (offset by corresponding
intersegment and intrasegment expenses within the segments), which are generally based on transactions made at
market-related rates. Our intersegment and intrasegment activities include, but are not limited to, the following
types of transactions:
PAGE 22
o NGL fractionation revenues from separating our NGL raw-make inventories into distinct NGL products using
our fractionation plants for our merchant activities group (an intersegment revenue of Fractionation
offset by an intersegment expense of Processing);
o liquids pipeline revenues from transporting our merchant volumes from the gas processing plants on our
pipelines to our NGL fractionation facilities (an intersegment revenue of Pipelines offset by an
intersegment expense of Processing); and,
o the sale of our NGL equity production extracted by our gas processing plants to our merchant activities
group (an intrasegment revenue of Processing offset by an intrasegment expense of Processing).
Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries, after
elimination of all material intercompany (both intersegment and intrasegment) accounts and transactions.
We include equity earnings from unconsolidated affiliates in segment gross operating margin and as a component of
revenues. Our equity investments with industry partners are a vital component of our business strategy and a
means by which we conduct our operations to align our interests with a supplier of raw materials to a facility or
a consumer of finished products from a facility. This method of operation also enables us to achieve favorable
economies of scale relative to the level of investment and business risk assumed versus what we could accomplish
on a stand alone basis. Many of these businesses perform supporting or complementary roles to our other business
operations. For example, we use the Promix NGL fractionator to process NGLs extracted by our gas plants. The NGLs
received from Promix then can be sold by our merchant businesses. Another example would be our relationship with
the BEF MTBE facility. Our isomerization facilities process normal butane for this plant and our HSC pipeline
transports MTBE for delivery to BEF's storage facility on the Houston Ship Channel.
Our revenues are derived from a wide customer base. All consolidated revenues were earned in the United States. Our
operations are centered along the Texas, Louisiana and Mississippi Gulf Coast areas. See Note 15 regarding an
expansion of our business activities into certain regions of the central and western United States.
Consolidated property, plant and equipment and investments in and advances to unconsolidated affiliates are
allocated to each segment on the basis of each asset's or investment's principal operations. The principal
reconciling item between consolidated property, plant and equipment and segment property is
construction-in-progress. Segment property represents those facilities and projects that contribute to gross
operating margin and is net of accumulated depreciation on these assets. Since assets under construction do not
generally contribute to segment gross operating margin, these assets are not included in the operating segment
totals until they are deemed operational. Consolidated intangible assets and goodwill are allocated to the
segments based on the classification of the assets to which they relate.
PAGE 23
A reconciliation of segment gross operating margin to consolidated income before minority interest follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------
Total segment gross operating margin $66,938 $131,255 $93,351 $204,148
Depreciation and amortization (16,962) (11,793) (34,199) (21,822)
Retained lease expense, net (2,273) (2,660) (4,578) (5,320)
(Gain) loss on sale of assets 1 6 (12) 387
Selling, general and administrative (7,740) (7,737) (15,702) (13,905)
---------------------------------------------------------------------
Consolidated operating income 39,964 109,071 38,860 163,488
Interest expense (19,032) (16,331) (37,545) (23,318)
Interest income from unconsolidated affiliates 62 7 92 31
Dividend income from unconsolidated affiliates 1,242 2,196 1,632
Interest income-other 241 1,479 1,575 5,477
Other, net 46 (251) (31) (531)
---------------------------------------------------------------------
Consolidated income before minority interest $22,523 $ 93,975 $ 5,147 $146,779
=====================================================================
PAGE 24
Information by operating segment, together with reconciliations to the consolidated totals, is presented in the
following table:
Operating Segments
---------------------------------------------------------------- Adjs.
Octane and Consol.
Fractionation Pipelines Processing Enhancement Other Elims. Totals
----------------------------------------------------------------------------------------
Revenues from
external customers:
Three months ended June 30, 2002 $169,345 $138,589 $477,941 $382 $786,257
Three months ended June 30, 2001 86,566 178,958 693,242 631 959,397
Six months ended June 30, 2002 278,767 237,670 930,975 899 1,448,311
Six months ended June 30, 2001 176,245 186,145 1,432,011 1,311 1,795,712
Intersegment and intrasegment
revenues:
Three months ended June 30, 2002 56,103 25,578 140,969 102 $(222,752)
Three months ended June 30, 2001 44,133 24,631 131,657 96 (200,517)
Six months ended June 30, 2002 89,500 50,088 267,229 202 (407,019)
Six months ended June 30, 2001 85,785 45,410 241,966 191 (373,352)
Equity income in
unconsolidated affiliates:
Three months ended June 30, 2002 1,973 2,219 $2,876 7,068
Three months ended June 30, 2001 1,692 2,125 5,233 9,050
Six months ended June 30, 2002 3,612 6,801 5,882 16,295
Six months ended June 30, 2001 2,253 3,406 5,402 11,061
Total revenues:
Three months ended June 30, 2002 227,421 166,386 618,910 2,876 484 (222,752) 793,325
Three months ended June 30, 2001 132,391 205,714 824,899 5,233 727 (200,517) 968,447
Six months ended June 30, 2002 371,879 294,559 1,198,204 5,882 1,101 (407,019) 1,464,606
Six months ended June 30, 2001 264,283 234,961 1,673,977 5,402 1,502 (373,352) 1,806,773
Total gross operating margin
by segment:
Three months ended June 30, 2002 33,853 32,190 (1,182) 2,876 (799) 66,938
Three months ended June 30, 2001 32,803 24,696 68,112 5,233 411 131,255
Six months ended June 30, 2002 58,230 64,858 (34,558) 5,882 (1,061) 93,351
Six months ended June 30, 2001 58,471 42,819 96,510 5,402 946 204,148
Segment assets:
At June 30, 2002 470,249 918,052 129,028 9,239 44,003 1,570,571
At December 31, 2001 357,122 717,348 124,555 8,921 98,844 1,306,790
Investments in and advances
to unconsolidated affiliates:
At June 30, 2002 98,029 213,852 33,000 58,189 403,070
At December 31, 2001 93,329 216,029 33,000 55,843 398,201
Intangible Assets:
At June 30, 2002 52,369 8,011 188,842 249,222
At December 31, 2001 7,857 194,369 202,226
Goodwill:
At June 30, 2002 81,543 81,543
Total revenues for the second quarter of 2002 were lower than those of the second quarter of 2001 primarily due
to a decline in NGL product prices between the two periods. The same can be said for the difference between the
first six months of 2002 compared to the same period in 2001. Total gross operating margin for the second quarter
of 2002 decreased $64.3 million from the second quarter of 2001 primarily due to the 2001 period including $64.7
million of commodity hedging income in the Processing segment that was not repeated in the 2002 period. For the
PAGE 25
first six months of 2002, gross operating margin decreased $110.8 million compared to the first six months of
2001. The year-to-date decline in gross operating margin is primarily due to the 2002 period including $50.9
million in commodity hedging losses versus the 2001 period including $70.3 million in commodity hedging income
(together accounting for $121.2 million of the year-to-date difference in gross operating margin). The $121.2
million difference in commodity hedging results is primarily reflected in the Processing segment.
Since January 1, 2002, segment assets have increased $263.8 million. The increase is primarily due to the
Diamond-Koch acquisitions completed during the first quarter of 2002 and the Toca Western acquisition in June
2002 (see Note 2). Intangible assets increased $47.0 million since January 1, 2002 primarily the result of the
contract-based intangible assets we acquired from Diamond-Koch (see Note 7). Goodwill was $81.5 million at June
30, 2002 due to the goodwill we added as a result of the Diamond-Koch acquisition and the reclassification of the
goodwill associated with the 1999 MBA acquisition (see Note 7).
15. SUBSEQUENT EVENTS
Purchase of Interests in Mapletree and E-Oaktree
On August 1, 2002, we announced the purchase of equity interests in affiliates of Williams, which in turn, own
controlling interests in Mid-America Pipeline Company, LLC (formerly Mid-America Pipeline Company) and Seminole
Pipeline Company. The purchase price of the acquisition was approximately $1.2 billion (subject to certain
post-closing purchase price adjustments). The effective date of the acquisition was July 31, 2002.
The acquisitions include a 98% ownership interest in Mapletree, LLC ("Mapletree"), owner of a 100% interest in
Mid-America Pipeline Company, LLC and certain propane terminals and storage facilities. The Mid-America pipeline
is a major NGL pipeline system consisting of three NGL pipelines, with 7,226 miles of pipeline, and average
transportation volumes of approximately 850 MBPD. Mid-America's 2,548-mile Rocky Mountain system transports mixed
NGLs from the Rocky Mountain Overthrust and San Juan Basin areas to Hobbs, Texas. Its 2,740-mile Conway North
segment links the large NGL hub at Conway, Kansas to the upper Midwest; its 1,938 mile Conway South system connects
the Conway hub with Kansas refineries and transports mixed NGLs from Conway, Kansas to Hobbs, Texas.
We also acquired a 98% ownership interest in E-Oaktree, LLC, owner of an 80% equity interest in Seminole Pipeline
Company. The Seminole pipeline consists of a 1,281-mile NGL pipeline, with an average transportation volume of
approximately 260 MBPD. This pipeline transports mixed NGLs and NGL products from Hobbs, Texas and the Permian
Basin to Mont Belvieu, Texas.
The post-closing purchase price adjustments of the Mapletree and E-Oaktree acquisitions are expected to be
completed during the fourth quarter of 2002. These acquisitions do not require any material governmental approvals.
These acquisitions were funded by a $1.2 billion senior unsecured 364-day term loan entered into by the Operating
Partnership on July 31, 2002. The lenders under this facility are Wachovia Bank, National Association; Lehman
Brothers Bank, FSB; Lehman Commercial Paper Inc. and Royal Bank of Canada. As defined within the credit agreement,
the loan will generally bear interest at either (i) the greater of (a) the Prime Rate or (b) the Federal Funds
Effective Rate plus one-half percent or (ii) a Eurodollar rate, with any rate in effect being increased by an
appropriate applicable margin. The credit agreement contains various affirmative and negative covenants
applicable to the Operating Partnership similar to those required under our Multi-Year and 364-Day Credit
Facility agreements. The $1.2 billion term loan is guaranteed by Enterprise Products Partners L.P. through an
unsecured guarantee. The loan will be repaid as follows:$150 million due on December 31, 2002, $450 million on
March 31, 2003 and $600 million on July 30, 2003.
On August 1, 2002, Seminole Pipeline Company had $60 million in senior unsecured notes due in December 2005. The
principal amount of these notes amortize by $15 million each December 1 through 2005. In accordance with GAAP,
this debt will be consolidated on our balance sheet because of our 98% controlling interest in E-Oaktree, LLC,
which owns 80% of Seminole Pipeline Company.
PAGE 26
Third Amendment to our Multi-Year and 364-Day Credit Facilities
On July 31, 2002, certain covenants of our Multi-Year and 364-Day Credit Facilities were further amended to allow
for increased financial flexibility in light of the Mapletree and E-Oaktree acquisitions. As defined within the
third amendment to each of these loan agreements, the maximum ratio of Consolidated Indebtedness to Consolidated
EBITDA allowed by our lenders was increased as follows from that noted in the second amendment issued in April
2002:
Changes made to the
Consolidated Indebtedness to Consolidated EBITDA Ratio
- ---------------------------------------------------------------------------
Maximum Ratio Allowed
------------------------------------------
Calculation made for Old provisions New provisions
the rolling four-quarter under 2nd under 3rd
period ending Amendment Amendment
- ---------------------------------------------------------------------------
September 30, 2002 4.50 to 1.0 6.00 to 1.0
December 31, 2002 4.00 to 1.0 5.25 to 1.0
March 31, 2003 4.00 to 1.0 5.25 to 1.0
June 30, 2003 4.00 to 1.0 4.50 to 1.0
September 30, 2003 and 4.00 to 1.0 4.00 to 1.0
for each rolling-four
quarter period thereafter
In addition, the negative covenant on Indebtedness (as defined within the Multi-Year and 364-Day credit
agreements) was amended to permit the Seminole Pipeline Company indebtedness assumed in connection with the
acquisition of E-Oaktree.
PAGE 27
PART I. FINANCIAL INFORMATION.
Item 1B. CONSOLIDATED FINANCIAL STATEMENTS.
Enterprise Products Operating L.P.
Consolidated Balance Sheets
(Dollars in thousands)
June 30,
2002 December 31,
ASSETS (unaudited) 2001
---------------------------------------
Current Assets
Cash and cash equivalents (includes restricted cash of $5,034 at
June 30, 2002 and $5,752 at December 31, 2001) $7,788 $137,823
Accounts and notes receivable - trade, net of allowance for doubtful
accounts of $21,098 at June 30, 2002 and $20,642 at
December 31, 2001 284,021 256,927
Accounts receivable - affiliates 11,503 4,405
Inventories 153,280 69,443
Prepaid and other current assets 34,089 50,207
---------------------------------------
Total current assets 490,681 518,805
Property, Plant and Equipment, Net 1,570,571 1,306,790
Investments in and Advances to Unconsolidated Affiliates 403,070 398,201
Intangible assets, net of accumulated amortization of $18,235 at
June 30, 2002 and $13,084 at December 31, 2001 249,222 202,226
Goodwill 81,543
Other Assets 6,911 5,201
---------------------------------------
Total $2,801,998 $2,431,223
=======================================
LIABILITIES AND PARTNERS' EQUITY
Current Liabilities
Accounts payable - trade $ 70,716 $54,269
Accounts payable - affiliate 21,233 33,691
Accrued gas payables 303,983 233,536
Accrued expenses 12,961 22,233
Accrued interest 24,676 24,302
Other current liabilities 70,024 44,767
---------------------------------------
Total current liabilities 503,593 412,798
Long-Term Debt 1,223,552 855,278
Other Long-Term Liabilities 7,919 8,061
Minority Interest 2,331 1,468
Commitments and Contingencies
Partners' Equity
Limited Partner 1,062,422 1,148,124
General Partner 10,841 11,716
Parent's Units acquired by Trust (8,660) (6,222)
---------------------------------------
Total Partners' Equity 1,064,603 1,153,618
---------------------------------------
Total $2,801,998 $2,431,223
=======================================
See Notes to Unaudited Consolidated Financial Statements
PAGE 28
Enterprise Products Operating L.P.
Statements of Consolidated Operations
(Dollars in thousands)
(Unaudited)
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------
REVENUES
Revenues from consolidated operations $786,257 $959,397 $1,448,311 $1,795,712
Equity income in unconsolidated affiliates 7,068 9,050 16,295 11,061
---------------------------------------------------------------------
Total 793,325 968,447 1,464,606 1,806,773
---------------------------------------------------------------------
COST AND EXPENSES
Operating costs and expenses 745,621 851,639 1,410,044 1,629,380
Selling, general and administrative 7,815 8,418 15,601 14,586
---------------------------------------------------------------------
Total 753,436 860,057 1,425,645 1,643,966
---------------------------------------------------------------------
OPERATING INCOME 39,889 108,390 38,961 162,807
OTHER INCOME (EXPENSE)
Interest expense (19,032) (16,331) (37,545) (23,318)
Interest income from unconsolidated affiliates 62 3 92 15
Dividend income from unconsolidated affiliates 1,242 2,196 1,632
Interest income - other 384 1,626 1,820 5,771
Other, net (65) (251) (142) (531)
---------------------------------------------------------------------
Other income (expense) (17,409) (14,953) (33,579) (16,431)
---------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 22,480 93,437 5,382 146,376
MINORITY INTEREST (33) (44) (86) (67)
---------------------------------------------------------------------
NET INCOME $ 22,447 $ 93,393 $ 5,296 $ 146,309
=====================================================================
See Notes to Unaudited Consolidated Financial Statements
PAGE 29
Enterprise Products Operating L.P.
Statements of Consolidated Cash Flows
(Dollars in thousands)
(Unaudited)
Six Months Ended
June 30,
---------------------------------
2002 2001
---------------------------------
OPERATING ACTIVITIES
Net income $ 5,296 $146,309
Adjustments to reconcile net income to cash flows provided by
(used for) operating activities:
Depreciation and amortization 35,349 23,234
Equity in income of unconsolidated affiliates (16,295) (11,061)
Distributions received from unconsolidated affiliates 29,113 13,212
Leases paid by EPCO 4,579 5,320
Minority interest 86 67
Loss (gain) on sale of assets 12 (387)
Changes in fair market value of financial instruments (see Note 11) 19,702 (55,880)
Net effect of changes in operating accounts (45,691) (30,611)
---------------------------------
Operating activities cash flows 32,151 90,203
---------------------------------
INVESTING ACTIVITIES
Capital expenditures (26,755) (57,090)
Proceeds from sale of assets 12 563
Business acquisitions, net of cash acquired (394,775) (225,665)
Investments in and advances to unconsolidated affiliates (10,137) (115,282)
---------------------------------
Investing activities cash flows (431,655) (397,474)
---------------------------------
FINANCING ACTIVITIES
Long-term debt borrowings 538,000 449,716
Long-term debt repayments (170,000)
Debt issuance costs (418) (3,125)
Cash distributions to partners (96,490) (77,494)
Cash distributions to minority interest (45)
Cash contribution from General Partner 39
Cash contributions from minority interest 777 110
Parent's Units acquired by consolidated Trust (2,439)
Increase in restricted cash 718 (7,321)
---------------------------------
Financing activities cash flows 270,187 361,841
---------------------------------
NET CHANGE IN CASH AND CASH EQUIVALENTS (129,317) 54,570
CASH AND CASH EQUIVALENTS, DECEMBER 31 132,071 58,446
---------------------------------
CASH AND CASH EQUIVALENTS, JUNE 30 $ 2,754 $113,016
=================================
See Notes to Unaudited Consolidated Financial Statements
PAGE 30
Enterprise Products Operating L.P.
Notes to Unaudited Consolidated Financial Statements
1. GENERAL
In the opinion of Enterprise Products Operating L.P., the accompanying unaudited consolidated financial
statements include all adjustments consisting of normal recurring accruals necessary for a fair presentation of
its consolidated financial position as of June 30, 2002 and consolidated results of operations and cash flows for
the three and six months ended June 30, 2002 and 2001. Within these footnote disclosures of Enterprise Products
Operating L.P., references to "we", "us", "our" or "the Company" shall mean the consolidated financial statements
of Enterprise Products Operating L.P. References to "Limited Partner" shall mean the consolidated financial
statements of our parent, Enterprise Products Partners L.P., which are included elsewhere in this combined report
on Form 10-Q.
Although we believe 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 SEC. These unaudited financial statements should be read in conjunction with our
annual report on Form 10-K (File No. 333-93239-01) for the year ended December 31, 2001.
The results of operations for the three and six months ended June 30, 2002 are not necessarily indicative of the
results to be expected for the full year.
Dollar amounts presented within these footnote disclosures are stated in thousands of dollars, unless otherwise
indicated.
Certain abbreviated entity names and other capitalized terms are described within the glossary of this quarterly
report on Form 10-Q.
2. BUSINESS ACQUISITIONS
Acquisition of Diamond-Koch propylene fractionation business in February 2002
In February 2002, we purchased various propylene fractionation assets and certain inventories of refinery grade
propylene, propane, and polymer grade propylene from Diamond-Koch. These include a 66.7% interest in a polymer
grade propylene fractionation facility located in Mont Belvieu, Texas (the "Mont Belvieu III" facility), a 50%
interest in an entity which owns a polymer grade propylene export terminal located on the Houston Ship Channel in
La Porte, Texas, and varying interests in several supporting distribution pipelines and related equipment. Mont
Belvieu III has the capacity to produce approximately 41 MBPD of polymer grade propylene. These assets are part of
our Mont Belvieu propylene fractionation operations, which is part of the Fractionation segment. The purchase
price of $239.0 million was funded by a drawdown on our Multi-Year and 364-Day Credit Facilities (see Note 8).
Acquisition of Diamond-Koch storage business in January 2002
In January 2002, we purchased various hydrocarbon storage assets from Diamond-Koch. The storage facilities consist
of 30 salt dome storage caverns with a useable capacity of 68 million barrels, local distribution pipelines and
related equipment. The facilities provide storage services for mixed natural gas liquids, ethane, propane,
butanes, natural gasoline and olefins (such as ethylene), polymer grade propylene, chemical grade propylene and
refinery grade propylene.
The facilities are located in Mont Belvieu, Texas and serve the largest petrochemical and refinery complex in the
United States. Collectively, these facilities represent the largest underground storage operation of its kind in
the world. The size and location of the business provide it with a competitive position to increase its services
PAGE 31
to expanding Gulf Coast petrochemical complexes. These assets are part of our Mont Belvieu storage operations,
which is part of the Pipelines segment. The purchase price of $129.6 million was funded by utilizing cash on hand.
Allocation of purchase price of Diamond-Koch acquisitions
The Diamond-Koch acquisitions were accounted for under the purchase method of accounting and, accordingly, the
purchase price of each has been allocated to the assets acquired and liabilities assumed based on their estimated
fair values as follows:
Estimated Fair Values at
----------------------------------------
Feb. 1, 2002 Jan. 1, 2002
Propylene
Fractionation Storage Total
------------------------------------------------------------
Inventories $ 4,994 $ 4,994
Prepaid and other current assets 3,148 $ 890 4,038
Property, plant and equipment 96,772 120,571 217,343
Investments in unconsolidated affiliates 7,550 7,550
Intangible assets (see Note 7) 53,000 8,127 61,127
Goodwill (see Note 7) 73,686 73,686
Current liabilities (107) (107)
------------------------------------------------------------
Total purchase price $239,043 $129,588 $368,631
============================================================
The fair value estimates were developed by independent appraisers using recognized business valuation
techniques. The allocation of the purchase price is preliminary pending the results of a repermitting process
expected to be complete during the fourth quarter of 2002.
The purchase price paid for the propylene fractionation business resulted in $73.7 million in goodwill. The
goodwill primarily represents the value management has attached to future earnings improvements and to the
strategic location of the assets. Earnings from the propylene business are expected to improve substantially from
the last few years with the years 2003 and 2004 projected to be peak years in the petrochemical business
cycle. Additionally, the demand for chemical grade and polymer grade propylene is forecast to grow at an average
of 4.4% per year from 2002 to 2006.
The propylene fractionation assets are located in Mont Belvieu, Texas on the Gulf Coast, the largest natural gas
liquids and petrochemical marketplace in the U.S. The assets have access to substantial supply from major Gulf
Coast and central U.S. producers of refinery grade propylene. The polymer grade products produced at the facility
have competitive advantages because of distribution direct to customers via affiliated pipelines and through an
affiliated export facility.
Acadian Gas post-closing adjustments completed in April 2002
In April 2002, we finalized the post-closing purchase price adjustment associated with our April 2001 acquisition
of Acadian Gas. Acadian Gas was acquired from an affiliate of Shell and is involved in the purchase, sale,
transportation and storage of natural gas in Louisiana. As a result, we paid Shell $18.0 million for various
working capital items, of which the majority were related to natural gas inventories. The Acadian Gas acquisition
was accounted for under the purchase method of accounting and, accordingly, the final purchase price has been
allocated to the assets acquired and liabilities assumed based on their estimated fair values at April 1, 2001 as
follows:
PAGE 32
Current assets $83,123
Investments in unconsolidated affiliates 2,723
Property, plant and equipment 232,187
Current liabilities (72,896)
Other long-term liabilities (1,460)
--------------------
Total purchase price $243,677
====================
Pro forma effect of Diamond-Koch and Acadian Gas business acquisitions
As noted earlier, the Acadian Gas acquisition occurred on April 1, 2001. We acquired Diamond-Koch's storage
business on January 1, 2002 and its propylene fractionation business on February 1, 2002. As a result, our actual
fiscal 2002 Statements of Consolidated Operations reflect the Diamond-Koch propylene fractionation business and
the Diamond-Koch storage business for their respective acquisition dates through June 2002 and the results of
Acadian Gas. For the first six months of fiscal 2001, our Statements of Consolidated Operations reflect only three
months of Acadian Gas.
The following table presents unaudited pro forma financial information incorporating the historical
(pre-acquisition) financial results of the propylene fractionation and storage assets we acquired from
Diamond-Koch and those of Acadian Gas that we acquired from Shell. This information is helpful in gauging the
possible impact that these acquisitions might have had on our results of operations had they been completed on
January 1, 2001 as opposed to the actual dates that these acquisitions occurred. The pro forma information is
based upon data currently available to and certain estimates and assumptions made by management and, as a result,
are not necessarily indicative of our financial results had the transactions actually occurred on these
dates. Likewise, the unaudited pro forma information is not necessarily indicative of our future financial results.
Three Months Six Months Ended
Ended June 30, June 30,
------------------------------
2001 2002 2001
--------------------------------------------------------
Revenues $1,043,671 $1,482,040 $2,195,472
Income before extraordinary item
and minority interest $ 89,886 $ 5,291 $ 146,771
Net income $ 89,842 $ 5,204 $ 146,704
Minor acquisitions initiated during the second quarter of 2002
We initiated the purchase of an additional interest in our Mont Belvieu NGL fractionation from ChevronTexaco and
the acquisition of a gas processing plant and NGL fractionator in Louisiana from Western Resources during the
second quarter of 2002. Due to the immaterial nature and incomplete status of these two transactions, our
discussion of each minor purchase is limited to the following:
Acquisition of ChevronTexaco's interest in our Mont Belvieu NGL fractionator. In April 2002, we executed an
agreement with an affiliate of ChevronTexaco to purchase their 12.5% undivided ownership interest in our Mont
Belvieu, Texas NGL fractionator. The purchase price was approximately $8.0 million. The Mont Belvieu facility has a
gross NGL fractionation capacity of 210 MBPD of which 26.2 MBPD was ChevronTexaco's net share. ChevronTexaco was
required to sell their 12.5% interest in a consent order by the FTC as a condition of approving the merger
between Chevron and Texaco. The effective date of the purchase was June 1, 2002.
The other joint owners of the facility (affiliates of Duke Energy Field Services and Burlington Resources Inc.)
have the option to acquire their pro rata share of the ChevronTexaco interest. These preferential purchase rights
expire on September 30, 2002. If the other joint owners fully exercise their option to acquire their share of the
interest, our ownership interest would increase to approximately 71.4% from 62.5% currently. Should the joint
owners decline to exercise their options, we would own 75.0% of the facility. If the other joint owners acquire
PAGE 33
any portion of their share of the ChevronTexaco interest, our purchase price will be reduced accordingly. We
expect to complete this transaction during the third quarter of 2002.
Acquisition of gas processing and NGL fractionator assets from Western Gas Resources, Inc. In June 2002, we
executed an agreement to acquire a natural gas processing plant, NGL fractionator and supporting assets
(including contracts) from Western Gas Resources, Inc. for $32.5 million plus certain post-closing purchase price
adjustments. The "Toca Western" facilities are located in St. Bernard Parish, Louisiana near our existing Toca
natural gas processing plant. The gas processing facility has a capacity of 160 MMcf/d and the NGL fractionator
can fractionate up to 14.2 MBPD of NGLs.
This purchase is subject to a preferential purchase right by the other joint owners of our Yscloskey gas
processing facility that expires on September 24, 2002. We are one of the largest owners in the Yscloskey plant
with a 28.2% ownership interest. Should any of the other owners exercise their respective right to acquire their
pro rata interest in the Toca Western facilities, it would reduce the ownership interest we ultimately acquire
and the purchase price we pay. Because of the preferential rights, we expect to close this transaction during the
third quarter of 2002.
3. INVENTORIES
Our inventories are as follows at the dates indicated:
June 30, December 31,
2002 2001
-----------------------------------
Regular trade inventory $ 70,340 $35,894
Forward-sales inventory 45,960 33,549
Peak Season inventory 20,959
Other 16,021
-----------------------------------
Inventory $153,280 $69,443
===================================
A description of each inventory is as follows:
o Our regular trade (or "working"), inventory is comprised of inventories of natural gas, NGLs and
petrochemicals that are available for immediate sale. This inventory is valued at the lower of average
cost or market, with "market" being determined by spot-market related prices.
o The forward-sales inventory is comprised of segregated NGL volumes dedicated to the fulfillment of
forward sales contracts and is valued at the lower of average cost or market, with "market" being
defined as the weighted-average of the sales prices of the forward sales contracts.
o The peak season inventory is comprised of segregated NGL volumes that are expected to be sold outside of
the current summer-winter season and is valued at the lower of average cost or market, with "market"
being determined by spot-market related prices. These volumes are generally expected to be sold within
the next twelve months, but may be held for longer periods depending on market conditions.
o Other inventories generally consist of segregated NGL volumes set aside for possible short-term use as
fuel on an equivalent MMBtu basis. This inventory is carried at the lower of average cost or market,
with "market" being determined by spot-market related prices. The volumes associated with this inventory
are anticipated to be used and/or sold within the next twelve months.
Due to fluctuating market conditions in the NGL, natural gas and petrochemical industry, we occasionally
recognize lower of average cost or market adjustments when the cost of our inventories exceed their net realizable
value. These non-cash adjustments are charged to operating costs and expenses in the period they are recognized
and affect our segment operating results in the following manner:
o NGL inventory write downs are recorded as a cost of the Processing segment's merchant activities;
o Natural gas inventory write downs are recorded as a cost of the Pipeline segment's Acadian Gas
operations; and
PAGE 34
o Petrochemical inventory write downs are recorded as a cost of the Fractionation segment's propylene
fractionation business.
For the second quarter of 2002, we recognized an adjustment of $4.5 million to write down NGL inventories to
their net realizable value. For the second quarter of 2001, we recorded $25.8 million of such write downs:$19.4
million against NGL inventories, $4.9 million against natural gas inventories and $1.5 million against
petrochemical inventories.
For the first six months of 2002, we recognized $4.6 million in NGL inventory write downs. For the same six month
period in 2001, we recorded $27.8 million in lower of average cost or market write downs. The 2001 adjustments
were $21.4 million against NGL inventories, $4.9 million against natural gas inventories and $1.5 million against
petrochemical inventories. To the extent our commodity hedging strategies address inventory-related risks and are
successful, these inventory value adjustments are mitigated (or in some cases, reversed). See Note 11 for a
description of our commodity hedging activities.
4. PROPERTY, PLANT AND EQUIPMENT
Our property, plant and equipment and accumulated depreciation are as follows:
Estimated
Useful Life June 30, December 31,
in Years 2002 2001
---------------------------------------------------
Plants and pipelines 5-35 $1,626,739 $1,398,843
Underground and other storage facilities 5-35 241,806 127,900
Transportation equipment 3-35 3,952 3,736
Land 20,014 15,517
Construction in progress 44,003 98,844
-------------------------------------
Total 1,936,514 1,644,840
Less accumulated depreciation 365,943 338,050
-------------------------------------
Property, plant and equipment, net $1,570,571 $1,306,790
=====================================
Property, plant and equipment is recorded at cost and is depreciated using the straight-line method over the
asset's estimated useful life. Maintenance, repairs and minor renewals are charged to operations as incurred. The
cost of assets retired or sold, together with the related accumulated depreciation, is removed from the accounts,
and any gain or loss on disposition is included in income.
Additions and improvements to and major renewals of existing assets are capitalized and depreciated using the
straight-line method over the estimated useful life of the new equipment or modifications. These expenditures
result in a long-term benefit to the Company. We generally classify improvements and major renewals of existing
assets as sustaining capital expenditures and all other capital spending (on existing and new assets) as
expansion capital expenditures.
Depreciation expense for the three months ended June 30, 2002 and 2001 was $13.8 million and $11.0 million,
respectively. For the six months ended June 30, 2002 and 2001, it was $27.9 million and $20.3 million,
respectively.
5. INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED AFFILIATES
We own interests in a number of related businesses that are accounted for under the equity or cost method. The
investments in and advances to these unconsolidated affiliates are grouped according the operating segment to
which they relate. For a general discussion of our operating segments, see Note 12.
PAGE 35
We acquired three equity method unconsolidated affiliates as part of our acquisition of Diamond-Koch's propylene
fractionation business (see Note 2). We purchased an aggregate 50% interest in La Porte Pipeline Company, L.P.
and La Porte Pipeline GP, L.L.C. (collectively, "La Porte") which together own a private polymer grade propylene
pipeline extending from Mont Belvieu to La Porte, Texas. In addition, we acquired 50% of the outstanding capital
stock of Olefins Terminal Corporation ("OTC") which owns a polymer grade propylene storage facility and related
dock infrastructure (located on the Houston Ship Channel) for loading waterborne propylene vessels. Both the La
Porte and OTC investments are considered an integral part of our Mont Belvieu III propylene fractionation
operations. These investments are classified as part of our Fractionation operating segment.
The following table shows the aggregate amount of investments in and advances to (and our ownership percentages
in) unconsolidated affiliates at June 30, 2002 and December 31, 2001:
Ownership June 30, December 31,
Percentage 2002 2001
--------------------------------------------------------
Accounted for on equity basis:
Fractionation:
BRF 32.25% $ 28,687 $ 29,417
BRPC 30.00% 18,197 18,841
Promix 33.33% 43,513 45,071
La Porte 50.00% 5,814
OTC 50.00% 1,818
Pipeline:
EPIK 50.00% 14,375 14,280
Wilprise 37.35% 8,663 8,834
Tri-States 33.33% 26,448 26,734
Belle Rose 41.67% 11,211 11,624
Dixie 19.88% 37,284 37,558
Starfish 50.00% 23,777 25,352
Neptune 25.67% 77,226 76,880
Nemo 33.92% 12,211 12,189
Evangeline 49.50% 2,657 2,578
Octane Enhancement:
BEF 33.33% 58,189 55,843
Accounted for on cost basis:
Processing:
VESCO 13.10% 33,000 33,000
----------------------------------------
Total $403,070 $398,201
========================================
PAGE 36
The following table shows equity in income (loss) of unconsolidated affiliates for the three and six months ended
June 30, 2002 and 2001:
Three Months Ended Six Months Ended
June 30, June 30,
Ownership -----------------------------------------------------------
Percentage 2002 2001 2002 2001
-------------------------------------------------------------------------------------
Fractionation:
BRF 32.25% $743 $ 42 $ 1,292 $ 60
BRPC 30.00% 278 252 527 404
Promix 33.33% 996 1,396 2,039 1,789
La Porte 50.00% (173) (265)
OTC 50.00% 128 18
Pipelines:
EPIK 50.00% (54) (172) 1,629 (1,094)
Wilprise 37.35% 320 85 467 (137)
Tri-States 33.33% 365 135 834 100
Belle Rose 41.67% 40 29 114 (60)
Dixie 19.88% (156) 69 561 960
Starfish 50.00% 973 1,022 1,785 1,973
Ocean Breeze 25.67% - 12 - 14
Neptune 25.67% 682 1,095 1,460 1,789
Nemo 33.92% 44 1 22 10
Evangeline 49.50% 5 (149) (71) (149)
Octane Enhancement:
BEF 33.33% 2,877 5,233 5,883 5,402
--------------------------------------------------------------------
Total $7,068 $9,050 $16,295 $11,061
====================================================================
Our initial investment in Promix, La Porte, Dixie, Neptune and Nemo exceeded our share of the historical cost of
the underlying net assets of such entities ("excess cost"). The excess cost of these investments is reflected in
our investments in and advances to unconsolidated affiliates for these entities. The excess cost amounts related
to Promix, La Porte and Nemo are attributable to the tangible plant and pipeline assets of each entity, the
excess cost of which is amortized against equity earnings from these entities in a manner similar to
depreciation. The excess cost of Dixie includes amounts attributable to both goodwill and tangible pipeline
assets, with that portion assigned to the pipeline assets being amortized in a manner similar to depreciation. The
goodwill inherent in Dixie's excess cost is subject to periodic impairment testing and is not amortized. The
following table summarizes our excess cost information:
PAGE 37
Amortization
Unamortized balance at Charged to
Initial -------------------------------- Equity Earnings
Excess June 30, December 31, during Amortization
Cost 2002 2001 2002 Period
---------------------------------------------------------------------------------------
Fractionation segment:
Promix $7,955 $6,794 $7,083 $199 20 years
La Porte 873 855 n/a 18 35 years
Pipelines segment:
Dixie
Attributable to pipeline assets 28,448 26,480 26,887 406 35 years
Goodwill 9,246 8,827 8,827 n/a n/a
Neptune 12,768 12,221 12,404 182 35 years
Nemo 727 708 718 10 35 years
The following tables presents summarized income statement information for our unconsolidated investments
accounted for under the equity method (for the periods indicated on a 100% basis).
Summarized Income Statement Data for the Three Months Ended
-------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
----------------------------------------------- ------------------------------------------------
Operating Net Operating Net
Revenues Income Income Revenues Income Income
----------------------------------------------- ------------------------------------------------
Fractionation:
BRF $ 5,750 $ 2,295 $ 2,305 $ 3,802 $ 265 $ 294
BRPC 3,150 923 930 3,400 793 842
Promix 10,819 3,274 3,285 12,340 4,447 4,487
La Porte (301) (306)
OTC 1,421 302 258
Pipeline:
EPIK 1,577 (117) (109) 792 (375) (348)
Wilprise 1,033 855 857 494 224 227
Tri-States 3,680 1,088 1,097 2,321 388 403
Belle Rose 433 95 96 407 13 21
Dixie 6,270 (1,853) (1,191) 8,799 2,001 1,124
Starfish 6,714 2,169 1,943 7,051 2,571 2,299
Ocean Breeze 53 39 39
Neptune 6,926 2,046 2,338 9,362 5,223 5,195
Nemo 887 114 118 (27) 2
Evangeline 35,551 1,030 9 47,609 1,010 (144)
Octane Enhancement:
BEF 58,132 8,570 8,628 76,054 15,509 15,700
----------------------------------------------- ------------------------------------------------
Total $142,343 $20,490 $20,258 $172,484 $32,081 $30,141
=============================================== ================================================
PAGE 38
Summarized Income Statement Data for the Six Months Ended
-------------------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
----------------------------------------------- ------------------------------------------------
Operating Net Operating Net
Revenues Income Income Revenues Income Income
----------------------------------------------- ------------------------------------------------
Fractionation:
BRF $ 10,355 $ 3,960 $ 4,007 $ 7,825 $ 300 $ 350
BRPC 6,102 1,742 1,758 6,833 1,232 1,347
Promix 20,683 6,683 6,713 21,343 5,888 5,964
La Porte - (535) (541)
OTC 1,792 109 37
Pipeline:
EPIK 9,849 3,237 3,257 1,967 (1,782) (1,725)
Wilprise 1,804 1,248 1,251 893 (378) (367)
Tri-States 6,780 2,490 2,503 3,953 262 299
Belle Rose 941 271 273 554 (205) (192)
Dixie 21,398 5,552 3,331 24,036 8,301 4,829
Starfish 13,143 4,105 3,569 13,467 4,390 3,916
Ocean Breeze - - - 87 87 65
Neptune 14,629 5,561 5,645 16,747 8,648 8,581
Nemo 1,282 40 48 (42) 36
Evangeline 61,060 1,880 (170) 47,609 1,010 (144)
Octane Enhancement:
BEF 106,061 17,548 17,648 113,918 15,922 16,207
----------------------------------------------- ------------------------------------------------
Total $275,879 $53,891 $49,329 $259,232 $43,633 $39,166
=============================================== ================================================
6. RECENTLY ISSUED ACCOUNTING STANDARDS
In June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 prohibits the use of the pooling-of-interests method for
business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for
by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to
business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142
was effective for our fiscal year that began January 1, 2002 for all goodwill and other intangible assets
recognized in our consolidated balance sheet at that date, regardless of when those assets were initially
recognized.
At December 31, 2001, our intangible assets were comprised of the values associated with the Shell natural gas
processing agreement and the goodwill related to the 1999 MBA acquisition. In accordance with SFAS No. 141, we
reclassified the MBA goodwill to a separate line item on our consolidated balance sheet apart from the Shell
contract. Based upon SFAS No. 142, the value of the Shell natural gas processing agreement will continue to be
amortized over its remaining contract term of approximately 18 years; however, amortization of the MBA goodwill
will cease. The MBA goodwill will be subject to periodic impairment testing in accordance with SFAS No. 142 due
to its indefinite life. For additional information regarding our intangible assets and goodwill (including
additions to both classes of assets as a result of the Diamond-Koch acquisitions), see Note 7.
In accordance with the transition provisions of SFAS No. 142, we have completed an impairment review of
the December 31, 2001 MBA goodwill balance. Professionals in the business valuation industry were consulted
regarding the assumptions and techniques used in our analysis. As a result of this review, no impairment loss was
indicated. Any subsequent impairment losses stemming from future goodwill impairment studies will be reflected as
a component of operating income in the Statements of Consolidated Operations.
In addition to SFAS No. 141 and No. 142, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", in June 2001. This statement establishes accounting standards for the recognition and measurement of
PAGE 39
a liability for an asset retirement obligation and the associated asset retirement cost. This statement is
effective for our fiscal year beginning January 1, 2003. We are evaluating the provisions of this statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement addresses financial accounting and reporting for the impairment and/or disposal of long-lived
assets. We adopted this statement effective January 1, 2002 and determined that it did not have any significant
impact on our financial statements as of that date.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS
No. 13, and Technical Corrections." The purpose of this statement is to update, clarify and simplify existing
accounting standards. We adopted this statement effective April 30, 2002 and determined that it did not have any
significant impact on our financial statements as of that date.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This standard requires companies to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting
guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). "SFAS No. 146 replaces
Issue 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December
31, 2002. This statement is effective for our fiscal year beginning January 1, 2003. We are evaluating the
provisions of this statement.
7. INTANGIBLE ASSETS AND GOODWILL
Intangible assets
Our recorded intangible assets are comprised of the estimated values assigned to contract rights we own arising
from agreements with customers. According to SFAS No. 141, a contract-based intangible asset with a finite useful
life is amortized over its estimated useful life, which is the period over which the asset is expected to
contribute directly or indirectly to the future cash flows of the entity. It is based on an analysis of all
pertinent factors including (a) the expected use of the asset by the entity, (b) the expected useful life of
related assets (i.e., fractionation facility, storage well, etc.), (c) any legal, regulatory or contractual
provisions, including renewal or extension periods that would not cause substantial costs or modifications to
existing agreements, (d) the effects of obsolescence, demand, competition, and other economic factors and (e) the
level of maintenance required to obtain the expected future cash flows.
The specific, identifiable intangible assets of a business enterprise depend largely upon the nature of its
operations. Potential intangible assets include intellectual property such as technology, patents, trademarks and
trade names, customer contracts and relationships, and non-compete agreements, as well as other intangible
assets. The approach to the valuation of each intangible asset will vary depending upon the nature of the asset,
the business in which it is utilized, and the economic returns it is generating or is expected to generate.
At June 30, 2002, our intangible assets consisted of the Shell natural gas processing agreement that we acquired
as part of the TNGL acquisition in August 1999 and certain propylene fractionation and storage contracts we
acquired in connection with the Diamond-Koch acquisitions in January and February 2002. The value of the Shell
natural gas processing agreement is being amortized on a straight-line basis over its remaining contract term
(currently $11.1 million annually from 2002 through 2019). At June 30, 2002, the unamortized value of the Shell
contract was $188.8 million.
The value of the propylene fractionation and storage contracts acquired from Diamond-Koch is being amortized on a
straight-line basis over the economic life of the assets to which they relate, which is currently estimated at 35
years. Although the majority of these contracts have terms of one to two years, we have assumed that our
relationship with these customers will extend beyond the contractually-stated term primarily based on
PAGE 40
historically low customer contract turnover rates within these operations. At June 30, 2002, the unamortized value
of these contracts was $60.4 million.
Goodwill
At June 30, 2002, the value of goodwill was $81.5 million. Our goodwill is attributable to the excess of the
purchase price over the fair value of assets acquired and is comprised of the following (values as of June 30,
2002):
o $73.7 million associated with the purchase of propylene fractionation assets from Diamond-Koch in
February 2002; and,
o $7.8 million related to the July 1999 purchase of Kinder Morgan's ownership interest in MBA which in
turn owned an interest in our Mont Belvieu NGL fractionation facility.
Since our adoption of SFAS No. 142 on January 1, 2002, our goodwill amounts are no longer amortized. Instead, we
periodically review the reporting units to which the goodwill amounts relate for indications of possible
impairment. If such indicators are present (i.e., loss of a significant customer, economic obsolescence of plant
assets, etc.), the fair value of the reporting unit, including its related goodwill, will be calculated and
compared to its combined book value. Our goodwill amounts are classified as part of the Fractionation segment
since they are related to assets recorded in this operating segment.
The fair value of a reporting unit refers to the amount at which it could be bought or sold in a current
transaction between willing parties. Quoted market prices in active markets are the best evidence of fair value
and are used to the extent they are available. If quoted market prices are not available, an estimate of fair
value is determined based on the best information available to us, including prices of similar assets and the
results of using other valuation techniques such as discounted cash flow analysis and multiples of earnings
approaches. The underlying assumptions in such models rely on information available to us at a given point in
time and are viewed as reasonable and supportable considering available evidence.
If the fair value of the reporting unit exceeds its book value, goodwill is not considered impaired and no
adjustment to earnings would be required. Should the fair value of the reporting unit (including its goodwill) be
less than its book value, a charge to earnings would be recorded to adjust goodwill to its implied fair value.
Pro Forma impact of discontinuation of amortization of goodwill
The following table discloses the unaudited pro forma impact on earnings of discontinuing amortization of the MBA
goodwill (for the three and six months ended June 30, 2001).
Three Months Six Months
Ended June 30, Ended June 30,
2001 2001
---------------------------------------------
Reported net income $93,393 $146,309
Discontinue goodwill amortization 111 222
---------------------------------------------
Adjusted net income $93,504 $146,531
=============================================
PAGE 41
8. DEBT OBLIGATIONS
Our debt consisted of the following at:
June 30, December 31,
2002 2001
---------------------------------------
Borrowings under:
Senior Notes A, 8.25% fixed rate, due March 2005 $350,000 $350,000
MBFC Loan, 8.70% fixed rate, due March 2010 54,000 54,000
Senior Notes B, 7.50% fixed rate, due February 2011 450,000 450,000
Multi-Year Credit Facility, due November 2005 230,000
364-Day Credit Facility, due November 2002 (a) 138,000
---------------------------------------
Total principal amount 1,222,000 854,000
Unamortized balance of increase in fair value related to
hedging a portion of fixed-rate debt 1,895 1,653
Less unamortized discount on:
Senior Notes A (99) (117)
Senior Notes B (244) (258)
Less current maturities of debt - -
---------------------------------------
Long-term debt $1,223,552 $855,278
=======================================
(a) Under the terms of this facility, the Operating Partnership has the option to convert this facility into a
term loan due November 15, 2003. Management intends to refinance this obligation with a similar obligation at or
before maturity.
The above table does not reflect the $1.26 billion in debt we incurred on July 31, 2002 in connection with the
Mapletree and E-Oaktree acquisitions (see Note 13 for information regarding this subsequent event).
At June 30, 2002, we had a total of $75 million of standby letters of credit capacity under our Multi-Year Credit
Facility of which $9.4 million was outstanding.
Enterprise Products Partners L.P. acts as guarantor of certain of our debt obligations. This parent-subsidiary
guaranty provision exists under our Senior Notes, MBFC Loan, Multi-Year and 364-Day Credit Facility.
In April 2002, we increased the amount that we can borrow under the Multi-Year Credit Facility by $20 million and
the 364-Day Credit Facility by $80 million, up to an amount not exceeding $500 million in the aggregate for both
facilities. At June 30, 2002, we had borrowed a total of $368 million under these two facilities.
The indentures under which the Senior Notes and the MBFC Loan were issued contain various restrictive
covenants. We were in compliance with these covenants at June 30, 2002.
On April 24, 2002, certain covenants of our Multi-Year and 364-Day Credit Facilities were amended to allow for
the commodity hedging losses we incurred during the first four months of 2002. As defined within the second
amendment to each of these loan agreements, the changes included allowing us to exclude from the calculation of
Consolidated EBITDA up to $50 million in losses resulting from hedging NGLs that utilized natural gas-based
financial instruments entered into on or prior to April 24, 2002. This exclusion applies to our quarterly
Consolidated EBITDA calculations in which the earnings impact of such specific instruments were recognized. This
provision allows for $45.1 million to be added back to Consolidated EBITDA for the first quarter of 2002 and $4.9
million to be added back for the second quarter of 2002. Due to the rolling four-quarter nature of the
Consolidated EBITDA calculation, this provision will affect our financial covenants through the first quarter of
2003. In addition, the second amendment temporarily raised the maximum ratio allowed under the Consolidated
Indebtedness to Consolidated EBITDA ratio for the rolling-four quarter period ending September 30, 2002 (this
provision was superseded by the third amendment to these loan agreements executed on July 31, 2002, see Note 13
for information regarding this subsequent event).
PAGE 42
We were in compliance with the covenants of our Multi-Year and 364-Day revolving credit agreements at June 30,
2002.
9. PARENT'S UNITS ACQUIRED BY TRUST
During the first quarter of 1999, we established the EPOLP 1999 Grantor Trust (the "Trust") to fund potential
future obligations under EPCO's long-term incentive plan (through the exercise of Common Unit options granted to
directors of the General Partner and EPCO employees who participate in our business). The Common Units of our
parent purchased by the Trust are accounted for in a manner similar to treasury stock under the cost method of
accounting. At June 30, 2002, the Trust held 427,200 Common Units. The Trust purchased 100,000 Common Units
during the first six months of 2002 at a cost of $2.4 million.
The Trust is a party to our parent's Unit Buy-Back Program under which the Trust and our parent can repurchase up
to 2.0 million Common Units. The Common Unit purchases made during the first six months of 2002 were under this
program. At June 30, 2002, 677,900 Common Units could be repurchased under this program by the Trust or our
parent separately or in combination. Purchases made by our parent will be funded by intercompany loans between us
and our parent that will be settled on a quarterly basis.
The Unit totals noted above reflect a two-for-one split of our Parent's Units that occurred in May 2002.
10. SUPPLEMENTAL CASHFLOWS DISCLOSURE
The net effect of changes in operating assets and liabilities is as follows:
Six Months Ended
June 30,
-------------------------------------
2002 2001
-------------------------------------
(Increase) decrease in:
Accounts and notes receivable $(34,188) $ 96,064
Inventories (78,843) 522
Prepaid and other current assets 9,599 (10,843)
Other assets (3,436) (118)
Increase (decrease) in:
Accounts payable 3,989 (55,682)
Accrued gas payable 70,447 (78,008)
Accrued expenses (9,272) (10,550)
Accrued interest 374 14,546
Other current liabilities (4,219) 13,271
Other liabilities (142) 187
-------------------------------------
Net effect of changes in operating accounts $(45,691) $(30,611)
=====================================
During the first six months of 2002, we completed $394.8 million in business acquisitions of which the purchase
price allocations of each affected various balance sheet accounts. See Note 2 for information regarding the
allocation of the purchase price for these acquisitions.
The $32.5 million purchase price obligation of the Toca Western facilities will not be paid until September
2002. This amount was accrued as additional property, plant and equipment with the offsetting payable amount
recorded under other current liabilities.
We record various financial instruments relating to commodity positions and interest rate swaps at their
respective fair values using mark-to-market accounting. For the six months ended June 30, 2002, we recognized a
net $19.7 million in non-cash changes related to decreases in the fair value of these financial instruments,
PAGE 43
primarily in our commodity financial instruments portfolio. For the six months ended June 30, 2001, we recognized
a net $55.9 million in non-cash mark-to-market income from our financial instruments portfolio.
Cash and cash equivalents at June 30, 2002, per the Statements of Consolidated Cash Flows, excludes $5.0 million
of restricted cash. This restricted cash represents amounts held by a brokerage firm as margin deposits associated
with our financial instruments portfolio and for physical purchase transactions made on the NYMEX exchange.
11. FINANCIAL INSTRUMENTS
We are exposed to financial market risks, including changes in commodity prices in our natural gas and NGL
businesses and in interest rates with respect to a portion of our debt obligations. We may use financial
instruments (i.e., futures, forwards, swaps, options, and other financial instruments with similar
characteristics) to mitigate the risks of certain identifiable and anticipated transactions, primarily in our
Processing segment. As a matter of policy, we do not use financial instruments for speculative (or trading)
purposes.
Commodity financial instruments
Our Processing and Octane Enhancement segments are directly exposed to commodity price risk through their
respective business operations. The prices of natural gas, NGLs and MTBE are subject to fluctuations in response
to changes in supply, market uncertainty and a variety of additional factors that are beyond our control. In order
to manage the risks associated with our Processing segment, we may enter into swaps, forwards, commodity futures,
options and other commodity financial instruments with similar characteristics that are permitted by contract or
business custom to be settled in cash or with another financial instrument. The primary purpose of these risk
management activities (or hedging strategies) is to hedge exposure to price risks associated with natural gas,
NGL inventories, firm commitments and certain anticipated transactions. We do not hedge our exposure to the MTBE
markets. Also, in our Pipelines segment, we may utilize a limited number of commodity financial instruments to
manage the price Acadian Gas charges certain of its customers for natural gas.
We have adopted a financial commodity and commercial policy to manage our exposure to the risks of our natural
gas and NGL businesses. The objective of these policies is to assist us in achieving our profitability goals while
maintaining a portfolio with an acceptable level of risk, defined as remaining within the position limits
established by the General Partner. Under these policies, we enter into risk management transactions to manage
price risk, basis risk, physical risk or other risks related to our commodity positions on both a short-term
(less than one month) and long-term basis, generally not to exceed 24 months. The General Partner oversees our
hedging strategies associated with physical and financial risks (such as those mentioned previously), approves
specific activities subject to the policies (including authorized products, instruments and markets) and
establishes specific guidelines and procedures for implementing and ensuring compliance with the policies.
We routinely review our outstanding financial instruments in light of current market conditions. If market
conditions warrant, some financial instruments may be closed out in advance of their contractual settlement dates
thus realizing income or loss depending on the specific exposure. When this occurs, we may enter into a new
commodity financial instrument to reestablish the economic hedge to which the closed instrument relates.
Our commodity financial instruments may not qualify for hedge accounting treatment under the specific guidelines
of SFAS No. 133 because of ineffectiveness. A hedge is normally regarded as effective if, among other things, at
inception and throughout the term of the financial instrument, we could expect changes in the fair value of the
hedged item to be almost fully offset by the changes in the fair value of the financial instrument. When
financial instruments do not qualify as effective hedges under the guidelines of SFAS No. 133, changes in the
fair value of these positions are recorded on the balance sheet and in earnings through mark-to-market
accounting. The use of mark-to-market accounting for these ineffective instruments results in a degree of non-cash
earnings volatility that is dependent upon changes in the underlying commodity prices.
We recognized a loss of $50.9 million in the first six months of 2002 from our commodity hedging activities, of
which $45.1 million was attributable to the first quarter of 2002. These losses are treated as an increase in
operating costs and expenses in our Statements of Consolidated Operations. Of this amount, $31.9 million has been
PAGE 44
realized (e.g., paid out to counterparties). The remaining $19.0 million represents the negative change in value
of the open positions between December 31, 2001 and June 30, 2002 (based on market prices at those dates). The
market value of our open positions at June 30, 2002 was $11.1 million payable (a loss).
For the first six months of 2001, we recognized income of $70.3 million from these activities of which $5.6
million was recorded in the first quarter and $64.7 million in the second quarter. Of the $70.3 million recorded
for the first six months of 2001, $52.4 million was attributable to the market value of open positions at June
30, 2001.
Interest rate swaps
Our interest rate exposure results from variable-rate borrowings from commercial banks and fixed-rate borrowings
pursuant to the Company's Senior Notes and MBFC Loan. We manage a portion of our exposure to changes in interest
rates by utilizing interest rate swaps. The objective of holding interest rate swaps is to manage debt service
costs by converting a portion of fixed-rate debt into variable-rate debt or a portion of variable-rate debt into
fixed-rate debt. An interest rate swap, in general, requires one party to pay a fixed-rate on the notional amount
while the other party pays a floating-rate based on the notional amount.
The General Partner oversees the strategies associated with financial risks and approves instruments that are
appropriate for our requirements. At June 30, 2002, we had one interest rate swap outstanding having a notional
amount of $54 million extending through March 2010. Under this agreement, we exchanged a fixed-rate of 8.70% for a
market-based variable-rate. If it elects to do so, the counterparty may terminate this swap in March 2003.
We recognized income of $0.8 million during the first six months of 2002 from our interest rate swaps that is
treated as a reduction of interest expense ($0.7 million recorded in the second quarter of 2002). The fair value
of the interest rate swap at June 30, 2002 was a receivable of $3.1 million. We recognized income of $5.5 million
during the first six months of 2001 from interest rate swaps. The benefit recorded in 2001 was primarily due to
the election of a counterparty to not terminate its interest rate swap in the first quarter of 2001.
12. SEGMENT INFORMATION
Operating segments are components of a business about which separate financial information is available and that
are regularly evaluated by the chief operating decision maker in deciding how to allocate resources and in
assessing performance. Generally, financial information is required to be reported on the basis that it is used
internally for evaluating segment performance and deciding how to allocate resources to segments.
We have five reportable operating segments: Pipelines, Fractionation, Processing, Octane Enhancement and Other. The
reportable segments are generally organized according to the type of services rendered (or process employed) and
products produced and/or sold, as applicable. The segments are regularly evaluated by the Chief Executive Officer
of the General Partner. Pipelines consists of both liquids and natural gas pipeline systems, storage and
import/export terminal services. Fractionation primarily includes NGL fractionation, isomerization, and polymer
grade propylene fractionation services. Processing includes the natural gas processing business and its related
merchant activities. Octane Enhancement represents our equity interest in BEF, a facility that produces motor
gasoline additives to enhance octane (currently producing MTBE). The Other operating segment consists of fee-based
marketing services and other plant support functions.
We evaluate segment performance based on gross operating margin. Gross operating margin reported for each segment
represents operating income before depreciation and amortization, lease expense obligations retained by EPCO,
gains and losses on the sale of assets and general and administrative expenses. In addition, segment gross
operating margin is exclusive of interest expense, interest income (from unconsolidated affiliates or others),
dividend income from unconsolidated affiliates, minority interest, extraordinary charges and other income and
expense transactions.
Gross operating margin by segment includes intersegment and intrasegment revenues (offset by corresponding
intersegment and intrasegment expenses within the segments), which are generally based on transactions made at
PAGE 45
market-related rates. Our intersegment and intrasegment activities include, but are not limited to, the following
types of transactions:
o NGL fractionation revenues from separating our NGL raw-make inventories into distinct NGL products using
our fractionation plants for our merchant activities group (an intersegment revenue of Fractionation
offset by an intersegment expense of Processing);
o liquids pipeline revenues from transporting our merchant volumes from the gas processing plants on our
pipelines to our NGL fractionation facilities (an intersegment revenue of Pipelines offset by an
intersegment expense of Processing); and,
o the sale of our NGL equity production extracted by our gas processing plants to our merchant activities
group (an intrasegment revenue of Processing offset by an intrasegment expense of Processing).
Our consolidated financial statements include our accounts and those of our majority-owned subsidiaries, after
elimination of all material intercompany (both intersegment and intrasegment) accounts and transactions.
We include equity earnings from unconsolidated affiliates in segment gross operating margin and as a component of
revenues. Our equity investments with industry partners are a vital component of our business strategy and a
means by which we conduct our operations to align our interests with a supplier of raw materials to a facility or
a consumer of finished products from a facility. This method of operation also enables us to achieve favorable
economies of scale relative to the level of investment and business risk assumed versus what we could accomplish
on a stand alone basis. Many of these businesses perform supporting or complementary roles to our other business
operations. For example, we use the Promix NGL fractionator to process NGLs extracted by our gas plants. The NGLs
received from Promix then can be sold by our merchant businesses. Another example would be our relationship with
the BEF MTBE facility. Our isomerization facilities process normal butane for this plant and our HSC pipeline
transports MTBE for delivery to BEF's storage facility on the Houston Ship Channel.
Our revenues are derived from a wide customer base. All consolidated revenues were earned in the United States. Our
operations are centered along the Texas, Louisiana and Mississippi Gulf Coast areas. See Note 13 regarding an
expansion of our business activities into certain regions of the central and western United States.
Consolidated property, plant and equipment and investments in and advances to unconsolidated affiliates are
allocated to each segment on the basis of each asset's or investment's principal operations. The principal
reconciling item between consolidated property, plant and equipment and segment property is
construction-in-progress. Segment property represents those facilities and projects that contribute to gross
operating margin and is net of accumulated depreciation on these assets. Since assets under construction do not
generally contribute to segment gross operating margin, these assets are not included in the operating segment
totals until they are deemed operational. Consolidated intangible assets and goodwill are allocated to the
segments based on the classification of the assets to which they relate.
PAGE 46
A reconciliation of segment gross operating margin to consolidated income before minority interest follows:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------
Total segment gross operating margin $66,938 $131,255 $93,351 $204,148
Depreciation and amortization (16,962) (11,793) (34,199) (21,822)
Retained lease expense, net (2,273) (2,660) (4,578) (5,320)
(Gain) loss on sale of assets 1 6 (12) 387
Selling, general and administrative (7,815) (8,418) (15,601) (14,586)
---------------------------------------------------------------------
Consolidated operating income 39,889 108,390 38,961 162,807
Interest expense (19,032) (16,331) (37,545) (23,318)
Interest income from unconsolidated affiliate 62 3 92 15
Dividend income from unconsolidated affiliates 1,242 2,196 1,632
Interest income - other 384 1,626 1,820 5,771
Other, net (65) (251) (142) (531)
---------------------------------------------------------------------
Consolidated income before minority interest $22,480 $ 93,437 $ 5,382 $146,376
=====================================================================
PAGE 47
Information by operating segment, together with reconciliations to the consolidated totals, is presented in the
following table:
Operating Segments
---------------------------------------------------------------- Adjs.
Octane and Consol.
Fractionation Pipelines Processing Enhancement Other Elims. Totals
----------------------------------------------------------------------------------------
Revenues from
External customers:
Three months ended June 30, 2002 $169,345 $138,589 $477,941 $382 $786,257
Three months ended June 30, 2001 86,566 178,958 693,242 631 959,397
Six months ended June 30, 2002 278,767 237,670 930,975 899 1,448,311
Six months ended June 30, 2001 176,245 186,145 1,432,011 1,311 1,795,712
Intersegment and intrasegment
Revenues:
Three months ended June 30, 2002 56,103 25,578 140,969 102 $(222,752)
Three months ended June 30, 2001 44,133 24,631 131,657 96 (200,517)
Six months ended June 30, 2002 89,500 50,088 267,229 202 (407,019)
Six months ended June 30, 2001 85,785 45,410 241,966 191 (373,352)
Equity income in
unconsolidated affiliates:
Three months ended June 30, 2002 1,973 2,219 $2,876 7,068
Three months ended June 30, 2001 1,692 2,125 5,233 9,050
Six months ended June 30, 2002 3,612 6,801 5,882 16,295
Six months ended June 30, 2001 2,253 3,406 5,402 11,061
Total revenues:
Three months ended June 30, 2002 227,421 166,386 618,910 2,876 484 (222,752) 793,325
Three months ended June 30, 2001 132,391 205,714 824,899 5,233 727 (200,517) 968,447
Six months ended June 30, 2002 371,879 294,559 1,198,204 5,882 1,101 (407,019) 1,464,606
Six months ended June 30, 2001 264,283 234,961 1,673,977 5,402 1,502 (373,352) 1,806,773
Total gross operating margin
by segment:
Three months ended June 30, 2002 33,853 32,190 (1,182) 2,876 (799) 66,938
Three months ended June 30, 2001 32,803 24,696 68,112 5,233 411 131,255
Six months ended June 30, 2002 58,230 64,858 (34,558) 5,882 (1,061) 93,351
Six months ended June 30, 2001 58,471 42,819 96,510 5,402 946 204,148
Segment assets:
At June 30, 2002 470,249 918,052 129,028 9,239 44,003 1,570,571
At December 31, 2001 357,122 717,348 124,555 8,921 98,844 1,306,790
Investments in and advances
to unconsolidated affiliates:
At June 30, 2002 98,029 213,852 33,000 58,189 403,070
At December 31, 2001 93,329 216,029 33,000 55,843 398,201
Intangible Assets:
At June 30, 2002 52,369 8,011 188,842 249,222
At December 31, 2001 7,857 194,369 202,226
Goodwill:
At June 30, 2002 81,543 81,543
Total revenues for the second quarter of 2002 were lower than those of the second quarter of 2001 primarily due
to a decline in NGL product prices between the two periods. The same can be said for the difference between the
first six months of 2002 compared to the same period in 2001. Total gross operating margin for the second quarter
of 2002 decreased $64.3 million from the second quarter of 2001 primarily due to the 2001 period including $64.7
PAGE 48
million of commodity hedging income in the Processing segment that was not repeated in the 2002 period. For the
first six months of 2002, gross operating margin decreased $110.8 million compared to the first six months of
2001. The year-to-date decline in gross operating margin is primarily due to the 2002 period including $50.9
million in commodity hedging losses versus the 2001 period including $70.3 million in commodity hedging income
(together accounting for $121.2 million of the year-to-date difference in gross operating margin). The $121.2
million difference in commodity hedging results is primarily reflected in the Processing segment.
Since January 1, 2002, segment assets have increased $263.8 million. The increase is primarily due to the
Diamond-Koch acquisitions completed during the first quarter of 2002 and the Toca Western acquisition in June
2002 (see Note 2). Intangible assets increased $47.0 million since January 1, 2002 primarily the result of the
contract-based intangible assets we acquired from Diamond-Koch (see Note 7). Goodwill was $81.5 million at June
30, 2002 due to the goodwill we added as a result of the Diamond-Koch acquisition and the reclassification of the
goodwill associated with the 1999 MBA acquisition (see Note 7).
13. SUBSEQUENT EVENTS
Purchase of Interests in Mapletree and E-Oaktree
On August 1, 2002, we announced the purchase of equity interests in affiliates of Williams, which in turn, own
controlling interests in Mid-America Pipeline Company, LLC (formerly Mid-America Pipeline Company) and Seminole
Pipeline Company. The purchase price of the acquisition was approximately $1.2 billion (subject to certain
post-closing purchase price adjustments). The effective date of the acquisition was July 31, 2002.
The acquisitions include a 98% ownership interest in Mapletree, LLC ("Mapletree"), owner of a 100% interest in
Mid-America Pipeline Company, LLC and certain propane terminals and storage facilities. The Mid-America pipeline
is a major NGL pipeline system consisting of three NGL pipelines, with 7,226 miles of pipeline, and average
transportation volumes of approximately 850 MBPD. Mid-America's 2,548-mile Rocky Mountain system transports mixed
NGLs from the Rocky Mountain Overthrust and San Juan Basin areas to Hobbs, Texas. Its 2,740-mile Conway North segment
links the large NGL hub at Conway, Kansas to the upper Midwest; its 1,938 mile Conway South system connects the Conway
hub with Kansas refineries and transports mixed NGLs from Conway, Kansas to Hobbs, Texas.
We also acquired a 98% ownership interest in E-Oaktree, LLC, owner of an 80% equity interest in Seminole Pipeline
Company. The Seminole pipeline consists of a 1,281-mile NGL pipeline, with an average transportation volume of
approximately 260 MBPD. This pipeline transports mixed NGLs and NGL products from Hobbs, Texas and the Permian
Basin to Mont Belvieu, Texas.
The post-closing purchase price adjustments of the Mapletree and E-Oaktree acquisitions are expected to be
completed during the fourth quarter of 2002. These acquisitions do not require any material governmental approvals.
These acquisitions were funded by a $1.2 billion senior unsecured 364-day term loan entered into by the Operating
Partnership on July 31, 2002. The lenders under this facility are Wachovia Bank, National Association; Lehman
Brothers Bank, FSB; Lehman Commercial Paper Inc. and Royal Bank of Canada. As defined within the credit agreement,
the loan will generally bear interest at either (i) the greater of (a) the Prime Rate or (b) the Federal Funds
Effective Rate plus one-half percent or (ii) a Eurodollar rate, with any rate in effect being increased by an
appropriate applicable margin. The credit agreement contains various affirmative and negative covenants
applicable to the Operating Partnership similar to those required under our Multi-Year and 364-Day Credit
Facility agreements. The $1.2 billion term loan is guaranteed by Enterprise Products Partners L.P. through an
unsecured guarantee. The loan will be repaid as follows:$150 million due on December 31, 2002, $450 million on
March 31, 2003 and $600 million on July 30, 2003.
On August 1, 2002, Seminole Pipeline Company had $60 million in senior unsecured notes due in December 2005. The
principal amount of these notes amortize by $15 million each December 1 through 2005. In accordance with GAAP,
this debt will be consolidated on our balance sheet because of our 98% controlling interest in E-Oaktree, LLC,
which owns 80% of Seminole Pipeline Company.
PAGE 49
Third Amendment to our Multi-Year and 364-Day Credit Facilities
On July 31, 2002, certain covenants of our Multi-Year and 364-Day Credit Facilities were further amended to allow
for increased financial flexibility in light of the Mapletree and E-Oaktree acquisitions. As defined within the
third amendment to each of these loan agreements, the maximum ratio of Consolidated Indebtedness to Consolidated
EBITDA allowed by our lenders was increased as follows from that noted in the second amendment issued in April
2002:
Changes made to the
Consolidated Indebtedness to Consolidated EBITDA Ratio
- ---------------------------------------------------------------------------
Maximum Ratio Allowed
------------------------------------------
Calculation made for Old provisions New provisions
the rolling four-quarter under 2nd under 3rd
period ending Amendment Amendment
- ---------------------------------------------------------------------------
September 30, 2002 4.50 to 1.0 6.00 to 1.0
December 31, 2002 4.00 to 1.0 5.25 to 1.0
March 31, 2003 4.00 to 1.0 5.25 to 1.0
June 30, 2003 4.00 to 1.0 4.50 to 1.0
September 30, 2003 and 4.00 to 1.0 4.00 to 1.0
for each rolling-four
quarter period thereafter
In addition, the negative covenant on Indebtedness (as defined within the Multi-Year and 364-Day credit
agreements) was amended to permit the Seminole Pipeline Company indebtedness assumed in connection with the
acquisition of E-Oaktree.
PAGE 50
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS.
For the interim periods ended June 30, 2002 and 2001.
Enterprise Products Partners L.P. is a publicly-traded master limited partnership (NYSE, symbol "EPD") that
conducts substantially all of its business through its 98.9899% owned subsidiary, Enterprise Products Operating
L.P. (the "Operating Partnership"), the Operating Partnership's subsidiaries, and a number of investments with
industry partners. Since the Operating Partnership owns substantially all of Enterprise Products Partners L.P.'s
consolidated assets and conducts substantially all of its business and operations, the information set forth
herein constitutes combined information for the two registrants. Unless the context requires otherwise, references
to "we", "us", "our" or the "Company" are intended to mean the consolidated business and operations of Enterprise
Products Partners L.P., which includes Enterprise Products Operating L.P. and its subsidiaries.
The following discussion and analysis should be read in conjunction with the unaudited consolidated financial
statements and notes thereto of the Company and Operating Partnership included in Part I of this report on Form
10-Q.
CEO and CFO certification of our SEC filings
Certification required under SEC Order No. 4-460.On June 28, 2002, the SEC requested that the CEO and CFO
of 947 publicly-traded companies (with fiscal 2001 revenues in excess of $1.2 billion) file sworn written
statements that their most recent reports filed with the SEC are materially truthful and complete or explain why
such a statement would be incorrect. Enterprise Products Partners L.P. was included on this list. On August 9,
2002, we forwarded to the SEC sworn written statements by O.S. Andras (the CEO of our General Partner) and
Michael A. Creel (the CFO of our General Partner) attesting that, to the best of their knowledge, all of our SEC
filings made since January 1, 2002 (and through August 9, 2002) have been materially truthful and complete. These
filings include our fiscal 2001 Form 10-K, our first quarter of 2002 Form 10-Q and our reports on Form 8-K filed
during that period. In addition to the actual sworn statements forwarded to the SEC, we electronically filed
these documents on Form 8-K under Item 9 on August 12, 2002. Once the actual sworn statements have been scanned
and electronically processed, the SEC will post them and the date of receipt on their website for public viewing.
The SEC's website is www.sec.gov. In addition, we are required to post these certifications on our
website, www.eprod.com.
Certifications required under Section 906 of the Sarbanes-Oxley Act of 2002. On July 30, 2002, George W.
Bush, President of the United States, signed into law the Sarbanes-Oxley Act of 2002 (the "Act"). Section 906 of
the Act requires that each periodic report containing financial statements filed by a registrant with the SEC
pursuant to Section 13(a) and 15(d) of the Securites Exchange Act of 1934 (the "1934 Act") on or after July 20,
2002 must be accompanied by a written statement by the issuer's CEO and CFO. That statement must certify that such
report fully complies with the requirements of Sections 13(a) and 15(d) of the 1934 Act and that information
contained in the periodic report fairly presents, in all material respects, the financial condition and results
of operations of the registrant. This certification is in addition to those documents required under SEC Order
No. 4-460.
The Sarbanes-Oxley certification begins with this report on Form 10-Q for both of our registrants: Enterprise
Products Partners L.P. and Enterprise Products Operating L.P. On August 13, 2002, we filed with the SEC, as
correspondence accompanying this report on Form 10-Q, the required certifications by Mr. Andras and Mr. Creel.
PAGE 51
General
Our Company was formed in April 1998 to acquire, own and operate all of the natural gas liquid ("NGL") processing
and distribution assets of Enterprise Products Company ("EPCO"). We are a leading North American provider of a
wide range of midstream energy services to our customers located in the central and western United States and
Gulf Coast. Our services include the:
o gathering, transmission and storage of natural gas from both onshore and offshore Louisiana developments;
o purchase and sale of natural gas in south Louisiana;
o processing of natural gas into a saleable and transportable product that meets industry quality
specifications by removing NGLs and impurities;
o fractionation of mixed NGLs produced as by-products of oil and natural gas production into their
component purity products: ethane, propane, isobutane, normal butane and natural gasoline;
o conversion of normal butane to isobutane through the process of isomerization;
o production of MTBE from isobutane and methanol;
o transportation of NGL products to customers by pipeline and railcar;
o production of high purity propylene from refinery-sourced propane/propylene mix;
o import and export of certain NGL and petrochemical products through our dock facilities;
o transportation of high purity propylene by pipeline;
o storage of NGL and petrochemical products; and,
o sale of NGL and petrochemical products we produce and/or purchase for resale on a merchant basis.
Our General Partner, Enterprise Products GP, LLC, owns a 1.0% general partner interest in the Company and a
1.0101% general partner interest in the Operating Partnership. Our principal executive offices are located at 2727
North Loop West, Houston, Texas 77008-1038 and our telephone number is 713-880-6500.
Cautionary Statement regarding Forward-Looking Information and Risk Factors
This quarterly report on Form 10-Q contains various forward-looking statements and information that are based on
our beliefs and those of the General Partner, as well as assumptions made by and information currently available
to us. When used in this document, words such as "anticipate", "project", "expect", "plan", "forecast", "intend",
"could", "believe", "may", and similar expressions and statements regarding the plans and objectives of the
Company for future operations, are intended to identify forward-looking statements. Although we and the General
Partner believe that such expectations reflected in such forward-looking statements are reasonable, neither we
nor the General Partner can give any assurance that such expectations will prove to be correct. Such statements
are subject to a variety of risks, uncertainties and assumptions. If one or more of these risks or uncertainties
materialize, or if underlying assumptions prove incorrect, our actual results may vary materially from those we
anticipated, estimated, projected or expected.
An investment in our debt or equity securities involves a degree of risk. Among the key risk factors that may have
a direct bearing on our results of operations and financial condition are:
o competitive practices in the industries in which we compete;
o fluctuations in oil, natural gas and NGL prices and production due to weather and other natural and
economic forces;
o operational and systems risks;
o environmental liabilities that are not covered by indemnity or insurance;
o the impact of current and future laws and governmental regulations (including environmental regulations)
affecting the midstream energy industry in general and our NGL and natural gas operations in particular;
o the loss of a significant customer;
o the use of financial instruments to hedge commodity and other risks which prove to be economically
ineffective; and
o the failure to complete one or more new projects on time or within budget.
PAGE 52
The prices of natural gas and NGLs are subject to fluctuations in response to changes in supply, market
uncertainty and a variety of additional factors that are beyond our control. These factors include the level of
domestic oil, natural gas and NGL production and development, the availability of imported oil and natural gas,
actions taken by foreign oil and natural gas producing nations and companies, the availability of transportation
systems with adequate capacity, the availability of competitive fuels and products, fluctuating and seasonal
demand for oil, natural gas and NGLs, and conservation and the extent of governmental regulation of production
and the overall economic environment.
In addition we must obtain access to new natural gas volumes for our processing business in order to maintain or
increase gas plant throughput levels to offset natural declines in field reserves. The number of wells drilled by
third parties to obtain new volumes will depend on, among other factors, the price of gas and oil, the energy
policy of the federal government and the availability of foreign oil and gas, none of which is in our control.
The products that we process, sell or transport are principally used as feedstocks in petrochemical manufacturing
and in the production of motor gasoline and as fuel for residential and commercial heating. A reduction in demand
for our products or services by industrial customers, whether because of general economic conditions, reduced
demand for the end products made with NGL products, increased competition from petroleum-based products due to
pricing differences, adverse weather conditions, governmental regulations affecting prices and production levels
of natural gas or the content of motor gasoline or other reasons, could have a negative impact on our results of
operation. 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 volumes processed
and sold by us.
Lastly, our expectations regarding future capital expenditures are only forecasts regarding these matters. These
forecasts may be substantially different from actual results due to various uncertainties including the following
key factors: (a) the accuracy of our estimates regarding capital spending requirements, (b) the occurrence of any
unanticipated acquisition opportunities, (c) the need to replace unanticipated losses in capital assets, (d)
changes in our strategic direction and (e) unanticipated legal, regulatory and contractual impediments with
regards to our construction projects.
For a description of the tax and other risks of owning our Common Units or the Operating Partnership's debt
securities, see our registration documents (together with any amendments thereto) filed with the SEC on Forms S-1
and S-3. Our SEC File number is 1-14323 and our Operating Partnership's SEC File number is 333-93239-01.
Recent acquisitions and other investments
Purchase of Interests in Mapletree and E-Oaktree. On August 1, 2002, we announced the purchase of equity
interests in affiliates of Williams, which in turn, own controlling interests in Mid-America Pipeline Company,
LLC ("Mid-America") and Seminole Pipeline Company ("Seminole"). The purchase price of the acquisition was
approximately $1.2 billion (subject to certain post-closing purchase price adjustments). The effective date of the
acquisition was July 31, 2002.
The acquisitions include a 98% ownership interest in Mapletree, LLC ("Mapletree"), owner of a 100% interest in
Mid-America Pipeline Company, LLC and certain propane terminals and storage facilities. The Mid-America pipeline
is a major NGL pipeline system consisting of three NGL pipelines, with 7,226 miles of pipeline, and average
transportation volumes of approximately 850 MBPD. Mid-America's 2,548-mile Rocky Mountain system transports mixed
NGLs from the Rocky Mountain Overthrust and San Juan Basin areas to Hobbs, Texas. Its 2,740-mile Conway North segment
links the large NGL hub at Conway, Kansas to the upper Midwest; its 1,938 mile Conway South system connects the Conway
hub with Kansas refineries and transports mixed NGLs from Conway, Kansas to Hobbs, Texas.
We also acquired a 98% ownership interest in E-Oaktree, LLC, owner of an 80% equity interest in Seminole Pipeline
Company. The Seminole pipeline consists of a 1,281-mile NGL pipeline, with an average transportation volume of
approximately 260 MBPD. This pipeline transports mixed NGLs and NGL products from Hobbs, Texas and the Permian
Basin to Mont Belvieu, Texas.
PAGE 53
These pipelines connect our Mont Belvieu and Gulf Coast NGL businesses with all of the major natural gas and NGL
supply basins in North America, giving us the ability to provide integrated midstream energy services to the two
fastest growing natural gas basins in the United States - the deepwater Gulf of Mexico and the Rocky Mountain
Overthrust.
In order to fund this transaction, the Operating Partnership entered into a $1.2 billion senior unsecured 364-day
credit facility. Our plans for permanent financing of this acquisition include the issuance of equity, including
partnership equity for institutional investors, and debt in amounts which are consistent with our objective of
maintaining our financial flexibility and investment grade balance sheet.
The post-closing purchase price adjustments of the Mapletree and E-Oaktree acquisitions are expected to be
completed during the fourth quarter of 2002. These acquisitions do not require any material governmental approvals.
Acquisition of Diamond-Koch's Mont Belvieu storage and propylene fractionation assets. In January 2002, we
completed the acquisition of Diamond-Koch's Mont Belvieu storage assets from affiliates of Valero Energy
Corporation and Koch Industries, Inc. for $129.6 million. These facilities include 30 storage wells with a useable
capacity of 68 MMBbls and allow for the storage of mixed NGLs, ethane, propane, butanes, natural gasoline and
olefins (such as ethylene), polymer grade propylene, chemical grade propylene and refinery grade propylene. With
the inclusion of the former D-K facilities we own and operate 95 MMBbls of storage capacity at Mont Belvieu, one
of the largest such facilities in the world. In addition, we completed the purchase of Diamond-Koch's 66.7%
interest in a propylene fractionation facility and related assets in February 2002 at a cost of approximately
$239.0 million. Including this purchase, we effectively own 58.3 MBPD of net propylene fractionation capacity in
Mont Belvieu and have access to additional customers at this key industry hub.
Acquisition of ChevronTexaco's interest in our Mont Belvieu NGL fractionator. In April 2002, we executed an
agreement with an affiliate of ChevronTexaco to purchase their 12.5% undivided ownership interest in our Mont
Belvieu, Texas NGL fractionator. The purchase price was approximately $8.0 million. The Mont Belvieu facility has a
gross NGL fractionation capacity of 210 MBPD of which 26.2 MBPD was ChevronTexaco's net share. ChevronTexaco was
required to sell their 12.5% interest in a consent order by the FTC as a condition of approving the merger
between Chevron and Texaco. The effective date of the purchase was June 1, 2002.
The other joint owners of the facility (affiliates of Duke Energy Field Services and Burlington Resources Inc.)
have the option to acquire their pro rata share of the ChevronTexaco interest. These preferential purchase rights
expire on September 30, 2002. If the other joint owners fully exercise their option to acquire their share of the
interest, our ownership interest would increase to approximately 71.4% from 62.5% currently. Should the joint
owners decline to exercise their options, we would own 75.0% of the facility. If the other joint owners acquire
any portion of their share of the ChevronTexaco interest, our purchase price will be reduced accordingly. We
expect to complete this transaction during the third quarter of 2002.
Acquisition of gas processing and NGL fractionator assets from Western Gas Resources, Inc. In June 2002,
we executed an agreement to acquire a natural gas processing plant, NGL fractionator and supporting assets
(including contracts) from Western Gas Resources, Inc. for $32.5 million plus certain post-closing purchase price
adjustments. The "Toca Western" facilities are located in St. Bernard Parish, Louisiana near our existing Toca
natural gas processing plant. The gas processing facility has a capacity of 160 MMcf/d and the NGL fractionator
can fractionate up to 14.2 MBPD of NGLs.
This purchase is subject to a preferential purchase right which expires on September 24, 2002 by the other joint
owners of our Yscloskey gas processing facility. We are one of the largest owners in the Yscloskey plant with a
28.2% ownership interest. Should any of the other owners exercise their respective right to acquire their pro rata
interest in the Toca Western facilities, it would reduce the ownership interest we ultimately acquire and the
purchase price we pay. Because of the preferential rights, we expect to close this transaction during the third
quarter of 2002.
PAGE 54
Our accounting policies
In our financial reporting process, we employ methods, estimates and assumptions that affect the reported amounts
of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial
statements. These methods, estimates and assumptions also affect the reported amounts of revenues and expenses
during the reporting period. Investors should be aware that actual results could differ from these estimates
should the underlying assumptions prove to be incorrect. Examples of these estimates and assumptions include
depreciation methods and estimated lives of property, plant and equipment, amortization methods and estimated
lives of qualifying intangible assets, methods employed to measure the fair value of goodwill, revenue
recognition policies and mark-to-market accounting procedures. The following describes the estimation risk in each
of these significant financial statement items:
o Property, plant and equipment. Property, plant and equipment is recorded at cost and is
depreciated using the straight-line method over the asset's estimated useful life. Our plants, pipelines
and storage facilities have estimated useful lives of five to 35 years. Our miscellaneous transportation
equipment have estimated useful lives of three to 35 years. Depreciation is the systematic and rational
allocation of an asset's cost, less its residual value (if any), to the periods it
benefits. Straight-line depreciation results in depreciation expense being incurred evenly over the life
of the asset. The determination of an asset's estimated useful life must take a number of factors into
consideration, including technological change, normal depreciation and actual physical usage. If any of
these assumptions subsequently change, the estimated useful life of the asset could change and result in
an increase or decrease in depreciation expense. Additionally, if we determine that an asset's
undepreciated cost may not be recoverable due to economic obsolescence, the business climate, legal or
other factors, we would review the asset for impairment and record any necessary reduction in the
asset's value as a charge against earnings. At June 30, 2002 and December 31, 2001, the net book value of
our property, plant and equipment was $1.6 billion and $1.3 billion, respectively.
o Intangible assets. The specific, identifiable intangible assets of a business enterprise depend
largely upon the nature of its operations. Potential intangible assets include intellectual property such
as technology, patents, trademarks and trade names, customer contracts and relationships, and
non-compete agreements, as well as other intangible assets. The approach to the valuation of each
intangible asset will vary depending upon the nature of the asset, the business in which it is utilized,
and the economic returns it is generating or is expected to generate.
Our recorded intangible assets primarily include the estimated value assigned to certain contract-based
assets representing the rights we own arising from contractual agreements. According to SFAS No. 141, a
contract-based intangible with a finite useful life is amortized over its estimated useful life, which
is the period over which the asset is expected to contribute directly or indirectly to the future cash
flows of the entity. It is based on an analysis of all pertinent factors including (a) the expected use
of the asset by the entity, (b) the expected useful life of related assets (i.e., fractionation
facility, storage well, etc.), (c) any legal, regulatory or contractual provisions, including renewal or
extension periods that would not cause substantial costs or modifications to existing agreements, (d)
the effects of obsolescence, demand, competition, and other economic factors and (e) the level of
maintenance required to obtain the expected future cash flows.
At June 30, 2002, our intangible assets primarily consisted of the Shell natural gas processing
agreement that we acquired as a result of the TNGL acquisition in August 1999 and certain propylene
fractionation and storage contracts we acquired in connection with our Diamond-Koch acquisitions in
January and February 2002. The value of the Shell natural gas processing agreement is being amortized on
a straight-line basis over its remaining contract term (currently $11.1 million annually from 2002
through 2019). If the economic life of this contract were later determined to be impaired due to negative
changes in Shell's natural gas exploration and production activities in the Gulf of Mexico, then we
might need to reduce the amortization period of this asset to less than the remaining life of the
agreement. Such a change would increase the annual amortization charge at that time. At June 30, 2002, the
unamortized value of the Shell contract was $188.8 million.
PAGE 55
The value of the propylene fractionation and storage contracts acquired from Diamond-Koch is being
amortized on a straight-line basis over the economic life of the assets to which they relate, which is
currently estimated at 35 years. Although the majority of these contracts have terms of one to two
years, we have assumed that our relationship with these customers will extend beyond the
contractually-stated term primarily based on historical low customer contract turnover rates within
these operations. If the economic life of the assets were later determined to be impaired due to negative
changes within the industry or otherwise, then we might need to reduce the amortization period of these
contract-based assets to less than 35 years. Such a change would increase amortization expense at that
time. At June 30, 2002, the unamortized value of these contracts was $60.4 million.
o Goodwill. At June 30, 2002, the value of goodwill was $81.5 million. Our goodwill is attributable
to the excess of the purchase price over the fair value of assets acquired and is comprised of the
following (values as of June 30, 2002):
o $73.7 million associated with the purchase of propylene fractionation assets from Diamond-Koch in
February 2002; and,
o $7.8 million related to the July 1999 purchase of Kinder Morgan's ownership interest in MBA which in
turn owned an interest in our Mont Belvieu NGL fractionation facility.
Since our adoption of SFAS No. 142 on January 1, 2002, our goodwill amounts are no longer
amortized. Instead, goodwill is tested at a reporting unit level annually, and more frequently, if
certain circumstances indicate it is more likely than not that the fair value of goodwill is below its
carrying amount. If such indicators are present (i.e., loss of a significant customer, economic
obsolescence of plant assets, etc.), the fair value of the reporting unit, including its related
goodwill, is calculated and compared to its combined book value. Currently, all of our goodwill is
recorded as part of the Fractionation operating segment (based on the assets to which the goodwill
relates).
The fair value of a reporting unit refers to the amount at which it could be bought or sold in a current
transaction between willing parties. Quoted market prices in active markets are the best evidence of
fair value and are used to the extent they are available. If quoted market prices are not available, an
estimate of fair value is determined based on the best information available to us, including prices of
similar assets and the results of using other valuation techniques such as discounted cash flow analysis
and multiples of earnings approaches. The underlying assumptions in such models rely on information
available to us at a given point in time and are viewed as reasonable and supportable considering
available evidence.
If the fair value of the reporting unit exceeds its book value, goodwill is not considered impaired and
no adjustment to earnings would be required. Should the fair value of the reporting unit (including its
goodwill) be less than its book value, a charge to earnings would be recorded to adjust goodwill to its
implied fair value.
o Revenue recognition. In general, we recognize revenue from our customers when all of the following
criteria are met: (i) firm contracts are in place, (ii) delivery has occurred or services have been
rendered, (iii) pricing is fixed and determinable and (iv) collectibility is reasonably assured. When
contracts settle (i.e., either physical delivery of product has taken place or the services designated
in the contract have been performed), we determine if an allowance is necessary and record it
accordingly. The revenues that we record are not materially based on estimates. We believe the assumptions
underlying any revenue estimates that we might use will not prove to be significantly different from
actual amounts due to the routine nature of these estimates and the stability of our operations.
Of the contracts that we enter into with customers, the majority fall within five main categories as
described below:
o Tolling (or throughput) arrangements where we process or transport customer volumes for a cash fee
(usually on a per gallon or other unit of measurement basis);
PAGE 56
o In-kind fractionation arrangements where we process customer mixed NGL volumes for a percentage of the
end NGL products in lieu of a cash fee (exclusive to our Norco and Toca Western NGL fractionation
facilities);
o Merchant contracts where we sell products to customers at market-related prices for cash;
o Storage agreements where we store volumes or reserve storage capacity for customers for a cash fee; and
o Fee-based marketing services where we market volumes for customers for either a percentage of the final
cash sales price or a cash fee per gallon handled.
A number of tolling (or throughput) arrangements are utilized in our Fractionation and Pipeline
segments. Examples include NGL fractionation, isomerization and pipeline transportation agreements.
Typically, we recognize revenue from tolling arrangements once contract services have been performed. At
times, the tolling fees we or our affiliates charge for pipeline transportation services are regulated
by such governmental agencies as the FERC. A special type of tolling arrangement, an "in-kind" contract,
is utilized by various customers at our Norco and Toca Western NGL fractionation facilities. An in-kind
processing contract allows us to retain a contractually-determined percentage of NGL products produced
for the customer in lieu of a cash tolling fee per gallon. Revenue is recognized from these "in-kind"
contracts when we sell (at market-related prices) and deliver the fractionated NGLs that we retained.
Our Processing segment businesses employ tolling and merchant contracts. If a customer pays us a cash
tolling fee for our natural gas processing services, we record revenue to the extent that natural gas
volumes have been processed and sent back to the producer. If we retain mixed NGLs as our fee for natural
gas processing services, we record revenue when the NGLs (in mixed and/or fractionated product form) are
sold and delivered to customers using merchant contracts. In addition to the Processing segment, merchant
contracts are utilized in the Fractionation segment to record revenues from the sale of propylene
volumes and in the Pipelines segment to record revenues from the sale of natural gas. Our merchant
contracts are generally based on market-related prices as determined by the individual agreements.
We have established an allowance for doubtful accounts to cover potential bad debts from customers. Our
allowance amount is generally determined as a percentage of revenues for the last twelve months. In
addition, we may also increase the allowance account in response to specific identification of customers
involved in bankruptcy proceedings and the like. We routinely review our estimates in this area to
ascertain that we have recorded ample reserves to cover forecasted losses. If unanticipated financial
difficulties were to occur with a significant customer or customers, there is the possibility that the
allowance for doubtful accounts would need to be increased to bring the allowance up to an appropriate
level based on the new information obtained. Our allowance for doubtful accounts was $21.1 million at
June 30, 2002 and $20.6 million at December 31, 2001.
o Fair value accounting for financial instruments. Our earnings are also affected by use of the
mark-to-market method of accounting required under GAAP for certain financial instruments. We use
financial instruments such as swaps, forwards and other contracts to manage price risks associated with
inventories, firm commitments and certain anticipated transactions, primarily within our Processing
segment. Currently none of these financial instruments qualify for hedge accounting treatment and thus
the changes in fair value of these instruments are recorded on the balance sheet and through earnings
(i.e., using the "mark-to-market" method) rather than being deferred until the firm commitment or
anticipated transaction affects earnings. The use of mark-to-market accounting for financial instruments
results in a degree of non-cash earnings volatility that is dependent upon changes in underlying indexes,
primarily commodity prices. Fair value for the financial instruments we employ is determined using price
data from highly liquid markets such as the NYMEX commodity exchange.
For the six months ending June 30, 2002, we recognized losses from our commodity hedging activities of
$50.9 million. Of this loss, $19.0 million is attributable to the negative change in market value of the
commodity hedging portfolio since December 31, 2001 using the mark-to-market method of accounting for
our financial instruments. For additional information regarding our use of financial instruments to
manage risk and the earnings sensitivity of these instruments to changes in underlying commodity prices,
see the Processing segment discussion under "Our results of operations" and Item 3 of this report.
PAGE 57
Additional information regarding our financial statements and those of the Operating Partnership can be found in
the Notes to Unaudited Consolidated Financial Statements of each entity included elsewhere in this report on
Form 10-Q.
Our results of operations
Revenues, costs and expenses and operating income. The following table shows our consolidated revenues,
costs and expenses, and operating income for the three and six month periods ended June 30, 2002 and 2001
(dollars in thousands):
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------
Revenues $793,325 $968,447 $1,464,606 $1,806,773
Costs and expenses 753,361 859,376 1,425,746 1,643,285
Operating income 39,964 109,071 38,860 163,488
Revenues for the three months ended June 30, 2002 declined $175.1 million when compared to the same three-month
period in 2001. Revenues for the six months ended June 30, 2002 declined $342.2 million when compared to the same
six-month period in 2001. The quarterly and year-to-date decline is primarily due to lower NGL prices which
affected revenues from our gas processing business and related merchant activities. This was partially offset by
the addition of revenue from businesses we have acquired since June 30, 2001.
Costs and expenses for the three months ended June 30, 2002 decreased $106.0 million when compared to those
recorded for the three months ended June 30, 2001. Costs and expenses for the six months ended June 30, 2002
declined $217.5 million when compared to the same period in 2001. The decrease in quarterly and year-to-date costs
and expenses is primarily due to lower NGL and natural gas prices (which affected energy-related expenses at our
facilities and cost of sales in our merchant activities). This was partially offset by expenses from acquired
businesses and a negative change in our commodity hedging results.
Operating income declined $69.1 million quarter-to-quarter and $124.6 million year-to-year primarily the result
of the items discussed in the previous two paragraphs, particularly that of the negative change in commodity
hedging results. For the three months ended June 30, 2002, we recognized a loss from the commodity hedging
activities of our gas processing business of $5.8 million versus income of $64.7 million in the second quarter of
2001 (a $70.5 million negative change between periods). For the six months ended June 30, 2002, we recognized a
loss of $50.9 million from these hedging activities as compared to income of $70.3 million during the same period
in 2001 (a $121.2 million negative change between periods).
PAGE 58
The following table illustrates selected average quarterly prices for natural gas, crude oil, selected NGL
products and polymer grade propylene since January 2001:
Polymer
Natural Normal Grade
Gas, Crude Oil, Ethane, Propane, Butane, Isobutane, Propylene,
$/MMBtu $/barrel $/gallon $/gallon $/gallon $/gallon $/pound
-----------------------------------------------------------------------------------------
(a) (b) (a) (a) (a) (a) (a)
Fiscal 2001:
First quarter (c) $7.05 $28.77 $0.49 $0.63 $0.70 $0.74 $0.23
Second quarter $4.65 $27.86 $0.37 $0.50 $0.56 $0.66 $0.19
Third quarter $2.90 $26.64 $0.27 $0.41 $0.49 $0.49 $0.16
Fourth quarter $2.43 $21.04 $0.21 $0.34 $0.40 $0.39 $0.18
Fiscal 2002:
First quarter $2.34 $21.41 $0.22 $0.30 $0.38 $0.44 $0.16
Second quarter $3.38 $26.26 $0.26 $0.40 $0.48 $0.51 $0.20
- ----------------------------------------------------------------------------------------------------------------
(a) Natural gas, NGL and polymer grade propylene prices represent an average of selected index prices
(b) Crude Oil price is representative of West Texas Intermediate
(c) Natural gas prices peaked at approximately $10 per MMBtu in January 2001
Gross operating margin. Our management evaluates segment performance based on gross operating margin (or
"margin"). Gross operating margin for each segment represents operating income before depreciation and
amortization, lease expense obligations retained by EPCO, gains and losses on the sale of assets and selling,
general and administrative expenses. Segment gross operating margin is exclusive of interest expense, interest
income amounts, dividend income, minority interest, extraordinary charges and other income and expense
transactions.
We have five reportable operating segments: Pipelines, Fractionation, Processing, Octane Enhancement and Other.
Pipelines consists of liquids and natural gas pipeline systems, storage and import/export terminal services.
Fractionation primarily includes NGL fractionation, isomerization and propylene fractionation. Processing
includes our natural gas processing business and related merchant activities. Octane Enhancement represents our
interest in a facility that produces motor gasoline additives to enhance octane (currently producing MTBE). The
Other operating segment primarily consists of fee-based marketing services.
We include equity earnings from unconsolidated affiliates in segment gross operating margin and as a component of
revenues. Our equity investments with industry partners are a vital component of our business strategy and a
means by which we conduct our operations to align our interests with a supplier of raw materials to a facility or
a consumer of finished products from a facility. This method of operation also enables us to achieve favorable
economies of scale relative to the level of investment and business risk assumed versus what we could accomplish
on a stand alone basis. Many of these businesses perform supporting or complementary roles to our other business
operations. For example, we use the Promix NGL fractionator to process NGLs extracted by our gas plants. The NGLs
received from Promix then can be sold by our merchant businesses. Another example would be our relationship with
the BEF MTBE facility. Our isomerization facilities process normal butane for this plant and our HSC pipeline
transports MTBE for delivery to BEF's storage facility on the Houston Ship Channel.
PAGE 59
Our gross operating margin amounts by segment (in thousands of dollars) along with a reconciliation to
consolidated operating income were as follows for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------------------
2002 2001 2002 2001
---------------------------------------------------------------------
Gross operating margin by segment:
Pipelines $32,190 $ 24,696 $64,858 $ 42,819
Fractionation 33,853 32,803 58,230 58,471
Processing (1,182) 68,112 (34,558) 96,510
Octane enhancement 2,876 5,233 5,882 5,402
Other (799) 411 (1,061) 946
---------------------------------------------------------------------
Gross operating margin total 66,938 131,255 93,351 204,148
Depreciation and amortization 16,962 11,793 34,199 21,822
Retained lease expense, net 2,273 2,660 4,578 5,320
Loss (gain) on sale of assets (1) (6) 12 (387)
Selling, general and administrative expenses 7,740 7,737 15,702 13,905
---------------------------------------------------------------------
Consolidated operating income $39,964 $109,071 $38,860 $163,488
=====================================================================
Our significant plant production and other volumetric data were as follows for the periods indicated:
Three Months Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------------------
2002 2001 2002 2001
--------------------------------------------------------------------
MBPD, Net
---------
Major NGL and petrochemical pipelines 499 519 518 430
Equity NGL production 74 63 78 54
NGL fractionation 237 202 226 184
Isomerization 86 94 80 82
Propylene fractionation 58 29 55 30
Octane enhancement 6 5 5 4
BBtu/d, net
-----------
Natural gas pipelines 1,300 1,295 1,262 1,263
The following discussions highlight the significant quarterly and year-to-date comparisons in gross operating
margin and volumes by operating segment.
Pipelines
Our Pipelines segment consists of natural gas, NGL and petrochemical liquids transportation and distribution
pipelines. Our natural gas pipeline systems provide for the gathering, transmission and storage of natural gas
from both onshore and offshore Louisiana developments. Our liquids pipelines transport mixed NGLs and hydrocarbons
to NGL fractionation plants and distribute NGL and petrochemical products to petrochemical plants, refineries and
propane markets.
Three months ended June 30, 2002 and 2001. Our Pipelines segment posted a near record quarterly gross
operating margin of $32.2 million for the second quarter of 2002 compared to $24.7 million for the second quarter
of 2001. Net pipeline volumes for the second quarter of 2002 were 841 MBPD compared to 860 MBPD for the same
quarter during 2001. These volumes are on an energy equivalent basis where 3.8 MMBtus of natural gas is
equivalent to one barrel of NGLs. Of the $7.5 million increase in margin quarter-to-quarter, $6.3 million of the
increase is attributable to storage assets we acquired from Diamond-Koch in January 2002. Other factors in the
quarter-to-quarter difference are as follows:
PAGE 60
o Margin from our Acadian Gas operations improved $3.4 million quarter-to-quarter primarily due to natural
gas inventory value write downs recorded during the second quarter of 2001 that did not recur in the
2002 period.
o Our Louisiana Pipeline System posted a $2.4 million increase in margin primarily due to a rise in
liquids throughput rates attributable to higher NGL extraction and downstream processing rates between
the two quarters.
o Margin from our Houston Ship Channel NGL import facility and associated HSC pipeline decreased a
combined $2.8 million quarter-to-quarter primarily due to a decline in mixed butane import activity.
o Margin from the Lou-Tex Propylene pipeline declined $1.5 million quarter-to-quarter primarily due to
lower pipeline throughput rates during the 2002 period attributable to a decrease in petrochemical
production flowing through this system.
o Our Lou-Tex NGL pipeline system posted a $0.4 million decrease in margin quarter-to-quarter primarily
due to downtime and expense associated with repairs and maintenance during the second quarter of 2002.
o Margin from our Gulf of Mexico natural gas pipelines decreased $0.4 million quarter-to-quarter primarily
due to mechanical problems at certain Gulf of Mexico production platforms. These platforms recommenced
production in May 2002.
Six months ended June 30, 2002 and 2001. From a year-to-date perspective, our Pipelines segment recognized
$64.9 million in gross operating margin for the first six months of 2002 compared to $42.8 million during the
same period in 2001. Net pipeline volumes (on an energy equivalent basis) were 850 MBPD during the 2002 period
versus 762 MBPD during the 2001 period. As in the quarter-to-quarter discussion above, the largest factor in the
difference in margin between the two periods is the margin contribution from the storage assets we acquired from
Diamond-Koch. For the first six months of 2002, these acquired assets added $8.2 million to the gross operating
margin of this segment. Other significant year-to-date differences are as follows:
o The 2002 period includes six months of Acadian Gas margins whereas the 2001 period includes only three
months (we acquired Acadian Gas on April 1, 2002). The additional quarter's worth of margin in the 2002
period accounts for $4.2 million of the overall increase in segment margin. This amount is in addition
to the $3.4 million benefit noted above for Acadian Gas in the quarter-to-quarter analysis.
o Margin from the Louisiana Pipeline System for the 2002 period increased $5.5 million over the 2001
period primarily due to higher liquids throughput rates. Liquids transport volumes increased to 182
MBPD during the first six months of 2002 compared to 119 MBPD during the first six months of 2001. The
lower throughput rates during the 2001 period were primarily due to decreased NGL extraction rates at
gas processing plants during the first half of 2001 caused by high natural gas prices.
o Equity earnings from EPIK's export terminal increased $2.7 million period-to-period due to a strong
export market during the first quarter of 2002. Unusually high domestic prices for propane-related
products in the first half of 2001 decreased export opportunities. Product prices during the first
quarter of 2002 presented EPIK with a more favorable export environment relative to the first quarter
of 2001.
o Margin from our Lou-Tex NGL pipeline system increased $1.9 million period-to-period primarily due to a
13 MBPD increase in transportation volumes.
o Margin from the Lou-Tex Propylene pipeline decreased $2.6 million period-to-period primarily due to
lower pipeline throughput rates and higher operating costs. The reduction in volumes is generally
attributable to a decline in petrochemical production by shippers.
o Margin from our Houston Ship Channel NGL import facility decreased $1.7 million period-to-period
primarily due to a decline in mixed butane imports.
o Margin from our Gulf of Mexico natural gas pipelines decreased $0.5 million period-to-period due
to mechanical problems at certain Gulf of Mexico production platforms, as mentioned previously.
Fractionation
Our Fractionation segment includes eight NGL fractionators, an isomerization complex and four propylene
fractionation facilities. NGL fractionators separate mixed NGL streams into discrete NGL products: ethane,
propane, isobutane, normal butane and natural gasoline. Our isomerization unit converts normal butane into mixed
butane, which is subsequently fractionated into normal butane, isobutane and high purity isobutane. In general,
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our propylene fractionation plants separate refinery grade propylene (a mixture of propane and propylene) into
either polymer grade propylene or chemical grade propylene along with by-products of propane and mixed butane.
Three months ended June 30, 2002 and 2001. On a quarterly basis, gross operating margin was $33.9 million
for the three months ended June 30, 2002 compared to $32.8 million for the same period in 2001. NGL fractionation
margin decreased $1.7 million for the second quarter of 2002 when compared to the second quarter of 2001. NGL
fractionation net volumes improved to 237 MBPD during the 2002 period versus 202 MBPD during the 2001 period. The
decrease in NGL fractionation margin is primarily due to lower tolling revenues at our Mont Belvieu NGL
fractionator due to competition at this industry hub, lower in-kind fees at our Norco plant (caused by lower NGL
prices in 2002 relative to 2001), partially offset by increased margins from our Tebone and Venice NGL
fractionation facilities due to increased volumes.
Our isomerization business posted a $5.1 million decrease in margin for the second quarter of 2002 when compared
to the second quarter of 2001. Isomerization volumes were 86 MBPD during the 2002 period versus 94 MBPD during the
2001 period. The decrease in margin is primarily due to lower isomerization revenues. Certain of our isomerization
fees are indexed to historical natural gas prices which were lower during the second quarter of 2002 relative to
the second quarter of 2001.
For the second quarter of 2002, gross operating margin from propylene fractionation was $7.3 million higher than
the second quarter of 2001. The second quarter of 2002 includes $7.5 million in margin from the propylene
fractionation business we acquired from Diamond-Koch in February 2002. Net volumes at our propylene fractionation
facilities increased to 58 MBPD for the second quarter of 2002 compared to 29 MBPD for the second quarter of
2001. Of the 28 MBPD increase in 2002 volumes, 26 MBPD is attributable to operations acquired from Diamond-Koch.
Six months ended June 30, 2002 and 2001. From a year-to-date perspective, Fractionation gross operating
margin was $58.2 million for the first six months of 2002 versus $58.5 million for the first six months of 2001.
NGL fractionation margin decreased $2.8 million during the 2002 period when compared to the 2001 period. NGL
fractionation net volumes improved to 226 MBPD during the first six months of 2002 versus 184 MBPD for the same
period in 2001. NGL fractionation volumes during the first quarter of 2001 were unusually low due to reduced NGL
extraction rates at gas processing plants caused by abnormally high natural gas prices (which resulted in a
decrease in mixed NGL volumes available for fractionation). The decrease in NGL fractionation margin for the 2002
period is primarily due to the following:
o certain non-routine maintenance charges at our Mont Belvieu facility in the first quarter of 2002;
o a decrease in tolling revenues at our Mont Belvieu facility due to competition at this industry hub
(which offset a 12 MBPD increase in fractionation volumes);
o lower in-kind fee revenue at our Norco plant (caused by lower NGL prices in 2002 relative to 2001);
o partially offset by increased margins at other facilities due to higher processing volumes.
Our isomerization business posted a $9.9 million decrease in margin for the first six months of 2002 when
compared to the first six months of 2001. Isomerization volumes decreased to 80 MBPD during the 2002 period versus
82 MBPD during the 2001 period. The decrease in margin is primarily due to lower isomerization revenues. As
discussed earlier, certain of our isomerization tolling fees are indexed to historical natural gas prices and
were positively impacted when the price of natural gas was at historically high levels during 2001, particularly
during the first quarter of 2001.
For the first six months of 2002, gross operating margin from propylene fractionation was $11.6 million higher
than the same period in 2001. The first six months of 2002 includes $10.4 million in margin from the propylene
fractionation business we acquired from Diamond-Koch in February 2002. The remainder of the increase in margin is
primarily due to lower energy-related costs at our other Mont Belvieu propylene fractionation facilities
attributable to lower natural gas prices between periods. Net volumes at our propylene fractionation facilities
increased to 55 MBPD for the first six months of 2002 compared to 30 MBPD for the first six months of 2001. Of the
25 MBPD increase in 2002 volumes, 24 MBPD is attributable to operations acquired from Diamond-Koch.
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Processing
This segment is comprised of our natural gas processing business and related merchant activities. At the core of
our natural gas processing business are twelve gas plants located primarily in south Louisiana. Our net share of
the NGL production from these gas plants (i.e., "our equity NGL production"), in addition to the NGLs we purchase
on a merchant basis and a portion of the production from our isomerization facilities, support the merchant
activities included in this operating segment.
Three months ended June 30, 2002 and 2001. Gross operating margin was a loss of $1.2 million for the second
quarter of 2002 versus income of $68.1 million for the second quarter of 2001. Our equity NGL production for the
second quarter of 2002 increased 11 MBPD over the same period in 2001 primarily due to improved gas processing
economics quarter-to-quarter, which were generally the result of lower natural gas prices. The change in margin
between the two quarters can generally be attributed to the following:
o We recorded a loss of $5.8 million from our commodity hedging activities during the second quarter of
2002 compared to income of $64.7 million during the second quarter of 2001. This accounted for $70.5
million of the negative change in margin. For further information regarding our commodity hedging losses,
see "Impact of commodity hedging activities on our results of operations" in this Processing
section.
o Results for the second quarter of 2001 reflected exceptionally strong demand for isobutane from refiners
which did not reoccur during the second quarter of 2002. During the second quarter of 2001, gasoline
refiners purchased unusually high levels of isobutane in anticipation of concerns regarding reformulated
gasoline production during the summer of 2001. These supply concerns did not reappear during 2002 which
affected both prices and sales volumes.
o Lastly, the decline in commodity hedging results and isobutane demand was offset by a favorable decrease
in NGL inventory valuation adjustments between the two quarters.
Six months ended June 30, 2002 and 2001. Gross operating margin was a loss of $34.6 million for the first
six months of 2002 compared to income of $96.5 million for the first six months of 2001. Our equity NGL production
averaged 78 MBPD during the 2002 period versus 54 MBPD during the 2001 period. Equity NGL production during the
2001 period reflected reduced NGL extraction rates at our gas plants resulting from abnormally high natural gas
prices (which negatively affected operating costs), particularly during the first quarter of 2001. Of the $131.1
million decrease in margin between periods, the significant differences are as follows:
o We recorded a loss of $50.9 million from our commodity hedging activities during the first six months of
2002, of which $45.1 million of the loss was recognized during the first quarter of 2002. This compares
to $70.3 million of income from such activities during the first six months of 2001. This change in
results accounts for $121.2 million of the decrease in margin. For further information regarding our
commodity hedging losses, see "Impact of commodity hedging activities on our results of
operations"in this section.
o Prior year margin benefited from unusually strong propane demand in the first quarter of 2001 for
heating and isobutane in the second quarter of 2001 for refining. The higher prices caused by the
extraordinary demand for these products during the 2001 periods did not recur during the 2002 period.
o Lastly, the decline in commodity hedging results and propane and isobutane demand was offset by a
favorable decrease in NGL inventory valuation adjustments between the two quarters and improved
processing margins. Processing economics improved period to period as a result of lower natural gas
prices during the 2002 period relative to the 2001 period which in turn resulted in higher equity NGL
production rates during 2002.
Impact of commodity hedging activities on our results of operations. In order to manage the risks
associated with our Processing segment, we may enter into commodity financial instruments to hedge our exposure
to price risks associated with natural gas, NGL production and inventories, firm commitments and certain
anticipated transactions. We have employed various hedging strategies to mitigate the effects of fluctuating
commodity prices (primarily NGL and natural gas prices) on margins from our Processing segment.
Beginning in late 2000 and extending through March 2002, a large number of our hedging transactions were based on
the historical relationship between natural gas prices and NGL prices. This type of hedging strategy utilized the
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forward sale of natural gas at a fixed-price with the expected margin on the settlement of the position
offsetting or mitigating changes in the anticipated margins on NGL merchant activities and the value of equity
NGL production. Throughout 2001, this strategy proved very successful for us (as the price of natural gas declined
relative to our fixed positions) and was responsible for most of the $101.3 million in income we recorded from
commodity hedging activities.
As a result of the success of this strategy, we continued using this strategy going into 2002. In late March 2002,
the effectiveness of this hedging strategy deteriorated due to a rapid increase in natural gas prices whereby the
loss in the value of fixed-price natural gas financial instruments was not offset by increased gas processing
margins. A number of factors influenced this rapid increase in natural gas prices. These factors included industry
concerns that current drilling activity was not sufficient to support the production levels needed to satisfy the
increase in demand resulting from the U.S. economic recovery. In addition, the industry was concerned about the
potential need for natural gas to replace nuclear power in some areas of the U.S. as nuclear power facilities
were taken offline for critical maintenance work. As a result, we recognized a loss on these hedging activities
of $45.1 million during the first quarter of 2002.
Due to the inherent uncertainty that was controlling the markets, management decided that it was prudent for the
Company to exit this hedging strategy, and we did so by late April 2002. By the time the positions were generally
closed out, the value of the portfolio had declined by an additional $5.7 million; thus, the total loss from this
strategy during fiscal 2002 was $50.8 million. The $5.8 million loss we recorded during the second quarter of 2002
is primarily due to this additional decline. Of the $50.8 million in losses from this strategy recorded during
2002, $7.6 million was related to mark-to-market income from these instruments that we recognized
in the fourth quarter of 2001. The remaining $43.2 million represents our cash exposure from these losses of which
$31.9 million has been paid to counterparties through June 30, 2002. The balance of the cash payments will be made
over the remainder of 2002.
A variety of factors influence whether or not our hedging strategies are successful. For additional information
regarding our commodity financial instruments, see Item 3 of this report on Form 10-Q.
Octane Enhancement
Our Octane Enhancement segment consists of a 33.33% equity investment in BEF, which owns a facility which
currently produces motor gasoline additives to enhance octane.
Three months ended June 30, 2002 and 2001. Our second quarter of 2002 equity earnings from BEF decreased
$2.4 million when compared to the second quarter of 2001. The decrease is primarily due to lower MTBE prices
quarter-to-quarter. MTBE prices were very strong during the second quarter of 2001 due to exceptional demand for
reformulated gasoline by refiners in anticipation of supply problems in the summer of 2001.
Six months ended June 30, 2002 and 2001. Equity earnings from our BEF investment improved to $5.9 million
for the first six months of 2002 from $5.4 million for the first six months of 2001. The improvement is primarily
due to a 24% increase in MTBE production during the 2002 period due to less maintenance downtime offset by the
impact of lower overall MTBE prices period-to-period which affected margins.
Other matters
Selling, general and administrative expenses. Selling, general and administrative expenses for the first
six months of 2002 increased $1.8 million when compared to the first six months of 2001. This increase is
primarily due to the additional staff and resources acquired as a result of business acquisitions.
Interest expense. Interest expense increased between the second quarters of 2002 and 2001 and the
year-to-date periods primarily due to additional borrowings we made in conjunction with the Diamond-Koch
acquisitions and investments in inventories. Also, the first quarter of 2001 includes a $9.3 million benefit
related to our interest rate swaps which did not reoccur in 2002.
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General outlook for the remainder of 2002
Processing
We anticipate that our equity NGL production rates will approximate 65 MBPD for the third quarter and rise to
around 70 MBPD during the fourth quarter. The mechanical problems at certain customer Gulf of Mexico production
platforms that curtailed natural gas flows during the March through May timeframe have been fixed and production
from these areas is expected to be at normal levels for the remainder of the year. We also anticipate that
production from Shell's Princess field will begin late in the third quarter (these volumes will be processed at
our Venice gas plant). From a processing economics perspective, natural gas prices are expected to remain
moderate to strong over the remainder of the year, which will negatively affect processing margins given
anticipated NGL prices. We expect that as gas prices rise over the coming months, some regional gas plants will
be forced into ethane rejection mode. This will negatively impact downstream volumes available for fractionation.
If gas prices decline and NGL prices strengthen, processing economics would improve and may lead to full NGL
extraction rates at our facilities. At full NGL extraction rates, we expect that our equity NGL production rate
would approximate 90 MBPD to 95 MBPD. Our current outlook for processing economics is based on quarterly
weighted-average NGL prices ranging from approximately 39 CPG to 44 CPG and quarterly natural gas prices
averaging from approximately $3.30 per MMBtu to $3.60 per MMBtu.
Pipelines
The indirect acquisition of interests in the Mid-America and Seminole NGL pipeline systems on July 31, 2002 was a
significant transaction for us. It was a transforming event because it extends our platform of assets beyond the
Gulf Coast and gives us a strong business position in the Midwest and linkage to Canadian NGL production. These
pipelines integrate our Mont Belvieu and Gulf Coast NGL business with all of the major natural gas and NGL supply
basins in North America. We will now provide integrated midstream energy services to the two fastest growing
natural gas basins in the United States - the deepwater Gulf of Mexico and the Rocky Mountain Overthrust.
We know these assets very well. Our parent, EPCO, was a charter partner in the formation and development of the
Seminole Pipeline in 1981 and one of the Seminole lines terminates at our Mont Belvieu complex. In addition,
several key members of our management team, who were formerly with MAPCO Inc., had commercial responsibilities
for the Mid-America and Seminole pipeline systems for many years. We anticipate that these pipeline businesses
will substantially increase our fee-based cash flows and offer excellent growth prospects for the future. We are
truly excited about the acquisition of these premier midstream energy assets.
We are diligently working to integrate these assets into our system. For the third and fourth quarters of 2002,
the existing business plan forecasts throughput volumes to be near capacity. We believe that these volume
expectations are reasonable. Based upon historical information available to us, we believe that these investments
will generate approximately $154 million of EBITDA (representing our pro-rata share of such cash flows) on
an annualized twelve-month basis, which does not include the effect of any cost-saving synergies that may develop
over time as we integrate these assets into our system.
As for our Gulf Coast liquids pipelines, we expect that ethane rejection at gas processing facilities in the
region will negatively affect the throughput rates on certain of our pipelines during the third quarter. We
expect that rates will improve during the fourth quarter as gas processing economics improve resulting in an
increase in NGL volumes for transport to fractionation facilities. Also, we expect volumes on the Dixie propane
pipeline system to increase in the fourth quarter as seasonal heating requirements in the southeastern U.S.
increase throughput on the system.
Our storage operations should continue to benefit as NGL production continues and slow petrochemical and other
downstream demand for feedstocks keeps inventory levels higher than normal. Import volumes at our Houston Ship
Channel import dock are expected to be near historical averages for the remainder of the year. EPIK's export
business should see a rise in throughput rates over the same period as export opportunities increase. EPIK
usually experiences an increase in exports of propane during the winter months.
PAGE 65
We anticipate that our Gulf of Mexico and Acadian Gas natural gas pipeline businesses will be stable for the
remainder of the year with normal margins. Throughput on our propylene pipelines for the remainder of the year
should be consistent with that of the first half of the year.
Fractionation
We expect that NGL volumes available for fractionation will decline 10% to 15% from levels seen earlier this year
as the impact of ethane rejection at regional gas plants begins to affect our facilities. Margins from our Mont
Belvieu NGL fractionation complex will continue to be under pressure due to the intense competition at this
industry hub caused by excess fractionation capacity in the region (given the current demand picture for NGLs
from petrochemical companies). Margins from in-kind NGL fractionation fees (such as those at Norco) should be
consistent with the prior year given our expectations for NGL prices.
Our isomerization units should operate at 90% to 95% of the production rates seen during the first half of the
year. The operating rates of these facilities are in part linked to gasoline refinery demand which will
experience a seasonal decline in the third and fourth quarters. Our propylene fractionation units should operate
at rates similar to those seen in the first six months of 2002 on the assumption that demand for petrochemicals
should remain constant for the remainder of the year.
Octane Enhancement
BEF should experience a seasonal decline in margins during the third and fourth quarters as the summer driving
season ends and refiners reduce their demand for MTBE (which will negatively affect the price we receive for our
MTBE production). If our assumptions regarding the future price of natural gas are realized, our margins may also
be under pressure due to an increase in feedstock costs, particularly that of methanol.
Our liquidity and capital resources
As noted at the beginning of Item 2, since the Operating Partnership owns substantially all of Enterprise
Products Partners L.P.'s consolidated assets and conducts substantially all of its business and operations, the
following discussion of liquidity and capital resources constitutes combined (or consolidated) information for
the two registrants. References to partnership equity securities in this discussion pertain to Units issued by
Enterprise Products Partners L.P. References to public debt pertain to those obligations issued by Enterprise
Products Operating L.P. and guaranteed by Enterprise Products Partners L.P.
General. Our primary cash requirements, in addition to normal operating expenses and debt service, are for
capital expenditures (both sustaining and expansion-related), business acquisitions and distributions to
partners. We expect to fund our short-term needs for such items as operating expenses and sustaining capital
expenditures with operating cash flows. Capital expenditures for long-term needs resulting from internal growth
projects and business acquisitions are expected to be funded by a variety of sources including (either separately
or in combination) cash flows from operating activities, borrowings under bank credit facilities and the issuance
of additional partnership equity and public debt. Our quarterly cash distributions to partners are expected to be
funded primarily by current period operating cash flows or to a lesser extent, temporary borrowings under bank
credit facilities or a combination thereof. Our debt service requirements are expected to be funded by operating
cash flows and/or refinancing arrangements.
Operating cash flows primarily reflect the effects of net income adjusted for depreciation and amortization,
equity income and cash distributions from unconsolidated affiliates, fluctuations in fair values of financial
instruments and changes in operating accounts. The net effect of changes in operating accounts is generally the
result of timing of sales and purchases near the end of each period. Cash flows from operations are directly
linked to earnings from our business activities. Like our results of operations, these cash flows are exposed to
certain risks including fluctuations in NGL and energy prices, competitive practices in the midstream energy
industry and the impact of operational and systems risks. The products that we process, sell or transport are
principally used as feedstocks in petrochemical manufacturing and in the production of motor gasoline and as fuel
for residential and commercial heating. Reduced demand for our products or services by industrial customers,
whether because of general economic conditions, reduced demand for the end products made with NGL products,
PAGE 66
increased competition from petroleum-based products due to pricing differences or other reasons, could have a
negative impact on earnings and thus the availability of cash from operating activities. For a more complete
discussion of these and other risk factors pertinent to our businesses, see "Cautionary Statement regarding
Forward-Looking information and Risk Factors".
As noted above, certain of our liquidity and capital resource requirements are met using borrowings under bank
credit facilities and/or the issuance of additional partnership equity or public debt (separately or in
combination). As of June 30, 2002, total borrowing capacity under our revolving bank credit facilities was $500
million of which $132 million was available. On February 23, 2001, we filed a $500 million universal shelf
registration (the "February 2001 Shelf") covering the issuance of an unspecified amount of partnership equity or
debt securities or a combination thereof. Our plans for permanent financing of the approximately $1.2 billion
Mapletree and E-Oaktree acquisitions include the issuance of equity, including partnership equity for
institutional investors, and debt in amounts which are consistent with our objective of maintaining our financial
flexibility and investment grade balance sheet. For additional information regarding our debt, see the section
below labeled "Our debt obligations".
We have the ability, under certain conditions during the Subordination Period, to issue an unlimited number of
Common Units to finance acquisitions and capital improvements. The Subordination Period generally extends until
the first day of any quarter beginning after June 30, 2003 when certain financial tests have been satisfied. We
have the ability to issue an unlimited number of Common Units for this type of expenditure if Adjusted Operating
Surplus (as defined within our partnership agreement) for the previous four fiscal quarter period prior to the
expenditure, on a pro forma basis, would have increased as a result of such expenditure (i.e., would have been
accretive on a pro forma basis for each of the previous four fiscal quarters).
For those acquisitions and other transactions that do not qualify under the aforementioned pro forma "accretive"
test, we have 54,550,000 Units available (and unreserved) for general partnership purposes during the
Subordination Period. After the Subordination Period expires, we may prudently issue an unlimited number of Units
for general partnership purposes that do not meet the pro forma "accretive" test.
If deemed necessary, we believe that additional financing arrangements can be obtained at reasonable
terms. Furthermore, we believe that maintenance of our investment grade credit ratings combined with a continued
ready access to debt and equity capital at reasonable rates and sufficient trade credit to operate our businesses
efficiently provide a solid foundation to meet our long and short-term liquidity and capital resource
requirements.
Credit ratings. Our current investment grade credit ratings of Baa2 by Moody's and BBB by S and P highlight our
underlying financial strength. We maintain regular communications with these rating agencies which independently
judge our credit worthiness based on a variety of quantitative and qualitative factors.
On August 2, 2002, Moody's and S and P changed their ratings outlook regarding our debt securities from "stable" to
"negative". The ratings agencies did not take any action to downgrade our ratings; they remain at Baa2 by Moody's
and BBB by S and P. Their negative outlook on the future of our ratings reflects the execution risk they see
associated with our permanent financing plan for the Mapletree and E-Oaktree acquisitions, which includes the
issuance of traditional retail partnership equity, institutional partnership equity and long-term debt
aggregating about $1.2 billion over the remainder of 2002 and first quarter of 2003. On a positive note, the
ratings agencies noted that as a result of the acquisition, our cash flows should be more stable due to the
increase in fee-based revenues. They also commented that the acquired entities should result in the
diversification of our current NGL businesses and enhance our overall business profile.
The change in ratings outlook (as opposed to an actual change in ratings) does not translate into any material
financial impact on our liquidity. Management is committed to achieving its goals of permanent financing for the
Mapletree and E-Oaktree acquisitions and will actively pursue the appropriate mix and timing of offerings of
partnership equity and issuance of public debt that will maintain our investment grade balance sheet. We strongly
believe that the maintenance of an investment grade credit rating is important in managing our liquidity and
capital resource requirements.
Two-for-one split of Limited Partner Units. On February 27, 2002, we announced that the Board
of Directors of the General Partner had approved a two-for-one split for each class of our Units. The partnership
PAGE 67
Unit split was accomplished by distributing one additional partnership Unit for each partnership Unit outstanding
to holders of record on April 30, 2002. The Units were distributed on May 15, 2002. All references to number of
Units or earnings per Unit contained in this document relate to the post-split Units, except if indicated
otherwise.
Consolidated cash flows for six months ended June 30, 2002 compared to six months ended June 30, 2001
Operating cash flows. Cash flow from operating activities was an inflow of $45.2 million for the first six
months of 2002 compared to $90.6 million during the same period in 2001. Excluding changes in operating accounts
which are generally the result of timing of sales and purchases near the end of each period, adjusted cash flow
from operating activities would be an inflow of $77.6 million in 2002 versus $121.2 million during 2001. Cash
flow from operating activities before changes in operating accounts is an important measure of our liquidity. It
provides an indication of our success in generating core cash flows from the assets and investments we own or
have an interest in. The $43.6 million decrease in adjusted cash flows between the two year-to-date periods is
primarily due to:
o net hedging losses in 2002 versus net hedging income in 2001; offset by
o increased distributions from our unconsolidated affiliates and
o an increase in operating earnings due to acquisitions.
As noted under the Processing segment discussion under "Our results of operations" section, we recorded
$50.9 million in net commodity hedging losses during the first six months of 2002 compared to $70.4 million of
income during the first six months of 2001. Of the recorded hedging loss for the 2002 period, we have realized
(i.e., paid out to counterparties) $31.9 million of this loss. The difference of $19.0 million between the
recorded loss and the realized loss represents the non-cash change in market value of the overall portfolio
between December 31, 2001 and June 30, 2002. At June 30, 2002, the market value of the commodity financial
instruments that were outstanding was a payable of $11.1 million, which we expect to pay to counterparties over
the remainder of the 2002.
We discontinued the hedging strategy underlying the $50.9 million in losses in April 2002. This strategy had
helped create basically all of the $70.3 million in income from commodity hedging activities we recorded during
the first six months of 2001, of which $17.9 million had been received from counterparties through June 30, 2001.
Our current hedging strategies are limited in scope and duration. These strategies primarily cover the price risk
associated with certain NGL inventories and fuel costs. We do not expect any material impact on our liquidity from
the settlement of these commodity financial instruments, which settle primarily in the fourth quarter of 2002 and
first quarter of 2003. The market value of these instruments at June 30, 2002 was a net payable of $0.3 million,
(which is included in the $11.1 million payable market value of the overall portfolio mentioned previously). From
a cash flow sensitivity standpoint, if the commodity prices underlying these instruments were to increase by 10%
from the levels they were at on June 30, 2002, the amount we would have to pay counterparties would increase to
$0.8 million from $0.3 million. Likewise, if the underlying prices decreased by 10%, we would receive cash of $0.1
million from counterparties as opposed to paying $0.3 million. These amounts do not reflect the degree to which
the cash flows of the hedged transaction would be oppositely affected by the change in prices.
Investing cash flows. During the first six months of 2002, we used $431.7 million in cash to finance
investing activities compared to $397.5 million spent during the first six months of 2001. The 2001 period
includes $113 million paid to acquire equity interests in several Gulf of Mexico natural gas pipelines from El
Paso (our Neptune, Starfish and Nemo equity investments) and $225.7 million paid to acquire Shell's Acadian Gas
natural gas pipeline system. The 2002 period reflects $394.8 million in business acquisitions including $368.7
million paid to acquire Diamond-Koch's propylene fractionation and NGL and petrochemical storage businesses and
$18.0 million paid to Shell representing the final purchase price adjustment relating to the Acadian Gas
acquisition.
Financing cash flows. Our financing activities generated $257.3 million in cash inflows during the first
six months of 2002 compared to $362.4 million during the first six months of 2001. The 2002 period includes $368
million in borrowings under our revolving credit facilities while the 2001 period reflects $449.7 million in
proceeds from the issuance of the Senior Notes B. Cash distributions paid to our partners increased
period-to-period primarily due to increases in both the declared quarterly distribution rate and the number of
Units entitled to receive distributions.
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On a forward-looking basis, the conversion of Shell's non-distribution bearing Special Units to
distribution-bearing Common Units will increase distributions paid to partners beginning with the third quarter
of 2002 distribution paid in November 2002. See "Conversion of Shell Special Units to Common Units" on
page 74 for additional information regarding this issue.
Cash requirements for future growth
Acquisitions. We are committed to the long-term growth and viability of the Company. Our strategy involves
expansion through business acquisitions and internal growth projects. In recent years, major oil and gas companies
have sold non-strategic assets in the midstream natural gas industry in which we operate. We forecast that this
trend will continue, and expect independent oil and natural gas companies to consider similar disposal
options. Management continues to analyze potential acquisitions, joint venture or similar transactions with
businesses that operate in complementary markets and geographic regions. We believe that the Company is positioned
to continue to grow through acquisitions that will expand its platform of assets and through internal growth
projects.
For fiscal 2002, we have invested or are committed to invest $1.6 billion in business acquisitions and internal
growth projects including $1.2 billion for the interests in Mapletree and E-Oaktree we purchased from affiliates
of Williams in July 2002;$239.0 million for the Mont Belvieu propylene fractionation assets we purchased from
Diamond-Koch in February 2002; and $129.6 million for the Mont Belvieu NGL and petrochemical storage assets we
purchased from Diamond-Koch in January 2002. Our goal is to invest at least $400 million annually in such
opportunities to the extent that we believe such investments will be accretive to our limited partners.
The funds needed to achieve this goal can be attained through a combination of operating cash flows, public and
private debt and/or partnership equity. Of the $1.6 billion in business acquisitions and internal growth projects
we have completed thus far in 2002, we have borrowed approximately $1.5 billion of the funds required. This will
translate into additional debt service costs during 2002.
The $1.2 billion we borrowed to effect the Mapletree and E-Oaktree acquisitions was in the form of a 364-day term
loan. The loan will be repaid as follows:$150 million due on December 31, 2002, $450 million on March 31, 2003
and $600 million on July 30, 2003. As noted earlier, our plans for permanent financing of this acquisition include
the issuance of equity, including partnership equity for institutional investors, and debt in amounts which are
consistent with our objective of maintaining our financial flexibility and investment grade balance sheet.
Distributions. Another stated goal of management is to increase the distribution rate to our investors by
at least 10% annually. For the fourth quarter of 2001, the declared annual rate was $1.25 per Common Unit (on a
post-split basis). In the first quarter of 2002, the declared annual rate was raised to $1.34 per Common Unit. Our
goal is to raise the declared annual rate to at least $1.375 per Common Unit by the end of fiscal 2002. Based on
the number of distribution-bearing Units projected to be outstanding during 2002 (not including the effect of any
potential equity offerings), we project that this goal would translate into cash distributions to partners
increasing by approximately $46 million over the amounts paid during 2001. The number of distribution-Units
projected to be outstanding during 2002 includes the conversion of 19.0 million non-distribution bearing Special
Units owned by Shell into an equal amount of distribution-bearing Common Units.
Our distribution rate is supported by prospective and historical cumulative cash flow since our IPO in July
1998. From our IPO through August 2002, we generated $849.6 million in cash that was available for distribution to
Unitholders, of which $573.3 million was paid to Unitholders (including the second quarter of 2002 distribution
paid on August 12, 2002). Our policy has been to retain and reinvest the difference of $276.3 million (the
"excess cash flow") into projects that we anticipate will be accretive in terms of cash flow to our Unitholders
over time. This policy has helped us to maintain a strong financial presence in the markets we serve by
minimizing debt and using the excess cash flow to expand the partnership through internal growth and acquisitions.
We believe that all cash distributions will be paid out of operating cash flows over the long-term; however, from
time to time, we may temporarily borrow under our bank credit facilities for the purpose of paying distributions
until the full cash flow impact of our operations are realized.
PAGE 69
Capital spending. At June 30, 2002, we had $6.8 million in outstanding purchase commitments attributable to
capital projects. Of this amount, $5.1 million is related to the construction of assets that will be recorded as
property, plant and equipment and $1.7 million is associated with capital projects of our unconsolidated
affiliates which will be recorded as additional investments.
During the first six months of 2002, our capital expenditures were $26.8 million. For the remainder of 2002, we
expect our capital spending to approximate $8.1 million of which $5.7 million is forecasted for our Pipelines
segment. Our unconsolidated affiliates forecast a combined $13.9 million in capital expenditures during the
remainder of 2002 of which we expect our share to be approximately $4.8 million, the majority of which relate to
expansion projects on our Gulf of Mexico natural gas pipeline systems. These outlays will be recorded as
additional investments in unconsolidated affiliates.
Our debt obligations
Our debt consisted of the following at:
June 30, December 31,
2002 2001
---------------------------------------
Borrowings under:
Senior Notes A, 8.25% fixed rate, due March 2005 $ 350,000 $350,000
MBFC Loan, 8.70% fixed rate, due March 2010 54,000 54,000
Senior Notes B, 7.50% fixed rate, due February 2011 450,000 450,000
Multi-Year Credit Facility, due November 2005 230,000
364-Day Credit Facility, due November 2002 (a) 138,000
---------------------------------------
Total principal amount 1,222,000 854,000
Unamortized balance of increase in fair value related to
hedging a portion of fixed-rate debt 1,895 1,653
Less unamortized discount on:
Senior Notes A (99) (117)
Senior Notes B (244) (258)
Less current maturities of debt - -
---------------------------------------
Long-term debt $1,223,552 $855,278
=======================================
(a) Under the terms of this facility, the Operating Partnership has the option to convert this facility into a
term loan due November 15, 2003. Management intends to refinance this obligation with a similar obligation at or
before maturity.
Debt associated with Mapletree and E-Oaktree acquisitions. The above table does not reflect the $1.2
billion senior unsecured 364-day term loan entered into by the Operating Partnership to fund the acquisition of
indirect interests in the Mid-America and Seminole pipelines from affiliates of Williams on July 31, 2002. The
lenders under this facility are Wachovia Bank, National Association; Lehman Brothers Bank, FSB; Lehman Commercial
Paper Inc. and Royal Bank of Canada. As defined within the credit agreement, the loan will generally bear interest
at either (i) the greater of (a) the Prime Rate or (b) the Federal Funds Effective Rate plus one-half percent or
(ii) a Eurodollar rate, with any rate in effect being increased by an appropriate applicable margin. The credit
agreement contains various affirmative and negative covenants applicable to the Operating Partnership similar to
those required under our Multi-Year and 364-Day Credit Facility agreements (as defined within the second and
third amendments to these revolving credit facilities, see "Covenants" below). The $1.2 billion term loan
is guaranteed by Enterprise Products Partners L.P. through an unsecured guarantee. The loan will be repaid as
follows:$150 million due on December 31, 2002, $450 million on March 31, 2003 and $600 million on July 30, 2003.
On August 1, 2002, Seminole Pipeline Company had $60 million in senior unsecured notes due in December 2005. The
principal amount of these notes amortize by $15 million each December 1 through 2005. In accordance with GAAP,
this debt will be consolidated on our balance sheet because of our 98% controlling interest in E-Oaktree, LLC,
which owns 80% of Seminole Pipeline Company.
PAGE 70
Letters of credit. At June 30, 2002, we had a total of $75 million of standby letters of credit capacity
under our Multi-Year Credit Facility of which $9.4 million was outstanding.
Parent-subsidiary guarantees. Enterprise Products Partners L.P. also acts as guarantor of the Operating
Partnership's other debt obligations. This parent-subsidiary guaranty provision exists under our Senior Notes,
MBFC Loan, Multi-Year and 364-Day Credit Facility. The consolidated financial statements of both the Company and
Operating Partnership are included as part of this report on Form 10-Q.
Increased borrowing limits under revolving credit facilities. In April 2002, we increased the amount that
we can borrow under the Multi-Year Credit Facility by $20 million and the 364-Day Credit Facility by $80 million,
up to an amount not exceeding $500 million in the aggregate for both facilities. At June 30, 2002, we had
borrowed a total of $368 million under these two facilities.
Covenants. The indentures under which the Senior Notes and the MBFC Loan were issued contain various
restrictive covenants. We were in compliance with these covenants at June 30, 2002.
On April 24, 2002, certain covenants of our Multi-Year and 364-Day Credit Facilities were amended to allow for
the commodity hedging losses we incurred during the first four months of 2002. As defined within the second
amendment to each of these loan agreements, the changes included allowing us to exclude from the calculation of
Consolidated EBITDA up to $50 million in losses resulting from hedging NGLs that utilized natural gas-based
financial instruments entered into on or prior to April 24, 2002. This exclusion applies to our quarterly
Consolidated EBITDA calculations in which the earnings impact of such specific instruments were recognized. This
provision allows for $45.1 million to be added back to Consolidated EBITDA for the first quarter of 2002 and $4.9
million to be added back for the second quarter of 2002. Due to the rolling four-quarter nature of the
Consolidated EBITDA calculation, this provision will affect our financial covenants through the first quarter of
2003. In addition, the second amendment temporarily raised the maximum ratio allowed under the Consolidated
Indebtedness to Consolidated EBITDA ratio for the rolling-four quarter period ending September 30, 2002 (this
provision was superseded by the third amendment to these loan agreements as noted in the following paragraph).
On July 31, 2002, certain covenants of our Multi-Year and 364-Day Credit Facilities were further amended to allow
for increased financial flexibility in light of the Mapletree and E-Oaktree acquisitions. As defined within the
third amendment to each of these loan agreements, the maximum ratio of Consolidated Indebtedness to Consolidated
EBITDA allowed by our lenders was increased as follows from that noted in the second amendment issued in April
2002:
Changes made to the
Consolidated Indebtedness to Consolidated EBITDA Ratio
- ---------------------------------------------------------------------------
Maximum Ratio Allowed
------------------------------------------
Calculation made for Old provisions New provisions
the rolling four-quarter under 2nd under 3rd
period ending Amendment Amendment
- ---------------------------------------------------------------------------
September 30, 2002 4.50 to 1.0 6.00 to 1.0
December 31, 2002 4.00 to 1.0 5.25 to 1.0
March 31, 2003 4.00 to 1.0 5.25 to 1.0
June 30, 2003 4.00 to 1.0 4.50 to 1.0
September 30, 2003 and 4.00 to 1.0 4.00 to 1.0
for each rolling-four
quarter period thereafter
In addition, the negative covenant on Indebtedness (as defined within the Multi-Year and 364-Day credit
agreements) was amended to permit the Seminole Pipeline Company indebtedness assumed in connection with the
acquisition of E-Oaktree.
We were in compliance with the covenants of our Multi-Year and 364-Day revolving credit agreements at June 30,
2002.
PAGE 71
Summary of contractual obligations and material commercial commitments
The following table summarizes our contractual obligations and material purchase and other commitments for the
periods shown. The values shown in the table are as of June 30, 2002 with the exception that long-term debt
includes those obligations incurred or assumed on August 1, 2002 in connection with the Mapletree and E-Oaktree
acquisitions.
Contractual Obligation 2004 2006
or Material Commercial through through After
Commitment Total 2002 2003 2005 2007 2007
- ----------------------------------------------------------------------------------------------------------------------------
Contractual Obligation (expressed in
terms of millions of dollars payable
per period:)
Long-term debt $2,482.0 $165.0 $1,203.0 $ 610.0 $504.0
Operating leases $ 16.0 $ 2.7 $ 5.1 $ 5.0 $0.6 $ 2.6
Capital spending commitments:
Property, plant and equipment $ 5.1 $ 5.1
Investments in unconsolidated
affiliates $ 1.7 $ 1.7
Other commitments (expressed in terms
of millions of dollars potentially
payable per period):
Letters of Credit under Multi-Year
Credit Facility $ 9.4 $ 9.4
Other Material Contractual Obligations
(Purchase commitments expressed
in terms of minimum volumes
under contract per period:)
NGLs (MBbls) 26,810 6,415 10,371 9,684 340
Natural gas (BBtus) 135,174 6,863 13,725 25,991 25,595 63,000
Long-term debt. Long-term debt reflects amounts due under our Senior Notes A and B, the MBFC Loan and our
two revolving credit facilities. Of the $138 million outstanding under the 364-Day Credit Facility, management is
evaluating its refinancing alternatives regarding amounts due in November 2002 under the 364-Day Credit
Facility. Management intends to refinance this obligation with a similar obligation at or before maturity.
As noted previously, we have included the aggregate $1.26 billion increase in debt associated with the Mapletree
and E-Oaktree acquisitions which occurred on July 31, 2002. The debt associated with these acquisitions consists
of (a) the $1.2 billion 364-Day term loan we incurred to pay affiliates of Williams for these businesses plus (b)
the $60 million in debt principal outstanding on Seminole's balance sheet at acquisition date. The $1.2 billion
364-Day term loan will be repaid as follows:$150 million due on December 31, 2002, $450 million on March 31, 2003
and $600 million on July 30, 2003. For additional information regarding these new debt obligations, see "Our
debt obligations" beginning on page 70 and "Acquisitions" beginning on page 69.
Operating leases. We lease certain equipment and processing facilities under noncancelable and cancelable
operating leases. The amounts shown in the table above represent minimum future rental payments due on such leases
with terms in excess of one year. The amounts shown reflect additional operating lease commitments arising from
the Diamond-Koch acquisitions in January and February 2002.
PAGE 72
Letters of Credit under our Multi-Year Credit Facility. Our letters of credit increased from $2.4 million
at December 31, 2001 to $9.4 million at June 30, 2002 primarily due to letter of credit requirements associated
with our purchase of hydrocarbon imports. As of August 7, 2002, our letters of credit were $2.2 million.
Recent accounting developments
In June 2001, the FASB issued two new pronouncements: SFAS No. 141, "Business Combinations", and SFAS No. 142,
"Goodwill and Other Intangible Assets". SFAS No. 141 prohibits the use of the pooling-of-interests method for
business combinations initiated after June 30, 2001 and also applies to all business combinations accounted for
by the purchase method that are completed after June 30, 2001. There are also transition provisions that apply to
business combinations completed before July 1, 2001, that were accounted for by the purchase method. SFAS No. 142
was effective for our fiscal year that began January 1, 2002 for all goodwill and other intangible assets
recognized in our consolidated balance sheet at that date, regardless of when those assets were initially
recognized.
At December 31, 2001, our intangible assets were comprised of the values associated with the Shell natural gas
processing agreement and the goodwill related to the 1999 MBA acquisition. In accordance with SFAS No. 141, we
reclassified the MBA goodwill to a separate line item on our consolidated balance sheet apart from the Shell
contract. Based upon our interpretation of SFAS No. 142, the value of the Shell natural gas processing agreement
will continue to be amortized over its remaining contract term of approximately 18 years; however, amortization
of the MBA goodwill will cease. The MBA goodwill will be subject to periodic impairment testing in accordance
with SFAS No. 142 due to its indefinite life. For additional information regarding our intangible assets and
goodwill (including additions to both classes of assets as a result of the Diamond-Koch acquisitions), see Note 6.
In accordance with the transition provisions of SFAS No. 142, we have completed an impairment review of
the December 31, 2001 MBA goodwill balance using a fair value methodology. Professionals in the business valuation
industry were consulted regarding the assumptions and techniques used in our analysis. As a result of this
review, no impairment loss was indicated. Any subsequent impairment losses stemming from future goodwill
impairment studies will be reflected as a component of operating income in the Statements of Consolidated
Operations.
In addition to SFAS No. 141 and No. 142, the FASB also issued SFAS No. 143, "Accounting for Asset Retirement
Obligations", in June 2001. This statement establishes accounting standards for the recognition and measurement of
a liability for an asset retirement obligation and the associated asset retirement cost. This statement is
effective for our fiscal year beginning January 1, 2003. We are evaluating the provisions of this statement.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets".
This statement addresses financial accounting and reporting for the impairment and/or disposal of long-lived
assets. We adopted this statement effective January 1, 2002 and determined that it did not have any significant
impact on our financial statements as of that date.
In April 2002, the FASB issued SFAS No. 145, "Rescission of SFAS Statements No. 4, 44, and 64, Amendment of SFAS
No. 13, and Technical Corrections." The purpose of this statement is to update, clarify and simplify existing
accounting standards. We adopted this statement effective April 30, 2002 and determined that it did not have any
significant impact on our financial statements as of that date.
In July 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities."
This standard requires companies to recognize costs associated with exit or disposal activities when they are
incurred rather than at the date of a commitment to exit or disposal plan. Examples of costs covered by the
standard include lease termination costs and certain employee severance costs that are associated with a
restructuring, discontinued operation, plant closing, or other exit or disposal activity. Previous accounting
guidance was provided by EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits
and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring). "SFAS No. 146 replaces
Issue 94-3. SFAS No. 146 is to be applied prospectively to exit or disposal activities initiated after December
31, 2002. This statement is effective for our fiscal year beginning January 1, 2003. We are evaluating the
provisions of this statement.
PAGE 73
Uncertainties regarding our investment in BEF
We have a 33.3% ownership interest in BEF, which owns a facility currently producing MTBE. MTBE has come under
increasing scrutiny by various governmental agencies and environmental groups over the last few years because of
allegations that MTBE contaminates water supplies, causes health problems and has not been as beneficial in
reducing air pollution as originally contemplated in clean air programs. Certain states, primarily California,
have moved to ban or reduce MTBE use due to these concerns. In addition, the U.S. Senate, in April 2002, passed
an energy bill that includes a total ban on the use of MTBE, effective in four years. The Senate bill now goes to
a conference committee with the U.S. House of Representatives for resolution. The U.S. House of Representatives
energy bill, which passed in August 2001, contains no such ban. We can give no assurance as to whether the
federal government or individual states will ultimately adopt legislation banning the use of MTBE.
In April 2002, a jury in California found three energy companies liable for polluting Lake Tahoe's drinking water
with MTBE. While this decision sets no legal precedent, this was the first time that a jury has defined gasoline
containing MTBE to be a "defective product". This decision is expected to be appealed. Although this development
has no direct impact on BEF since our customer uses the MTBE we produce in its northeastern U.S. operations, it
does contribute to the overall challenging outlook regarding the long-term viability of domestic MTBE production.
In light of these developments, we and the other two partners of BEF are actively compiling a contingency plan
for the BEF facility should MTBE be banned. We are currently leaning toward a possible conversion of the facility
from MTBE production to alkylate production. We believe that if MTBE usage is banned or significantly curtailed,
the motor gasoline industry would need a substitute additive to maintain octane levels in gasoline and that
alkylate would be an attractive substitute. We are currently undergoing a more rigorous and detailed engineering
study that is expected to be completed during the third quarter of 2002, at which time a more definitive
conversion cost estimate will be available. The cost to convert the facility will depend on the type of alkylate
process chosen and level of alkylate production desired by the partnership.
Conversion of EPCO Subordinated Units to Common Units
As a result of the Company satisfying certain financial tests, 10,704,936 (or 25%) of EPCO's Subordinated Units
converted to Common Units on May 1, 2002. Should the financial criteria continue to be satisfied through the
first quarter of 2003, an additional 25% of the Subordinated Units would undergo an early conversion to Common
Units on May 1, 2003. The remaining 50% of Subordinated Units would convert on August 1, 2003 should the balance
of the conversion requirements be met. Subordinated Units have no voting rights until converted to Common
Units. The conversion(s) will have no impact upon our earnings per unit since the Subordinated Units are already
included in both the basic and fully diluted calculations.
Conversion of Shell Special Units to Common Units
In accordance with existing agreements with Shell, 19.0 million of Shell's non-distribution bearing Special Units
converted to distribution-bearing Common Units on August 1, 2002. The remaining 10.0 million Special Units will
convert to Common Units on a one-for-one basis in August 2003. These conversions have a dilutive impact on basic
earnings per Unit.
Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
We are exposed to financial market risks, including changes in commodity prices in our natural gas and NGL
businesses and in interest rates with respect to a portion of our debt obligations. We may use financial
instruments (i.e., futures, forwards, swaps, options, and other financial instruments with similar
characteristics) to mitigate the risks of certain identifiable and anticipated transactions, primarily in our
Processing segment. As a matter of policy, we do not use financial instruments for speculative (or trading)
purposes.
For additional information regarding our financial instruments, see Note 13 of the Company's Notes to Unaudited
Consolidated Financial Statements.
PAGE 74
Commodity financial instruments
Our Processing and Octane Enhancement segments are directly exposed to commodity price risk through their
respective business operations. The prices of natural gas, NGLs and MTBE are subject to fluctuations in response
to changes in supply, market uncertainty and a variety of additional factors that are beyond our control. In order
to manage the risks associated with our Processing segment, we may enter into swaps, forwards, commodity futures,
options and other commodity financial instruments with similar characteristics that are permitted by contract or
business custom to be settled in cash or with another financial instrument. The primary purpose of these risk
management activities (or hedging strategies) is to hedge exposure to price risks associated with natural gas,
NGL inventories, firm commitments and certain anticipated transactions. We do not hedge our exposure to the MTBE
markets. Also, in our Pipelines segment, we may utilize a limited number of commodity financial instruments to
manage the price Acadian Gas charges certain of its customers for natural gas.
We have adopted a financial commodity and commercial policy to manage our exposure to the risks of our natural
gas and NGL businesses. The objective of these policies is to assist us in achieving our profitability goals while
maintaining a portfolio with an acceptable level of risk, defined as remaining within the position limits
established by the General Partner. Under these policies, we enter into risk management transactions to manage
price risk, basis risk, physical risk or other risks related to our commodity positions on both a short-term
(less than one month) and long-term basis, generally not to exceed 24 months. The General Partner oversees our
hedging strategies associated with physical and financial risks (such as those mentioned previously), approves
specific activities subject to the policies (including authorized products, instruments and markets) and
establishes specific guidelines and procedures for implementing and ensuring compliance with the policies.
Our commodity financial instruments may not qualify for hedge accounting treatment under the specific guidelines
of SFAS No. 133 because of ineffectiveness. A hedge is normally regarded as effective if, among other things, at
inception and throughout the term of the financial instrument, we could expect changes in the fair value of the
hedged item to be almost fully offset by the changes in the fair value of the financial instrument. When
financial instruments do not qualify as effective hedges under the guidelines of SFAS No. 133, changes in the
fair value of these positions are recorded on the balance sheet and in earnings through mark-to-market
accounting. The use of mark-to-market accounting for these ineffective instruments results in a degree of non-cash
earnings volatility that is dependent upon changes in the underlying commodity prices.
We assess the risk of our commodity financial instrument portfolio using a sensitivity analysis model. The
sensitivity analysis performed on this portfolio measures the potential income or loss (e.g., the change in fair
value of the portfolio) based upon a hypothetical 10% movement in the underlying quoted market prices of the
commodity financial instruments outstanding at the dates noted within the following table. In general, we derive
the quoted market prices used in the model from those actively quoted on commodity exchanges (ex. NYMEX) for
instruments of similar duration. In those rare instances where prices are not actively quoted, we employ
regression analysis techniques possessing strong correlation factors.
The sensitivity analysis model takes into account the following primary factors and assumptions:
o the current quoted market price of natural gas;
o the current quoted market price of NGLs;
o changes in the composition of commodities hedged (i.e., the mix between natural gas and related NGLs);
o fluctuations in the overall volume of commodities hedged (for both natural gas and related NGL hedges
outstanding);
o market interest rates, which are used in determining the present value; and
o a liquid market for such financial instruments.
An increase in fair value of the commodity financial instruments (based upon the factors and assumptions noted
above) approximates the income that would be recognized if all of the commodity financial instruments were
settled at the dates noted within the table. Conversely, a decrease in fair value of the commodity financial
instruments would result in the recording of a loss.
PAGE 75
The sensitivity analysis model does not include the impact that the same hypothetical price movement would have
on the hedged commodity positions to which they relate. Therefore, the impact on the fair value of the commodity
financial instruments of a change in commodity prices would be offset by a corresponding gain or loss on the
hedged commodity positions, assuming:
o the commodity financial instruments function effectively as hedges of the underlying risk;
o the commodity financial instruments are not closed out in advance of their expected term; and
o as applicable, anticipated underlying transactions settle as expected.
We routinely review our outstanding financial instruments in light of current market conditions. If market
conditions warrant, some financial instruments may be closed out in advance of their contractual settlement dates
thus realizing income or loss depending on the specific exposure. When this occurs, we may enter into a new
commodity financial instrument to reestablish the economic hedge to which the closed instrument relates.
The following table shows the impact of hypothetical price movements on our commodity financial instrument
portfolio at the dates indicated:
Sensitivity Analysis for Commodity Financial Instruments Portfolio
Estimates of Fair Value ("FV") and Earnings Impact ("EI")
due to selected changes in quoted market prices at dates selected
Estimated Portfolio Value in millions of dollars at
Resulting ----------------------------------------------------
Scenario classification 12/31/01 03/31/02 06/30/02 08/01/02
- ----------------------------------------------------------------------------------------------------------------------
FV assuming no change in quoted market prices Asset (Liability) $ 5.6 $(20.8) $(11.1) $(5.5)
FV assuming 10% increase in quoted market prices Asset (Liability) $(0.3) $(30.7) $(11.3) $(5.3)
EI assuming 10% increase in quoted market prices Income (Loss) $(5.9) $ (9.9) $ (0.2) $ 0.2
FV assuming 10% decrease in quoted market prices Asset (Liability) $11.4 $(10.9) $(10.8) $(5.8)
EI assuming 10% decrease in quoted market prices Income (Loss) $ 5.8 $ 9.9 $ 0.3 $(0.3)
As the table shows, the estimated value of our commodity hedging portfolio declined from a $5.6 million asset at
December 31, 2001 to a $20.8 million payable at March 31, 2002. The negative change in value was primarily due to
an increase in natural gas prices that occurred at the end of the first quarter of 2002. The vast majority of our
hedging transactions over the last year and a half have been based on the historical relationship between natural
gas and NGL prices. This type of hedging strategy utilized the forward sale of natural gas at a fixed-price with
the expected margin on the settlement of the position offsetting or mitigating changes in the anticipated margins
on NGL merchant activities and the value of our equity NGL production.
This strategy was successful during periods of falling natural gas prices (as was the case during most of 2001)
and we chose to continue this strategy going into 2002 believing that the fundamentals of the natural gas
business indicated additional moderation in prices. Unfortunately, the price of natural gas became unstable and
rapidly increased as speculation surrounding potential natural gas shortages began to influence the market in
March 2002. As the market price of natural gas increased, our fixed positions became less and less profitable
until we were finally left in a payable position (i.e., in a loss position on these instruments). As a result, we
recognized a loss from our commodity hedging activities for the first quarter of 2002 of $45.1 million.
Due to the inherent uncertainty that was controlling the markets, management decided that it was prudent for the
Company to exit this strategy and did so by late April 2002. By the time that these positions were generally
closed out in late April, we had incurred approximately $5.7 million in additional losses; thus, the total
commodity hedging loss for 2002 due to this strategy was approximately $50.8 million.
Of the $50.8 million in losses from this strategy recorded during 2002, $7.6 million is related to mark-to-market
income from these instruments that we recognized in the fourth quarter of 2001. The remaining $43.2 million
PAGE 76
represents our cash exposure from these losses of which $31.9 million has been paid to counterparties through
June 30, 2002. The balance of the cash payments will be made over the remainder of 2002.
The value of the portfolio at June 30, 2002 was $11.1 million payable. A movement in market prices at this date
has minimal impact on the value of the portfolio because most of the portfolio has been generally closed out as
noted above. The change in overall portfolio value primarily reflects the settlement of transactions that
occurred during the second quarter of 2002. The value of the portfolio was $5.5 million payable at August 1,
2002. The change between June 30, 2002 and August 1, 2002 is primarily the result of settlements that occurred
during July 2002.
Our current hedging strategies are limited in scope and duration. These commodity financial instruments primarily
hedge the price risk associated with certain NGL inventories and fuel costs. These instruments are short-term in
nature with settlements extending through March 2003. The market value of these instruments at June 30, 2002 was a
net payable of $0.3 million, (which is included in the $11.1 million payable market value of the overall
portfolio mentioned previously). From a cash flow sensitivity standpoint, if the commodity prices underlying these
instruments were to increase by 10% from the levels they were at on June 30, 2002, the amount we would have to
pay counterparties would increase to $0.8 million from $0.3 million. Likewise, if the underlying prices decreased
by 10%, we would receive cash of $0.1 million from counterparties as opposed to paying $0.3 million. These amounts
do not reflect the degree to which the cash flows of the hedged transaction would be oppositely affected by the
change in prices. A variety of factors influence whether or not our hedging strategies are successful.
Interest rate swaps
Our interest rate exposure results from variable-rate borrowings from commercial banks and fixed-rate borrowings
pursuant to the Company's Senior Notes and MBFC Loan. We manage a portion of our exposure to changes in interest
rates by utilizing interest rate swaps. The objective of holding interest rate swaps is to manage debt service
costs by converting a portion of fixed-rate debt into variable-rate debt or a portion of variable-rate debt into
fixed-rate debt. An interest rate swap, in general, requires one party to pay a fixed-rate on the notional amount
while the other party pays a floating-rate based on the notional amount.
The General Partner oversees the strategies associated with financial risks and approves instruments that are
appropriate for our requirements. At June 30, 2002, we had one interest rate swap outstanding having a notional
amount of $54 million extending through March 2010. Under this agreement, we exchanged a fixed-rate of 8.70% for
a market-based variable-rate. If the counterparty elects to do so, it may terminate this swap in March 2003.
We recognized income of $0.7 million and $0.8 million for the three and six months ended June 30, 2002,
respectively, that is treated as a reduction of interest expense in our Statements of Consolidated Operations. The
fair value of the interest rate swap at June 30, 2002 was a receivable of $3.1 million. This fair value would
decrease slightly if quoted market interest rates were to increase by 10%.
PAGE 77
Part II, Other Information
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits.
2.1 Purchase and Sale Agreement between Coral Energy, LLC and Enterprise Products Operating L.P. dated as of
September 22, 2000. (Exhibit 10.1 to the Company's Form 8-K filed on September 26, 2000).
2.2 Purchase and Sale Agreement dated as of January 16, 2002 by and between Diamond-Koch, L.P. and
Diamond-Koch III, L.P. and Enterprise Products Texas Operating L.P. (Exhibit 10.1 to the Company's Form
8-K filed February 8, 2002).
2.3 Purchase and Sale Agreement dated as of January 31, 2002 by and between D-K Diamond-Koch, L.L.C.,
Diamond-Koch, L.P. and Diamond-Koch III, L.P. as Sellers, and Enterprise Products Operating L.P., as
Buyer. (Exhibit 10.2 to the Company's Form 8-K filed February 8, 2002).
2.4 Purchase Agreement dated as of July 31, 2002 by and between E-Birchtree, LLC and E-Cypress, LLC (Exhibit
2.1 to the Company's Form 8-K filed August 12, 2002).
2.5 Purchase Agreement dated as of July 31, 2002 by and between E-Birchtree, LLC and Enterprise Products
Operating L.P. (Exhibit 2.2 to the Company's Form 8-K filed August 12, 2002).
3.1 Form of Amended and Restated Agreement of Limited Partnership of Enterprise Products Operating L.P.
(Exhibit 3.2 to the Company's Registration Statement of Form S-1/A, File No. 333-52537, filed on July
21, 1998).
3.2 First Amended and Restated Limited Liability Company Agreement of Enterprise Products GP, LLC dated
September 17, 1999. (Exhibit 99.8 on the Company's Form 8-K/A-1 filed October 27, 1999).
3.3* Third Amended and Restated Agreement of Limited Partnership of Enterprise Products Partners L.P. dated
May 15, 2002.
3.4* Amendment No. 1 to Third Amended and Restated Agreement of Limited Partnership of Enterprise Products
Partners L.P. dated August 7, 2002.
4.1 Form of Common Unit certificate. (Exhibit 4.1 to the Company's Registration Statement on Form S-1/A, File
No. 333-52537, filed on July 21, 1998).
4.2 Unitholder Rights Agreement among Tejas Energy LLC, Tejas Midstream Enterprises, LLC, Enterprise
Products Partners L.P., Enterprise Products Operating L.P., Enterprise Products Company, Enterprise
Products GP, LLC and EPC Partners II, Inc. dated September 17, 1999. (The Company incorporates by
reference the above document included as Exhibit "C" to the Schedule 13D filed September 27, 1999 by
Tejas Energy, LLC).
4.3 Contribution Agreement by and among Tejas Energy LLC, Tejas Midstream Enterprises, LLC, Enterprise
Products Partners L.P., Enterprise Products Operating L.P., Enterprise Products Company, Enterprise
Products GP, LLC and EPC Partners II, Inc. dated September 17, 1999. (The Company incorporates by
reference the above document included as Exhibit "B" to the Schedule 13 D filed September 27, 1999 by
Tejas Energy, LLC).
4.4 Registration Rights Agreement between Tejas Energy LLC and Enterprise Products Partners L.P. dated
September 17, 1999. (The Company incorporates by reference the above document included as Exhibit "E" to
the Schedule 13 D filed September 27, 1999 by Tejas Energy, LLC).
PAGE 78
4.5 Form of Indenture dated as of March 15, 2000, among Enterprise Products Operating L.P., as Issuer,
Enterprise Products Partners L.P., as Guarantor, and First Union National Bank, as Trustee. (Exhibit 4.1
on the Company's Form 8-K filed March 10, 2000).
4.6 Form of Global Note representing $350 million principal amount of 8.25% Senior Notes due 2005 (the
"Senior Notes A"). (Exhibit 4.2 on the Company's Form 8-K filed March 10, 2000).
4.7 $250 million Multi-Year Revolving Credit Agreement (the "Multi-Year Credit Facility") among Enterprise
Products Operating L.P., First Union National Bank, as administrative agent; Bank One, NA, as
documentation agent; and The Chase Manhattan Bank, as syndication agent and the Several Banks from time
to time parties thereto dated November 17, 2000. (Exhibit 4.2 on the Company's Form 8-K filed January 25,
2001).
4.8 $150 Million 364-Day Revolving Credit Agreement (the "364-Day Credit Facility") among Enterprise
Products Operating L.P. and First Union National Bank, as administrative agent; Bank One, NA, as
documentation agent; and The Chase Manhattan Bank, as syndication agent and the Several Banks from time
to time parties thereto dated November 17, 2000. (Exhibit 4.3 on the Company's Form 8-K filed January 25,
2001).
4.9 Guaranty Agreement (relating to the Multi-Year Credit Facility) by Enterprise Products Partners L.P. in
favor of First Union National Bank, as administrative agent dated November 17, 2000.(Exhibit 4.4 on the
Company's Form 8-K filed January 25, 2001).
4.10 Guaranty Agreement (relating to the 364-Day Credit Facility) by Enterprise Products Partners L.P. in
favor of First Union National Bank, as administrative agent dated November 17, 2000. (Exhibit 4.5 on the
Company's Form 8-K filed January 25, 2001).
4.11 Form of Global Note representing $450 million principal amount of 7.50% Senior Notes due 2011 (the
"Senior Notes B"). (Exhibit 4.1 to the Company's Form 8-K filed January 25, 2001).
4.12 First Amendment to Multi-Year Credit Facility dated April 19, 2001. (Exhibit 4.12 to the Company's Form
10-Q filed May 14, 2001).
4.13 First Amendment to 364-Day Credit Facility dated November 6, 2001, effective as of November 16, 2001.
(Exhibit 4.13 to the Company's Form 10-K filed March 21, 2002).
4.14 Second Amendment and Supplement to Multi-Year Credit Facility dated April 24, 2002.
4.15 Second Amendment and Supplement to 364-Day Credit Facility dated April 24, 2002.
4.16 Third Amendment and Supplement to Multi-Year Credit Facility dated July 31, 2002. (Exhibit 4.1 to the
Company's Form 8-K filed August 12, 2002).
4.17 Third Amendment and Supplement to 364-Day Credit Facility dated July 31, 2002. (Exhibit 4.2 to the
Company's Form 8-K filed August 12, 2002).
4.18 $1.2 billion 364-Day Term Loan Credit Agreement among Enterprise Products Operating L.P.; Wachovia Bank,
National Association, as administrative agent; Lehman Commercial Paper Inc., as co-syndication agent;
and the Royal Bank of Canada, as co-syndication agent and arranger dated July 31, 2002. (Exhibit 4.3 to
the Company's Form 8-K filed August 12, 2002).
4.19 Guaranty Agreement (relating to the $1.2 billion 364-Day Term Loan Credit Agreement) by Enterprise
Products Partners L.P. in favor of Wachovia Bank, National Association, as administrative agent dated
July 31, 2002. (Exhibit 4.4 to the Company's Form 8-K filed August 12, 2002).
PAGE 79
12.1* Computation of ratio of earnings to fixed charges for the six months ended June 30, 2002 and each of the
five years ended December 31, 2001, 2000, 1999, 1998 and 1997 for Enterprise Products Partners L.P.
12.2* Computation of ratio of earnings to fixed charges for the six months ended June 30, 2002 and each of the
five years ended December 31, 2001, 2000, 1999, 1998 and 1997 for Enterprise Products Operating L.P.
* An asterisk indicates that an exhibit is filed in conjunction with this report. All other documents are
incorporated by reference as indicated in their descriptions.
No material contracts have been entered into during the first six months of 2002.
(b) Reports on Form 8-K.
On April 2, 2002, we filed a Form 8-K that noted a press release declaring our first quarter of 2002 distribution
rate of $0.67 per Common Unit (on a pre-split basis).
PAGE 80
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrants have
duly caused this report to be signed on their behalf by the undersigned thereunto duly authorized, in the City of
Houston, State of Texas on August 13, 2002.
ENTERPRISE PRODUCTS PARTNERS L.P.
(A Delaware Limited Partnership)
ENTERPRISE PRODUCTS OPERATING L.P.
(A Delaware Limited Partnership)
By: Enterprise Products GP, LLC,
As General Partner for both registrants
By: /s/ Michael J. Knesek
Name: Michael J. Knesek
Title: Vice President, Controller and Principal Accounting
Officer of the General Partner
THIRD AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
ENTERPRISE PRODUCTS PARTNERS L.P.
TABLE OF CONTENTS
Page
------------------
ARTICLE I
DEFINITIONS
1.1 Definitions..............................................................................................2
1.2 Construction.............................................................................................2
ARTICLE II
ORGANIZATION
2.1 Formation................................................................................................2
2.2 Name.....................................................................................................2
2.3 Registered Office; Registered Agent; Principal Office; Other Offices.....................................2
2.4 Purpose and Business.....................................................................................3
2.5 Powers...................................................................................................3
2.6 Power of Attorney........................................................................................3
2.7 Term.....................................................................................................4
2.8 Title to Partnership Assets..............................................................................4
ARTICLE III
RIGHTS OF LIMITED PARTNERS
3.1 Limitation of Liability..................................................................................5
3.2 Management of Business...................................................................................5
3.3 Outside Activities of the Limited Partners...............................................................5
3.4 Rights of Limited Partners...............................................................................5
ARTICLE IV
CERTIFICATES; RECORD HOLDERS; TRANSFER OF PARTNERSHIP INTERESTS;
REDEMPTION OF PARTNERSHIP INTERESTS
4.1 Certificates.............................................................................................6
4.2 Mutilated, Destroyed, Lost or Stolen Certificates........................................................6
4.3 Record Holders...........................................................................................7
4.4 Transfer Generally.......................................................................................7
4.5 Registration and Transfer of Limited Partner Interests...................................................8
4.6 Transfer of General Partner Interest.....................................................................8
4.7 Restrictions on Transfers................................................................................9
4.8 Citizenship Certificates; Non-citizen Assignees.........................................................10
4.9 Redemption of Partnership Interests of Non-citizen Assignees............................................10
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTEREST
5.1 Prior Contributions.....................................................................................12
5.2 Continuation of General Partner and Limited Partner Interests; Initial Offering; Issuance of Class A
Special Units; Contributions by the General Partner.....................................................12
5.3 Contributions by the Underwriters.......................................................................12
5.4 Interest and Withdrawal.................................................................................13
5.5 Capital Accounts........................................................................................13
5.6 Issuances of Additional Partnership Securities..........................................................15
5.7 Limitations on Issuance of Additional Partnership Securities............................................16
5.8 Conversion of Subordinated Units........................................................................17
5.9 Limited Preemptive Right................................................................................19
5.10 Splits and Combinations.................................................................................19
5.11 Fully Paid and Non-Assessable Nature of Limited Partner Interests.......................................19
5.12 Creation and Conversion of Class A Special Units........................................................19
PAGE i
ARTICLE VI
ALLOCATIONS AND DISTRIBUTIONS
6.1 Allocations for Capital Account Purposes................................................................20
6.2 Allocations for Tax Purposes............................................................................27
6.3 Requirement and Characterization of Distributions; Distributions to Record Holders......................28
6.4 Distributions of Available Cash from Operating Surplus..................................................29
6.5 Distributions of Available Cash from Capital Surplus....................................................30
6.6 Adjustment of Minimum Quarterly Distribution and Target Distribution Levels.............................31
6.7 Special Provisions Relating to the Holders of Subordinated Units and Class A Special Units..............31
6.8 Entity-Level Taxation...................................................................................32
ARTICLE VII
MANAGEMENT AND OPERATION OF BUSINESS
7.1 Management..............................................................................................32
7.2 Certificate of Limited Partnership......................................................................34
7.3 Restrictions on General Partner's Authority.............................................................34
7.4 Reimbursement of the General Partner....................................................................35
7.5 Outside Activities......................................................................................35
7.6 Loans from the General Partner; Loans or Contributions from the Partnership; Contracts with Affiliates;
Certain Restrictions on the General Partner.............................................................36
7.7 Indemnification.........................................................................................38
7.8 Liability of Indemnitees................................................................................39
7.9 Resolution of Conflicts of Interest.....................................................................39
7.10 Other Matters Concerning the General Partner............................................................41
7.11 Purchase or Sale of Partnership Securities..............................................................41
7.12 Registration Rights of the General Partner and its Affiliates...........................................41
7.13 Reliance by Third Parties...............................................................................43
ARTICLE VIII
BOOKS, RECORDS, ACCOUNTING AND REPORTS
8.1 Records and Accounting..................................................................................44
8.2 Fiscal Year.............................................................................................44
8.3 Reports.................................................................................................44
ARTICLE IX
TAX MATTERS
9.1 Tax Returns and Information.............................................................................44
9.2 Tax Elections...........................................................................................44
9.3 Tax Controversies.......................................................................................45
9.4 Withholding.............................................................................................45
ARTICLE X
ADMISSION OF PARTNERS
10.1 Admission of Initial Limited Partners...................................................................45
10.2 Admission of Substituted Limited Partner................................................................45
10.3 Admission of Successor General Partner..................................................................46
10.4 Admission of Additional Limited Partners................................................................46
10.5 Amendment of Agreement and Certificate of Limited Partnership...........................................46
PAGE ii
ARTICLE XI
WITHDRAWAL OR REMOVAL OF PARTNERS
11.1 Withdrawal of the General Partner.......................................................................46
11.2 Removal of the General Partner..........................................................................48
11.3 Interest of Departing Partner and Successor General Partner.............................................48
11.4 Termination of Subordination Period, Conversion of Subordinated Units and Extinguishment of Cumulative
Common Unit Arrearages..................................................................................49
11.5 Withdrawal of Limited Partners..........................................................................49
ARTICLE XII
DISSOLUTION AND LIQUIDATION
12.1 Dissolution.............................................................................................49
12.2 Continuation of the Business of the Partnership After Dissolution.......................................50
12.3 Liquidator..............................................................................................50
12.4 Liquidation.............................................................................................51
12.5 Cancellation of Certificate of Limited Partnership......................................................51
12.6 Return of Contributions.................................................................................52
12.7 Waiver of Partition.....................................................................................52
12.8 Capital Account Restoration.............................................................................52
ARTICLE XIII
AMENDMENT OF PARTNERSHIP AGREEMENT; MEETINGS; RECORD DATE
13.1 Amendment to be Adopted Solely by the General Partner...................................................52
13.2 Amendment Procedures....................................................................................53
13.3 Amendment Requirements..................................................................................53
13.4 Special Meetings........................................................................................55
13.5 Notice of a Meeting.....................................................................................55
13.6 Record Date.............................................................................................55
13.7 Adjournment.............................................................................................55
13.8 Waiver of Notice........................................................................................55
13.9 Quorum..................................................................................................55
13.10 Conduct of a Meeting....................................................................................56
13.11 Action Without a Meeting................................................................................56
13.12 Voting and Other Rights.................................................................................56
ARTICLE XIV
MERGER
14.1 Authority...............................................................................................57
14.2 Procedure for Merger or Consolidation...................................................................57
14.3 Approval by Limited Partners of Merger or Consolidation.................................................58
14.4 Certificate of Merger...................................................................................59
14.5 Effect of Merger........................................................................................59
ARTICLE XV
RIGHT TO ACQUIRE LIMITED PARTNER INTERESTS
15.1 Right to Acquire Limited Partner Interests..............................................................59
ARTICLE XVI
GENERAL PROVISIONS
16.1 Addresses and Notices...................................................................................61
16.2 Further Action..........................................................................................61
16.3 Binding Effect..........................................................................................61
16.4 Integration.............................................................................................61
16.5 Creditors...............................................................................................61
16.6 Waiver..................................................................................................61
16.7 Counterparts............................................................................................61
16.8 Applicable Law..........................................................................................61
16.9 Invalidity of Provisions................................................................................62
16.10 Consent of Partners.....................................................................................62
PAGE iii
THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF ENTERPRISE PRODUCTS PARTNERS L.P.
THIS THIRD AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF ENTERPRISE PRODUCTS PARTNERS L.P. dated
as of May 15, 2002, is entered into by and among Enterprise Products GP, LLC, a Delaware limited liability
company, as the General Partner, and the Limited Partners as provided herein. In consideration of the covenants,
conditions and agreements contained herein, the parties hereto hereby agree as follows:
PAGE 1
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 the Limited Partners 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 as of June 1, 1998, as amended by that certain Amended and Restated Agreement of Limited Partnership of
Enterprise Products Partners L.P., dated as of July 31, 1998, as amended by that certain Second Amended and
Restated Agreement of Limited Partnership of Enterprise Products Partners L.P., dated September 17, 1999, as
amended by Amendment No. 1, dated as of June 9, 2000, to the Second Amended and Restated Agreement of Limited
Partnership of Enterprise Products Partners L.P. The purpose of this amendment and restatement is to reflect the
various numerical changes resulting from the two-for-one split in Common Units, Subordinated Units and Class A
Special Units (the "Unit Split") declared by the General Partner on February 27, 2002, having a record date of
April 30, 2002 and a payment date of May 15, 2002. The Unit Split was effectuated in accordance with Section
5.10 of this Agreement, and all such numerical changes are reflected as if the Unit Split had occurred at the
beginning of the Partnership. Subject to the provisions of this Agreement, the General Partner and the Limited
Partners 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 P.O. Box 4324, Houston, Texas 77210-4324 or
such other place as the General Partner may from time to time designate by notice to the Limited Partners. The
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 P.O. Box 4324,
Houston, Texas 77210-4324 or such other place as the General Partner may from time to time designate by notice to
the Limited Partners.
PAGE 2
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
PAGE 3
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,
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
Page 4
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 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;
PAGE 5
(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.
(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, Subordinated Units or Class A
Special 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. Subject to the
requirements of Section 6.7(b), the Partners holding Certificates evidencing Class A Special Units may exchange
such Certificates for Certificates evidencing Common Units on or after the date on which such Class A Special
Units are converted into Common Units pursuant to the terms of Section 5.12.
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.
PAGE 6
(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.
(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,
PAGE 7
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 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.
PAGE 8
(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 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.
Page 9
(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), and the transfer of a Class A Special Unit that has been
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 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.
PAGE 10
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.
PAGE 11
ARTICLE V
CAPITAL CONTRIBUTIONS AND ISSUANCE OF PARTNERSHIP INTEREST
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 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; Initial Offering; Issuance of Class A
Special Units; Contributions by the General Partner.
(a) 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 was converted into
67,105,830 Common Units and 42,819,740 Subordinated Units, and such Partnership Interest shall be
continued.
(c) All other Partnership Interests that were issued prior to the date hereof and are currently Outstanding
shall be continued.
(d) Upon the issuance of the Class A Special Units (other than the Series 2002B Class A Special Units) and
upon the issuance of any additional Limited Partner Interests by the Partnership, 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 was required to
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 issued Common Units to each Underwriter on whose behalf such Capital Contribution was 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 was required to 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
issued Common Units to each Underwriter on whose behalf such Capital Contribution was 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 were 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
24,000,000, (ii) the "Option Units" as such term is used in the Underwriting Agreement in aggregate
number up to 3,600,000 issuable upon exercise of the Over-Allotment Option pursuant to subparagraph (b)
hereof, and (iii) the 67,105,830 Common Units and 42,819,749 Subordinated Units issuable to EPC Partners
II pursuant to Section 5.2(b).
Page 12
(d) On the date hereof, Tejas shall be issued 29,000,000 Class A Special Units and be admitted as a Limited
Partner of the Partnership in exchange for certain Capital Contributions described in the Tejas
Contribution Agreement. If, but only if, the Year 2000 Performance Test is fully satisfied and met,
Tejas will be issued an additional 6,000,000 Class A Special Units in accordance with the Year 2000
Performance Test and, if, but only if, the Year 2001 Performance Test is fully satisfied and met, Tejas
will be issued an additional 6,000,000 Class A Special Units in accordance with the Year 2001
Performance Test; provided, however, that if the Year 2000 Performance Test and/or the Year 2001
Performance Test is not met, the Class A Special Units that would have been but were not issued pursuant
to such tests will be issued to Tejas in accordance with the Combined Performance Test if, but only if,
the Combined Performance Test is met. In no event shall the aggregate number of Class A Special Units
issued upon satisfaction of the Performance Tests (collectively, the "Series 2002B Class A Special
Units") exceed 12,000,000. Upon the issuance of any Series 2002B Class A Special Units pursuant to this
Section 5.3(d), the Net Agreed Value of Tejas' initial Capital Contribution shall be increased by an
amount equal to the fair market value of such Series 2002B Class A Special Units discounted at a 5.42%
rate to the date hereof.
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.
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.
PAGE 13
(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 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) 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)
or (B) a Class A Special Unit that has converted into a Common Unit pursuant to Section 5.12,
the Capital Account maintained for such Person with respect to its Subordinated Units,
converted Subordinated Units or converted Class A Special Units will (x) first, be allocated to
the Subordinated Units, converted Subordinated Units or converted Class A Special Units to be
transferred in an amount equal to the product of (1) the number of such Subordinated Units,
Page 14
converted Subordinated Units or converted Class A Special Units to be transferred and (2) the
Per Unit Capital Amount for a Common Unit, and (y) second, any remaining balance in such
Capital Account will be retained by the transferor, regardless of whether it has retained any
Subordinated Units, converted Subordinated Units or converted Class A Special Units. Following
any such allocation, the transferor's Capital Account, if any, maintained with respect to the
retained Subordinated Units, converted Subordinated Units or converted Class A Special Units,
if any, will have a balance equal to the amount allocated under clause (y) hereinabove, and the
transferee's Capital Account established with respect to the transferred Subordinated Units,
converted Subordinated Units or converted Class A Special Units will have a balance equal to
the amount allocated under clause (x) hereinabove. If the transferor has not retained any
Subordinated Units, converted Subordinated Units or converted Class A Special Units, any
remaining balance in such Capital Account will be retained by transferor, such Capital Account
interest having rights to receive distributions pursuant to Section 12.4(c) and being allocated
Net Termination Losses pursuant to Section 6.1(c)(ii)(C).
(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 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.
Page 15
(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 95,550,000 additional
Parity Units without the prior approval of the holders of a Unit Majority. The Class A Special Units
issued hereunder shall be deemed to be Parity Units. 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 Class A Special Units pursuant to
Section 5.12, (v) upon conversion of the General Partner Interest pursuant to Section 11.3(c), (vi)
pursuant to the employee benefit plans of the General Partner, EPC, the Partnership or any other Group
Member and (vii) in the event of a combination or subdivision of Common Units.
(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:
PAGE 16
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 10,704,936 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 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
Page 17
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 10,704,936 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).
PAGE 18
5.9 Limited Preemptive Right.
Except as provided in this Section 5.9, no Person shall have any preemptive, preferential or other
similar right with respect to the issuance of any Partnership Security, 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, and the number of Common Units into which Class A Special
Units are to be converted pursuant to Section 5.12) 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).
PAGE 19
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.
5.12 Creation and Conversion of Class A Special Units. Pursuant to Section 5.6, the General Partner
hereby designates and creates a special class of Units designated "Class A Special Units" and fixes the
designations, preferences and relative, participating, optional or other special rights, powers and duties of the
holders of the Class A Special Units as follows:
(a) The Class A Special Units shall be divided into four series as set forth below, and each series of Class
A Special Units shall be evidenced by a distinct Certificate issued in accordance with Section 4.1. The
number of Class A Special Units comprising each series of Class A Special Units shall automatically
convert into Common Units on a one-for-one basis on the date set forth opposite such number below (the
"Class A Special Units Conversation Dates"):
(i) 2,000,000 Series 2000 Class A Special Units - the first day following the Record Date for distribution
in respect of the Quarter ended June 30, 2000;
(ii) 10,000,000 Series 2001 Class A Special Units - the first day following the Record Date for distribution
in respect of the Quarter ended June 30, 2001;
(iii) 17,000,000 Series 2002 Class A Special Units plus the first 2,000,000 Series 2002B Class A Special
Units, if any, issued pursuant to the second sentence of Section 5.3(d) upon satisfaction of
the Performance Tests -- the first day following the Record Date for distribution in respect of
the Quarter ended June 30, 2002; and
(iv) other than the Series 2002B Class A Special Units converted pursuant to Section 5.12(a)(iii), the number
of Series 2002B Class A Special Units, if any, issued pursuant to the second sentence of
Section 5.3(d) upon satisfaction of the Performance Tests - the first day following the Record
Date for distribution in respect of the Quarter ended June 30, 2003;
provided, however, that notwithstanding the foregoing, the Class A Special Units will not convert or
be convertible into Common Units until after such time as the issuance of such Common Units has been
approved by holders of a majority of the Units (not including for this purpose the Class A Special
Units) present and entitled to vote at a meeting of Unitholders called to consider and vote upon such
issuance.
(b) Except as otherwise provided in this Section 5.12(b), upon conversion pursuant to Section 5.12(a), Class
A Special Units to be converted shall cease to remain outstanding and shall have no rights or
obligations under this Agreement. Upon a request from the General Partner, Partners holding Class A
Special Units converted pursuant to Section 5.12(a) shall surrender the Certificates evidencing such
Class A Special Units in exchange for Certificates issued in accordance with Section 4.1.
(c) Except for distributions pursuant to Section 12.4(c) and except as otherwise expressly provided in this
Agreement by reference to the Class A Special Units, the Class A Special Units shall have no voting
rights, rights to distributions, rights to allocation, rights upon dissolution and liquidation or other
rights with respect to the Partnership.
PAGE 20
(d) A Class A Special Unit that has converted into a Common Unit shall be subject to the provisions of
Section 6.7(b).
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.
(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
Unitholders holding Common Units and Subordinated Units 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 Unitholders holding Common Units and
Subordinated Units 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 Unitholders holding Common Units and Subordinated Units 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 holding Common Units and Subordinated Units
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);
PAGE 21
(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 such Partner has been allocated Net Termination Gain equal to any
such deficit balance in its Capital Account;
B. Second, if prior to the conversion of the last Outstanding Class A Special Unit, the Per Unit Capital
Amount with respect to a Class A Special Unit is higher or lower than the Per Unit
Capital Amount with respect to each Common Unit, 99% to the Unitholders holding Common
Units and Class A Special Units in the manner and amount necessary to equalize, to the
maximum extent possible, the Per Unit Capital Amount with respect to each Common Unit
and each Class A Special Unit, and 1% to the General Partner;
C. Third, 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;
D. Fourth, 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;
E. Fifth, 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 ");
F. Sixth, 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
Page 22
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 ");
G. Seventh, 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
H. 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 (and the Capital
Accounts of the Partners shall be decreased 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, 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;
B. Second, if, prior to the conversion of the last Outstanding Class A Special Unit, the Per Unit Capital
Amount with respect to a Class A Special Unit is higher or lower than the Per Unit
Capital Amount with respect to each Common Unit, 99% to the Unitholders holding Common
Units and Class A Special Units in the manner and amount necessary to equalize, to the
maximum extent possible, the Per Unit Capital Amount with respect to each Common Unit
and each Class A Special Unit, and 1% to the General Partner;
C. Third, 99% to all Unitholders holding Common Units and Class A Special Units and to holders of Capital
Account interests described in the last sentence of Section 5.5(c)(ii), in proportion
to their relative Capital Account balances and 1% to the General Partner until the
Capital Account in respect of each Common Unit and Class A Special Unit then
Outstanding has been reduced to zero; and
Page 23
D. Fourth, 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 1/99th 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
Page 24
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),
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.
Page 25
(x) Economic Uniformity. (A) With respect to any taxable period ending upon, or after, a Class A
Special Unit Conversion Date, 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 the Partner holding Class A Special Units that
have been converted to Common Units pursuant to Section 5.12, until such Partner has been
allocated an amount of gross income or gain that increases the Capital Account maintained with
respect to such converted Class A Special Units to an amount equal to the product of (1) the
number of converted Class A Special Units held by such Partner and (2) the Per Unit Capital
Amount for a Common Unit. The purpose of this allocation is to establish uniformity between
the Capital Accounts underlying converted Class A Special 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 Class A Special Units into Common Units. This
allocation method for establishing such economic uniformity will only be available if the
method for allocating the Capital Account maintained with respect to the Class A Special Units
between the transferred and retained Class A Special Units pursuant to Section 5.5(c)(ii) does
not otherwise provide such economic uniformity to the converted Class A Special Units; (B) 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 Sections 6.1(d)(iii) and 6.1(d)(x)(A), 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 (1) the number of Final Subordinated Units held by such Partner and (2) 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 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.
Page 26
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.
(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.
Page 27
(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 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.
Page 28
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;
(iv) Fourth, 99% to all Unitholders holding Common Units and all Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until there has been distributed in respect of each such
Unit then Outstanding an amount equal to the excess of the First Target Distribution over the
Minimum Quarterly Distribution for such Quarter;
Page 29
(v) Fifth, 85.8673% to all Unitholders holding Common Units and all Unitholders holding Subordinated Units,
Pro Rata, and 14.1327% to the General Partner until there has been distributed in respect of
each such 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 holding Common Units and all Unitholders holding Subordinated Units,
Pro Rata, and 24.2347% to the General Partner until there has been distributed in respect of
each such 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 holding Common Units and all Unitholders holding Subordinated
Units, 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 holding Common Units and all Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until there has been distributed in respect of each such
Unit then Outstanding an amount equal to the Minimum Quarterly Distribution for such Quarter;
(ii) Second, 99% to all Unitholders holding Common Units and all Unitholders holding Subordinated Units, Pro
Rata, and 1% to the General Partner until there has been distributed in respect of each such
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 holding Common Units and all Unitholders holding Subordinated Units,
Pro Rata, and 14.1327% to the General Partner until there has been distributed in respect of
each such 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 holding Common Units and all Unitholders holding Subordinated Units,
Pro Rata, and 24.2347% to the General Partner until there has been distributed in respect of
each such 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 holding Common Units and all Unitholders holding Subordinated
Units, 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).
Page 30
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 holding
Common Units and all Unitholders holding Subordinated Units, 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.
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 and Class A Special 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 so converted 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 or a Class A Special Unit which has converted into a Common
Unit pursuant to Section 5.8 or Section 5.12, respectively, shall not be issued a Common Unit
Certificate pursuant to Section 4.1, and shall not be permitted to transfer its converted Subordinated
Units or Class A Special 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 or Class
A Special Unit should have, as a substantive matter, like intrinsic economic and federal income tax
Page 31
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 or Class A Special Units in preparation for a transfer of
such converted Subordinated Units or Class A Special 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.
(c) Immediately upon the conversion of Class A Special Units into Common Units pursuant to Section 5.12, the
Unitholder holding a Class A Special Unit so converted 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 Class A Special Units shall remain
subject to the provisions of Sections 5.5(c)(ii), 6.1(d)(x)(A) and 6.7(b).
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 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;
Page 32
(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;
(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;
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(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.
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 (other than the Class A Special Units) or by other written
instrument executed and delivered by holders of all of the Outstanding Limited Partner Interests (other
than the Class A Special Units) 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.
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(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 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.
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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 Indemnitees 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.
Page 36
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.
Page 37
(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.
Page 38
(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.
(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.
Page 39
(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.
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
Page 40
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
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.
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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 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.
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(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 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
Page 43
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
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.
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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.
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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 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 was 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 admitted the Underwriters to the
Partnership as Initial Limited Partners in respect of the Common Units purchased by them. Upon the issuance by
the Partnership of Class A Special Units to Tejas as described in Section 5.3, the General Partner shall admit
Tejas to the Partnership as an Initial Limited Partner in respect of the Class A Special Units issued to Tejas.
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
Page 46
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 the 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;
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(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;
(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.
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11.2 Removal of the General Partner. The General Partner may be removed if such removal is approved
by Unitholders holding at least 66% of the Outstanding Units (including Units held by the General Partner and its
Affiliates but excluding Class A Special Units). 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 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.
Page 49
(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.
(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;
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(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 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
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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 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).
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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 judicial authority or contained in any federal or state statute (including the
Delaware Act) or (B) facilitate the trading of the Limited Partner Interests (including the division of
any class or classes of Outstanding Limited Partner Interests 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;
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(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. A proposed amendment that
adversely alters the powers, obligations or special rights of the Class A Special Units set forth herein shall be
effective upon its approval by the holders of a majority of the Class A Special Units. 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 to take any action shall be amended, altered, changed, repealed or rescinded in any respect
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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 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.
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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 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.
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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 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.
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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 (other than Limited
Partners holding Class A Special Units, in their capacity as such), 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.
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(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 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
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(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 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
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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 (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.
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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.
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.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
Enterprise Products Partners L.P.
(A Delaware Limited Partnership)
By: Enterprise Products GP, LLC
as General Partner
/s/ O. S. Andras
----------------
Date: President and Chief Executive Officer
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: Enterprise Products GP, LLC
General Partner, as attorney-in-fact for the Limited
Partners pursuant to the Powers of Attorney granted
pursuant to Section 2.6.
By: /s/ O. S. Andras
----------------
President and Chief Executive Officer
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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. Notwithstanding the foregoing, a Person shall only be considered an "Affiliate" of the General
Partner if such Person owns, directly or indirectly, 50% or more of the voting securities of the General Partner
or otherwise possesses the sole power to direct or cause the direction of the management and policies of the
General Partner.
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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 Third 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.
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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
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.
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"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).
"Class A Special Units" means the special class of Units designated and created pursuant to Section
5.12.
"Class A Special Units Conversion Dates" has the meaning assigned to such term in Section 5.12.
"Closing Date" means July 31, 1998.
"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).
"Combined Performance Test" shall be met if, at any time during the Production Period, Gas Production
reaches 725 billion cubic feet on a cumulative basis during the Production Period and Tejas provides written
notice to the General Partner stating that such production level has been reached during the Production Period
and which notice shall include information supporting that statement reasonably acceptable to the General Partner.
"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 or a Class A Special 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.
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"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. ` 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).
"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" means EPC Partners II, Inc., a Delaware corporation.
"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:
Proposed Project Estimated
---------------- ---------
Capital Costs
-------------
(i) Baton Rouge Fractionator $20.0 Million
(ii) Tri-State Pipeline $10.0 Milion
(iii) Wilprise Pipeline $8.0 Million
(iv) NGL Product Chiller $8.5 Million
------------
Total $46.5 Million
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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)(E).
"First Target Distribution" means $0.253 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 $0.253 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.
"Force Majeure Event" means an event during which Gas Production is reduced, in whole or in part, by
an event reasonably beyond the control of the party producing such Gas Production, including but not limited to
any event of force majeure under the Shell Processing Agreement (as defined in the Tejas Contribution Agreement)
or any of the Dedicated Leases under, and as defined in, the Shell Processing Agreement (as defined in the Tejas
Contribution Agreement).
"Gas Production" means natural gas produced from all Dedicated Leases (as defined in the Shell
Processing Agreement (as defined in the Tejas Contribution Agreement)).
"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.
"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).
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"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, the Underwriters, and Tejas, 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, Class A Special 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 $0.225 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 $0.225 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
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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
(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, with respect to Partnership Securities other than Class A Special Units,
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.
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"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.
"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, Subordinated Units, and Class A Special Units.
"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.
"Percentage Interest" means as of the date of such determination (a) with respect to Sections
6.1(a) and (b), (i) as to the General Partner, 1.0%, and (ii) as to any Unitholder or Assignee holding Common
Units or Subordinated Units, the product obtained by multiplying (A) 99% by (B) the quotient obtained by dividing
(x) the number of Common Units and Subordinated Units held by such Unitholder or Assignee by (y) the total number
of all Outstanding Common Units and Outstanding Subordinated Units, and (b) with respect to Sections other than
Sections 6.1(a) and (b), (i) as to the General Partner, 1.0%, and (ii) as to any Unitholder or Assignee holding
Units, the quotient obtained by multiplying (A) 99% by (B) the quotient obtained by dividing (x) the number of
Units held by such Unitholder or Assignee by (y) the total number of all Outstanding Units.
"Performance Tests" means the Year 2000 Performance Test, the Year 2001 Performance Test and the
Combined Performance Test.
"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.
"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.
"Production Period" means calendar years 2000 and 2001, as such periods may be extended as a result
of Force Majeure Events in accordance with the Year 2000 Performance Test and the Year 2001 Performance Test.
"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.
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"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
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)(F).
"Second Target Distribution" means $0.3085 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 $0.3085 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.
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"Series 2002B Class Special Units" has the meaning assigned to such term in Section 5.3(d).
"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
(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).
"Tejas" means Tejas Energy, LLC, a Delaware limited liability company.
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"Tejas Contribution Agreement" means the Contribution Agreement among Tejas, Tejas Midstream
Enterprises, LLC, the Partnership, the Operating Partnership, EPC, the General Partner and EPC Partners II, dated
September 17, 1999.
"Third Target Distribution" means $0.392 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 $0.392 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 July 27, 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, Subordinated Units, and Class A Special 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, 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, and each Class A Special Unit at any time
Outstanding shall represent the same fractional part of the Partnership Interests of all Limited Partners holding
Class A Special Units as each other Class A Special Unit.
"Unitholders" means the holders of Common Units, Subordinated Units, and Class A Special 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)(C).
"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).
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"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.
"Year 2000 Performance Test" shall be met if, at any point in time during calendar year 2000, as such
period shall be extended for a period of days equal to the number of days during calendar year 2000 when there is
a Force Majeure Event, Gas Production meets either of the following contingencies, and Tejas provides written
notice to the General Partner stating that such contingency has been met and which notice includes information
supporting that statement reasonably acceptable to the General Partner. The two contingencies are:
1. Gas Production being 950 million cubic feet per day for 180 days (there being no requirement for such
days to be consecutive) during calendar year 2000 as such period may be extended due to Force Majeure Events; or
2. Gas Production being 375 billion cubic feet on a cumulative basis during calendar year 2000 as such
period may be extended due to Force Majeure Events.
"Year 2001 Performance Test" shall be met if, at any point in time during calendar year 2001, as such
period shall be extended for a period of days equal to the number of days during calendar year 2001 when there is
a Force Majeure Event, Gas Production meets either of the following contingencies, and Tejas provides written
notice to the General Partner stating that such contingency has been met and which notice includes information
supporting that statement reasonably acceptable to the General Partner. The two contingencies are:
1. Gas production being 900 million cubic feet per day for 180 days (there being no requirement for such
days to be consecutive) during calendar year 2001 as such period may be extended due to Force Majeure Events; or
2. Gas Production being 350 billion cubic feet on a cumulative basis during calendar year 2001 as such
period may be extended due to Force Majeure Events.
Page 78
AMENDMENT NO. 1
TO
THIRD AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
ENTERPRISE PRODUCTS PARTNERS L.P.
This Amendment No. 1, dated as of August 7, 2002 (this "Amendment"), to the Third Amended and Restated Agreement of Limited
Partnership of Enterprise Products Partners L.P., dated as of May 15, 2002 (the "Partnership Agreement"), is entered into by and
among Enterprise Products GP, LLC, a Delaware limited liability company, as the General Partner, and the Limited Partners as
provided herein. Each capitalized term used but not otherwise defined herein shall have the meaning assigned to such term in the
Partnership Agreement.
W I T N E S S E T H:
WHEREAS, on September 1, 2001, the Board of Directors and Executive Committee of the General Partner resolved that all
Common Units purchased by the Partnership under the Common Unit Repurchase Plan approved by the General Partner on July 5, 2000,
would not be retired or cancelled but would be held by the Partnership as treasury units, and authorized certain officers of the
General Partner to perform all acts and execute all documents as they deemed necessary or advisable to implement such action; and
WHEREAS, the officers of the General Partner have determined that it is advisable to amend the Partnership Agreement to
specifically provide that Common Units reacquired by the Partnership shall be held as treasury units unless cancelled pursuant to
action by the General Partner; and
WHEREAS, on August 7, 2002, the Board of Directors and the Executive Committee of the General Partner approved this
Amendment;
NOW, THEREFORE, in consideration of the premises, the parties hereto agree as follows:
1. The first sentence of Section 7.11 of the Partnership Agreement is hereby amended to read in its entirety as
follows:
"The General Partner may cause the Partnership to purchase or otherwise acquire Partnership
Securities, such Partnership Securities shall be held by the Partnership as treasury securities
unless they are expressly cancelled by action of an appropriate officer of the General Partner;
provided that, except as permitted pursuant to Section 4.9, the General Partner may not cause any
Group Member to purchase Subordinated Units during the Subordination Period."
2. This Amendment shall be deemed effective with respect to all Common Units purchased by the Partnership after the
action taken by the General Partner on September 1, 2001, referred to above.
3. As amended hereby, the Partnership Agreement is in all respects ratified, confirmed and approved and shall remain
in full force and effect.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date first written above.
GENERAL PARTNER:
ENTERPRISE PRODUCTS GP, LLC
By: /s/ Richard H. Bachmann
Richard H. Bachmann
Executive Vice President
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: Enterprise Products GP, LLC
General Partner, as attorney-in-fact for the Limited Partners pursuant
to the Powers of Attorney granted pursuant to Section 2.6
By: /s/ Richard H. Bachmann
Richard H. Bachmann
Executive Vice President
Computation of Ratio of Earnings to Fixed Charges
for the six months ended June 30, 2002 and each of the five years ended
December 31, 2001, 2000, 1999, 1998 and 1997 for Enterprise Products Partners L.P.
(dollars in millions)
Six Months For the Year Ended December 31,
Ended
June 30 ---------------------------------------------------------------
2002 2001 2000 1999 1998 1997
------------------------------------------------------------------------------
Income (loss) before minority interest
and equity investments $(11.1) $219.3 $198.6 $108.0 $(5.5) $37.0
Add:
Fixed charges 42.2 60.3 43.7 23.5 21.5 37.6
Amortization of
capitalized interest 0.1 0.2 0.2 0.1 0.1 0.1
Distributed income
of equity investees 29.1 45.1 37.3 6.0 9.1 7.3
Less:
Capitalized interest (0.7) (2.9) (3.3) (0.2) (0.2) (2.0)
Minority interest (0.0) (2.5) (2.3) (1.2) (0.1) (0.5)
------------------------------------------------------------------------------
Total Earnings $59.6 $319.5 $274.2 $136.2 $24.9 $79.5
==============================================================================
Fixed charges:
Interest expense 37.5 49.6 33.3 16.4 15.1 25.7
Capitalized interest 0.7 2.9 3.3 0.2 0.2 2.0
Interest portion of
rental expense 4.0 7.8 7.1 6.9 6.2 9.9
------------------------------------------------------------------------------
Total $42.2 $60.3 $43.7 $23.5 $21.5 $37.6
==============================================================================
Ratio of Earnings to Fixed charges 1.41x 5.30x 6.27x 5.80x 1.16x 2.11x
==============================================================================
These computations take into account our consolidated operations and the distributed income from our equity method
investees. For purposes of these calculations, "earnings" is the amount resulting from adding and subtracting the
following items.
Add the following, as applicable: consolidated pre-tax income before minority interest and income or loss from equity
investees; fixed charges; amortization of capitalized interest; distributed income of equity investees; and our share
of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges.
From the total of the added items, subtract the following, as applicable: interest capitalized; preference security
dividend requirements of consolidated subsidiaries; and minority interest in pre-tax income of subsidiaries that have
not incurred fixed charges.
The term "fixed charges" means the sum of the following: interest expensed and capitalized; amortized premiums, discounts
and capitalized expenses related to indebtedness; an estimate of interest within rental expenses (equal to one-third of
rental expense); and preference security dividend requirements of consolidated subsidiaries.
PAGE 1
EXHIBIT 12.2
Computation of Ratio of Earnings to Fixed Charges
for the six months ended June 30, 2002 and each of the five years ended
December 31, 2001, 2000, 1999, 1998 and 1997 for Enterprise Products Operating L.P.
(dollars in millions)
Six Months For the Year Ended December 31,
Ended ---------------------------------------------------------------
June 30,
2002 2001 2000 1999 1998 1997
------------------------------------------------------------------------------
Income (loss) before minority interest
and equity investments $(10.9) $219.5 $199.1 $108.4 $ (5.5) $37.0
Add:
Fixed charges 42.2 60.3 43.7 23.5 21.5 37.6
Amortization of
capitalized interest 0.1 0.2 0.2 0.1 0.1 0.1
Distributed income
of equity investees 29.1 45.1 37.3 6.0 9.1 7.3
Less:
Capitalized interest (0.7) (2.9) (3.3) (0.2) (0.2) (2.0)
Minority interest (0.1) (0.1) (0.1) (0.1) (0.1) (0.1)
------------------------------------------------------------------------------
Total Earnings $59.7 $322.1 $276.9 $137.7 $24.9 $79.9
==============================================================================
Fixed charges:
Interest expense 37.5 49.6 33.3 16.4 15.1 25.7
Capitalized interest 0.7 2.9 3.3 0.2 0.2 2.0
Interest portion
of rental expense 4.0 7.8 7.1 6.9 6.2 9.9
------------------------------------------------------------------------------
Total $42.2 $60.3 $43.7 $23.5 $21.5 $37.6
==============================================================================
Ratio of Earnings to Fixed charges 1.42x 5.34x 6.34x 5.86x 1.16x 2.13x
==============================================================================
These computations take into account our consolidated operations and the distributed income from our equity method
investees. For purposes of these calculations, "earnings" is the amount resulting from adding and subtracting the
following items.
Add the following, as applicable: consolidated pre-tax income before minority interest and income or loss from equity
investees; fixed charges; amortization of capitalized interest; distributed income of equity investees; and our share
of pre-tax losses of equity investees for which charges arising from guarantees are included in fixed charges.
From the total of the added items, subtract the following, as applicable: interest capitalized; preference security
dividend requirements of consolidated subsidiaries; and minority interest in pre-tax income of subsidiaries that have
not incurred fixed charges.
The term "fixed charges" means the sum of the following: interest expensed and capitalized; amortized premiums,
discounts and capitalized expenses related to indebtedness; an estimate of interest within rental expenses
(equal to one-third of rental expense); and preference security dividend requirements of consolidated subsidiaries.
PAGE 2