THE INFORMATION IN THIS PRELIMINARY PROSPECTUS SUPPLEMENT IS NOT COMPLETE AND
MAY BE CHANGED. THIS PRELIMINARY PROSPECTUS SUPPLEMENT AND THE ATTACHED
PROSPECTUS ARE NOT AN OFFER TO SELL THESE SECURITIES AND WE ARE NOT SOLICITING
AN OFFER TO BUY THESE SECURITIES IN ANY STATE WHERE THE OFFER OR SALE IS NOT
PERMITTED.
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-102778
333-102778-01
SUBJECT TO COMPLETION, DATED MAY 27, 2003
PRELIMINARY PROSPECTUS SUPPLEMENT
(TO PROSPECTUS DATED APRIL 21, 2003)
[ENTERPRISE LOGO]
8,700,000 COMMON UNITS
ENTERPRISE PRODUCTS PARTNERS L.P.
$ PER COMMON UNIT
------------------
We are selling 8,700,000 common units, including 650,000 common units to be
offered to an entity or entities controlled by Dan L. Duncan, the Chairman of
our general partner, or members of Mr. Duncan's family, and 50,000 common units
to be offered to O.S. Andras, the President and Chief Executive Officer of our
general partner. We have granted the underwriters an option to purchase up to
1,305,000 additional common units to cover over-allotments.
Our common units are listed on the New York Stock Exchange under the symbol
"EPD." The last reported sales price of our common units on the New York Stock
Exchange on May 22, 2003 was $23.90 per common unit.
INVESTING IN OUR COMMON UNITS INVOLVES RISK. SEE "RISK FACTORS" BEGINNING
ON PAGE 2 OF THE ACCOMPANYING PROSPECTUS.
------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if this
prospectus supplement or the related prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
------------------
PER COMMON UNIT TOTAL
--------------- ---------------
Public Offering Price $ $
Underwriting Discount(1) $ $
Proceeds to Enterprise Products Partners (before expenses) $ $
---------------
(1) The underwriters will not receive any underwriting discount or commission on
the sale of the 650,000 common units to an entity or entities controlled by
Mr. Duncan or members of his family, nor on the sale of the 50,000 common
units to Mr. Andras.
The underwriters expect to deliver the common units to purchasers on or
about , 2003.
------------------
Joint Book-Running Managers
CITIGROUP MORGAN STANLEY
------------------
GOLDMAN, SACHS & CO.
UBS WARBURG
RAYMOND JAMES
RBC CAPITAL MARKETS
SANDERS MORRIS HARRIS
WACHOVIA SECURITIES
, 2003
[ENTERPRISE PRODUCTS PARTNERS L.P. SYSTEM MAP APPEARS HERE]
This document is in two parts. The first part is this prospectus
supplement, which describes the terms of this offering of common units. The
second part is the accompanying prospectus, which gives more general
information, some of which may not apply to the common units.
You should rely only on the information contained or incorporated by
reference in this prospectus supplement or the accompanying prospectus. We have
not authorized anyone to provide you with different information. We are not
making an offer of these securities in any state where the offer is not
permitted. You should not assume that the information contained in this
prospectus supplement or the accompanying prospectus is accurate as of any date
other than the date on the front of these documents or that any information we
have incorporated by reference is accurate as of any date other than the date of
the document incorporated by reference.
TABLE OF CONTENTS
PAGE
----
PROSPECTUS SUPPLEMENT
Summary..................................................... S-1
Risk Factors................................................ S-13
Use of Proceeds............................................. S-13
Price Range of Common Units and Distributions............... S-14
Capitalization.............................................. S-15
Management.................................................. S-16
Tax Considerations.......................................... S-19
Underwriting................................................ S-20
Incorporation of Certain Documents by Reference............. S-23
Legal Matters............................................... S-23
Experts..................................................... S-23
Index to Financial Statements............................... F-1
PROSPECTUS
About This Prospectus....................................... iii
Our Company................................................. 1
Risk Factors................................................ 2
Use of Proceeds............................................. 10
Ratio of Earnings to Fixed Charges.......................... 10
Description of Debt Securities.............................. 11
Description of Our Common Units............................. 25
Cash Distribution Policy.................................... 27
Description of Our Partnership Agreement.................... 34
Tax Consequences............................................ 39
Selling Unitholders......................................... 52
Plan of Distribution........................................ 52
Where You Can Find More Information......................... 53
Forward-Looking Statements.................................. 54
Legal Matters............................................... 54
Experts..................................................... 54
i
SUMMARY
This summary highlights information contained elsewhere in this prospectus
supplement. You should read carefully the entire prospectus supplement, the
accompanying prospectus, the documents incorporated by reference and the other
documents to which we refer for a more complete understanding of this offering.
You should read "Risk Factors" beginning on page 2 of the accompanying
prospectus for more information about important risks that you should consider
before buying common units in this offering. The information presented in this
prospectus supplement assumes that the underwriters do not exercise their
over-allotment option. All references in this prospectus supplement and the
accompanying prospectus to number of units, earnings per unit or unit price give
effect to our two-for-one unit split on May 15, 2002.
ENTERPRISE PRODUCTS PARTNERS L.P.
We are a leading North American midstream energy company that provides a
wide range of services to producers and consumers of natural gas and natural gas
liquids, or NGLs. NGLs are used by the petrochemical and refining industries to
produce plastics, motor gasoline and other industrial and consumer products and
also are used as residential, agricultural and industrial fuels. Our asset
platform in the Gulf Coast region of the United States, combined with our
Mid-America and Seminole pipeline systems, creates the only integrated natural
gas and NGL transportation, fractionation, processing, storage and import/export
network in North America. We provide integrated services to our customers and
generate fee-based cash flow from multiple sources along our natural gas and NGL
"value chain".
For the year ended December 31, 2002, we had revenues of $3.6 billion,
gross operating margin of $332.6 million, operating income of $194.6 million and
net income of $95.5 million. For the three months ended March 31, 2003, we had
revenues of $1.5 billion, gross operating margin of $126.4 million, operating
income of $85.0 million and net income of $40.5 million. Please read "Non-GAAP
Financial Measures" on pages S-11 and S-12 for an explanation of gross operating
margin and a reconciliation of gross operating margin to operating income, which
is the financial measure calculated and presented in accordance with generally
accepted accounting principles ("GAAP") that is the most directly comparable to
gross operating margin.
Our business has five reportable segments:
Pipelines. Our Pipelines segment includes approximately 14,000 miles of
NGL, petrochemical and natural gas pipelines located primarily in the Rocky
Mountain, Mid-Continent and Gulf Coast regions of the United States. This
segment also includes our storage and import/export terminalling businesses.
Fractionation. Our Fractionation segment includes eight NGL fractionators,
the largest commercial isomerization complex in the United States and four
propylene fractionation facilities. NGL fractionators separate mixed NGL streams
produced as by-products of natural gas production and crude oil refining into
discrete NGL products: ethane, propane, isobutane, normal butane and natural
gasoline. Our isomerization complex converts normal butane into mixed butane,
which is subsequently fractionated into normal butane, isobutane and high purity
isobutane. Our propylene fractionators separate refinery-sourced
propane/propylene mix into propane, propylene and mixed butane.
Processing. Our Processing segment is comprised of our natural gas
processing business and related NGL marketing activities. At the core of our
natural gas processing business are 13 gas plants, located primarily in south
Louisiana, that process raw natural gas into a product that meets pipeline and
industry specifications by removing NGLs and impurities. In connection with our
processing businesses, we receive a portion of the NGL production from these gas
plants. This equity NGL production, together with the NGLs we purchase, supports
the NGL marketing activities included in this operating segment.
Octane Enhancement and Other. Our Octane Enhancement segment consists of a
33.3% equity investment in Belvieu Environmental Fuels, or BEF, which owns a
facility that produces motor gasoline additives used to enhance octane. Our
Other segment consists primarily of fee-based marketing services and unallocated
cost of services that support our operations and business activities.
S-1
Since our initial public offering in July 1998 at a price of $11.00 per
common unit, we have completed investments with a combined value of over $3.1
billion. As demonstrated by our July 2002 acquisitions of the Mid-America and
Seminole pipeline systems, we are committed to growing our fee-based businesses.
We believe that these acquisitions will increase our gross operating margins
derived from fee-based businesses to between 85% and 90% of total gross
operating margin, based on average natural gas and NGL product prices for the
last ten years.
RECENT DEVELOPMENTS
Distribution Reinvestment Plan. On May 2, 2003, the board of directors of
our general partner approved the implementation of a cash distribution
reinvestment plan for our common units, authorizing the issuance of up to
5,000,000 common units pursuant to the plan. The plan will enable our limited
partners to reinvest all or a portion of the quarterly cash distributions they
receive from their common units. This plan will allow our limited partners to
participate while leaving their common units in the custody of their
stockbroker. Initially, any common units purchased through this plan will be
purchased at a five percent discount to the "prevailing market price" as defined
by the plan. Our goal is to have this plan in place prior to the quarterly cash
distribution that will be paid to limited partners in August 2003.
Conversion of Subordinated Units. As a result of our satisfying certain
financial tests, 10,704,936 of our subordinated units converted into an equal
number of common units on May 1, 2003. We expect the remaining 21,409,868
subordinated units will convert into an equal number of common units on or about
August 1, 2003.
Distribution Increase. On May 12, 2003, we paid a quarterly cash
distribution for the first quarter of 2003 of $0.3625 per common and
subordinated unit, or $1.45 per common and subordinated unit on an annualized
basis, which represents an approximate 5% increase in our quarterly distribution
rate over the previous quarter and a 61% increase in our quarterly distribution
rate since our initial public offering.
Amendment of Shell Processing Agreement. Effective March 1, 2003, we
amended our 20-year natural gas processing agreement with Shell, which grants us
the right to process Shell's current and future natural gas production from the
state and federal waters of the Gulf of Mexico. The amendment protects us from
processing Shell's gas at an economic loss while continuing to provide Shell
with relative assurance that its gas will continue to be processed during
periods when natural gas prices are high relative to NGL prices. For a more
detailed discussion of this amendment, please read "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Related party
transactions" in our Quarterly Report on Form 10-Q for the quarter ended March
31, 2003.
Repayment of Acquisition Term Loan. By mid-February 2003, we had repaid
all of the outstanding indebtedness under our senior unsecured 364-day term loan
incurred to finance the Mid-America and Seminole acquisitions with the net
proceeds from debt and equity financings completed during the fourth quarter of
2002 and the first quarter of 2003.
Amendment to Our Partnership Agreement. As with most publicly traded
limited partnerships, our partnership agreement provides incentive distribution
rights, which entitle our general partner to receive a higher percentage of the
cash we distribute when the cash distributed quarterly per common and
subordinated unit exceeds certain levels. On December 17, 2002, we amended our
partnership agreement to eliminate our general partner's right to receive 50% of
total cash distributions with respect to that portion of quarterly cash
distributions that exceeds $0.392 per common and subordinated unit. Under the
terms of the amendment, our general partner capped its incentive distribution
rights at the current level of 25% of the total cash distributions with respect
to that portion of quarterly cash distributions that exceeds $0.3085 per common
and subordinated unit. Our general partner did not receive any consideration to
give up this right. The primary reasons our general partner elected to
unilaterally forego its right to these higher distributions include:
- lowering our effective cost of capital, making new investments and
acquisitions more accretive to our limited partners;
S-2
- increasing our financial flexibility to invest in capital projects, make
acquisitions, retire debt and increase quarterly cash distributions to
our limited partners; and
- enhancing our ability to meet management's goal of increasing the cash
distribution rate per common unit and subordinated unit by at least 10%
annually.
RECENT CAPITAL INVESTMENTS AND ACQUISITIONS
2003 Capital Investments. We have approved capital expenditures of $136.4
million for the following internal growth projects, which we expect will be
substantially completed by the first quarter of 2004:
- the $39.9 million expansion of our Neptune gas processing plant,
which is expected to increase the plant's capacity by approximately
115%;
- the $40.1 million expansion of our Norco NGL fractionator, which is
expected to increase the fractionator's capacity by approximately
35%;
- the $20.0 million construction of a 41-mile pipeline to transport
natural gas from the Gunnison deepwater development to our Stingray
pipeline system; and
- the $36.4 million construction or expansion of various NGL pipelines
and other facilities.
2003 Acquisitions. So far in 2003, we have completed:
- the $14.4 million purchase of the remaining 50% interest in the EPIK
NGL export terminal on the Houston Ship Channel, making us the sole
owner of this facility; and
- the $14.2 million purchase of a 70-mile distribution pipeline that
transports high purity isobutane from our facilities in Mont Belvieu
to markets on the Texas Gulf Coast.
Acquisition of Mid-America and Seminole Pipeline Systems. On July 31,
2002, we completed the acquisition of a 98% interest in the Mid-America pipeline
system and a 78% interest in the Seminole pipeline system from The Williams
Companies, Inc. for approximately $1.2 billion in cash. Mid-America is a
7,226-mile NGL pipeline system connecting the Hobbs hub located on the Texas-New
Mexico border with supply regions in the Rocky Mountains and with supply regions
and markets in the Midwest. The Mid-America pipeline system is comprised of
three major segments: the Conway North pipeline, the Conway South pipeline and
the Rocky Mountain pipeline. Seminole is a 1,281-mile pipeline system that
interconnects with the Mid-America pipeline system and transports mixed NGLs and
NGL products from the Hobbs hub and the Permian basin to Mont Belvieu, Texas.
Major customers utilizing the Mid-America and Seminole pipeline systems include
BP, Burlington, a Chevron/Phillips joint venture, Duke, Equistar and Williams.
The acquisition of the Mid-America and Seminole pipeline systems
significantly enhances our existing asset base by:
- accessing NGL-rich natural gas production in major natural gas producing
regions in the United States and Canada;
- expanding our integrated natural gas and NGL network;
- providing access to new end markets for NGL products; and
- increasing our gross operating margins from fee-based businesses.
In addition to our current strategic position in the Gulf of Mexico, we now have
access to major supply basins throughout the United States and Canada, including
the Rocky Mountains, the San Juan and Permian basins, the Mid-Continent region
and, through third-party pipeline connections, north into Canada's Western
Sedimentary basin. The combination of these assets with our existing assets also
creates a significant link between Mont Belvieu, Texas and Conway, Kansas, the
two largest NGL hubs in the United States, and provides additional access to new
end markets for NGL products. The Conway South segment of the Mid-America
pipeline system connects Conway to the Hobbs hub, which is, in turn, connected
to Mont Belvieu via
S-3
the Seminole pipeline system. The 2,740-mile Conway North pipeline links the
market hub in Conway with petrochemical and refining customers and propane
markets in the upper Midwest.
OUR BUSINESS STRATEGY
Our business strategy is to:
- capitalize on expected increases in natural gas and NGL production
resulting from development activities in the deepwater and continental
shelf areas of the Gulf of Mexico and the Rocky Mountain region;
- develop and invest in joint venture projects with strategic partners that
will provide the raw materials for these projects or purchase the
projects' end products;
- expand our asset base through accretive acquisitions of complementary
midstream energy assets; and
- increase our fee-based cash flows by investing in pipelines and other
fee-based businesses.
COMPETITIVE STRENGTHS
We believe that our integrated network of midstream energy assets is
well-positioned to benefit from demand for our services from producers and
consumers of natural gas, NGLs and petrochemicals. Our most significant
competitive strengths are:
Strategic locations. Our operations are strategically located to serve the
major supply basins of NGL-rich natural gas, the major NGL markets and storage
hubs in North America and international markets. Our location in these markets
ensures continued access to natural gas, NGL and petrochemical supply volumes,
anticipated demand growth and business expansion opportunities.
Large-Scale, Integrated Platform of Assets. We believe the operating costs
of our large-scale facilities are either competitive with, or significantly
lower than, those associated with our competitors. In addition, our assets are
physically linked to form the only integrated natural gas and NGL
transportation, fractionation, processing, storage and import/export network in
North America, which connects the largest supply basins to the largest consuming
markets, both domestic and international. Certain of our assets currently have
additional capacity that can accommodate increased volumes at low incremental
cost.
Fee-Based Businesses. As demonstrated by our July 2002 acquisitions of the
Mid-America and Seminole pipeline systems, we are committed to growing our
fee-based businesses. We expect that our gross operating margins derived from
fee-based businesses in 2003 will be between 85% and 90% of total gross
operating margin, based on average natural gas and NGL product prices for the
last ten years. A substantial portion of our fee-based revenue is attributable
to our FERC regulated pipeline systems, which provide services to customers such
as BP, ChevronTexaco, Burlington Resources, Duke Energy Field Services and
Marathon.
Relationships with Major Oil, Natural Gas and Petrochemical Companies. We
have long-term relationships with many of our suppliers and customers. We
jointly own facilities with many of our customers who either provide raw
materials to or consume the end products from our facilities. These joint
venture partners include major oil, natural gas and petrochemical companies,
including Shell, ExxonMobil, BP, ChevronTexaco, Duke Energy Field Services, Dow
Chemical, Burlington Resources, Marathon, El Paso and Devon Energy.
Experienced Operator. We have historically operated our largest natural
gas processing and fractionation facilities and most of our pipelines. As the
leading provider of NGL-related services, we have established a reputation in
the industry as a reliable and cost-effective operator. By virtue of our
successful and award-winning operating and safety record, we believe we are well
positioned to continue to operate as a large-scale processor of natural gas,
NGLs and other products for our customers.
Experienced Management Team whose Interests are Aligned with Those of Our
Unitholders. Our senior management team averages more than 27 years of industry
experience. Following this offering, affiliates of
S-4
Dan L. Duncan, the chairman of our general partner, will continue to own a 70%
interest in our general partner, which will continue to own a 2% general partner
interest in us. In addition, Mr. Duncan and his affiliates and our directors and
executive officers will collectively own an approximate 56.2% limited partner
interest in us.
Enhanced Access to Capital. We believe that we have a lower cost of
capital than many of our competitors, which enables us to compete more
effectively in acquiring assets and expanding our systems. Our recent amendment
to our partnership agreement to eliminate our general partner's right to receive
50% of cash distributions with respect to that portion of quarterly cash
distributions that exceed $0.392 per unit will provide a further competitive
advantage if and when our distributions reach that level.
OUR RELATIONSHIP WITH SHELL
We have made several acquisitions from Shell, including our $529 million
acquisition of Tejas Natural Gas Liquids, LLC, or TNGL, in 1999. In conjunction
with the acquisition of TNGL, we entered into the 20-year natural gas processing
agreement with Shell referred to above, which grants us the right to process
Shell's current and future natural gas production from the Gulf of Mexico within
the state and federal waters off Texas, Louisiana, Mississippi, Alabama and
Florida. This is a life of lease dedication, which may extend our natural gas
processing rights well beyond the remaining 16 years of the agreement. Following
this offering, Shell will own an approximate 19.4% limited partner interest in
us. Shell currently owns a 45.4% equity interest in one of our propylene
fractionators at our Mont Belvieu complex, a 66% interest in our Nemo natural
gas pipeline system and a 50% interest in each of our Nautilus, Manta Ray,
Stingray and Triton natural gas pipeline systems.
PARTNERSHIP STRUCTURE AND MANAGEMENT
Our operations are conducted through, and our operating assets are owned
by, our subsidiaries. The chart on the following page depicts our organizational
and ownership structure after giving effect to this offering. Upon consummation
of the offering of our common units:
- there will be 47,253,970 publicly held common units outstanding,
representing a 22.4% limited partner interest in us;
- Enterprise Products Company, or EPCO, and its affiliates and our
directors and executive officers will own 97,508,232 common units and
21,409,868 subordinated units, representing an aggregate 56.2% limited
partner interest in us;
- Shell will own 31,000,000 common units and 10,000,000 special units
representing a 19.4% limited partner interest in us; and
- Our general partner will continue to own a combined 2.0% general partner
interest in us and all of our incentive distribution rights.
Our principal executive offices are located at 2727 North Loop West,
Houston, Texas 77008, and our phone number is (713) 880-6500.
S-5
OWNERSHIP OF ENTERPRISE PRODUCTS PARTNERS L.P. AND THE OPERATING PARTNERSHIP
PERCENTAGE INTEREST
UNITS (on a combined basis)
----------- ---------------------
Public common units................................. 47,253,970 22.4%
EPCO common units(1)................................ 97,508,232 46.1%
EPCO subordinated units............................. 21,409,868 10.1%
Shell common units.................................. 31,000,000 14.7%
Shell special units................................. 10,000,000 4.7%
General partner interest(2)......................... 2.0%
------
Total.......................................... 100.0%
(FLOW CHART)
---------------
(1) Includes units held by affiliates of EPCO and our directors and executive
officers.
(2) 2.0% general partner interest represents an aggregate 1.0% general partner
interest in Enterprise Products Partners L.P. and a 1.0101% general partner
interest in the operating partnership.
S-6
THE OFFERING
Common units offered...... 8,700,000 common units, including 650,000 common
units to be offered to an entity or entities
controlled by Dan L. Duncan, the Chairman of our
general partner, or members of Mr. Duncan's family,
and 50,000 common units to be offered to O.S. Andras,
the President and Chief Executive Officer of our
general partner; or
10,005,000 common units if the underwriters exercise
their over-allotment option in full.
Units outstanding after
this offering............. 175,762,202 common units or 177,067,202 common units
if the underwriters exercise their over-allotment
option in full;
21,409,868 subordinated units; and
10,000,000 special units.
Use of proceeds........... We will use the net proceeds from this offering,
including our general partner's proportionate capital
contribution, to repay a portion of the indebtedness
outstanding under our revolving credit facilities.
Cash distributions........ Under our partnership agreement, we must distribute
all of our cash on hand as of the end of each
quarter, less reserves established by our general
partner. We refer to this cash as "available cash,"
and we define its meaning in our partnership
agreement.
On May 12, 2003, we paid a quarterly cash
distribution for the first quarter of 2003 of $0.3625
per common and subordinated unit, or $1.45 per common
and subordinated unit on an annualized basis.
When quarterly cash distributions exceed $0.253 per
unit in any quarter, our general partner receives a
higher percentage of the cash distributed in excess
of that amount, in increasing percentages up to 25%
if the quarterly cash distributions exceed $0.3085
per unit. On December 17, 2002, we amended our
partnership agreement to eliminate the general
partner's right to receive 50% of cash distributions
with respect to that portion of quarterly cash
distributions that exceeds $0.392 per common and
subordinated unit. Our special units do not accrue
distributions and are not entitled to quarterly cash
distributions until their conversion into an equal
number of common units on August 1, 2003. For a
description of our cash distribution policy, please
read "Cash Distribution Policy" in the accompanying
prospectus.
Estimated ratio of taxable
income to
distributions........... We estimate that if you own the common units you
purchase in this offering through December 31, 2005,
you will be allocated, on a cumulative basis, an
amount of federal taxable income for that period that
will be less than 10% of the cash distributed with
respect to that period. Please read "Tax
Considerations" in this prospectus supplement for the
basis of this estimate.
New York Stock Exchange
symbol.................. EPD
S-7
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL AND OPERATING DATA
The following table sets forth for the periods and at the dates indicated
selected historical and pro forma financial and operating data for us. The
selected historical income statement and balance sheet data for each of the
three years in the period ended December 31, 2002 are derived from and should be
read in conjunction with our audited financial statements that are incorporated
by reference into this prospectus supplement. The selected historical data for
the three month periods ending March 31, 2002 and 2003 are derived from and
should be read in conjunction with our unaudited financial statements that are
incorporated by reference into this prospectus supplement.
The summary pro forma as adjusted financial statements of Enterprise
Products Partners show the pro forma effect of:
- the Mid-America and Seminole pipeline systems acquired from Williams in
July 2002;
- the propylene fractionation business acquired from Diamond-Koch in
February 2002;
- the completion of our October 2002 and January 2003 equity offerings and
the receipt of the general partner's proportionate capital contributions;
- our issuance of $350 million of 6.375% Senior Notes due 2013 in January
2003, and our issuance of $500 million of 6.875% Senior Notes due 2033 in
February 2003;
- the completion of this offering and the receipt of the general partner's
proportionate capital contribution; and
- the application of the net proceeds from this offering to repay a portion
of indebtedness outstanding under our revolving credit facilities.
The summary pro forma financial data for the year ended December 31, 2002
and three months ended March 31, 2003 are derived from the unaudited pro forma
financial statement and have been prepared as if the transactions had occurred
at the beginning of each period presented.
The non-generally accepted accounting principle financial measures of gross
operating margin and EBITDA are presented in the following table. Please read
"Non-GAAP Financial Measures" on pages S-11 and S-12 for an explanation of these
financial measures and a reconciliation of each of these financial measures to
its most directly comparable financial measure calculated and presented in
accordance with generally accepted accounting principles.
S-8
ENTERPRISE PRODUCTS PARTNERS L.P.
CONSOLIDATED HISTORICAL PRO FORMA AS ADJUSTED
-------------------------------------------------------------- ---------------------------
THREE MONTHS ENDED THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED
------------------------------------ ----------------------- DECEMBER 31, MARCH 31,
2000 2001 2002 2002 2003 2002 2003
---------- ---------- ---------- ---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
(Dollars in thousands, except per
Unit amounts)
STATEMENT OF CONSOLIDATED
OPERATIONS DATA:
REVENUES
Third parties.................. $2,689,541 $2,641,913 $3,102,066 $ 571,246 $1,348,782 $3,284,135 $1,348,782
Related parties................ 359,479 512,456 482,717 90,808 132,804 482,717 132,804
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total revenues............... 3,049,020 3,154,369 3,584,783 662,054 1,481,586 3,766,852 1,481,586
---------- ---------- ---------- ---------- ---------- ---------- ----------
COSTS AND EXPENSES
Operating costs and expenses
Third parties.................. 1,953,341 2,052,309 2,686,982 518,049 1,152,302 2,770,745 1,152,302
Related parties................ 847,719 809,434 695,579 146,503 234,402 695,579 234,402
Selling, general and
administrative
Third parties.................. 12,665 10,347 18,686 2,009 5,087 36,821 5,087
Related parties................ 15,680 19,949 24,204 5,953 6,384 24,204 6,384
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total costs and expenses....... 2,829,405 2,892,039 3,425,451 672,514 1,398,175 3,527,349 1,398,175
---------- ---------- ---------- ---------- ---------- ---------- ----------
EQUITY IN INCOME OF
UNCONSOLIDATED AFFILIATES...... 24,119 25,358 35,253 9,227 1,621 35,144 1,621
---------- ---------- ---------- ---------- ---------- ---------- ----------
OPERATING INCOME................. 243,734 287,688 194,585 (1,233) 85,032 274,647 85,032
---------- ---------- ---------- ---------- ---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest expense................. (33,329) (52,456) (101,580) (18,513) (41,911) (136,948) (32,733)
Interest income from related
parties........................ 1,787 31 139 30 139
Dividend income from
unconsolidated affiliates...... 7,091 3,462 4,737 954 2,601 4,737 2,601
Interest income -- other......... 3,748 7,029 2,313 1,334 200 2,313 200
Other, net....................... (272) (1,104) (113) 52 34 (863) 34
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other income (expense)... (20,975) (43,038) (94,504) (16,143) (39,076) (130,622) (29,898)
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE PROVISION FOR
INCOME TAXES AND MINORITY
INTEREST....................... 222,759 244,650 100,081 (17,376) 45,956 144,025 55,134
PROVISION FOR INCOME TAXES....... (1,634) (3,129) (7,865) (3,129)
---------- ---------- ---------- ---------- ---------- ---------- ----------
INCOME BEFORE MINORITY
INTEREST....................... 222,759 244,650 98,447 (17,376) 42,827 136,160 52,005
MINORITY INTEREST................ (2,253) (2,472) (2,947) 173 (2,322) (6,858) (2,424)
---------- ---------- ---------- ---------- ---------- ---------- ----------
NET INCOME....................... $ 220,506 $ 242,178 $ 95,500 $ (17,203) $ 40,505 $ 129,302 $ 49,581
========== ========== ========== ========== ========== ========== ==========
BASIC EARNINGS PER UNIT:
Net income per Common and
Subordinated Unit.............. $ 1.62 $ 1.70 $ 0.55 $ (0.13) $ 0.20 $ 0.63 $ 0.23
========== ========== ========== ========== ========== ========== ==========
DILUTED EARNINGS PER UNIT:
Net income per Common,
Subordinated and Special
Unit........................... $ 1.32 $ 1.39 $ 0.48 $ (0.13) $ 0.19 $ 0.57 $ 0.22
========== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA:
Total assets..................... $1,951,368 $2,424,692 $4,230,272 $2,736,262 $4,266,390 $4,266,390
Total debt....................... 403,847 855,278 2,246,463 1,218,596 2,001,636 1,798,425
Total partners' equity........... 935,959 1,146,922 1,200,904 1,082,611 1,438,833 1,639,991
S-9
CONSOLIDATED HISTORICAL PRO FORMA AS ADJUSTED
-------------------------------------------------------------- ---------------------------
THREE MONTHS ENDED THREE MONTHS
FOR THE YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED
------------------------------------ ----------------------- DECEMBER 31, MARCH 31,
2000 2001 2002 2002 2003 2002 2003
---------- ---------- ---------- ---------- ---------- ------------ ------------
(UNAUDITED) (UNAUDITED)
Other Financial Data:
Cash flows from (used in)
operating activities........... $ 360,870 $ 283,328 $ 329,761 $ (9,973) $ 151,549
Cash flows from (used in)
investing activities........... (268,798) (491,213) (1,708,348) (396,485) (73,093)
Cash flows from (used in)
financing activities........... (36,893) 279,547 1,260,333 304,419 (69,684)
Gross operating margin(1)........ 320,615 376,783 332,349 26,286 126,438 452,038 126,438
EBITDA(1)........................ 291,145 345,750 284,820 18,555 113,224 381,435 113,122
Distributions received from
unconsolidated affiliates...... 37,267 45,054 57,662 14,438 15,626 57,662 15,626
Equity in income of
unconsolidated affiliates...... 24,119 25,358 35,253 9,227 1,621 35,144 1,621
OPERATING DATA (IN MBPD, EXCEPT AS
NOTED):
Pipelines:
Major NGL and petrochemical
pipelines.................... 367 453 1,357 537 1,348
Natural gas pipelines
(BBtu/d)..................... 1,349 1,207 1,224 1,055
Fractionation:
NGL fractionation.............. 213 204 235 204 240
Isomerization.................. 74 80 84 74 80
Propylene fractionation........ 33 31 55 52 61
Processing -- equity NGL
production..................... 72 63 73 81 54
Octane enhancement............... 5 5 5 4 3
---------------
(1) The non-generally accepted accounting principle financial measures of gross
operating margin and EBITDA are presented in this table. Please read
"Non-GAAP Financial Measures" on pages S-11 and S-12 for an explanation of
these financial measures and a reconciliation of each of these financial
measures to its most directly comparable financial measure calculated and
presented in accordance with generally accepted accounting principles.
S-10
NON-GAAP FINANCIAL MEASURES
We include in this prospectus supplement the non-GAAP financial measures of
gross operating margin and EBITDA, and provide reconciliations of these non-GAAP
financial measures to their most directly comparable financial measure or
measures calculated and presented in accordance with GAAP.
We define gross operating margin as operating income before: (1)
depreciation and amortization expense; (2) operating lease expenses for which we
do not have the payment obligation; (3) gains and losses on the sale of assets;
and (4) selling, general and administrative expenses. Gross operating margin is
an important performance measure of the core profitability of our operations.
This measure forms the basis of our internal financial reporting and is used by
senior management in deciding how to allocate capital resources among segments.
We believe that investors benefit from having access to the same financial
measures that our management uses. The GAAP measure most directly comparable to
gross operating margin is operating income.
We define EBITDA as net income plus interest expense, provision for income
taxes and depreciation and amortization expense. EBITDA is used as a
supplemental financial measure by management and by external users of our
financial statements, such as investors, commercial banks, research analysts and
rating agencies, to assess: (a) the financial performance of our assets without
regard to financing methods, capital structures or historical cost basis; (b)
the ability of our assets to generate cash sufficient to pay interest cost and
support our indebtedness; (c) our operating performance and return on capital as
compared to those of other companies in the midstream energy sector, without
regard to financing and capital structure; and (d) the viability of projects and
the overall rates of return on alternative investment opportunities. EBITDA
should not be considered an alternative to net income, operating income, cash
flow from operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles. EBITDA is
not intended to represent cash flow. Because EBITDA excludes some, but not all,
items that affect net income and these measures may vary among other companies,
the EBITDA data presented above may not be comparable to similarly titled
measures of other companies. We have reconciled EBITDA to net income and
operating activities cash flows.
S-11
The following table presents a reconciliation of the non-GAAP financial
measures of total gross operating margin to the GAAP financial measure of
operating income and a reconciliation of the non-GAAP financial measure of
EBITDA to the GAAP financial measures of net income and of operating activities
cash flows, on a historical basis and pro forma as adjusted basis, as
applicable, for each of the periods indicated.
PRO FORMA AS ADJUSTED
CONSOLIDATED HISTORICAL ------------------------
------------------------------------------------------- THREE
THREE MONTHS ENDED MONTHS
FOR THE YEAR ENDED DECEMBER 31, MARCH 31, YEAR ENDED ENDED
--------------------------------- ------------------- DECEMBER 31, MARCH 31,
2000 2001 2002 2002 2003 2002 2003
--------- --------- --------- -------- -------- ------------ ---------
Reconciliation of Non-GAAP "Total
Gross Operating Margin" to GAAP
"Operating Income"
Operating Income................... $243,734 $287,688 $194,585 $ (1,233) $ 85,032 $274,647 $ 85,032
Adjustments to reconcile
Total Gross Operating Margin to
Operating Income:
Depreciation and amortization
in operating costs and
expenses.................. 35,621 48,775 86,029 17,238 27,657 107,243 27,657
Retained lease expense, net
in operating costs and
expenses.................. 10,645 10,414 9,124 2,305 2,274 9,124 2,274
(Gain) loss on sale of assets
in operating costs and
expenses.................. 2,270 (390) (1) 14 4 (1) 4
Selling, general and
administrative costs...... 28,345 30,296 42,890 7,962 11,471 61,025 11,471
-------- -------- -------- -------- -------- -------- --------
Total Gross Operating Margin....... $320,615 $376,783 $332,627 $ 26,286 $126,438 $452,038 $126,438
======== ======== ======== ======== ======== ======== ========
Reconciliation of Non-GAAP "EBITDA"
to GAAP "Net Income" and GAAP
"Operating Activities Cash Flows"
Net Income....................... $220,506 $242,178 $ 95,500 $(17,203) $ 40,505 $129,302 $ 49,581
Adjustments to derive EBITDA:
Interest expense (including
amortization component)... 33,329 52,456 101,580 18,513 41,911 136,948 32,733
Provision for income taxes... 1,634 3,129 7,865 3,129
Other depreciation and
amortization.............. 37,310 51,116 86,106 17,245 27,679 107,320 27,679
-------- -------- -------- -------- -------- -------- --------
EBITDA........................... $291,145 $345,750 $284,820 $ 18,555 $113,224 $381,435 $113,122
======== ========
Reconciliation of "EBITDA" to
"Operating Activities Cash
Flows":
Leases paid by EPCO, net
(excluding minority
interest portion)......... 10,537 10,309 9,033 2,281 2,251
Deferred income tax.......... 446 (396)
Changes in fair market value
of financial
instruments............... -- (5,697) 10,213 30,141 (28)
Minority interest............ 2,253 2,472 2,947 (173) 2,321
Interest expense, net of
amortization component.... (29,594) (51,669) (92,761) (17,811) (30,329)
Equity in income of
unconsolidated
affiliates................ (24,119) (25,358) (35,253) (9,227) (1,621)
Distributions received from
unconsolidated
affiliates................ 37,267 45,054 57,662 14,438 15,626
Net effect of changes in
operating accounts........ 71,111 (37,143) 92,655 (48,191) 50,497
Loss (gain) on sale of
assets.................... 2,270 (390) (1) 14 4
-------- -------- -------- -------- --------
Operating Activities Cash
Flows.......................... $360,870 $283,328 $329,761 $ (9,973) $151,549
======== ======== ======== ======== ========
S-12
RISK FACTORS
An investment in our common units involves risks. You should consider
carefully the risk factors included under the caption "Risk Factors" beginning
on page 2 of the accompanying prospectus, together with all of the other
information included in, or incorporated by reference into, this prospectus
supplement, in evaluating an investment in our common units. If any of these
risks were to occur, our business, financial condition or results of operations
could be adversely affected. In that case, the trading price of our common units
could decline and you could lose all or part of your investment.
USE OF PROCEEDS
We expect to receive net proceeds of approximately $199.2 million from the
sale of the 8,700,000 common units we are offering. The net proceeds are based
on an assumed public offering price of $23.90 per common unit after deducting
underwriting discounts and commissions and estimated offering expenses payable
by us. The underwriters will not receive any underwriting discount or commission
on the sale of 650,000 common units to an entity or entities controlled by Dan
L. Duncan, the Chairman of our general partner, or members of his family, or on
the sale of 50,000 common units to O.S. Andras, the President and Chief
Executive Officer of our general partner. In connection with the offering, we
also will receive a net capital contribution of $4.0 million from our general
partner to maintain its combined 2% general partner interest. If the
underwriters exercise their over-allotment option in full, we will receive net
proceeds of approximately $233.7 million, including a proportionate net capital
contribution of $4.7 million from our general partner.
We will use the net proceeds from this offering, including our general
partner's proportionate capital contribution, to repay a portion of the
indebtedness outstanding under our revolving credit facilities, which
indebtedness was incurred for working capital purposes and to fund several
acquisitions and capital projects, including:
- the $14.4 million purchase of the remaining 50% interest in the EPIK
NGL export terminal in March 2003;
- the $14.2 million acquisition of a 70-mile isobutane distribution
pipeline in March 2003;
- the $11.5 million acquisition of NGL terminals and propane
inventories in November 2002;
- the $32.6 million acquisition of gas processing and NGL
fractionation assets in June 2002;
- the $8.1 million acquisition of an additional interest in our Mont
Belvieu NGL fractionator in June 2002; and
- approximately $78.9 million in capital expenditures and $23.4
million of investments in and advances to our unconsolidated
affiliates during the twelve months ended March 31, 2003.
Our credit facilities mature in November 2003 and November 2005,
respectively. At May 16, 2003, the interest rates on our credit facilities were
approximately 2.4% and 1.9%, respectively.
The repayment of indebtedness will increase the borrowing capacity under
our revolving credit facilities. We intend to borrow under these facilities to
finance a portion of the following capital investments:
- the $39.9 million expansion of our Neptune gas processing plant;
- the $40.1 million expansion of our Norco NGL fractionator;
- the $20.0 million construction of a 41-mile natural gas pipeline to
connect the Gunnison deepwater development to our Stingray pipeline
system; and
- the $36.4 million construction or expansion of various NGL pipelines
and other facilities.
Affiliates of several of the underwriters for this offering are lenders
under one or both of our credit facilities and will be repaid with the net
proceeds from this offering. Please read "Underwriting."
S-13
PRICE RANGE OF COMMON UNITS AND DISTRIBUTIONS
On May 15, 2003, we had 167,062,202 common units outstanding, beneficially
held by approximately 23,300 holders. The common units are traded on the NYSE
under the symbol "EPD."
The following table sets forth, for the periods indicated, the high and low
closing sales price ranges for the common units, as reported on the NYSE
Composite Transaction Tape, and the amount, record date and payment date of the
quarterly cash distributions paid per common unit. The last reported sales price
of our common units on the NYSE on May 22, 2003 was $23.90 per common unit.
PRICE RANGES CASH DISTRIBUTION HISTORY
--------------- ------------------------------------------
PER RECORD PAYMENT
HIGH LOW UNIT(1) DATE DATE
------ ------ ---------- ------------- -------------
2001
1st Quarter.......................... $18.03 $13.44 $0.2750 Apr. 30, 2001 May 10, 2001
2nd Quarter.......................... 21.53 16.60 0.2938 Jul. 31, 2001 Aug. 10, 2001
3rd Quarter.......................... 23.95 19.76 0.3125 Oct. 31, 2001 Nov. 9, 2001
4th Quarter.......................... 25.98 22.25 0.3125 Jan. 31, 2002 Feb. 11, 2002
2002
1st Quarter.......................... $25.35 $23.31 $0.3350 Apr. 30, 2002 May 10, 2002
2nd Quarter.......................... 24.35 16.25 0.3350 Jul. 31, 2002 Aug. 12, 2002
3rd Quarter.......................... 22.00 16.25 0.3450 Oct. 31, 2002 Nov. 12, 2002
4th Quarter.......................... 19.51 17.00 0.3450 Jan. 31, 2003 Feb. 11, 2003
2003
1st Quarter.......................... $20.85 $18.01 $0.3625 Apr. 30, 2003 May 12, 2003
2nd Quarter (through May 22, 2003)... 24.38 20.83
---------------
(1) For each quarter, we paid an identical cash distribution on all outstanding
subordinated units.
S-14
CAPITALIZATION
The following table sets forth our capitalization as of March 31, 2003 on:
- a consolidated historical basis; and
- an as adjusted basis to give effect to the common units offered by this
prospectus supplement, our general partner's proportionate capital
contribution and the application of the net proceeds from this offering
to repay a portion of indebtedness outstanding under our revolving credit
facilities.
You should read our financial statements and notes that are incorporated by
reference in this prospectus supplement for additional information about our
capital structure.
AS OF MARCH 31, 2003
--------------------------
CONSOLIDATED
HISTORICAL AS ADJUSTED
------------ -----------
(UNAUDITED)
(Dollars in thousands)
Cash and cash equivalents................................... $ 41,346 $ 41,346
========== ==========
Short-term debt:
Seminole Notes, current maturities(1)..................... $ 15,000 $ 15,000
Long-term debt:
364-Day Revolving Credit facility, due November 2003...... 32,000
Multi-Year Revolving Credit facility, due November 2005... 225,000 53,789
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
Senior Notes C, 6.375% fixed-rate, due February 2013...... 350,000 350,000
Senior Notes D, 6.875% fixed-rate, due March 2033......... 500,000 500,000
Seminole Notes, 6.67% fixed-rate.......................... 30,000 30,000
---------- ----------
Total principal amount.................................... $2,006,000 $1,802,789
Unamortized balance of increase in fair value related to
hedging a portion of fixed-rate debt...................... 1,712 1,712
Unamortized discounts on:
Senior Notes A............................................ (71) (71)
Senior Notes B............................................ (222) (222)
Senior Notes D............................................ (5,783) (5,783)
---------- ----------
Total debt.................................................. $2,001,636 $1,798,425
Minority interest........................................... 71,273 73,326
Partners' equity:
Common units.............................................. $1,181,052 $1,380,219
Subordinated units........................................ 111,863 111,863
Special units............................................. 143,926 143,926
Treasury units............................................ (17,808) (17,808)
General partner interests................................. 14,514 16,505
Accumulated other comprehensive income.................... 5,286 5,286
---------- ----------
Total partners' equity.................................... $1,438,833 $1,639,991
---------- ----------
Total capitalization........................................ $3,511,742 $3,511,742
========== ==========
---------------
(1) In December 1993, Seminole Pipeline Company issued $75 million of its 6.67%
senior unsecured notes in a private placement. These notes are payable at
$15 million annually each December 1 commencing in 2001 through 2005. This
debt is being incorporated into our capitalization amounts as a result of
our acquisition of a 78% ownership interest in the Seminole pipeline system.
S-15
MANAGEMENT
The following table sets forth certain information with respect to the
executive officers and members of the board of directors of our general partner.
Executive officers and directors are elected for one-year terms.
NAME AGE POSITION WITH GENERAL PARTNER
---- --- -----------------------------
Dan L. Duncan........................ 70 Director and Chairman of the Board
O.S. Andras.......................... 67 Director, President and Chief Executive Officer
Richard H. Bachmann.................. 50 Director, Executive Vice President, Chief Legal
Officer and Secretary
Michael A. Creel..................... 49 Executive Vice President and Chief Financial Officer
A.J. Teague.......................... 58 Executive Vice President
William D. Ray....................... 67 Executive Vice President
Charles E. Crain..................... 69 Senior Vice President
A. Monty Wells....................... 57 Senior Vice President
W. Ordemann.......................... 44 Senior Vice President
Gil H. Radtke........................ 42 Senior Vice President
James M. Collingsworth............... 48 Senior Vice President
Michael J. Knesek.................... 48 Vice President, Controller and Principal Accounting
Officer
W. Randall Fowler.................... 46 Vice President and Treasurer
Randa D. Williams.................... 41 Director
J.R. Eagan........................... 48 Director
J.A. Berget.......................... 50 Director
Dr. Ralph S. Cunningham.............. 62 Director
Augustus Y. Noojin, III.............. 56 Director
Lee W. Marshall, Sr.................. 70 Director
Richard S. Snell..................... 60 Director
Dan L. Duncan was elected Chairman and a Director of our general partner in
April 1998. Mr. Duncan has served as Chairman of the Board of our predecessor,
EPCO, since 1979.
O.S. Andras was elected President, Chief Executive Officer and a Director
of our general partner in April 1998. Mr. Andras served as President and Chief
Executive Officer of EPCO from 1996 to February 2001 and currently serves as
Vice Chairman of the Board of EPCO.
Richard H. Bachmann was elected Director of our general partner in June
2000. He has served as Executive Vice President, Chief Legal Officer and
Secretary of our general partner and EPCO since January 1999. Previously, he was
a partner with the Snell & Smith P.C. law firm in Houston, Texas, from 1993 to
1999 and prior to that was a partner with the Butler & Binion law firm in
Houston from 1988 to 1993.
Michael A. Creel was elected an Executive Vice President of our general
partner and EPCO in February 2001, having served as a Senior Vice President of
our general partner and EPCO since November 1999. In June 2000, Mr. Creel, a
certified public accountant, assumed the role of Chief Financial Officer of our
general partner and EPCO along with his other responsibilities. Previously, he
served with Tejas Energy, LLC, a Shell affiliate, as Senior Vice
President -- Finance from 1997 to 1998, Senior Vice President, Chief Financial
Officer and Treasurer from 1998 to 1999 and Senior Vice President from January
to September 1999. From 1995 to 1997, Mr. Creel was Vice President and Treasurer
of NorAm Energy Corp.
A.J. Teague was elected an Executive Vice President of our general partner
in November 1999. From 1998 to 1999 he served as President of Tejas Natural Gas
Liquids, LLC, then a Shell affiliate, and from 1997 to 1998 was President of
Marketing and Trading for MAPCO, Inc.
William D. Ray was elected an Executive Vice President of our general
partner in April 1998. Mr. Ray served as EPCO's Executive Vice President of
Supply and Marketing from 1985 to 1998.
Charles E. Crain was elected a Senior Vice President of our general partner
in April 1998. Mr. Crain served as Senior Vice President of Operations for EPCO
from 1991 to 1998.
S-16
A. Monty Wells was elected a Senior Vice President of our general partner
in June 2000 after serving as Manager -- Marketing and Supply since 1998. Mr.
Wells joined EPCO in 1980, and served as Manager of Marketing and Supply from
1990 to 1999 and Vice President of Marketing and Supply from 1999 to 2000.
William Ordemann joined us as a Vice President of our general partner in
October 1999 and was elected a Senior Vice President in September 2001. From
January 1997 to February 1998, Mr. Ordemann was a Vice President of Shell
Midstream Enterprises, LLC, and from February 1998 to September 1999 was a Vice
President of Tejas Natural Gas Liquids, LLC, both Shell affiliates.
Gil H. Radtke was elected a Senior Vice President of our general partner in
February 2002. Mr. Radtke joined us in connection with our purchase of
Diamond-Koch's storage and propylene fractionation assets in January and
February 2002. Before joining us, Mr. Radtke served as President of the
Diamond-Koch joint venture from 1999 to 2002, where he was responsible for its
storage, propylene fractionation, pipeline and NGL fractionation businesses.
From 1997 to 1999 he was Vice President, Petrochemicals and Storage of
Diamond-Koch. Mr. Radtke was previously employed by Ultramar Diamond-Shamrock
Corporation (a partner in the Diamond-Koch joint venture) beginning in 1983.
James M. Collingsworth joined our general partner as a Vice President in
November 2001 and was elected a Senior Vice President in November 2002.
Previously, he served as a board member of Texaco Canada Petroleum Inc. from
July 1998 to October 2001 and was employed by Texaco from 1991 to 2001 in
various management positions, including Senior Vice President of NGL Assets and
Business Services from July 1998 to October 2001. Prior to joining Texaco, Mr.
Collingsworth was director of feedstocks for Rexene Petrochemical Company from
1988 to 1991 and served in the MAPCO, Inc. organization from 1973 to 1988 in
various capacities including customer service and business development manager
of the Mid-America and Seminole pipelines.
James A. Cisarik was elected a Senior Vice President of our general partner
in February 2003. Mr. Cisarik joined us in April 2001 when we acquired Acadian
Gas from Shell. His primary responsibility since joining us has been oversight
of the commercial activities of our natural gas businesses, principally those of
Acadian Gas and our Gulf of Mexico natural gas pipeline investments. From
February 1999 through March 2001, Mr. Cisarik was a Senior Vice President of
Coral Energy, LLC, and from 1997 to February 1999 was Vice President, Market
Development of Tejas Energy, LLC, both affiliates of Shell, with
responsibilities in market development for their Texas and Louisiana natural gas
pipeline systems. Prior to his employment at Tejas Energy, LLC, he was employed
from 1983 to 1997 by Tejas Gas Corporation and other previous owners of Acadian
Gas.
Michael J. Knesek was elected Principal Accounting Officer and a Vice
President of our general partner in August 2000. Since 1990, Mr. Knesek, a
certified public accountant, has been the Controller and a Vice President of
EPCO.
W. Randall Fowler joined us as director of investor relations in January
1999 and was elected to the additional positions of Treasurer and a Vice
President of our general partner and EPCO in August 2000. From May 1995 to
December 1997, Mr. Fowler served as an Assistant Treasurer at NorAm Energy Corp.
From January 1998 through December 1998, Mr. Fowler served as Director of
Finance for Reliant Energy.
Randa D. Williams was elected a Director of our general partner in April
1998. In February 2001, she was promoted to President and Chief Executive
Officer of EPCO from her previous position of Group Executive Vice President of
EPCO, a position she had held since 1994. Ms. Williams is the daughter of Dan L.
Duncan.
J.R. Eagan was elected a Director of our general partner in October 2000.
Ms. Eagan has served in various executive-level positions with Shell, and since
February 2002 she has held the office of Chief Financial Officer of Shell Oil
Company and Vice President Finance & Commercial Operations of Shell Exploration
and Production Company. From January 2000 to January 2002 she served as Vice
President, Finance & Commercial Operations of Shell Exploration and Production
Company. From January 1999 to December 1999 she was Vice President Finance of
Shell Exploration and Production Company. From January 1998 to October 1998 she
was Deputy Group Controller of Shell International Limited.
S-17
J.A. Berget was elected a Director of our general partner in November 2000.
Since 1995, Mr. Berget has served in various managerial capacities with the
Royal Dutch/Shell Group of Companies, including General Manager of the Brent
Business Unit of Shell U.K. from January 1997 to March 1999, General Manager,
New Markets of the Brent Business Unit of Shell U.K. from March 1999 to October
2000 and Vice President and General Manager of Shell Exploration and Production
Company from October 2000 to the present. Mr. Berget also serves as a director
of Enventure Global Technologies (a joint venture between Shell and Halliburton
Company).
Dr. Ralph S. Cunningham was elected a Director of our general partner in
April 1998. Dr. Cunningham retired in 1997 from CITGO Petroleum Corporation,
where he had served as President and Chief Executive Officer since 1995. Dr.
Cunningham serves as a director of Tetra Technologies, Inc. (a publicly traded
energy services and chemicals company) and Agrium, Inc. (a Canadian publicly
traded agricultural chemicals company) and was a director of EPCO from 1987 to
1997. Dr. Cunningham serves as Chairman of our Audit and Conflicts Committee.
Augustus Y. Noojin, III, was elected a Director of our general partner in
May 2002. Mr. Noojin became President and Chief Executive Officer of Shell U.S.
Gas & Power, LLC, an affiliate of Shell, in May 2002. Previously, he served as
President and Chief Executive Officer of Shell Oil Products Company from October
2000 to May 2002, Executive Vice President of Shell Chemicals Company from
January 1998 to September 2000, and Vice President -- Transportation of Shell
Oil Products Company from January 1996 to December 1997.
Lee W. Marshall, Sr. was elected a Director of our general partner in April
1998. Mr. Marshall has been the Managing Partner and principal owner of Bison
Resources, LLC, (a privately held oil and gas production company) since 1993.
Previously, he held senior management positions with Union Pacific Resources, as
Senior Vice President, Refining, Manufacturing and Marketing, with Wolverine
Exploration Company as Executive Vice President and Chief Financial Officer and
with Tenneco Oil Company as Senior Vice President, Marketing. Mr. Marshall is a
member of our Audit and Conflicts Committee.
Richard W. Snell was elected a Director of our general partner in June
2000. Mr. Snell was an attorney with the Snell & Smith, P.C. law firm in
Houston, Texas from the founding of the firm in 1993 until May 2000. Since May
2000 he has been a partner with the firm of Thompson & Knight LLP in Houston,
Texas and is a certified public accountant. Mr. Snell is a member of our Audit
and Conflicts Committee.
S-18
TAX CONSIDERATIONS
The tax consequences to you of an investment in common units will depend in
part on your own tax circumstances. For a discussion of the principal federal
income tax considerations associated with our operations and the ownership and
disposition of common units, please read "Tax Consequences" in the accompanying
prospectus. We recommend that you consult your own tax advisor about the
federal, state, local and foreign tax consequences peculiar to your
circumstances.
We estimate that if you purchase common units in this offering and own them
through December 31, 2005, then you will be allocated, on a cumulative basis, an
amount of federal taxable income for that period that will be less than 10% of
the cash distributed with respect to that period. If you own common units
purchased in this offering for a shorter period, the percentage of federal
taxable income allocated to you may be higher. These estimates are based upon
the assumption that our available cash for distribution will approximate the
amount required to distribute cash to the holders of the common units in an
amount equal to the quarterly distribution of $0.3625 per unit and other
assumptions with respect to capital expenditures, cash flow and anticipated cash
distributions. These estimates and assumptions are subject to, among other
things, numerous business, economic, regulatory, competitive and political
uncertainties beyond our control. Further, the estimates are based on current
tax law and certain tax reporting positions that we have adopted with which the
IRS could disagree. In addition, subsequent issuances of equity securities by us
could also affect the percentage of distributions that will constitute taxable
income. Accordingly, we cannot assure you that the estimates will be correct.
The actual percentage of distributions that will constitute taxable income could
be higher or lower, and any differences could be material and could materially
affect the value of the common units.
Congress recently passed legislation, which the President is expected to
sign, reducing the maximum tax rate applicable to corporate dividends to 15%.
The effect of this reduction, if any, on the value of our common units in
relation to investments in corporate stock is not clear. The legislation also
reduces the maximum tax rate for an individual to 35% and the maximum tax rate
applicable to net long term capital gains of an individual to 15%.
S-19
UNDERWRITING
Citigroup Global Markets Inc. and Morgan Stanley & Co. Incorporated are
acting as joint bookrunning managers of the offering, and are acting as
representatives of the underwriters named below. Subject to the terms and
conditions stated in the underwriting agreement dated the date of this
prospectus supplement, each underwriter named below has agreed to purchase, and
we have agreed to sell to that underwriter, the number of common units set forth
opposite the underwriter's name.
NUMBER OF
COMMON UNITS
UNDERWRITER ------------
Citigroup Global Markets Inc. ..............................
Morgan Stanley & Co. Incorporated...........................
Goldman, Sachs & Co. .......................................
UBS Warburg LLC.............................................
Raymond James & Associates, Inc. ...........................
RBC Dain Rauscher Inc. .....................................
Sanders Morris Harris Inc. .................................
Wachovia Securities, Inc. ..................................
---------
Total.................................................. 8,700,000
=========
An entity or entities controlled by Dan L. Duncan, the Chairman of our
general partner, or members of his family, will purchase 650,000 common units in
this offering, and O.S. Andras, the President and Chief Executive Officer of our
general partner, will purchase 50,000 common units in this offering, in each
case directly from the underwriters at a price equal to the public offering
price. The underwriters will not receive any underwriting discount or commission
on the sale of these 700,000 units.
The underwriting agreement provides that the obligations of the
underwriters to purchase the common units included in this offering are subject
to approval of legal matters by counsel and to other conditions. The
underwriters are obligated to purchase all the common units (other than those
covered by the over-allotment option described below) if they purchase any of
the common units.
The underwriters propose to offer some of the common units directly to the
public at the public offering price set forth on the cover page of this
prospectus and some of the common units to dealers at the public offering price
less a concession not to exceed $ per common unit. The underwriters may
allow, and dealers may reallow, a concession not to exceed $ per common unit
on sales to other dealers. If all of the common units are not sold at the
initial offering price, the representatives may change the public offering price
and the other selling terms.
We have granted to the underwriters an option, exercisable for 30 days from
the date of this prospectus supplement, to purchase up to 1,305,000 additional
common units at the public offering price less the underwriting discount and
commission. The underwriters may exercise the option solely for the purpose of
covering over-allotments, if any, in connection with this offering. To the
extent the option is exercised, each underwriter must purchase a number of
additional common units approximately proportionate to that underwriter's
initial purchase commitment.
We, our affiliates that own common units and the directors and executive
officers of our general partner have agreed that we and they will not, subject
to limited exceptions, directly or indirectly, sell, offer, pledge or otherwise
dispose of any common units or any securities convertible into or exchangeable
or exercisable for common units or enter into any derivative transaction with
similar effect as a sale of common units for a period of 90 days after the date
of this prospectus supplement without the prior written consent of the
representatives. The restrictions described in this paragraph do not apply to
the sale of common units to the underwriters.
The representatives, in their discretion, may release the common units
subject to lock-up agreements in whole or in part at any time with or without
notice. When determining whether or not to release common units from lock-up
agreements, the representatives will consider, among other factors, the
unitholders' reasons for
S-20
requesting the release, the number of common units for which the release is
being requested and market conditions at the time.
Affiliates of Citigroup Global Markets Inc., UBS Warburg LLC, RBC Dain
Rauscher Inc. and Wachovia Securities, Inc. are lenders to us under our
revolving credit facilities and will be repaid with a portion of the net
proceeds from this offering.
The following table shows the underwriting discounts and commissions that
we are to pay to the underwriters in connection with this offering. These
amounts are shown assuming both no exercise and full exercise of the
underwriters' option to purchase additional common units.
PAID BY ENTERPRISE
PRODUCTS PARTNERS
---------------------------
NO EXERCISE FULL EXERCISE
----------- -------------
Per common unit............................................. $ $
Total....................................................... $ $
In connection with the offering, the representatives, on behalf of the
underwriters, may purchase and sell common units in the open market. These
transactions may include short sales, syndicate covering transactions and
stabilizing transactions. Short sales involve syndicate sales of common units in
excess of the number of common units to be purchased by the underwriters in the
offering, which creates a syndicate short position. "Covered" short sales are
sales of common units made in an amount up to the number of common units
represented by the underwriters' over-allotment option. In determining the
source of common units to close out the covered syndicate short position, the
underwriters will consider, among other things, the price of common units
available for purchase in the open market as compared to the price at which they
may purchase common units through the over-allotment option. Transactions to
close out the covered syndicate short position involve either purchases of the
common units in the open market after the distribution has been completed or the
exercise of the over-allotment option. The underwriters may also make "naked"
short sales of common units in excess of the over-allotment option. The
underwriters must close out any naked short position by purchasing common units
in the open market. A naked short position is more likely to be created if the
underwriters are concerned that there may be downward pressure on the price of
the common units in the open market after pricing that could adversely affect
investors who purchase in the offering. Stabilizing transactions consist of bids
for or purchases of common units in the open market while the offering is in
progress.
The underwriters also may impose a penalty bid. Penalty bids permit the
underwriters to reclaim a selling concession from a syndicate member when the
representatives repurchase common units originally sold by that syndicate member
in order to cover syndicate short positions or make stabilizing purchases.
Any of these activities may have the effect of preventing or retarding a
decline in the market price of the common units. They may also cause the price
of the common units to be higher than the price that would otherwise exist in
the open market in the absence of these transactions. The underwriters may
conduct these transactions on the New York Stock Exchange or in the
over-the-counter market, or otherwise. If the underwriters commence any of these
transactions, then they may discontinue them at any time.
Neither we nor any of the underwriters make any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the common units. In addition, neither
we nor any of the underwriters make any representation that the underwriters
will engage in these stabilizing transactions or that any transaction, once
commenced, will not be discontinued without notice.
We estimate that our portion of the total expenses of this offering will be
$725,000.
The underwriters have performed investment banking or advisory services for
us from time to time for which they have received customary fees and expenses.
The underwriters may, from time to time, engage in transactions with and perform
services for us in the ordinary course of their business.
S-21
A prospectus in electronic format may be made available on the websites
maintained by one or more of the underwriters. The representatives may agree to
allocate a number of shares to underwriters for sale to their online brokerage
account holders. The representatives will allocate shares to underwriters that
may make Internet distributions on the same basis as other allocations. In
addition, shares may be sold by the underwriters to securities dealers who
resell shares to online brokerage account holders.
We, our general partner and our operating partnership have agreed to
indemnify the underwriters against certain liabilities, including liabilities
under the Securities Act of 1933, or to contribute to payments the underwriters
may be required to make because of any of those liabilities.
Because the NASD views the common units offered hereby as interests in a
direct participation program, the offering is being made in compliance with Rule
2810 of the NASD Conduct Rules. Investor suitability with respect to the common
units should be judged similarly with respect to other securities that are
listed for trading on a national securities exchange.
No sales to accounts over which the underwriters have discretionary
authority may be made without the prior written approval of the customer.
The common units are listed on the New York Stock Exchange under the symbol
"EPD."
S-22
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to incorporate by reference into this prospectus
supplement and the accompanying prospectus the information we file with it,
which means that we can disclose important information to you by referring you
to those documents. The information incorporated by reference is considered to
be part of this prospectus supplement and the accompanying prospectus, and later
information that we file with the Commission will automatically update and
supersede this information. We incorporate by reference the documents listed
below filed by us and any future filings made by us with the Commission under
section 13(a), 13(c), 14 or 15(d) of the Exchange Act until our offering is
completed:
- our Annual Report on Form 10-K/A for the fiscal year ended December 31,
2002, Commission File Nos. 1-14323 and 333-93239-01;
- our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31,
2003, Commission File Nos. 1-14323 and 333-93239-01;
- our Current Reports on Form 8-K filed with the Commission on January 10,
2003, April 30, 2003 (excluding Item 9 and Item 12 information) and May
9, 2003, Commission File Nos. 1-14323 and 333-93239-01; and
- the description of our common units contained in the Registration
Statement on Form 8-A, initially filed with the Commission on July 21,
1998, and any subsequent amendment thereto filed for the purposes of
updating such description.
LEGAL MATTERS
Certain legal matters with respect to the common units will be passed upon
for us by Vinson & Elkins L.L.P., Houston, Texas. Certain legal matters with
respect to the common units will be passed upon for the underwriters by Baker
Botts L.L.P., Houston, Texas. Baker Botts L.L.P. performs legal services for us
and our affiliates from time to time.
EXPERTS
The (i) consolidated financial statements and the related consolidated
financial statement schedule of Enterprise Products Partners L.P. and
subsidiaries as of December 31, 2002 and 2001 and for each of the three years in
the period ended December 31, 2002 incorporated by reference in this prospectus
supplement, and (ii) the balance sheet of Enterprise Products GP, LLC as of
December 31, 2002, incorporated by reference in this prospectus supplement, have
been audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are incorporated by reference herein (each such report expresses
an unqualified opinion and the reports for Enterprise Products Partners L.P.
include an explanatory paragraph referring to a change in method of accounting
for derivative instruments in 2001 as discussed in Note 8 to Enterprise Products
Partners L.P.'s consolidated financial statements), and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
The financial statements of Mid-America Pipeline System and Seminole
Pipeline Company as of December 31, 2000 and 2001 and for each of the three
years in the period ended December 31, 2001 appearing in Enterprise Products
Partners L.P. and Enterprise Products Operating L.P.'s Current Report on Form
8-K filed May 9, 2003, have been audited by Ernst & Young LLP, independent
auditors, as set forth in their reports thereon included therein and
incorporated herein by reference. Such financial statements are incorporated
herein by reference in reliance upon such reports given on the authority of such
firm as experts in accounting and auditing.
S-23
INDEX TO FINANCIAL STATEMENTS
Enterprise Products Partners L.P. Unaudited Pro Forma
Consolidated Financial Statements:
Introduction.............................................. F-2
Pro Forma Statement of Consolidated Operations for the
year ended December 31, 2002........................... F-4
Pro Forma Statement of Consolidated Operations for the
three months ended March 31, 2003...................... F-5
Pro Forma Consolidated Balance Sheet at March 31, 2003.... F-6
Notes to Unaudited Pro Forma Consolidated Financial
Statements............................................. F-7
F-1
ENTERPRISE PRODUCTS PARTNERS L.P.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
INTRODUCTION
The following pro forma financial information has been prepared to assist
in your analysis of the financial effects of strategic acquisitions we have
completed since January 2002. These pro forma statements also give effect to:
- our January 2003 equity offering of 14,662,500 Common Units;
- the January 2003 issuance of our $350 million, 6.375% Senior Notes C due
2013;
- the February 2003 issuance of our $500 million, 6.875% Senior Notes D due
2033; and
- the sale of 8,700,000 Common Units in May 2003 as contemplated by this
offering.
The equity and debt offerings we completed during January and February 2003
are hereafter collectively referred to as the "first quarter of 2003 capital
transactions." Unless the context requires otherwise, references to "we," "us,"
"our," "Enterprise" 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. References to "General
Partner" are intended to mean Enterprise Products GP, LLC.
Since January 2002, we have completed the following strategic business
acquisitions:
- the acquisition of controlling interests in natural gas liquid ("NGL")
pipeline systems owned by Mid-America Pipeline Company, LLC
("Mid-America") and Seminole Pipeline Company ("Seminole") from
affiliates of The Williams Companies Inc. ("Williams") in July 2002;
- the acquisition of a controlling interest in a propylene fractionation
business from affiliates of Valero Energy Corporation and Koch
Industries, Inc. (collectively, "Diamond-Koch") in February 2002; and,
- the acquisition of an NGL and petrochemical storage business from
Diamond-Koch in January 2002.
The pro forma consolidated balance sheet shows the proposed May 2003 sale
of 8,700,000 Common Units as if the sale occurred on March 31, 2003. Our March
31, 2003 historical consolidated balance sheet already reflects the previously
noted acquisitions and first quarter of 2003 capital transactions.
The pro forma 2002 annual statement of consolidated operations assumes the
acquisitions, the first quarter of 2003 capital transactions and the proposed
May 2003 Common Unit offering all occurred on January 1, 2002. The pro forma
quarterly statement of consolidated operations for the first three months of
2003 assumes that the first quarter of 2003 capital transactions and the
proposed May 2003 Common Unit offering both occurred on January 1, 2003. Our
first quarter of 2003 statement of consolidated operations already reflects the
capital transactions completed during the quarter (to the extent outstanding
based on the date each was completed) and the previously noted acquisitions. In
general, the pro forma financial information is based on the following
information:
- The audited and unaudited financial statements of Enterprise, which
includes Enterprise Products Operating L.P. and its subsidiaries.
- The audited and unaudited income statements of the acquired businesses.
The unaudited information was derived from the records of the previous
owners and is believed to be reliable.
- Earnings from the acquired businesses are included in the financial
statements of Enterprise from the date of their respective acquisition.
For example, our historical statement of consolidated operations for 2002
reflects the earnings of Mid-America and Seminole since July 31, 2002
(i.e., for August through December). The earnings of Mid-America and
Seminole for the first seven months of 2002 are reflected in the columns
labeled "Mid-America Historical" and "Seminole Historical."
F-2
The unaudited pro forma consolidated financial statements should be read in
conjunction with and are qualified in their entirety by reference to the notes
accompanying such pro forma consolidated financial statements and with the
historical consolidated financial statements and related notes of Enterprise,
Mid-America and Seminole included in our Annual Reports on Form 10-K/A for the
year ended December 31, 2002 and our Form 10-Q for the three months ended March
31, 2003 and with the historical financial statements and related notes of
Mid-America and Seminole included in our Current Report on Form 8-K dated May 9,
2003. The unaudited pro forma information is not necessarily indicative of the
financial results that would have occurred if the acquisitions described herein
had taken place on the dates indicated or if we had issued equity and borrowed
funds on the dates indicated, nor is it indicative of our future consolidated
financial results.
F-3
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 2002
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
MID- ADJUSTMENTS ADJUSTED
ENTERPRISE AMERICA SEMINOLE ENTERPRISE DUE TO EQUITY ENTERPRISE
HISTORICAL HISTORICAL HISTORICAL OTHER ADJUSTMENTS PRO FORMA OFFERING PRO FORMA
---------- ---------- ---------- ------- ----------- ---------- ------------- ----------
REVENUES
Revenues from
consolidated operations
Third parties.......... $3,102,066 $125,796 $41,281 $17,434 $ (2,442)(a) $3,284,135 $3,284,135
Related parties........ 482,717 -- -- -- -- 482,717 482,717
---------- -------- ------- ------- -------- ---------- ----------
Total revenues....... 3,584,783 125,796 41,281 17,434 (2,442) 3,766,852 3,766,852
---------- -------- ------- ------- -------- ---------- ----------
COSTS AND EXPENSES
Operating costs and
expenses
Third parties.......... 2,686,982 48,485 20,672 16,122 (2,442)(a) 2,770,745 2,770,745
126(b)
800(c)
Related parties........ 695,579 695,579 695,579
Selling, general and
administrative
Third parties.......... 18,686 16,871 1,004 260 36,821 36,821
Related parties........ 24,204 24,204 24,204
---------- -------- ------- ------- -------- ---------- ----------
Total costs and
expenses........... 3,425,451 65,356 21,676 16,382 (1,516) 3,527,349 3,527,349
---------- -------- ------- ------- -------- ---------- ----------
EQUITY IN INCOME OF
UNCONSOLIDATED
AFFILIATES............. 35,253 (109) 35,144 35,144
---------- -------- ------- ------- -------- ---------- ----------
OPERATING INCOME......... 194,585 60,440 19,605 943 (926) 274,647 274,647
---------- -------- ------- ------- -------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest expense......... (101,580) (5,407) (2,340) 4,777(d) (141,010) 4,062(m) (136,948)
21,390(e)
(500)(f)
(22,613)(g)
(34,737)(h)
Interest income from
related parties........ 139 139 139
Dividend income from
unconsolidated
affiliates............. 4,737 4,737 4,737
Interest
income -- other........ 2,313 2,313 2,313
Other, net............... (113) (743) (7) (863) (863)
---------- -------- ------- ------- -------- ---------- ------ ----------
Other income
(expense).......... (94,504) (6,150) (2,347) (31,683) (134,684) 4,062 (130,622)
---------- -------- ------- ------- -------- ---------- ------ ----------
INCOME BEFORE PROVISION
FOR INCOME TAXES AND
MINORITY INTEREST...... 100,081 54,290 17,258 943 (32,609) 139,963 4,062 144,025
PROVISION FOR INCOME
TAXES.................. (1,634) (20,050) (6,231) 20,050(i) (7,865) (7,865)
---------- -------- ------- ------- -------- ---------- ------ ----------
INCOME BEFORE MINORITY
INTEREST............... 98,447 34,240 11,027 943 (12,559) 132,098 4,062 136,160
MINORITY INTEREST........ (2,947) (3,870)(j) (6,817) (41)(j) (6,858)
---------- -------- ------- ------- -------- ---------- ------ ----------
NET INCOME............... $ 95,500 $ 34,240 $11,027 $ 943 $(16,429) $ 125,281 $4,021 $ 129,302
========== ======== ======= ======= ======== ========== ====== ==========
ALLOCATION OF NET INCOME
TO:
General Partner........ $ 10,663 $ 298(k) $ 10,961 $ 40(k) $ 11,001
========== ======== ========== ====== ==========
Limited Partner........ $ 84,837 $ 29,483(k) $ 114,320 $3,981(k) $ 118,301
========== ======== ========== ====== ==========
BASIC EARNINGS PER UNIT:
Number of Units used in
computing Basic
Earnings per Unit.... 155,454 22,180(l) 177,634 8,700(m) 186,334
========== ======== ========== ====== ==========
Income before minority
interest............. $ 0.56 $ 0.68 $ 0.67
========== ========== ==========
Net income............. $ 0.55 $ 0.64 $ 0.63
========== ========== ==========
DILUTED EARNINGS PER UNIT
Number of Units used in
computing Diluted
Earnings per Unit.... 176,490 22,180(l) 198,670 8,700(m) 207,370
========== ======== ========== ====== ==========
Income before minority
interest............. $ 0.50 $ 0.61 $ 0.60
========== ========== ==========
Net income............. $ 0.48 $ 0.58 $ 0.57
========== ========== ==========
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
F-4
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA STATEMENT OF CONSOLIDATED OPERATIONS
FOR THE THREE MONTHS ENDED MARCH 31, 2003
(DOLLARS IN THOUSANDS, EXCEPT PER UNIT AMOUNTS)
ADJUSTMENTS ADJUSTED
ENTERPRISE ENTERPRISE DUE TO EQUITY ENTERPRISE
HISTORICAL ADJUSTMENTS PRO FORMA OFFERING PRO FORMA
---------- ----------- ---------- ------------- ----------
REVENUES
Revenues from consolidated operations
Third parties............................................. $1,348,782 $1,348,782 $1,348,782
Related parties........................................... 132,804 132,804 132,804
---------- ---------- ----------
Total revenues............................................ 1,481,586 1,481,586 1,481,586
---------- ---------- ----------
COSTS AND EXPENSES
Operating costs and expenses
Third parties............................................. 1,152,302 1,152,302 1,152,302
Related parties........................................... 234,402 234,402 234,402
Selling, general and administrative
Third parties............................................. 5,087 5,087 5,087
Related parties........................................... 6,384 6,384 6,384
---------- ---------- ----------
Total costs and expenses.................................. 1,398,175 1,398,175 1,398,175
---------- ---------- ----------
EQUITY IN INCOME OF UNCONSOLIDATED AFFILIATES............... 1,621 1,621 1,621
---------- ---------- ----------
OPERATING INCOME............................................ 85,032 85,032 85,032
---------- ---------- ----------
OTHER INCOME (EXPENSE)
Interest expense............................................ (41,911) $13,728 (e) (33,748) $1,015 (m) (32,733)
(1,376)(g)
(4,189)(h)
Dividend income from unconsolidated affiliates.............. 2,601 2,601 2,601
Interest income -- other.................................... 200 200 200
Other, net.................................................. 34 34 34
---------- ------- ---------- ------ ----------
Other income (expense).................................... (39,076) 8,163 (30,913) 1,015 (29,898)
---------- ------- ---------- ------ ----------
INCOME BEFORE PROVISION FOR INCOME TAXES AND MINORITY
INTEREST.................................................... 45,956 8,163 54,119 1,015 55,134
PROVISION FOR INCOME TAXES.................................. (3,129) (3,129) (3,129)
---------- ------- ---------- ------ ----------
INCOME BEFORE MINORITY INTEREST............................. 42,827 8,163 50,990 1,015 52,005
MINORITY INTEREST........................................... (2,322) (92)(j) (2,414) (10)(j) (2,424)
---------- ------- ---------- ------ ----------
NET INCOME.................................................. $ 40,505 $ 8,071 $ 48,576 $1,005 $ 49,581
========== ======= ========== ====== ==========
ALLOCATION OF NET INCOME TO:
General Partner........................................... $ 4,137 $ 81 (k) $ 4,218 $ 10 (k) $ 4,228
========== ======= ========== ====== ==========
Limited Partner........................................... $ 36,368 $ 7,990 (k) $ 44,358 $ 995 (k) $ 45,353
========== ======= ========== ====== ==========
BASIC EARNINGS PER UNIT
Number of Units used in computing
Basic Earnings per Unit................................. 186,191 2,281 (l) 188,472 8,700 (m) 197,172
========== ======= ========== ====== ==========
Income before minority interest........................... $ 0.21 $ 0.25 $ 0.24
========== ========== ==========
Net income................................................ $ 0.20 $ 0.24 $ 0.23
========== ========== ==========
DILUTED EARNINGS PER UNIT
Number of Units used in computing
Diluted Earnings per Unit............................... 196,191 2,281 (l) 198,472 8,700 (m) 207,172
========== ======= ========== ====== ==========
Income before minority interest........................... $ 0.20 $ 0.24 $ 0.23
========== ========== ==========
Net income................................................ $ 0.19 $ 0.22 $ 0.22
========== ========== ==========
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
F-5
ENTERPRISE PRODUCTS PARTNERS L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET AT MARCH 31, 2003
(DOLLARS IN THOUSANDS, UNAUDITED)
ADJUSTMENTS AS ADJUSTED
ENTERPRISE DUE TO EQUITY ENTERPRISE
HISTORICAL OFFERING PRO FORMA
---------- ------------- -----------
ASSETS
CURRENT ASSETS
Cash and cash equivalents........................... $ 41,346 $ 207,930(m) $ 41,346
4,132(m)
(8,851)(m)
(203,211)(m)
Accounts and notes receivable -- trade, net......... 482,965 482,965
Accounts receivable -- affiliates................... 406 406
Inventories......................................... 101,962 101,962
Prepaid and other current assets.................... 22,432 22,432
---------- --------- ----------
Total current assets........................ 649,111 -- 649,111
PROPERTY, PLANT AND EQUIPMENT, NET.................... 2,845,993 2,845,993
INVESTMENTS IN AND ADVANCES TO UNCONSOLIDATED 386,249
AFFILIATES.......................................... 386,249
INTANGIBLE ASSETS..................................... 274,072 274,072
GOODWILL.............................................. 81,547 81,547
DEFERRED TAX ASSET.................................... 13,113 13,113
OTHER ASSETS.......................................... 16,305 16,305
---------- --------- ----------
TOTAL....................................... $4,266,390 $ -- $4,266,390
========== ========= ==========
LIABILITIES AND PARTNERS' EQUITY
CURRENT LIABILITIES
Current maturities of debt.......................... $ 15,000 $ 15,000
Accounts payable -- trade........................... 74,364 74,364
Accounts payable -- affiliates...................... 35,162 35,162
Accrued gas payables................................ 575,504 575,504
Accrued expenses.................................... 19,987 19,987
Accrued interest.................................... 17,974 17,974
Other current liabilities........................... 23,994 23,994
---------- --------- ----------
Total current liabilities................... 761,985 761,985
LONG-TERM DEBT........................................ 1,986,636 $(203,211)(m) 1,783,425
OTHER LONG-TERM LIABILITIES........................... 7,663 7,663
MINORITY INTEREST..................................... 71,273 2,053(m) 73,326
COMMITMENTS AND CONTINGENCIES
PARTNERS' EQUITY
Common Units........................................ 1,181,052 207,930(m) 1,380,219
(8,763)(m)
Subordinated Units.................................. 111,863 111,863
Special Units....................................... 143,926 143,926
Treasury Units...................................... (17,808) (17,808)
General Partner..................................... 14,514 2,079(m) 16,505
(88)(m)
Accumulated Other Comprehensive Income.............. 5,286 5,286
---------- --------- ----------
Total Partners' Equity...................... 1,438,833 $ 201,158 1,639,991
---------- --------- ----------
TOTAL....................................... $4,266,390 $ -- $4,266,390
========== ========= ==========
The accompanying notes are an integral part of these unaudited pro forma
condensed financial statements.
F-6
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
These unaudited pro forma consolidated financial statements and underlying
pro forma adjustments are based upon currently available information and certain
estimates and assumptions made by us; therefore, actual results will differ from
pro forma results. However, we believe the assumptions provide a reasonable
basis for presenting the significant effects of the transactions noted herein.
We believe the pro forma adjustments give appropriate effect to those
assumptions and are properly applied in the pro forma financial information.
Our March 31, 2003 historical balance sheet reflects all acquisitions made
through that date, including the $1.2 billion Mid-America and Seminole
acquisition completed on July 31, 2002. In our pro forma 2002 annual statement
of consolidated operations, the column labeled "Other" represents the historical
financial amounts of the propylene fractionation business we acquired from
Diamond-Koch in the first quarter of 2002 through its date of acquisition. The
NGL and petrochemical storage business we acquired from Diamond-Koch is already
reflected in our historical 2002 results, since we acquired these facilities
effective January 1, 2002. The pro forma adjustments we made to our historical
financial statements are described as follows:
(a) Reflects the elimination of material intercompany revenues and
expenses between acquired businesses and Enterprise as appropriate in
consolidation.
(b) As a result of the propylene fractionation business we purchased
from Diamond-Koch during the first quarter of 2002, we acquired certain
contract-based intangible assets that are subject to amortization. On a pro
forma basis, amortization expense associated with these intangible assets
increased by $0.1 million for the year ended December 31, 2002.
(c) Reflects the pro forma depreciation expense adjustment for the
Mid-America and Seminole pipeline assets. For purposes of calculating pro
forma depreciation expense, we have applied the straight-line method using
an estimated remaining useful life of the Mid-America and Seminole assets
of 35 years to our new basis in these assets of approximately $1.3 billion.
After adjusting for historical depreciation recorded on Mid-America and
Seminole during the first seven months of 2002, pro forma depreciation
expense increased $0.8 million for the year ended December 31, 2002.
(d) Reflects the removal of interest expense associated with
Mid-America's $90.0 million in private placement debt, which was
extinguished prior to our purchase of the Mid-America interest. The pro
forma entry gives effect to the removal of interest expense associated with
this debt of $4.8 million in 2002.
(e) In order to fund the Mid-America and Seminole acquisitions at
closing on July 31, 2002, we entered into a $1.2 billion 364-Day Term Loan
and accessed $10 million under our 364-Day Revolving Credit facility. We
used proceeds from our equity offerings in October 2002 and January 2003
and the issuance of our Senior Notes C and D in January and February 2003
to completely repay these initial borrowings by mid-February 2003.
The pro forma adjustment removes the interest expense and related
amortizations we recorded associated with the debt we used to initially
fund the Mid-America and Seminole acquisitions. As a result, pro forma
interest expense was reduced $21.4 million for the year ended December 31,
2002 and $13.7 million for the three months ended March 31, 2003. This debt
was partially refinanced using fixed-rate borrowings (see "g" and "h"
below).
(f) We financed our purchase of Diamond-Koch's propylene fractionation
business in February 2002 with approximately $239.0 million of
variable-rate debt. The pro forma entry gives effect to an increase in
interest expense associated with this debt of $0.5 million for the year
ended December 31, 2002. If the underlying variable interest rate used in
the pro forma calculation were to increase by 0.125%, pro forma interest
expense would increase by $0.1 million for the year ended December 31,
2002.
F-7
ENTERPRISE PRODUCTS PARTNERS L.P.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED
FINANCIAL STATEMENTS -- (CONTINUED)
(g) Reflects an increase in pro forma interest expense resulting from
our issuance of Senior Notes C in January 2003 ($350 million in principal
amount at a fixed-rate of 6.375%). The pro forma increase in interest
expense is $22.6 million for the year ended December 31, 2002 and $1.4
million for the three months ended March 31, 2003. Pro forma interest
expense includes bond issue cost amortization of $0.3 million for the year
ended December 31, 2002 and $0.1 million for the three months ended March
31, 2003.
(h) Reflects an increase in pro forma interest expense resulting from
our issuance of Senior Notes D in February 2003 ($500 million in principal
amount at a fixed-rate of 6.875%). The pro forma increase in interest
expense is $34.7 million for the year ended December 31, 2002 and $4.2
million for the three months ended March 31, 2003. Pro forma interest
expense includes bond issue cost and discount amortization of $0.4 million
for the year ended December 31, 2002 and $0.1 million for the three months
ended March 31, 2003.
(i) In connection with the Mid-America acquisition, immediately prior
to the acquisition's effective date, Williams converted Mid-America from a
corporation to a limited liability company. The pro forma adjustment
reflects this change in Mid-America's tax structure by eliminating
historical income tax-related expense amounts. The impact on Mid-America's
pro forma earnings was the elimination of $20.1 million in income tax
expense for the year ended December 31, 2002.
(j) Reflects the allocation of pro forma earnings to minority interest
holders. Williams has a 2% interest in Mid-America and Seminole. The other
owners of Seminole hold a 20% minority interest. Finally, our General
Partner holds an approximate 1% minority interest in the earnings of our
Operating Partnership.
(k) Reflects the adjustments necessary to allocate pro forma earnings
between our Limited Partners and General Partner.
(l) Since closing the Mid-America and Seminole acquisition in July
2002, we have completed two Common Unit offerings. The first took place on
October 8, 2002 when we sold 9,800,000 Common Units; the second, when we
sold 14,662,500 Common Units on January 15, 2003. Our pro forma adjustment
for the year ended December 31, 2002 reflects an increase in the
weighted-average number of Common Units outstanding as if both offerings
had occurred on January 1, 2002. Our pro forma adjustment for the three
months ended March 31, 2003 reflects an increase in the weighted-average
number of Common Units outstanding as if the January 2003 equity offering
had occurred on January 1, 2003.
(m) Reflects the proposed sale of 8,700,000 Common Units at an
estimated offering price of $23.90 per Unit in May 2003. Net estimated
proceeds from this sale would be approximately $199.2 million after
deducting applicable underwriting discounts, commissions and offering
expenses of $8.8 million. In connection with this offering, our General
Partner would make a net capital contribution of $4.0 million to maintain
its approximate 2% combined General Partner interest in the Company after
deducting its share of the underwriting discounts, commissions and offering
expenses. The combined proceeds from this equity offering would be used to
repay $203.2 million of debt outstanding under our revolving credit
facilities. As a result of this use of proceeds, pro forma interest expense
would decrease by $4.1 million for the year ended December 31, 2002 and
$1.0 million for the three months ended March 31, 2003.
F-8
PROSPECTUS
[ENTERPRISE LOGO]
$1,500,000,000
ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE PRODUCTS OPERATING L.P.
---------------------
COMMON UNITS
DEBT SECURITIES
---------------------
We may offer the following securities under this prospectus:
- common units representing limited partner interests in Enterprise
Products Partners L.P.; and
- debt securities of Enterprise Products Operating L.P., which will be
guaranteed by its parent company, Enterprise Products Partners L.P.
This prospectus provides you with a general description of the securities
we may offer. Each time we sell securities we will provide a prospectus
supplement that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. You should read carefully this prospectus and any
prospectus supplement before you invest. You should also read the documents we
have referred you to in the "Where You Can Find More Information" section of
this prospectus for information on us and for our financial statements.
In addition, common units may be offered from time to time by other holders
thereof. Any selling unitholders will be identified, and the number of common
units to be offered by them will be specified, in a prospectus supplement to
this prospectus. We will not receive proceeds of any sale of shares by any such
selling unitholders.
Our common units are listed on the New York Stock Exchange under the
trading symbol "EPD."
---------------------
Unless otherwise specified in a prospectus supplement, the senior debt
securities, when issued, will be unsecured and will rank equally with our other
unsecured and unsubordinated indebtedness. The subordinated debt securities,
when issued, will be subordinated in right of payment to our senior debt.
LIMITED PARTNERSHIPS ARE INHERENTLY DIFFERENT FROM CORPORATIONS. YOU SHOULD
REVIEW CAREFULLY "RISK FACTORS" BEGINNING ON PAGE 2 FOR A DISCUSSION OF
IMPORTANT RISKS YOU SHOULD CONSIDER BEFORE INVESTING ON OUR SECURITIES.
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of this prospectus. Any representation to the contrary is a
criminal offense.
This prospectus may not be used to consummate sales of securities unless
accompanied by a prospectus supplement.
---------------------
The date of this prospectus is April 21, 2003.
TABLE OF CONTENTS
PAGE
----
ABOUT THIS PROSPECTUS....................................... iii
OUR COMPANY................................................. 1
RISK FACTORS................................................ 2
Risks Related to Our Business............................. 2
We have significant leverage that may restrict our
future financial and operating flexibility............ 2
A decrease in the difference between NGL product prices
and natural gas prices results in lower margins on
volumes processed, which would adversely affect our
profitability......................................... 2
A reduction in demand for our products by the
petrochemical, refining or heating industries, could
adversely affect our results of operations............ 3
A decline in the volume of NGLs delivered to our
facilities could adversely affect our results of
operations............................................ 3
Our business requires extensive credit risk management
that may not be adequate to protect against customer
nonpayment............................................ 4
Acquisitions and expansions may affect our business by
substantially increasing the level of our indebtedness
and contingent liabilities and increasing our risks of
being unable to effectively integrate these new
operations............................................ 4
Terrorist attacks aimed at our facilities could
adversely affect our business......................... 4
Risks Related to Our Common Units as a Result of Our
Partnership Structure.................................. 4
We may not have sufficient cash from operations to pay
distributions at the current level following
establishment of cash reserves and payments of fees
and expenses, including payments to our general
partner............................................... 4
Cost reimbursements due our general partner may be
substantial and will reduce our cash available for
distribution to holders of common units............... 5
Our general partner and its affiliates have limited
fiduciary responsibilities and conflicts of interest
with respect to our partnership....................... 5
Even if unitholders are dissatisfied, they cannot
easily remove our general partner..................... 6
If our general partner is removed without cause during
the subordination period, your distribution and
liquidation preference over the subordinated units
will be prematurely eliminated........................ 6
We may issue additional common units without the
approval of common unitholders, which would dilute
their existing ownership interests.................... 6
Our general partner has a limited call right that may
require common unitholders to sell their units at an
undesirable time or price............................. 7
Common unitholders may not have limited liability if a
court finds that limited partner actions constitute
control of our business............................... 7
Tax Risks to Common Unitholders........................... 7
The IRS could treat us as a corporation for tax
purposes, which would substantially reduce the cash
available for distribution to common unitholders...... 8
A successful IRS contest of the federal income tax
positions we take may adversely impact the market for
common units, and the costs of any contests will be
borne by our unitholders and our general partner...... 8
Common unitholders may be required to pay taxes even if
they do not receive any cash distributions............ 8
Tax gain or loss on disposition of common units could
be different than expected............................ 8
Tax-exempt entities, regulated investment companies and
foreign persons face unique tax issues from owning
common units that may result in adverse tax
consequences to them.................................. 9
We are registered as a tax shelter. This may increase
the risk of an IRS audit of us or a unitholder........ 9
We will treat each purchaser of common units as having
the same tax benefits without regard to the units
purchased. The IRS may challenge this treatment, which
could adversely affect the value of our common
units................................................. 9
Common unitholders will likely be subject to state and
local taxes in states where they do not live as a
result of investment in our common units.............. 9
USE OF PROCEEDS............................................. 10
RATIO OF EARNINGS TO FIXED CHARGES.......................... 10
i
PAGE
----
DESCRIPTION OF DEBT SECURITIES.............................. 11
General................................................... 11
Guarantee................................................. 12
Certain Covenants......................................... 12
Events of Default......................................... 16
Amendments and Waivers.................................... 17
Defeasance................................................ 19
Subordination............................................. 19
Book-Entry System......................................... 21
Limitations on Issuance of Bearer Securities.............. 22
No Recourse Against General Partner....................... 23
Concerning the Trustee.................................... 23
Governing Law............................................. 24
DESCRIPTION OF OUR COMMON UNITS............................. 25
Meetings/Voting........................................... 25
Status as Limited Partner or Assignee..................... 25
Limited Liability......................................... 25
Reports and Records....................................... 26
Class A Special Units..................................... 26
CASH DISTRIBUTION POLICY.................................... 27
Distributions of Available Cash........................... 27
Operating Surplus and Capital Surplus..................... 27
Subordination Period...................................... 28
Distributions of Available Cash from Operating Surplus
During the Subordination Period........................ 29
Distributions of Available Cash from Operating Surplus
After Subordination Period............................. 30
Incentive Distributions................................... 30
Distributions from Capital Surplus........................ 30
Adjustment to the Minimum Quarterly Distribution and
Target Distribution Levels............................. 31
Distributions of Cash upon Liquidation.................... 31
DESCRIPTION OF OUR PARTNERSHIP AGREEMENT.................... 34
Purpose................................................... 34
Power of Attorney......................................... 34
Reimbursements of Our General Partner..................... 34
Issuance of Additional Securities......................... 34
Amendments to Our Partnership Agreement................... 35
Withdrawal or Removal of Our General Partner.............. 36
Liquidation and Distribution of Proceeds.................. 36
Change of Management Provisions........................... 37
Limited Call Right........................................ 37
Indemnification........................................... 37
Registration Rights....................................... 38
TAX CONSEQUENCES............................................ 39
Partnership Status........................................ 39
Limited Partner Status.................................... 40
Tax Consequences of Unit Ownership........................ 41
Tax Treatment of Operations............................... 45
Disposition of Common Units............................... 46
Uniformity of Units....................................... 48
Tax-Exempt Organizations and Other Investors.............. 48
Administrative Matters.................................... 49
State, Local and Other Tax Considerations................. 51
Tax Consequences of Ownership of Debt Securities.......... 51
SELLING UNITHOLDERS......................................... 52
PLAN OF DISTRIBUTION........................................ 52
Distribution by Selling Unitholders....................... 53
WHERE YOU CAN FIND MORE INFORMATION......................... 53
FORWARD-LOOKING STATEMENTS.................................. 54
LEGAL MATTERS............................................... 54
EXPERTS..................................................... 54
ii
You should rely only on the information contained or incorporated by
reference in this prospectus or any prospectus supplement. We have not
authorized any other person to provide you with different information. If anyone
provides you with different or inconsistent information, you should not rely on
it. You should not assume that the information incorporated by reference or
provided in this prospectus or any prospectus supplement is accurate as of any
date other than the date on the front of each document.
In this prospectus, the terms "we," "us" and "our" refer to Enterprise
Products Partners L.P. and Enterprise Products Operating L.P. and their
subsidiaries, unless otherwise indicated or the context requires otherwise.
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we file with the
Securities and Exchange Commission (the "Commission") using a "shelf"
registration process. Under this shelf process, we may offer from time to time
up to $1,500,000,000 of our securities. Each time we offer securities, we will
provide you with a prospectus supplement that will describe, among other things,
the specific amounts and prices of the securities being offered and the terms of
the offering. The prospectus supplement may also add, update or change
information contained in this prospectus. Any statement that we make in this
prospectus will be modified or superseded by any inconsistent statement made by
us in a prospectus supplement. Therefore, you should read this prospectus and
any attached prospectus supplement before you invest in our securities.
iii
OUR COMPANY
We are a publicly traded limited partnership that was formed in April 1998
to acquire, own, and operate all of the NGL processing and distribution assets
of Enterprise Products Company, or EPCO. We conduct all of our business through
our 99% owned subsidiary, Enterprise Products Operating L.P., our "Operating
Partnership" and its subsidiaries and joint ventures. Our general partner,
Enterprise Products GP, LLC, owns a 1.0% interest in us and a 1.0101% interest
in our Operating Partnership.
We are a leading North American midstream energy company that provides a
wide range of services to producers and consumers of natural gas and natural gas
liquids, or NGLs. NGLs are used by the petrochemical and refining industries to
produce plastics, motor gasoline and other industrial and consumer products and
also are used as residential and industrial fuels. Our asset platform creates
the only integrated natural gas and NGL transportation, fractionation,
processing, storage and import/export network in North America. We provide
integrated services to our customers and generate fee-based cash flow from
multiple sources along our natural gas and NGL "value chain." Our services
include the:
- gathering and transmission of raw natural gas from both onshore and
offshore Gulf of Mexico developments;
- processing of raw natural gas into a marketable product that meets
industry quality specifications by removing mixed NGLs and impurities;
- purchase and transportation of natural gas for delivery to our
industrial, utility and municipal customers;
- transportation of mixed NGLs to fractionation facilities by pipeline;
- fractionation, or separation, of mixed NGLs produced as by-products of
crude oil refining and natural gas production into component NGL
products: ethane, propane, isobutane, normal butane and natural gasoline;
- transportation of NGL products to end-users by pipeline, railcar and
truck;
- import and export of NGL products and petrochemical products through our
dock facilities;
- fractionation of refinery-sourced propane/propylene mix into high purity
propylene, propane and mixed butane;
- transportation of high purity propylene to end-users by pipeline;
- storage of natural gas, mixed NGLs, NGL products and petrochemical
products;
- conversion of normal butane to isobutane through the process of
isomerization;
- production of high-octane additives for motor gasoline from isobutane;
and
- sale of NGL and petrochemical products we produce and/or purchase for
resale on a merchant basis.
Certain of our facilities are owned jointly by us and other industry
partners, either through co-ownership arrangements or joint ventures. Some of
our jointly owned facilities are operated by other owners.
We do not have any employees. All of our management, administrative and
operating functions are performed by employees of EPCO, our ultimate parent
company, pursuant to the EPCO Agreement. For a discussion of the EPCO Agreement,
please read Item 13 of our Annual Report on Form 10-K.
Our principal executive offices are located at 2727 North Loop West,
Houston, Texas 77008-1038, and our telephone number is (713) 880-6500.
1
RISK FACTORS
An investment in our securities involves risks. You should consider
carefully the following risk factors, together with all of the other information
included in, or incorporated by reference into, this prospectus and any
prospectus supplement in evaluating an investment in our securities. This
prospectus also contains forward-looking statements that involve risks and
uncertainties. Please read "Forward-Looking Statements." Our actual results
could differ materially from those anticipated in the forward-looking statements
as a result of certain factors, including the risks described below and
elsewhere in this prospectus. If any of these risks occur, our business,
financial condition or results of operation could be adversely affected.
RISKS RELATED TO OUR BUSINESS
WE HAVE SIGNIFICANT LEVERAGE THAT MAY RESTRICT OUR FUTURE FINANCIAL AND
OPERATING FLEXIBILITY.
Our leverage is significant in relation to our partners' capital. At
February 28, 2003, our total outstanding debt, which represented approximately
58.0% of our total capitalization, was approximately $2.1 billion. As of January
31, 2003, we had $2.1 billion of senior indebtedness ranking equal in right of
payment to all of our other senior indebtedness. As to the assets of our
subsidiary, Seminole Pipeline Company, this $2.1 billion in senior indebtedness
is structurally subordinated and ranks junior in right of payment to $45 million
of indebtedness of Seminole Pipeline Company.
Debt service obligations, restrictive covenants and maturities resulting
from this leverage may adversely affect our ability to finance future
operations, pursue acquisitions and fund other capital needs, and may make our
results of operations more susceptible to adverse economic or operating
conditions. Our ability to repay, extend or refinance our existing debt
obligations and to obtain future credit will depend primarily on our operating
performance, which will be affected by general economic, financial, competitive,
legislative, regulatory, business and other factors, many of which are beyond
our control.
Our ability to access the capital markets for future offerings may be
limited by adverse market conditions resulting from, among other things, general
economic conditions, contingencies and uncertainties that are difficult to
predict and beyond our control. If we are unable to access the capital markets
for future offerings, we might be forced to seek extensions for some of our
short-term maturities or to refinance some of our debt obligations through bank
credit, as opposed to long-term public debt securities or equity securities. The
price and terms upon which we might receive such extensions or additional bank
credit could be more onerous than those contained in our existing debt
agreements. Any such arrangements could, in turn, increase the risk that our
leverage may adversely affect our future financial and operating flexibility.
A DECREASE IN THE DIFFERENCE BETWEEN NGL PRODUCT PRICES AND NATURAL GAS PRICES
RESULTS IN LOWER MARGINS ON VOLUMES PROCESSED, WHICH WOULD ADVERSELY AFFECT
OUR PROFITABILITY.
The profitability of our operations depends upon the spread between NGL
product prices and natural gas prices. NGL product prices and natural gas prices
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 production;
- the availability of imported oil and gas
- actions taken by foreign oil and gas producing nations;
- the availability of transportation systems with adequate capacity;
- the availability of competitive fuels;
- fluctuating and seasonal demand for oil, gas and NGLs; and
- conservation and the extent of governmental regulation of production and
the overall economic environment.
2
Our Processing segment is directly exposed to commodity price risks, as we
take title to NGLs and are obligated under certain of our gas processing
contracts to pay market value for the energy extracted from the natural gas
stream. We are exposed to various risks, primarily that of commodity price
fluctuations in response to changes in supply, market uncertainty and a variety
of additional factors that are beyond our control. These pricing risks cannot be
completely hedged or eliminated, and any attempt to hedge pricing risks may
expose us to financial losses.
A REDUCTION IN DEMAND FOR OUR PRODUCTS BY THE PETROCHEMICAL, REFINING OR
HEATING INDUSTRIES, COULD ADVERSELY AFFECT OUR RESULTS OF OPERATIONS.
A reduction in demand for our products by the petrochemical, refining or
heating industries, whether because of general economic conditions, reduced
demand by consumers for the end products made with NGL products, increased
competition from petroleum-based products due to pricing differences, adverse
weather conditions, government regulations affecting prices and production
levels of natural gas or the content of motor gasoline or other reasons, could
adversely affect our results of operations. For example:
Ethane. If natural gas prices increase significantly in relation to
ethane prices, it may be more profitable for natural gas processors to
leave the ethane in the natural gas stream to be burned as fuel than to
extract the ethane from the mixed NGL stream for sale.
Propane. The demand for propane as a heating fuel is significantly
affected by weather conditions. Unusually warm winters will cause the
demand for propane to decline significantly and could cause a significant
decline in the volumes of propane that we extract and transport.
Isobutane. Any reduction in demand for motor gasoline in general or
MTBE in particular may similarly reduce demand for isobutane. During
periods in which the difference in market prices between isobutane and
normal butane is low or inventory values are high relative to current
prices for normal butane or isobutane, our operating margin from selling
isobutane will be reduced.
MTBE. A number of states have either banned or currently are
considering legislation to ban MTBE. In addition, Congress is contemplating
a federal ban on MTBE, and several oil companies have taken an early
initiative to phase out the production of MTBE. If MTBE is banned or if its
use is significantly limited, the revenues and equity earnings we record
may be materially reduced or eliminated. For additional information
regarding MTBE, please read "Business and Properties -- Regulation and
Environmental Matters -- Impact of the Clean Air Act's oxygenated fuels
programs on our BEF investment" in our Annual Report on Form 10-K for the
year ended December 31, 2002.
Propylene. Any downturn in the domestic or international economy could
cause reduced demand for propylene, which could cause a reduction in the
volumes of propylene that we produce and expose our investment in
inventories of propane/propylene mix to pricing risk due to requirements
for short-term price discounts in the spot or short-term propylene markets.
Please read Items 1 and 2. "Business and Properties -- The Company's
Operations" beginning on page 3 of our Annual Report on Form 10-K for a more
detailed discussion of our operations.
A DECLINE IN THE VOLUME OF NGLS DELIVERED TO OUR FACILITIES COULD ADVERSELY
AFFECT OUR RESULTS OF OPERATIONS.
Our profitability is materially impacted by the volume of NGLs processed at
our facilities. A material decrease in natural gas production of crude oil
refining, as a result of depressed commodity prices or otherwise, or a decrease
in imports of mixed butanes, could result in a decline in the volume of NGLs
delivered to our facilities for processing, thereby reducing revenue and
operating income.
3
OUR BUSINESS REQUIRES EXTENSIVE CREDIT RISK MANAGEMENT THAT MAY NOT BE
ADEQUATE TO PROTECT AGAINST CUSTOMER NONPAYMENT.
As a result of business failures, revelations of material
misrepresentations and related financial restatements by several large,
well-known companies in various industries over the last year, there have been
significant disruptions and extreme volatility in the financial markets and
credit markets. Because of the credit intensive nature of the energy industry
and troubling disclosures by some large, diversified energy companies, the
energy industry has been especially impacted by these developments, with the
rating agencies downgrading a number of large energy-related companies.
Accordingly, in this environment we are exposed to an increased level of credit
and performance risk with respect to our customers. If we fail to adequately
assess the creditworthiness of existing or future customers, unanticipated
deterioration in their creditworthiness could have an adverse impact on us.
ACQUISITIONS AND EXPANSIONS MAY AFFECT OUR BUSINESS BY SUBSTANTIALLY
INCREASING THE LEVEL OF OUR INDEBTEDNESS AND CONTINGENT LIABILITIES AND
INCREASING OUR RISKS OF BEING UNABLE TO EFFECTIVELY INTEGRATE THESE NEW
OPERATIONS.
From time to time, we evaluate and acquire assets and businesses that we
believe complement our existing operations. We may encounter difficulties
integrating these acquisitions with our existing businesses without a loss of
employees or customers, a loss of revenues, an increase in operating or other
costs or other difficulties. In addition, we may not be able to realize the
operating efficiencies, competitive advantages, cost savings or other benefits
expected from these acquisitions. Future acquisitions may require substantial
capital or the incurrence of substantial indebtedness. As a result, our
capitalization and results of operations may change significantly following an
acquisition, and you will not have the opportunity to evaluate the economic,
financial and other relevant information that we will consider in determining
the application of these funds and other resources.
TERRORIST ATTACKS AIMED AT OUR FACILITIES COULD ADVERSELY AFFECT OUR BUSINESS.
Since the September 11, 2001 terrorist attacks on the United States, the
United States government has issued warnings that energy assets, including our
nation's pipeline infrastructure, may be the future target of terrorist
organizations. Any terrorist attack on our facilities, those of our customers
and, in some cases, those of other pipelines, could have a material adverse
effect on our business. An escalation of political tensions in the Middle East
and elsewhere, such as the recent commencement of United States military action
in Iraq, could result in increased volatility in the world's energy markets and
result in a material adverse effect on our business.
RISKS RELATED TO OUR COMMON UNITS AS A RESULT OF OUR PARTNERSHIP STRUCTURE
WE MAY NOT HAVE SUFFICIENT CASH FROM OPERATIONS TO PAY DISTRIBUTIONS AT THE
CURRENT LEVEL FOLLOWING ESTABLISHMENT OF CASH RESERVES AND PAYMENTS OF FEES AND
EXPENSES, INCLUDING PAYMENTS TO OUR GENERAL PARTNER.
Because distributions on our common units are dependent on the amount of
cash we generate, distributions may fluctuate based on our performance. We
cannot guarantee that we will continue to pay distributions at the current level
each quarter. The actual amount of cash that is available to be distributed each
quarter will depend upon numerous factors, some of which are beyond our control
and the control of our general partner. These factors include but are not
limited to the following:
- the level of our operating costs;
- the level of competition in our business segments;
- prevailing economic conditions;
- the level of capital expenditures we make;
- the restrictions contained in our debt agreements and our debt service
requirements;
4
- fluctuations in our working capital needs;
- the cost of acquisitions, if any; and
- the amount, if any, of cash reserves established by our general partner,
in its discretion.
In addition, you should be aware that our ability to pay the minimum
quarterly distribution each quarter depends primarily on our cash flow,
including cash flow from financial reserves and working capital borrowings, and
not solely on profitability, which is affected by non-cash items. As a result,
we may make cash distributions during periods when we record losses and we may
not make distributions during periods when we record net income.
COST REIMBURSEMENTS DUE OUR GENERAL PARTNER MAY BE SUBSTANTIAL AND WILL REDUCE
OUR CASH AVAILABLE FOR DISTRIBUTION TO HOLDERS OF COMMON UNITS.
Prior to making any distribution on our common units, we will reimburse our
general partner and its affiliates, including officers and directors of our
general partner, for expenses they incur on our behalf. The reimbursement of
expenses could adversely affect our ability to pay cash distributions to holders
of common units. Our general partner has sole discretion to determine the amount
of these expenses, subject to an annual limit. In addition, our general partner
and its affiliates may provide us other services for which we will be charged
fees as determined by our general partner.
OUR GENERAL PARTNER AND ITS AFFILIATES HAVE LIMITED FIDUCIARY RESPONSIBILITIES
AND CONFLICTS OF INTEREST WITH RESPECT TO OUR PARTNERSHIP.
The directors and officers of our general partner and its affiliates have
duties to manage the general partner in a manner that is beneficial to its
members. At the same time, our general partner has duties to manage our
partnership in a manner that is beneficial to us. Therefore, our general
partner's duties to us may conflict with the duties of its officers and
directors to its members.
Such conflicts may include, among others, the following:
- decisions of our general partner regarding the amount and timing of asset
purchases and sales, cash expenditures, borrowings, issuances of
additional units and reserves in any quarter may affect the level of cash
available to pay quarterly distributions to unitholders and the general
partner;
- under our partnership agreement, our general partner determines which
costs incurred by it and its affiliates are reimbursable by us;
- our general partner is allowed to take into account the interests of
parties other than us, such as Enterprise Products Company, in resolving
conflicts of interest, which has the effect of limiting its fiduciary
duty to unitholders;
- affiliates of our general partner may compete with us in certain
circumstances;
- our general partner may limit its liability and reduce its fiduciary
duties, while also restricting the remedies available to unitholders for
actions that might, without the limitations, constitute breaches of
fiduciary duty. As a result of purchasing units, you are deemed to
consent to some actions and conflicts of interest that might otherwise
constitute a breach of fiduciary or other duties under applicable law;
- we do not have any employees and we rely solely on employees of the
general partner and its affiliates; and
- in some instances, our general partner may cause us to borrow funds in
order to permit the payment of distributions, even if the purpose or
effect of the borrowing is to make a distribution on the subordinated
units, to make incentive distributions or to hasten the expiration of the
subordination period.
5
EVEN IF UNITHOLDERS ARE DISSATISFIED, THEY CANNOT EASILY REMOVE OUR GENERAL
PARTNER.
Unlike the holders of common stock in a corporation, unitholders have only
limited voting rights on matters affecting our business and, therefore, limited
ability to influence management's decisions regarding our business. Unitholders
did not elect our general partner or the directors of the general partner and
will have no right to elect our general partner or the directors of our general
partner on an annual or other continuing basis.
Furthermore, if unitholders are dissatisfied with the performance of our
general partner, they will have little ability to remove our general partner.
Our general partner may not be removed except upon the vote of the holders of at
least 66 2/3% of the outstanding units voting together as a single class.
Because affiliates of our general partner own more than one-third of our
outstanding units, the general partner currently cannot be removed without the
consent of the general partner and its affiliates.
Unitholders' voting rights are further restricted by the partnership
agreement provision stating that any units held by a person that owns 20% or
more of any class of units then outstanding, other than our general partner and
its affiliates, cannot be voted on any matter. In addition, the partnership
agreement contains provisions limiting the ability of unitholders to call
meetings or to acquire information about our operations, as well as other
provisions limiting the unitholders' ability to influence the manner or
direction of management.
As a result of these provisions, the price at which the common units will
trade may be lower because of the absence or reduction of a takeover premium in
the trading price.
IF OUR GENERAL PARTNER IS REMOVED WITHOUT CAUSE DURING THE SUBORDINATION
PERIOD, YOUR DISTRIBUTION AND LIQUIDATION PREFERENCE OVER THE SUBORDINATED
UNITS WILL BE PREMATURELY ELIMINATED.
If our general partner is removed without cause during the subordination
period, all remaining subordinated units will automatically convert into common
units and will share distributions with the existing common units pro rata,
existing arrearages on the common units will be extinguished and the common
units will no longer be entitled to arrearages if we fail to pay the minimum
quarterly distribution in any quarter. A removal of the general partner under
these circumstances would adversely affect the common units by prematurely
eliminating their distribution and liquidation preference over the subordinated
units, which otherwise would have continued until we had met certain
distribution and performance tests.
Under our partnership agreement, cause is narrowly defined to mean that a
court of competent jurisdiction has entered a final non-appealable judgment
finding our general partner liable for actual fraud, gross negligence or willful
or wanton misconduct in its capacity as our general partner. Cause does not
include most cases of charges of poor management of the business, so the removal
of the general partner because of the unitholders' dissatisfaction with the
general partner's performance in managing our partnership will most likely
result in the termination of the subordination period.
WE MAY ISSUE ADDITIONAL COMMON UNITS WITHOUT THE APPROVAL OF COMMON
UNITHOLDERS, WHICH WOULD DILUTE THEIR EXISTING OWNERSHIP INTERESTS.
During the subordination period, our general partner may cause us to issue
up to 54,550,000 additional common units without any approval by the common
unitholders. Our general partner may also cause us to issue an unlimited number
of additional common units or other equity securities of equal rank with the
common units, without such approval, in a number of circumstances, such as:
- the issuance of common units in connection with acquisitions that
increase cash flow from operations per unit on a pro forma basis;
- the conversion of subordinated units into common units;
- the conversion of special units into common units;
6
- the conversion of the general partner interest and the incentive
distribution rights into common units as a result of the withdrawal of
our general partner; or
- issuances of common units under our long-term incentive plan.
After the end of the subordination period, we may issue an unlimited number
of limited partner interests of any type without the approval of the
unitholders. Our partnership agreement does not give the common unitholders the
right to approve our issuance of equity securities ranking junior to the common
units.
The issuance of additional common units or other equity securities of equal
or senior rank will have the following effects:
- the proportionate ownership interest of common unitholders in us will
decrease;
- the amount of cash available for distribution on each unit may decrease;
- since a lower percentage of total outstanding units will be subordinated
units, the risk that a shortfall in the payment of the minimum quarterly
distribution will be borne by the common unitholders will increase;
- the relative voting strength of each previously outstanding unit may be
diminished; and
- the market price of the common units may decline.
OUR GENERAL PARTNER HAS A LIMITED CALL RIGHT THAT MAY REQUIRE COMMON
UNITHOLDERS TO SELL THEIR UNITS AT AN UNDESIRABLE TIME OR PRICE.
If at any time our general partner and its affiliates own 85% more of the
common units then outstanding, our general partner will have the right, but not
the obligation, which it may assign to any of its affiliates or to us, to
acquire all, but not less than all, of the remaining common units held by
unaffiliated persons at a price not less than their then current market price.
As a result, common unitholders may be required to sell their common units at an
undesirable time or price and may therefore not receive any return on their
investment. They may also incur a tax liability upon a sale of their units.
Under our partnership agreement, Shell is not deemed to be an affiliate of our
general partner for purposes of this limited call right.
COMMON UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IF A COURT FINDS THAT LIMITED
PARTNER ACTIONS CONSTITUTE CONTROL OF OUR BUSINESS.
Under Delaware law, common unitholders could be held liable for our
obligations to the same extent as a general partner if a court determined that
the right of limited partners to remove our general partner or to take other
action under the partnership agreement constituted participation in the
"control" of our business.
Under Delaware law, the general partner generally has unlimited liability
for the obligations of the partnership, such as its debts and environmental
liabilities, except for those contractual obligations of the partnership that
are expressly made without recourse to the general partner.
In addition, Section 17-607 of the Delaware Revised Uniform Limited
Partnership Act provides that, under some circumstances, a limited partner may
be liable to us for the amount of a distribution for a period of three years
from the date of the distribution.
TAX RISKS TO COMMON UNITHOLDERS
You are urged to read "Tax Consequences" beginning on page 39 for a more
complete discussion of the following federal income tax risks related to owning
and disposing of common units.
7
THE IRS COULD TREAT US AS A CORPORATION FOR TAX PURPOSES, WHICH WOULD
SUBSTANTIALLY REDUCE THE CASH AVAILABLE FOR DISTRIBUTION TO COMMON
UNITHOLDERS.
The anticipated after-tax economic benefit of an investment in the common
units depends largely on our being treated as a partnership for federal income
tax purposes. We have not requested, and do not plan to request, a ruling from
the IRS on this or any other matter affecting us.
If we were classified as a corporation for federal income tax purposes, we
would pay federal income tax on our income at the corporate tax rate, which is
currently a maximum of 35%, and we likely would pay state taxes as well.
Distributions to you would generally be taxed again to you as corporate
distributions, and no income, gains, losses or deductions would flow through to
you. Because a tax would be imposed upon us as a corporation, the cash available
for distribution to you would be substantially reduced. Therefore, treatment of
us as a corporation would result in a material reduction in the after-tax return
to you, likely causing a substantial reduction in the value of the common units.
A change in current law or a change in our business could cause us to be
taxed as a corporation for federal income tax purposes or otherwise subject us
to entity-level taxation. Our partnership agreement provides that, if a law is
enacted or existing law is modified or interpreted in a manner that subjects us
to taxation as a corporation or otherwise subjects us to entity-level taxation
for federal, state or local income tax purposes, then the minimum quarterly
distribution and the target distribution levels will be decreased to reflect
that impact on us.
A SUCCESSFUL IRS CONTEST OF THE FEDERAL INCOME TAX POSITIONS WE TAKE MAY
ADVERSELY IMPACT THE MARKET FOR COMMON UNITS, AND THE COSTS OF ANY CONTESTS
WILL BE BORNE BY OUR UNITHOLDERS AND OUR GENERAL PARTNER.
We have not requested a ruling from the IRS with respect to any matter
affecting us. The IRS may adopt positions that differ from the conclusions of
our counsel expressed in the accompanying prospectus or from the positions we
take. It may be necessary to resort to administrative or court proceedings to
sustain some or all of our counsel's conclusions or the positions we take. A
court may not concur with our counsel's conclusions or the positions we take.
Any contest with the IRS may materially and adversely impact the market for
common units and the price at which they trade. In addition, the costs of any
contest with the IRS, principally legal, accounting and related fees, will be
borne indirectly by our unitholders and our general partner.
COMMON UNITHOLDERS MAY BE REQUIRED TO PAY TAXES EVEN IF THEY DO NOT RECEIVE
ANY CASH DISTRIBUTIONS.
Common unitholders will be required to pay federal income taxes and, in
some cases, state, local and foreign income taxes on their share of our taxable
income even if they do not receive any cash distributions from us. They may not
receive cash distributions from us equal to their share of our taxable income or
even equal to the actual tax liability that results from their share of our
taxable income.
TAX GAIN OR LOSS ON DISPOSITION OF COMMON UNITS COULD BE DIFFERENT THAN
EXPECTED.
If you sell your common units, you will recognize gain or loss equal to the
difference between the amount realized and your tax basis in those common units.
Prior distributions to you in excess of the total net taxable income you were
allocated for a common unit, which decreased your tax basis in that common unit,
will, in effect, become taxable income to you if the common unit is sold at a
price greater than your tax basis in that common unit, even if the price you
receive is less than your original cost. A substantial portion of the amount
realized, whether or not representing gain, may be ordinary income to you.
Should the IRS successfully contest some positions we take, you could recognize
more gain on the sale of units than would be the case under those positions,
without the benefit of decreased income in prior years. Also, if you sell your
units, you may incur a tax liability in excess of the amount of cash you receive
from the sale.
8
TAX-EXEMPT ENTITIES, REGULATED INVESTMENT COMPANIES AND FOREIGN PERSONS FACE
UNIQUE TAX ISSUES FROM OWNING COMMON UNITS THAT MAY RESULT IN ADVERSE TAX
CONSEQUENCES TO THEM.
Investment in common units by tax-exempt entities, such as individual
retirement accounts (known as IRAs), regulated investment companies (known as
mutual funds) and foreign persons raises issues unique to them. For example,
virtually all of our income allocated to unitholders who are organizations
exempt from federal income tax, including individual retirement accounts and
other retirement plans, will be unrelated business taxable income and will be
taxable to them. Very little of our income will be qualifying income to a
regulated investment company or mutual fund. Distributions to foreign persons
will be reduced by withholding taxes at the highest effective U.S. federal
income tax rate for individuals, and foreign persons will be required to file
federal income tax returns and pay tax on their share of our taxable income.
WE ARE REGISTERED AS A TAX SHELTER. THIS MAY INCREASE THE RISK OF AN IRS AUDIT
OF US OR A UNITHOLDER.
We are registered with the IRS as a "tax shelter." Our tax shelter
registration number is 9906100007. The tax laws require that some types of
entities, including some partnerships, register as "tax shelters" in response to
the perception that they claim tax benefits that may be unwarranted. As a
result, we may be audited by the IRS and tax adjustments could be made. Any
unitholder owning less than a 1% profits interest in us has very limited rights
to participate in the income tax audit process. Further, any adjustments in our
tax returns will lead to adjustments in our unitholders' tax returns and may
lead to audits of unitholders' tax returns and adjustments of items unrelated to
us. You will bear the cost of any expense incurred in connection with an
examination of your personal tax return and indirectly bear a portion of the
cost of an audit of us.
WE WILL TREAT EACH PURCHASER OF COMMON UNITS AS HAVING THE SAME TAX BENEFITS
WITHOUT REGARD TO THE UNITS PURCHASED. THE IRS MAY CHALLENGE THIS TREATMENT,
WHICH COULD ADVERSELY AFFECT THE VALUE OF OUR COMMON UNITS.
Because we cannot match transferors and transferees of common units, we
adopt depreciation and amortization positions that may not conform with all
aspects of applicable Treasury regulations. A successful IRS challenge to those
positions could adversely affect the amount of tax benefits available to a
common unitholder. It also could affect the timing of these tax benefits or the
amount of gain from a sale of common units and could have a negative impact on
the value of the common units or result in audit adjustments to the common
unitholder's tax returns.
COMMON UNITHOLDERS WILL LIKELY BE SUBJECT TO STATE AND LOCAL TAXES IN STATES
WHERE THEY DO NOT LIVE AS A RESULT OF AN INVESTMENT IN OUR COMMON UNITS.
In addition to federal income taxes, common unitholders will likely be
subject to other taxes, including state and local income taxes, unincorporated
business taxes and estate, inheritance or intangible taxes that are imposed by
the various jurisdictions in which we do business or own property and in which
they do not reside. Common unitholders may be required to file state and local
income tax returns and pay state and local income taxes in many or all of the
jurisdictions in which we do business or own property. Further, they may be
subject to penalties for failure to comply with those requirements. It is the
responsibility of the common unitholder to file all United States federal, state
and local tax returns. Our counsel has not rendered an opinion on the state or
local tax consequences of an investment in the common units.
9
USE OF PROCEEDS
We will use the net proceeds from any sale of securities described in this
prospectus for future business acquisitions and other general corporate
purposes, such as working capital, investments in subsidiaries, the retirement
of existing debt and/or the repurchase of common units or other securities. The
prospectus supplement will describe the actual use of the net proceeds from the
sale of securities. The exact amounts to be used and when the net proceeds will
be applied to corporate purposes will depend on a number of factors, including
our funding requirements and the availability of alternative funding sources.
We will not receive any proceeds from any sale of common units by any
selling unitholders.
RATIO OF EARNINGS TO FIXED CHARGES
The ratios of earnings to fixed charges for each of the periods indicated
are as follows:
YEAR ENDED DECEMBER 31,
--------------------------------
COMPANY 1998 1999 2000 2001 2002
------- ---- ---- ---- ---- ----
Enterprise Products Partners L.P............................ 1.16 5.84 6.40 5.10 2.07
Enterprise Products Operating L.P........................... 1.16 5.90 6.46 5.14 2.08
These computations include us and our subsidiaries, and 50% or less equity
companies. For these ratios, "earnings" is the amount resulting from adding and
subtracting the following items.
Add the following:
- pre-tax income from continuing operations before adjustment for minority
interests in consolidated subsidiaries or 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:
- 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 the interest within rental expenses (equal to one-third of
rental expense); and
- preference security dividend requirements of consolidated subsidiaries.
10
DESCRIPTION OF DEBT SECURITIES
In this Description of Debt Securities references to the "Issuer" mean only
Enterprise Products Operating L.P. and not its subsidiaries. References to the
"Guarantor" mean only Enterprise Products Partners L.P. and not its
subsidiaries. References to "we" and "us" mean the Issuer and the Guarantor
collectively.
The debt securities will be issued under an Indenture dated as of March 15,
2000 (the "Indenture"), among the Issuer, the Guarantor, and Wachovia Bank,
National Association (successor to First Union National Bank), as trustee (the
"Trustee"). The terms of the debt securities will include those expressly set
forth in the Indenture and those made part of the Indenture by reference to the
Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). Capitalized
terms used in this Description of Debt Securities have the meanings specified in
the Indenture.
This Description of Debt Securities is intended to be a useful overview of
the material provisions of the debt securities and the Indenture. Since this
Description of Debt Securities is only a summary, you should refer to the
Indenture for a complete description of our obligations and your rights.
GENERAL
The Indenture does not limit the amount of debt securities that may be
issued thereunder. Debt securities may be issued under the Indenture from time
to time in separate series, each up to the aggregate amount authorized for such
series. The debt securities will be general obligations of the Issuer and the
Guarantor and may be subordinated to Senior Indebtedness of the Issuer and the
Guarantor. See "-- Subordination."
A prospectus supplement and a supplemental indenture (or a resolution of
our Board of Directors and accompanying officers' certificate) relating to any
series of debt securities being offered will include specific terms relating to
the offering. These terms will include some or all of the following:
- the form and title of the debt securities;
- the total principal amount of the debt securities;
- the portion of the principal amount which will be payable if the maturity
of the debt securities is accelerated;
- the currency or currency unit in which the debt securities will be paid,
if not U.S. dollars;
- any right we may have to defer payments of interest by extending the
dates payments are due whether interest on those deferred amounts will be
payable as well;
- the dates on which the principal of the debt securities will be payable;
- the interest rate which the debt securities will bear and the interest
payment dates for the debt securities;
- any optional redemption provisions;
- any sinking fund or other provisions that would obligate us to repurchase
or otherwise redeem the debt securities;
- any changes to or additional Events of Default or covenants;
- whether the debt securities are to be issued as Registered Securities or
Bearer Securities or both; and any special provisions for Bearer
Securities;
11
- the subordination, if any, of the debt securities and any changes to the
subordination provisions of the Indenture; and
- any other terms of the debt securities.
The prospectus supplement will also describe any material United States
federal income tax consequences or other special considerations applicable to
the applicable series of debt securities, including those applicable to:
- Bearer Securities;
- debt securities with respect to which payments of principal, premium or
interest are determined with reference to an index or formula, including
changes in prices of particular securities, currencies or commodities;
- debt securities with respect to which principal, premium or interest is
payable in a foreign or composite currency;
- debt securities that are issued at a discount below their stated
principal amount, bearing no interest or interest at a rate that at the
time of issuance is below market rates; and
- variable rate debt securities that are exchangeable for fixed rate debt
securities.
At our option, we may make interest payments, by check mailed to the
registered holders thereof or, if so stated in the applicable prospectus
supplement, at the option of a holder by wire transfer to an account designated
by the holder. Except as otherwise provided in the applicable prospectus
supplement, no payment on a Bearer Security will be made by mail to an address
in the United States or by wire transfer to an account in the United States.
Unless otherwise provided in the applicable prospectus supplement,
Registered Securities may be transferred or exchanged at the office of the
Trustee at which its corporate trust business is principally administered in the
United States or at the office of the Trustee or the Trustee's agent in New York
City, subject to the limitations provided in the Indenture, without the payment
of any service charge, other than any applicable tax or governmental charge.
Bearer Securities will be transferable only by delivery. Provisions with respect
to the exchange of Bearer Securities will be described in the applicable
prospectus supplement.
Any funds we pay to a paying agent for the payment of amounts due on any
debt securities that remain unclaimed for two years will be returned to us, and
the holders of the debt securities must thereafter look only to us for payment
thereof.
GUARANTEE
The Guarantor will unconditionally guarantee to each holder and the Trustee
the full and prompt payment of principal of, premium, if any, and interest on
the debt securities, when and as the same become due and payable, whether at
maturity, upon redemption or repurchase, by declaration of acceleration or
otherwise.
CERTAIN COVENANTS
Except as set forth below or as may be provided in a prospectus supplement
and supplemental indenture, neither the Issuer nor the Guarantor is restricted
by the Indenture from incurring any type of indebtedness or other obligation,
from paying dividends or making distributions on its partnership interests or
capital stock or purchasing or redeeming its partnership interests or capital
stock. The Indenture does not require the maintenance of any financial ratios or
specified levels of net worth or liquidity. In addition, the Indenture does not
contain any provisions that would require the Issuer to repurchase or redeem or
otherwise modify the terms of any of the debt securities upon a change in
control or other events involving the Issuer which may adversely affect the
creditworthiness of the debt securities.
12
Limitations on Liens. The Indenture provides that the Guarantor will not,
nor will it permit any Subsidiary to, create, assume, incur or suffer to exist
any mortgage, lien, security interest, pledge, charge or other encumbrance
("liens") other than Permitted Liens (as defined below) upon any Principal
Property (as defined below) or upon any shares of capital stock of any
Subsidiary owning or leasing any Principal Property, whether owned or leased on
the date of the Indenture or thereafter acquired, to secure any indebtedness for
borrowed money ("debt") of the Guarantor or the Issuer or any other person
(other than the debt securities), without in any such case making effective
provision whereby all of the debt securities outstanding shall be secured
equally and ratably with, or prior to, such debt so long as such debt shall be
so secured.
In the Indenture, the term "Subsidiary" means:
(1) the Issuer; or
(2) any corporation, association or other business entity of which more
than 50% of the total voting power of the equity interests entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof or any partnership of
which more than 50% of the partners' equity interests (considering all
partners' equity interests as a single class) is, in each case, at the time
owned or controlled, directly or indirectly, by the Guarantor, the Issuer
or one or more of the other Subsidiaries of the Guarantor or the Issuer or
combination thereof.
"Permitted Liens" means:
(1) liens upon rights-of-way for pipeline purposes;
(2) any statutory or governmental lien or lien arising by operation of
law, or any mechanics', repairmen's, materialmen's, suppliers', carriers',
landlords', warehousemen's or similar lien incurred in the ordinary course
of business which is not yet due or which is being contested in good faith
by appropriate proceedings and any undetermined lien which is incidental to
construction, development, improvement or repair; or any right reserved to,
or vested in, any municipality or public authority by the terms of any
right, power, franchise, grant, license, permit or by any provision of law,
to purchase or recapture or to designate a purchaser of, any property;
(3) liens for taxes and assessments which are (a) for the then current
year, (b) not at the time delinquent, or (c) delinquent but the validity or
amount of which is being contested at the time by the Guarantor or any
Subsidiary in good faith by appropriate proceedings;
(4) liens of, or to secure performance of, leases, other than capital
leases; or any lien securing industrial development, pollution control or
similar revenue bonds;
(5) any lien upon property or assets acquired or sold by the Guarantor
or any Subsidiary resulting from the exercise of any rights arising out of
defaults on receivables;
(6) any lien in favor of the Guarantor or any Subsidiary; or any lien
upon any property or assets of the Guarantor or any Subsidiary in existence
on the date of the execution and delivery of the Indenture;
(7) any lien in favor of the United States of America or any state
thereof, or any department, agency or instrumentality or political
subdivision of the United States of America or any state thereof, to secure
partial, progress, advance, or other payments pursuant to any contract or
statute, or any debt incurred by the Issuer or any Subsidiary for the
purpose of financing all or any part of the purchase price of, or the cost
of constructing, developing, repairing or improving, the property or assets
subject to such lien;
(8) any lien incurred in the ordinary course of business in connection
with workmen's compensation, unemployment insurance, temporary disability,
social security, retiree health or similar laws or regulations or to secure
obligations imposed by statute or governmental regulations;
(9) liens in favor of any person to secure obligations under provisions
of any letters of credit, bank guarantees, bonds or surety obligations
required or requested by any governmental authority in
13
connection with any contract or statute; or any lien upon or deposits of
any assets to secure performance of bids, trade contracts, leases or
statutory obligations;
(10) any lien upon any property or assets created at the time of
acquisition of such property or assets by the Guarantor or any Subsidiary
or within one year after such time to secure all or a portion of the
purchase price for such property or assets or debt incurred to finance such
purchase price, whether such debt was incurred prior to, at the time of or
within one year after the date of such acquisition; or any lien upon any
property or assets to secure all or part of the cost of construction,
development, repair or improvements thereon or to secure debt incurred
prior to, at the time of, or within one year after completion of such
construction, development, repair or improvements or the commencement of
full operations thereof (whichever is later), to provide funds for any such
purpose;
(11) any lien upon any property or assets existing thereon at the time
of the acquisition thereof by the Guarantor or any Subsidiary and any lien
upon any property or assets of a person existing thereon at the time such
person becomes a Subsidiary by acquisition, merger or otherwise; provided
that, in each case, such lien only encumbers the property or assets so
acquired or owned by such person at the time such person becomes a
Subsidiary;
(12) liens imposed by law or order as a result of any proceeding before
any court or regulatory body that is being contested in good faith, and
liens which secure a judgment or other court-ordered award or settlement as
to which the Guarantor or the applicable Subsidiary has not exhausted its
appellate rights;
(13) any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or replacements) of
liens, in whole or in part, referred to in clauses (1) through (12) above;
provided, however, that any such extension, renewal, refinancing, refunding
or replacement lien shall be limited to the property or assets covered by
the lien extended, renewed, refinanced, refunded or replaced and that the
obligations secured by any such extension, renewal, refinancing, refunding
or replacement lien shall be in an amount not greater than the amount of
the obligations secured by the lien extended, renewed, refinanced, refunded
or replaced and any expenses of the Guarantor and its Subsidiaries
(including any premium) incurred in connection with such extension,
renewal, refinancing, refunding or replacement; or
(14) any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of the Guarantor or
any Subsidiary.
"Principal Property" means, whether owned or leased on the date of the
Indenture or thereafter acquired:
(1) any pipeline assets of the Guarantor or any Subsidiary, including
any related facilities employed in the transportation, distribution,
storage or marketing of refined petroleum products, natural gas liquids,
and petrochemicals, that are located in the United States of America or any
territory or political subdivision thereof; and
(2) any processing or manufacturing plant or terminal owned or leased by
the Guarantor or any Subsidiary that is located in the United States or any
territory or political subdivision thereof,
except, in the case of either of the foregoing clauses (1) or (2):
(a) any such assets consisting of inventories, furniture, office
fixtures and equipment (including data processing equipment), vehicles
and equipment used on, or useful with, vehicles; and
(b) any such assets, plant or terminal which, in the opinion of the
board of directors of the General Partner, is not material in relation
to the activities of the Issuer or of the Guarantor and its Subsidiaries
taken as a whole.
Notwithstanding the foregoing, under the Indenture, the Guarantor may, and
may permit any Subsidiary to, create, assume, incur, or suffer to exist any lien
upon any Principal Property to secure debt of the Guarantor or any other person
(other than the debt securities) other than a Permitted Lien without securing
the debt securities, provided that the aggregate principal amount of all debt
then outstanding secured by such lien and all similar liens, together with all
Attributable Indebtedness from Sale-Leaseback Transactions
14
(excluding Sale-Leaseback Transactions permitted by clauses (1) through (4),
inclusive, of the first paragraph of the restriction on sale-leasebacks covenant
described below) does not exceed 10% of Consolidated Net Tangible Assets.
"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets after deducting therefrom:
(1) all current liabilities (excluding (A) any current liabilities that
by their terms are extendable or renewable at the option of the obligor
thereon to a time more than 12 months after the time as of which the amount
thereof is being computed, and (B) current maturities of long-term debt);
and
(2) the value (net of any applicable reserves) of all goodwill, trade
names, trademarks, patents and other like intangible assets, all as set
forth, or on a pro forma basis would be set forth, on the consolidated
balance sheet of the Guarantor and its consolidated subsidiaries for the
Guarantor's most recently completed fiscal quarter, prepared in accordance
with generally accepted accounting principles.
Restriction on Sale-Leasebacks. The Indenture provides that the Guarantor
will not, and will not permit any Subsidiary to, engage in the sale or transfer
by the Guarantor or any Subsidiary of any Principal Property to a person (other
than the Issuer or a Subsidiary) and the taking back by the Guarantor or any
Subsidiary, as the case may be, of a lease of such Principal Property (a
"Sale-Leaseback Transaction"), unless:
(1) such Sale-Leaseback Transaction occurs within one year from the date
of completion of the acquisition of the Principal Property subject thereto
or the date of the completion of construction, development or substantial
repair or improvement, or commencement of full operations on such Principal
Property, whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period,
including renewals, of not more than three years;
(3) the Guarantor or such Subsidiary would be entitled to incur debt
secured by a lien on the Principal Property subject thereto in a principal
amount equal to or exceeding the Attributable Indebtedness from such
Sale-Leaseback Transaction without equally and ratably securing the debt
securities; or
(4) the Guarantor or such Subsidiary, within a one-year period after
such Sale-Leaseback Transaction, applies or causes to be applied an amount
not less than the Attributable Indebtedness from such Sale-Leaseback
Transaction to (a) the prepayment, repayment, redemption, reduction or
retirement of any debt of the Guarantor or any Subsidiary that is not
subordinated to the debt securities, or (b) the expenditure or expenditures
for Principal Property used or to be used in the ordinary course of
business of the Guarantor or its Subsidiaries. "Attributable Indebtedness,"
when used with respect to any Sale-Leaseback Transaction, means, as at the
time of determination, the present value (discounted at the rate set forth
or implicit in the terms of the lease included in such transaction) of the
total obligations of the lessee for rental payments (other than amounts
required to be paid on account of property taxes, maintenance, repairs,
insurance, assessments, utilities, operating and labor costs and other
items that do not constitute payments for property rights) during the
remaining term of the lease included in such Sale-Leaseback Transaction
(including any period for which such lease has been extended). In the case
of any lease that is terminable by the lessee upon the payment of a penalty
or other termination payment, such amount shall be the lesser of the amount
determined assuming termination upon the first date such lease may be
terminated (in which case the amount shall also include the amount of the
penalty or termination payment, but no rent shall be considered as required
to be paid under such lease subsequent to the first date upon which it may
be so terminated) or the amount determined assuming no such termination.
Notwithstanding the foregoing, under the Indenture the Guarantor may, and
may permit any Subsidiary to, effect any Sale-Leaseback Transaction that is not
excepted by clauses (1) through (4), inclusive, of the first paragraph under
"-- Restrictions On Sale-Leasebacks," provided that the Attributable
Indebtedness from such Sale-Leaseback Transaction, together with the aggregate
principal amount of outstanding debt
15
(other than the debt securities) secured by liens other than Permitted Liens
upon Principal Property, do not exceed 10% of Consolidated Net Tangible Assets.
Merger, Consolidation or Sale of Assets. The Indenture provides that each
of the Guarantor and the Issuer may, without the consent of the holders of any
of the debt securities, consolidate with or sell, lease, convey all or
substantially all of its assets to, or merge with or into, any partnership,
limited liability company or corporation if:
(1) the partnership, limited liability company or corporation formed by
or resulting from any such consolidation or merger or to which such assets
shall have been transferred (the "successor") is either the Guarantor or
the Issuer, as applicable, or assumes all the Guarantor's or the Issuer's,
as the case may be, obligations and liabilities under the Indenture and the
debt securities (in the case of the Issuer) and the Guarantee (in the case
of the Guarantor);
(2) the successor is organized under the laws of the United States, any
state or the District of Columbia; and
(3) immediately after giving effect to the transaction no Default or
Event of Default shall have occurred and be continuing.
The successor will be substituted for the Guarantor or the Issuer, as the
case may be, in the Indenture with the same effect as if it had been an original
party to the Indenture. Thereafter, the successor may exercise the rights and
powers of the Guarantor or the Issuer, as the case may be, under the Indenture,
in its name or in its own name. If the Guarantor or the Issuer sells or
transfers all or substantially all of its assets, it will be released from all
liabilities and obligations under the Indenture and under the debt securities
(in the case of the Issuer) and the Guarantee (in the case of the Guarantor)
except that no such release will occur in the case of a lease of all or
substantially all of its assets.
EVENTS OF DEFAULT
Each of the following will be an Event of Default under the Indenture with
respect to a series of debt securities:
(1) default in any payment of interest on any debt securities of that
series when due, continued for 30 days;
(2) default in the payment of principal of or premium, if any, on any
debt securities of that series when due at its stated maturity, upon
optional redemption, upon declaration or otherwise;
(3) failure by the Guarantor or the Issuer to comply for 60 days after
notice with its other agreements contained in the Indenture;
(4) certain events of bankruptcy, insolvency or reorganization of the
Issuer or the Guarantor (the "bankruptcy provisions"); or
(5) the Guarantee ceases to be in full force and effect or is declared
null and void in a judicial proceeding or the Guarantor denies or
disaffirms its obligations under the Indenture or the Guarantee.
However, a default under clause (3) of this paragraph will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding debt securities of that series notify the Issuer and the
Guarantor of the default such default is not cured within the time specified in
clause (3) of this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(4) above) occurs and is continuing, the Trustee by notice to the Issuer, or the
holders of at least 25% in principal amount of the outstanding debt securities
of that series by notice to the Issuer and the Trustee, may, and the Trustee at
the request of such holders shall, declare the principal of, premium, if any,
and accrued and unpaid interest, if any, on all the debt securities of that
series to be due and payable. Upon such a declaration, such principal, premium
and accrued and unpaid interest will be due and payable immediately. If an Event
of Default
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described in clause (4) above occurs and is continuing, the principal of,
premium, if any, and accrued and unpaid interest on all the debt securities will
become and be immediately due and payable without any declaration or other act
on the part of the Trustee or any holders. The holders of a majority in
principal amount of the outstanding debt securities of a series may waive all
past defaults (except with respect to nonpayment of principal, premium or
interest) and rescind any such acceleration with respect to the debt securities
of that series and its consequences if rescission would not conflict with any
judgment or decree of a court of competent jurisdiction and all existing Events
of Default, other than the nonpayment of the principal of, premium, if any, and
interest on the debt securities of that series that have become due solely by
such declaration of acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the debt securities unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding debt
securities of that series have requested the Trustee to pursue the remedy;
(3) such holders have offered the Trustee reasonable security or
indemnity against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after
the receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding
debt securities of that series have not given the Trustee a direction that,
in the opinion of the Trustee, is inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding debt securities of a series are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust or power conferred on the
Trustee with respect to that series of debt securities. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder or that would involve the Trustee in personal liability. Prior to taking
any action under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the Default
within 90 days after it occurs. Except in the case of a Default in the payment
of principal of, premium, if any, or interest on any debt securities, the
Trustee may withhold notice if and so long as a committee of trust officers of
the Trustee in good faith determines that withholding notice is in the interests
of the holders. In addition, the Issuer is required to deliver to the Trustee,
within 120 days after the end of each fiscal year, a certificate indicating
whether the signers thereof know of any Default that occurred during the
previous year. The Issuer also is required to deliver to the Trustee, within 30
days after the occurrence thereof, written notice of any events which would
constitute certain Defaults, their status and what action the Issuer is taking
or proposes to take in respect thereof.
AMENDMENTS AND WAIVERS
Modifications and amendments of the Indenture may be made by the Issuer,
the Guarantor and the Trustee with the consent of the holders of a majority in
principal amount of all debt securities then outstanding under the Indenture
(including consents obtained in connection with a tender offer or exchange offer
for the
17
debt securities). However, without the consent of each holder of outstanding
debt securities of each series affected thereby, no amendment may, among other
things:
(1) reduce the amount of debt securities whose holders must consent to
an amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any debt securities;
(3) reduce the principal of or extend the stated maturity of any debt
securities;
(4) reduce the premium payable upon the redemption of any debt
securities or change the time at which any debt securities may be redeemed
as described above under "-- Optional Redemption" or any similar provision;
(5) make any debt securities payable in money other than that stated in
the debt securities;
(6) impair the right of any holder to receive payment of, premium, if
any, principal of and interest on such holder's debt securities on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's debt securities;
(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions; or
(8) release the Guarantor or modify the Guarantee in any manner adverse
to the holders.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each series affected thereby, on behalf of all such holders,
may waive compliance by the Issuer and the Guarantor with certain restrictive
provisions of the Indenture. Subject to certain rights of the Trustee as
provided in the Indenture, the holders of a majority in aggregate principal
amount of the debt securities of each series affected thereby, on behalf of all
such holders, may waive any past default under the Indenture (including any such
waiver obtained in connection with a tender offer or exchange offer for the debt
securities), except a default in the payment of principal, premium or interest
or a default in respect of a provision that under the Indenture that cannot be
modified or amended without the consent of all holders of the series of debt
securities that is affected.
Without the consent of any holder, the Issuer, the Guarantor and the
Trustee may amend the Indenture to:
(1) cure any ambiguity, omission, defect or inconsistency;
(2) provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of the Guarantor or
the Issuer under the Indenture;
(3) provide for uncertificated debt securities in addition to or in
place of certificated debt securities (provided that the uncertificated
debt securities are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated debt
securities are described in Section 163(f)(2)(B) of the Code);
(4) add guarantees with respect to the debt securities;
(5) secure the debt securities;
(6) add to the covenants of the Guarantor or the Issuer for the benefit
of the holders or surrender any right or power conferred upon the Guarantor
or the Issuer;
(7) make any change that does not adversely affect the rights of any
holder; or
(8) comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, the Issuer is required to mail to the holders a
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notice briefly describing such amendment. However, the failure to give such
notice to all the holders, or any defect therein, will not impair or affect the
validity of the amendment.
DEFEASANCE
The Issuer at any time may terminate all its obligations under a series of
debt securities and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the debt securities, to replace mutilated,
destroyed, lost or stolen debt securities and to maintain a registrar and paying
agent in respect of the debt securities. If the Issuer exercises its legal
defeasance option, the Guarantee will terminate with respect to that series.
The Issuer at any time may terminate its obligations under covenants
described under "-- Certain Covenants" (other than "Merger, Consolidation or
Sale of Assets"), the bankruptcy provisions with respect to the Guarantor and
the Guarantee provision described under "Events of Default" above with respect
to a series of debt securities ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the affected series of debt securities may
not be accelerated because of an Event of Default with respect thereto. If the
Issuer exercises its covenant defeasance option, payment of the affected series
of debt securities may not be accelerated because of an Event of Default
specified in clause (3), (4), (with respect only to the Guarantor) or (5) under
"-- Events of Default" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the series of debt securities to redemption or maturity, as the case
may be, and must comply with certain other conditions, including delivery to the
Trustee of an opinion of counsel (subject to customary exceptions and
exclusions) to the effect that holders of the series of debt securities will not
recognize income, gain or loss for Federal income tax purposes as a result of
such deposit and defeasance and will be subject to Federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred. In the case of legal
defeasance only, such opinion of counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law.
SUBORDINATION
Debt securities of a series may be subordinated to our "Senior
Indebtedness," which we define generally to include all notes or other evidences
of indebtedness for money borrowed by the Issuer, including guarantees, that are
not expressly subordinate or junior in right of payment to any other
indebtedness of the Issuer. Subordinated debt securities will be subordinate in
right of payment, to the extent and in the manner set forth in the Indenture and
the prospectus supplement relating to such series, to the prior payment of all
indebtedness of the Issuer and Guarantor that is designated as "Senior
Indebtedness" with respect to the series.
The holders of Senior Indebtedness of the Issuer will receive payment in
full of the Senior Indebtedness before holders of subordinated debt securities
will receive any payment of principal, premium or interest with respect to the
subordinated debt securities:
- upon any payment of distribution of our assets of the Issuer to its
creditors;
- upon a total or partial liquidation or dissolution of the Issuer; or
- in a bankruptcy, receivership or similar proceeding relating to the
Issuer or its property.
Until the Senior Indebtedness is paid in full, any distribution to which
holders of subordinated debt securities would otherwise be entitled will be made
to the holders of Senior Indebtedness, except that such
19
holders may receive units representing limited partner interests and any debt
securities that are subordinated to Senior Indebtedness to at least the same
extent as the subordinated debt securities.
If the Issuer does not pay any principal, premium or interest with respect
to Senior Indebtedness within any applicable grace period (including at
maturity), or any other default on Senior Indebtedness occurs and the maturity
of the Senior Indebtedness is accelerated in accordance with its terms, the
Issuer may not:
- make any payments of principal, premium, if any, or interest with respect
to subordinated debt securities;
- make any deposit for the purpose of defeasance of the subordinated debt
securities; or
- repurchase, redeem or otherwise retire any subordinated debt securities,
except that in the case of subordinated debt securities that provide for
a mandatory sinking fund, we may deliver subordinated debt securities to
the Trustee in satisfaction of our sinking fund obligation,
unless, in either case,
- the default has been cured or waived and the declaration of acceleration
has been rescinded;
- the Senior Indebtedness has been paid in full in cash; or
- the Issuer and the Trustee receive written notice approving the payment
from the representatives of each issue of "Designated Senior
Indebtedness."
Generally, "Designated Senior Indebtedness" will include:
- indebtedness for borrowed money under a bank credit agreement, called
"Bank Indebtedness"; and
- any specified issue of Senior Indebtedness of at least $100 million.
During the continuance of any default, other than a default described in
the immediately preceding paragraph, that may cause the maturity of any Senior
Indebtedness to be accelerated immediately without further notice, other than
any notice required to effect such acceleration, or the expiration of any
applicable grace periods, the Issuer may not pay the subordinated debt
securities for a period called the "Payment Blockage Period." A Payment Blockage
Period will commence on the receipt by us and the Trustee of written notice of
the default, called a "Blockage Notice," from the representative of any
Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period.
The Payment Blockage Period may be terminated before its expiration:
- by written notice from the person or persons who gave the Blockage
Notice;
- by repayment in full in cash of the Senior Indebtedness with respect to
which the Blockage Notice was given; or
- if the default giving rise to the Payment Blockage Period is no longer
continuing.
Unless the holders of Senior Indebtedness shall have accelerated the maturity of
the Senior Indebtedness, we may resume payments on the subordinated debt
securities after the expiration of the Payment Blockage Period.
Generally, not more than one Blockage Notice may be given in any period of
360 consecutive days unless the first Blockage Notice within the 360-day period
is given by holders of Designated Senior Indebtedness, other than Bank
Indebtedness, in which case the representative of the Bank Indebtedness may give
another Blockage Notice within the period. The total number of days during which
any one or more Payment Blockage Periods are in effect, however, may not exceed
an aggregate of 179 days during any period of 360 consecutive days.
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After all Senior Indebtedness is paid in full and until the subordinated
debt securities are paid in full, holders of the subordinated debt securities
shall be subrogated to the rights of holders of Senior Indebtedness to receive
distributions applicable to Senior Indebtedness.
By reason of the subordination, in the event of insolvency, our creditors
who are holders of Senior Indebtedness, as well as certain of our general
creditors, may recover more, ratably, than the holders of the subordinated debt
securities.
BOOK-ENTRY SYSTEM
We will issue the debt securities in the form of one or more global
securities in fully registered form initially in the name of Cede & Co., as
nominee of DTC, or such other name as may be requested by an authorized
representative of DTC. The global securities will be deposited with the Trustee
as custodian for DTC and may not be transferred except as a whole by DTC to a
nominee of DTC or by a nominee of DTC to DTC or another nominee of DTC or by DTC
or any nominee to a successor of DTC or a nominee of such successor.
DTC has advised us as follows:
- DTC is a limited-purpose trust company organized under the New York
Banking Law, a "banking organization" within the meaning of the New York
Banking Law, a member of the Federal Reserve System, a "clearing
corporation" within the meaning of the New York Uniform Commercial Code,
and a "clearing agency" registered pursuant to the provisions of Section
17A of the Exchange Act.
- DTC holds securities that its participants deposit with DTC and
facilitates the settlement among direct participants of securities
transactions, such as transfers and pledges, in deposited securities,
through electronic computerized book-entry changes in direct
participants' accounts, thereby eliminating the need for physical
movement of securities certificates.
- Direct participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations.
- DTC is owned by a number of its direct participants and by the New York
Stock Exchange, Inc., the American Stock Exchange LLC and the National
Association of Securities Dealers, Inc.
- Access to the DTC system is also available to others such as securities
brokers and dealers, banks and trust companies that clear through or
maintain a custodial relationship with a direct participant, either
directly or indirectly.
- The rules applicable to DTC and its direct and indirect participants are
on file with the Commission.
Purchases of debt securities under the DTC system must be made by or
through direct participants, which will receive a credit for the debt securities
on DTC's records. The ownership interest of each actual purchaser of debt
securities is in turn to be recorded on the direct and indirect participants'
records. Beneficial owners of the debt securities will not receive written
confirmation from DTC of their purchase, but beneficial owners are expected to
receive written confirmations providing details of the transaction, as well as
periodic statements of their holdings, from the direct or indirect participants
through which the beneficial owner entered into the transaction. Transfers of
ownership interests in the debt securities are to be accomplished by entries
made on the books of direct and indirect participants acting on behalf of
beneficial owners. Beneficial owners will not receive certificates representing
their ownership interests in the debt securities, except in the event that use
of the book-entry system for the debt securities is discontinued.
To facilitate subsequent transfers, all debt securities deposited by direct
participants with DTC are registered in the name of DTC's partnership nominee,
Cede & Co., or such other name as may be requested by an authorized
representative of DTC. The deposit of debt securities with DTC and their
registration in the name of Cede & Co. or such other nominee do not effect any
change in beneficial ownership. DTC has no knowledge of the actual beneficial
owners of the debt securities; DTC's records reflect only the identity of the
direct participants to whose accounts such debt securities are credited, which
may or may not be the
21
beneficial owners. The direct and indirect participants will remain responsible
for keeping account of their holdings on behalf of their customers.
Conveyance of notices and other communications by DTC to direct
participants, by, direct participants to indirect participants, and by direct
participants and indirect participants to beneficial owners will be governed by
arrangements among them, subject to any statutory or regulatory requirements as
may be in effect from time to time.
Neither DTC nor Cede & Co. (nor any other DTC nominee) will consent or vote
with respect to the global securities. Under its usual procedures, DTC mails an
omnibus proxy to the issuer as soon as possible after the record date. The
omnibus proxy assigns Cede & Co.'s consenting or voting rights to those direct
participants to whose accounts the debt securities are credited on the record
date (identified in the listing attached to the omnibus proxy).
All payments on the global securities will be made to Cede & Co., as holder
of record, or such other nominee as may be requested by an authorized
representative of DTC. DTC's practice is to credit direct participants' accounts
upon DTC's receipt of funds and corresponding detail information from us or the
Trustee on payment dates in accordance with their respective holdings shown on
DTC's records. Payments by participants to beneficial owners will be governed by
standing instructions and customary practices, as is the case with securities
held for the accounts of customers in bearer form or registered in "street
name," and will be the responsibility of such participant and not of DTC, us or
the Trustee, subject to any statutory or regulatory requirements as may be in
effect from time to time. Payment of principal, premium, if any, and interest to
Cede & Co. (or such other nominee as may be requested by an authorized
representative of DTC) shall be the responsibility of us or the Trustee.
Disbursement of such payments to direct participants shall be the responsibility
of DTC, and disbursement of such payments to the beneficial owners shall be the
responsibility of direct and indirect participants.
DTC may discontinue providing its service as securities depositary with
respect to the debt securities at any time by giving reasonable notice to us or
the Trustee. In addition, we may decide to discontinue use of the system of
book-entry transfers through DTC (or a successor securities depositary). Under
such circumstances, in the event that a successor securities depositary is not
obtained, note certificates in fully registered form are required to be printed
and delivered to beneficial owners of the global securities representing such
debt securities.
Neither we, the Trustee nor the initial purchasers will have any
responsibility or obligation to direct or indirect participants, or the persons
for whom they act as nominees, with respect to the accuracy of the records of
DTC, its nominee or any participant with respect to any ownership interest in
the debt securities, or payments to, or the providing of notice to participants
or beneficial owners.
So long as the debt securities are in DTC's book-entry system, secondary
market trading activity in the debt securities will settle in immediately
available funds. All payments on the debt securities issued as global securities
will be made by us in immediately available funds.
LIMITATIONS ON ISSUANCE OF BEARER SECURITIES
The debt securities of a series may be issued as Registered Securities
(which will be registered as to principal and interest in the register
maintained by the registrar for the debt securities) or Bearer Securities (which
will be transferable only by delivery). If the debt securities are issuable as
Bearer Securities, certain special limitations and conditions will apply.
In compliance with United States federal income tax laws and regulations,
we and any underwriter, agent or dealer participating in an offering of Bearer
Securities will agree that, in connection with the original issuance of the
Bearer Securities and during the period ending 40 days after the issue date,
they will not offer, sell or deliver any such Bearer Securities, directly or
indirectly, to a United States Person (as defined below) or to any person within
the United States, except to the extent permitted under United States Treasury
regulations.
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Bearer Securities will bear a legend to the following effect: "Any United
States person who holds this obligation will be subject to limitations under the
United States federal income tax laws, including the limitations provided in
Sections 165(j) and 1287(a) of the Internal Revenue Code." The sections referred
to in the legend provide that, with certain exceptions, a United States taxpayer
who holds Bearer Securities will not be allowed to deduct any loss with respect
to, and will not be eligible for capital gain treatment with respect to any gain
realized on the sale, exchange, redemption or other disposition of, the Bearer
Securities.
For this purpose, "United States" includes the United States of America and
its possessions, and "United States person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States, or an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source.
Pending the availability of a definitive global security or individual
Bearer Securities, as the case may be, debt securities that are issuable as
Bearer Securities may initially be represented by a single temporary global
security, without interest coupons, to be deposited with a common depositary in
London for Morgan Guaranty Trust Company of New York, Brussels Office, as
operator of the Euroclear System ("Euroclear"), or Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") for credit to the accounts designated by or on
behalf of the purchasers thereof. Following the availability of a definitive
global security in bearer form, without coupons attached, or individual Bearer
Securities and subject to any further limitations described in the applicable
prospectus supplement, the temporary global security will be exchangeable for
interests in the definitive global security or for the individual Bearer
Securities, respectively, only upon receipt of a "Certificate of Non-U.S.
Beneficial Ownership," which is a certificate to the effect that a beneficial
interest in a temporary global security is owned by a person that is not a
United States Person or is owned by or through a financial institution in
compliance with applicable United States Treasury regulations. No Bearer
Security will be delivered in or to the United States. If so specified in the
applicable prospectus supplement, interest on a temporary global security will
be paid to each of Euroclear and CEDEL with respect to that portion of the
temporary global security held for its account, but only upon receipt as of the
relevant interest payment date of a Certificate of Non-U.S. Beneficial
Ownership.
NO RECOURSE AGAINST GENERAL PARTNER
Our general partner and its directors, officers, employees and members, as
such, shall have no liability for any obligations of the Guarantor or the Issuer
under the debt securities, the Indenture or the guarantee or for any claim based
on, in respect of, or by reason of, such obligations or their creation. Each
holder by accepting a note waives and releases all such liability. The waiver
and release are part of the consideration for issuance of the debt securities.
Such waiver may not be effective to waive liabilities under the federal
securities laws, and it is the view of the Commission that such a waiver is
against public policy.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the right of the Trustee,
should it become our creditor, to obtain payment of claims in certain cases, or
to realize for its own account on certain property received in respect of any
such claim as security or otherwise. The Trustee is permitted to engage in
certain other transactions. However, if it acquires any conflicting interest
within the meaning of the Trust Indenture Act, it must eliminate the conflict or
resign as Trustee.
The holders of a majority in principal amount of all outstanding debt
securities (or if more than one series of debt securities under the Indenture is
affected thereby, all series so affected, voting as a single class) will have
the right to direct the time, method and place of conducting any proceeding for
exercising any remedy or power available to the Trustee for the debt securities
or all such series so affected.
If an Event of Default occurs and is not cured under the Indenture and is
known to the Trustee, the Trustee shall exercise such of the rights and powers
vested in it by the Indenture and use the same degree of care and skill in its
exercise as a prudent person would exercise or use under the circumstances in
the conduct of his own affairs. Subject to such provisions, the Trustee will not
be under any obligation to exercise any of
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its rights or powers under the Indenture at the request of any of the holders of
debt securities unless they shall have offered to such Trustee reasonable
security and indemnity.
Wachovia Bank, National Association is the Trustee under the Indenture and
has been appointed by the Issuer as Registrar and Paying Agent with regard to
the debt securities. Wachovia Bank, National Association is the Administrative
Agent and a lender under the Issuer's credit facilities.
GOVERNING LAW
The Indenture, the debt securities and the guarantee are governed by, and
will be construed in accordance with, the laws of the State of New York.
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DESCRIPTION OF OUR COMMON UNITS
Generally, our common units represent limited partner interests that
entitle the holders to participate in our cash distributions and to exercise the
rights and privileges available to limited partners under our partnership
agreement. For a description of the relative rights and preferences of holders
of common units, holders of subordinated units and our general partner in and to
cash distributions, together with a description of the circumstances under which
subordinated units convert into common units, see "Cash Distribution Policy" in
this prospectus.
Our outstanding common units are listed on the NYSE under the symbol "EPD."
Any additional common units we issue will also be listed on the NYSE.
The transfer agent and registrar for our common units is Mellon Investor
Services LLC.
MEETINGS/VOTING
Each holder of common units is entitled to one vote for each common unit on
all matters submitted to a vote of the unitholders.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described below under "-- Limited Liability," the common units
will be fully paid, and unitholders will not be required to make additional
capital contributions to us.
For a purchaser of common units offered by this prospectus to be registered
as a record holder of common units on the books of our transfer agent or issued
a common unit certificate, the purchaser must execute a transfer application
whereby the purchaser requests admission as a substituted limited partner and
makes representations and agrees to provisions stated in the transfer
application. If this action is not taken, a purchaser's common units will be
held in nominee accounts.
An assignee, pending its admission as a substituted limited partner, is
entitled to an interest in us equivalent to that of a limited partner with
respect to the right to share in allocations and distributions, including
liquidating distributions. Our general partner will vote and exercise other
powers attributable to common units owned by an assignee who has not become a
substituted limited partner at the written direction of the assignee.
Transferees who do not execute and deliver transfer applications will be treated
neither as assignees nor as record holders of common units and will not receive
distributions, federal income tax allocations or reports furnished to record
holders of common units. The only right the transferees will have is the right
to admission as a substituted limited partner in respect of the transferred
common units upon execution of a transfer application in respect of the common
units. A nominee or broker who has executed a transfer application with respect
to common units held in street name or nominee accounts will receive
distributions and reports pertaining to its common units.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of our
business within the meaning of the Delaware Revised Uniform Limited Partnership
Act (the "Delaware Act") and that he otherwise acts in conformity with the
provisions of our partnership agreement, his liability under the Delaware Act
will be limited, subject to some possible exceptions, generally to the amount of
capital he is obligated to contribute to us in respect of his units plus his
share of any undistributed profits and assets.
Under the Delaware Act, a limited partnership may not make a distribution
to a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
liabilities for which the recourse of creditors is limited to specific property
of the partnership, exceed the fair value of the assets of the limited
partnership.
For the purposes of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of the property
subject to liability of which recourse of creditors is limited shall be
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included in the assets of the limited partnership only to the extent that the
fair value of that property exceeds the nonrecourse liability. The Delaware Act
provides that a limited partner who receives a distribution and knew at the time
of the distribution that the distribution was in violation of the Delaware Act
is liable to the limited partnership for the amount of the distribution for
three years from the date of the distribution.
REPORTS AND RECORDS
As soon as practicable. but in no event later than 120 days after the close
of each fiscal year, our general partner will furnish or make available to each
unitholder of record (as of a record date selected by our general partner) an
annual report containing our audited financial statements for the past fiscal
year. These financial statements will be prepared in accordance with generally
accepted accounting principles. In addition, no later than 45 days after the
close of each quarter (except the fourth quarter), our general partner will
furnish or make available to each unitholder of record (as of a record date
selected by our general partner) a report containing our unaudited financial
statements and any other information required by law.
Our general partner will use all reasonable efforts to furnish each
unitholder of record information reasonably required for tax reporting purposes
within 90 days after the close of each fiscal year. Our general partner's
ability to furnish this summary tax information will depend on the cooperation
of unitholders in supplying information to our general partner. Each unitholder
will receive information to assist him in determining his U.S. federal and state
and Canadian federal and provincial tax liability and filing his U.S. federal
and state and Canadian federal and provincial income tax returns.
A limited partner can, for a purpose reasonably related to the limited
partner's interest as a limited partner, upon reasonable demand and at his own
expense, have furnished to him:
- a current list of the name and last known address of each partner; a copy
of our tax returns;
- information as to the amount of cash and a description and statement of
the agreed value of any other property or services, contributed or to be
contributed by each partner and the date on which each became a partner;
- copies of our partnership agreement. our certificate of limited
partnership, amendments to either of them and powers of attorney which
have been executed under our partnership agreement; information regarding
the status of our business and financial condition; and
- any other information regarding our affairs as is just and reasonable.
Our general partner may, and intends to, keep confidential from the limited
partners trade secrets and other information the disclosure of which our general
partner believes in good faith is not in our best interest or which we are
required by law or by agreements with third parties to keep confidential.
CLASS A SPECIAL UNITS
A total of 29,000,000 Class A special units were issued as part of the
purchase price of Tejas Natural Gas Liquids LLC. These units do not accrue
distributions and are not entitled to cash distributions until their conversion
into an equal number of common units. On August 1, 2000, August 1, 2001 and
August 1, 2002, 2,000,000, 10,000,000 and 17,000,000 of the Class A special
units, respectively, were converted into an equal number of common units. As an
additional part of the purchase price of Tejas Natural Gas Liquids LLC, we
agreed to issue up to 12,000,000 more Class A special units to the seller if the
volumes of natural gas that we process for Shell Oil Company and its affiliates
reach certain agreed upon levels in 2000 and 2001. On August 1, 2000, we issued
6,000,000 of these Class A special units to the seller, and on August 1, 2001,
we issued the remaining 6,000,000 Class A special units to the seller under our
foregoing agreement. On August 1, 2002, 2,000,000 of these additional Class A
special units converted into an equal number of common units. The remaining
10,000,000 additional Class A special units will convert into an equal number of
common units in August 2003.
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CASH DISTRIBUTION POLICY
DISTRIBUTIONS OF AVAILABLE CASH
General. Within approximately 45 days after the end of each quarter, we
will distribute all of our available cash to unitholders of record on the
applicable record date.
Definition of Available Cash. Available cash is defined in our partnership
agreement and generally means, with respect to any calendar quarter, all cash on
hand at the end of such quarter:
- less the amount of cash reserves that is necessary or appropriate in the
reasonable discretion of the general partner to:
- provide for the proper conduct of our business;
- comply with applicable law or any debt instrument or other agreement
(including reserves for future capital expenditures and for our future
credit needs); or
- provide funds for distributions to unitholders and our general partner
in respect of any one or more of the next four quarters;
- plus all cash on hand on the date of determination of available cash for
the quarter resulting from working capital borrowings made after the end
of the quarter. Working capital borrowings are generally borrowings that
are made under our credit facilities and in all cases are used solely for
working capital purposes or to pay distributions to partners.
OPERATING SURPLUS AND CAPITAL SURPLUS
General. Cash distributions are characterized as distributions from either
operating surplus or capital surplus. We distribute available cash from
operating surplus differently than available cash from capital surplus.
Definition of Operating Surplus. Operating surplus is defined in the
partnership agreement and generally means:
- our cash balance on July 31, 1998, the closing date of our initial public
offering of common units (excluding $46.5 million to fund certain capital
commitments existing at such closing date); plus
- all of our cash receipts since the closing of our initial public
offering, excluding cash from interim capital transactions such as
borrowings that are not working capital borrowings, sales of equity and
debt securities and sales or other disposition of assets for cash, other
than inventory, accounts receivable and other assets sold in the ordinary
course of business or as part of normal retirements or replacements of
assets; plus
- up to $60.0 million of cash from interim capital transactions; plus
- working capital borrowings made after the end of a quarter but before the
date of determination of operating surplus for the quarter; less
- all of our operating expenditures since the closing of our initial public
offering, including the repayment of working capital borrowings, but not
the repayment of other borrowings, and including maintenance capital
expenditures; less
- the amount of cash reserved that we deem necessary or advisable to
provide funds for future operating expenditures.
Definition of Capital Surplus. Capital surplus is generally generated only
by borrowings (other than borrowings for working capital purposes), sales of
debt and equity securities and sales or other dispositions of assets for cash
(other than inventory, accounts receivable and other assets disposed of in the
ordinary course of business).
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Characterization of Cash Distributions. To avoid the difficulty of trying
to determine whether available cash we distribute is from operating surplus or
from capital surplus, all available cash we distribute from any source will be
treated as distributed from operating surplus until the sum of all available
cash distributed since July 31, 1998 equals the operating surplus as of the end
of the quarter prior to such distribution. Any available cash in excess of such
amount (irrespective of its source) will be deemed to be from capital surplus
and distributed accordingly.
If available cash from capital surplus is distributed in respect of each
common unit in an aggregate amount per common unit equal to the $11.00 initial
public offering price of the common units, plus any common unit arrearages, the
distinction between operating surplus and capital surplus will cease, and all
distributions of available cash will be treated as if they were from operating
surplus. We do not anticipate that there will be significant distributions from
capital surplus.
SUBORDINATION PERIOD
General. With respect to each quarter during the subordination period, to
the extent there is sufficient available cash, the holders of common units will
have the right to receive the minimum quarterly distribution of $0.225 per unit,
plus any common unit arrearages, prior to any distribution of available cash to
the holders of subordinated units. The purpose of the subordinated units is to
increase the likelihood that during the subordination period there will be
sufficient available cash from operating surplus for us to distribute the
minimum quarterly distribution on each common unit. Common units will not accrue
arrearages with respect to distributions for any quarter after the subordination
period, and subordinated units will not accrue any arrearages with respect to
distributions for any quarter.
Definition of Subordination Period. The subordination period will
generally extend until the first day of any quarter beginning after June 30,
2003 that the following tests are met:
- distributions of available cash from operating surplus on each of the
outstanding common units and the subordinated units with respect to each
of the three consecutive, non-overlapping, four-quarter periods
immediately preceding such date equaled or exceeded the minimum quarterly
distribution on all of the outstanding common units and subordinated
units during such periods;
- 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 outstanding common
units and subordinated units during those periods on a fully diluted
basis; and
-- the related distribution on the general partner interests in us and our
operating partnership; and
- there are no outstanding common unit arrearages.
Early Conversion of Subordinated Units. On May 1, 2002, 10,704,936 of the
original subordinated units, or approximately 25%, converted into an equal
number of common units. As of December 31, 2002, 32,114,804 subordinated units
remained outstanding. An additional 10,704,936 subordinated units will convert
into an equal number of common units on the first day after the record date
established for the distribution in respect of any quarter ending on or after
March 31, 2003 if the following tests are met:
- distributions of available cash from operating surplus on the common
units and the subordinated units with respect to each of the three
consecutive, non-overlapping, four-quarter periods immediately preceding
such date equaled or exceeded the sum of the minimum quarterly
distribution on all of the outstanding common units and subordinated
units during such periods;
- 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 $0.225 per unit on all of the
common units and subordinated units that were outstanding during such
period on a fully
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diluted basis and the related distribution on the general partner
interests in us and our operating partnership; and
- there are no outstanding common unit arrearages.
Because the tests for early conversion and the end of the subordination
period are the same, if the test for early conversion is not met for the quarter
ending March 31, 2003, there will not be any additional early conversion of the
subordinated units. If the test is met at the end of any subsequent quarter,
then the subordination period will end and all of the subordinated units will
convert into common units. On August 1, 2003, 10,000,000 special units owned by
Shell that are currently not entitled to distributions will convert into common
units and, if the subordination period has not terminated at such time, will be
included as common units for purposes of the above test.
Definition of Adjusted Operating Surplus. Adjusted operating surplus is
intended to reflect the cash generated from operations during a particular
period and therefore excludes net increases in working capital borrowings and
net drawdowns of reserves of cash generated in prior periods. Adjusted operating
surplus for any period generally means:
- operating surplus generated during that period; less
- any net increase in working capital borrowings during that period; less
- any net reduction in cash reserves for operating expenditures during that
period not relating to an operating expenditure made during that period;
plus
- any net decrease in working capital borrowings during that period; plus
- any net increase in cash reserves for operating expenditures during that
period required by any debt instrument for the repayment of principal,
interest or premium.
Effect of Expiration of the Subordination Period. Upon expiration of the
subordination period, each outstanding subordinated unit will convert into one
common unit and will then participate pro rata with the other common units in
distributions of available cash. In addition, if our general partner is removed
as our general partner under circumstances where cause does not exist and units
held by our general partner and its affiliates are not voted in favor of such
removal:
- the subordination period will end and all outstanding subordinated units
will immediately convert into common units on a one-for-one basis;
- any existing common unit arrearages will be extinguished; and
- our general partner will have the right to convert its general partner
interest into common units or to receive cash in exchange for such
interests.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS DURING THE SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus with
respect to any quarter during the subordination period in the following manner:
- first, 98% to the common unitholders, pro rata, and 2% to the general
partner, until there has been distributed in respect of each outstanding
common unit an amount equal to $0.225 per unit for such quarter.
- second, 98% to the common unitholders, pro rata, and 2% to the general
partner, until there has been distributed in respect of each outstanding
common unit an amount equal to any common unit arrearages accrued and
unpaid with respect to any prior quarters during the subordination
period;
- third, 98% to the subordinated unitholders, pro rata, and 2% to the
general partner, until there has been distributed in respect of each
outstanding subordinated unit an amount equal to $0.225 per unit; and
- thereafter, in the manner described in "Incentive Distributions" below.
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The above references to the 2% of available cash from operating surplus
distributed to the general partner are references to the amount of the
percentage interest of our general partner (exclusive of its or any of its
affiliates' interests as holders of common units or subordinated units) in
distributions from us and our operating partnership. Our general partner owns a
1% general partner interests in us and a 1.0101% general partner interest in our
operating partnership.
With respect to any common unit, the term "common unit arrearages" refers
to the amount by which the minimum quarterly distribution of $0.225 per unit in
any quarter during the subordination period exceeds the distribution of
available cash from operating surplus actually made for such quarter on a common
unit issued in our initial public offering, cumulative for such quarter and all
prior quarters during the subordination period. Common unit arrearages will not
accrue interest.
DISTRIBUTIONS OF AVAILABLE CASH FROM OPERATING SURPLUS AFTER SUBORDINATION
PERIOD
We will make distributions of available cash from operating surplus with
respect to any quarter after the subordination period in the following manner:
- first, 98% to all common unitholders, pro rata and 2% to the general
partner, until there has been distributed in respect of each unit an
amount equal to $0.225; and
- thereafter, in the manner described in "Incentive Distributions" below.
INCENTIVE DISTRIBUTIONS
Incentive distributions represent the right to receive an increasing
percentage of quarterly distributions of available cash from operating surplus
after the minimum quarterly distribution and the target distribution levels have
been achieved. For any quarter for which available cash from operating surplus
is distributed to the common and subordinated unitholders in an amount equal to
$0.225 per unit on all units and to the common unitholders in an amount equal to
any unpaid common unit arrearages, then any additional available cash from
operating surplus in respect of such quarter will be distributed among the
unitholders and the general partner in the following manner:
- first, 98% to all common and subordinated unitholders, pro rata, and 2%
to the general partner, until the unitholders have received a total of
$0.253 for such quarter in respect of each outstanding unit (the "First
Target Distribution");
- second, 85% to all common and subordinated unitholders, pro rata, and 15%
to the general partner, until the unitholders have received a total of
$0.3085 for such quarter in respect of each outstanding unit (the "Second
Target Distribution"); and
- thereafter, 75% to all common and subordinated unitholders, pro rata, and
25% to the general partner.
In each case, the amount of the target distribution set forth above is
exclusive of any distributions to our common unitholders to eliminate any
cumulative arrearages in payment of the minimum quarterly distribution.
DISTRIBUTIONS FROM CAPITAL SURPLUS
How Distributions from Capital Surplus Will Be Made. We will make
distributions of available cash from capital surplus in the following manner:
- first, 98% to all common and subordinated unitholders, pro rata, and 2%
to the general partner, until we have distributed, in respect of each
outstanding common unit issued in our initial public offering, available
cash from capital surplus in an aggregate amount per common unit equal to
the initial unit price of $11.00;
- second, 98% to the holders of common units, pro rata, and 2% to the
general partner, until the Company has distributed, in respect of each
outstanding common unit, available cash from capital
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surplus in an aggregate amount equal to any unpaid common unit arrearages
with respect to such common unit; and
- thereafter, all distributions of available cash from capital surplus will
be distributed as if they were from operating surplus.
Effect of a Distribution from Capital Surplus. Our partnership agreement
treats a distribution of capital surplus on a common unit as the repayment of
the common unit price from its initial public offering, which is a return of
capital. The initial public offering price less any distributions of capital
surplus per common unit is referred to as the unrecovered initial common unit
price. Each time a distribution of capital surplus is made on a common unit, the
minimum quarterly distribution and the target distribution levels for all units
will be reduced in the same proportion as the corresponding reduction in the
unrecovered initial common unit price. Because distributions of capital surplus
will reduce the minimum quarterly distribution, after any of these distributions
are made, it may be easier for our general partner to receive incentive
distributions and for the subordinated units to convert into common units.
However, any distribution by us of capital surplus before the unrecovered
initial common unit price is reduced to zero cannot be applied to the payment of
the minimum quarterly distribution or any arrearages.
Once we distribute capital surplus on a common unit in any amount equal to
the unrecovered initial common unit price plus any arrearages, it will reduce
the minimum quarterly distribution and the target distribution levels to zero
and it will make all future distributions of available cash from operating
surplus, with 25% being paid to the holders of units, as applicable, and 75% to
our general partner.
ADJUSTMENT TO THE MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the minimum quarterly distribution and target
distribution levels made upon a distribution of available cash from capital
surplus, if we combine our units into fewer units or subdivide our units into a
greater number of units, we will proportionately adjust:
- the minimum quarterly distribution;
- the target distribution levels;
- the unrecovered initial common unit price;
- the number of common units issuable during the subordination period
without a unitholder vote; and
- the number of common units issuable upon conversion of the subordinated
units.
For example, in the event of a two-for-one split of the common units
(assuming no prior adjustments), the minimum quarterly distribution, each of the
target distribution levels and the unrecovered capital of the common units would
each be reduced to 50% of its initial level.
In addition, if legislation is enacted or if existing law is modified or
interpreted in a manner that causes us to become taxable as a corporation or
otherwise subject to taxation as an entity for federal, state or local income
tax purposes, then we will reduce the minimum quarterly distribution and the
target distribution levels by multiplying the same by one minus the sum of the
highest effective federal corporate income tax rate that could apply and any
increase in the effective overall state and local income tax rates. For example,
if we became subject to a maximum effective federal, state and local income tax
rate of 38%, then the minimum quarterly distribution and the target distribution
levels would each be reduced to 62% of their previous levels.
DISTRIBUTIONS OF CASH UPON LIQUIDATION
If we dissolve in accordance with the partnership agreement, we will sell
or otherwise dispose of our assets in a process called a liquidation. We will
first apply the proceeds of liquidation to the payment of our creditors in the
order of priority provided in the partnership agreement and by law and,
thereafter, we will distribute any remaining proceeds to the unitholders and our
general partner in accordance with their respective capital account balances as
so adjusted.
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Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
common units to a preference over the holders of outstanding subordinated units
upon our liquidation, to the extent required to permit common unitholders to
receive their unrecovered capital plus any unpaid common unit arrearages. Thus,
net losses recognized upon our liquidation will be allocated to the holders of
the subordinated units to the extent of their capital account balances before
any loss is allocated to the holders of the common units, and net gains
recognized upon liquidation will be allocated first to restore negative balances
in the capital account of the general partner and any unitholders and then to
the common unitholders until their capital account balances equal their
unrecovered capital plus unpaid common unit arrearages. However, no assurance
can be given that there will be sufficient gain upon our liquidation to enable
the holders of common units to fully recover all of such amounts, even though
there may be cash available after such allocation for distribution to the
holders of subordinated units.
Manner of Adjustments for Gain. The manner of the adjustment is set forth
in the partnership agreement. If our liquidation occurs before the end of the
subordination period, we will allocate any net gain (or unrealized gain
attributable to assets distributed in kind to the partners as follows:
- first, to the general partner and the holders of units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances:
- second, 98% to the holders of common units, pro rata, and 2% to the
general partner, until the capital account for each common unit is equal
to the sum of
- the unrecovered capital in respect of such common unit; plus
- the amount of the minimum quarterly distribution for the quarter during
which our liquidation occurs; plus
- any unpaid common unit arrearages in respect of such common unit;
- third, if the capital account with respect to a Class A special unit is
not equal to the capital account with respect to each common unit, 98% to
the holders of common units and the holders of Class A special units in
the manner and amount necessary to equalize, to the maximum extent
possible, the capital account for each common unit and Class A special
unit, and 2% to the general partner;
- fourth, 98% to the holders of subordinated units, pro rata, and 2% to the
general partner, until the capital account for each subordinated unit is
equal to the sum of
- the unrecovered capital in respect of such subordinated unit; plus
- the amount of the minimum quarterly distribution for the quarter during
which our liquidation occurs;
- fifth, 98% to all unitholders, pro rata, and 2% to the general partner,
until there has been allocated under this paragraph fifth an amount per
unit equal to:
- the sum of the excess of the First Target Distribution per unit over the
minimum quarterly distribution per unit for each quarter of our
existence; less
- the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the minimum quarterly distribution
per unit that were distributed 98% to the unitholders, pro rata, and 2%
to the general partner for each quarter of our existence;
- sixth, 85% to all unitholders, pro rata, and 15% to the general partner,
until there has been allocated under this paragraph sixth an amount per
unit equal to:
- the sum of the excess of the Second Target Distribution per unit over
the First Target Distribution per unit for each quarter of our
existence; less
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- the cumulative amount per unit of any distributions of available cash
from operating surplus in excess of the First Target Distribution per
unit that were distributed 85% to the unitholders, pro rata, and 15% to
the general partner for each quarter of our existence; and
- thereafter, 75% to all unitholders, pro rata, and 25% to the general
partner.
If the liquidation occurs after the conversion of all the Class A special
units into common units, the distinction between Class A special units and
common units will disappear, so that all of paragraph third above will no longer
be applicable. If the liquidation occurs after the subordination period, the
distinction between common units and subordinated units will disappear, so that
the third bullet of paragraph second above and all of paragraph fourth above
will no longer be applicable.
Manner of Adjustments for Losses. Upon our liquidation, any loss will
generally be allocated to the general partner and the unitholders as follows:
- first, 98% to holders of subordinated units in proportion to the positive
balances in their respective capital accounts and 2% to the general
partner, until the capital accounts of the holders of the subordinated
units have been reduced to zero;
- second, if the capital account with respect to a Class A special unit is
not equal to the capital account with respect to each common unit, 98% to
the holders of common units and the holders of Class A special units in
the manner and amount necessary to equalize, to the maximum extent
possible, the capital account for each common unit and Class A special
unit, and 2% to the general partner;
- third, 98% to the holders of common units in proportion to the positive
balances in their respective capital accounts and 2% to the general
partner, until the capital accounts of the common unitholders have been
reduced to zero; and
- thereafter, 100% to the general partner.
If the liquidation occurs after the subordination period, the distinction
between common units and subordinated units will disappear, so that all of
paragraph first above will no longer be applicable. If the liquidation occurs
after the conversion of all the Class A special units into common units, the
distinction between Class A special units and common units will disappear, so
that all of paragraph second above will no longer be applicable.
Adjustments to Capital Accounts. In addition, interim adjustments to
capital accounts will be made at the time we issue additional partnership
interests or make distributions of property. Such adjustments will be based on
the fair market value of the partnership interests or the property distributed
and any gain or loss resulting therefrom will be allocated to the unitholders
and the general partner in the same manner as gain or loss is allocated upon
liquidation. In the event that positive interim adjustments are made to the
capital accounts, any subsequent negative adjustments to the capital accounts
resulting from the issuance of additional partnership interests in us,
distributions of property by us, or upon our liquidation, will be allocated in a
manner which results, to the extent possible, in the capital account balances of
the general partner equaling the amount that would have been the general
partner's capital account balances if no prior positive adjustments to the
capital accounts had been made.
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DESCRIPTION OF OUR PARTNERSHIP AGREEMENT
The following is a summary of the material provisions of our partnership
agreement. Our amended and restated partnership agreement has been filed with
the Commission, and is incorporated by reference in this prospectus. The
following provisions of our partnership agreement are summarized elsewhere in
this prospectus:
- distributions of our available cash are described under "Cash
Distribution Policy";
- allocations of taxable income and other tax matters are described under
"Tax Consequences"; and
- rights of holders of common units are described under "Description of Our
Common Units."
PURPOSE
Our purpose under our partnership agreement is to serve as a partner of our
operating partnership and to engage in any business activities that may be
engaged in by our operating partnership or that are approved by our general
partner. The partnership agreement of our operating partnership provides that it
may engage in any activity that was engaged in by our predecessors at the time
of our initial public offering or reasonably related thereto and any other
activity approved by our general partner.
POWER OF ATTORNEY
Each limited partner, and each person who acquires a unit from a unitholder
and executes and delivers a transfer application, grants to our general partner
and, if appointed, a liquidator, a power of attorney to, among other things,
execute and file documents required for our qualification, continuance or
dissolution. The power of attorney also grants the authority for the amendment
of, and to make consents and waivers under, our partnership agreement.
REIMBURSEMENTS OF OUR GENERAL PARTNER
Our general partner does not receive any compensation for its services as
our general partner. It is, however, entitled to be reimbursed for all of its
costs incurred in managing and operating our business. Our partnership agreement
provides that our general partner will determine the expenses that are allocable
to us in any reasonable manner determined by our general partner in its sole
discretion.
ISSUANCE OF ADDITIONAL SECURITIES
Our partnership agreement authorizes us to issue an unlimited number of
additional limited partner interests and other equity securities that are equal
in rank with or junior to our common units on terms and conditions established
by our general partner in its sole discretion without the approval of any
limited partners. During the subordination period, however, except as set forth
in the following paragraph, we may not issue an aggregate of more than
approximately 54,550,000 additional common units or an equivalent number of
units that are equal in rank with our common units, in each case, without the
approval of at least a majority of our outstanding common units (excluding
common units owned by the general partner and its affiliates).
During the subordination period, we may issue an unlimited number of common
units to finance an acquisition or a capital improvement that would have
resulted, on a pro forma basis, in an increase in per unit adjusted operating
surplus as provided in our partnership agreement.
In no event may we issue partnership interests during the subordination
period that are senior to our common units without the approval of the holders
of a majority of our outstanding common units (excluding common units owned by
the general partner and its affiliates).
It is possible that we will fund acquisitions through the issuance of
additional common units or other equity securities. Holders of any additional
common units we issue will be entitled to share equally with the then-existing
holders of common units in our cash distributions. In addition, the issuance of
additional
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partnership interests may dilute the value of the interests of the then-existing
holders of common units in our net assets.
In accordance with Delaware law and the provisions of our partnership
agreement, we may also issue additional partnership interests that, in the sole
discretion of our general partner, may have special voting rights to which
common units are not entitled.
Our general partner has the right, which it may from time to time assign in
whole or in part to any of its affiliates, to purchase common units,
subordinated units or other equity securities whenever, and on the same terms
that, we issue those securities to persons other than our general partner and
its affiliates, to the extent necessary to maintain their percentage interests
in us that existed immediately prior to the issuance. The holders of common
units will not have preemptive rights to acquire additional common units or
other partnership interests in us.
AMENDMENTS TO OUR PARTNERSHIP AGREEMENT
Amendments to our partnership agreement may be proposed only by our general
partner. Any amendment that materially and adversely affects the rights or
preferences of any type or class of limited partner interests in relation to
other types or classes of limited partner interests or our general partner
interest will require the approval of at least a majority of the type or class
of limited partner interests or general partner interests so affected. However,
our general partner may make amendments to our partnership agreement without the
approval of our limited partners or assignees to reflect:
- a change in our name, the location of our principal place of business,
our registered agent or our registered office;
- the admission, substitution, withdrawal or removal of partners;
- a change to qualify or continue our qualification as a limited
partnership or a partnership in which our limited partners have limited
liability under the laws of any state or to ensure that neither we, our
operating partnership, nor any of our subsidiaries will be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes;
- a change that does not adversely affect our limited partners in any
material respect;
- a change to (i) 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 or (ii) facilitate the trading of our limited partner
interests or comply with any rule, regulation, guideline or requirement
of any national securities exchange on which our limited partner
interests are or will be listed for trading;
- a change in our fiscal year or taxable year and any changes that are
necessary or advisable as a result of a change in our fiscal year or
taxable year;
- an amendment that is necessary to prevent us, or our general partner or
its directors, officers, trustees or agents from 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;
- an amendment that is necessary or advisable in connection with the
authorization or issuance of any class or series of our securities;
- any amendment expressly permitted in our partnership agreement to be made
by our general partner acting alone;
- an amendment effected, necessitated or contemplated by a merger agreement
approved in accordance with our partnership agreement;
- an amendment that is necessary or advisable to reflect, account for and
deal with appropriately our formation of, or investment in, any
corporation, partnership, joint venture, limited liability company or
35
other entity other than our operating partnership, in connection with our
conduct of activities permitted by our partnership agreement;
- a merger or conveyance to effect a change in our legal form; or
- any other amendments substantially similar to the foregoing.
WITHDRAWAL OR REMOVAL OF OUR GENERAL PARTNER
Our general partner has agreed not to withdraw voluntarily as our general
partner prior to December 31, 2008 without obtaining the approval of the holders
of a majority of our outstanding common units, excluding those held by our
general partner and its affiliates, and furnishing an opinion of counsel stating
that such withdrawal (following the selection of the successor general partner)
would not result in the loss of the limited liability of any of our limited
partners or of a member of our operating partnership or cause us or our
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).
On or after December 31, 2008, our general partner may withdraw as general
partner without first obtaining approval of any unitholder by giving 90 days'
written notice, and that withdrawal will not constitute a violation of our
partnership agreement. In addition, our general partner may withdraw without
unitholder approval upon 90 days' notice to our limited partners if at least 50%
of our outstanding common units are held or controlled by one person and its
affiliates other than our general partner and its affiliates.
Upon the voluntary withdrawal of our general partner, the holders of a
majority of our outstanding common units, excluding the common units held by the
withdrawing general partner and its affiliates, may elect a successor to the
withdrawing general partner. If a successor is not elected, or is elected but an
opinion of counsel regarding limited liability and tax matters cannot be
obtained, we will be dissolved, wound up and liquidated, unless within 90 days
after that withdrawal, the holders of a majority of our outstanding units,
excluding the common units held by the withdrawing general partner and its
affiliates, and the holders of a majority of the subordinated units, voting as
separate classes, agree to continue our business and to appoint a successor
general partner.
Our general partner may not be removed unless that removal is approved by
the vote of the holders of not less than two-thirds of our outstanding units,
including units held by our general partner and its affiliates, and we receive
an opinion of counsel regarding limited liability and tax matters. Any removal
of this kind is also subject to the approval of a successor general partner by
the vote of the holders of a majority of our outstanding common units, including
those held by our general partner and its affiliates, and the holders of a
majority of the subordinated units, voting as separate classes.
While our partnership agreement limits the ability of our general partner
to withdraw, it allows the general partner interest to be transferred to an
affiliate or to a third party in conjunction with a merger or sale of all or
substantially all of the assets of our general partner. In addition, our
partnership agreement expressly permits the sale, in whole or in part, of the
ownership of our general partner. Our general partner may also transfer, in
whole or in part, the common units and subordinated units it owns.
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon our dissolution, unless we are reconstituted and continued as a new
limited partnership, the person authorized to wind up our affairs (the
liquidator) will, acting with all the powers of our general partner that
36
the liquidator deems necessary or desirable in its good faith judgment,
liquidate our assets. The proceeds of the liquidation will be applied as
follows:
- first, towards the payment of all of our creditors and the creation of
a reserve for contingent liabilities; and
- then, to all partners in accordance with the positive balance in the
respective capital accounts.
Under some circumstances and subject to some limitations, the liquidator
may defer liquidation or distribution of our assets for a reasonable period of
time. If the liquidator determines that a sale would be impractical or would
cause a loss to our partners, our general partner may distribute assets in kind
to our partners.
CHANGE OF MANAGEMENT PROVISIONS
Our partnership agreement contains the following specific provisions that
are intended to discourage a person or group from attempting to remove our
general partner or otherwise change management:
- if the holders, including the general partner and its affiliates, of at
least 66 2/3% of the units vote to remove the general partner without
cause, all remaining subordinated units will automatically convert into
common units and will share distributions with the existing common units
pro rata, existing arrearages on the common units will be extinguished
and the common units will no longer be entitled to arrearages if we fail
to pay the minimum quarterly distribution in any quarter. Cause is
narrowly defined to mean that 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 our general partner;
- any units held by a person that owns 20% or more of any class of units
then outstanding, other than our general partner and its affiliates,
cannot be voted on any matter; and
- the partnership agreement contains provisions limiting the ability of
unitholders to call meetings or to acquire information about our
operations, as well as other provisions limiting the unitholders' ability
to influence the manner or direction of management.
LIMITED CALL RIGHT
If at any time our general partner and its affiliates own 85% or more of
the issued and outstanding limited partner interests of any class, our general
partner will have the right to purchase all, but not less than all, of the
outstanding limited partner interests of that class that are held by
non-affiliated persons. The record date for determining ownership of the limited
partner interests would be selected by our general partner on at least 10 but
not more than 60 days' notice. The purchase price in the event of a purchase
under these provisions would be the greater of (1) the current market price (as
defined in our partnership agreement) of the limited partner interests of the
class as of the date three days prior to the date that notice is mailed to the
limited partners as provided in the partnership agreement and (2) the highest
cash price paid by our general partner or any of its affiliates for any limited
partner interest of the class purchased within the 90 days preceding the date
our general partner mails notice of its election to purchase the units. Under
our partnership agreement, Shell is not deemed to be an affiliate of our general
partner for purposes of this limited call right.
As of March 1, 2003, our general partner and its affiliates own 81,875,602
common units and 32,114,804 subordinated units, representing an aggregate 56.8%
limited partner interest in us.
INDEMNIFICATION
Under our partnership agreement, in most circumstances, we will indemnify
our general partner, its affiliates and their officers and directors to the
fullest extent permitted by law, from and against all losses, claims or damages
any of them may suffer by reason of their status as general partner, officer or
director, as long as the person seeking indemnity acted in good faith and in a
manner believed to be in or not opposed to our best interest. Any
indemnification under these provisions will only be out of our assets. Our
general
37
partner shall not be personally liable for, or have any obligation to contribute
or loan funds or assets to us to enable us to effectuate any indemnification. We
are authorized to purchase insurance against liabilities asserted against and
expenses incurred by persons for our activities, regardless of whether we would
have the power to indemnify the person against liabilities under our partnership
agreement.
REGISTRATION RIGHTS
Under our partnership agreement, we have agreed to register for resale
under the Securities Act of 1933, as amended (the "Securities Act") and
applicable state securities laws any common units, subordinated units or other
partnership securities proposed to be sold by our general partner or any of its
affiliates or their assignees if an exemption from the registration requirements
is not otherwise available. We are obligated to pay all expenses incidental to
the registration, excluding underwriting discounts and commissions.
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TAX CONSEQUENCES
This section is a summary of the material tax consequences that may be
relevant to prospective unitholders who are individual citizens or residents of
the United States and, unless otherwise noted in the following discussion,
represents the opinion of Vinson & Elkins L.L.P., special counsel to the general
partner and us, insofar as it relates to matters of United States federal income
tax law matters. This section is based upon current provisions of the Internal
Revenue Code, existing and proposed regulations and current administrative
rulings and court decisions, all of which are subject to change. Later changes
in these authorities may cause the tax consequences to vary substantially from
the consequences described below.
The following discussion does not comment on all federal income tax matters
affecting us or the unitholders. Moreover, the discussion focuses on unitholders
who are individual citizens or residents of the United States and has only
limited application to corporations, estates, trusts, nonresident aliens or
other unitholders subject to specialized tax treatment, such as tax-exempt
institutions, foreign persons, individual retirement accounts (IRAs), real
estate investment trusts (REITs)or mutual funds. Accordingly, we recommend that
each prospective unitholder consult, and depend on, his own tax advisor in
analyzing the federal, state, local and foreign tax consequences particular to
him of the ownership or disposition of common units.
All statements as to matters of law and legal conclusions, but not as to
factual matters, contained in this section, unless otherwise noted, are the
opinion of counsel and are based on the accuracy of the representations made by
us.
No ruling has been or will be requested from the IRS regarding any matter
affecting us or prospective unitholders. Instead, we will rely on opinions and
advice of Vinson & Elkins L.L.P. Unlike a ruling, an opinion of counsel
represents only that counsel's best legal judgment and does not bind the IRS or
the courts. Accordingly, the opinions and statements made here may not be
sustained by a court if contested by the IRS. Any contest of this sort with the
IRS may materially and adversely impact the market for the common units and the
prices at which common units trade. In addition, the costs of any contest with
the IRS will be borne directly or indirectly by the unitholders and the general
partner. Furthermore, the tax treatment of us, or of an investment in us, may be
significantly modified by future legislative or administrative changes or court
decisions. Any modifications may or may not be retroactively applied.
For the reasons described below, counsel has not rendered an opinion with
respect to the following specific federal income tax issues:
(1) the treatment of a unitholder whose common units are loaned to a
short seller to cover a short sale of common units (please read "-- Tax
Consequences of Unit Ownership -- Treatment of Short Sales");
(2) whether our monthly convention for allocating taxable income and
losses is permitted by existing Treasury Regulations (please read
"-- Disposition of Common Units -- Allocations Between Transferors and
Transferees"); and
(3) whether our method for depreciating Section 743 adjustments is
sustainable (please read "-- Tax Consequences of Unit Ownership -- Section
754 Election").
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner of a partnership is required to take into
account his share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of whether
cash distributions are made to him by the partnership. Distributions by a
partnership to a partner are generally not taxable unless the amount of cash
distributed is in excess of the partner's adjusted basis in his partnership
interest.
Section 7704 of the Internal Revenue Code provides that publicly-traded
partnerships will, as a general rule, be taxed as corporations. However, an
exception, referred to as the "Qualifying Income Exception," exists with respect
to publicly-traded partnerships of which 90% or more of the gross income for
every taxable
39
year consists of "qualifying income." Qualifying income includes income and
gains derived from the exploration, development, mining or production,
processing, refining, transportation and marketing of any mineral or natural
resource. Other types of qualifying income include interest other than from a
financial business, dividends, gains from the sale of real property and gains
from the sale or other disposition of assets held for the production of income
that otherwise constitutes qualifying income. We estimate that less than 2% of
our current gross income is not qualifying income; however, this estimate could
change from time to time. Based upon and subject to this estimate, the factual
representations made by us and the general partner and a review of the
applicable legal authorities, counsel is of the opinion that at least 90% of our
current gross income constitutes qualifying income.
No ruling has been or will be sought from the IRS and the IRS has made no
determination as to our status or the status of the Operating Partnership as
partnerships for federal income tax purposes or whether our operations generate
"qualifying income" under Section 7704 of the Internal Revenue Code. Instead, we
will rely on the opinion of counsel that, based upon the Internal Revenue Code,
its regulations, published revenue rulings and court decisions and the
representations described below, we and the Operating Partnership will be
classified as a partnership for federal income tax purposes.
In rendering its opinion, counsel has relied on factual representations
made by us and the general partner. The representations made by us and our
general partner upon which counsel has relied are:
(a) Neither we nor the Operating Partnership will elect to be treated as
a corporation; and
(b) For each taxable year, more than 90% of our gross income will be
income from sources that our counsel has opined or will opine is
"qualifying income" within the meaning of Section 7704(d) of the Internal
Revenue Code.
If we fail to meet the Qualifying Income Exception, other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery, we will be treated as if we had transferred all
of our assets, subject to liabilities, to a newly formed corporation, on the
first day of the year in which we fail to meet the Qualifying Income Exception,
in return for stock in that corporation, and then distributed that stock to the
unitholders in liquidation of their interests in us. This contribution and
liquidation should be tax-free to unitholders and us so long as we, at that
time, do not have liabilities in excess of the tax basis of our assets.
Thereafter, we would be treated as a corporation for federal income tax
purposes.
If we were taxable as a corporation in any taxable year, either as a result
of a failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the unitholders, and our net income would be
taxed to us at corporate rates. In addition, any distribution made to a
unitholder would be treated as either taxable dividend income, to the extent of
our current or accumulated earnings and profits, or, in the absence of earnings
and profits, a nontaxable return of capital, to the extent of the unitholder's
tax basis in his common units, or taxable capital gain, after the unitholder's
tax basis in his common units is reduced to zero. Accordingly, taxation as a
corporation would result in a material reduction in a unitholder's cash flow and
after-tax return and thus would likely result in a substantial reduction of the
value of the units.
The discussion below is based on the conclusion that we will be classified
as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Company will be treated
as partners of the Company for federal income tax purposes. Also:
(a) assignees who have executed and delivered transfer applications, and
are awaiting admission as limited partners, and
(b) unitholders whose common units are held in street name or by a
nominee and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common units,
40
will be treated as partners of the Company for federal income tax purposes. As
there is no direct authority addressing assignees of common units who are
entitled to execute and deliver transfer applications and become entitled to
direct the exercise of attendant rights, but who fail to execute and deliver
transfer applications, the opinion of Vinson & Elkins L.L.P. does not extend to
these persons. Furthermore, a purchaser or other transferee of common units who
does not execute and deliver a transfer application may not receive some federal
income tax information or reports furnished to record holders of common units
unless the common units are held in a nominee or street name account and the
nominee or broker has executed and delivered a transfer application for those
common units.
A beneficial owner of common units whose units have been transferred to a
short seller to complete a short sale would appear to lose his status as a
partner with respect to those units for federal income tax purposes. Please read
"-- Tax Consequences of Unit Ownership -- Treatment of Short Sales."
Income, gain, deductions or losses would not appear to be reportable by a
unitholder who is not a partner for federal income tax purposes, and any cash
distributions received by a unitholder who is not a partner for federal income
tax purposes would therefore be fully taxable as ordinary income. We strongly
recommend that prospective unitholders consult their own tax advisors with
respect to their status as partners in the Company for federal income tax
purposes.
TAX CONSEQUENCES OF UNIT OWNERSHIP
Flow-through of Taxable Income. We will not pay any federal income tax.
Instead, each unitholder will be required to report on his income tax return his
share of our income, gains, losses and deductions without regard to whether
corresponding cash distributions are received by him. Consequently, we may
allocate income to a unitholder even if he has not received a cash distribution.
Each unitholder will be required to include in income his allocable share of our
income, gains, losses and deductions for our taxable year ending with or within
his taxable year. Our taxable year ends on December 31.
Treatment of Distributions. Distributions by us to a unitholder generally
will not be taxable to the unitholder for federal income tax purposes to the
extent of his tax basis in his common units immediately before the distribution.
Our cash distributions in excess of a unitholder's tax basis generally will be
considered to be gain from the sale or exchange of the common units, taxable in
accordance with the rules described under "-- Disposition of Common Units"
below. Any reduction in a unitholder's share of our liabilities for which no
partner, including the general partner, bears the economic risk of loss, known
as "nonrecourse liabilities," will be treated as a distribution of cash to that
unitholder. To the extent our distributions cause a unitholder's "at risk"
amount to be less than zero at the end of any taxable year, he must recapture
any losses deducted in previous years. Please read "-- Limitations on
Deductibility of Losses."
A decrease in a unitholder's percentage interest in us because of our
issuance of additional common units will decrease his share of our nonrecourse
liabilities, and thus will result in a corresponding deemed distribution of
cash. A non-pro rata distribution of money or property may result in ordinary
income to a unitholder, regardless of his tax basis in his common units, if the
distribution reduces the unitholder's share of our "unrealized receivables,"
including depreciation recapture, and/or substantially appreciated "inventory
items," both as defined in the Internal Revenue Code, and collectively, "Section
751 Assets." To that extent, he will be treated as having been distributed his
proportionate share of the Section 751 Assets and having exchanged those assets
with us in return for the non-pro rata portion of the actual distribution made
to him. This latter deemed exchange will generally result in the unitholder's
realization of ordinary income. That income will equal the excess of (1) the
non-pro rata portion of that distribution over (2) the unitholder's tax basis
for the share of Section 751 Assets deemed relinquished in the exchange.
Basis of Common Units. A unitholder's initial tax basis for his common
units will be the amount he paid for the common units plus his share of our
nonrecourse liabilities. That basis will be increased by his share of our income
and by any increases in his share of our nonrecourse liabilities. That basis
will be decreased, but not below zero, by distributions from us, by the
unitholder's share of our losses, by any decreases in his share of our
nonrecourse liabilities and by his share of our expenditures that are not
deductible in computing taxable income and are not required to be capitalized. A
unitholder will have no share of our debt which is
41
recourse to the general partner, but will have a share, generally based on his
share of profits, of our nonrecourse liabilities. Please read "-- Disposition of
Common Units -- Recognition of Gain or Loss."
Limitations on Deductibility of Losses. The deduction by a unitholder of
his share of our losses will be limited to the tax basis in his units and, in
the case of an individual unitholder or a corporate unitholder, if more than 50%
of the value of the corporate unitholder's stock is owned directly or indirectly
by five or fewer individuals or some tax-exempt organizations, to the amount for
which the unitholder is considered to be "at risk" with respect to our
activities, if that is less than his tax basis. A unitholder must recapture
losses deducted in previous years to the extent that distributions cause his at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that his tax basis or at risk
amount, whichever is the limiting factor, is subsequently increased. Upon the
taxable disposition of a unit, any gain recognized by a unitholder can be offset
by losses that were previously suspended by the at risk limitation but may not
be offset by losses suspended by the basis limitation. Any excess loss above
that gain previously suspended by the at risk or basis limitations is no longer
utilizable.
In general, a unitholder will be at risk to the extent of the tax basis of
his units, excluding any portion of that basis attributable to his share of our
nonrecourse liabilities, reduced by any amount of money he borrows to acquire or
hold his units, if the lender of those borrowed funds owns an interest in us, is
related to the unitholder or can look only to the units for repayment. A
unitholder's at risk amount will increase or decrease as the tax basis of the
unitholder's units increases or decreases, other than tax basis increases or
decreases attributable to increases or decreases in his share of our nonrecourse
liabilities.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
deduct losses from passive activities, which are generally corporate or
partnership activities in which the taxpayer does not materially participate,
only to the extent of the taxpayer's income from those passive activities. The
passive loss limitations are applied separately with respect to each
publicly-traded partnership. Consequently, any passive losses we generate will
be available to offset only our passive income generated in the future and will
not be available to offset income from other passive activities or investments,
including our investments or investments in other publicly-traded partnerships,
or salary or active business income. Passive losses that are not deductible
because they exceed a unitholder's share of income we generate may be deducted
in full when he disposes of his entire investment in us in a fully taxable
transaction with an unrelated party. The passive activity loss rules are applied
after other applicable limitations on deductions, including the at risk rules
and the basis limitation.
A unitholder's share of our net income may be offset by any suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships.
Limitations on Interest Deductions. The deductibility of a non-corporate
taxpayer's "investment interest expense" is generally limited to the amount of
that taxpayer's "net investment income." Investment interest expense includes:
- interest on indebtedness properly allocable to property held for
investment;
- our interest expense attributed to portfolio income; and
- the portion of interest expense incurred to purchase or carry an interest
in a passive activity to the extent attributable to portfolio income.
The computation of a unitholder's investment interest expense will take
into account interest on any margin account borrowing or other loan incurred to
purchase or carry a unit. Net investment income includes gross income from
property held for investment and amounts treated as portfolio income under the
passive loss rules, less deductible expenses, other than interest, directly
connected with the production of investment income, but generally does not
include gains attributable to the disposition of property held for investment.
The IRS has indicated that net passive income earned by a publicly-traded
partnership will be treated as
42
investment income to unitholders. In addition, the unitholder's share of our
portfolio income will be treated as investment income.
Entity-Level Collections. If we are required or elect under applicable law
to pay any federal, state or local income tax on behalf of any unitholder or the
general partner or any former unitholder, we are authorized to pay those taxes
from our funds. That payment, if made, will be treated as a distribution of cash
to the partner on whose behalf the payment was made. If the payment is made on
behalf of a person whose identity cannot be determined, we are authorized to
treat the payment as a distribution to all current unitholders. We are
authorized to amend the partnership agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of units and to adjust
later distributions, so that after giving effect to these distributions, the
priority and characterization of distributions otherwise applicable under the
partnership agreement is maintained as nearly as is practicable. Payments by us
as described above could give rise to an overpayment of tax on behalf of an
individual partner in which event the partner would be required to file a claim
in order to obtain a credit or refund.
Allocation of Income, Gain, Loss and Deduction. In general, if we have a
net profit, our items of income, gain, loss and deduction will be allocated
among the general partner and the unitholders in accordance with their
percentage interests in us. At any time that distributions are made to the
common units in excess of distributions to the subordinated units, or incentive
distributions are made to the general partner, gross income will be allocated to
the recipients to the extent of these distributions. If we have a net loss for
the entire year, that loss will be allocated first to the general partner and
the unitholders in accordance with their percentage interests in us to the
extent of their positive capital accounts and, second, to the general partner.
Specified items of our income, gain, loss and deduction will be allocated
to account for the difference between the tax basis and fair market value of
property contributed to us by the general partner and its affiliates, referred
to in this discussion as "Contributed Property." The effect of these allocations
to a unitholder purchasing common units in this offering will be essentially the
same as if the tax basis of our assets were equal to their fair market value at
the time of an offering. In addition, items of recapture income will be
allocated to the extent possible to the partner who was allocated the deduction
giving rise to the treatment of that gain as recapture income in order to
minimize the recognition of ordinary income by some unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and manner to
eliminate the negative balance as quickly as possible.
An allocation of items of our income, gain, loss or deduction, other than
an allocation required by the Internal Revenue Code to eliminate the difference
between a partner's "book" capital account, credited with the fair market value
of Contributed Property, and "tax" capital account, credited with the tax basis
of Contributed Property, referred to in this discussion as the "Book-Tax
Disparity", will generally be given effect for federal income tax purposes in
determining a partner's share of an item of income, gain, loss or deduction only
if the allocation has substantial economic effect. In any other case, a
partner's share of an item will be determined on the basis of his interest in
us, which will be determined by taking into account all the facts and
circumstances, including his relative contributions to us, the interests of all
the partners in profits and losses, the interest of all the partners in cash
flow and other nonliquidating distributions and rights of all the partners to
distributions of capital upon liquidation.
Vinson & Elkins L.L.P. is of the opinion that, with the exception of the
issues described in "-- Tax Consequences of Unit Ownership -- Section 754
Election" and "-- Disposition of Common Units -- Allocations Between Transferors
and Transferees," allocations under our partnership agreement will be given
effect for federal income tax purposes in determining a partner's share of an
item of income, gain, loss or deduction.
Treatment of Short Sales. A unitholder whose units are loaned to a "short
seller" to cover a short sale of units may be considered as having disposed of
those units. If so, he would no longer be a partner for those
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units during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period:
- any of our income, gain, loss or deduction with respect to those units
would not be reportable by the unitholder;
- any cash distributions received by the unitholder as to those units
would be fully taxable; and
- all of these distributions would appear to be ordinary income.
Counsel has not rendered an opinion regarding the treatment of a unitholder
where common units are loaned to a short seller to cover a short sale of common
units; therefore, unitholders desiring to assure their status as partners and
avoid the risk of gain recognition from a loan to a short seller should modify
any applicable brokerage account agreements to prohibit their brokers from
borrowing their units. The IRS has announced that it is actively studying issues
relating to the tax treatment of short sales of partnership interests. Please
also read "-- Disposition of Common Units -- Recognition of Gain or Loss."
Alternative Minimum Tax. Each unitholder will be required to take into
account his distributive share of any items of our income, gain, loss or
deduction for purposes of the alternative minimum tax. The current minimum tax
rate for noncorporate taxpayers is 26% on the first $175,000 of alternative
minimum taxable income in excess of the exemption amount and 28% on any
additional alternative minimum taxable income. We strongly recommend that
prospective unitholders consult with their tax advisors as to the impact of an
investment in units on their liability for the alternative minimum tax.
Tax Rates. In general the highest effective United States federal income
tax rate for individuals currently is 38.6% and the maximum United States
federal income tax rate for net capital gains of an individual currently is 20%
if the asset disposed of was held for more than 12 months at the time of
disposition.
Section 754 Election. We have made the election permitted by Section 754
of the Internal Revenue Code. That election is irrevocable without the consent
of the IRS. The election generally permits us to adjust a common unit
purchaser's tax basis in our assets ("inside basis") under Section 743(b) of the
Internal Revenue Code to reflect his purchase price. This election does not
apply to a person who purchases common units directly from us. The Section
743(b) adjustment belongs to the purchaser and not to other unitholders. For
purposes of this discussion, a unitholder's inside basis in our assets will be
considered to have two components: (1) his share of our tax basis in our assets
("common basis") and (2) his Section 743(b) adjustment to that basis.
Treasury regulations under Section 743 of the Internal Revenue Code require
that, if the remedial allocation method is adopted (which we have adopted), a
portion of the Section 743(b) adjustment attributable to recovery property be
depreciated over the remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury regulation Section 1.167(c)-l(a)(6), a Section
743(b) adjustment attributable to property subject to depreciation under Section
167 of the Internal Revenue Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either the straight-
line method or the 150% declining balance method. Under our partnership
agreement, our general partner is authorized to take a position to preserve the
uniformity of units even if that position is not consistent with these Treasury
Regulations. Please read "-- Tax Treatment of Operations -- Uniformity of
Units."
Although Vinson & Elkins L.L.P. is unable to opine as to the validity of
this approach because there is no clear authority on this issue, we intend to
depreciate the portion of a Section 743(b) adjustment attributable to unrealized
appreciation in the value of Contributed Property, to the extent of any
unamortized Book-Tax Disparity, using a rate of depreciation or amortization
derived from the depreciation or amortization method and useful life applied to
the common basis of the property, or treat that portion as non-amortizable to
the extent attributable to property the common basis of which is not
amortizable. This method is consistent with the regulations under Section 743
but is arguably inconsistent with Treasury regulation Section 1.167(c)-1(a)(6).
To the extent this Section 743(b) adjustment is attributable to appreciation in
value in excess of the unamortized Book-Tax Disparity, we will apply the rules
described in the Treasury regulations and legislative history. If we determine
that this position cannot reasonably be taken, we may take a depreciation
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or amortization position under which all purchasers acquiring units in the same
month would receive depreciation or amortization, whether attributable to common
basis or a Section 743(b) adjustment, based upon the same applicable rate as if
they had purchased a direct interest in our assets. This kind of aggregate
approach may result in lower annual depreciation or amortization deductions than
would otherwise be allowable to some unitholders. Please read "-- Tax Treatment
of Operations -- Uniformity of Units."
A Section 754 election is advantageous if the transferee's tax basis in his
units is higher than the units' share of the aggregate tax basis of our assets
immediately prior to the transfer. In that case, as a result of the election,
the transferee would have, among other items, a greater amount of depreciation
and depletion deductions and his share of any gain or loss on a sale of our
assets would be less. Conversely, a Section 754 election is disadvantageous if
the transferee's tax basis in his units is lower than those units' share of the
aggregate tax basis of our assets immediately prior to the transfer. Thus, the
fair market value of the units may be affected either favorably or unfavorably
by the election.
The calculations involved in the Section 754 election are complex and will
be made on the basis of assumptions as to the value of our assets and other
matters. For example, the allocation of the Section 743(b) adjustment among our
assets must be made in accordance with the Internal Revenue Code. The IRS could
seek to reallocate some or all of any Section 743(b) adjustment allocated by us
to our tangible assets to goodwill instead. Goodwill, as an intangible asset, is
generally amortizable over a longer period of time or under a less accelerated
method than our tangible assets. We cannot assure you that the determinations we
make will not be successfully challenged by the IRS and that the deductions
resulting from them will not be reduced or disallowed altogether. Should the IRS
require a different basis adjustment to be made, and should, in our opinion, the
expense of compliance exceed the benefit of the election, we may seek permission
from the IRS to revoke our Section 754 election. If permission is granted, a
subsequent purchaser of units may be allocated more income than he would have
been allocated had the election not been revoked.
TAX TREATMENT OF OPERATIONS
Accounting Method and Taxable Year. We use the year ending December 31 as
our taxable year and the accrual method of accounting for federal income tax
purposes. Each unitholder will be required to include in income his share of our
income, gain, loss and deduction for our taxable year ending within or with his
taxable year. In addition, a unitholder who has a taxable year ending on a date
other than December 31 and who disposes of all of his units following the close
of our taxable year but before the close of his taxable year must include his
share of our income, gain, loss and deduction in income for his taxable year,
with the result that he will be required to include in income for his taxable
year his share of more than one year of our income, gain, loss and deduction.
Please read "-- Disposition of Common Units -- Allocations Between Transferors
and Transferees."
Initial Tax Basis, Depreciation and Amortization. The tax basis of our
assets will be used for purposes of computing depreciation and cost recovery
deductions and, ultimately, gain or loss on the disposition of these assets. The
federal income tax burden associated with the difference between the fair market
value of our assets and their tax basis immediately prior to an offering will be
borne by our general partner, its affiliates and our unitholders as of that
time. Please read "-- Tax Consequences of Unit Ownership -- Allocation of
Income, Gain, Loss and Deduction."
To the extent allowable, we may elect to use the depreciation and cost
recovery methods that will result in the largest deductions being taken in the
early years after assets are placed in service. We are not entitled to any
amortization deductions with respect to any goodwill conveyed to us on
formation. Property we subsequently acquire or construct may be depreciated
using accelerated methods permitted by the Internal Revenue Code.
If we dispose of depreciable property by sale, foreclosure, or otherwise,
all or a portion of any gain, determined by reference to the amount of
depreciation previously deducted and the nature of the property, may be subject
to the recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions with
respect to property we own will likely be required to recapture some or all, of
those deductions as ordinary income upon a sale of his interest in us.
45
Please read "-- Tax Consequences of Unit Ownership -- Allocation of Income,
Gain, Loss and Deduction" and "-- Disposition of Common Units -- Recognition of
Gain or Loss."
The costs incurred in selling our units (called "syndication expenses")
must be capitalized and cannot be deducted currently, ratably or upon our
termination. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized by us, and as syndication
expenses, which may not be amortized by us. The underwriting discounts and
commissions we incur will be treated as a syndication cost.
Valuation and Tax Basis of Our Properties. The federal income tax
consequences of the ownership and disposition of units will depend in part on
our estimates of the relative fair market values, and the initial tax bases, of
our assets. Although we may from time to time consult with professional
appraisers regarding valuation matters, we will make many of the relative fair
market value estimates ourselves. These estimates and determinations of basis
are subject to challenge and will not be binding on the IRS or the courts. If
the estimates of fair market value or basis are later found to be incorrect, the
character and amount of items of income, gain, loss or deductions previously
reported by unitholders might change, and unitholders might be required to
adjust their tax liability for prior years and incur interest and penalties with
respect to those adjustments.
DISPOSITION OF COMMON UNITS
Recognition of Gain or Loss. Gain or loss will be recognized on a sale of
units equal to the difference between the amount realized and the unitholder's
tax basis for the units sold. A unitholder's amount realized will be measured by
the sum of the cash or the fair market value of other property received by him
plus his share of our nonrecourse liabilities. Because the amount realized
includes a unitholder's share of our nonrecourse liabilities, the gain
recognized on the sale of units could result in a tax liability in excess of any
cash received from the sale.
Prior distributions from us in excess of cumulative net taxable income for
a common unit that decreased a unitholder's tax basis in that common unit will,
in effect, become taxable income if the common unit is sold at a price greater
than the unitholder's tax basis in that common unit, even if the price received
is less than his original cost.
Except as noted below, gain or loss recognized by a unitholder, other than
a "dealer" in units, on the sale or exchange of a unit held for more than one
year will generally be taxable as capital gain or loss. Capital gain recognized
by an individual on the sale of units held more than 12 months will generally be
taxed at a maximum rate of 20%. A portion of this gain or loss, which will
likely be substantial, however, will be separately computed and taxed as
ordinary income or loss under Section 751 of the Internal Revenue Code to the
extent attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "inventory items" we own. The term "unrealized
receivables" includes potential recapture items, including depreciation
recapture. Ordinary income attributable to unrealized receivables, inventory
items and depreciation recapture may exceed net taxable gain realized upon the
sale of a unit and may be recognized even if there is a net taxable loss
realized on the sale of a unit. Thus, a unitholder may recognize both ordinary
income and a capital loss upon a sale of units. Net capital loss may offset
capital gains and no more than $3,000 of ordinary income, in the case of
individuals, and may only be used to offset capital gain in the case of
corporations.
The IRS has ruled that a partner who acquires interests in a partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis for all those interests. Upon a sale or other disposition of
less than all of those interests, a portion of that tax basis must be allocated
to the interests sold using an "equitable apportionment" method. Although the
ruling is unclear as to how the holding period of these interests is determined
once they are combined, recently finalized Treasury regulations under Section
1223 of the Internal Revenue Code allow a selling unitholder who can identify
common units transferred with an ascertainable holding period to elect to use
the actual holding period of the common units transferred. Thus, according to
the ruling, a common unitholder will be unable to select high or low basis
common units to sell as would be the case with corporate stock, but, according
to the Treasury regulations, may designate specific common units sold for
purposes of determining the holding period of units transferred. A unitholder
46
electing to use the actual holding period of common units transferred must
consistently use that identification method for all subsequent sales or
exchanges of common units. We strongly recommend that a unitholder considering
the purchase of additional units or a sale of common units purchased in separate
transactions consult his tax advisor as to the possible consequences of this
ruling and application of the final regulations.
Specific provisions of the Internal Revenue Code affect the taxation of
some financial products and securities, including partnership interests, by
treating a taxpayer as having sold an "appreciated" partnership interest, one in
which gain would be recognized if it were sold, assigned or terminated at its
fair market value, if the taxpayer or related persons enter(s) into:
- a short sale;
- an offsetting notional principal contract; or
- a futures or forward contract with respect to the partnership interest or
substantially identical property.
Moreover, if a taxpayer has previously entered into a short sale, an
offsetting notional principal contract or a futures or forward contract with
respect to the partnership interest, the taxpayer will be treated as having sold
that position if the taxpayer or a related person then acquires the partnership
interest or substantially identical property. The Secretary of Treasury is also
authorized to issue regulations that treat a taxpayer that enters into
transactions or positions that have substantially the same effect as the
preceding transactions as having constructively sold the financial position.
Allocations Between Transferors and Transferees. In general, our taxable
income and losses will be determined annually, will be prorated on a monthly
basis and will be subsequently apportioned among the unitholders in proportion
to the number of units owned by each of them as of the opening of the applicable
exchange on the first business day of the month (the "Allocation Date").
However, gain or loss realized on a sale or other disposition of our assets
other than in the ordinary course of business will be allocated among the
unitholders on the Allocation Date in the month in which that gain or loss is
recognized. As a result, a unitholder transferring units may be allocated
income, gain, loss and deduction realized after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Vinson & Elkins L.L.P. is unable to opine on the
validity of this method of allocating income and deductions between unitholders.
If this method is not allowed under the Treasury regulations, or only applies to
transfers of less than all of the unitholder's interest, our taxable income or
losses might be reallocated among the unitholders. We are authorized to revise
our method of allocation between unitholders, as well as among unitholders whose
interests vary during a taxable year, to conform to a method permitted under
future Treasury regulations.
A unitholder who owns units at any time during a quarter and who disposes
of them prior to the record date set for a cash distribution for that quarter
will be allocated items of our income, gain, loss and deductions attributable to
that quarter but will not be entitled to receive that cash distribution.
Notification Requirements. A unitholder who sells or exchanges units is
required to notify us in writing of that sale or exchange within 30 days after
the sale or exchange. We are required to notify the IRS of that transaction and
to furnish specified information to the transferor and transferee. However,
these reporting requirements do not apply to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Failure to satisfy these reporting obligations may lead to the
imposition of substantial penalties.
Constructive Termination. We will be considered to have been terminated
for tax purposes if there is a sale or exchange of 50% or more of the total
interests in our capital and profits within a 12-month period. A constructive
termination results in the closing of our taxable year for all unitholders. In
the case of a unitholder reporting on a taxable year other than a fiscal year
ending December 31, the closing of our taxable year may result in more than 12
months of our taxable income or loss being includable in his taxable income for
the year of termination. We would be required to make new tax elections after a
termination, including a new election under Section 754 of the Internal Revenue
Code, and a termination would result in a deferral of
47
our deductions for depreciation. A termination could also result in penalties if
we were unable to determine that the termination had occurred. Moreover, a
termination might either accelerate the application of, or subject us to, any
tax legislation enacted before the termination.
UNIFORMITY OF UNITS
Because we cannot match transferors and transferees of units, we must
maintain uniformity of the economic and tax characteristics of the units to a
purchaser of these units. In the absence of uniformity, we may be unable to
completely comply with a number of federal income tax requirements, both
statutory and regulatory. A lack of uniformity can result from a literal
application of Treasury Regulation Section 1.167(c)-1(a)(6). Any non-uniformity
could have a negative impact on the value of the units. Please read "-- Tax
Consequences of Unit Ownership -- Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property, to
the extent of any unamortized Book-Tax Disparity, using a rate of depreciation
or amortization derived from the depreciation or amortization method and useful
life applied to the common basis of that property, or treat that portion as
nonamortizable, to the extent attributable to property the common basis of which
is not amortizable, consistent with the regulations under Section 743, even
though that position may be inconsistent with Treasury regulation Section
1.167(c)-1(a)(6). Please read "-- Tax Consequences of Unit Ownership -- Section
754 Election." To the extent that the Section 743(b) adjustment is attributable
to appreciation in value in excess of the unamortized Book-Tax Disparity, we
will apply the rules described in the Treasury regulations and legislative
history. If we determine that this position cannot reasonably be taken, we may
adopt a depreciation and amortization position under which all purchasers
acquiring units in the same month would receive depreciation and amortization
deductions, whether attributable to a common basis or Section 743(b) adjustment,
based upon the same applicable rate as if they had purchased a direct interest
in our property. If this position is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be allowable to
some unitholders and risk the loss of depreciation and amortization deductions
not taken in the year that these deductions are otherwise allowable. This
position will not be adopted if we determine that the loss of depreciation and
amortization deductions will have a material adverse effect on the unitholders.
If we choose not to utilize this aggregate method, we may use any other
reasonable depreciation and amortization method to preserve the uniformity of
the intrinsic tax characteristics of any units that would not have a material
adverse effect on the unitholders. The IRS may challenge any method of
depreciating the Section 743(b) adjustment described in this paragraph. If this
challenge were sustained, the uniformity of units might be affected, and the
gain from the sale of units might be increased without the benefit of additional
deductions. Please read "-- Disposition of Common Units -- Recognition of Gain
or Loss."
TAX-EXEMPT ORGANIZATIONS AND OTHER INVESTORS
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to those investors and,
as described below, may have substantially adverse tax consequences to them.
Employee benefit plans and most other organizations exempt from federal
income tax, including individual retirement accounts and other retirement plans,
are subject to federal income tax on unrelated business taxable income.
Virtually all of our income allocated to a unitholder that is a tax-exempt
organization will be unrelated business taxable income and will be taxable to
them.
A regulated investment company or "mutual fund" is required to derive 90%
or more of its gross income from interest, dividends and gains from the sale of
stocks or securities or foreign currency or specified related sources. It is not
anticipated that any significant amount of our gross income will include that
type of income.
Non-resident aliens and foreign corporations, trusts or estates that own
units will be considered to be engaged in business in the United States because
of the ownership of units. As a consequence they will be required to file
federal tax returns to report their share of our income, gain, loss or deduction
and pay federal income tax at regular rates on their share of our net income or
gain. Under rules applicable to publicly traded
48
partnerships, we will withhold (currently at the rate of 38.6%) on cash
distributions made quarterly to foreign unitholders. Each foreign unitholder
must obtain a taxpayer identification number from the IRS and submit that number
to our transfer agent on a Form W-8 BEN or applicable substitute form in order
to obtain credit for these withholding taxes.
In addition, because a foreign corporation that owns units will be treated
as engaged in a United States trade or business, that corporation may be subject
to the United States branch profits tax at a rate of 30%, in addition to regular
federal income tax, on its share of our income and gain, as adjusted for changes
in the foreign corporation's "U.S. net equity," which are effectively connected
with the conduct of a United States trade or business. That tax may be reduced
or eliminated by an income tax treaty between the United States and the country
in which the foreign corporate unitholder is a "qualified resident." In
addition, this type of unitholder is subject to special information reporting
requirements under Section 6038C of the Internal Revenue Code.
Under a ruling of the IRS, a foreign unitholder who sells or otherwise
disposes of a unit will be subject to federal income tax on gain realized on the
sale or disposition of that unit to the extent that this gain is effectively
connected with a United States trade or business of the foreign unitholder.
Apart from the ruling, a foreign unitholder will not be taxed or subject to
withholding upon the sale or disposition of a unit if he has owned less than 5%
in value of the units during the five-year period ending on the date of the
disposition and if the units are regularly traded on an established securities
market at the time of the sale or disposition.
ADMINISTRATIVE MATTERS
Information Returns and Audit Procedures. We intend to furnish to each
unitholder, within 90 days after the close of each calendar year, specific tax
information, including a Schedule K-1, which describes his share of our income,
gain, loss and deduction for our preceding taxable year. In preparing this
information, which will not be reviewed by counsel, we will take various
accounting and reporting positions, some of which have been mentioned earlier,
to determine his share of income, gain, loss and deduction. We cannot assure you
that those positions will yield a result that conforms to the requirements of
the Internal Revenue Code, Treasury regulations or administrative
interpretations of the IRS. Neither we nor counsel can assure prospective
unitholders that the IRS will not successfully contend in court that those
positions are impermissible. Any challenge by the IRS could negatively affect
the value of the units.
The IRS may audit our federal income tax information returns. Adjustments
resulting from an IRS audit may require each unitholder to adjust a prior year's
tax liability, and possibly may result in an audit of his own return. Any audit
of a unitholder's return could result in adjustments not related to our returns
as well as those related to our returns.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS and
tax settlement proceedings. The tax treatment of partnership items of income,
gain, loss and deduction are determined in a partnership proceeding rather than
in separate proceedings with the partners. The Internal Revenue Code requires
that one partner be designated as the "Tax Matters Partner" for these purposes.
The partnership agreement names our general partner as our Tax Matters Partner.
The Tax Matters Partner will make some elections on our behalf and on
behalf of unitholders. In addition, the Tax Matters Partner can extend the
statute of limitations for assessment of tax deficiencies against unitholders
for items in our returns. The Tax Matters Partner may bind a unitholder with
less than a 1% profits interest in us to a settlement with the IRS unless that
unitholder elects, by filing a statement with the IRS, not to give that
authority to the Tax Matters Partner. The Tax Matters Partner may seek judicial
review, by which all the unitholders are bound, of a final partnership
administrative adjustment and, if the Tax Matters Partner fails to seek judicial
review, judicial review may be sought by any unitholder having at least a 1%
interest in profits or by any group of unitholders having in the aggregate at
least a 5% interest in profits. However, only one action for judicial review
will go forward, and each unitholder with an interest in the outcome may
participate.
49
A unitholder must file a statement with the IRS identifying the treatment
of any item on his federal income tax return that is not consistent with the
treatment of the item on our return. Intentional or negligent disregard of this
consistency requirement may subject a unitholder to substantial penalties.
Nominee Reporting. Persons who hold an interest in us as a nominee for
another person are required to furnish to us:
(a) the name, address and taxpayer identification number of the
beneficial owner and the nominee;
(b) whether the beneficial owner is
(1) a person that is not a United States person,
(2) a foreign government, an international organization or any wholly
owned agency or instrumentality of either of the foregoing, or
(3) a tax-exempt entity;
(c) the amount and description of units held, acquired or transferred
for the beneficial owner; and
(d) specific information including the dates of acquisitions and
transfers, means of acquisitions and transfers, and acquisition cost for
purchases, as well as the amount of net proceeds from sales.
Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and specific
information on units they acquire, hold or transfer for their own account. A
penalty of $50 per failure, up to a maximum of $100,000 per calendar year, is
imposed by the Internal Revenue Code for failure to report that information to
us. The nominee is required to supply the beneficial owner of the units with the
information furnished to us.
Registration as a Tax Shelter. The Internal Revenue Code requires that
"tax shelters" be registered with the Secretary of the Treasury. It is arguable
that we are not subject to the registration requirement on the basis that we
will not constitute a tax shelter. However, our general partner, as our
principal organizer, has registered us as a tax shelter with the Secretary of
Treasury because of the absence of assurance that we will not be subject to tax
shelter registration and in light of the substantial penalties which might be
imposed if registration is required and not undertaken.
ISSUANCE OF THIS REGISTRATION NUMBER DOES NOT INDICATE THAT INVESTMENT IN
US OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE
IRS.
We must supply our tax shelter registration number to unitholders, and a
unitholder who sells or otherwise transfers a unit in a later transaction must
furnish the registration number to the transferee. The penalty for failure of
the transferor of a unit to furnish the registration number to the transferee is
$100 for each failure. The unitholders must disclose our tax shelter
registration number on Form 8271 to be attached to the tax return on which any
deduction, loss or other benefit we generate is claimed or on which any of our
income is included. A unitholder who fails to disclose the tax shelter
registration number on his return, without reasonable cause for that failure,
will be subject to a $250 penalty for each failure. Any penalties discussed are
not deductible for federal income tax purposes.
Accuracy-related Penalties. An additional tax equal to 20% of the amount
of any portion of an underpayment of tax that is attributable to one or more
specified causes, including negligence or disregard of rules or regulations,
substantial understatements of income tax and substantial valuation
misstatements, is imposed by the Internal Revenue Code. No penalty will be
imposed, however, for any portion of an underpayment if it is shown that there
was a reasonable cause for that portion and that the taxpayer acted in good
faith regarding that portion.
A substantial understatement of income tax in any taxable year exists if
the amount of the understatement exceeds the greater of 10% of the tax required
to be shown on the return for the taxable year or $5,000
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($10,000 for most corporations). The amount of any understatement subject to
penalty generally is reduced if any portion is attributable to a position
adopted on the return:
(1) for which there is, or was, "substantial authority," or
(2) as to which there is a reasonable basis and the pertinent facts of
that position are disclosed on the return.
More stringent rules apply to "tax shelters," a term that in this context
does not appear to include us. If any item of income, gain, loss or deduction
included in the distributive shares of unitholders might result in that kind of
an "understatement" of income for which no "substantial authority" exists, we
must disclose the pertinent facts on our return. In addition, we will make a
reasonable effort to furnish sufficient information for unitholders to make
adequate disclosure on their returns to avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property,
or the adjusted basis of any property, claimed on a tax return is 200% or more
of the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment attributable
to a substantial valuation misstatement exceeds $5,000 ($10,000 for most
corporations). If the valuation claimed on a return is 400% or more than the
correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, you will be subject to other taxes,
including state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which we do business or own property or in which you are a
resident. Although an analysis of those various taxes is not presented here,
each prospective unitholder should consider their potential impact on his
investment in us. You will be required to file state income tax returns and to
pay state income taxes in some or all of the states in which we do business or
own property and may be subject to penalties for failure to comply with those
requirements. In some states, tax losses may not produce a tax benefit in the
year incurred and also may not be available to offset income in subsequent
taxable years. Some of the states may require us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a unitholder who is not a
resident of the state. Withholding, the amount of which may be greater or less
than a particular unitholder's income tax liability to the state, generally does
not relieve a nonresident unitholder from the obligation to file an income tax
return. Amounts withheld may be treated as if distributed to unitholders for
purposes of determining the amounts distributed by us. Please read "-- Tax
Consequences of Unit Ownership -- Entity-Level Collections." Based on current
law and our estimate of our future operations, our general partner anticipates
that any amounts required to be withheld will not be material. We may also own
property or do business in other states in the future.
It is the responsibility of each unitholder to investigate the legal and
tax consequences, under the laws of pertinent states and localities, of his
investment in us. Accordingly, we strongly recommend that each prospective
unitholder consult, and depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each unitholder to
file all state and local, as well as United States federal tax returns, that may
be required of him. Vinson & Elkins L.L.P. has not rendered an opinion on the
state or local tax consequences of an investment in us.
TAX CONSEQUENCES OF OWNERSHIP OF DEBT SECURITIES
A description of the material federal income tax consequences of the
acquisition, ownership and disposition of debt securities will be set forth in
the prospectus supplement relating to the offering of debt securities.
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SELLING UNITHOLDERS
In addition to covering our offering of securities, this Prospectus covers
the offering for resale of an unspecified number of common units by selling
unitholders. The applicable prospectus supplement will set forth, with respect
to each selling unitholder:
- the name of the selling unitholder,
- the nature of any position, office or other materials relationship which
the selling unitholder will have had within the prior three years with us
or any of our predecessors or affiliates,
- the number of common units owned by the selling unitholders prior to the
offering,
- the amount of common units to be offered for the selling unitholder's
account, and
- the amount and (if one percent or more) the percentage of the common
units to be owned by the selling unitholders after completion of the
offering.
PLAN OF DISTRIBUTION
We may sell the common units or debt securities directly, through agents,
or to or through underwriters or dealers. Please read the prospectus supplement
to find the terms of the common unit or debt securities offering including:
- the names of any underwriters, dealers or agents;
- the offering price;
- underwriting discounts;
- sales agents' commissions;
- other forms of underwriter or agent compensation;
- discounts, concessions or commissions that underwriters may pass on to
other dealers; and
- any exchange on which the common units or debt securities are listed.
We may change the offering price, underwriter discounts or concessions, or
the price to dealers when necessary. Discounts or commissions received by
underwriters or agents and any profits on the resale of common units or debt
securities by them may constitute underwriting discounts and commissions under
the Securities Act.
Unless we state otherwise in the prospectus supplement, underwriters will
need to meet certain requirements before purchasing common units or debt
securities. Agents will act on a "best efforts" basis during their appointment.
We will also state the net proceeds from the sale in the prospectus supplement.
Any brokers or dealers that participate in the distribution of the common
units or debt securities may be "underwriters" within the meaning of the
Securities Act for such sales. Profits, commissions, discounts or concessions
received by such broker or dealer may be underwriting discounts and commissions
under the securities act.
When necessary, we may fix common unit or debt securities distribution
using changeable, fixed prices, market prices at the time of sale, prices
related to market prices, or negotiated prices.
We may, through agreements, indemnify underwriters, dealers or agents who
participate in the distribution of the common units or debt securities against
certain liabilities including liabilities under the Securities Act. We may also
provide funds for payments such underwriters, dealers or agents may be required
to make. Underwriters, dealers and agents, and their affiliates may transact
with us and our affiliates in the ordinary course of their business.
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DISTRIBUTION BY SELLING UNITHOLDERS
Distribution of any common units to be offered by one or more of the
selling unitholders may be effected from time to time in one or more
transactions (which may involve block transactions) (1) on the New York Stock
Exchange, (2) in the over-the-counter market, (3) in underwritten transactions;
(4) in transactions otherwise than on the New York Stock Exchange or in the
over-the-counter market or (5) in a combination of any of these transactions.
The transactions may be effected by the selling unitholders at market prices
prevailing at the time of sale, at prices related to the prevailing market
prices, at negotiated prices or at fixed prices. The selling unitholders may
offer their shares through underwriters, brokers, dealers or agents, who may
receive compensation in the form of underwriting discounts, commissions or
concessions from the selling unitholders and/or the purchasers of the shares for
whom they act as agent. The selling unitholders may engage in short sales, short
sales against the box, puts and calls and other transactions in our securities,
or derivatives thereof, and may sell and deliver their common units in
connection therewith. In addition, the selling unitholders may from time to time
sell their common units in transactions permitted by Rule 144 under the
Securities Act.
As of the date of this prospectus, we have not engaged any underwriter,
broker, dealer or agent in connection with the distribution of common units
pursuant to this prospectus by the selling unitholders. To the extent required,
the number of common units to be sold, the purchase price, the name of any
applicable agent, broker, dealer or underwriter and any applicable commissions
with respect to a particular offer will be set forth in the applicable
prospectus supplement. The aggregate net proceeds to the selling unitholders
from the sale of their common units offered hereby will be the sale price of
those shares, less any commissions, if any, and other expenses of issuance and
distribution not borne by us.
The selling unitholders and any brokers, dealers, agents or underwriters
that participate with the selling unitholders in the distribution of shares may
be deemed to be "underwriters" within the meaning of the Securities Act, in
which event any discounts, concessions and commissions received by such brokers,
dealers, agents or underwriters and any profit on the resale of the shares
purchased by them may be deemed to be underwriting discounts and commissions
under the Securities Act.
The applicable prospectus supplement will set forth the extent to which we
will have agreed to bear fees and expenses of the selling unitholders in
connection with the registration of the common units being offered hereby by
them. We may, if so indicated in the applicable prospectus supplement, agree to
indemnify selling unitholders against certain civil liabilities, including
liabilities under the Securities Act.
WHERE YOU CAN FIND MORE INFORMATION
Enterprise Products Partners L.P. and Enterprise Products Operating L.P.
file combined annual, quarterly and current reports, and other information with
the Commission under the Securities Exchange Act of 1934, as amended (the
"Securities Exchange Act"). You may read and copy any document we file at the
Commission's public reference room at 450 Fifth Street, N.W., Washington, D.C.
20549. Please call the Commission at 1-800-732-0330 for further information on
the public reference room. Our filings are also available to the public at the
Commission's web site at http://www.sec.gov. In addition, documents filed by us
can be inspected at the offices of the New York Stock Exchange, Inc. 20 Broad
Street, New York, New York 10002.
The Commission allows us to incorporate by reference into this prospectus
the information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is part of this prospectus and later information that
we file with the Commission will automatically update and supersede this
information. Therefore, before you decide to invest in a particular offering
under this shelf registration, you should always check for reports we may have
filed with the Commission after the date of this prospectus. We incorporate by
reference the documents listed below filed by Enterprise Products Partners L.P.
and Enterprise Products Operating L.P. and any future filings
53
made by either company with the Commission under section 13(a), 13(c), 14 or
15(d) of the Securities Exchange Act until our offering is completed:
- Annual Report on Form 10-K for the fiscal year ended December 31, 2002,
Commission File Nos. 1-14323 and 333-93239-01;
- Current Report on Form 8-K filed with the Commission on January 10, 2003,
Commission File Nos. 1-14323 and 333-93239-01; and
- the description of the common units contained in the Registration
Statement on Form 8-A, initially filed with the Commission on July 21,
1998, and any subsequent amendment thereto filed for the purposes of
updating such description.
We will provide without charge to each person, including any beneficial
owner, to whom this prospectus is delivered, upon written or oral request, a
copy of any document incorporated by reference in this prospectus, other than
exhibits to any such document not specifically described above. Requests for
such documents should be directed to Investor Relations, Enterprise Products
Partners L.P., 2727 North Loop West, Suite 700, Houston, Texas 77008-1038;
telephone number: (713) 880-6812.
We intend to furnish or make available to our unitholders within 90 days
(or such shorter period as the Commission may prescribe) following the close of
our fiscal year end annual reports containing audited financial statements
prepared in accordance with generally accepted accounting principles and furnish
or make available within 45 days (or such shorter period as the Commission may
prescribe) following the close of each fiscal quarter quarterly reports
containing unaudited interim financial information, including the information
required by Form 10-Q, for the first three fiscal quarters of each of our fiscal
years. Our annual report will include a description of any transactions with our
general partner or its affiliates, and of fees, commissions, compensation and
other benefits paid, or accrued to our general partner or its affiliates for the
fiscal year completed, including the amount paid or accrued to each recipient
and the services performed.
FORWARD-LOOKING STATEMENTS
This prospectus and the documents incorporated by reference contain various
forward-looking statements and information that are based on our beliefs and
those of our general partner, as well as assumptions made by us and information
currently available to us. When used in this prospectus, words such as
"anticipate," "project," "expect," "plan," "goal," "forecast," "intend,"
"could," "believe," "may" and similar expressions and statements regarding our
plans and objectives for future operations, are intended to identify forward-
looking statements. Although we and our general partner believe that such
expectations reflected in such forward-looking statements are reasonable,
neither we nor our general partner can give any assurances 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 anticipated, estimated, projected
or expected.
You should not put undue reliance on any forward-looking statements. When
considering forward-looking statements, please review the risk factors described
under "Risk Factors" in this prospectus and in any prospectus supplement.
LEGAL MATTERS
Vinson & Elkins L.L.P., our counsel, will issue an opinion for us about the
legality of the common units and debt securities and the material federal income
tax considerations regarding the common units. Any underwriter will be advised
about other issues relating to any offering by their own legal counsel.
EXPERTS
The (i) consolidated financial statements and the related consolidated
financial statement schedules of Enterprise Products Partners L.P. and of
Enterprise Products Operating L.P. and subsidiaries as of
54
December 31, 2002 and 2001, and for each of the three years in the period ended
December 31, 2002, incorporated by reference in this prospectus, and (ii) the
balance sheet of Enterprise Products GP, LLC as of December 31, 2002,
incorporated by reference in this prospectus, have been audited by Deloitte &
Touche LLP, independent auditors, as stated in their reports, which are
incorporated by reference herein (each such report expresses an unqualified
opinion and the reports for Enterprise Products Partners L.P. and Enterprise
Products Operating L.P. each include an explanatory paragraph referring to a
change in method of accounting for goodwill in 2002 and derivative instruments
in 2001 as discussed in Notes 8 and 1, respectively, to Enterprise Products
Partners L.P.'s and Enterprise Products Operating L.P.'s consolidated financial
statements, respectively) and have been so incorporated in reliance upon the
reports of such firm given upon their authority as experts in accounting and
auditing.
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8,700,000 COMMON UNITS
ENTERPRISE PRODUCTS PARTNERS L.P.
(ENTERPRISE PRODUCTS PARTNERS L.P. LOGO)
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PROSPECTUS SUPPLEMENT
, 2003
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CITIGROUP
MORGAN STANLEY
GOLDMAN, SACHS & CO.
UBS WARBURG
RAYMOND JAMES
RBC CAPITAL MARKETS
SANDERS MORRIS HARRIS
WACHOVIA SECURITIES
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