Initial Public Offering (IPO): Pre-Effective Amendment to Registration Statement (General Form) — Form S-1 Filing Table of Contents
Document/ExhibitDescriptionPagesSize 1: S-1/A Amendment No.3 to Form S-1 - Registration No. HTML 2.38M 333-138371
15: CORRESP ¶ Comment-Response or Other Letter to the SEC HTML 18K
2: EX-1.1 Form of Underwriting Agreement HTML 224K
3: EX-3.6 Amended Limited Liability Company Agreement HTML 135K
4: EX-5.1 Opinion of Andrews Kurth LLP HTML 10K
5: EX-8.1 Opinion of Andrews Kurth LLP HTML 11K
6: EX-10.1 Form of Contribution, Conveyance and Assumption HTML 53K
Agreement
9: EX-10.13 Form of Amended Limited Liability Company HTML 172K
Agreement
10: EX-10.15 Form of Amended Limited Liability Company HTML 156K
Agreement
11: EX-10.18 Form of Fourth Amended Administrative Services HTML 105K
Agreement
12: EX-10.19 Form of Omnibus Agreement HTML 66K
7: EX-10.8 Form of Contribution, Conveyance and Assumption HTML 70K
Agreement
8: EX-10.9 Form of Contribution, Conveyance and Assumption HTML 59K
Agreement
13: EX-21.1 List of Subsidiaries HTML 15K
14: EX-23.1 Consent of Deloitte & Touche LLP HTML 9K
(Name, Address, Including Zip
Code, and Telephone Number, Including Area Code, of Agent for
Service)
Copies to:
Robert V. Jewell
David C. Buck
Andrews Kurth LLP
600 Travis, Suite 4200 Houston, Texas77002
(713) 220-4200
Joshua Davidson
Sean T. Wheeler
Baker Botts L.L.P.
One Shell Plaza, 910 Louisiana Houston, Texas77002
(713) 229-1234
Approximate date of commencement of proposed sale to the
public: As soon as practicable after this
Registration Statement becomes effective.
If any of the securities being registered on this form are to be
offered on a delayed or continuous basis pursuant to
Rule 415 under the Securities Act of 1933, check the
following box. o
If this Form is filed to register additional securities for an
offering pursuant to Rule 462(b) under the Securities Act,
check the following box and list the Securities Act registration
statement number of the earlier effective registration statement
for the same offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(c) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
If this Form is a post-effective amendment filed pursuant to
Rule 462(d) under the Securities Act, check the following
box and list the Securities Act registration statement number of
the earlier effective registration statement for the same
offering. o
The Registrant hereby amends this Registration Statement on
such date or dates as may be necessary to delay its effective
date until the Registrant shall file a further amendment which
specifically states that this Registration Statement shall
thereafter become effective in accordance with Section 8(a)
of the Securities Act of 1933 or until the Registration
Statement shall become effective on such date as the Securities
and Exchange Commission, acting pursuant to said
Section 8(a), may determine.
The information in
this preliminary prospectus is not complete and may be changed.
These securities may not be sold until the registration
statement filed with the Securities and Exchange
Commission is effective. This preliminary prospectus is not an
offer to sell these securities and it is not soliciting an offer
to buy these securities in any state where the offer or sale is
not permitted.
Duncan Energy Partners L.P. is a limited partnership recently
formed by Enterprise Products Partners L.P. This is the initial
public offering of our common units. We currently estimate that
the initial public offering price will be between $19.00 and
$21.00 per common unit. Before this offering, there has
been no public market for our common units. Our common units
have been approved for listing, subject to official notice of
issuance, on the New York Stock Exchange under the symbol
“DEP.”
Investing in our common units
involves risks. Please read “Risk Factors” beginning
on page 21.
These risks include the following:
•
We may not have sufficient cash from operations to enable us to
pay distributions on our common units.
•
Changes in demand for and production of hydrocarbon products may
materially adversely affect our results of operations, cash
flows and financial condition.
•
We depend on Enterprise Products Partners L.P. and certain other
key customers for a significant portion of our revenues. The
loss of any of these key customers could result in a decline in
our revenues and cash from operations available to pay
distributions to our unitholders.
•
Our general partner and its affiliates, including Enterprise
Products Partners L.P., will have conflicts of interest and
limited fiduciary duties, which may permit them to favor their
own interests to your detriment.
•
Affiliates of our general partner, including Enterprise Products
Partners L.P., Enterprise GP Holdings L.P. and TEPPCO Partners
L.P., may compete with us and be entitled to pursue certain
business opportunities before us. This arrangement may limit our
ability to grow.
•
Our general partner has a limited call right that may require
you to sell your common units at an undesirable time or price.
•
Unitholders have limited voting rights and are not entitled to
elect our general partner or its directors.
•
You will experience immediate and substantial dilution of
$5.64 per unit in the net tangible book value of your
common units.
•
You may be required to pay taxes on income from us even if you
do not receive any cash distributions from us.
Per Common Unit
Total
Initial public offering price
$
$
Underwriting discount(1)
$
$
Proceeds to us (before expenses)
$
$
(1)
Excludes a fee payable to Lehman Brothers of $1,000,000 in
consideration of advice rendered by Lehman Brothers regarding
the structure of this offering and our partnership.
We have granted the underwriters a
30-day
option to purchase up to an additional 1,950,000 common units on
the same terms and conditions as set forth above if the
underwriters sell more than 13,000,000 common units in this
offering.
Neither the Securities and Exchange Commission nor any state
securities commission has approved or disapproved of these
securities or passed upon the accuracy or adequacy of this
prospectus. Any representation to the contrary is a criminal
offense.
Lehman Brothers, on behalf of the underwriters, expects to
deliver the common units on or
about ,
2007.
You should rely only on the information contained in this
prospectus. We have not, and the underwriters 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. We are not, and the underwriters are not, making an offer to
sell these securities in any jurisdiction where an offer or sale
is not permitted. You should assume that the information
appearing in this prospectus is accurate only as of the date on
the front cover of this prospectus. Our business, financial
condition and results of operations may have changed since that
date.
Until ,
2007 (25 days after the date of this prospectus), all
dealers that buy, sell or trade our common units, whether or not
participating in this offering, may be required to deliver a
prospectus. This is in addition to the dealers’ obligation
to deliver a prospectus when acting as underwriters and with
respect to their unsold allotments or subscriptions.
This summary highlights information contained elsewhere in
this prospectus. You should read the entire prospectus
carefully, including the historical and pro forma financial
statements and the notes to those financial statements. You
should read “Risk Factors” for important information
about risks that you should consider before buying our common
units. The information presented in this prospectus assumes an
initial public offering price per unit of $20.00 and that the
underwriters’ option to purchase additional common units is
not exercised, unless otherwise noted.
All references in this prospectus to “we,”“us,”“Duncan Energy Partners,” the
“Partnership” and “our” refer to Duncan
Energy Partners L.P. and its subsidiaries. All references in
this prospectus to “we,”“us,”“our” or the “Company,” when used in a
historical context, are intended to mean and include the
combined business and operations of Duncan Energy Partners
Predecessor. Duncan Energy Partners Predecessor reflects
ownership of 100% of the assets being contributed, but we will
own only a 66% interest in these assets after their contribution
in connection with this offering. For all references in this
prospectus to the terms “our general partner,”“DEP Holdings,”“Enterprise Products
Partners,”“Enterprise Products OLP,”“Enterprise Products GP,”“Enterprise GP
Holdings,”“EPE Holdings,”“EPCO,”“Mont Belvieu Caverns,”“Acadian Gas,”“Sabine Propylene,”“Lou-Tex Propylene,”“South Texas NGL,”“TEPPCO Partners,”“TEPPCO GP” and “Evangeline,” please read
Appendix B — Glossary of Terms. Please also read
Appendix B — Glossary of Terms for a glossary of
industry terms used in this prospectus.
We are a Delaware limited partnership formed by Enterprise
Products Partners in September 2006 to own, operate and acquire
a diversified portfolio of midstream energy assets. We are
engaged in the business of gathering, transporting, marketing
and storing natural gas and transporting and storing natural gas
liquids, or NGLs, and petrochemicals. Our assets were previously
owned by Enterprise Products Partners and are part of its
integrated midstream energy asset network, or “value
chain,” which includes natural gas gathering, processing,
transportation and storage; NGL fractionation (or separation),
transportation, storage and import and export terminaling; crude
oil transportation; and offshore production platform services.
After this offering, we will own 66% of the equity interests in
the subsidiaries that hold our operating assets, and affiliates
of Enterprise Products Partners will continue to own the
remaining 34%. We believe our relationship with Enterprise
Products Partners will enable us to maintain stable cash flows
and optimize our scale, strategic location and pipeline
connections.
Our operations are organized into the following four business
segments:
•
NGL & Petrochemical Storage
Services. Our NGL & Petrochemical
Storage Services segment consists of 33 salt dome caverns
located in Mont Belvieu, Texas, with an underground storage
capacity of approximately 100 MMBbls, and certain related
assets. These assets receive, store and deliver NGLs and
petrochemical products for industrial customers located along
the upper Texas Gulf Coast, which has the largest concentration
of petrochemical plants and refineries in the United States.
•
Natural Gas Pipelines & Services. Our
Natural Gas Pipelines & Services segment consists of
the Acadian Gas system, which is an onshore natural gas pipeline
system that gathers, transports, stores and markets natural gas
in Louisiana. The Acadian Gas system links natural gas supplies
from onshore and offshore Gulf of Mexico developments (including
offshore pipelines, continental shelf and deepwater production)
with local gas distribution companies, electric generation
plants and industrial customers, including those in the Baton
Rouge-New Orleans-Mississippi River corridor. In the aggregate,
the Acadian Gas system includes over 1,000 miles of
high-pressure transmission lines and lateral and gathering lines
with an aggregate throughput capacity of approximately one Bcf/d
and a leased storage facility with approximately three Bcf of
storage capacity.
•
Petrochemical Pipeline Services. Our
Petrochemical Pipeline Services segment consists of two
petrochemical pipeline systems with an aggregate of
284 miles of pipeline. The Lou-Tex Propylene pipeline
system consists of a
263-mile
pipeline used to transport chemical-grade propylene between
Sorrento, Louisiana and Mont Belvieu, Texas. The
Sabine Propylene pipeline system consists of a
21-mile
pipeline used to transport polymer-grade propylene from Port
Arthur, Texas to a pipeline interconnect in Cameron Parish,
Louisiana on a
transport-or-pay
basis.
•
NGL Pipeline Services. Our NGL Pipeline
Services segment consists of a
290-mile
pipeline system used to transport NGLs from two Enterprise
Products Partners’ facilities located in South Texas to
Mont Belvieu, Texas and related interconnections. We acquired a
223-mile
segment of the system in August 2006, and we are in the process
of acquiring and constructing other segments of the pipeline.
The system became operational and began transporting NGLs in
January 2007 after undergoing modifications, extensions and
interconnections. Additional expansions are scheduled to be
completed during the remainder of 2007.
Our
Relationship With Enterprise Products Partners
Enterprise Products Partners is a North American midstream
energy company that provides a wide range of services to
producers and consumers of natural gas, NGLs and crude oil.
Enterprise Products Partners’ value chain is an integrated
midstream energy asset network that links producers of natural
gas, NGLs and crude oil from some of the largest supply basins
in the United States, Canada and the Gulf of Mexico with
domestic consumers and international markets. For the year ended
December 31, 2005, Enterprise Products Partners had
revenues of $12.3 billion, operating income of
$663 million and net income of $420 million. For the
nine months ended September 30, 2006, Enterprise Products
Partners had revenues of $10.6 billion, operating income of
$653.7 million and net income of $468.4 million. After
giving effect to this offering, we will continue to have a
number of commercial relationships, including transportation and
storage agreements, with Enterprise Products Partners and its
affiliates. In addition, in the event we propose to sell any
equity interests in our operating subsidiaries or material
assets of those entities, other than sales of inventory and
other assets in the ordinary course of business, Enterprise
Products OLP will have a right of first refusal to purchase
those interests or assets.
We believe our relationship with EPCO and Enterprise Products
Partners will provide us access to an experienced management
team and commercial relationships throughout the energy
industry. However, this relationship is also a source of
potential conflicts. For example, Enterprise Products Partners,
EPCO and their affiliates are not restricted from competing with
us and may generally acquire, construct or dispose of midstream
or other assets in the future without any obligation to offer us
the opportunity to purchase or construct those assets or
participate in these activities. Please read “Conflicts of
Interest, Business Opportunity Agreements and Fiduciary
Duties” and “Certain Relationships and Related Party
Transactions” for more information on these commercial and
other relationships.
Formation
Transactions
At the closing of this offering, the following transactions will
occur:
•
Enterprise Products OLP will contribute to us 66% of the equity
interests in Mont Belvieu Caverns, Acadian Gas, Sabine
Propylene, Lou-Tex Propylene and South Texas NGL;
•
We will issue to Enterprise Products OLP 7,301,571 common units
representing an approximate 35.2% limited partner interest in us
(or an approximate 25.8% limited partner interest if the
underwriters exercise in full their option to purchase
additional common units), and we will issue a 2% general partner
interest to our general partner, DEP Holdings, LLC;
•
We will borrow approximately $200 million under our new
credit agreement, which will be used to fund a portion of our
payment to Enterprise Products Partners in connection with the
transactions described above;
•
We will sell 13,000,000 common units to the public in this
offering representing an approximate 62.8% limited partner
interest in us (or an approximate 72.2% limited partner interest
if the underwriters exercise in full their option to purchase
additional common units), and will use the net proceeds from
this offering as described under “Use of Proceeds;”
We will become party to an existing administrative services
agreement among EPCO and certain of its affiliates;
•
We will enter into various new transportation, storage and
operating agreements with Enterprise Products OLP and its
affiliates; and
•
We will enter into an omnibus agreement with Enterprise Products
OLP, pursuant to which Enterprise Products OLP will agree to
(i) indemnify us for certain environmental liabilities, tax
liabilities and title and
right-of-way
defects occurring or existing before the closing and
(ii) reimburse us for our 66% share of excess construction
costs, if any, above our current estimated cost to complete
planned expansions on the South Texas NGL pipeline and Mont
Belvieu Caverns brine-related facilities. In addition, we will
grant Enterprise Products OLP a right of first refusal on
the equity interests in certain of our operating subsidiaries
and on the material assets of these entities, other than sales
of inventory and other assets in the ordinary course of
business, and a preemptive right with respect to equity
securities issued by certain of our subsidiaries, other than as
consideration in an acquisition or in connection with a loan or
debt financing.
Management
and Ownership
As is common with publicly traded limited partnerships and in
order to maximize operational flexibility, we will conduct our
operations through subsidiaries.
Our general partner will manage our operations and activities.
Some of the executive officers and non-independent directors of
our general partner also serve as executive officers or
directors of Enterprise Products GP, EPE Holdings and TEPPCO GP.
Please read “Management.” Our general partner will not
receive any management fee or other compensation in connection
with its management of our business but will be entitled to be
reimbursed for all direct and indirect expenses incurred on our
behalf. Neither our general partner nor the board of directors
of our general partner will be elected by our unitholders.
Unlike shareholders in a corporation, our unitholders will not
elect or remove the board of directors of our general partner.
Our principal executive offices are located at 1100 Louisiana
Street, 10th Floor, Houston, Texas77002, and our telephone
number is
(713) 381-6500.
Our website is located at http://www.deplp.com. Information on
our website or any other website is not incorporated by
reference into this prospectus and does not constitute a part of
this prospectus.
The following diagram depicts our organizational structure after
giving effect to this offering and the related transactions
assuming no exercise of the underwriters’ option to
purchase additional common units.
Common units subject to the underwriters’ option to
purchaseadditional common units
If the underwriters exercise their option to purchase additional
units in full, we will issue 1,950,000 additional common units
to the public and redeem 1,950,000 common units from Enterprise
Products OLP, who may be deemed to be a selling unitholder in
this offering. Please read “Selling Unitholder.”
Common units outstanding after this offering
20,301,571 common units.
Use of proceeds
We will use the net proceeds from this offering of approximately
$243.4 million (based on an assumed offering price of
$20.00 per unit), after deducting the underwriting discount and
a $1.0 million structuring fee, but before estimated
expenses associated with the offering and related formation
transactions, to:
• distribute approximately $212.3 million to
Enterprise Products OLP as a portion of the cash consideration
and reimbursement for capital expenditures relating to the
assets contributed to us;
• provide approximately $28.2 million to fund our
share of estimated capital expenditures to complete planned
expansions to the South Texas NGL pipeline system and brine
production and above-ground storage projects at Mont Belvieu
subsequent to the closing of this offering; and
• pay approximately $2.9 million of other
estimated net expenses associated with this offering and related
formation transactions described on page 2.
In addition, we will borrow approximately $200 million
under our new $300 million credit agreement, and we will
distribute $198.9 million of these borrowings to Enterprise
Products OLP in partial consideration for the assets contributed
to us upon the closing of this offering.
If the underwriters exercise their option to purchase additional
common units, we will use all of the net proceeds from the sale
of those common units to redeem an equal number of common units
from Enterprise Products OLP. For the resulting beneficial
ownership, read “Security Ownership of Certain Beneficial
Owners and Management.”
Cash distributions
We will make initial quarterly distributions of $0.40 per
common unit to the extent we have sufficient cash from
operations after establishment of cash reserves and payment of
fees and expenses, including reimbursement of expenses to our
general partner. Our ability to pay cash distributions at this
initial distribution rate is subject to various restrictions and
other factors described in more detail under the caption
“Cash Distribution Policy and Restrictions on
Distributions.” We must distribute all of our cash on hand
at the end of each quarter, less reserves established by our
general partner.
We refer to this cash as “available cash,” and we
define its meaning in our partnership agreement as summarized in
“How We Make Cash Distributions — Distributions
of Available Cash — Definition of Available
Cash.” The amount of available cash may be greater than or
less than the aggregate amount associated with payment of the
expected initial quarterly distribution on all common units. In
general, we will pay 98% of any cash distributions we make each
quarter to our unitholders and the remaining 2% to our general
partner.
Unlike many publicly traded limited partnerships, our general
partner is not entitled to any incentive distributions and we do
not have any subordinated units.
We believe that, based on the assumptions and considerations
described in “Cash Distribution Policy and Restrictions on
Distributions — Assumptions and Considerations,”
we will have sufficient available cash to pay the full initial
quarterly distribution on all our common units and our general
partner interest for each quarter during the four quarters
ending December 31, 2007. We estimate that our pro forma
available cash for the year ended December 31, 2005 would
have been sufficient to pay only 30% of the initial quarterly
distributions on our common units and our general partner
interest during that period. We estimate that our pro forma
available cash for the four quarters ended September 30,2006 would not have been sufficient to pay any distributions on
our common units and our general partner interest.
We will pay investors in this offering a prorated distribution
for the first quarter during which we are a publicly traded
partnership. This distribution will be paid for the period
beginning on the first day our common units are publicly traded
and ending on the last day of that fiscal quarter. Therefore, we
will pay investors in this offering a distribution for the
period from the closing date of this offering to and including
March 31, 2007. We expect to pay this cash distribution on
or about May 15, 2007.
Limited call right
If at any time our general partner and its affiliates own 80% or
more of our outstanding common units, our general partner has
the right, but not the obligation, to purchase all of the
remaining common units at a price not less than the then-current
market price of the common units.
Issuance of additional units
We can issue an unlimited number of units without the consent of
our unitholders. Please read “Common Units Eligible For
Future Sale” and “Description of Material Provisions
of Our Partnership Agreement — Issuance of Additional
Securities.”
Limited voting rights
Our general partner will manage all of our operations. Unlike
the holders of common stock of a corporation, you will have only
limited voting rights on matters affecting our business and you
will have no right to elect our general partner or its officers
or directors. Our general partner may not be removed except by a
vote of the holders of at least
662/3%
of the outstanding common units, including common units owned by
our general partner and its affiliates. Upon completion of this
offering, affiliates of our
general partner will own approximately 36.0% of our outstanding
common units (or approximately 26.4% of our outstanding common
units if the underwriters’ option to purchase additional
common units is exercised in full). Please read
“Description of Material Provisions of Our Partnership
Agreement — Withdrawal or Removal of Our General
Partner.”
Estimated ratio of taxable income to distributions
We estimate that if you own the common units you purchase in
this offering through the record date for distributions for the
period ending December 31, 2009, you will be allocated, on
a cumulative basis, an amount of federal taxable income for that
period that will be less than 20% of the cash distributed with
respect to that period. For example, if you receive an annual
distribution of $1.60 per common unit, we estimate that
your average allocated federal taxable income per year will be
no more than $0.32 per common unit. Please read
“Material Tax Consequences” in this prospectus for the
basis of this estimate.
Material tax consequences
For a discussion of other material federal income tax
consequences that may be relevant to prospective unitholders who
are individual citizens or residents of the United States,
please read “Material Tax Consequences.”
Exchange listing
Our common units have been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange
under the symbol “DEP.”
The following diagram summarizes the current organizational
structure of EPCO, affiliates of Dan L. Duncan and our
affiliates at December 31, 2006.
General. Conflicts of interest exist and may
arise in the future as a result of the relationships among us,
Enterprise Products Partners, Enterprise GP Holdings, TEPPCO
Partners and our and their respective general partners and
affiliates. Our general partner is controlled indirectly by
Enterprise Products Partners. Mr. Dan L. Duncan has the
ability to elect, remove and replace the directors and officers
of our general partner and the general partners of Enterprise
Products Partners, Enterprise GP Holdings and TEPPCO Partners.
The assets of Enterprise Products Partners, Enterprise GP
Holdings, TEPPCO Partners and us overlap in certain areas, which
may result in various conflicts of interest in the future.
The directors and officers of our general partner have fiduciary
duties to manage our business in a manner beneficial to us and
our partners. Some of the executive officers and non-independent
directors of our general partner also serve as executive
officers or directors of Enterprise Products GP, EPE Holdings
and TEPPCO GP. As a result, they have fiduciary duties to manage
the business of each of those entities in a manner beneficial to
such entities and their respective partners. Consequently, these
directors and officers may
encounter situations in which their fiduciary obligations to
Enterprise Products Partners, Enterprise GP Holdings or TEPPCO
Partners, on the one hand, and us, on the other hand, are in
conflict. For a more detailed description of the conflicts of
interest involving our general partner, please read
“Conflicts of Interest, Business Opportunity Agreements and
Fiduciary Duties.”
It is not possible to predict the nature or extent of these
potential future conflicts of interest at this time, nor is it
possible to determine how we will address and resolve any such
future conflicts of interest. However, the resolution of these
conflicts may not always be in our best interest or that of our
unitholders.
Business Opportunity Agreements under our Administrative
Services Agreement. At or prior to the closing of
this offering, we and our general partner will become party to
an existing administrative services agreement with EPCO,
Enterprise Products Partners and its general partner, Enterprise
GP Holdings and its general partner, TEPPCO Partners and its
general partner, and certain affiliated entities. The
administrative services agreement will address potential
conflicts that may arise among us and our general partner,
Enterprise Products Partners and its general partner, Enterprise
GP Holdings and its general partner, TEPPCO Partners and its
general partner, and the EPCO Group, which includes EPCO and its
affiliates but does not include the aforementioned entities and
their controlled affiliates.
The administrative services agreement will provide, among other
things, that:
•
if a business opportunity to acquire certain equity securities
(which we define to include general partner interests in
publicly traded partnerships and similar interests and any
associated incentive distribution rights, limited partner
interests or similar interests owned by the owner of such
general partner interest or its affiliates), is presented to the
EPCO Group, us, and our general partner, Enterprise Products
Partners and its general partner, or Enterprise GP Holdings and
its general partner, Enterprise GP Holdings will have the first
right to pursue the acquisition. In the event that Enterprise GP
Holdings abandons the acquisition, Enterprise Products Partners
will have the second right to pursue such acquisition either for
itself or, if desired by Enterprise Products Partners in its
sole discretion, for our benefit. In the event that Enterprise
Products Partners affirmatively directs the acquisition to us,
we may pursue such acquisition. In the event that Enterprise
Products Partners abandons the acquisition for itself and for
us, the EPCO Group may pursue the acquisition without any
further obligation to any other party or offer such opportunity
to other affiliates; and
•
if any business opportunity not covered by the preceding bullet
point is presented to the EPCO Group, us and our general
partner, Enterprise Products Partners and its general partner,
or Enterprise GP Holdings and its general partner, Enterprise
Products Partners will have the first right to pursue such
opportunity either for itself or, if desired by Enterprise
Products Partners in its sole discretion, for our benefit. In
the event that Enterprise Products Partners affirmatively
directs the business opportunity to us, we may pursue such
business opportunity. In the event Enterprise Products Partners
abandons the business opportunity for itself and for us,
Enterprise GP Holdings will have the second right to pursue such
business opportunity. In the event Enterprise GP Holdings
abandons the business opportunity, the EPCO Group may pursue the
business opportunity without any further obligation to any other
party or offer such opportunity to other affiliates.
None of the EPCO Group, we and our general partner, Enterprise
Products Partners and its general partner, or Enterprise GP
Holdings and its general partner will have any obligation to
present business opportunities to TEPPCO Partners, its general
partner or their controlled affiliates, nor will TEPPCO
Partners, its general partner or their controlled affiliates
have any obligation to present business opportunities to the
EPCO Group, us and our general partner, Enterprise Products
Partners and its general partner, or Enterprise GP Holdings and
its general partner. For a more detailed description of these
provisions, please read “Certain Relationships and Related
Party Transactions — Administrative Services
Agreement.”
Shared Personnel. DEP Holdings, as our general
partner, will manage our operations and activities. Under the
administrative services agreement, EPCO will provide all
employees and administrative, operational and other services for
us. All of our general partner’s executive officers will,
and certain other EPCO employees assigned to our operations may,
also perform services for EPCO, Enterprise Products Partners,
Enterprise GP Holdings, TEPPCO Partners and their affiliates.
The services performed by these shared personnel will generally
be limited to non-commercial functions, including but not
limited to human resources, information technology, financial
and accounting services and legal services. We have adopted
policies and procedures intended to protect and prevent
inappropriate disclosure by shared personnel of commercial and
other non-public information relating to us, EPCO, Enterprise
Products Partners, Enterprise GP Holdings and TEPPCO Partners.
Because our general partner’s executive officers allocate
time among EPCO, us, Enterprise Products Partners, Enterprise GP
Holdings and TEPPCO Partners, these officers face conflicts
regarding the allocation of their time, which may adversely
affect our business, results of operations and financial
condition.
Compensation Arrangements. Dan L. Duncan, as
the control person of EPCO, our general partner and the general
partners of Enterprise Products Partners, Enterprise GP Holdings
and TEPPCO Partners, is responsible for establishing the
compensation arrangements for all EPCO employees, including
employees who provide services to us, Enterprise Products
Partners, Enterprise GP Holdings and TEPPCO Partners.
Fiduciary Duties. Our partnership agreement
limits the liability and reduces the fiduciary duties of our
general partner and its affiliates to our unitholders. Our
partnership agreement also restricts the remedies available to
unitholders for actions that might otherwise constitute a breach
of our general partner’s and its affiliates’ fiduciary
duty owed to unitholders. By purchasing our common units, you
are treated as having consented to various actions contemplated
in the partnership agreement and conflicts of interest that
might otherwise constitute a breach of fiduciary or other duties
under applicable state law. Please read “Conflicts of
Interest, Business Opportunity Agreements and Fiduciary
Duties — Fiduciary Duties” for a description of
the fiduciary duties imposed on our general partner by Delaware
law, the material modifications of these duties contained in our
partnership agreement and certain legal rights and remedies
available to unitholders.
For a description of our other relationships with our
affiliates, please read “Certain Relationships and Related
Party Transactions.”
An investment in our common units involves risks associated with
our business, our partnership structure and the tax
characteristics of our common units. The following list of risk
factors is not exhaustive. For more information about these and
other risks, please read “Risk Factors” beginning on
page 21. These risks include, among others:
Risks
Inherent in Our Business
•
We may not have sufficient cash from operations to enable us to
pay our expected initial quarterly distribution on our common
units.
•
A decrease in demand for natural gas, NGLs, NGL products or
petrochemical products by the petrochemical, refining or heating
industries could materially adversely affect our results of
operations, cash flows and financial position.
•
Because of the natural decline in gas production from existing
wells, our success depends on our ability to obtain access to
new sources of natural gas, which is dependent on factors beyond
our control. Any decrease in supplies of natural gas could
adversely affect our business and operating results.
•
A natural disaster, catastrophe or other event could result in
severe personal injury, property damage and environmental
damage, which could curtail our operations and otherwise
materially adversely affect our cash flow and, accordingly,
affect the market price of our common units.
•
We may not be able to make acquisitions or to make acquisitions
on economically acceptable terms, which may limit our ability to
grow.
•
Federal, state or local regulatory measures could materially
adversely affect our business, results of operations, cash flows
and financial condition.
•
Environmental costs and liabilities and changing environmental
regulation could materially affect our results of operations,
cash flows and financial condition.
•
We depend on Enterprise Products Partners and certain other key
customers for a significant portion of our revenues. The loss of
any of these key customers could result in a decline in our
revenues and cash available to pay distributions to you.
•
Successful development of LNG import terminals outside our areas
of operations could reduce the demand for our services.
•
We do not own all of the land on which our pipelines and
facilities are located, which could disrupt our operations.
Risks
Inherent in an Investment in Us
•
Affiliates of our general partner, including Enterprise Products
Partners, Enterprise GP Holdings and TEPPCO Partners, may
compete with us, and business opportunities may be directed by
contract to Enterprise Products Partners and Enterprise GP
Holdings before us under the administrative services agreement.
•
Our general partner and its affiliates own a controlling
interest in us and have conflicts of interest and limited
fiduciary duties, which may permit them to favor their own
interests to your detriment.
•
Our general partner has a limited call right that may require
you to sell your common units at an undesirable time or price.
•
Our partnership agreement limits our general partner’s
fiduciary duties to unitholders and restricts the remedies
available to unitholders for actions taken by our general
partner that might otherwise constitute breaches of fiduciary
duty.
An affiliate of Enterprise Products Partners will have the power
to appoint and remove our directors and management.
•
Unitholders have limited voting rights and are not entitled to
elect our general partner or its directors, which could lower
the trading price of our common units.
•
You will experience immediate and substantial dilution of
$5.64 per common unit.
•
We may issue additional units without your approval, which would
dilute your ownership interests.
•
Cost reimbursements to EPCO and its affiliates will reduce cash
available for distribution to you.
Tax
Risks
•
Our tax treatment depends on our status as a partnership for
federal income tax purposes, as well as our not being subject to
a material amount of entity-level taxation by individual states.
If the Internal Revenue Service, or the IRS, were to treat us as
a corporation or if we were to become subject to entity-level
taxation for state tax purposes, then our cash distributions to
you would be substantially reduced.
•
If the IRS contests the federal income tax positions we take,
the market for our common units may be adversely impacted, and
the costs of any contest will reduce our cash distributions to
you.
•
You may be required to pay taxes on your share of our income
even if you do not receive any cash distributions from us.
Duncan Energy Partners L.P. was formed on
September 29, 2006; therefore, it does not have any
historical financial statements prior to its formation. The
following tables set forth, for the periods and at the dates
indicated, the summary historical combined financial and
operating data of Duncan Energy Partners Predecessor, which was
derived from the books and records of Enterprise Products
Partners.
The summary historical combined financial data for the nine
months ended September 30, 2006 and for the years ended
December 31, 2005, 2004 and 2003 and combined balance sheet
data at September 30, 2006 and at December 31, 2005
and 2004 is derived from and should be read in conjunction with
the audited combined financial statements of Duncan Energy
Partners Predecessor included elsewhere in this prospectus
beginning on
page F-13.
The summary historical combined financial data for the nine
months ended September 30, 2005 and combined balance sheet
data at September 30, 2005 is derived from the unaudited
condensed combined financial statements of Duncan Energy
Partners Predecessor. The operating data for all periods are
unaudited. The summary unaudited pro forma combined financial
data of Duncan Energy Partners was derived from and should be
read in conjunction with our unaudited pro forma condensed
combined financial statements included in this prospectus
beginning on
page F-2.
The following information should also be read together with the
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Enterprise Products Partners, through its subsidiaries, has
owned controlling interests and operated the underlying assets
of Mont Belvieu Caverns, Acadian Gas, Lou-Tex Propylene and
Sabine Propylene for several years. Enterprise Products Partners
will retain a 34% ownership interest in each of these four
entities (as well as South Texas NGL). Enterprise Products
Partners will own our general partner, DEP Holdings, which owns
a 2% general partner interest in us, and therefore indirectly
has the ability to control us. In addition, Enterprise Products
Partners will own approximately 36.0% of our common units after
completion of this offering, or approximately 26.4% of our
outstanding common units if the underwriters exercise their
option to purchase additional common units in full. For
financial reporting purposes, the ownership interests of
Enterprise Products Partners are deemed to represent the parent
(or sponsor) interest in our pro forma results of our operations
and financial position.
The summary unaudited pro forma combined financial data for the
nine months ended September 30, 2006 and for the year ended
December 31, 2005 assume the pro forma transactions noted
herein occurred at the beginning of each period presented or on
September 30, 2006 for the balance sheet data. These
transactions include:
•
The August 2006 purchase of a pipeline by Enterprise Products
Partners for approximately $97.7 million in cash, the
subsequent contribution of this pipeline to South Texas NGL, and
estimated additional costs of $37.7 million required to
modify this pipeline and to acquire and construct additional
pipelines in order to place this system into operation in
January 2007. The pro forma financial data does not reflect
estimated additional capital expenditures of $28.6 million
that will be made by South Texas NGL in 2007 to complete planned
expansions to this system. We will retain cash in an amount
equal to our 66% share (approximately $18.9 million)
of these estimated capital expenditures from the net proceeds of
this offering in order to fund our share of the planned
expansion costs. The pro forma combined results of operations
data does not reflect any results attributable to the historical
activities of this pipeline.
•
The expenditure of $21.3 million in connection with the
construction of additional brine production capacity and
above-ground storage reservoirs at Mont Belvieu. The pro forma
financial data does not reflect estimated additional capital
expenditures of $14.1 million that will be made by Mont
Belvieu Caverns subsequent to December 31, 2006 to complete
these projects. We will retain cash in an amount equal to our
66% share (approximately $9.3 million) of these
additional capital expenditures from the net proceeds of this
offering in order to fund our share of the planned expansion
costs.
•
The contribution of a 66% interest in certain entities, which
are wholly-owned subsidiaries of Enterprise Products Partners,
and the retention by Enterprise Products Partners of a 34%
interest in these entities.
The revision of related party storage contracts between us and
Enterprise Products Partners to (1) increase certain
storage fees paid by Enterprise Products Partners and
(2) reflect the allocation to Enterprise Products Partners
of all storage measurement gains and losses relating to products
under these agreements, and the execution of a limited liability
company agreement for Mont Belvieu Caverns providing for the
special allocation and other agreements relating to other
measurement gains and losses to Enterprise Products Partners.
•
The assignment to us of certain third-party agreements that
effectively reduce tariff rates received by us for the transport
of propylene volumes.
Our unaudited pro forma, as adjusted financial data also gives
effect to the following:
•
our borrowing of $200 million under a new revolving credit
facility;
•
our issuance and sale of 13,000,000 common units to the public
in this offering;
•
our payment of estimated underwriting discounts and commissions,
a structuring fee and other offering expenses; and
•
our use of net proceeds from the borrowing and this offering as
consideration for the contributed ownership interests in Mont
Belvieu Caverns, Acadian Gas, Lou-Tex Propylene, Sabine
Propylene and South Texas NGL from Enterprise Products Partners.
The following table presents the summary historical combined
financial and operating data of Duncan Energy Partners
Predecessor and our summary unaudited pro forma combined
financial information for the annual periods indicated (dollars
in thousands, except per unit amounts):
The following table presents the summary historical combined
financial and operating data of Duncan Energy Partners
Predecessor and our summary unaudited pro forma combined
financial information for the interim periods indicated (dollars
in thousands, except per unit amounts):
Income before provision for income
taxes and parent interest
31,557
40,284
33,209
23,279
Provision for income taxes
(21
)
(21
)
(21
)
Income before parent interest
31,557
40,263
33,188
23,258
Parent’s share of net income
(15,733
)
Income from continuing operations
31,557
40,263
$
33,188
$
7,525
Cumulative effect of change in
accounting principle
9
Net income
$
31,557
$
40,272
Earnings per unit —
public, basic and diluted
$
0.58
Combined Balance Sheet Data (at
period end):(1)
Total assets
$
617,402
$
747,155
$
799,675
$
828,963
Total debt
200,000
Parent’s interest in the
Partnership
305,233
Owners’ net investment
520,727
662,131
716,465
Partners’ equity —
public
240,520
Other Combined Financial
Data:(1)
Net cash flows provided by
operating activities
$
37,226
$
62,301
Cash flows used in investing
activities
16,669
58,226
Cash flows used in financing
activities(2)
20,557
4,075
Gross operating margin
49,611
58,198
$
52,998
$
52,998
EBITDA
45,810
55,761
48,677
32,944
Operating
Data:(1)
Natural Gas Pipelines &
Services, net:
Natural gas throughput volumes
(Bbtus/d)
657
773
773
773
Petrochemical Pipeline Services,
net:
Petrochemical transportation
volumes (MBbls/d)
34
36
36
36
The non-GAAP financial measures of gross operating margin and
earnings before interest, income taxes, depreciation and
amortization, which we refer to as “EBITDA,” are
presented in the summary historical financial data for Duncan
Energy Partners Predecessor and in our pro forma financial data.
For a description of these non-GAAP financial measures and
reconciliations of these non-GAAP financial measures to their
most directly comparable GAAP financial measures, please read
“— Non-GAAP Financial Measures.”
The following information is provided to highlight significant
trends and other information regarding Duncan Energy Partners
Predecessor’s historical operating results, financial
position and other financial data. Each section below represents
a footnote to the tables above:
(1) We view the combined financial data of Duncan Energy
Partners Predecessor from the financial statements of Mont
Belvieu Caverns, Acadian Gas, Lou-Tex Propylene and Sabine
Propylene, which were derived from the accounts and records of
Enterprise Products Partners. Enterprise Products Partners did
not own certain of the businesses for all periods presented in
this section. As a result, the summary selected data reflects
the following information:
•
Enterprise Products Partners owned Mont Belvieu Caverns and
Lou-Tex Propylene for all periods presented. Our pro forma
balance sheet data reflects assumed capital expenditures of
$21.3 million by Mont Belvieu Caverns in connection with
the construction of additional brine production capacity and
above-ground storage reservoirs. Our pro forma financial data
does not reflect estimated additional capital expenditures of
$14.1 million that will be made by Mont Belvieu Caverns
subsequent to December 31, 2006 to complete these projects.
We will retain cash in an amount equal to our 66% share
(approximately $9.3 million) of these additional capital
expenditures from the net proceeds of this offering in order to
fund our share of the planned expansion costs.
•
Enterprise Products Partners acquired Acadian Gas in April 2001;
therefore, the selected data includes Acadian Gas from the date
of its acquisition. No financial data was available from the
seller for periods prior to April 2001.
•
Enterprise Products Partners constructed the pipeline owned by
Sabine Propylene and placed it in service in November 2001;
therefore, the selected data includes Sabine Propylene from
November 2001 to present.
•
In August 2006, Enterprise Products Partners purchased a
223-mile
pipeline extending from Corpus Christi, Texas to Pasadena, Texas
from ExxonMobil Pipeline Company. The total purchase price for
this asset was approximately $97.7 million in cash. This
pipeline system will be owned by South Texas NGL (along with
others being constructed and to be acquired) and will be used to
transport NGLs from two Enterprise Products Partners’
facilities located in South Texas to Mont Belvieu, Texas. The
total estimated cost to acquire and construct the additional
pipelines is $66.3 million. Our pro forma balance sheet
data reflects assumed capital expenditures of
$37.7 million, including approximately $8 million
spent to acquire a
10-mile
pipeline from an affiliate of TEPPCO Partners, to make this
pipeline system operational in January 2007. We expect that it
will cost an additional $28.6 million to complete planned
expansions of the South Texas NGL pipeline after the closing of
this offering, of which our 66% share will be approximately
$18.9 million. This expenditure is not reflected in the pro
forma financial data because we expect to use cash on hand from
the proceeds of this offering to fund this cost.
Duncan Energy Partners Predecessor’s historical financial
information does not reflect any transactions related to the NGL
pipeline asset acquired in August 2006 or subsequent capital
expenditures for the construction and acquisition of related
pipelines. Furthermore, the pro forma adjustments are limited to
those required to present an estimate of owners’ net
investment immediately prior to this offering. The pro forma
results of operations data does not reflect any results
attributable to the historical activities of these NGL pipelines.
ExxonMobil has informed us that no discrete and separable
financial information existed for the pipeline we acquired in
August 2006, which was comprised of two separately operated
pipelines prior to our purchase. The seller had previously
utilized these pipelines for a different product and the
pipeline was out of service when we acquired it. The
10-mile
pipeline acquired from an affiliate of TEPPCO Partners was used
as a feeder line for NGL products and operated by different
management. We understand no financial statement information is
available for this minor component asset. There is no meaningful
financial data available regarding the prior use of these
pipelines by the sellers that would be meaningful to our
investors. In addition, such data, if available, would not
assist investors in understanding either the evolution of the
business (which is a new NGL transportation network) nor the
track record of management (which will be different).
(2) Duncan Energy Partners Predecessor operated within the
Enterprise Products Partners cash management program for all
periods presented. Cash flows used in financing activities
represent transfers of excess cash from Duncan Energy Partners
Predecessor to Enterprise Products Partners equal to cash
provided by operations less cash used in investing activities.
Conversely, cash flows provided by financing activities
represent contributions from Enterprise Products Partners.
For additional information regarding our combined results of
operations and liquidity and capital resources, please read
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Non-GAAP Financial
Measures
We include in this prospectus the non-GAAP financial measures of
gross operating margin and EBITDA, and provide reconciliations
of these non-GAAP measures to their most directly comparable
measure or measures calculated and presented in accordance with
GAAP.
Gross operating margin. We evaluate segment
performance based on the non-GAAP financial measure of gross
operating margin. Gross operating margin (total and by segment)
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 business segments. We
believe that investors benefit from having access to the same
financial measures that our management uses in evaluating
segment results. The GAAP measure most directly comparable to
total segment gross operating margin is operating income. Our
non-GAAP financial measure of total segment gross operating
margin should not be considered as an alternative to GAAP
operating income.
We define total (or combined) segment gross operating margin as
operating income before: (1) depreciation, amortization and
accretion expense; (2) gains and losses on the sale of
assets; and (3) general and administrative expenses. Gross
operating margin is exclusive of other income and expense
transactions, provision for income taxes, minority interest,
extraordinary charges and the cumulative effect of changes in
accounting principles. Gross operating margin by segment is
calculated by subtracting segment operating costs and expenses
(net of the adjustments noted above) from segment revenues, with
both segment totals before the elimination of any intersegment
and intrasegment transactions. Our combined revenues reflect the
elimination of all material intercompany transactions.
We include equity earnings from Evangeline, a subsidiary of
Acadian Gas, in our measurement of the Natural Gas
Pipelines & Services segment gross operating margin and
operating income. Our equity investments in midstream energy
operations such as those conducted by Evangeline are a vital
component of our long-term business strategy and important to
the operations of Acadian Gas. This method of operation enables
us to achieve favorable economies of scale relative to our level
of investment and also lowers our exposure to business risks
compared the profile we would have on a stand-alone basis. Our
equity investments are within the same industry as our combined
operations; therefore, we believe treatment of earnings from our
equity method investee as a component of gross operating margin
and operating income is appropriate.
EBITDA. We define EBITDA as net income or loss
plus interest expense, provision for income taxes and
depreciation, accretion and amortization expense. EBITDA is
commonly 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: (1) the financial performance of our
assets without regard to financing methods, capital structures
or historical cost basis; (2) the ability of our assets to
generate cash sufficient to pay interest cost and support our
indebtedness; (3) our operating performance and return on
capital as compared to those of other companies in the midstream
energy industry, without regard to financing and capital
structure; and (4) the viability of projects and the
overall rates of return on alternative investment opportunities.
Because EBITDA excludes some, but not all, items that affect net
income or loss and because these measures may vary among other
companies, the EBITDA data presented in this prospectus may not
be comparable to similarly titled measures of other companies.
The GAAP measure most directly comparable to EBITDA is net cash
provided by operating activities.
The following tables present (1) a reconciliation of the
non-GAAP financial measure of gross operating margin to the GAAP
financial measure of operating income and (2) a
reconciliation of the non-GAAP financial measure of EBITDA to
the GAAP financial measure of net income (income from continuing
operations with regards to our pro forma information) on a
historical and pro forma basis, as applicable, for each of the
periods presented (dollars in thousands). With regards to EBITDA
measures determined using the historical financial information
of Duncan Energy Partners Predecessor, EBITDA is also reconciled
to the GAAP financial measure of net cash provided by operating
activities.
Reconciliation of GAAP
“operating income” to non-GAAP “gross operating
margin”
Operating income
$
52,453
$
58,176
$
40,201
$
33,927
$
33,927
Adjustments to reconcile
operating income to gross operating margin:
Depreciation, amortization and
accretion in operating costs and expenses
17,882
18,374
19,453
19,453
19,453
Loss (gain) on sale of assets in
operating costs and expenses
(7
)
5
5
5
General and administrative costs
6,138
5,442
4,483
6,983
6,983
Total gross operating margin
$
76,473
$
81,985
$
64,142
$
60,368
$
60,368
Reconciliation of non-GAAP
“EBITDA” to GAAP “net income” (or GAAP
“income from continuing operations” with respect to
pro forma data) and GAAP “net cash provided by operating
activities”
Net income (income from continuing
operations with respect to pro forma data)
$
52,454
$
58,124
$
39,087
$
33,395
$
5,846
Additions to income to derive
EBITDA:
Interest expense
532
532
13,807
Depreciation, accretion and
amortization
17,882
18,374
19,453
19,453
19,453
EBITDA
$
70,336
$
76,498
$
59,072
$
53,380
$
39,106
Adjustments to EBITDA to derive
net cash provided by operating activities (add or subtract as
indicated by sign of number):
Cumulative effect of change in
accounting principle
582
Interest expense
(532
)
Equity in income of unconsolidated
affiliates
(131
)
(231
)
(331
)
Loss (gain) on sale of assets
(7
)
5
Changes in fair market value of
financial instruments
Reconciliation of GAAP
“operating income” to non-GAAP “gross operating
margin”
Operating income
$
31,557
$
40,278
$
33,203
$
33,203
Adjustments to reconcile
operating income to gross operating margin:
Depreciation, amortization and
accretion in operating costs and expenses
14,253
15,468
15,468
15,468
Loss (gain) on sale of assets in
operating costs and expenses
2
(17
)
(17
)
(17
)
General and administrative costs
3,799
2,469
4,344
4,344
Total gross operating margin
$
49,611
$
58,198
$
52,998
$
52,998
Reconciliation of non-GAAP
“EBITDA” to GAAP “net income” (or GAAP
“income from continuing operations” with respect to
pro forma data) and GAAP “net cash provided by operating
activities”
Net income (income from continuing
operations with respect to pro forma data)
$
31,557
$
40,272
$
33,188
$
7,525
Additions to income to derive
EBITDA:
Interest expense
9,930
Provision for income taxes
21
21
21
Depreciation, accretion and
amortization
14,253
15,468
15,468
15,468
EBITDA
$
45,810
$
55,761
$
48,677
$
32,944
Adjustments to EBITDA to derive
net cash provided by operating activities (add or subtract as
indicated by sign of number):
Provision for income taxes
(21
)
Cumulative effect of change in
accounting principle
(9
)
Equity in income of unconsolidated
affiliates
(280
)
(624
)
Deferred income tax expense
21
Loss (gain) on sale of assets
2
(17
)
Changes in fair market value of
financial instruments
Limited partner interests are inherently different from the
capital stock of a corporation, although many of the business
risks to which we are subject are similar to those that would be
faced by a corporation engaged in a similar business. You should
carefully consider the following risk factors together with all
of the other information included in this prospectus in
evaluating an investment in our common units.
If any of the following risks were actually to occur, our
business, financial condition, or results of operations could be
materially adversely affected. In that case, we might not be
able to pay distributions on our common units, the trading price
of our common units could decline, and you could lose all or
part of your investment.
We may
not have sufficient available cash to enable us to pay our
expected initial quarterly distribution on our common units
after establishment of cash reserves and payment of fees and
expenses, including reimbursement of expenses to our general
partner.
We may not have sufficient available cash each quarter to pay
our expected initial quarterly distribution. The amount of cash
we can distribute on our common units principally depends upon
the amount of cash we generate from our operations, which will
fluctuate from quarter to quarter based on, among other things:
•
the prices we obtain for our transportation and storage
services;
•
the volumes of natural gas, NGLs and propylene our customers
transport or store;
•
the prices of, level of production of, and demand for, natural
gas, propylene and NGLs in the markets we serve;
•
the level of competition from other midstream energy companies,
as well as from alternative fuels;
•
the level of our operating costs, including reimbursement of
expenses to our general partner; and
•
prevailing economic and market conditions.
In addition, the actual amount of cash we will have available
for distribution will depend on other factors such as:
•
the level of our capital expenditures;
•
the restrictions on distributions contained in our credit
agreement and our debt service requirements;
•
the cost of acquisitions, if any;
•
fluctuations in our working capital needs;
•
our ability to borrow to make distributions to our
unitholders; and
•
the amount, if any, of cash reserves established by our general
partner.
Please read “Cash Distribution Policy and Restrictions on
Distributions” for a discussion of how we determine our
available cash.
On a
pro forma historical basis, we would not have had sufficient
cash available for distributions to pay the expected initial
quarterly distribution on all common units for the year ended
December 31, 2005 and the four quarters ended
September 30, 2006.
The amount of available cash we will need to pay our expected
initial quarterly distribution for four quarters on the common
units and the 2% general partner interest to be outstanding
immediately after this offering is approximately
$33.1 million. Pro forma combined available cash to make
distributions generated during fiscal 2005 and the four quarters
ended September 30, 2006 would have been approximately
$9.9 million and a deficit of $14.1 million,
respectively. These amounts would have been sufficient to allow
us
to pay only 30% of the initial quarterly distributions on the
common units and the 2% general partner interest during 2005.
These amounts would not have been sufficient to allow us to pay
any distributions on our common units and the general partner
interest during the four quarters ended September 30, 2006.
For a calculation of our ability to make distributions to
unitholders based on our pro forma results in 2005 and for the
twelve months ended September 30, 2006, as well as
estimated cash available to pay distributions for the four
quarters ending December 31, 2007, please read “Cash
Distribution Policy and Restrictions on Distributions.”
The
assumptions underlying our estimate of cash available for
distribution we include in our “Cash Distribution Policy
and Restrictions on Distributions” are inherently uncertain
and are subject to significant business, economic, financial,
regulatory and competitive risks and uncertainties that could
cause actual results to differ materially from those
expected.
Our estimate of cash available for distribution set forth in
“Cash Distribution Policy and Restrictions on
Distributions” is based on assumptions that are inherently
uncertain and are subject to significant business, economic,
financial, regulatory and competitive risks and uncertainties
that could cause actual results to differ materially from those
estimated. Furthermore, our estimate of cash available for
distribution for the four quarters ending December 31, 2007
is equal to the amount of available cash we need to pay the
expected initial quarterly distribution on all common units for
such quarters. If we do not achieve the estimated results, we
may not be able to pay the full expected initial quarterly
distribution or any amount on our common units, in which event
the market price of our common units may decline materially.
The
amount of cash we have available for distribution to unitholders
depends primarily on our cash flow and not solely on
profitability, which may prevent us from making cash
distributions during periods when we record net
income.
The amount of cash we have available for distribution depends
primarily on our cash flow, including cash flow from financial
reserves and working capital or other borrowings, and not solely
on profitability, which will be affected by non-cash items. As a
result, we may make cash distributions during periods when we
record losses and may not make cash distributions during periods
when we record net income.
Changes
in demand for and production of hydrocarbon products may
materially adversely affect our results of operations, cash
flows and financial condition.
We operate predominantly in the midstream energy sector which
includes transporting and storing natural gas, NGLs and
propylene. As such, our results of operations, cash flows and
financial condition may be materially adversely affected by
changes in the prices of these hydrocarbon products and by
changes in the relative price levels among these hydrocarbon
products. Changes in prices and changes in the relative price
levels may impact demand for hydrocarbon products, which in turn
may impact production and volumes transported by us and related
transportation and storage handling fees. We may also incur
price risk to the extent counterparties do not perform in
connection with our marketing of natural gas, NGLs and propylene.
In the past, the prices of natural gas have been extremely
volatile, and we expect this volatility to continue. The NYMEX
daily settlement price for natural gas for the prompt month
contract in 2004 ranged from a high of $8.75 per MMBtu to a low
of $4.57 per MMBtu. In 2005, the same index ranged from a
high of $15.38 per MMBtu to a low of $5.79 per MMBtu.
In 2006, the same index ranged from a high of $10.63 per MMBtu
to a low of $4.20 per MMBtu.
Generally, the prices of natural gas, NGLs and other hydrocarbon
products are subject to fluctuations in response to changes in
supply, demand, market uncertainty and a variety of additional
factors that are impossible to control. These factors include:
•
the level of domestic production and consumer product demand;
•
the availability of imported natural gas;
•
actions taken by foreign natural gas producing nations;
the availability of transportation systems with adequate
capacity;
•
the availability of competitive fuels;
•
fluctuating and seasonal demand for natural gas and NGLs;
•
the impact of conservation efforts;
•
the extent of governmental regulation and taxation of
production; and
•
the overall economic environment.
A
decrease in demand for natural gas, NGLs, NGL products or
petrochemical products by the petrochemical, refining or heating
industries could materially adversely affect our results of
operations, cash flows and financial position.
A decrease in demand for natural gas, NGLs, NGL products or
petrochemical products by the petrochemical, refining or heating
industries, whether because of a general downturn in economic
conditions, reduced demand by consumers for the end products
made with products we transport, increased competition from
petroleum-based products due to pricing differences, adverse
weather conditions, increased government regulations affecting
prices and production levels of natural gas or other reasons,
could materially adversely affect our results of operations,
cash flows and financial position. For example:
•
Ethane. Ethane is primarily used in the
petrochemical industry as feedstock for ethylene, one of the
basic building blocks for a wide range of plastics and other
chemical products. If natural gas prices increase significantly
in relation to NGL product prices or if the demand for ethylene
falls (and, therefore, the demand for ethane by NGL producers
falls), it may be more profitable for natural gas producers to
leave the ethane in the natural gas stream to be burned as fuel
than to extract the ethane from the mixed NGL stream for sale as
an ethylene feedstock.
•
Propylene. Propylene is sold to petrochemical
companies for a variety of uses, principally for the production
of polypropylene. Propylene is subject to rapid and material
price fluctuations. Any downturn in the domestic or
international economy could cause reduced demand for, and an
oversupply of propylene, which could cause a reduction in the
volumes of propylene that we transport.
Any
decrease in supplies of natural gas could adversely affect our
business and operating results. Because of the natural decline
in gas production from existing wells, our success depends on
our ability to obtain access to new sources of natural gas,
which is dependent on factors beyond our control.
Over the past two years that have been reported, gas production
from state waters of the Gulf Coast region, which supplies much
of our throughput, has declined an average of approximately
2.9% from 133 Bcf for 2003 to 129 Bcf for 2004,
according to the Energy Information Administration, or EIA. We
cannot give any assurance regarding the gas production
industry’s ability to find new sources of domestic supply.
Production from existing wells and gas supply basins connected
to our pipelines will naturally decline over time, which means
that our cash flows associated with the gathering or
transportation of gas from these wells and basins will also
decline over time. The amount of natural gas reserves underlying
these wells may also be less than we anticipate, and the rate at
which production from these reserves declines may be greater
than we anticipate. Accordingly, to maintain or increase
throughput levels on our pipelines, we must continually obtain
access to new supplies of natural gas. The primary factors
affecting our ability to obtain new sources of natural gas to
our pipelines include:
•
the level of successful drilling activity near our pipelines;
•
our ability to compete for these supplies;
•
our ability to connect our pipelines to the suppliers;
•
the successful completion of new LNG facilities near our
pipelines; and
The level of drilling activity is dependent on economic and
business factors beyond our control. The primary factor that
impacts drilling decisions is the price of oil and natural gas.
These commodity prices reached record levels during 2006, but
current prices have declined in recent months. A sustained
decline in natural gas prices could result in a decrease in
exploration and development activities in the fields served by
our pipelines, which would lead to reduced throughput levels on
our pipelines. Other factors that impact production decisions
include producers’ capital budget limitations, the ability
of producers to obtain necessary drilling and other governmental
permits, the availability and cost of drilling rigs and other
drilling equipment, and regulatory changes. Because of these
factors, even if new natural gas reserves were discovered in
areas served by our pipelines, producers may choose not to
develop those reserves or may connect them to different
pipelines.
Imported LNG is expected to be a significant component of future
natural gas supply to the United States. Much of this increase
in LNG supplies is expected to be imported through new LNG
facilities to be developed over the next decade. Eleven LNG
projects have been approved by the FERC to be constructed in the
Gulf Coast region and an additional four LNG projects have been
proposed for the region. We cannot predict which, if any, of
these projects will be constructed. If a significant number of
these new projects fail to be developed with their announced
capacity, or there are significant delays in such development,
or if they are built in locations where they are not connected
to our systems or they do not influence sources of supply on our
systems, we may not realize expected increases in future natural
gas supply available for transportation through our systems.
If we are not able to obtain new supplies of natural gas to
replace the natural decline in volumes from existing supply
basins, or if the expected increase in natural gas supply
through imported LNG is not realized, throughput on our
pipelines would decline which could have a material adverse
effect on our financial condition, results of operations and
ability to make distributions to you.
In
accordance with industry practice, we do not obtain independent
evaluations of natural gas reserves dedicated to our pipeline
systems, including our South Texas NGL pipeline. Accordingly,
volumes of natural gas gathered on our pipeline systems in the
future could be less than we anticipate, which could adversely
affect our cash flow and our ability to make cash distributions
to unitholders.
In accordance with industry practice, we do not obtain
independent evaluations of natural gas reserves connected to our
pipeline systems due to the unwillingness of producers to
provide reserve information as well as the cost of such
evaluations. Accordingly, we do not have estimates of total
reserves dedicated to our systems (or to processing facilities
such as those serving Enterprise Products Partners in South
Texas) or the anticipated lives of such reserves. If the total
reserves or estimated lives of the reserves connected to our
pipeline systems, particularly in South Texas, is less than we
anticipate and we are unable to secure additional sources of
natural gas, then the volumes of natural gas gathered on our
South Texas NGL and other pipeline systems in the future could
be less than we anticipate. A decline in the volumes of natural
gas gathered on our pipeline systems could have an adverse
effect on our business, results of operations, financial
condition and our ability to make cash distributions to you.
We
will depend in large part on Enterprise Products Partners and
the continued success of its business as we operate our assets
as part of their value chain, and adverse changes in its related
businesses may reduce our revenue, earnings or cash available
for distribution.
We will enter into a number of material contracts with
Enterprise Products Partners and its subsidiaries relating to
transportation, storage and leases, and our cash flows and
financial condition will depend in large part on the continued
success of Enterprise Products Partners as we operate our assets
as part of its value chain. For example, our South Texas NGL
system revenues will depend solely on the volumes processed at
the South Texas facilities owned by Enterprise Products
Partners. Enterprise Products Partners has no obligation to
produce any volumes at these facilities. If anticipated volumes
are not processed by Enterprise Products Partners at these
facilities, our estimated revenues on this system will be
reduced.
Any adverse changes in the business of Enterprise Products
Partners, due to market conditions, sales of assets or
otherwise, or the failure of Enterprise Products Partners to
renew any of its material agreements with
us, could reduce our revenue, earnings or cash available for
distribution. Please read “Certain Relationships and
Related Party Transactions” for a summary of certain of
these agreements.
The
credit and risk profile of our general partner and its owners
could adversely affect our credit ratings and risk profile,
which could increase our borrowing costs or hinder our ability
to raise capital.
The credit and business risk profiles of a general partner or
owners of a general partner may be factors in credit evaluations
of a master limited partnership. This is because the general
partner controls the business activities of the partnership,
including its cash distribution policy and acquisition strategy
and business risk profile. Another factor that may be considered
is the financial condition of our general partner and its
owners, including the degree of their financial leverage and
their dependence on cash flow from the partnership to service
their indebtedness.
If we were to seek a credit rating in the future, our credit
rating may be adversely affected by the leverage of the owners
of our general partner, as credit rating agencies such as
Standard & Poor’s Ratings Services and
Moody’s Investors Service may consider these entities’
leverage because of their ownership interest in and control of
us, the strong operational links between them and their
affiliates and us, and our reliance on Enterprise Products
Partners for a substantial percentage of our revenue. Any such
adverse effect on our credit rating would increase our cost of
borrowing or hinder our ability to raise money in the capital
markets, which would impair our ability to grow our business and
make distributions to unitholders.
Affiliates of Enterprise Products Partners, the indirect owner
of our general partner, have significant indebtedness
outstanding and are dependent principally on the cash
distributions from their general partner and limited partner
interests in Enterprise Products Partners, Enterprise GP
Holdings and TEPPCO Partners to service such indebtedness. Any
distributions by Enterprise Products Partners, Enterprise GP
Holdings and TEPPCO Partners to such entities will be made only
after satisfying their then current obligations to their
creditors. Although we have taken certain steps in our
organizational structure, financial reporting and contractual
relationships to reflect the separateness of us and our general
partner from the entities that control our general partner, and
other entities controlled by Dan L. Duncan, our credit ratings
and business risk profile could be adversely affected if the
ratings and risk profiles of Dan L. Duncan or the entities that
control our general partner were viewed as substantially lower
or more risky than ours.
A
natural disaster, catastrophe or other event could result in
severe personal injury, property damage and environmental
damage, which could curtail our operations and otherwise
materially adversely affect our cash flow and, accordingly,
affect the market price of our common units.
Some of our operations involve risks of personal injury,
property damage and environmental damage, which could curtail
our operations and otherwise materially adversely affect our
cash flow. For example, natural gas facilities operate at high
pressures, sometimes in excess of 1,100 pounds per square inch.
Pipelines may suffer inadvertent damage from construction, and
farm and utility equipment. Virtually all of our operations are
exposed to potential natural disasters, including hurricanes,
tornadoes, storms and floods. The location of our assets and our
customers’ assets in the Gulf Coast region makes them
particularly vulnerable to hurricane risk.
If one or more facilities that we own or that deliver natural
gas or other products to us are damaged by severe weather or any
other disaster, accident, catastrophe or event, our operations
could be significantly interrupted. Similar interruptions could
result from damage to production or other facilities that supply
our facilities or other stoppages arising from factors beyond
our control. These interruptions might involve significant
damage to people, property or the environment, and repairs might
take from a week or less for a minor incident to six months or
more for a major interruption. Any event that interrupts the
revenues generated by our operations, or which causes us to make
significant expenditures not covered by insurance, could reduce
our cash available for paying distributions and, accordingly,
adversely affect the market price of our common units.
EPCO maintains insurance coverage on behalf of us, although
insurance will not cover many types of interruptions that might
occur and will not cover amounts up to applicable deductibles.
As a result of market
conditions, premiums and deductibles for certain insurance
policies can increase substantially, and in some instances,
certain insurance may become unavailable or available only for
reduced amounts of coverage. For example, changes in the
insurance markets subsequent to the terrorist attacks on
September 11, 2001 and the hurricanes in 2005 have made it
more difficult for us to obtain certain types of coverage. As a
result, EPCO may not be able to renew existing insurance
policies on behalf of us or procure other desirable insurance on
commercially reasonable terms, if at all. If we were to incur a
significant liability for which we were not fully insured, it
could have a material adverse effect on our financial position
and results of operations. In addition, the proceeds of any such
insurance may not be paid in a timely manner and may be
insufficient if such an event were to occur.
Our
debt levels may limit our flexibility to obtain additional
financing and pursue other business opportunities.
At the closing of this offering, we expect to have approximately
$200 million of indebtedness outstanding under our credit
agreement and the ability to borrow up to an additional
$100 million, subject to certain conditions and
limitations, under the credit agreement. Our significant level
of indebtedness could have important consequences to us,
including:
•
our ability to obtain additional financing, if necessary, for
working capital, capital expenditures, acquisitions or other
purposes may be impaired or such financing may not be available
on favorable terms;
•
covenants contained in our existing and future credit and debt
arrangements will require us to meet financial tests that may
affect our flexibility in planning for and reacting to changes
in our business, including possible acquisition opportunities;
•
we will need a substantial portion of our cash flow to make
principal and interest payments on our indebtedness, reducing
the funds that would otherwise be available for operation,
future business opportunities and distributions to
unitholders; and
•
our debt level will make us more vulnerable than our competitors
with less debt to competitive pressures or a downturn in our
business or the economy generally.
Our ability to service our indebtedness will depend upon, among
other things, our future financial and operating performance,
which will be affected by prevailing economic conditions and
financial, business, regulatory and other factors, some of which
are beyond our control. If our operating results are not
sufficient to service our current or future indebtedness, we
will be forced to take actions such as reducing distributions,
reducing or delaying business activities, acquisition,
investments or capital expenditures, selling assets,
restructuring or refinancing our indebtedness, or seeking
additional equity capital or bankruptcy protection. We may not
be able to effect any of these remedies on satisfactory terms or
at all.
Our
new revolving credit facility will contain operating and
financial restrictions, including covenants and restrictions
that may be affected by events beyond our control, that may
limit our business and financing activities.
The operating and financial restrictions and covenants in our
credit agreement and any future financing agreements could
restrict our ability to finance future operations or capital
needs or to expand or pursue our business activities. For
example, our new credit agreement will restrict or limit our
ability to:
•
make distributions if any default or event of default occurs;
•
incur additional indebtedness or guarantee other indebtedness;
make any material change to the nature of our business,
including consolidations, liquidations and dissolutions; or
•
enter into a merger, consolidation, sale and leaseback
transaction or sale of assets.
Our ability to comply with the covenants and restrictions
contained in our credit agreement may be affected by events
beyond our control, including prevailing economic, financial and
industry conditions. If market or other economic conditions
deteriorate, our ability to comply with these covenants may be
impaired. If we violate any of the restrictions, covenants,
ratios or tests in our credit agreement, a significant portion
of our indebtedness may become immediately due and payable, and
our lenders’ commitment to make further loans to us may
terminate. We might not have, or be able to obtain, sufficient
funds to make these accelerated payments.
Restrictions
in our revolving credit facility could limit our ability to make
distributions upon the occurrence of certain
events.
Our payment of principal and interest on our debt will reduce
cash available for distributions on our common units. Our new
credit agreement will limit our ability to make distributions
upon the occurrence of the following events, among others:
•
failure to pay any principal, interest, fees, expenses or other
amounts when due;
•
failure of any representation or warranty to be true and correct
in any material respect;
•
failure to perform or otherwise comply with the covenants in the
credit agreement;
•
failure to pay any other material debt;
•
a bankruptcy or insolvency event involving us, our general
partner or any of our subsidiaries;
•
the entry of, and failure to pay, one or more adverse judgments
in excess of a specified amount against which enforcement
proceedings are brought or that are not stayed pending appeal;
•
a change in control of us;
•
a judgment default or a default under any material agreement if
such default could have a material adverse effect on us; and
•
the occurrence of certain events with respect to employee
benefit plans subject to ERISA.
Any subsequent refinancing of our current debt or any new debt
could have similar or more restrictive provisions. For more
information regarding our credit agreement, please read
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources — New Revolving Credit
Facility.”
Increases
in interest rates could materially adversely affect our
business, results of operations, cash flows and financial
condition.
We have significant exposure to increases in interest rates.
After giving effect to this offering and the borrowing of
approximately $200 million under our new credit agreement,
pro forma as of September 30, 2006, we would have
approximately $200 million of consolidated debt, of which
we expect all will be at variable interest rates. As a result,
our results of operations, cash flows and financial condition
could be materially adversely affected by significant increases
in interest rates.
An increase in interest rates may also cause a corresponding
decline in demand for equity investments, in general, and in
particular for yield-based equity investments such as our common
units. Any such reduction in demand for our common units
resulting from other more attractive investment opportunities
may cause the trading price of our common units to decline.
Our
hedging activities may have a material adverse effect on our
earnings, profitability, cash flows, including its ability to
make distributions, and financial condition.
We utilize derivative financial instruments related to the
future price of natural gas and the future price of NGLs with
the intent of reducing volatility in our cash flows due to
fluctuations in commodity prices. While our hedging activities
are designed to reduce commodity price risk, we remain exposed
to fluctuations in commodity prices to some extent. The extent
of our commodity price exposure is related largely to the
effectiveness and scope of our hedging activities. For example,
the derivative instruments we utilize are based on posted market
prices, which may differ significantly from the actual natural
gas prices or NGLs prices that we realize in our operations.
Furthermore, our hedges relate to only a portion of the volume
of our expected sales and, as a result, we will continue to have
direct commodity price exposure to the unhedged portion. Our
actual future sales may be significantly higher or lower than
estimated at the time we entered into derivative transactions
for such period. If the actual amount is higher than estimated,
we will have greater commodity price exposure than intended. If
the actual amount is lower than the amount that is subject to
our derivative financial instruments, we might be forced to
satisfy all or a portion of our derivative transactions without
the benefit of the cash flow from the sale or purchase of the
underlying physical commodity, resulting in a substantial
diminution of liquidity.
As a result of these factors, our hedging activities may not be
as effective as intended in reducing the volatility of our cash
flows, which could adversely affect our ability to make
distributions to unitholders. In addition, our hedging
activities are subject to the risks that a counterparty may not
perform its obligation under the applicable derivative
instrument, the terms of the derivative instruments are
imperfect, and our hedging procedures may not be properly
followed. We cannot assure you that the steps we take to monitor
our derivative financial instruments will detect and prevent
violations of our risk management policies and procedures,
particularly if deception or other intentional misconduct is
involved.
Our
construction of new assets is subject to regulatory,
environmental, political, legal and economic risks, which may
result in delays, increased costs or decreased cash
flows.
One of the connections between our South Texas NGL pipeline and
the Mont Belvieu facility is a pipeline we have leased from
TEPPCO Partners. The initial term of this lease will expire on
September 15, 2007, and if we are unable to construct our
planned replacement pipeline or extend the lease, the operations
of our South Texas NGL pipeline will be interrupted. We cannot
assure you that any construction will not be delayed due to
government permits, weather conditions or other factors beyond
our control.
In addition, one of the ways we intend to grow our business is
through the construction of new midstream energy assets. The
construction of new assets involves numerous operational,
regulatory, environmental, political and legal risks beyond our
control and may require the expenditure of significant amounts
of capital. These potential risks include, among other things,
the following:
•
we may be unable to complete construction projects on schedule
or at the budgeted cost due to the unavailability of required
construction personnel or materials, accidents, weather
conditions or an inability to obtain necessary permits;
•
we will not receive any material increases in revenues until the
project is completed, even though we may have expended
considerable funds during the construction phase, which may be
prolonged;
•
we may construct facilities to capture anticipated future growth
in production in a region in which such growth does not
materialize;
•
since we are not engaged in the exploration for and development
of natural gas reserves, we may not have access to third-party
estimates of reserves in an area prior to our constructing
facilities in the area. As a result, we may make construct
facilities in an area where the reserves are materially lower
than we anticipate;
where we do rely on third-party estimates of reserves in making
a decision to construct facilities, these estimates may prove to
be inaccurate because there are numerous uncertainties inherent
in estimating reserves; and
•
we may be unable to obtain
rights-of-way
to construct additional pipelines or the cost to do so may be
uneconomical.
A materialization of any of these risks could adversely affect
our ability to achieve growth in the level of our cash flows or
realize benefits from expansion opportunities or construction
projects.
We may
not be able to make acquisitions or to make acquisitions on
economically acceptable terms, which may limit our ability to
grow.
We will be limited in our ability to make acquisitions by our
business opportunity agreements with Enterprise Products
Partners and Enterprise GP Holdings. These agreements will
entitle them to take business opportunities for the benefit of
themselves before allowing us to take them. In addition, our
ability to grow depends, in part, on our ability to make
acquisitions that result in an increase in the cash generated
from operations per unit. If we are unable to make these
accretive acquisitions either because we are (1) unable to
identify attractive acquisition candidates or negotiate
acceptable purchase contracts with them, (2) unable to
obtain financing for these acquisitions on economically
acceptable terms, or (3) outbid by competitors, then our
future growth and ability to maintain and increase over time
distributions will be limited.
Acquisitions
that appear to be accretive may nevertheless reduce our cash
from operations on a per unit basis.
Even if we make acquisitions that we believe will be accretive,
these acquisitions may nevertheless reduce our cash from
operations on a per unit basis. Any acquisition involves
potential risks, including, among other things:
•
mistaken assumptions about volumes, revenues and costs,
including synergies;
•
an inability to integrate successfully the businesses we acquire;
•
a decrease in our liquidity as a result of our using a
significant portion of our available cash or borrowing capacity
to finance the acquisition;
•
a significant increase in our interest expense or financial
leverage if we incur additional debt to finance the acquisition;
•
the assumption of unknown liabilities for which we are not
indemnified or for which our indemnity is inadequate;
•
an inability to hire, train or retain qualified personnel to
manage and operate our growing business and assets;
•
limitations on rights to indemnity from the seller;
•
mistaken assumptions about the overall costs of equity or debt;
•
the diversion of management’s and employees’ attention
from other business concerns;
•
unforeseen difficulties operating in new product areas or new
geographic areas; and
•
customer or key employee losses at the acquired businesses.
If we consummate any future acquisitions, our capitalization and
results of operations may change significantly, 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.
Federal,
state or local regulatory measures could materially affect our
business, results of operations, cash flows and financial
condition.
The Surface Transportation Board, or STB, regulates
transportation on interstate propylene pipelines. The current
version of the Interstate Commerce Act, or ICA, and its
implementing regulations give the STB authority to regulate the
rates we charge for service on the propylene pipelines and
generally requires that our rates and practices be just and
reasonable and nondiscriminatory. The rates we charge for
movements on our propylene pipelines may be subject to challenge
and any successful challenge to those rates could adversely
affect our revenues. Our interstate propylene pipelines formerly
were regulated by the FERC, and we cannot guarantee that the
FERC will not reassert jurisdiction over those facilities in the
future.
The intrastate natural gas pipeline transportation services we
provide are subject to various Louisiana state laws and
regulations that apply to the rates we charge and the terms and
conditions of the services we offer. Although state regulation
typically is less onerous than FERC regulation, the rates we
charge and the provision of our services may be subject to
challenge. In addition, the transportation and storage services
furnished by our intrastate natural gas facilities on behalf of
interstate natural gas pipelines or certain local distribution
companies are regulated by the FERC pursuant to Section 311
of the Natural Gas Policy Act of 1978, or NGPA. Pursuant to the
NGPA, we are required to offer those services on an open and
nondiscriminatory basis at a fair and equitable rate. Such
FERC-regulated NGPA Section 311 rates also may be subject
to challenge and successful challenges may adversely affect our
revenues.
Although our natural gas gathering systems are generally exempt
from FERC regulation under the Natural Gas Act of 1938, FERC
regulation still significantly affects our natural gas gathering
business. In recent years, the FERC has pursued pro-competition
policies in its regulation of interstate natural gas pipelines.
If the FERC does not continue this approach, it could have an
adverse effect on the rates we are able to charge in the future.
In addition, the distinction between FERC-regulated transmission
service and federally unregulated gathering services is the
subject of regular litigation, so, in such a circumstance, the
classification and regulation of some of our gathering
facilities may be subject to change based on future
determinations by the FERC and the courts. Additional rules and
legislation pertaining to these matters are considered and
adopted from time to time. We cannot predict what effect, if
any, such regulatory changes and legislation might have on our
operations, but we could be required to incur additional capital
expenditures.
For a general overview of federal, state and local regulation
applicable to our assets, please read “Business —
Regulation of Operations.”
Our
partnership status may be a disadvantage to us in calculating
our cost of service for rate-making purposes.
In May 2005, the FERC issued a policy statement permitting the
inclusion of an income tax allowance in the cost of
service-based rates of a pipeline organized as a tax
pass-through partnership entity to reflect actual or potential
income tax liability on public utility income, if the pipeline
proves that the ultimate owner of its interests has an actual or
potential income tax liability on such income. The policy
statement also provides that whether a pipeline’s owners
have such actual or potential income tax liability will be
reviewed by the FERC on a
case-by-case
basis. In August 2005, the FERC also dismissed requests for
rehearing of its new policy statement. On December 16,2005, the FERC issued its first significant case-specific review
of the income tax allowance issue in another company’s rate
case. The FERC reaffirmed its new income tax allowance policy
and directed the subject pipeline to provide certain evidence
necessary for the pipeline to determine its income tax
allowance. The new tax allowance policy and the December 16
order have been appealed to the United States Court of Appeals
for the District of Columbia Circuit. As a result, the ultimate
outcome of these proceedings is not certain and could result in
changes to the FERC’s treatment of income tax allowances in
cost of service. Depending upon how the policy statement on
income tax allowances is applied in practice to pipelines
organized as pass-through entities, and whether it is ultimately
upheld or modified on judicial review, these decisions might
adversely affect us.
Environmental
costs and liabilities and changing environmental regulation
could materially affect our results of operations, cash flows
and financial condition.
Our operations are subject to extensive federal, state and local
regulatory requirements relating to environmental affairs,
health and safety, waste management and chemical and petroleum
products. These include, for example, (1) the federal Clean
Air Act and comparable state laws and regulations that impose
obligations related to air emissions, (2) the federal
Resource Conservation and Recovery Act, or RCRA, and comparable
state laws that impose requirements for the discharge of waste
from our facilities and (3) the Comprehensive Environmental
Response Compensation and Liability Act of 1980, or CERCLA, also
known as “Superfund,” and comparable state laws that
regulate the clean up of hazardous substances that may have been
released at properties currently or previously owned or operated
by us or locations to which we have sent waste for disposal.
Governmental authorities have the power to enforce compliance
with applicable regulations and permits and to subject violators
to administrative, civil and criminal penalties, including
substantial fines, the imposition of remedial requirements, and
the issuance of orders enjoining future operations. Certain
environmental laws, including CERCLA and analogous state laws
and regulations, impose strict, joint and several liability for
costs required to cleanup and restore sites where hazardous
substances or hydrocarbons have been disposed or otherwise
released. Moreover, third parties, including neighboring
landowners, may also have the right to pursue legal actions to
enforce compliance or to recover for personal injury and
property damage allegedly caused by the release of hazardous
substances, hydrocarbons or other waste products into the
environment.
We will make expenditures in connection with environmental
matters as part of normal capital expenditure programs. However,
future environmental law developments, such as stricter laws,
regulations, permits or enforcement policies, could
significantly increase some costs of our operations, including
the handling, manufacture, use, emission or disposal of
substances and wastes.
Our
pipeline integrity program may impose significant costs and
liabilities on us.
Pursuant to the Pipeline Safety Improvement Act of 2002, the
United States Department of Transportation, or DOT, has adopted
regulations requiring pipeline operators to develop integrity
management programs for transportation pipelines located where a
leak or rupture could do the most harm in “high consequence
areas.” The regulations require operators to:
•
perform ongoing assessments of pipeline integrity;
•
identify and characterize applicable threats to pipeline
segments that could impact a high consequence area;
•
improve data collection, integration and analysis;
•
repair and remediate the pipeline, as necessary; and
•
implement preventive and mitigating actions.
At this time, we cannot predict the ultimate costs of compliance
with this rule because those costs will depend on the number and
extent of any repairs found to be necessary as a result of the
pipeline integrity testing that is required by the rule. We will
continue our pipeline integrity testing programs to assess and
maintain the integrity of our pipelines. The results of these
tests could cause us to incur significant and unanticipated
capital and operating expenditures for repairs or upgrades
deemed necessary to ensure the continued safe and reliable
operation of our pipelines.
We are
subject to strict regulations at many of our facilities
regarding employee safety, and failure to comply with these
regulations could adversely affect our ability to make
distributions to you.
The workplaces associated with our pipelines are subject to the
requirements of the federal Occupational Safety and Health Act,
or OSHA, and comparable state statutes that regulate the
protection of the health and safety of workers. In addition, the
OSHA hazard communication standard requires that we maintain
information about hazardous materials used or produced in our
operations and that we provide this information
to employees, state and local governmental authorities and local
residents. The failure to comply with OSHA requirements or
general industry standards, keep adequate records or monitor
occupational exposure to regulated substances could have a
material adverse effect on our business, financial condition,
results of operations and ability to make distributions to you.
We
depend on Enterprise Products Partners and certain other key
customers for a significant portion of our revenues. The loss of
any of these key customers could result in a decline in our
revenues and cash available to make distributions to
you.
We rely on a limited number of customers for a significant
portion of revenues. For the year ended December 31, 2005
and the nine months ended September 30, 2006, Enterprise
Products Partners and its affiliates accounted for approximately
9% and 12% of our total combined revenues, respectively. We
expect Enterprise Products Partners and its affiliates will
account for an increased percentage of our total revenues after
this offering. In addition, several of our assets will also rely
on only one or two customers for the asset’s cash flow. For
example, the only shipper on our South Texas NGL pipeline is
Enterprise Products Partners; the only customers on our Lou-Tex
Propylene pipeline are ExxonMobil and Shell; the only customer
on our Sabine Propylene pipeline is Shell; and the only shipper
on the pipeline held by Evangeline is Entergy. In order for new
customers to use these pipelines, we or the new shippers would
be required to construct interim pipeline connections.
Our contracts with affiliates include storage leases between
Mont Belvieu Caverns and certain subsidiaries of Enterprise
Products Partners and TEPPCO Partners that will reflect
amendments to prior agreements effective concurrently with the
closing of this offering. The effect of these amendments will be
to decrease the total fees payable to us. Although we believe
the current agreements will generally reflect current market
rates, these agreements will be entered into with affiliates and
not through arms’ length negotiations. Please read
“Certain Relationships and Related Party
Transactions — Related Party Transactions with
Enterprise Products Partners” for a description of our
affiliate contracts.
We may be unable to negotiate extensions or replacements of
these contracts and those with other key customers on favorable
terms. The loss of all or even a portion of the contracted
volumes of these customers, as a result of competition,
creditworthiness or otherwise, could have a material adverse
effect on our financial condition, results of operations and
ability to make distributions to you, unless we are able to
contract for comparable volumes from other customers at
favorable rates.
We are
exposed to the credit risks of our key customers, and any
material nonpayment or nonperformance by our key customers could
reduce our ability to make distributions to our
unitholders.
We are subject to risks of loss resulting from nonpayment or
nonperformance by our customers. Any material nonpayment or
nonperformance by our key customers could reduce our ability to
make distributions to our unitholders. Furthermore, some of our
customers may be highly leveraged and subject to their own
operating and regulatory risks. We generally do not require
collateral for our accounts receivable. If we fail to adequately
assess the creditworthiness of existing or future customers,
unanticipated deterioration in their creditworthiness and any
resulting increase in nonpayment or nonperformance by them could
have a material adverse effect on our business, results of
operations, financial condition and ability to make cash
distributions to you.
We
depend on the leadership and involvement of Dan L. Duncan and
other key personnel for the success of our and our
subsidiaries’ businesses.
We depend on the leadership, involvement and services of Dan L.
Duncan, the founder of EPCO and the Chairman of our general
partner. Mr. Duncan has been integral to the success of
Enterprise Products Partners and the success of EPCO, and will
be integral to our success, due in part to his ability to
identify and develop business opportunities, make strategic
decisions and attract and retain key personnel. The loss of his
leadership and involvement or the services of any members of our
senior management team could have a material adverse effect on
our business, results of operations, cash flows and financial
condition.
Successful
development of LNG import terminals outside our areas of
operations could reduce the demand for our
services.
Development of new, or expansion of existing, LNG facilities
outside our areas of operations could reduce the need for
customers to transport natural gas from supply basins connected
to our pipelines. This could reduce the amount of gas
transported by our pipelines for delivery off-system to other
intrastate or interstate pipelines serving these customers. If
we are not able to replace these volumes with volumes to other
markets or other regions, throughput on our pipelines would
decline which could have a material adverse effect on our
financial condition, results of operations and ability to make
distributions to you.
We do
not own all of the land on which our pipelines and facilities
are located, which could disrupt our operations.
We do not own all of the land on which our pipelines and
facilities are located, and we are therefore subject to the risk
of increased costs to maintain necessary land use. We obtain the
rights to construct and operate certain of our pipelines and
related facilities on land owned by third parties and
governmental agencies for a specific period of time. Our loss of
these rights, through our inability to renew
right-of-way
contracts or otherwise, or increased costs to renew such rights,
could have a material adverse effect on our business, results of
operations, financial condition and ability to make
distributions to you.
Mergers
among our customers or competitors could result in lower volumes
being shipped on our pipelines, thereby reducing the amount of
cash we generate.
Mergers among our existing customers or competitors could
provide strong economic incentives for the combined entities to
utilize systems other than ours and we could experience
difficulty in replacing lost volumes and revenues. Because most
of our operating costs are fixed, a reduction in volumes would
result in not only a reduction of revenues, but also a decline
in net income and cash flow of a similar magnitude, which would
reduce our ability to meet our financial obligations and make
distributions to you.
Because
of our lack of asset and geographic diversification, adverse
developments in our pipeline operations would reduce our ability
to make distributions to our unitholders.
We rely on the revenues generated from our pipelines and related
assets. Furthermore, our assets are concentrated in Texas and
Louisiana. Due to our lack of diversification in asset type and
location, an adverse development in our business or our
operating areas would have a significantly greater impact on our
financial condition and results of operations than if we
maintained more diverse assets and operating areas.
Terrorist
attacks aimed at our facilities or our customers’
facilities could adversely affect our business, results of
operations, cash flows and financial condition.
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 or
pipelines or those of our customers could have a material
adverse effect on our business.
Enterprise
Products Partners, EPCO and their affiliates may compete with
us, and business opportunities may be directed by contract to
those affiliates prior to us under the administrative services
agreement.
Our partnership agreement will not prohibit Enterprise Products
Partners, EPCO and their affiliates, other than our general
partner, from owning and operating natural gas and NGL pipeline
and storage assets or engaging in businesses that otherwise
compete directly or indirectly with us. In addition, Enterprise
Products Partners and EPCO may acquire, construct or dispose of
additional midstream or other natural gas assets in the future,
without any obligation to offer us the opportunity to purchase
or construct any of these assets.
Under the administrative services agreement that we will enter
into at or prior to the closing of this offering, if any
business opportunity, other than a business opportunity to
acquire general partner interests and other related equity
securities in a publicly traded partnership, is presented to
EPCO and its affiliates, us and our general partner, Enterprise
Products Partners and its general partner, or Enterprise GP
Holdings and its general partner, then Enterprise Products
Partners will have the first right to pursue such opportunity
for itself or, in its sole discretion, to affirmatively direct
the opportunity to us. If Enterprise Products Partners abandons
the business opportunity for itself or for us, then Enterprise
GP Holdings will have the second right to pursue such
opportunity. If any business opportunity to acquire general
partner interests and other related equity securities in a
publicly traded partnership is presented, then Enterprise GP
Holdings will have the right to pursue such opportunity before
Enterprise Products Partners is given the opportunity to pursue
it for itself or to direct it to us. Accordingly, we will be
limited by contract in our ability to take certain business
opportunities for our partnership. Please read “Conflicts
of Interest, Business Opportunity Agreements and Fiduciary
Duties.”
Our
general partner and its affiliates own a controlling interest in
us and have conflicts of interest and limited fiduciary duties,
which may permit them to favor their own interests to your
detriment.
Following the offering, Enterprise Products OLP will own
indirectly a 2% general partner interest and directly
approximately 36.0% of our outstanding common units (or
approximately 26.4% of our outstanding common units if the
underwriters’ option to purchase additional common units is
exercised in full) and will own and control our general partner,
which controls us. Although our general partner has a fiduciary
duty to manage us in a manner beneficial to us and our
unitholders, the directors and officers of our general partner
have a fiduciary duty to manage it and our general partner in a
manner beneficial to Enterprise Products Partners and its
affiliates. Furthermore, certain directors and officers of our
general partner may be directors or officers of affiliates of
our general partner. Conflicts of interest may arise between
Enterprise Products Partners and its affiliates, including our
general partner, on the one hand, and us and our unitholders, on
the other hand. As a result of these conflicts, our general
partner may favor its own interests and the interests of its
affiliates over the interests of our unitholders. Please read
“— Our partnership agreement limits our general
partner’s fiduciary duties to unitholders and restricts the
remedies available to unitholders for actions taken by our
general partner that might otherwise constitute breaches of
fiduciary duty.” These potential conflicts include, among
others, the following situations:
•
Enterprise Products Partners, EPCO and their affiliates may
engage in substantial competition with us on the terms set forth
in an amended and restated administrative services agreement.
Please read “— Enterprise Products Partners, EPCO
and their affiliates may engage in competition with us, and
business opportunities may be directed by contract to those
affiliates prior to us under an amended and restated
administrative services agreement.”
•
Neither our partnership agreement nor any other agreement
requires EPCO, Enterprise Products Partners, Enterprise GP
Holdings and TEPPCO Partners or their affiliates (other than our
general partner) to pursue a business strategy that favors us.
Directors and officers of EPCO and the general partners of
Enterprise Products Partners, Enterprise GP Holdings and TEPPCO
Partners and their affiliates have a fiduciary duty to make
decisions in the best interest of their shareholders or
unitholders, which may be contrary to our interests.
•
Our general partner is allowed to take into account the
interests of parties other than us, such as EPCO, Enterprise
Products Partners, Enterprise GP Holdings and TEPPCO Partners
and their affiliates, in resolving conflicts of interest, which
has the effect of limiting its fiduciary duty to our unitholders.
•
Some of the officers of EPCO who provide services to us also may
devote significant time to the business of Enterprise Products
Partners, Enterprise GP Holdings and TEPPCO Partners, and will
be compensated by EPCO for such services.
•
Our partnership agreement limits the liability and reduces the
fiduciary duties of our general partner, while also restricting
the remedies available to our unitholders for actions that,
without these limitations, might constitute breaches of
fiduciary duty. By purchasing common units, unitholders will
be deemed to have consented to some actions and conflicts of
interest that might otherwise constitute a breach of fiduciary
or other duties under applicable law.
•
Our general partner determines the amount and timing of asset
purchases and sales, operating expenditures, capital
expenditures, borrowings, repayments of indebtedness, issuances
of additional partnership securities and cash reserves, each of
which can affect the amount of cash that is available for
distribution to our unitholders.
•
Our general partner determines which costs, including allocated
overhead, incurred by it and its affiliates are reimbursable by
us.
•
Enterprise Products Partners or TEPPCO Partners may propose to
contribute additional assets to us and, in making such proposal,
the directors of those entities have a fiduciary duty to their
unitholders and not to our unitholders.
•
Our partnership agreement does not restrict our general partner
from causing us to pay it or its affiliates for any services
rendered on terms that are fair and reasonable to us or entering
into additional contractual arrangements with any of these
entities on our behalf.
•
Our general partner intends to limit its liability regarding our
contractual obligations.
•
Our general partner may exercise its rights to call and purchase
all of our common units if at any time it and its affiliates own
80% or more of the outstanding common units.
•
Our general partner controls the enforcement of obligations owed
to us by it and its affiliates, including the administrative
services agreement.
•
Our general partner decides whether to retain separate counsel,
accountants or others to perform services for us.
Please read “Certain Relationships and Related Party
Transactions” and “Conflicts of Interest, Business
Opportunity Agreements and Fiduciary Duties.”
We may
be limited in our ability to consummate transactions, including
acquisitions with affiliates of our general
partner.
We will have inherent conflicts of interest with affiliates of
our general partner, including Enterprise Products Partners and
TEPPCO Partners. These conflicts may cause the audit and
conflicts committees of these entities not to approve, or
unitholders of these entities to dispute, any transactions that
may be proposed or consummated between or among us and these
affiliates. This may inhibit or prevent us from consummating
transactions, including acquisitions, with them.
We do
not have any officers or employees and rely solely on officers
of our general partner and employees of EPCO and its
affiliates.
Certain of the executive officers and directors of our general
partner are also officers and/or directors of EPCO, the general
partner of Enterprise GP Holdings, the general partner of
Enterprise Products Partners, the general partner of TEPPCO or
other affiliates of EPCO. These relationships may create
conflicts of interest regarding corporate opportunities and
other matters. The resolution of any such conflicts may not
always be in our or our unitholders’ best interests. In
addition, these overlapping executive officers and directors
allocate their time among EPCO, Enterprise GP Holdings,
Enterprise Products Partners, TEPPCO Partners, us and other
affiliates of EPCO. These officers and directors face potential
conflicts regarding the allocation of their time, which may
adversely affect our business, results of operations and
financial condition.
An
affiliate of Enterprise Products Partners will have the power to
appoint and remove our directors and management.
Because Enterprise Products OLP owns 100% of DEP Holdings, it
will have the ability to elect all the members of the board of
directors of our general partner. Our general partner will have
control over all
decisions related to our operations. Furthermore, the goals and
objectives of Enterprise Products OLP relating to us may not be
consistent with those of a majority of the public unitholders.
Our
general partner has a limited call right that may require you to
sell your common units at an undesirable time or
price.
If at any time our general partner and its affiliates own 80% or
more of the outstanding common units, our general partner will
have the right, which it may assign to any of its affiliates or
to us, but not the obligation, to acquire all, but not less than
all, of the common units held by unaffiliated persons at a price
equal to the greater of:
•
the average of the daily closing prices of the common units over
the 20 trading days preceding the date three days before notice
of exercise of the call right is first mailed and
•
the highest price paid by our general partner or any of its
affiliates for common units during the
90-day
period preceding the date such notice is first mailed.
As a result, you may be required to sell your common units at a
price that is less than the initial offering price in this
offering or, because of the manner in which the purchase price
is determined, at a price less than the then current market
price of the common units. In addition, this call right may be
exercised at an otherwise undesirable time or price and you may
not receive any return on your investment. You may also incur a
tax liability upon a sale of your common units. Our general
partner is not obligated to obtain a fairness opinion regarding
the value of the common units to be repurchased by it upon
exercise of the call right. There is no restriction in our
partnership agreement that prevents our general partner from
issuing additional common units or other equity securities and
exercising its call right. If our general partner exercised its
call right, the effect would be to take us private and, if the
common units were subsequently deregistered, we might no longer
be subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended, or the Exchange Act. Following
this offering, affiliates of our general partner will own
approximately 36.0% of the outstanding common units
(approximately 26.4% of the outstanding common units if the
underwriters exercise their option to purchase additional common
units in full).
For additional information about the call right, please read
“Description of Material Provisions of Our Partnership
Agreement — Limited Call Right.”
Our
partnership agreement limits our general partner’s
fiduciary duties to unitholders and restricts the remedies
available to unitholders for actions taken by our general
partner that might otherwise constitute breaches of fiduciary
duty.
Our partnership agreement contains provisions that reduce the
standards to which our general partner would otherwise be held
by state fiduciary duty law. For example, our partnership
agreement:
•
permits our general partner to make a number of decisions in its
individual capacity, as opposed to in its capacity as our
general partner. This entitles our general partner to consider
only the interests and factors that it desires, and it has no
duty or obligation to give any consideration to any interest of,
or factors affecting, us, our affiliates or any limited partner.
Examples include the exercise of its limited call right, its
rights to vote or transfer the common units it owns, its
registration rights and the determination of whether to consent
to any merger or consolidation of the partnership or amendment
to the partnership agreement;
•
provides in the absence of bad faith by the audit and conflicts
committee or our general partner, the resolution, action or
terms made, taken or provided in connection with a potential
conflict of interest transaction will be conclusive and binding
on all persons (including all partners) and will not constitute
a breach of the partnership agreement or any standard of care or
duty imposed by law;
•
provides the general partner shall not be liable to the
partnership or any partner for its good faith reliance on the
provisions of the partnership agreement to the extent it has
duties, including fiduciary duties, and liabilities at law or in
equity;
generally provides that affiliate transactions and resolutions
of conflicts of interest not approved by the audit and conflicts
committee of the board of directors of our general partner must
be on terms no less favorable to us than those generally
provided to or available from unrelated third parties or be
“fair and reasonable” to us;
•
provides that it shall be presumed that the resolution of any
conflicts of interest by our general partner or the audit and
conflicts committee was not made in bad faith, and in any
proceeding brought by or on behalf of any limited partner or us,
the person bringing or prosecuting such proceeding will have the
burden of overcoming such presumption; and
•
provides that our general partner and its officers and directors
will not be liable for monetary damages to us or our limited
partners for any acts or omissions unless there has been a final
and non-appealable judgment entered by a court of competent
jurisdiction determining that the general partner or those other
persons acted in bad faith or engaged in fraud or willful
misconduct or, in the case of a criminal matter, acted with
knowledge that the conduct was criminal.
By purchasing a common unit, a unitholder will become bound by
the provisions of our partnership agreement, including the
provisions described above. Please read “Description of Our
Common Units — Transfer of Units.”
Unitholders
have limited voting rights and are not entitled to elect our
general partner or its directors, which could lower the trading
price of our common units.
Unlike the holders of common stock in a corporation, unitholders
have only limited voting rights on matters affecting our
business and, therefore, limited ability to influence
management’s decisions regarding our business. Unitholders
will have no right to elect our general partner or its board of
directors on an annual or other continuing basis. The board of
directors of our general partner, including the independent
directors, is chosen entirely by its owners and not by the
unitholders. Furthermore, even if our unitholders were
dissatisfied with the performance of our general partner, they
will, practically speaking, have no ability to remove our
general partner. As a result of these limitations, the price at
which the common units will trade could be diminished because of
the absence or reduction of a control premium in the trading
price.
The vote of the holders of at least
662/3%
of all outstanding common units is required to remove our
general partner. Following the closing of this offering,
Enterprise Products Partners and its affiliates will own
approximately 36.0% of our outstanding common units (or
approximately 26.4% of our outstanding common units if the
underwriters exercise their option to purchase additional common
units in full).
You
will experience immediate and substantial dilution of
$5.64 per unit.
The assumed initial public offering price of $20.00 per
unit exceeds the pro forma net tangible book value of
$14.36 per common unit. Based on this assumed initial
public offering price, you will incur immediate and substantial
dilution of $5.64 per unit. This dilution results primarily
because the assets sold and contributed by our general partner
and its affiliates are recorded at their historical cost, and
not their fair value, in accordance with GAAP. Please read
“Dilution.”
We may
issue additional units without your approval, which would dilute
your ownership interests.
At any time, we may issue an unlimited number of limited partner
interests of any type without the approval of our unitholders.
Our partnership agreement does not give our unitholders the
right to approve our issuance of equity securities ranking
junior to the common units at any time. In addition, our
partnership agreement does not prohibit the issuance by our
subsidiaries of equity securities, which may effectively rank
senior to the common units.
The issuance by us of additional common units or other equity
securities will have the following effects:
•
the ownership interest of unitholders immediately prior to the
issuance will decrease;
•
the amount of cash distributions on each common unit may
decrease;
the relative voting strength of each previously outstanding
common unit may be diminished;
•
the ratio of taxable income to distributions may
increase; and
•
the market price of the common units may decline.
Our
partnership agreement restricts the voting rights of unitholders
owning 20% or more of our common units.
Our partnership agreement restricts unitholders’ voting
rights by providing that any common units held by a person that
owns 20% or more of any class of units then outstanding, other
than our general partner, its affiliates, their transferees and
persons who acquired such units with the prior approval of the
board of directors of our general partner, cannot vote on any
matter. Our partnership agreement also contains provisions
limiting the ability of common unitholders to call meetings or
to acquire information about our operations, as well as other
provisions limiting common unitholders’ ability to
influence the manner or direction of management.
We
have a holding company structure in which our subsidiaries
conduct our operations and own our operating assets, which may
affect our ability to make distributions to you.
We are a partnership holding company and our operating
subsidiaries conduct all of our operations and own all of our
operating assets. We have no significant assets other than the
ownership interests in our subsidiaries and joint ventures. As a
result, our ability to make distributions to our unitholders
depends on the performance of our subsidiaries and joint
ventures and their ability to distribute funds to us. The
ability of our subsidiaries and joint ventures to make
distributions to us may be restricted by, among other things,
the provisions of existing and future indebtedness, applicable
state partnership and limited liability company laws and other
laws and regulations, including FERC policies. For example, all
cash flows from Evangeline are currently used to service its
debt.
Affiliates of Enterprise Products Partners currently own a
minority equity interest in all of our subsidiaries and will
have a right of first refusal to acquire these subsidiaries or
their material assets if we desire to sell them, other than
inventory and other assets sold in the ordinary course of
business. These rights may adversely affect our ability to
dispose of these assets. In addition, our ownership interest in
Mont Belvieu Caverns may be diluted, and the cash flow from
our NGL & Petrochemical Storage Services segment may be
reduced, if we do not contribute our proportionate share of any
future costs to fund expansion projects at Mont Belvieu Caverns.
We do
not have the same flexibility as other types of organizations to
accumulate cash and equity to protect against illiquidity in the
future.
Unlike a corporation, our partnership agreement requires us to
make quarterly distributions to our unitholders of all available
cash reduced by any amounts of reserves for commitments and
contingencies, including capital and operating costs and debt
service requirements. The value of our common units and other
limited partner interests may decrease in direct correlation
with decreases in the amount we distribute per common unit.
Accordingly, if we experience a liquidity problem in the future,
we may not be able to issue more equity to recapitalize.
Cost
reimbursements to EPCO and its affiliates will reduce cash
available for distribution to you.
Prior to making any distribution on the common units, we will
reimburse EPCO and its affiliates for all expenses they incur on
our behalf, including allocated overhead. These amounts will
include all costs incurred in managing and operating us,
including costs for rendering administrative staff and support
services to us, and overhead allocated to us by EPCO. Please
read “Cash Distribution Policy and Restrictions on
Distributions,”“Certain Relationships and Related
Party Transactions” and “Conflicts of Interest,
Business Opportunity Agreements and Fiduciary Duties —
Conflicts of Interest and Business Opportunity Agreements.”
The
payment of these amounts, including allocated overhead, to EPCO
and its affiliates could adversely affect our ability to make
distributions to you.
Unitholders
may not have limited liability if a court finds that unitholder
action constitutes control of our business.
The limitations on the liability of holders of limited partner
interests for the obligations of a limited partnership have not
been clearly established in some of the states in which we do
business. You could have unlimited liability for our obligations
if a court or government agency determined that:
•
we were conducting business in a state, but had not complied
with that particular state’s partnership statute; or
•
your right to act with other unitholders to remove or replace
our general partner, to approve some amendments to our
partnership agreement or to take other actions under our
partnership agreement constituted “control” of our
business.
Please read “Description of Material Provisions of Our
Partnership Agreement — Limited Liability” for a
discussion of the implications of the limitations of liability
on a unitholder.
Unitholders
may have liability to repay distributions.
Under certain circumstances, unitholders may have to repay
amounts wrongfully returned or distributed to them. Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act (the
“Delaware Act”), we may not make a distribution to you
if the distribution would cause our liabilities to exceed the
fair value of our assets. Liabilities to partners on account of
their partnership interests and liabilities that are
non-recourse to the partnership are not counted for purposes of
determining whether a distribution is permitted. Delaware law
provides that for a period of three years from the date of an
impermissible distribution, limited partners who received the
distribution and who knew at the time of the distribution that
it violated Delaware law will be liable to the limited
partnership for the distribution amount. A purchaser of common
units who becomes a limited partner is liable for the
obligations of the transferring limited partner to make
contributions to the partnership that are known to such
purchaser of common units at the time it became a limited
partner and for unknown obligations if the liabilities could be
determined from our partnership agreement.
Our
general partner’s interest in us and the control of our
general partner may be transferred to a third party without
unitholder consent.
Our general partner may transfer its general partner interest to
a third party in a merger or in a sale of all or substantially
all of its assets without the consent of the unitholders.
Furthermore, there is no restriction in our partnership
agreement on the ability of DEP Holdings or Enterprise Products
OLP to transfer their equity interests in our general partner or
our general partner to a third party. The new equity owner of
our general partner would then be in a position to replace the
board of directors and officers of our general partner with
their own choices and to influence the decisions taken by the
board of directors and officers of our general partner.
There
is no existing market for our common units, and a trading market
that will provide you with adequate liquidity may not
develop.
Prior to this offering, there has been no public market for the
common units. After this offering, there will be 13,000,000
publicly traded common units, assuming no exercise of the
underwriters’ option to purchase additional common units.
We do not know the extent to which investor interest will lead
to the development of a trading market or how liquid that market
might be. You may not be able to resell your common units at or
above the initial public offering price. Additionally, the lack
of liquidity may result in wide bid-ask spreads, contribute to
significant fluctuations in the market price of the common units
and limit the number of investors who are able to buy the common
units.
The initial public offering price for the common units will be
determined by negotiations between us and the representatives of
the underwriters and may not be indicative of the market price
of the common units that will prevail in the trading market. The
market price of our common units may decline below the initial
public offering price.
You should read “Material Tax Consequences” for a more
complete discussion of the expected material federal income tax
consequences of owning and disposing of common units.
Our
tax treatment depends on our status as a partnership for federal
income tax purposes, as well as our not being subject to a
material amount of entity-level taxation by individual states.
If the IRS were to treat us as a corporation or if we were to
become subject to a material amount of entity-level taxation for
state tax purposes, then our cash distributions to you would be
substantially reduced.
The anticipated after-tax 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 treated 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%.
Distributions to you would generally be taxed again as corporate
distributions, and no income, gains, losses, deductions or
credits would flow through to you. Because a tax would be
imposed upon us as a corporation, our cash available for
distribution to you would be substantially reduced. Thus,
treatment of us as a corporation would result in a material
reduction in the anticipated cash flow and after-tax return to
you, likely causing a substantial reduction in the value of the
common units.
Current law may change, causing us to be treated as a
corporation for federal income tax purposes or otherwise
subjecting us to a material amount of entity-level taxation. In
addition, because of widespread state budget deficits and other
reasons, several states, including Texas, are evaluating ways to
enhance state-tax collections. For example, our operating
subsidiaries will be subject to a newly revised Texas franchise
tax (the “Texas Margin Tax”) on the portion of their
revenue that is generated in Texas beginning for tax reports due
on or after January 1, 2008. Specifically, the Texas Margin
Tax will be imposed at a maximum effective rate of 0.7% of the
operating subsidiaries’ gross revenue that is apportioned
to Texas. If any additional state were to impose a tax upon us
or the operating subsidiaries as an entity, the cash available
for distribution to you would be reduced.
If the
IRS contests the federal income tax positions we take, the
market for our common units may be adversely impacted, and the
costs of any contest will reduce our cash distributions to
you.
We have not requested any ruling from the IRS with respect to
our treatment as a partnership for federal income tax purposes
or any other matter affecting us. The IRS may adopt positions
that differ from our counsel’s conclusions expressed in
this prospectus. It may be necessary to resort to administrative
or court proceedings to sustain some or all of our
counsel’s conclusions or the positions we take. A court may
not agree with some or all of our counsel’s conclusions or
the positions we take. Any contest with the IRS may materially
and adversely impact the market for our common units and the
price at which they trade. In addition, because the costs of any
contest with the IRS will be borne indirectly by our unitholders
and our general partner, any such contest will result in a
reduction in cash available for distribution.
You
may be required to pay taxes on your share of our income even if
you do not receive any cash distributions from us.
You will be required to pay federal income taxes and, in some
cases, state and local income taxes on your share of our taxable
income, whether or not you receive cash distributions from us.
You may not receive cash distributions from us equal to your
share of our taxable income or even equal to the actual tax
liability that results from your share of our taxable income.
Tax
gain or loss on the disposition of our common units could be
different than expected.
If you sell your common units, you will recognize gain or loss
equal to the difference between the amount realized and your tax
basis in those common units. Prior distributions to you in
excess of the total net taxable income you were allocated for a
common unit, which decreased your tax basis in that common unit,
will, in effect, become taxable income to you if the common unit
is sold at a price greater than your tax basis in that common
unit, even if the price you receive is less than your original
cost. A substantial portion of the amount realized, whether or
not representing gain, may be ordinary income to you.
Tax-exempt
entities and foreign persons face unique tax issues from owning
common units that may result in adverse tax consequences to
them.
Investment in common units by tax-exempt entities, such as
individual retirement accounts (“IRAs”), other
retirement plans, and
non-U.S. persons
raises issues unique to them. For example, virtually all of our
income allocated to organizations that are exempt from federal
income tax, including IRAs and other retirement plans, will be
unrelated business taxable income and will be taxable to them.
Distributions to
non-U.S. persons
will be reduced by withholding taxes at the highest applicable
effective tax rate, and
non-U.S. persons
will be required to file United States federal tax returns and
pay tax on their share of our taxable income. If you are a
tax-exempt entity or a
non-U.S. person
you should consult your tax advisor before investing in our
common units.
We
will treat each purchaser of common units as having the same tax
benefits without regard to the common units purchased. The IRS
may challenge this treatment, which could result in a decrease
in the value of the common units.
Because we cannot match transferors and transferees of common
units, we will adopt depreciation and amortization positions
that may not conform with all aspects of existing Treasury
regulations. A successful IRS challenge to those positions could
decrease the amount of tax benefits available to you. It also
could affect the timing of these tax benefits or the amount of
gain from your sale of common units and could have a negative
impact on the value of our common units or result in audit
adjustments to your tax returns. Please read “Material Tax
Consequences — Uniformity of Units” for a further
discussion of the effect of the depreciation and amortization
positions we will adopt.
The
sale or exchange of 50% or more of our capital and profits
interests will result in the termination of our partnership for
federal income tax purposes.
We will be considered to have terminated for federal income tax
purposes if there is a sale or exchange of 50% or more of the
total interests in our capital and profits within a twelve month
period. Our termination would, among other things, result in the
closing of our taxable year for all unitholders and could result
in a deferral of depreciation deductions allowable in computing
our taxable income. Please read “Material Tax
Consequences — Disposition of Common Units —
Constructive Termination” for a discussion of the
consequences of our termination for federal income tax purposes.
You
may be subject to state and local taxes and return filing
requirements as a result of investing in our common
units.
In addition to federal income taxes, you will likely be subject
to other taxes, such as state and local income taxes,
unincorporated business taxes and estate, inheritance or
intangible taxes that are imposed by the various jurisdictions
in which we do business or own property. You may be required to
file state and local income tax returns and pay state and local
income taxes in some or all of these various jurisdictions.
Further, you may be subject to penalties for failure to comply
with those requirements. We will initially own property or
conduct business in Louisiana and Texas. We may own property or
conduct business in other states or foreign countries in the
future. It is your responsibility to file all federal, state and
local tax returns. Our counsel has not rendered an opinion on
the state and local tax consequences of an investment in our
common units.
We expect to receive net proceeds from this offering of
approximately $243.4 million (based on an assumed offering
price of $20.00 per unit), after deducting underwriting
discounts and commissions and a $1.0 million structuring
fee, but before estimated net expenses associated with the
offering and related formation transactions.
We intend to use the net proceeds from this offering to:
•
distribute approximately $212.3 million to Enterprise
Products OLP as a portion of the cash consideration and
reimbursement for capital expenditures relating to the assets
contributed to us;
•
provide approximately $28.2 million to fund our
66% share of estimated capital expenditures to complete
planned expansions to the South Texas NGL pipeline system and
brine production and above-ground storage projects at Mont
Belvieu subsequent to the closing of this offering; and
•
pay approximately $2.9 million of other estimated net
expenses associated with this offering and related formation
transactions described on page 2.
The portion of net proceeds that we retain to fund planned
expansions (and the amount that we plan to distribute to
Enterprise Products OLP) assumes that, prior to the closing date
of this offering, South Texas NGL and Mont Belvieu Caverns will
have recorded $59 million of a total estimated additional
cost of $101.7 million to complete our acquisition and
construction of the South Texas NGL pipeline system and our
completion of brine production and above-ground storage projects
at Mont Belvieu. The amounts actually distributed or retained at
the closing of this offering will be increased or decreased by
an amount equal to 66% of the difference between:
(1) $101.7 million (the estimated total additional
costs); and
(2)
the actual construction and acquisition costs paid with respect
to (i) the South Texas NGL pipeline (excluding the original
pipeline purchase costs of approximately $97.7 million) and
(ii) the Mont Belvieu brine production and above-ground
storage projects, prior to the contribution of interests in
South Texas NGL and Mont Belvieu Caverns to us at the closing of
this offering.
Of the $59 million in total estimated costs noted above, as
of December 31, 2006, we had recorded $19.6 million of
the estimated additional costs for construction and acquisition
of the South Texas NGL pipeline system and $21.3 million of
the estimated additional costs related to the Mont Belvieu brine
production and above-ground storage projects.
If the offering price is more or less than the assumed
$20.00 per unit price, the amount that we will actually
distribute to Enterprise Products OLP will also be increased or
decreased by all of the difference in such net proceeds from
this offering.
Concurrently with the closing of this offering, we will also
borrow approximately $200 million under our new
$300 million credit agreement. We will distribute
$198.9 million of these borrowings to Enterprise Products
OLP in partial consideration for the assets contributed to us
upon the closing of this offering. For a description of our
credit agreement, please read “Management’s Discussion
and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital
Resources — New Revolving Credit Facility.”
If the underwriters exercise their option to purchase additional
common units, we will use all of the net proceeds from the sale
of those common units to redeem an equal number of common units
from Enterprise Products OLP, which may be deemed a selling
unitholder in this offering. Please read “Selling
Unitholder” and “Security Ownership of Certain
Beneficial Owners and Management.”
the cash and capitalization of our predecessor, Duncan Energy
Partners Predecessor, as of September 30, 2006 on a
combined historical basis;
•
our pro forma cash and capitalization as of September 30,2006, after, giving effect to:
•
the August 2006 purchase of a pipeline by Enterprise Products
Partners for approximately $97.7 million in cash, the
subsequent contribution of this pipeline to South Texas NGL and
the payment of estimated additional costs of $37.7 million
required to modify this pipeline and to acquire and construct
additional pipelines in order to place this pipeline system into
operation in January 2007;
•
the payment of estimated additional costs of $21.3 million
required to expand our Mont Belvieu brine production capacity
and above-ground storage reservoirs;
•
the contribution of a 66% interest in certain entities which are
wholly-owned subsidiaries of Enterprise Products Partners, and
the retention by Enterprise Products Partners of a 34% interest
in these entities;
•
the revision of related party storage contracts between us and
Enterprise Products Partners to (1) increase certain
storage fees paid by Enterprise Products Partners and
(2) reflect the allocation to Enterprise Products Partners
of all storage measurement gains and losses relating to products
under these agreements, and the execution of a limited liability
company agreement for Mont Belvieu Caverns providing for the
special allocation and other agreements relating to other
measurement gains and losses to Enterprise Products
Partners; and
•
the assignment to us of certain third-party agreements that
effectively reduce tariff rates received by us for the transport
of propylene volumes; and
•
our unaudited pro forma, as adjusted cash and capitalization as
of September 30, 2006, after giving effect to the
transactions described above, this offering, the borrowing of
approximately $200 million under a new $300 million
credit agreement by us in connection with our acquisition of
ownership interests in our subsidiaries from Enterprise Products
Partners, and the application of the net proceeds from this
offering and the borrowings as described under “Use of
Proceeds.”
This table is derived from, and should be read together with,
the historical combined financial statements of Duncan Energy
Partners Predecessor and our unaudited pro forma condensed
combined financial information included elsewhere in this
prospectus. You should also read this table in conjunction with
“Summary — Duncan Energy Partners
L.P. — Formation Transactions,”“Use of
Proceeds,” and “Management’s Discussion and
Analysis of Financial Condition and Results of Operations”
included elsewhere in this prospectus.
Represents cash retained for our 66% share of estimated 2007
capital expenditures to complete planned expansions of our South
Texas NGL pipeline and Mont Belvieu brine-related facilities.
Dilution is the amount by which the offering price paid by
purchasers of our common units sold in this offering will exceed
the pro forma net tangible book value per common unit after the
offering. Assuming an initial public offering price of
$20.00 per common unit, on a pro forma basis as of
September 30, 2006, after giving effect to the offering of
13,000,000 common units, our net tangible book value was
$297.5 million, or $14.36 per common unit. This amount
includes equity from new investors of $240.5 million and
the parent’s interest in common units and the general
partner interest of $61.6 million less the
Partnership’s 66% share of intangible assets. Purchasers of
our common units in this offering will experience substantial
and immediate dilution in net tangible book value per common
unit for financial accounting purposes, as illustrated in the
following table.
Assumed initial public offering
price per common unit
$
20.00
Pro forma net tangible book value
per common unit before the offering(1)
$
60.68
Decrease in net tangible book
value per common unit attributable to purchasers in the offering
46.32
Less: Pro forma net tangible book
value per common unit after the offering(2)
14.36
Immediate dilution in net tangible
book value per common unit to purchasers in the offering
$
5.64
(1)
Determined by dividing the net tangible book value of the
contributed net assets of $468.2 million, net of subsidiary
ownership interests retained by parent of $243.6 million,
by the number of common units (7,301,571 common units and the 2%
general partner interest, which has a dilutive effect equivalent
to 414,318 common units) to be issued to our general partner and
its affiliates for their contribution of assets and liabilities
to us. Our general partner’s dilutive effect equivalent was
determined by multiplying the total number of common units
deemed to be outstanding (i.e., the total number of common units
outstanding of 20,301,571 divided by 98%) by our general
partner’s 2% general partner interest.
(2)
Determined by dividing our pro forma net tangible book value of
$297.5 million, which reflects the application of the
assumed net proceeds of this offering, by the total number of
common units (20,301,571 common units and the 2% general partner
interest, which has a dilutive effect equivalent to 414,318
common units) to be outstanding after the offering. The
following table shows our calculation of pro forma net
tangible book value (dollars in thousands):
Pro forma net book value,
including Parent interest
$
302,155
Less: 66% share of intangible
assets attributable to parent’s interest in common units
and the general partner interest and new investors
(4,636
)
Pro forma net tangible book value,
including Parent interest
$
297,519
The following table sets forth the number of common units that
we will issue and the total consideration contributed to us by
our general partner and its affiliates and by the purchasers of
common units in this offering (dollars in thousands):
Common Units
Total
Acquired
Consideration
Number
Percent
Amount
Percent
Parent’s interest in common
units and general partner interest (1)(2)
7,715,889
37.2
%
$
61,635
20.4
%
New investors
13,000,000
62.8
%
240,520
79.6
%
Total
20,715,889
100.0
%
$
302,155
100.0
%
(1)
Upon the consummation of this offering, Enterprise Products OLP
and our general partner will own an aggregate of 7,301,571
common units and a 2% general partner interest having a dilutive
effect equivalent to 414,318 common units.
The assets contributed by Enterprise Products OLP were recorded
at historical cost in accordance with GAAP. Book value of the
consideration provided by our general partner and Enterprise
Products OLP, as of September 30, 2006, after giving effect
to the application of the net proceeds of the offering and the
retention of a 34% equity interest in the contributed
subsidiaries is as follows (dollars in thousands):
Pro forma owners’ net
investment
$
716,465
Less: Payment to Parent from the
net proceeds of the offering and borrowings under the credit
agreement
(411,232
)
Less: Parent retention of 34% of
the equity interests in contributed subsidiaries of the
Partnership
(243,598
)
Total consideration for
Parent’s interest in common units and general partner
interest
$
61,635
For financial reporting purposes, the parent’s retained
interest in the subsidiaries of $243.6 million and the
carryover basis in the common units and the general partner
interest as part of this offering is presented outside the
Partnership equity from the new public investors.
You should read the following discussion of our cash
distribution policy in conjunction with the specific assumptions
included in this section. For detailed information regarding the
factors and assumptions upon which our cash distribution policy
is based, please read “— Assumptions and
Considerations” below. In addition, you should read
“Forward-Looking Statements” and “Risk
Factors” for information regarding statements that do not
relate strictly to historical or current facts and certain risks
inherent in our business.
For additional information regarding our historical and pro
forma financial information, you should refer to the audited
historical combined financial statements of Duncan Energy
Partners Predecessor for the years ended December 31, 2003,
2004 and 2005 and the nine months ended September 30, 2006,
our unaudited historical financial statements for the nine
months ended September 30, 2005, and our unaudited pro
forma condensed combined financial information at
September 30, 2006 and for the year ended December 31,2005 and nine months ended September 30, 2006 included
elsewhere in this prospectus.
Our partnership agreement requires us to distribute all of our
available cash on a quarterly basis. Available cash is defined
to mean generally, for each fiscal quarter, all cash and cash
equivalents on the date of determination of available cash for
such quarter, less the reserves that our general partner
determines are necessary or appropriate to provide for the
conduct of our business, to comply with applicable law, any of
our debt instruments or other agreements or to provide for
future distributions to our unitholders for any one or more of
the upcoming four quarters. We intend to fund a portion of our
capital expenditures with additional borrowings under our new
revolving credit facility or the issuance of additional units.
We may also borrow to make distributions to unitholders, for
example, in circumstances where we believe that the distribution
level is sustainable over the long term, but short-term factors
have caused available cash from operations to be insufficient to
pay the distribution at the current level. Our partnership
agreement will not restrict our ability to borrow to pay
distributions. It is the current policy of the board of
directors of our general partner, however, that we should
maintain or increase our level of quarterly cash distributions
only when, in its judgment, we can sustain such distribution
levels over a long-term period. Our cash distribution policy
reflects a basic judgment that our unitholders will be better
served by us distributing our available cash, after expenses and
reserves, rather than retaining it. Also, because we are not
subject to an entity-level federal income tax, we have more cash
to distribute to you than would be the case if we were subject
to federal income tax.
Restrictions
and Limitations on Cash Distributions and Our Ability to Change
Our Cash Distribution Policy
There is no guarantee that unitholders will receive quarterly
distributions from us. Our distribution policy is subject to
certain restrictions and may be changed at any time, including:
•
Our cash distribution policy will be subject to restrictions on
distributions under our new credit facility. Specifically, our
revolving credit facility contains certain material financial
tests, such as a Consolidated Debt to Consolidated EBITDA ratio,
or leverage ratio, not to exceed 4.75 to 1.00 and a Consolidated
EBITDA to Consolidated Interest Expense ratio, or interest
coverage ratio, of not less than 2.75 to 1.00, and other
covenants that we must satisfy. Should we be unable to satisfy
these restrictions under our revolving credit facility, or if we
otherwise default under our revolving credit facility, we would
be prohibited from making a distribution to you notwithstanding
our stated cash distribution policy. These financial tests and
covenants are described in the prospectus under the caption
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations — Liquidity and
Capital Resources — New Revolving Credit
Facility.”
•
Our general partner will have the authority to establish cash
reserves for the prudent conduct of our business and for future
cash distributions to our unitholders, and the establishment of
those reserves
could result in a reduction in cash distributions to you from
levels we currently anticipate pursuant to our stated cash
distribution policy. Any determination to establish reserves
made by our general partner in the absence of bad faith will be
binding on the unitholders. Over a period of time, if we do not
set aside sufficient cash reserves or make sufficient cash
expenditures to maintain our asset base, we will be unable to
pay distributions at the current level from cash generated from
operations and would therefore expect to reduce our
distributions. We will not be able to increase our current level
of distributions without making accretive acquisitions or
capital expenditures that grow our asset base. A significant
decrease in throughput volumes or in the demand for or
production of hydrocarbon products from current levels would
adversely affect our ability to pay distributions. If our asset
base decreases and we do not reduce our distributions, a portion
of the distributions you receive may be considered a return of
part of your investment in us as opposed to a return on your
investment.
•
While our partnership agreement requires us to distribute all of
our available cash, our partnership agreement, including our
cash distribution policy contained therein, may be amended with
the consent of the general partner and a vote of the holders of
a majority of our common units. Following completion of this
offering, our public unitholders will own 64.0% of our common
units and Enterprise Products Partners (our parent and sponsor)
will own the remainder.
•
Even if our cash distribution policy is not amended, modified or
revoked, the amount of distributions we pay under our cash
distribution policy and the decision to make any distribution is
determined by our general partner, taking into consideration the
terms of our partnership agreement. Enterprise Products OLP owns
our general partner.
•
Under
Section 17-607
of the Delaware Revised Uniform Limited Partnership Act, we may
not make a distribution to our partners if the distribution
would cause our liabilities to exceed the fair value of our
assets.
We may lack sufficient cash to pay distributions to our
unitholders due to a number of factors, including:
•
A reduction in throughput volumes on our pipelines would
decrease our cash receipts from pipeline transportation
revenues, which would reduce cash available to pay distributions.
•
An increase in operating expenses, general and administrative
costs and state and federal income taxes would increase our cash
outlays for such items, which would reduce cash available to pay
distributions.
•
Principal repayments (to the extent not refinanced) and interest
payments on any current or future debt would generally be made
from cash generated by operating activities, which would reduce
cash available to pay distributions.
•
Capital expenditures reduce cash available to pay distributions
to the extent such amounts are funded from cash generated by
operating activities.
•
To the extent not funded by borrowings under our revolving
credit facility, working capital needs for such items as
inventory or prepaid items reduce cash available to pay
distributions.
Please read “Risk Factors” for additional discussion
of these factors.
Our
Ability to Grow Depends on Our Ability to Access External Growth
Capital
Our partnership agreement requires us to distribute all of our
available cash to our unitholders. As a result, we expect to
rely primarily upon external financing sources, including
commercial bank borrowings and the issuance of debt and equity
securities, to fund acquisition capital expenditures. To the
extent we are unable to finance growth externally, our cash
distribution policy will significantly impair our ability to
grow. To the extent we issue additional units in connection with
any acquisitions or other capital expenditures, the payment of
distributions on those additional units may increase the risk
that we will be unable to maintain or increase our per unit
distribution level, which in turn may impact the available cash
that we have to distribute on each unit. There are no
limitations in our partnership agreement or our revolving credit
facility on our ability to issue additional units, including
units ranking senior to the common units. The incurrence of
additional
commercial borrowings or other debt to finance any future growth
would result in increased interest expense, which in turn may
impact the amount of available cash that we have to distribute
to our unitholders.
Upon completion of this offering, the board of directors of our
general partner will adopt a cash distribution policy pursuant
to which we will declare an initial distribution of
$0.40 per unit per quarter (pro rated for the first quarter
during which we are a publicly traded partnership), or
$1.60 per unit per year, to be paid no later than
45 days after the end of each fiscal quarter. This equates
to an aggregate cash distribution of approximately
$8.3 million per quarter, or $33.1 million per year,
based on the units outstanding immediately after completion of
this offering. If the underwriters’ option to purchase
additional units is exercised, an equivalent number of common
units will be redeemed from Enterprise Products OLP.
Accordingly, the exercise of the underwriters’ option to
purchase additional units will not affect the total amount of
units outstanding or the amount of cash needed to pay the
initial distribution rate on all units. Our ability to make cash
distributions at the initial distribution rate pursuant to this
policy will be subject to the factors described above under the
caption “— General — Restrictions
and Limitations on Cash Distributions and Our Ability to Change
Our Cash Distribution Policy.”
As of the date of this offering, our general partner will be
entitled to 2% of all distributions that we make prior to our
liquidation. The general partner’s initial 2% interest in
these distributions may be reduced if we issue additional units
in the future and our general partner does not contribute a
proportionate amount of capital to us to maintain its initial 2%
general partner interest. Our general partner is not obligated
to contribute a proportionate amount of capital to us to
maintain its current general partner interest.
The following table sets forth the estimated aggregate
distribution amounts payable on our common units and general
partner interest during the year following the closing of this
proposed offering at our initial distribution rate of
$0.40 per common unit per quarter (or $1.60 per common
unit on an annualized basis).
Initial Quarterly Distribution
Units
One Quarter
Four Quarters
(Dollars in thousands)
Common units held by parent
(Enterprise Products OLP)
$
2,141
$
8,562
Common units held by public
unitholders (non-parent)
5,980
23,920
General partner interest
166
663
Total
$
8,287
$
33,145
These distributions will not be cumulative. Consequently, if
distributions on our common units are not paid with respect to
any fiscal quarter at the expected initial quarterly
distribution, our unitholders will not be entitled to receive
such payments in the future. We will pay distributions on or
about the 15th of each February, May, August and November
to holders of record on or about the 1st of each such
month. If the distribution date does not fall on a business day,
we will make the distribution on the business day immediately
preceding the indicated distribution date. On or before
May 15, 2007 to the extent we have available cash in
accordance with the terms of our partnership agreement, we will
pay a distribution to our unitholders equal to the initial
quarterly distribution prorated for the portion of the quarter
ending March 31, 2007 that we are public.
We do not have a legal obligation to pay distributions at our
initial distribution rate or at any other rate except as
provided in our partnership agreement. Our distribution policy
is consistent with the terms of our partnership agreement, which
requires that we distribute all of our available cash quarterly.
Under our partnership agreement, available cash is defined to
mean generally, for each fiscal quarter, all cash and cash
equivalents on the date of determination of available cash for
such quarter, less the reserves that our general partner
determines are necessary or appropriate to provide for the
conduct of our business, to comply with applicable law, any of
our debt instruments or other agreements or to provide for
future distributions to our unitholders for any one or more of
the upcoming four quarters.
In the sections that follow, we present in detail the basis for
our belief that we will be able to fully fund our initial
quarterly distribution of $0.40 per common unit per quarter
for the four quarters ending December 31, 2007. In those
sections we present two tables, including:
•
Our “Unaudited Pro Forma Combined Available Cash,” in
which we present the amount of pro forma available cash that we
would have had available for distribution to our limited
partners and parent with respect to the year ended
December 31, 2005 and four quarters ended
September 30, 2006 based on our pro forma financial
statements included in this prospectus. Our calculation of pro
forma available cash in this table should only be viewed as a
general indication of the amount of available cash that we might
have generated had we been in existence in an earlier period.
•
Our “Estimated Cash Available to Pay Distributions,”
in which we present our estimate of available cash to pay
distributions for the four quarters ending December 31,2007, which supports our belief that we will be able to fully
fund our initial annual distribution of $1.60 per common
unit during such period.
If we had completed the transactions contemplated in this
prospectus on January 1, 2005, our pro forma available cash
to pay distributions for the year ended December 31, 2005
would have been $9.9 million. This amount would have been
insufficient by approximately $23.2 million to pay the
initial annual distribution of $33.1 million on all our
common units and general partner interest. Likewise, our pro
forma available cash to pay distributions for the four quarters
ended September 30, 2006 would have been a deficit of
$14.1 million. This amount would have been insufficient by
approximately $47.2 million to pay the initial annual
distribution amount of $33.1 million on all our common
units and general partner interest.
The pro forma financial information does not reflect certain
changes in operating assumptions and expected results that
affect our projections for the four quarters ending
December 31, 2007, including principally:
•
The commencement of operations within our NGL Pipeline Services
segment. The South Texas NGL pipeline became operational in
January 2007 and is expected to generate an additional
$16.4 million of Estimated Consolidated Adjusted EBITDA
during the four quarters ending December 31, 2007. For a
definition of Estimated Consolidated Adjusted EBITDA, please
read “—Estimated Cash Available to Pay
Distributions;” and
•
The funding of growth capital expenditures with sources other
than cash from operations. Because we had no external financing
of capital projects in the year ended December 31, 2005 and
the four quarters ended September 30, 2006, pro forma
available cash was reduced by $19.5 million and
$61.1 million for capital expenditures in those respective
periods. We expect that, in the future, growth capital
expenditures will be funded with sources other than cash from
operations, such as proceeds from this offering, borrowings
under our new revolving credit facility, debt or equity
financings, or contributions from Enterprise Products OLP.
Therefore, we believe that we will have sufficient cash
available to pay quarterly distributions of $0.40 per unit
on all our common units and our general partner interest during
the four quarters ending December 31, 2007. See
“— Assumptions and Considerations” for the
specific assumptions underlying this belief.
The tables used in this section, “Unaudited Pro Forma
Combined Available Cash” and “Estimated Cash Available
to Pay Distributions,” have been prepared by, and are the
responsibility of our management. Our independent registered
public accounting firm has neither examined, compiled or
otherwise applied procedures to such information presented
herein and, accordingly do not express an opinion or any other
form of assurance on such information or its achievability, and
assume no responsibility for, and disclaim any association with
the prospective financial information. Such independent
registered public accounting firm’s reports included
elsewhere in this prospectus relate to the appropriately
described historical financial information. Such reports do not
extend to the tables and related information and should not be
read to do so. In addition, such tables and information were not
prepared with a view toward compliance with published guidelines
of the Securities and Exchange Commission or the guidelines
established by the American Institute of Certified Public
Accountants for preparation and presentation of prospective
financial information, and were not prepared in accordance with
accounting principles generally accepted in the United States of
America nor
The pro forma financial statements, upon which our pro forma
combined available cash for distributions is based, do not
purport to present our results of operations had the
transactions contemplated in this prospectus actually been
completed as of the dates indicated. Furthermore, cash available
for distribution is a cash accounting concept, while our pro
forma financial statements have been prepared on an accrual
basis. We derived the amounts of pro forma combined available
cash for distribution in the manner described in the table
below. As a result, the amount of pro forma combined available
cash for distribution should be viewed as only a general
indication of the amount of cash available for distribution that
we might have generated had we been formed in earlier periods.
The following table illustrates, on a pro forma basis, for the
year ended December 31, 2005 and for the four quarters
ended September 30, 2006, the amount of cash that would
have been available for distribution to the holders of our
common units (including Enterprise Products Partners) and our
general partner assuming that this offering had been consummated
at the beginning of each such period. The pro forma adjustments
in the following table give effect to (i) the contribution
of 66% of the ownership interests in Mont Belvieu Caverns,
Acadian Gas, Sabine Propylene and Lou-Tex Propylene,
(ii) the revision of related party storage contracts with
Enterprise Products Partners, including terms relating to the
allocation of measurement gains and losses, (iii) the
execution of a limited liability company agreement with Mont
Belvieu Caverns providing for special allocations to Enterprise
Products Partners, and (iv) the assignment of certain
third-party propylene transportation agreements, as if they had
occurred at the beginning of the periods presented.
Parent contribution (distribution)
for operating losses(d)
2,122
(49
)
Capital expenditures(i)
(19,472
)
(61,083
)
Pro Forma Combined Available
Cash
$
9,930
$
(14,056
)
Expected Cash
Distributions:
Expected distribution per unit
$
1.60
$
1.60
Distributions to our general
partner
$
663
$
663
Distributions on common units held
by public unitholders (non-parent)
23,920
23,920
Distributions on common units held
by parent
8,562
8,562
Total cash distributions
$
33,145
$
33,145
(Shortfall)
$
(23,215
)
$
(47,201
)
Debt Covenant Ratios
Leverage ratio(j)
5.56
5.07
Interest coverage ratio(j)
2.66
2.91
Notes to “Unaudited Pro Forma Combined Available Cash”
table:
(a)
Reflects historical combined cash provided by operating
activities of Duncan Energy Partners Predecessor for the year
ended December 31, 2005 or derived from such predecessor
information for the four quarters ended September 30, 2006.
(b)
Primarily reflects the historical combined changes in operating
accounts of Duncan Energy Partners Predecessor. Such changes are
generally the result of timing of cash receipts from sales and
cash payments for purchases and other expenses near the end of
each period. We will be able to use borrowings under our new
$300 million revolving credit facility to satisfy
discretionary cash needs for working capital requirements and,
thereby potentially decrease the use of cash flows from
operations to satisfy such
needs. We expect to have $100 million of additional
borrowing capacity under our revolving credit facility
immediately after giving effect to this offering and the
transactions contemplated at the closing. Consequently, we do
not reflect any adjustments to pro forma combined available cash
as a result of working capital components.
(c)
Reflects an increase in related party storage fees charged to
Enterprise Products Partners attributable to its use of the
storage facilities owned by Mont Belvieu Caverns.
(d)
Reflects the allocation to Enterprise Products Partners of
measurement gains and losses relating to products under storage
agreements between Enterprise Products Partners and Mont Belvieu
Caverns and the execution of a limited liability company
agreement with Mont Belvieu Caverns providing for special
allocations to Enterprise Products Partners and other agreements
relating to other measurement gains and losses.
(e)
Reflects a reduction in transportation rates we charge for usage
of the Lou-Tex Propylene and Sabine Propylene pipelines.
(f)
Reflects $2.5 million of our incremental general and
administrative expenses that we expect to incur as a result of
becoming a publicly traded entity. These costs include fees
associated with annual and quarterly reports to unitholders, tax
return and
Schedule K-1
preparation and distribution, investor relations, registrar and
transfer agent fees, incremental insurance costs, accounting and
legal services. These costs also include estimated related party
amounts payable to EPCO in connection with the administrative
services agreement. For additional information regarding the
administrative services agreement, please read “Certain
Relationships and Related Party Transactions —
Administrative Services Agreement.”
(g)
Reflects $13 million of cash interest cost resulting from
an assumed $200 million borrowed at an estimated variable
interest rate of 6.5% per annum under our $300 million
revolving credit facility. If the variable interest rate used to
calculate this interest expense were
1/8%
higher, our annual cash interest cost would increase to
$13.3 million.
(h)
Reflects Enterprise Products Partners contributions to (and
distributions from) subsidiaries. These amounts are net of the
parent’s share of capital expenditures of each subsidiary.
Enterprise Products Partners will own a 34% interest in each of
our subsidiaries and will be allocated a portion of the cash
flows of each subsidiary in accordance with its ownership
percentage. However, the parent’s 34% earnings allocation
with respect to Mont Belvieu Caverns is after a special
allocation by Mont Belvieu Caverns to the parent in an amount
equal to the subsidiary’s net measurement gain or loss each
period. Enterprise Products Partners will receive a cash
distribution from Mont Belvieu Caverns with respect to a net
measurement gain each quarter. Conversely, Enterprise Products
Partners will make a cash contribution to Mont Belvieu Caverns
with respect to a net measurement loss each quarter.
(i)
Reflects actual capital expenditures, net of contributions in
aid of construction costs, for growth and sustaining capital
projects for the periods indicated. The majority of these
capital expenditures were for the construction of additional
brine production capacity at the storage facility owned by Mont
Belvieu Caverns.
(j)
With the exception of meeting the interest coverage ratio for
the pro forma four quarters ending September 30, 2006, we
would not have been in compliance with the expected financial
covenants of our new revolving credit facility. These financial
tests and covenants are described under “Management’s
Discussion and Analysis of Financial Condition and Results of
Operations — Liquidity and Capital
Resources — New Revolving Credit Facility.” The
reason for this compliance shortfall is the lack of pro forma
EBITDA from our South Texas NGL pipeline, which became
operational in January 2007. Prior to the consummation of this
offering, we will enter into a ten-year transportation contract
with Enterprise Products Partners that will include all of the
volumes of NGLs transported on this pipeline system. Please read
“Business — NGL Pipeline Services
Segment — Customer and Related Party Contract”
and “Certain Relationships and Related Party
Transactions — Related Party Transactions with
Enterprise Products Partners.”
In order for us to pay an initial distribution rate of
$0.40 per unit for each quarter in the four quarters ending
December 31, 2007, we must generate at least
$77.1 million in Estimated Consolidated Adjusted EBITDA
during that period. Estimated Consolidated Adjusted EBITDA
should not be viewed as management’s projection of the
actual Consolidated Adjusted EBITDA that we would generate
during the four quarters ending December 31, 2007.
Estimated Consolidated Adjusted EBITDA of $77.1 million is
$23.7 million higher than Pro Forma Consolidated Adjusted
EBITDA for the year ended December 31, 2005 and
$16.3 million higher than Pro Forma Consolidated Adjusted
EBITDA for the four quarters ended September 30, 2006.
Our definition of EBITDA included under
“Summary — Summary Historical and Pro Forma
Financial and Operating Data — Non-GAAP Financial
Measures” differs from “Estimated Consolidated
Adjusted EBITDA.” We define EBITDA as net income or loss
plus interest expense, income taxes, depreciation and
amortization expense. We defined Estimated Consolidated Adjusted
EBITDA as EBITDA before parent interest in earnings. Our
measures of EBITDA and Estimated Consolidated Adjusted EBITDA
should not be considered alternatives to net income, income from
continuing operations, cash flows from operating activities, or
any other measure of financial performance calculated in
accordance with accounting principles generally accepted in the
United States as those items are used to measure operating
performance, liquidity or ability to service debt obligations.
We believe that we will be able to generate sufficient Estimated
Consolidated Adjusted EBITDA to pay our estimated initial
quarterly distribution during each of the four quarters ending
December 31, 2007. In “Assumptions and
Considerations,” we discuss the major assumptions
underlying this belief. We can give you no assurance that our
assumptions will be realized or that we will generate the
Estimated Consolidated Adjusted EBITDA or the expected level of
available cash, in which event we will not be able to pay the
initial quarterly distribution of $1.60 per year on our
units.
When considering our Estimated Consolidated Adjusted EBITDA, you
should keep in mind the risk factors and other cautionary
statements, including those under the headings “Risk
Factors” and “Forward-Looking Statements,”
included in elsewhere in this prospectus. Any of these factors
or the other risks discussed in this prospectus could cause our
financial condition and consolidated results of operations to
vary significantly from those set forth in the table,
“Estimated Cash Available to Pay Distributions.”
As a matter of policy, we do not make public projections
regarding our future sales, earnings, or other results. However,
we have prepared the prospective financial information set forth
below to present the table entitled “Estimated Cash
Available to Pay Distributions.” We do not undertake any
obligation to publicly release the results of any future
revisions we may make to the financial forecast or to update
this financial forecast to reflect events or circumstances after
the date in this prospectus. Therefore, you are cautioned not to
place undue reliance on this information.
In the following table entitled “Estimated Cash Available
to Pay Distributions,” we estimate that our Estimated
Consolidated Adjusted EBITDA will be approximately
$77.1 million for the four quarters ending
December 31, 2007.
Duncan
Energy Partners L.P.
Estimated Cash Available to Pay Distributions
Annualized initial quarterly
distributions per unit
$
1.60
Distributions to our general
partner
$
663
Distributions on common units held
by public unitholders (non-parent)
23,920
Distributions on common units held
by parent
8,562
Total estimated cash distributions
$
33,145
Debt Covenant Ratios
Leverage ratio(d)
4.0
x
Interest coverage ratio(d)
3.9
x
Notes to “Estimated Cash Available to Pay
Distributions” table:
(a)
Reflects $13 million of cash interest cost resulting from
an assumed $200 million borrowed at an estimated variable
interest rate of 6.5% per annum under our new revolving
credit facility. If the variable interest rate used to calculate
this interest expense were 1/8% higher, our annual cash interest
cost would increase to $13.3 million.
(b)
Reflects the cash distributions payable to Enterprise Products
Partners attributable to its interest in our subsidiaries. These
distributions are net of Enterprise Products Partners’
share of projected capital expenditures for each subsidiary.
(c)
In this table, we have included sustaining capital expenditure
estimates for the four quarters ending December 31, 2007.
Sustaining capital expenditures are capital expenditures (as
defined by GAAP) resulting from improvements to and major
renewals of existing assets. Such expenditures serve to maintain
(or sustain) existing operations but do not generate additional
revenues. For purposes of this table, we are assuming that all
of our sustaining capital expenditures for the four quarters
ending December 31, 2007 will be funded with cash flow from
operations. We may, however, borrow under our new revolving
credit facility to fund certain of our sustaining capital
expenditure needs. Borrowings to fund capital expenditures would
result in increased interest expense. This table does not
include $18.9 million net to us for the expansion of the
South Texas NGL pipeline system and $9.3 million net to us
for the expansion of brine production capacity and above-ground
storage reservoirs at Mont Belvieu, which we expect to fund with
proceeds from this offering, any expenditures for the currently
contemplated Mont Belvieu expansion projects, which we expect to
fund with borrowings under our new revolving credit facility,
equity or debt financings, or contributions from Enterprise
Products OLP, or any other growth capital expenditures.
(d)
Based on the terms of our new revolving credit facility, we
believe that we will be in compliance with our financial
covenants during 2007. These financial tests and covenants are
described under “Management’s
Based upon the specific assumptions outlined below with respect
to the four quarters ending December 31, 2007, we expect to
generate cash flow from operations in an amount sufficient to
pay the initial quarterly distribution on all units through
December 31, 2007.
While we believe that these assumptions are reasonable in light
of management’s current expectations concerning future
events, the estimates underlying these assumptions are
inherently uncertain and are subject to significant business,
economic, regulatory, environmental and competitive risks and
uncertainties that could cause actual results to differ
materially from those we anticipate. If our assumptions do not
materialize, the amount of actual cash available to pay
distributions could be substantially less than the amount we
currently estimate and could, therefore, be insufficient to
permit us to pay the full initial quarterly distribution (absent
borrowings under our new revolving credit facility), or any
amount, on all units, in which event the market price of our
units may decline substantially.
Over a period of time, if we do not set aside sufficient cash
reserves or make sufficient cash expenditures to maintain our
asset base, we will be unable to pay distributions at the
current level from cash generated from operations and would
therefore expect to reduce our distributions. We will not be
able to sustain our current level of distributions without
making accretive acquisitions or capital expenditures that
maintain or grow our asset base. Decreases in throughput volumes
or an increase in natural gas prices from current levels will
adversely affect our ability to pay distributions. If our asset
base decreases and we do not reduce our distributions, a portion
of the distributions you receive may be considered a return of
part of your investment in us as opposed to a return on your
investment.
Revenues
The following table shows the selected operating data and
segment revenues that support our Estimated Consolidated
Adjusted EBITDA for the four quarters ending December 31,2007 along with a comparison of historical volumetric and
revenue data underlying our Pro Forma Consolidated Adjusted
EBITDA for the year ended December 31, 2005 and four
quarters ended September 30, 2006.
Operating data presented in the preceding table for the year
ended December 31, 2005 and four quarters ended
September 30, 2006 reflect actual volumes.
(b)
Natural gas throughput represents combined transportation and
sales volumes for the Acadian Gas pipeline system, including our
50% share of Evangeline’s transportation volumes.
Throughput volumes forecast for
2007 on the Acadian Gas system are expected to be
60 billion British thermal units per day, or Bbtu/d, higher
than those posted for the year ended December 31, 2005. The
increase in transportation volumes between the two periods is
primarily due to the addition of new customers and an increase
in transport activity by customers related to pricing
differentials. Throughput volumes for the four quarters ended
December 31, 2007 are based on similar levels realized
during the four quarters ending September 30, 2006.
(c)
The South Texas NGL pipeline became operational in January 2007.
No volumetric data or revenue information is provided for the
year ended December 31, 2005 and four quarters ended
September 30, 2006. The estimated volumes shown in this
table are based on expected production at Enterprise Products
Partners’ Shoup and Armstrong fractionation facilities. We
expect production from these facilities in 2007 to be slightly
higher than production levels in 2006 due to higher processed
gas volumes in the South Texas region.
(d)
We expect petrochemical transportation volumes for the four
quarters ending December 31, 2007 to exceed realized
volumes for the year ended December 31, 2005 and four
quarters ended September 30, 2006. Throughput volumes on
these pipelines were lower following Hurricanes Katrina and Rita
in 2005. The change in revenues between periods is primarily
attributable to the change in volumes.
(e)
The
period-to-period
fluctuation in revenues from our Natural Gas
Pipelines & Services segment is largely due to changes
in the price of natural gas. Revenues from this segment are
primarily generated from the sale of natural gas to customers in
South Louisiana (using industry index prices). The market price
of natural gas, as measured at Henry Hub in Louisiana, averaged
$8.64 per MMBtu and $8.85 per MMBtu for the year ended
December 31, 2005 and four quarters ended
September 30, 2006, respectively. Forecast revenues for the
year ended December 31, 2007 are based on an estimated
natural gas price of $8.20 per MMBtu. As of
December 31, 2006, the Henry Hub spot price for natural gas
was expected (based on an average monthly price of NYMEX futures
for 2007 deliveries) to average $7.07 per MMBtu in 2007.
(f)
Revenues from our NGL & Petrochemical Storage Services
segment for the year ended December 31, 2007 are
$11.4 million higher than those presented for the year
ended December 31, 2005. Revenues for the four quarters
ending December 31, 2007 are $3.3 million higher than
those presented for the four quarters ended September 30,2006. The increase in revenues for the 2007 period relative to
the pro forma periods is primarily due to the renegotiation of
related-party revenue contracts with Enterprise Products
Partners.
Costs
and Expenses
The following table shows the components of costs and expenses
used to determine our Estimated Consolidated Adjusted EBITDA for
the four quarters ending December 31, 2007 along with a
comparison of cost and expense data underlying our Pro Forma
Consolidated Adjusted EBITDA for the year ended
December 31, 2005 and four quarters ended
September 30, 2006.
Pro forma cost and expense data
(dollars in millions):
Cost of natural gas sales(a)
$
836.5
$
920.5
$
706.9
Operating costs and expenses,
excluding non-cash costs(b)
50.0
49.5
59.2
General and administrative costs,
including pro forma incremental public company costs(c)
7.0
5.7
6.5
Total
$
893.5
$
975.7
$
772.6
Notes to “Costs and Expenses” table:
(a)
The
period-to-period
change in the cost of natural gas sales is largely due to
changes in the price of natural gas. We purchase natural gas at
industry index-based prices to satisfy our contractual sales
obligations.
The market price of natural gas, as measured at Henry Hub in
Louisiana, averaged $8.64 per MMBtu and $9.34 per
MMBtu for the year ended December 31, 2005 and four
quarters ended September 30, 2006, respectively. Forecast
revenues for the year ended December 31, 2007 are based on
an estimated natural gas price of $8.20 per MMBtu. As of
December 31, 2006, the Henry Hub spot price for natural gas
was expected (based on an average monthly price of NYMEX futures
for 2007 deliveries) to average $7.07 per MMBtu in 2007.
(b)
We forecast our operating costs and expenses, excluding non-cash
costs, for the four quarters ending December 31, 2007 to
approximate $59.2 million. This amount is $9.2 million
higher than pro forma operating costs and expenses for the year
ended December 31, 2005 and $9.7 million higher than
those for the four quarters ended September 30, 2006. The
2007 period includes $3.7 million of operating costs and
expenses associated with our South Texas NGL pipeline system,
which became operational in January 2007. In addition, forecast
operating costs and expenses for 2007 includes pipeline
integrity-related expenses of $2.8 million, which is
$2 million higher than those recorded for the year ended
December 31, 2005 and $1 million lower than those for
the four quarters ended September 30, 2006.
(c)
Costs and expenses for all periods include the pro forma effect
of $2.5 million of incremental general and administrative
expenses that we expect to incur as a result of becoming a
publicly traded entity. These costs include fees associated with
annual and quarterly reports to unitholders, tax return and
Schedule K-1
preparation and distribution, investor relations, registrar and
transfer agent fees, incremental insurance costs, accounting and
legal services. These costs also include estimated related party
amounts payable to EPCO, Inc. in connection with the
administrative services agreement. For additional information
regarding the administrative services agreement, please read
“Certain Relationships and Related Party
Transactions — Administrative Services
Agreement.” Estimated general and administrative costs for
the four quarters ending December 31, 2007 include
$0.6 million attributed to our South Texas NGL pipeline
system.
Capital
Expenditures
Our capital expenditures consist of sustaining capital
expenditures and those related to growth projects. Sustaining
capital expenditures are capital expenditures (as defined by
GAAP) resulting from improvements to and major renewals of
existing assets. Such expenditures serve to maintain (or
sustain) existing operations but do not generate additional
revenues. Growth capital spending relates to projects that
(i) result in additional revenue streams from existing
assets or (ii) expand our asset base through construction
of new facilities that will generate additional revenue streams.
Combined capital spending, net of contributions in aid of
construction costs, was $19.5 million for the year ended
December 31, 2005 and $61.1 million for the four
quarters ended September 30, 2006. Construction of
additional brine production capacity and above-ground storage
reservoirs at the facility owned by Mont Belvieu Caverns
accounted for $11.4 million and $38.2 million of
capital expenditures for the year ended December 31, 2005
and nine months ended September 30, 2006. All of these
projects are estimated to be completed and placed in service by
the end of the first quarter of 2007. The remainder of combined
capital spending for the year ended December 31, 2005 and
nine months ended September 30, 2006 is attributable to
sustaining capital projects, the majority of which relate to
pipeline integrity projects.
During 2007, we expect that South Texas NGL will make capital
expenditures of $28.6 million to complete planned
expansions (Phase II) to the South Texas NGL pipeline
system. In addition, we expect that Mont Belvieu Caverns will
make additional capital expenditures of $14.1 million to
complete brine production and above-ground storage projects. We
expect to fund our 66% share of these expenditures
(approximately $28.2 million) with proceeds from this
offering. We may also incur $25 million to $75 million
of additional growth capital expenditures in 2007 in connection
with currently contemplated expansion projects at Mont Belvieu
Caverns. We expect to finance any such projects through
borrowings under our new revolving credit facility, the issuance
of debt or additional equity, or contributions from Enterprise
Products OLP. The tables in this section do not reflect these
planned and potential capital expenditures.
Our Estimated Cash Available to Pay Distributions for the four
quarters ending December 31, 2007 includes an anticipated
$5.9 million of sustaining capital expenditures.
Our interest cost reflects $13 million of cash interest
cost resulting from an assumed $200 million borrowed at an
estimated variable interest rate of 6.5% per annum under our new
$300 million revolving credit facility. If the variable
interest rate used to calculate this interest expense were 1/8%
higher, our annual cash interest cost would increase to
$13.3 million.
Supplemental
Forecast Data
Our forecast of total gross operating margin for the four
quarters ending December 31, 2007 is approximately
$83.6 million. A reconciliation of forecast GAAP operating
income for 2007 to forecast non-GAAP gross operating margin in
total is as follows:
Revenues
$
849,692
Costs and expenses:
Cash costs and expenses
772,620
Depreciation and amortization
26,877
Total costs and expenses
799,497
Operating income
50,195
Adjustments to derive non-GAAP
forecast gross operating margin:
Add general and administrative
costs, including pro forma incremental public company costs
6,569
Add non-cash depreciation and
amortization
26,877
Gross operating margin in total
$
83,641
For a description of non-GAAP gross operating margin, please
read “Summary — Summary Historical and Pro Forma
Financial and Operating Data — Non-GAAP Financial
Measures.” On a percentage basis, we expect forecast gross
operating margin by segment for 2007 to approximate 49% for the
NGL and Petrochemical Storage Services segment, 20% for the NGL
Pipeline Services segment, 18% for the Natural Gas Pipelines and
Services segment, and 13% for the Petrochemical Pipeline
Services segment.
Following is a description of the relative rights and
preferences of holders of our common units in and to cash
distributions. The information presented in this section assumes
that our general partner continues to make capital contributions
to Duncan Energy Partners in order to maintain its 2% general
partner interest in Duncan Energy Partners.
General. Within approximately 45 days
after the end of each quarter, commencing with the quarter
ending on March 31, 2007, we will distribute all of our
available cash to unitholders of record on the applicable record
date. We will distribute 98% of our available cash to our common
unitholders, pro rata, and 2% to our general partner. Unlike
many publicly traded limited partnerships, our general partner
is not entitled to any incentive distributions and we do not
have any subordinated units.
Definition of Available Cash. Available cash
is defined in our partnership agreement and generally means,
with respect to any fiscal quarter, all cash and cash
equivalents on the date of determination of available cash for
such quarter:
•
less the amount of cash reserves established by the general
partner:
•
provide for the proper conduct of our business (including
reserves for future capital expenditures and for our future
credit needs);
•
comply with applicable law or any debt instrument or other
agreement; or
•
provide funds for distributions to unitholders and our general
partner in respect of any one or more of the next four quarters.
If we dissolve in accordance with our 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 and the liquidator in the order
of priority provided in our partnership agreement and by law
and, thereafter, we will distribute any remaining proceeds to
our unitholders and our general partner in accordance with their
respective capital account balances as so adjusted.
Manner of Adjustments for Gain. The manner of
the adjustment is set forth in our partnership agreement. Upon
our liquidation, we will allocate any net gain (or unrealized
gain attributable to assets distributed in kind to our partners)
as follows:
•
first, to our general partner and the holders of our
common units having negative balances in their capital accounts
to the extent of and in proportion to such negative
balances; and
•
thereafter, 98% to all of our unitholders, pro rata, and
2% to our general partner.
Manner of Adjustments for Losses. Upon our
liquidation, any loss will generally be allocated to our general
partner and our unitholders as follows:
•
first, 98% to the holders of our common units in
proportion to the positive balances in their respective capital
accounts and 2% to our general partner, until the capital
accounts of our unitholders have been reduced to zero; and
•
thereafter, 100% to our general partner.
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
our unitholders and our general partner in the same manner as
gain or loss is allocated upon liquidation.
Duncan Energy Partners L.P. was formed on September 29,2006; therefore, it does not have any historical financial
statements prior to its formation. The following tables set
forth, for the periods and at the dates indicated, the selected
historical combined financial and operating data of Duncan
Energy Partners Predecessor, which was derived from the books
and records of Enterprise Products Partners.
The selected historical financial data for the nine months
ended September 30, 2006 and for the years ended
December 31, 2005, 2004 and 2003 and combined balance sheet
data at September 30, 2006 and at December 31, 2005
and 2004 is derived from and should be read in conjunction with
the audited combined financial statements of Duncan Energy
Partners Predecessor included elsewhere in this prospectus
beginning on
page F-13.
The selected historical financial data for the nine months ended
September 30, 2005 and combined balance sheet data at
September 30, 2005 is derived from the unaudited condensed
combined financial statements of Duncan Energy Predecessor. The
operating data for all periods are unaudited. The selected
unaudited pro forma combined financial data of Duncan Energy
Partners was derived from and should be read in conjunction with
our unaudited pro forma condensed combined financial statements
included in this prospectus beginning on
page F-2.
The following information should be read together with the
“Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”
Enterprise Products Partners, through its subsidiaries, has
owned controlling interests and operated the underlying assets
of Mont Belvieu Caverns, Acadian Gas, Lou-Tex Propylene and
Sabine Propylene for several years. Enterprise Products Partners
will retain a 34% ownership interest in each of these four
entities (as well as South Texas NGL). Enterprise Products
Partners will own our general partner, DEP Holdings, which owns
a 2% general partner interest in us, and therefore indirectly
has the ability to control us. In addition, Enterprise Products
Partners will own approximately 36.0% of our outstanding common
units after completion of this proposed offering, or
approximately 26.4% of our outstanding common units if the
underwriters exercise their option to purchase additional common
units in full. For financial reporting purposes, the ownership
interests of Enterprise Products Partners are deemed to
represent the parent (or sponsor) interest in our pro forma
results of operations and financial position.
Our selected unaudited pro forma combined financial data gives
effect to the following significant transactions and events:
•
The August 2006 purchase of a pipeline by Enterprise Products
Partners for approximately $97.7 million in cash, the
subsequent contribution of this pipeline to South Texas NGL, and
estimated additional costs of $37.7 million, including
$8 million spent to acquire a pipeline asset from an
affiliate of TEPPCO Partners, to make this system operational in
January 2007. The pro forma financial data does not reflect
estimated additional capital expenditures of $28.6 million
that will be made by South Texas NGL in 2007 to complete planned
expansions to this system. We will retain cash in an amount
equal to our 66% share (approximately $18.9 million) of
these estimated capital expenditures from the net proceeds of
this offering in order to fund our share of the planned
expansion costs. The pro forma combined results of operations
data does not reflect any results attributable to the historical
activities of this pipeline.
•
The expenditure of $21.3 million in connection with the
construction of additional brine production capacity and
above-ground storage reservoirs at Mont Belvieu. The pro forma
financial data does not reflect estimated additional capital
expenditures of $14.1 million that will be made by Mont
Belvieu Caverns subsequent to December 31, 2006 to complete
these projects. We will retain cash in an amount equal to our
66% share (approximately $9.3 million) of these additional
capital expenditures from the net proceeds of this offering in
order to fund our share of the planned expansion costs.
•
The contribution of a 66% interest in each of Mont Belvieu
Caverns, Acadian Gas, Lou-Tex Propylene, Sabine Propylene and
South Texas NGL, all of which are wholly-owned subsidiaries of
Enterprise Products Partners, and the retention of Enterprise
Products Partners of a 34% interest in these entities.
•
The revision of related party storage contracts between us and
Enterprise Products Partners to (1) increase certain
storage fees paid by Enterprise Products Partners and
(2) reflect the allocation to
Enterprise Products Partners of all storage measurement gains
and losses relating to products under these agreements, and the
execution of a limited liability company agreement for Mont
Belvieu Caverns providing for the special allocation and other
agreements relating to other measurement gains and losses to
Enterprise Products Partners.
•
The assignment to us of certain third-party agreements that
effectively reduce tariff rates received by us compared to rates
previously charged by Lou-Tex Propylene and Sabine Propylene to
Enterprise Products Partners for the transport of propylene
volumes.
Our unaudited pro forma, as adjusted financial data also gives
effect to the following:
•
our borrowing of $200 million under a new $300 million
revolving credit facility;
•
our issuance and sale of 13,000,000 common units in this
offering;
•
our payment of estimated underwriting discounts and commissions,
a structuring fee and other offering expenses; and
•
our use of net proceeds from the borrowing and this offering as
consideration for the contributed ownership interests in Mont
Belvieu Caverns, Acadian Gas, Lou-Tex Propylene, Sabine
Propylene and South Texas NGL from Enterprise Products Partners.
The selected unaudited pro forma combined financial data for the
nine months ended September 30, 2006 and for the year ended
December 31, 2005 assume the pro forma transactions noted
herein occurred at the beginning of each period presented or on
September 30, 2006 for the balance sheet data.
The following table presents the selected historical combined
financial and operating data of Duncan Energy Partners
Predecessor and our selected pro forma financial information for
the annual periods indicated (dollars in thousands, except per
unit amounts):
The following table presents the selected historical combined
financial and operating data of Duncan Energy Partners
Predecessor and our pro forma combined financial information for
the interim periods indicated (dollars in thousands, except per
unit amounts):
The non-GAAP financial measures of gross operating margin and
earnings before interest, income taxes, depreciation and
amortization, which we refer to as “EBITDA,” are
presented in the selected historical and pro forma financial
data for Duncan Energy Partners Predecessor. For a description
of the non-GAAP financial measures that we use in this
prospectus and reconciliations of such non-GAAP financial
measures to their most directly comparable financial measure or
measures calculated and presented in accordance with GAAP,
please read “Summary — Summary Historical and Pro
Forma Financial and Operating Data —
Non-GAAP
Financial Measures.”
The following information is provided to highlight significant
trends and other information regarding Duncan Energy Partners
Predecessor’s historical operating results, financial
position and other financial data. Each section below represents
a footnote to the tables above:
(1) We view the combined financial statements of Duncan
Energy Partners Predecessor as the predecessor of the
Partnership, a Delaware limited partnership formed on
September 29, 2006. The financial statements of Mont
Belvieu Caverns, Acadian Gas, Lou-Tex Propylene and Sabine
Propylene combined to create Duncan Energy Partners Predecessor
were derived from the accounts and records of Enterprise
Products Partners, which did not own certain of the businesses
for all periods presented in this “Selected Historical and
Pro Forma Financial and Operating Data” section. As a
result, the selected data reflects the following information:
•
Enterprise Products Partners owned Mont Belvieu Caverns and
Lou-Tex Propylene for all periods presented. Our pro forma
balance sheet data reflects assumed capital expenditures of
$21.3 million by Mont Belvieu Caverns in connection with
the construction of additional brine production capacity and
above-ground storage reservoirs. Our pro forma financial
statements do not reflect estimated additional capital
expenditures of $14.1 million that will be made by Mont
Belvieu Caverns subsequent to December 31, 2006 to complete
these projects. We will retain cash in an amount equal to our
66% share of the additional capital expenditures (approximately
$9.3 million) from the net proceeds of this offering in
order to fund our share of the planned expansion costs.
•
Enterprise Products Partners acquired Acadian Gas in April 2001;
therefore, the selected data includes Acadian Gas from the date
of its acquisition. No financial data was available from the
seller prior to April 2001.
•
Enterprise Products Partners constructed the pipeline owned by
Sabine Propylene and placed it in service in November 2001;
therefore, the selected data includes Sabine Propylene from
November 2001 to present.
•
In August 2006, Enterprise Products Partners purchased
223 miles of NGL pipelines extending from Corpus Christi,
Texas to Pasadena, Texas from ExxonMobil Pipeline Company. The
purchase price for this asset was approximately
$97.7 million. This pipeline system will be contributed to
South Texas NGL (along with others being constructed and to be
acquired) and will be used to transport NGLs from two Enterprise
Products Partners’ facilities located in South Texas to
Mont Belvieu, Texas. The total estimated cost to acquire and
construct the additional pipelines is $66.3 million. Our
pro forma balance sheet data reflects assumed capital
expenditures of $37.7 million, including $8 million
spent to acquire a
10-mile
pipeline from an affiliate of TEPPCO Partners, to make this
system operational in January 2007. We expect that it will cost
an additional $28.6 million to complete planned expansions
of the South Texas NGL pipeline after the closing of this
offering, of which our 66% share will be approximately
$18.9 million. This expenditure is not reflected in the pro
forma financial data because we expect to use cash on hand from
the proceeds of this offering to fund this cost. The pro forma
combined results of operations data does not reflect any results
of operations attributable to the historical activities of the
existing NGL pipelines.
Furthermore, the pro forma adjustments are limited to those
required to present an estimate of owners’ net investment
immediately prior to the Partnership’s initial public
offering.
With respect to the pipeline acquired in August 2006, the seller
has informed us that no discrete and separable financial
information existed for the pipeline, which was comprised of two
separately operated pipelines prior to our purchase. The seller
had previously utilized these pipelines for a different product
and
the pipeline was out of service when we acquired it. With
respect to the
10-mile
pipeline acquired from an affiliate of TEPPCO Partners, this
pipeline was used as a feeder line for NGL products and operated
by different management. We understand no financial statements
information is available for this minor component asset. There
is no meaningful financial data available regarding the prior
use of these pipelines by the sellers that would be meaningful
to our investors. In addition, such data, if available, would
not assist investors in understanding either the evolution of
the business (which is a new NGL transportation network) nor the
track record of management (which will be different).
(2) Duncan Energy Partners Predecessor operated within the
Enterprise Products Partners cash management program for all
periods presented. Cash flows used in financing activities
represent transfers of excess cash from Duncan Energy Partners
Predecessor to Enterprise Products Partners equal to cash
provided by operations less cash used in investing activities.
Conversely, cash flows provided by financing activities
represent contributions from Enterprise Products Partners. These
cash transfers have been reflected in owner’s net
investment.
The historical combined financial statements included in this
prospectus reflect assets, liabilities and operations to be
contributed to us by Enterprise Products Partners L.P. and
various wholly owned subsidiaries upon the closing of this
offering. We refer to these assets, liabilities and operations
as the assets, liabilities and operations of Duncan Energy
Partners Predecessor. The following discussion analyzes the
financial condition and results of operations of Duncan Energy
Partners Predecessor, which reflects ownership of 100% of the
assets, liabilities and operations to be contributed to us.
However, we will only have a 66% interest in the assets,
liabilities and operations being contributed to us, and
Enterprise Products Partners will retain the remaining 34%
interest. You should read the following discussion of the
financial condition and results of operations for Duncan Energy
Partners Predecessor in conjunction with the historical combined
financial statements and notes of Duncan Energy Partners
Predecessor and the unaudited pro forma condensed combined
financial statements for Duncan Energy Partners L.P. included
elsewhere in this prospectus.
We are a Delaware limited partnership formed by Enterprise
Products Partners in September 2006 to own, operate and acquire
a diversified portfolio of midstream energy assets. For the
period discussed below, our operations were organized into the
following three business segments:
•
our NGL & Petrochemical Storage Services segment, which
consists of 33 salt dome caverns located in Mont Belvieu, Texas,
with an underground storage capacity of approximately
100 MMBbls, and certain related assets;
•
our Natural Gas Pipelines & Services segment, which
consists of an onshore natural gas pipeline system that gathers,
transports, stores and markets natural gas in Louisiana;
•
our Petrochemical Pipeline Services segment, which consists of
two petrochemical pipeline systems totaling 284 miles, including
the 263-mile
Lou-Tex Propylene pipeline system and the
21-mile
Sabine Propylene pipeline system; and
Our South Texas NGL pipeline system became operational in
January 2007. This business will be accounted for under a
fourth reporting segment, NGL Pipeline Services. The South Texas
NGL pipeline system consists of a
290-mile
pipeline system used to transport NGLs from two of Enterprise
Products Partners’ facilities located in South Texas to
Mont Belvieu, Texas and related interconnections. The historical
combined financial statements of Duncan Energy Partners
Predecessor do not include any results of operations for this
pipeline segment.
Our operating revenues from each of our segments (other than our
NGL Pipeline Services segment which became operational in
January 2007), and their relative percentages of our total
revenues, consisted of the following (dollars in millions):
Please read “Summary — Summary Historical
and Pro Forma Financial and Operating Data —
Non-GAAP Financial Measures” for a reconciliation of
total segment gross operating margin to operating income.
Our segment operating assets will be held by various
subsidiaries. In connection with this offering, Enterprise
Products OLP will contribute to us equity interests representing
a 66% interest in the following subsidiaries:
•
Mont Belvieu Caverns;
•
Acadian Gas;
•
Sabine Propylene and Lou-Tex Propylene; and
•
South Texas NGL (the assets of which became operational in
January 2007).
NGL & Petrochemical Storage Services
Segment. Our NGL & Petrochemical Storage
Services segment consists of 33 salt dome caverns located in
Mont Belvieu, Texas, with an underground storage capacity of
approximately 100 MMBbls, and certain related assets. These
assets receive, store and deliver NGLs and petrochemical
products for industrial customers located along the upper Texas
Gulf Coast, which has the largest concentration of petrochemical
plants and refineries in the United States.
We charge our customers monthly storage reservation fees to
reserve a specific storage capacity in our underground caverns
to meet their storage requirements. Customers pay reservation
fees based on the quantity of capacity reserved even if that
capacity is not actually utilized. When a customer exceeds its
reserved capacity, we will charge those customers an excess
storage fee. In addition, we charge our customers throughput
fees based on volumes injected and withdrawn from the storage
facility. Lastly, brine production revenues are derived from
customers that use brine in the production of feedstocks for
production of polyvinyl chloride (PVC).
We have a broad range of customers with contract terms that vary
from
month-to-month
to long-term contracts with durations of one to ten years. We
currently offer our customers, in various quantities and at
varying terms, two main types of storage contracts:
•
multi-product fungible storage contracts, which allow customers
to store any combination of fungible products; and
•
segregated product storage contracts, which are available to
customers who desire to store non-fungible products such as
propylene, ethylene and naphtha.
We evaluate pricing, volume and availability for storage on a
case-by-case
basis. Segregated storage allows a customer to reserve an entire
storage cavern and have its own product injected and withdrawn
without having its product commingled.
Natural Gas Pipelines & Services
Segment. Our Natural Gas Pipelines &
Services segment consists of the Acadian Gas system, which is an
onshore natural gas pipeline system that gathers, transports,
stores and markets natural gas in Louisiana. The Acadian Gas
system links natural gas supplies from onshore and offshore Gulf
of Mexico developments (including offshore pipelines,
continental shelf and deepwater production) with local gas
distribution companies, electric generation plants and
industrial customers, including those in the Baton Rouge-New
Orleans-Mississippi River corridor.
Natural gas throughput in our Natural Gas Pipelines &
Services segment consists of a combination of natural gas
marketing sales volumes and transportation volumes delivered on
behalf of third-party shippers, with marketing volumes and
transportation volumes representing approximately 45% and 55%,
respectively, of the average daily gas volumes for the first
nine months of 2006.
In our gas marketing activities, we purchase natural gas
supplies for our gas marketing business under contracts with
quantities and market-based pricing indices that correspond to
the quantities and the pricing indices utilized in our gas sales
activities, thereby limiting our commodity price risk. We do not
enter into
“back-to-back”
agreements in which the terms of any purchase agreement are
matched directly with any sales agreement.
In addition to our gas marketing activities, the Natural Gas
Pipelines & Services segment provides fee-based gas
transportation services for producers and gas marketing
companies under intrastate and Section 311 interruptible
transportation contracts. The primary term of these
transportation service contracts may vary from
month-to-month
to longer-term contracts, with durations typically of one to
three years. The revenues derived from these gas transportation
contracts are based on the quantities of gas delivered
multiplied by the per-unit transportation rate paid.
Our Natural Gas Pipelines & Services segment includes
our indirect ownership of 49.5% of the ownership interests in
the Evangeline pipeline, a
27-mile
pipeline extending from Taft, Louisiana to Westwego, Louisiana.
The Natural Gas Pipelines & Services segment’s
most significant natural gas sales contract is a
21-year
arrangement with Evangeline, which was entered into in 1991, and
includes minimum annual quantities. Evangeline uses these
natural gas volumes to meet its own supply obligation under a
corresponding sales agreement with Entergy Louisiana, its only
customer. We include equity earnings from Evangeline in our
measurement of segment gross operating margin and operating
income. Our equity investments in midstream energy operations,
such as those conducted by Evangeline, are a vital component of
our long-term business strategy and important to the operations
of our Natural Gas Pipelines & Services segment.
Our combined Natural Gas Pipelines & Services segment
revenues and operating costs and expenses are significantly
influenced by changes in natural gas prices. In general, higher
natural gas prices result in increased revenues from the sale of
natural gas; however, these same higher commodity prices also
increase the associated cost of sales as purchase prices rise.
Petrochemical Pipeline Services Segment. Our
Petrochemical Pipeline Services segment consists of two
petrochemical pipeline systems with an aggregate of
284 miles of pipeline. The Lou-Tex Propylene pipeline
system consists of a
263-mile
pipeline used to transport chemical-grade propylene between
Sorrento, Louisiana and Mont Belvieu, Texas. The Sabine
Propylene pipeline system consists of a
21-mile
pipeline used to transport polymer-grade propylene from Port
Arthur, Texas to a pipeline interconnect in Cameron Parish,
Louisiana on a
transport-or-pay
basis.
Shell and ExxonMobil are the only customers that use the Lou-Tex
Propylene pipeline. We have entered into separate product
exchange agreements with Shell and ExxonMobil through which we
agree to receive
propylene product in one location and deliver like product to
another location. The following is a summary of certain terms of
our exchange agreements for the use of the Lou-Tex Propylene
pipeline:
•
Shell Exchange Agreement. This agreement
expires on March 1, 2020, but will continue on an annual
basis subject to termination by either party. The exchange fees
paid by Shell are fixed until such time as a published power
index in Louisiana becomes available and the parties agree to
use such index. Shell is obligated to meet minimum delivery
requirements under this agreement. If Shell fails to meet these
requirements, it will be obligated to pay us a deficiency fee.
•
ExxonMobil Exchange Agreement. This agreement
expires on June 1, 2008, but will continue on a monthly
basis subject to termination by either party. The exchange fees
paid by ExxonMobil are based on the volume of chemical grade
propylene delivered to us.
Shell is the only current customer that uses the Sabine
Propylene pipeline. We are a party to a product exchange
agreement with Shell for the use of the Sabine Propylene
pipeline. This agreement expires on November 1, 2011, but
will continue on an annual basis subject to termination by
either party. The exchange fees paid by Shell are adjusted
yearly based on the U.S. Department of Labor wage index and
the yearly operating costs of the Sabine Propylene pipeline.
Shell is obligated to meet minimum delivery requirements under
this agreement. If Shell fails to meet these minimum delivery
requirements, it will be obligated to pay us a deficiency fee.
NGL Pipeline Services Segment. Our NGL
Pipeline Services segment consists of a
290-mile
pipeline system used to transport NGLs from two Enterprise
Products Partners’ facilities located in South Texas to
Mont Belvieu, Texas and related interconnections. We acquired a
223-mile
segment of the system in August 2006, and we are in the process
of acquiring and constructing other segments of the pipeline
system. The system was placed into operation and began
transporting NGLs in January 2007, after undergoing
modifications, extensions and interconnections. Additional
expansions are scheduled to be completed during the remainder of
2007.
The sole customer of our NGL Pipeline Services segment is
Enterprise Products Partners, which will use the South Texas NGL
pipeline system to ship the following products to Mont Belvieu,
Texas:
•
NGLs processed at its Shoup fractionation plant in Corpus
Christi, Texas;
•
NGLs processed at its Armstrong fractionation plant located near
Victoria, Texas; and
•
NGLs purchased by Enterprise Products Partners from third
parties in South Texas.
Prior to the closing of this offering, we will enter into a
ten-year transportation contract with Enterprise Products
Partners that will include all of the volumes of NGLs
transported on the South Texas NGL pipeline system. Under this
contract, Enterprise Products Partners will pay us a dedication
fee of $0.02 per gallon for all NGLs produced at the Shoup
and Armstrong fractionation plants. This dedication fee is
payable whether or not Enterprise Products Partners ships any
NGLs on the South Texas NGL pipeline system. For the nine months
ended September 30, 2006, the Shoup and Armstrong
fractionation plants collectively produced 65,884 Bbls/d of
NGLs. We will not take title to the products transported on the
South Texas NGL pipeline system; rather, Enterprise Products
Partners will retain title and the associated commodity risk.
Our management uses a variety of financial and operational
measurements to analyze our performance. These measurements
include the following: (1) pipeline volumes, (2) gross
operating margin and (3) EBITDA.
Pipeline Throughput Volumes. We view pipeline
throughput volumes as an important component of maximizing our
profitability. We gather and transport natural gas, NGLs and
propylene under fee-based contracts. Pipeline throughput volumes
from existing wells connected to our pipelines will naturally
decline over time as wells deplete. Accordingly, to maintain or
increase throughput levels on these pipelines, we must
continually obtain new supplies of natural gas. Our ability to
maintain existing supplies of natural gas and NGLs and obtain
new supplies are impacted by (1) the level of workovers or
recompletions of existing
connected wells and successful drilling activity in areas
currently dedicated to our pipelines and (2) our ability to
compete for volumes from successful new wells in other areas. We
regularly monitor producer activity in the areas served by the
Acadian Gas pipeline system, and the areas served by South Texas
NGL pipeline system and Enterprise Products Partners’ Shoup
and Armstrong fractionation facilities. The throughput volumes
of propylene on our Lou-Tex Propylene and Sabine Propylene
pipelines are substantially dependent upon the quantities of
propylene produced at third-party plants that have pipeline
connections with our propylene pipelines.
Gross Operating Margin. We evaluate segment
performance based on gross operating margin, which is a non-GAAP
financial measure. Gross operating margin (either in total or by
individual segment) 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
business segments. We believe that investors benefit from having
access to the same financial measures that our management uses
in evaluating segment results. The most directly comparable GAAP
measure to total segment gross operating margin is operating
income. Our gross operating margin should not be considered as
an alternative to operating income.
We define total (or combined) segment gross operating margin as
operating income before:
•
depreciation, amortization and accretion expense;
•
gains and losses on the sale of assets; and
•
general and administrative expenses.
Gross operating margin is exclusive of other income and expense
transactions, provision for income taxes, minority interest,
extraordinary charges and the cumulative effect of changes in
accounting principles. Gross operating margin by segment is
calculated by subtracting segment operating costs and expenses
(net of the adjustments noted above) from segment revenues, with
both segment totals before the elimination of any intersegment
and intrasegment transactions. Our combined revenues reflect the
elimination of all material intercompany transactions.
We include equity earnings from Evangeline in our measurement of
segment gross operating margin and operating income. This method
of operation enables us to achieve favorable economies of scale
relative to our level of investment and also lowers our exposure
to business risks compared to the profile we would have on a
stand-alone basis. Our equity investments are within the same
industry as our combined operations; therefore, we believe
treatment of earnings from our equity method investee as a
component of gross operating margin and operating income is
appropriate.
Gross operating margin should not be considered an alternative
to, or more meaningful than, net income, operating income, cash
flows from operating activities or any other measure of
financial performance presented in accordance with GAAP. Please
read “Summary — Summary Historical and Pro
Forma Financial and Operating Data —
Non-GAAP Financial Measures.”
EBITDA. We define EBITDA as net income or loss
plus interest expense, provision for income taxes and
depreciation, accretion and amortization expense. EBITDA is
commonly 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:
•
the financial performance of our assets without regard to
financing methods, capital structures or historical cost basis;
•
the ability of our assets to generate cash sufficient to pay
interest cost and support our indebtedness;
•
our operating performance and return on capital as compared to
those of other companies in the midstream energy industry,
without regard to financing and capital structure; and
•
the viability of projects and the overall rates of return on
alternative investment opportunities.
Because EBITDA excludes some, but not all, items that affect net
income or loss and because these measures may vary among other
companies, the EBITDA data presented in this prospectus may not
be comparable to similarly titled measures of other companies.
The GAAP measure most directly comparable to EBITDA is net cash
flows provided by operating activities.
EBITDA should not be considered an alternative to, or more
meaningful than, net income, operating income, cash flows from
operating activities or any other measure of financial
performance presented in accordance with GAAP. Please read
“Summary — Summary Historical and Pro Forma
Financial and Operating Data — Non-GAAP Financial
Measures.”
We believe that current natural gas prices will continue to
cause relatively high levels of natural gas-related drilling in
the United States, including Texas and Louisiana, as producers
seek to increase their level of natural gas production. Although
the number of natural gas wells drilled in the United States has
increased overall in recent years, a corresponding increase in
production has not been realized, primarily as a result of
smaller discoveries and the decline in production from existing
wells. We believe that an increase in United States drilling
activity, additional sources of supply such as liquefied natural
gas, and imports of natural gas will be required for the natural
gas industry to meet the expected increased demand for, and to
compensate for the slowing production of, natural gas in the
United States. A number of the areas in which we operate are
experiencing significant drilling activity as a result of recent
high natural gas prices, increased drilling for deeper natural
gas formations and the implementation of new exploration and
production techniques.
While we anticipate continued high levels of exploration and
production activities in a number of the areas in which we
operate, fluctuations in energy prices can greatly affect
production rates and investments by third parties in the
development of new natural gas reserves. Drilling activity
generally decreases as natural gas prices decrease. We have no
control over the level of drilling activity in the areas of our
operations.
You should read the discussion of our financial condition and
results of operations in conjunction with our historical and pro
forma financial statements included elsewhere in this
prospectus. Our future results could differ materially from our
historical results due to a variety of factors, including the
following:
Partial Ownership of Operating Assets. After
this offering, we will own 66% of the equity interests in the
subsidiaries that hold our operating assets and affiliates of
Enterprise Products Partners will continue to own the remaining
34%. The historical combined financial statements of Duncan
Energy Partners Predecessor were prepared from Enterprise
Products Partners’ separate historical accounting records
related to our operating assets. Accordingly, the discussion
that follows includes 100% of the results of operations for our
operating assets, but in the future we will only have a 66%
interest in those results.
No Historical Results for Our NGL Pipeline Services
Segment. The discussion of our historical results
that follows does not reflect any operations related to our NGL
Pipeline Services segment, which includes a
223-mile
pipeline, a
10-mile
pipeline acquired by an affiliate of Enterprise Products
Partners from an affiliate of TEPPCO Partners for
$8 million and subsequently contributed to us, and a
12-mile
pipeline leased from TEPPCO Partners until planned completion
during the third quarter of 2007 of a parallel pipeline
currently under construction by us. We acquired the
223-mile
pipeline in August 2006, at which time the seller informed us
that no discrete and separable financial information existed for
the pipeline. In addition, the seller had previously utilized
the pipeline for a different product and the pipeline was out of
service when we acquired it. The
10-mile
pipeline acquired by an affiliate of Enterprise Products
Partners from an affiliate of TEPPCO Partners and contributed to
us was used as a feeder line for NGL products and operated by
different management. We understand no financial statement
information is available for this minor component asset. There
is no meaningful financial data available regarding the prior
use of these pipelines by the sellers that would be meaningful
to our investors. In addition, such data, if available, would
not assist investors in understanding either the evolution of
the business (which is a new NGL transportation network) nor the
track record of management (which will be different).
Increase in Outstanding
Indebtedness. Historically, we have not had any
consolidated indebtedness and, therefore, we have not had
consolidated interest expense. We expect to borrow approximately
$200 million under a new revolving credit facility in
connection with this offering, which amount will be paid to
Enterprise Products Partners in connection with its contribution
of our operating assets to us. These additional borrowings are
expected to increase interest expense by approximately
$13 million per year assuming an interest rate of 6.5% and
amortization of debt issuance costs.
Increased Storage Fees. In connection with
this offering, we will increase certain storage fees charged to
Enterprise Products Partners for use of the facilities owned by
Mont Belvieu Caverns. Historically, such intercompany charges
were below market and eliminated in the consolidated revenues
and costs and expenses of Enterprise Products Partners.
Prospectively, such rates will be market-related. The pro forma
increase in storage revenues is $9.8 million for the nine
months ended September 30, 2006 and $11.6 million for
the year ended December 31, 2005.
Special Allocation of Measurement Gains and
Losses. Storage well gains and losses occur when
product movements into a storage well are different from those
redelivered to customers. In general, such variations result
from difficulties in precisely measuring significant volumes of
liquids at varying flow rates and temperatures. It is expected
that substantially all product delivered into storage will be
withdrawn over time. A measurement loss in one period is
expected to be offset by a measurement gain in a subsequent
period, unless product is physically lost in a storage well due
to problems with cavern integrity.
Historically, storage well measurement gains and losses, and
associated reserve accounts, have been included in our financial
statements. Operating costs and expenses reflect well loss
accruals of $3.1 million, $0.6 million and
$2.4 million for the years ended December 31, 2005,
2004 and 2003, respectively, and $0 and $2.5 million for
the nine months ended September 30, 2006 and 2005,
respectively. At September 30, 2006, the financial
statements of Duncan Energy Partners Predecessor included
$1.8 million in a measurement gain and loss reserve account.
In addition, operating gains and losses due to measurement
variances for product movements to and from storage wells
relating primarily to pipeline and well connection activities
are included in our financial statements. Many of our customer
storage arrangements allow us to retain a small amount of liquid
volumes to help offset any measurement losses. These variances
are estimated and settled at current prices each reporting
period as a net credit or charge to operating costs and
expenses. We do not retain volumes in inventory. The net amounts
for each of the years ended December 31, 2005, 2004 and
2003 were a $2.1 million charge, a $0.2 million credit
and a $1.4 million credit, respectively, and a
$1.0 million charge and a $3.2 million charge for the
nine months ended September 30, 2006 and 2005, respectively.
In connection with storage agreements for a variety of products
entered into between Enterprise Products Partners and Mont
Belvieu Caverns effective concurrently with the closing of this
offering, Enterprise Products Partners will agree to the
allocation of all measurement gains and losses relating to these
products.
In addition, the limited liability company agreement for Mont
Belvieu Caverns will specially allocate to Enterprise Products
Partners any items of income and gain or loss and deduction
relating to net measurement losses and measurement gains,
including amounts that Mont Belvieu Caverns may retain or deduct
as handling losses. Enterprise Products Partners will also be
required to contribute cash to Mont Belvieu Caverns, or will be
entitled to receive distributions from Mont Belvieu Caverns,
based on the then-current net measurement gains or measurement
losses. As a result, we will continue to record measurement
gains and losses associated with the operation of our Mont
Belvieu storage facility for parties other than Enterprise
Products Partners after the closing date of this offering on a
combined basis as operating costs and expenses. However, these
measurement gains and losses should not affect our net income or
have a significant impact on us with respect to our cash flows
from operating activities and, accordingly, no reserve account
will be established by us for measurement losses on our balance
sheet.
We will be responsible for product losses attributable to cavern
integrity events. During the three years ended December 31,2005 and nine months ended September 30, 2006, we did not
experience any significant physical loss of product due to a
loss of cavern integrity.
Decrease in Propylene Transportation
Rates. The transportation rates that we receive
for our Lou-Tex Propylene pipeline and our Sabine Propylene
pipeline for periods after our initial public offering will be
lower than our historical transportation rates. Historically,
Enterprise Products Partners was the shipper of record, and we
charged it the maximum tariff rate for using these assets.
Enterprise Products Partners then contracted with third parties
to ship volumes on these pipelines under exchange agreements. In
general, the revenues recognized by Enterprise Products Partners
in connection with these exchange agreements were less than the
maximum tariff rate it paid us. In connection with this
offering, Enterprise Products Partners will assign its exchange
agreements to us. Accordingly, the transportation rates we
receive for use of our Lou-Tex Propylene pipeline and Sabine
Propylene pipeline will be less than the historical rates that
we received from Enterprise Products Partners. The pro forma
reduction in revenues was $16.5 million for the
nine months ended September 30, 2006 and
$18.4 million for the year ended December 31, 2005.
Additional General and Administrative
Expenses. We expect to incur approximately $2.5
million in incremental general and administrative expenses as a
result of becoming a publicly traded entity. These costs include
fees associated with annual and quarterly reports to
unitholders, tax returns and
Schedule K-1
preparation and distribution, investor relations, registrar and
transfer agent fees, incremental insurance costs, accounting and
legal services. These costs also include estimated related party
amounts payable to EPCO in connection with the administrative
services agreement. For additional information regarding the
administrative services agreement, please read “Certain
Relationships and Related Party Transactions —
Administrative Services Agreement.”
Combined Revenues. Combined revenues for the
first nine months of 2006 were $740.1 million compared to
$649.4 million for the first nine months of 2005. The
period-to-period
increase in combined revenues is primarily due to a
$79.9 million increase in revenues associated with natural
gas marketing activities, which benefited from higher natural
gas sales volumes and prices. In addition, revenues from the
NGL & Petrochemical Storage Services segment increased
$6.8 million
period-to-period
primarily due to higher storage volumes.
Combined Costs and Expenses. Combined
operating costs and expenses were $698 million for the
first nine months of 2006 compared to $614.3 million for
the first nine months of 2005. The
period-to-period
increase in costs and expenses is primarily due to an
$84 million increase in purchase costs associated with our
natural gas marketing activities. General and administrative
costs decreased $1.3 million
period-to-period.
Changes in our combined revenues and costs and expenses
period-to-period
are explained in part by changes in energy commodity prices. In
general, higher natural gas prices result in an increase in our
combined revenues attributable to the sale of natural gas by
Acadian Gas; however, these same commodity prices also increase
the associated cost of sales as purchase prices rise. The Henry
Hub market price of natural
gas averaged $7.47 per MMBtu for the first nine months of
2006 versus $7.18 per MMBtu for the first nine months of
2005.
To a lesser extent, changes in our revenues and costs and
expenses are attributable to demand for NGL and petrochemical
storage services and activity on our propylene pipelines. Demand
for storage services affects the reservation, excess storage and
throughput fees earned by our NGL and petrochemical storage
business. In turn, demand for our storage services is driven by
such factors such as demand for petrochemical feedstocks by the
petrochemical industry and the quantity of NGLs extracted from
natural gas streams at regional gas processing facilities.
Segment Results. The following information
highlights significant
period-to-period
variances in gross operating margin by business segment.
Gross operating margin from the NGL & Petrochemical
Storage Services segment was $15.1 million for the first
nine months of 2006 compared to $7.8 million for the first
nine months of 2005. Revenues increased $6.8 million
period-to-period
primarily due to (i) higher excess storage and throughput
fees and (ii) brine production revenues. Operating costs
and expenses decreased $0.5 million
period-to-period
attributable to reduced measurement losses in 2006 compared to
2005, which were partially offset by higher utility and
maintenance costs.
Storage revenues for the first nine months of 2006 were
$5.5 million higher than the first nine months of 2005
primarily due to an increase in excess storage and throughput
fees. These fees were higher
period-to-period
due to an increase in storage volumes. We attribute the increase
in storage volumes to strong demand for petrochemical feedstocks
by the petrochemical industry and improved NGL processing
economics. Strong NGL processing economics in recent years have
increased the quantity of NGLs extracted from natural gas
streams at regional gas processing facilities, which increases
the demand for storage services. Also, brine production revenues
increase $1.2 million
period-to-period,
which reflects contractual changes made to the sales agreements
with our customers during 2006.
Gross operating margin from the Natural Gas Pipelines &
Services segment was $17.1 million for the first nine
months of 2006 versus $19.7 million for the first nine
months of 2005. Natural gas transportation volumes increased to
773 Bbtu/d during the first nine months of 2006 from 657 Bbtu/d
during the same period in 2005. Gross operating margin decreased
$2.6 million
period-to-period
primarily due to lower margins on natural gas sales during the
first nine months of 2006 relative to the same period of 2005.
Also, gross operating margin for the first nine months of 2006
includes a $2.3 million benefit from the collection of a
contingent asset related to a prior business acquisition. Equity
earnings from our investment in Evangeline increased
$0.3 million
period-to-period.
We realized higher natural gas sales margins during the first
nine months of 2005, as compared to the same period in 2006,
primarily due to the effects of Hurricane Katrina. This
hurricane impacted supply and demand for natural gas, NGLs,
crude oil and motor gasoline. In general, this resulted in an
increase in energy commodity prices, which was exacerbated in
certain regions due to local supply and demand imbalances. Our
natural gas sales margins, subsequent to Hurricane Katrina,
benefited from increased regional demand for natural gas and the
general increase in commodity prices.
Gross operating margin from the Petrochemical Pipeline Services
segment was $26.1 million for the first nine months of 2006
compared to $22.1 million for the first nine months of
2005. Petrochemical transportation volumes were 36 MBPD
during the first nine months of 2006 versus 34 MBPD during
the 2005 period. Transportation revenues increased
$3.1 million
period-to-period
primarily due to higher transportation volumes and a higher
average transportation fee on our Lou-Tex Propylene pipeline.
Operating costs and expenses decreased $0.9 million
period-to-period
primarily due to a reduction in property taxes associated with
the Lou-Tex Propylene pipeline. During 2006, we successfully
negotiated a lower property tax rate with the Louisiana state
taxing authority, which we estimate will provide an annual
benefit of approximately $1.9 million in 2006.
The Lou-Tex Propylene pipeline transports chemical-grade
propylene from multiple receipt points to multiple delivery
points. The contractual transportation fee we charge our
customers is based upon the
distance that product moves through the Lou-Tex Propylene
pipeline. During the first nine months of 2006 compared to the
same period of 2005, we earned a higher average transportation
fee due to our customers’ election to move chemical-grade
propylene over a greater distance through the Lou-Tex Propylene
pipeline.
Combined Revenues. Combined revenues for 2005
were $953.4 million compared to $748.9 million for
2004. The
year-to-year
increase in combined revenues is primarily due to higher natural
gas sales prices during 2005 relative to 2004, which accounted
for a $208.2 million increase in combined revenues
associated with natural gas marketing activities.
Combined Costs and Expenses. Combined
operating costs and expenses for 2005 were $909 million
compared to $685.5 million for 2004. The
year-to-year
increase in costs and expenses is primarily due to an increase
in the cost of sales associated with natural gas marketing
activities. Such costs increased $213 million
year-to-year
as a result of higher natural gas prices. General and
administrative costs decreased $1 million
year-to-year.
Changes in our combined revenues and costs and expenses
period-to-period
are explained in part by changes in energy commodity prices. In
general, higher natural gas prices result in an increase in our
combined revenues attributable to the sale of natural gas by
Acadian Gas; however, these same commodity prices also increase
the associated cost of sales as purchase prices rise. The Henry
Hub market price of natural gas averaged $8.64 per MMBtu
during 2005 versus $6.13 per MMBtu during 2004.
Other Income (Expense), Net. The amount in
2005 relates to interest accrued on potential assessments
related to a state sales tax dispute.
Segment Results. The following information
highlights significant
year-to-year
variances in gross operating margin by business segment:
Gross operating margin from the NGL & Petrochemical
Storage Services segment was $16.6 million for 2005
compared to $19.8 million for 2004. Revenues increased
$3.3 million
year-to-year
primarily due to higher excess storage and throughput fees.
These fees were higher in 2005 compared to 2004 due an increase
in storage volumes, which resulted from strong demand for
petrochemical feedstocks by the petrochemical industry and
improved NGL processing economics. The $3.3 million
increase in revenues was offset by a $6 million
year-to-year
increase in operating costs and expenses primarily due to higher
utility costs and higher measurement losses recognized in 2005.
Historically, operating costs and expenses of our NGL and
petrochemical storage business have been affected each period by
measurement gains and losses. Operating costs and expenses
reflect measurement losses of $5.2 million for 2005
compared to losses of $0.4 million for 2004. Prospectively,
effective concurrent with the closing of this offering, we will
specifically allocate to Enterprise Products Partners any items
of income and gain or loss and deduction relating to net
measurement gains and losses. Accordingly, in the future, these
measurement gains and losses should not affect our net income or
have a significant impact on us with respect to our cash flows
or operating activities.
Gross operating margin from the Natural Gas Pipelines &
Services segment was $18.9 million for 2005 compared to
$25.3 million for 2004. Natural gas throughput was 640
Bbtu/d during 2005 compared to 645 Bbtu/d during 2004. Gross
operating margin decreased $6.4 million
year-to-year
primarily due to lower margins on natural gas sales during 2005
relative to 2004. In general, Acadian Gas purchases natural gas
at prices that are based upon the Henry Hub index. In turn,
Acadian Gas generally wholesales natural gas to its customers at
the Henry Hub price plus a contractual margin. Acadian Gas’
natural gas sales contract with Evangeline contains a provision
whereby a portion of the contractual margin is determined
through a comparison of (i) Acadian Gas’s annual
weighted average natural gas purchase cost to (ii) a
benchmark determined by reference to a weighted average grouping
of natural gas market indices. As a result of this benchmarking
mechanism, we realized $4.8 million in higher natural gas
sales margins in 2004 relative to 2005. In addition, operating
costs and expenses increased $1.7 million
year-to-year
primarily due to higher
sales tax and pipeline integrity costs during 2005 as compared
to 2004. Equity earnings from our investment in Evangeline
increased $0.1 million
year-to-year.
Gross operating margin from the Petrochemical Pipeline Services
segment was $28.6 million for 2005 compared to
$36.9 million for 2004. Petrochemical transportation
volumes decreased to 33 MBPD during 2005 from 39 MBPD
during 2004. Gross operating margin decreased $8.3 million
year-to-year
primarily due to reduced transportation volumes on our Lou-Tex
Propylene pipeline. Lower transportation volumes accounted for
$6.8 million of the
year-to-year
decrease in gross operating margin. In addition, operating costs
and expenses increased $1.1 million
year-to-year
primarily due to higher pipeline integrity costs during 2005
compared to 2004.
Cumulative Effect of Change in Accounting
Principle. Net income for 2005 includes a
$0.6 million noncash charge for the cumulative effect of
change in accounting principle related to asset retirement
obligations. For additional information regarding this
accounting change, please read “— Other
Items” below.
Combined Revenues. Combined revenues were
$748.9 million for 2004 compared to $668.2 million for
2003. The
year-to-year
increase is primarily due to higher natural gas sales prices
during 2004 relative to 2003, which accounted for an
$80.5 million increase in combined revenues associated with
natural gas marketing activities.
Combined Costs and Expenses. Combined
operating costs and expenses were $685.5 million for 2004
compared to $609.8 million for 2003. The
year-to-year
increase in costs and expenses is primarily due to an increase
in the cost of sales associated with natural gas marketing
activities. Such costs increased $76.8 million
year-to-year
primarily due to higher natural gas prices. General and
administrative costs decreased $0.7 million
year-to-year.
Changes in our combined revenues and costs and expenses
period-to-period
are explained in part by changes in energy commodity prices. In
general, higher natural gas prices result in an increase in our
combined revenues attributable to the sale of natural gas by
Acadian Gas; however, these same commodity prices also increase
the associated cost of sales as purchase prices rise. The Henry
Hub market price of natural gas averaged $6.13 per MMBtu
during 2004 versus $5.38 per MMBtu during 2003.
Segment Results. The following information
highlights significant
year-to-year
variances in gross operating margin by business segment:
Gross operating margin from the NGL & Petrochemical
Storage Services segment was $19.8 million for 2004 and
2003. Revenues and operating costs and expenses were essentially
unchanged
period-to-period.
A decrease of $1.0 million in net measurement losses in
2004 relative to 2003 was offset by a $1.1 million increase
in repair and other maintenance costs in 2004.
Gross operating margin from the Natural Gas Pipelines &
Services segment was $25.3 million for 2004 versus
$18.3 million for 2003. Natural gas throughput increased to
645 Bbtu/d during 2004 from 600 Bbtu/d during 2003. Gross
operating margin increased $7 million
year-to-year
primarily due to improved margins on natural gas sales and
higher natural gas transportation volumes. Higher natural gas
sales margins, primarily due to the benchmarking mechanism in
Acadian Gas’ natural gas sales contract with Evangeline,
accounted for $3.6 million of the
period-to-period
increase in gross operating margin. Approximately
$1.7 million of the
period-to-period
increase in gross operating margin is attributable to higher
transportation volumes in 2004 compared to 2003. Also, gross
operating margin for 2004 includes a $1.7 million benefit
from the collection of a contingent asset related to a prior
business acquisition. Equity earnings from our investment in
Evangeline increased $0.1 million
year-to-year.
Gross operating margin from the Petrochemical Pipeline Services
segment was $36.9 million for 2004 compared to
$38.4 million for 2003. Petrochemical transportation
volumes were 39 MBPD during 2004 versus 40 MBPD during
2003. Gross operating margin from the Lou-Tex Propylene pipeline
decreased $1.5 million
year-to-year
as a result of reduced transportation volumes.
Our primary cash requirements will be normal operating and
general and administrative expenses, capital expenditures,
business acquisitions, distributions to partners and debt
service. We expect to fund our short-term needs for such items
as operating expenses and sustaining capital expenditures with
operating cash flows and borrowings under a new revolving credit
facility. Capital expenditures for long-term needs resulting
from internal growth projects and business acquisitions are
expected to be funded by a variety of sources (either separately
or in combination), including cash flows from operating
activities, borrowings under the new revolving credit facility,
and the issuance of additional debt or equity securities. We
expect to fund cash distributions to partners primarily with
operating cash flows. Debt service requirements are expected to
be funded by operating cash flows or refinancing arrangements.
Duncan
Energy Partners Predecessor Cash Flow
The following table summarizes our cash flows from operating,
investing and financing activities for the periods indicated
(dollars in thousands). For information regarding the individual
components of our cash flow amounts, please read the Statements
of Combined Cash Flows included elsewhere in this prospectus.
We have operated within the Enterprise Products Partners’
cash management program for all periods presented. For purposes
of presentation in the Statements of Combined Cash Flows, cash
flows from financing activities represent transfers of excess
cash from us to Enterprise Products Partners equal to cash
provided by operations less cash used in investing activities.
Such transfers of excess cash are shown as distributions to
owners in the Statements of Combined Owners’ Net
Investment. Conversely, if cash used in investing activities is
greater than cash provided by operations, then a deemed
contribution by owners is presented. As a result, the combined
financial statements do not present cash balances for any of the
periods presented.
Due to the foregoing method of presentation, our owners were
deemed to have paid $4.1 million and $20.6 million in
net cash distributions during the first nine months of 2006 and
2005, respectively.
Cash used in investing activities primarily represents
expenditures for capital projects. Cash used in financing
activities generally consists of contributions from and
distributions to owners.
The following information highlights the significant
period-to-period
variances in our cash flow amounts:
Operating activities. Net cash provided by
operating activities was $62.3 million for the first nine
months of 2006 compared to $37.2 million for the first nine
months of 2005. The $25.1 million increase in net cash
provided by operating activities is primarily due to higher
earnings for the first nine months of 2006 relative to the same
period in 2005 and the timing of cash receipts from sales and
cash payments for purchases and other expenses between periods.
For information regarding changes in revenues and costs and
expenses between the two nine month periods, please read
“— Results of Operations” above.
Investing activities. Cash used in investing
activities was $58.2 million for the first nine months of
2006 compared to $16.7 million for the first nine months of
2005. The $41.5 million increase in cash used in investing
activities is primarily due to an expansion of our Mont Belvieu,
Texas storage complex. The expansion includes the drilling of
two new brine production wells and the construction of two
above-ground brine storage reservoirs.
Financing activities. Net cash distributions
to owners were $4.1 million for the first nine months of
2006 compared to $20.6 million for the first nine months of
2005. The net change in cash distributions
resulted from an increase in cash provided by operating
activities and an increase in cash used for capital expenditures
for the first nine months of 2006.
Operating activities. Net cash provided by
operating activities was $40.6 million for 2005 compared to
$79.5 million for 2004. The $38.9 million decrease in
net cash provided by operating activities is primarily due to
lower earnings in 2005 relative to 2004 and the timing of cash
receipts from sales and cash payments for purchases and other
expenses between periods. For information regarding changes in
revenues and costs and expenses between the two years, please
read “— Results of Operations” above.
Investing activities. Cash used in investing
activities was $19.5 million for 2005 compared to
$6.9 million for 2004. The $12.6 million increase in
cash used in investing activities was primarily due to the
expansion of brine production and storage reservoirs at our Mont
Belvieu storage complex.
Financing activities. Net cash distributions
to owners were $21.1 million for 2005 compared to
$72.5 million for 2004. The change in cash distributions
results from a decrease in cash provided by operating activities
in 2005 combined with an increase in cash used for capital
expenditures in 2005.
Operating activities. Net cash provided by
operating activities was $79.4 million for 2004 compared to
$64.7 million for 2003. The $14.7 million increase in
net cash provided by operating activities is due to higher
earnings in 2004 relative to 2003 and the timing of cash
receipts from sales and cash payments for purchases and other
expenses between periods. For information regarding changes in
revenues and costs and expenses between the two years, please
read “— Results of Operations” above.
Investing activities. Cash used in investing
activities was $6.9 million for 2004 compared to
$0.3 million for 2003. In January 2002, we acquired a
number of storage wells from a third-party seller. The purchase
price we paid included four wells that were later determined not
to be usable for storage. We received a $10 million refund
of the purchase price from the seller in 2003, which is
reflected as “Cash refund from prior business
combination” on our Statements of Combined Cash Flows.
Financing activities. Net cash distributions
to owners were $72.5 million for 2004 compared to
$64.4 million for 2003. The change in cash distributions
results primarily from a $14.7 million increase in cash
provided by operating activities in 2004 partially offset by a
$6.6 increase in cash used in investing activities. As noted
above, cash used in investing activities for 2003 includes a
$10 million refund, related to an asset acquisition (a
benefit).
Capital
Requirements
General. The midstream energy business can be
capital intensive, requiring significant investment to maintain
and upgrade existing operations. For example, our NGL,
petrochemical and natural gas pipelines are subject to pipeline
safety programs administered by the U.S. Department of
Transportation through its Office of Pipeline Safety. This
federal agency has issued safety regulations containing
requirements for the development of integrity management
programs for hazardous liquid pipelines (which include NGL and
petrochemical pipelines) and natural gas pipelines. In general,
these regulations require companies to assess the condition of
their pipelines in certain high consequence areas (as defined by
the regulation) and to perform any necessary repairs. In
connection with the regulations for hazardous liquid pipelines,
we developed a pipeline integrity management program in 2002. In
connection with the regulations for natural gas pipelines, we
developed a pipeline integrity management program in 2004.
We expect our net cash outlay for pipeline integrity program
expenditures to approximate $2.7 million during the
remainder of 2006.
Our capital requirements have consisted primarily of, and we
anticipate will continue to consist of, the following:
•
sustaining capital expenditures, which are capital expenditures
made to replace partially or fully depreciated assets, to
maintain the existing operating capacity of our assets and to
extend their useful lives, or other capital expenditures that
are incurred in maintaining existing system volumes and related
cash flows (such as pipeline integrity costs); and
•
growth capital expenditures such as those to acquire additional
assets to grow our business, to expand and upgrade gathering
systems and processing plants and to construct or acquire
similar systems or facilities.
During the first nine months of 2006, our capital expenditures,
including sustaining and growth capital expenditures, totaled
$59.0 million. We have budgeted sustaining capital
expenditures of $5.9 million for the year ending
December 31, 2007. We expect that the costs to complete the
planned expansion of the South Texas NGL pipeline after the
closing of this offering and Mont Belvieu brine production and
above-ground storage projects will be approximately
$42.7 million, of which our 66% share will be approximately
$28.2 million. We expect to use cash on hand from the
proceeds of this offering to fund our share of these planned
expansion costs and Enterprise Products Partners will make a
capital contribution to South Texas NGL and Mont Belvieu Caverns
for its 34% share of the planned expansion costs.
We are evaluating several expansion projects at our Mont Belvieu
facilities. The projects currently contemplated may be commenced
during 2007 in the range of $25 to $75 million. Additional
expenditures of up to $200 million may be made during 2008
and 2009. Pursuant to the Mont Belvieu Caverns limited liability
company agreement, Enterprise Products OLP may, in its sole
discretion, fund a portion of any costs related to these
projects. We cannot assure you that we will pursue any expansion
projects, but if we do, we expect to finance any such projects
through borrowings under our new revolving credit facility, the
issuance of debt or additional equity, or contributions from
Enterprise Products OLP. For a further description of our
agreements with Enterprise Products Partners relating to
potential expansion opportunities, please read
“Business — NGL & Petrochemical Storage
Services Segment — Mont Belvieu Expansion
Opportunities,” and “Certain Relationships and Related
Party Transactions — Mont Belvieu Caverns Limited
Liability Company Agreement — Future Mont Belvieu
Caverns Expansion Capital.”
New
Revolving Credit Facility
We have entered into a new $300 million revolving credit
facility, all of which may be used for letters of credit, with a
$30 million sublimit for Swingline loans. The funding date of
the revolving credit facility will occur not later than ninety
days after the closing of this offering, at which point, we may
make our initial drawing under the facility. The new revolving
credit facility will mature four years from the funding date. We
may make up to two requests for one-year extensions of the
maturity date (subject to certain restrictions). The revolving
credit facility will be available to pay distributions upon the
initial contribution of assets to us, fund working capital, make
acquisitions and provide payment for general partnership
purposes. We can increase the revolving credit facility, without
consent of the lenders, by an amount not exceeding
$150 million by
adding to the facility one or more new lenders and/or increasing
the commitments of existing lenders. No lender will be required
to increase its commitment, unless it agrees to do so in its
sole discretion.
The revolving credit facility offers the following unsecured
loans, each having different minimum amount and interest
requirements:
•
LIBOR loans. LIBOR loans can be exercised in a
minimum amount of $5 million and multiples of $1 million
thereafter. No more than eight LIBOR borrowings may be
outstanding at any time under the revolving credit facility.
LIBOR loans will bear interest, at a rate per annum, equal to
LIBOR plus the applicable LIBOR margin.
•
Base Rate Loans. Base Rate Loans can be
exercised in a minimum amount of $1 million and multiples of
$500 thousand thereafter. These loans bear interest, at a rate
per annum, equal to the Base Rate plus zero. The Base Rate is
the higher of (i) the rate of interest publicly announced by the
administrative agent, Wachovia Bank, National Association, as
its Base Rate and (ii) 0.5% per annum above the Federal Funds
Rate in effect on such date.
•
Swingline Loans. Swingline loans can be
exercised in a minimum amount of $1 million and multiples
of $100 thousand thereafter. These loans bear interest at the
LIBOR Market Interest Rate plus the applicable LIBOR margin.
The revolving credit facility may be prepaid in whole or in part
at any time upon same day notice, in a minimum amount of
$3 million with respect to LIBOR loans and $1 million
with respect to Base Rate Loans (or any lesser amount equal to
outstanding borrowings), and integral multiples of
$1 million above that amount. Unless LIBOR loans are
prepaid on interest payment dates, breakage costs could be
incurred.
The revolving credit facility requires us to maintain a leverage
ratio for the prior four fiscal quarters of not more than 4.75
to 1.00 at the last day of each fiscal quarter commencing
June 30, 2007; provided, upon the closing of a permitted
acquisition, such ratio shall not exceed (a) 5.25 to 1.00
at the last day of the fiscal quarter in which such specified
acquisition occurred and at the last day of each of the two
fiscal quarters following the fiscal quarter in which such
specified acquisition occurred, and (b) 4.75 to 1.00 at the last
day of each fiscal quarter thereafter. In addition, prior to
obtaining an investment-grade rating by Standard &
Poor’s Ratings Services, Moody’s Investors Service or
Fitch Ratings, our interest coverage ratio, for the prior four
fiscal quarters shall not be less than 2.75 to 1.00 at the last
day of each fiscal quarter commencing June 30, 2007.
Our new revolving credit facility contains various operating and
financial covenants, including those restricting or limiting our
ability, and the ability of certain of our subsidiaries, to:
•
make distributions;
•
incur additional indebtedness;
•
grant liens or make certain negative pledges;
•
engage in certain asset conveyances, sales, leases, transfers,
distributions or otherwise dispose of certain assets, businesses
or operations;
•
make certain investments;
•
enter into a merger, consolidation, or dissolution;
•
engage in transactions with affiliates;
•
directly or indirectly make or permit any payment or
distribution in respect of our partnership interests; or
•
permit or incur any limitation on the ability of any of our
subsidiaries to pay dividends or make distributions to, repay
indebtedness to, or make subordinated loans or advances
to us.
If an event of default exists under the new credit agreement,
the lenders will be able to accelerate the maturity of the
credit agreement and exercise other rights and remedies. Each of
the following is an event of default under the new credit
agreement:
•
non-payment of any principal, interest or fees when due under
the credit agreement subject to grace periods to be negotiated;
•
non-performance of covenants subject to grace periods to be
negotiated;
•
failure of any representation or warranty to be true and correct
in any material respect;
•
failure to pay any other material debt exceeding
$10 million in the aggregate;
•
a change of control;
•
other customary defaults, including specified bankruptcy or
insolvency events, the Employee Retirement Income Security Act
of 1974, or ERISA, violations, and judgment defaults.
The following table summarizes our significant contractual
obligations at December 31, 2005. There have been no
material changes in the nature or amounts of such obligations
subsequent to December 31, 2005 other than the capital
expenditures related to South Texas NGL discussed below.
Payment or Settlement Due by Period
Less Than
1-3
3-5
More Than
Contractual Obligations(1)
Total
1 Year
Years
Years
5 Years
(2006)
(2007-2008)
(2009-2010)
Beyond 2010
Operating leases:
Underground natural gas storage
cavern
$
3,276
$
468
$
936
$
936
$
936
Right-of-way
agreements
$
533
$
79
$
159
$
26
$
269
Purchase obligations:
Product purchase commitments:
Estimated payment obligations:
Natural gas
$
1,518,016
$
216,690
$
433,973
$
433,380
$
433,973
Other
$
7,480
$
2,138
$
4,282
$
1,060
Underlying major volume
commitments:
Natural gas (in Bbtus)
127,850
18,250
36,550
36,500
36,550
Capital expenditure commitments
$
616
$
616
Other long-term liabilities
$
608
$
608
Total
$
1,530,529
$
219,991
$
439,350
$
435,402
$
435,786
(1)
The contractual obligations in this table reflect the
obligations of our subsidiaries on a total consolidated basis
even though we own less than a 100% equity interest in our
operating subsidiaries.
Scheduled maturities of long-term debt. The
foregoing table does not reflect approximately $200 million
of borrowings that we expect to make under our new revolving
credit facility that we will enter into at or prior to the
closing of this offering.
Estimated cash payments for interest. The
foregoing table does not reflect any estimated cash payments for
interest on expected initial borrowings of approximately
$200 million under our new revolving credit facility that
are expected to be made under variable interest rates.
Operating leases. We lease certain property,
plant and equipment under non-cancelable and cancelable
operating leases. Amounts shown in the preceding table represent
our minimum cash lease payment obligations under operating
leases with terms in excess of one year for the periods
indicated.
Our Natural Gas Pipelines & Services segment leases an
underground natural gas storage cavern that is integral to its
operations. The primary use of this cavern is to store natural
gas
held-for-sale
by us. The current term of the cavern lease expires in December
2012. The term of this contract does not provide for an
additional renewal period, but it requires the lessor to enter
into diligent negotiations with us under similar terms and
conditions if we wish to extend the lease agreement beyond
December 2012.
In addition, our pipeline operations have entered into leases
for land held pursuant to
right-of-way
agreements. Our significant
right-of-way
agreements have original terms that range from five to
50 years and include renewal options that could extend the
agreements for up to an additional 25 years. Our rental
payments are generally at fixed rates, as specified in the
individual contracts, and may be subject to escalation
provisions for inflation and other market-determined factors.
Lease expense is charged to operating costs and expenses on a
straight line basis over the period of expected economic
benefit. Contingent rental payments, if any, are expensed as
incurred. In general, we are required to perform routine
maintenance on the underlying leased assets. In addition,
certain leases give us the option to make leasehold
improvements. Maintenance and repairs of leased assets
attributable to our operations are charged to expense as
incurred. We have not made any significant leasehold
improvements during the periods presented. Lease expense
included in operating income was $1.2 million for each of
the years ended December 31, 2005, 2004 and 2003 and
$0.9 million and $1.0 million for the nine months
ended September 30, 2006 and 2005, respectively.
Purchase Obligations. We define purchase
obligations as agreements to purchase goods or services that are
enforceable and legally binding (unconditional) on us that
specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transactions.
Our Natural Gas Pipelines & Services segment has a
product purchase commitment for the purchase of natural gas in
Louisiana from a third party. This purchase agreement expires in
January 2013. Our purchase price under this contract
approximates the market price of natural gas at the time we take
delivery of the volumes. The preceding table shows the volume we
are committed to purchase and an estimate of our future payment
obligations for the periods indicated. Our estimated future
payment obligations are based on the contractual price at
December 31, 2005 applied to all future volume commitments.
Actual future payment obligations may vary depending on market
prices at the time of delivery.
At December 31, 2005, we do not have any product purchase
commitments with fixed or minimum pricing provisions having
remaining terms in excess of one year.
We also have short-term payment obligations relating to capital
projects we have initiated. These commitments represent
unconditional payment obligations that we have agreed to pay
vendors for services to be rendered or products to be delivered
in connection with our capital spending programs. The preceding
table shows these capital project commitments for the periods
indicated.
In August 2006, Enterprise Products Partners purchased
223 miles of NGL pipelines extending from Corpus Christi,
Texas to Pasadena, Texas from ExxonMobil Pipeline Company. The
total purchase price for this asset was approximately
$97.7 million in cash. Enterprise Products Partners will
contribute this pipeline system to South Texas NGL prior to the
closing of this offering. This pipeline system is used to
transport NGLs from two Enterprise Products Partners’
facilities to Mont Belvieu, Texas. The total estimated cost to
acquire and construct the additional pipelines that will
complete this system is $66.3 million. South Texas NGL made
capital expenditures of $37.7 million to make this pipeline
system operational in January 2007. We expect that it will cost
approximately $28.6 million to complete planned expansions
of the South Texas NGL pipeline after the closing of this
offering, of which our 66% share will be approximately
$18.9 million. In addition, we expect that Mont Belvieu
Caverns will make additional capital expenditures of
$14.1 million to complete construction of brine production
capacity and above-ground storage reservoirs, of which our 66%
share will be approximately $9.3 million. Following this
offering, we expect to use cash on hand from the proceeds of
this offering to fund our share of the planned expansion costs.
The preceding contractual obligations table does not include
these capital expenditures entered into after December 31,2005.
Other Long-Term Liabilities. We have recorded
long-term liabilities on our combined balance sheet reflecting
amounts we expect to pay in future periods beyond one year.
These liabilities primarily represent the present value of our
asset retirement obligations. Amounts shown in the preceding
table represent our best estimate as to the timing of
settlements based on information currently available.
$23.2 million in principal amount of 9.9% fixed interest
rate senior secured notes due December 2010 (the
“Series B” notes); and
•
a $7.5 million subordinated note payable to Evangeline
Northwest Corporation (the “ENC Note”).
The Series B notes are collateralized by the following:
•
Evangeline’s property, plant and equipment;
•
proceeds from Evangeline’s Entergy Louisiana natural gas
sales contract; and
•
a debt service reserve requirement.
Scheduled principal repayments on the Series B notes are
$5 million annually through 2009 with a final repayment in
2010 of approximately $3.2 million. The trust indenture
governing the Series B notes contains covenants such as
requirements to maintain certain financial ratios. Evangeline
was in compliance with such covenants during the periods
presented.
Evangeline incurred the ENC Note obligations in connection with
its acquisition of the Entergy natural gas sales contract in
1991. The ENC Note is subject to a subordination agreement which
prevents the repayment of principal and accrued interest on the
note until such time as the Series B note holders are
either fully cash secured through debt service accounts or have
been completely repaid. Variable rate interest accrues on the
subordinated note at a LIBOR rate plus 0.5%. Variable interest
rates charged on this note at December 31, 2005 and 2004
were 4.23% and 1.83%, respectively.
Except for the foregoing, we have no off-balance sheet
arrangements that have or are reasonably expected to have a
material current or future effect on our financial condition,
revenues, expenses, results of operations, liquidity, capital
expenditures or capital resources.
Inflation in the United States has been relatively low in recent
years and did not have a material impact on our results of
operations for the three-year period ended December 31,2005 or the first nine months of 2006. It may in the future,
however, increase the cost to acquire or replace property, plant
and equipment and may increase the costs of labor and supplies.
Our operating revenues and costs are influenced to a greater
extent by specific price changes in natural gas and NGLs. To the
extent permitted by competition, regulation and our existing
agreements, we have and will continue to pass along increased
costs to our customers in the form of higher fees and through
escalation provisions in specific contracts.
In our financial reporting process, we employ methods, estimates
and assumptions that will affect the reported amounts of assets
and liabilities and disclosure of contingent assets and
liabilities as of the date of our financial statements. These
methods, estimates and assumptions also affect the reported
amounts of revenues and expenses during the reporting period.
Investors should be aware that actual results could differ from
these estimates if the underlying assumptions prove to be
incorrect. The following is a description of the estimation risk
underlying our most significant financial statement items.
Depreciation
methods and estimated useful lives of property, plant and
equipment
In general, depreciation is the systematic and rational
allocation of an asset’s cost, less its residual value (if
any), to the periods it benefits. The majority of our property,
plant and equipment is depreciated using the straight-line
method, which results in depreciation expense being incurred
evenly over the life of the assets. Our estimate of depreciation
incorporates assumptions regarding the useful economic lives and
residual values of our assets. At the time we place our assets
in service, we believe such assumptions are reasonable; however,
circumstances may develop that would cause us to change these
assumptions, which would change our depreciation amounts on a
going forward basis. Some of these circumstances include changes
in laws and regulations relating to restoration and abandonment
requirements; changes in expected costs for dismantlement,
restoration and abandonment as a result of changes, or expected
changes, in labor, materials and other related costs associated
with these activities; changes in the useful life of an asset
based on the actual known life of similar assets, changes in
technology, or other factors; and changes in expected salvage
proceeds as a result of a change, or expected change in the
salvage market.
At September 30, 2006 and December 31, 2005, the net
book value of our property, plant and equipment was
$656.0 million and $512.2 million, respectively. We
recorded $19.2 million, $18.1 million and
$17.6 million in depreciation expense during the years
ended December 31, 2005, 2004 and 2003, respectively.
Depreciation expense was $15.4 million and
$14.2 million for the nine months ended September 30,2006 and 2005, respectively.
Measuring
recoverability of long-lived assets and equity method
investments
In general, long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that their
carrying amount may not be recoverable. Examples of such events
or changes might be production declines that are not replaced by
new discoveries or long-term decreases in the demand or price of
natural gas, oil or NGLs. Long-lived assets with recorded values
that are not expected to be recovered through expected future
cash flows are written-down to their estimated fair values. The
carrying value of a long-lived asset is not recoverable if it
exceeds the sum of undiscounted estimated cash flows expected to
result from the use and eventual disposition of the existing
asset. Our estimates of such undiscounted cash flows are based
on a number of assumptions including anticipated operating
margins and volumes; estimated useful life of the asset or asset
group; and estimated salvage values. An impairment charge would
be recorded for the excess of a long-lived asset’s carrying
value over its estimated fair value. Fair value of a long-lived
asset is estimated through appropriate valuation techniques,
which consider quoted market prices, replacement cost estimates
and probability-weighted discounted cash flows. We did not
recognize any asset impairment charges during the periods
presented.
Equity method investments are evaluated for impairment whenever
events or changes in circumstances indicate that there is a
possible loss in value of the investment other than a temporary
decline. Examples of such events include sustained operating
losses by the investee or long-term negative changes in the
investee’s industry. The carrying value of an equity method
investment is not recoverable if it exceeds the sum of the
discounted estimated cash flows expected to be derived from the
investment. This estimate of discounted cash flows is based on a
number of assumptions including discount rates; probabilities
assigned to different cash flow scenarios; anticipated margins
and volumes and estimated useful life of the investment. A
significant change in these underlying assumptions could result
in our recording an impairment charge. We did not recognize any
impairment charges related to our Evangeline affiliate during
the periods presented.
Amortization
methods and estimated useful lives of qualifying intangible
assets
The specific, identifiable intangible assets of a business
enterprise depend largely upon the nature of its operations.
Intangible assets include, but are not limited to, patents,
trademarks, trade names, contracts, customer relationships and
non-compete agreements. The method used to value each intangible
asset varies depending upon the nature of the intangible asset,
the business in which it is utilized, and the economic returns
it is generating or is expected to generate.
If our underlying assumptions regarding the estimated useful
life of an intangible asset change, then the amortization period
for such asset would be adjusted accordingly. Additionally, if
we determine that an intangible asset’s unamortized cost
may not be recoverable due to impairment, we may be required to
reduce the carrying value and the subsequent useful life of the
asset. Any such write-down of the value and unfavorable change
in the useful life of an intangible asset would increase
operating costs and expenses at that time.
Our intangible assets consist primarily of renewable storage
contracts with various customers that we acquired in connection
with the purchase of storage caverns from a third party in
January 2002. Due to the renewable nature of these contracts, we
amortize them on a straight-line basis over a
35-year
period, which is the estimated remaining economic life of the
storage assets to which they relate.
At September 30, 2006 and December 31, 2005, the
carrying value of our intangible asset portfolio was
$7.0 million and $7.2 million, respectively. We
recorded $0.2 million in amortization expense associated
with our intangible assets for all periods presented.
Our
revenue recognition policies and use of estimates for revenues
and expenses
In general, we recognize revenue from our customers when all of
the following criteria are met:
•
persuasive evidence of an exchange arrangement exists;
•
delivery has occurred or services have been rendered;
•
the buyer’s price is fixed or determinable; and
•
collectibility is reasonably assured.
When sales contracts are settled (i.e., either physical delivery
of product has taken place or the services designated in the
contract have been performed), we record any necessary allowance
for doubtful accounts.
We make estimates for certain revenue and expense items due to
time constraints on the financial accounting and reporting
process. At times, we must estimate revenues from a customer
before we actually bill the customer or accrue an expense we
incur before physically receiving a vendor’s invoice. Such
estimates reverse in the following period and are offset by our
recording the actual customer billing and vendor invoice
amounts. If the basis of our estimates proves to be
substantially incorrect, it could result in material adjustments
in results of operations between periods. For all periods
presented, our revenue and cost estimates are substantially
correct as compared to actual amounts.
Natural
gas imbalances
Natural gas imbalances result when a customer injects more or
less gas into a pipeline than it withdraws. The values of our
imbalance receivables and payables are based on natural gas
prices during the month such imbalances are created.
At December 31, 2005 and 2004, our imbalance receivables
were $1.6 million and $1.8 million, respectively, and
are reflected as a component of “Accounts
receivable — trade” on our Combined Balance
Sheets. At December 31, 2005 and 2004, our imbalance
payable was $2.9 million and $0.5 million
respectively, and is reflected as a component of “Accrued
gas payables” on our Combined Balance Sheets. At
September 30, 2006, our imbalance receivable was
$1.9 million and our imbalance payable was
$0.5 million.
Storage well gains and losses occur when product movements into
a storage well are different than those redelivered to
customers. In general, such variations result from difficulties
in precisely measuring significant volumes of liquids at varying
flow rates and temperatures. It is expected that substantially
all product delivered into a storage will be withdrawn over
time. A measurement loss in one period is expected to be offset
by a measurement gain in a subsequent period, unless product is
physically lost in a storage well due to problems with cavern
integrity. We did not experience any significant net losses
resulting from problems with cavern integrity during the three
years ended December 31, 2005 or for the nine month period
ended September 30, 2006.
Since we expect that storage well gains and losses will
approximate each other over time, we historically charged
storage well gains or losses to a storage imbalance account
during the month such imbalances are created based on current
pricing. The reserve was increased by measurement gains and loss
accruals and decreased by measurement losses. On an annual
basis, the storage imbalance reserve account was reviewed for
reasonableness based on historical storage well measurement
gains and losses and adjusted accordingly through a charge to
earnings. At December 31, 2005 and 2004, our storage
imbalance account was $4.5 million and $3.5 million.
At September 30, 2006, our storage imbalance was
$1.8 million. Net measurement losses of $2.0 million,
$2.2 million and $1.5 million were charged to the
reserve during the years ended December 31, 2005, 2004 and
2003, respectively, and $2.7 and $1.9 million for the nine
months ended September 30, 2006 and 2005, respectively.
Operating costs and expenses reflect well loss accruals of
$3.1 million, $0.6 million and $2.4 million for
the years ended December 31, 2005, 2004 and 2003,
respectively, and $0 and $2.5 million for the nine months
ended September 30, 2006 and 2005, respectively.
In addition, operating gains and losses due to measurement
variances for product movements to and from storage wells
relating primarily to pipeline and well connection activities
are included in our financial statements. Many of our customer
storage arrangements allow us to retain a small amount of liquid
volumes to help offset any measurement losses. These variances
are estimated and settled at current prices each reporting
period as a net credit or charge to operating costs and
expenses. We do not retain volumes in inventory. The net amounts
for each of the years ended December 31, 2005, 2004 and
2003 were a $2.1 million charge, $0.2 million credit
and $1.4 million credit, respectively, and a
$1.0 million charge and a $3.2 million charge for the
nine months ended September 30, 2006 and 2005, respectively.
In connection with storage agreements for a variety of products
entered into between Enterprise Products Partners and Mont
Belvieu Caverns effective concurrently with the closing of this
offering, Enterprise Products Partners will agree to the
allocation of all storage well measurement gains and losses
relating to these products.
In addition, the limited liability company agreement for Mont
Belvieu Caverns will specially allocate to Enterprise Products
Partners any items of income and gain or loss and deduction
relating to measurement losses and measurement gains, including
amounts that Mont Belvieu Caverns may retain or deduct as
handling losses. Enterprise Products Partners will also be
required to contribute cash to Mont Belvieu Caverns, or will be
entitled to receive distributions from Mont Belvieu Caverns,
based on the then-current net measurement gains or measurement
losses. As a result, we will continue to record measurement
gains and losses associated with the operation of our Mont
Belvieu storage facility for parties other than Enterprise
Products Partners after the closing date of this offering on a
consolidated basis as operating costs and expenses. However,
these measurement gains and losses should not affect our net
income or have a significant impact on us with respect to our
cash flows from operating activities and, accordingly, no
reserve account will be established by us for measurement losses
on our balance sheet.
Emerging Issues Task Force (“EITF”) 04-13,
“Accounting for Purchases and Sales of Inventory With the
Same Counterparty.”This accounting guidance requires
that two or more inventory transactions with the same
counterparty be viewed as a single non-monetary transaction, if
the transactions were entered into in contemplation of one
another. Exchanges of inventory between entities in the same
line of business should be
accounted for at fair value or recorded at carrying amounts,
depending on the classification of such inventory. This guidance
was effective April 1, 2006, and our adoption of this
guidance had no impact on our combined financial position,
results of operations or cash flows.
EITF 06-3,
“How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net Presentation).”This accounting guidance requires companies to disclose
their policy regarding the presentation of tax receipts on the
face of their income statements. This guidance specifically
applies to taxes imposed by governmental authorities on
revenue-producing transactions between sellers and customers
(gross receipts taxes are excluded). This guidance is effective
January 1, 2007. As a matter of policy, we report such
taxes on a net basis.
Financial Accounting Standards Board Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty
in Income Taxes, an Interpretation of SFAS 109, Accounting
for Income Taxes.”FIN 48 provides that the tax
effects of an uncertain tax position should be recognized in a
company’s financial statements if the position taken by the
entity is more likely than not sustainable, if it were to be
examined by an appropriate taxing authority, based on technical
merit. After determining a tax position meets such criteria, the
amount of benefit to be recognized should be the largest amount
of benefit that has more than a 50 percent chance of being
realized upon settlement. The provisions of FIN 48 are not
material to our financial statements.
Statement of Financial Accounting Standards
(“SFAS”) 155, “Accounting for Certain Hybrid
Financial Instruments.” This accounting standard
amends SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, amends SFAS 140, Accounting
for Transfers and Servicing of Financial Assets and
Extinguishments of Liabilities, and resolves issues
addressed in Statement 133 Implementation Issue D1,
Application of Statement 133 to Beneficial Interests to
Securitized Financial Assets. A hybrid financial
instrument is one that embodies both an embedded derivative and
a host contract. For certain hybrid financial instruments,
SFAS 133 requires an embedded derivative instrument be
separated from the host contract and accounted for as a separate
derivative instrument. SFAS 155 amends SFAS 133 to
provide a fair value measurement alternative for certain hybrid
financial instruments that contain an embedded derivative that
would otherwise be recognized as a derivative separately from
the host contract. For hybrid financial instruments within its
scope, SFAS 155 allows the holder of the instrument to make
a one-time, irrevocable election to initially and subsequently
measure the instrument in its entirety at fair value instead of
separately accounting for the embedded derivative and host
contract. We are evaluating the effect of this recent guidance,
which is effective January 1, 2007.
SFAS 157, “Fair Value Measurements.”This
accounting standard defines fair value, establishes a framework
for measuring fair value in generally accepted accounting
principles, and expands disclosures about fair value
measurements. SFAS 157 applies only to fair-value
measurements that are already required or permitted by other
accounting standards and is expected to increase the consistency
of those measurements. The statement emphasizes that fair value
is a market-based measurement that should be determined based on
the assumptions that market participants would use in pricing an
asset or liability. Companies will be required to disclose the
extent to which fair value is used to measure assets and
liabilities, the inputs used to develop the measurements, and
the effect of certain of the measurements on earnings (or
changes in net assets) for the period. SFAS 157 is
effective for fiscal years beginning after December 15,2007 and we will be required to adopt SFAS 157 as of
January 1, 2008. We are currently evaluating the impact of
adopting SFAS 157 on our financial position, results of
operations, and cash flows.
Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements.”SAB 108 addresses how the effects of
prior-year uncorrected misstatements should be considered when
quantifying misstatements in current-year financial statements.
The SAB requires registrants to quantify misstatements using
both the balance-sheet and income-statement approaches and to
evaluate whether either approach results in quantifying an error
that is material in light of relevant quantitative and
qualitative factors. When the effect of initial adoption is
determined to be material, SAB 108 allows registrants to
record that effect as a cumulative-effect adjustment to
beginning-of-year
retained earnings. The requirements are effective for annual
financial statements covering the first fiscal year ending after
November 15, 2006. Additionally, the nature and amount of
each individual error being corrected through the
cumulative-effect adjustment, when and how each error arose, and
the fact that the errors
had previously been considered immaterial is required to be
disclosed. We are required to adopt SAB 108 for our current
fiscal year ending December 31, 2006. We do not expect the
adoption of SAB 108 to have a material impact on our
financial statements.
We have an extensive and ongoing business relationships with
EPCO and Enterprise Products Partners and each of their
affiliates, including the following:
•
Enterprise Products Partners. Enterprise
Products Partners will assign to us all of the exchange
agreements with the customers of our Sabine Propylene and
Lou-Tex Propylene pipelines but will remain jointly and
severally liable on these agreements. We also provide
underground storage services to Enterprise Products Partners and
its affiliates to store NGLs and petrochemicals. Prior to the
closing of this offering, we will become party to a ground lease
with Enterprise Products Partners as a result of an assignment
by an affiliate of Enterprise Products Partners. Upon the
completion of our offering, we expect that certain terms of the
related party storage contracts between us and Enterprise
Products Partners will change, including (1) a reduction in
transportation rates on our Lou-Tex Propylene and Sabine
Propylene pipelines, (2) an increase in underground storage
fees and (3) the allocation to Enterprise Products Partners
of all storage measurement gains and losses relating to its
products. In addition, the limited liability company agreement
for Mont Belvieu Caverns will specially allocate measurement
gains and losses to Enterprise Products Partners, and contain
related contribution and distribution provisions. Enterprise
Products Partners will also remain jointly and severally liable
for certain contracts with third parties that it will assign to
us. Concurrently with the closing of this offering, we will
enter into an omnibus agreement with Enterprise Products OLP
pursuant to which Enterprise Products OLP will agree to
(i) indemnify us for certain environmental liabilities, tax
liabilities and title and
right-of-way
defects occurring or existing before the closing of this
offering and (ii) reimburse us for our 66% share of
excess construction costs, if any, above our current estimated
cost to complete planned expansions on the South Texas NGL
pipeline and Mont Belvieu Caverns brine-related facilities. In
addition, we will grant Enterprise Products OLP a right of first
refusal on the equity interests in certain of our operating
subsidiaries and on the material assets of these entities, other
than sales of inventory and other assets in the ordinary course
of business.
•
TEPPCO Partners. During January 2007, an
affiliate of Enterprise Products Partners purchased from an
affiliate of TEPPCO Partners a
10-mile,
18-inch
segment of pipeline that forms part of the South Texas NGL
pipeline for an aggregate purchase price of $8 million.
This pipeline will be among the assets owned by South Texas NGL
at the closing of this offering. We have also entered into a
lease with TEPPCO Partners for a
12-mile,
10-inch
interconnecting pipeline extending from Pasadena, Texas to
Baytown, Texas. The primary term of this lease will expire on
September 15, 2007, and will continue on a month-to-month
basis subject to termination by either party upon
60 days’ notice. This pipeline is being leased by us
in connection with operations on our South Texas NGL pipeline
until we complete the construction of a parallel pipeline.
•
EPCO. We have no employees. Prior to the
closing of this offering, we will become party to the
administrative services agreement with EPCO. Under this
agreement, EPCO will provide general administrative, management,
engineering and operating services as may be necessary to
operate our businesses, properties and assets (in accordance
with prudent industry practices). We will be required to
reimburse EPCO for its services in an amount equal to the sum of
all costs and expenses incurred by EPCO which are directly or
indirectly related to our business or activities (including EPCO
expenses reasonably allocated to us). The administrative
services agreement also contains agreements relating to business
opportunities.
•
Evangeline. We sell natural gas to Evangeline,
which, in turn, uses such natural gas to satisfy its sales
commitments to Entergy Louisiana. In addition, we also have a
service agreement with Evangeline whereby we provide Evangeline
with construction, operations, maintenance and administrative
support related to its pipeline system.
For more information, please read “Certain Relationships
and Related Party Transactions” and Note 6 of the
combined financial statements of the Duncan Energy Partners
Predecessor.
Provision for income taxes — Texas Margin
Tax. All of our operating subsidiaries are
organized as pass-through entities for income tax purposes. As a
result, the owners of such entities are responsible for federal
income taxes on their share of each entity’s taxable income.
In May 2006, the State of Texas substantially revised its
existing state franchise tax. The revised tax (the “Texas
Margin Tax”) becomes effective for franchise tax reports
due on or after January 1, 2008. In general, legal entities
that conduct business in Texas and benefit from limited
liability protection are subject to the Texas Margin Tax. We
believe that our operating subsidiaries will be subject to the
Texas Margin Tax on the portion of their revenues generated in
Texas. We recorded an estimated deferred tax liability of
approximately $21 thousand for the Texas Margin Tax in June
2006, with an offsetting expense shown as provision for income
taxes.
Cumulative effect of changes in accounting
principles. We recorded a cumulative effect of a
change in accounting principle of $0.6 million in
connection with our implementation of FASB Interpretation
No. 47, “Accounting for Conditional Asset
Requirement Obligations”(“FIN 47”) in
December 2005, which represents the depreciation and accretion
expense we would have recognized had we recorded these
conditional asset retirement obligations when incurred. The pro
forma effects of our adoption of FIN 47 are not presented
due to the immaterial nature of these amounts to our financial
statements. Based on information currently available, we
estimate that annual accretion expense will approximate
$0.1 million for each of the years 2006 through 2010.
Certain key employees of EPCO who allocate a portion of their
time to our affairs participate in long-term incentive
compensation plans managed by EPCO. These plans include the
issuance of restricted units of Enterprise Products Partners and
limited partner interests in EPE Unit L.P., a Delaware limited
partnership. Prior to January 1, 2006, EPCO accounted for
these awards using the provisions of Accounting Principles Board
Opinion 25, “Accounting for Stock Issued to
Employees.” On January 1, 2006, EPCO adopted
Statement of Financial Accounting Standards
(“SFAS”) 123(R), “Accounting for
Stock-Based Compensation,” to account for such awards.
Upon adoption of this accounting standard, we recognized a
cumulative effect of change in accounting principle of
$9 thousand (a benefit). Such awards are immaterial to our
combined financial position, results of operations and cash
flows.
General. We use financial instruments in our
Natural Gas Pipelines & Services segment to secure
certain fixed price natural gas sales contracts (referred to as
“customer fixed-price arrangements”). We also enter
into a limited number of cash flow hedges in connection with
such business. We recognize such instruments on the balance
sheet as assets or liabilities based on an instrument’s
fair value. Fair value is generally defined as the amount at
which the financial instrument could be exchanged in a current
transaction between willing parties, not in a forced or
liquidation sale. Changes in fair value of financial instrument
contracts are recognized currently in earnings unless specific
hedge accounting criteria are met.
To qualify as a hedge, the item to be hedged must expose us to
commodity price risk and the hedging instrument must reduce the
exposure and meet the hedging requirements of SFAS 133,
“Accounting for Derivative Instruments and Hedging
Activities” (as amended and interpreted). We formally
designate such financial instruments as hedges and document and
assess the effectiveness of the hedge at inception and on a
quarterly basis. Any ineffectiveness is immediately recognized
in earnings. Our customer fixed-price arrangements do not
qualify for hedge accounting under SFAS 133; therefore,
these instruments are accounted for using a
mark-to-market
approach each reporting period.
If a financial instrument meets the criteria of a cash flow
hedge, gains and losses from the instrument are recorded in
other comprehensive income. Gains and losses on cash flow hedges
are reclassified from other
comprehensive income to earnings when the forecasted transaction
occurs or, as appropriate, over the economic life of the
underlying asset. If the financial instrument meets the criteria
of a fair value hedge, gains and losses from the instrument will
be recorded on the income statement to offset corresponding
losses and gains of the hedged item. A contract designated as a
hedge of an anticipated transaction that is no longer likely to
occur is immediately recognized in earnings.
Commodity financial instrument portfolio. In
addition to its natural gas transportation business, our Natural
Gas Pipelines & Services segment engages in the
purchase and sale of natural gas to third party customers in the
Louisiana area. The price of natural gas fluctuates in response
to changes in supply, market uncertainty, and a variety of
additional factors that are beyond our control. We may use
commodity financial instruments such as futures, swaps and
forward contracts to mitigate such risks. In general, the types
of risks we attempt to hedge are those related to the
variability of future earnings and cash flows resulting from
changes in applicable commodity prices. The commodity financial
instruments we utilize may be settled in cash or with another
financial instrument. As a matter of policy, we do not use
financial instruments for speculative (or “trading”)
purposes.
Our Natural Gas Pipelines & Services segment enters
into a small number of cash flow hedges in connection with its
purchase of natural gas
held-for-sale.
In addition, our Natural Gas Pipelines & Services
segment enters into a limited number of offsetting financial
instruments that effectively fix the price of natural gas for
certain of its customers. Historically, the use of commodity
financial instruments was governed by policies established by
the general partner of Enterprise Products Partners. The
objective of this policy was to assist us in achieving its
profitability goals while maintaining a portfolio with an
acceptable level of risk, defined as remaining within the
position limits established by the general partner. In general,
we may enter into risk management transactions to manage price
risk, basis risk, physical risk or other risks related to its
commodity positions on both a short-term (less than
30 days) and long-term basis, not to exceed 24 months.
The general partner of Enterprise Products Partners monitored
the hedging strategies associated with the physical and
financial risks of our Natural Gas Pipelines & Services
segment (such as those mentioned previously), approved specific
activities subject to the policy (including authorized products,
instruments and markets) and established specific guidelines and
procedures for implementing and ensuring compliance with the
policy. Our general partner will continue such policies in the
future.
Due to the limited number and nature of the financial
instruments utilized by us, the effect on the portfolio of a
hypothetical 10% movement in the underlying quoted market prices
of natural gas is negligible at September 30, 2006 and
December 31, 2005 and 2004. The fair value of our commodity
financial instrument portfolio was a negligible amount at
September 30, 2006, a liability of $0.1 million at
December 31, 2005, and a liability of $0.3 million at
December 31, 2004.
We recorded losses of $0.2 million and $0.8 million
related to our commodity financial instruments for the years
ended December 31, 2005 and 2003, respectively. In 2004, we
recorded a gain of $0.2 million from our commodity
financial instruments. We recorded $0.3 million gain
related to our commodity financial instruments during the nine
months ended September 30, 2006. We recorded
$0.2 million of expense related to this portfolio during
the nine months ended September 30, 2005.
Product purchase commitments. Our Natural Gas
Pipelines & Services segment has a long-term natural
gas purchase contract with a third party. This purchase
agreement expires in January 2013. Our purchase price under this
contract approximates the market price of natural gas at the
time we take delivery of the volumes. For additional information
regarding our commitments, please read
“— Contractual Obligations” above.
We are a Delaware limited partnership formed by Enterprise
Products Partners in September 2006 to own, operate and acquire
a diversified portfolio of midstream energy assets. We are
engaged in the business of gathering, transporting, marketing
and storing natural gas and transporting and storing NGLs and
petrochemicals. Our assets were previously owned by Enterprise
Products Partners and are part of its integrated midstream
energy asset network or value chain, which includes natural gas
gathering, processing, transportation and storage; NGL
fractionation (or separation), transportation, storage and
import and export terminaling; crude oil transportation; and
offshore production platform services. After this offering, we
will own 66% of the equity interests in the subsidiaries that
hold our operating assets and affiliates of Enterprise Products
Partners will continue to own the remaining 34%. We believe our
relationship with Enterprise Products Partners will enable us to
maintain stable cash flows and optimize our scale, strategic
location and pipeline connections.
Our operations are organized into the following four business
segments:
•
NGL & Petrochemical Storage
Services. Our NGL & Petrochemical
Storage Services segment consists of 33 salt dome caverns
located in Mont Belvieu, Texas, with an underground storage
capacity of approximately 100 MMBbls, and certain related
assets. These assets receive, store and deliver NGLs and
petrochemical products for industrial customers located along
the upper Texas Gulf Coast, which has the largest concentration
of petrochemical plants and refineries in the United States.
•
Natural Gas Pipelines & Services. Our
Natural Gas Pipelines & Services segment consists of
the Acadian Gas system, which is an onshore natural gas pipeline
system that gathers, transports, stores and markets natural gas
in Louisiana. The Acadian Gas system links natural gas supplies
from onshore and offshore Gulf of Mexico developments (including
offshore pipelines, continental shelf and deepwater production)
with local gas distribution companies, electric generation
plants and industrial customers, including those in the Baton
Rouge-New Orleans-Mississippi River corridor. In the aggregate,
the Acadian Gas system includes over 1,000 miles of
high-pressure transmission lines and lateral and gathering lines
with an aggregate throughput capacity of approximately one Bcf/d
and a leased storage facility with approximately three Bcf of
storage capacity.
•
Petrochemical Pipeline Services. Our
Petrochemical Pipeline Services segment consists of two
petrochemical pipeline systems with an aggregate of
284 miles of pipeline. The Lou-Tex Propylene pipeline
system consists of a
263-mile
pipeline used to transport chemical-grade propylene between
Sorento, Louisiana and Mont Belvieu, Texas. The Sabine Propylene
pipeline system consists of a
21-mile
pipeline used to transport polymer-grade propylene from Port
Arthur, Texas to a pipeline interconnect in Cameron Parish,
Louisiana on a
transport-or-pay
basis.
•
NGL Pipeline Services. Our NGL Pipeline
Services segment consists of a
290-mile
pipeline system used to transport NGLs from two Enterprise
Products Partners’ facilities located in South Texas to
Mont Belvieu, Texas and related interconnections. We acquired a
223-mile
segment of the system in August 2006, and we are in the process
of acquiring and constructing other segments of the pipeline.
This system became operational and began transporting NGLs in
January 2007 after undergoing modifications, extensions and
interconnections. Additional expansions to this system are
scheduled to be completed during the remainder of 2007.
One of our principal attributes is our relationship with
Enterprise Products Partners and EPCO. Our assets connect to
various midstream energy assets of Enterprise Products Partners
and, therefore, form integral links within Enterprise Products
Partners’ value chain. Enterprise Products Partners is a
North American midstream energy company that provides a wide
range of services to producers and consumers of natural gas,
NGLs and crude oil, and is an industry leader in the development
of pipeline and other midstream infrastructure in the
continental United States and Gulf of Mexico. Enterprise
Products Partners’ value chain is an integrated midstream
energy asset network that links producers of natural gas, NGLs
and crude oil from some of the largest supply basins in the
United States, Canada and the Gulf of Mexico with domestic
consumers and international markets. We believe the operational
significance of these assets to Enterprise Products Partners, as
well as the alignment of our respective economic interests in
them, will result in a collaborative effort to promote their
operational efficiency and maximize value.
All of our and Enterprise Products Partners’ management,
administrative and operating functions will be performed by
employees of EPCO, Enterprise Products Partners’ ultimate
parent company under common control by Dan L. Duncan, pursuant
to an amended and restated administrative services agreement.
Dan L. Duncan and his affiliates will have a significant
interest in our partnership through Enterprise Products
OLP’s ownership of 34% of the equity interests in our
operating subsidiaries and Enterprise Products OLP’s direct
ownership of approximately 36.0% of our outstanding common units
(or approximately 26.4% if the underwriters’ option to
purchase additional units is exercised in full) and indirect
ownership of our 2% general partner interest. We believe our
relationship with Enterprise Products Partners and EPCO provides
us with a distinct advantage in both the operation of our
current assets and in the identification and execution of
potential future acquisitions that are not otherwise taken by
Enterprise Products Partners or Enterprise GP Holdings in
accordance with our business opportunity agreements.
Our primary business objectives are to maintain and, over time,
to increase our cash available for distributions to our
unitholders. Our business strategies to achieve these objectives
are to:
•
optimize the benefits of our economies of scale, strategic
location and pipeline connections serving our natural gas, NGL,
petrochemical and refining markets;
•
manage our existing and future asset portfolio to minimize the
volatility of our cash flows;
•
invest in organic growth projects to capitalize on market
opportunities which expand our asset base and generate
additional cash flow; and
•
pursue acquisitions of assets and businesses from related
parties, or, in accordance with our business opportunity
agreements, from third parties.
We believe we are well-positioned to achieve our primary
objectives and to execute our business strategies successfully
because of the following competitive strengths:
•
our operations currently consist of mature assets and a new NGL
pipeline which are expected to generate stable, predictable cash
flows;
•
our assets are strategically located in areas with high demand
for our services play a critical role in Enterprise Products
Partners’ midstream energy value chain;
•
Enterprise Products Partners and EPCO have established a
reputation in the midstream natural gas and NGL industry as
reliable and cost-effective operators;
•
the senior management team and board of directors of our general
partner have extensive industry experience and include some of
the most senior officers of Enterprise Products Partners and
EPCO;
•
we have a lower cost of capital than other publicly-traded
partnerships that have incentive distribution rights; and
•
our affiliation with Enterprise Products Partners and its
affiliates, may provide us access to attractive acquisition
opportunities from them and third parties.
We are currently engaged in the business of gathering,
transporting, marketing, and storing natural gas and
transporting, marketing and storing NGLs and petrochemicals. Our
business is directly impacted by changes in domestic demand for
and production of natural gas, NGLs, propylene and other
petrochemical products.
Natural
Gas Demand and Production
Natural gas continues to be a critical component of energy
consumption in the United States. According to the Energy
Information Administration, or the EIA, total annual domestic
consumption of natural gas is expected to increase from
approximately 22.4 trillion cubic feet, or Tcf,
(61.4 Bcf/d) in 2004 to approximately 26.9 Tcf
(73.7 Bcf/d) in 2030, representing an average annual growth
rate of over 1.12% per year. Most of that increase is
expected to occur before 2017, when total U.S. natural gas
consumption reaches just over 26.5 Tcf. After 2017, rising
natural gas prices are predicted to curb consumption growth and
reduce the natural gas share of total energy consumption. The
industrial and electricity generation sectors are the largest
users of natural gas in the United States. During the last three
years, these sectors accounted for approximately 56% of the
total natural gas consumed in the United States. In 2004,
natural gas represented approximately 24% of all end-user
domestic energy requirements. During the last five years, the
United States has on average consumed approximately
22.4 Tcf per year, with average annual domestic production
of approximately 18.9 Tcf during the same period. Driven by
growth in natural gas demand and high natural gas prices,
domestic natural gas production is projected to increase from
18.5 Tcf per year to 20.4 Tcf per year between 2004 and 2015.
Midstream
Industry
Once natural gas is produced from wells, producers then seek to
deliver the natural gas and its components to end-use markets.
The midstream natural gas industry is the link between upstream
exploration and production activities and downstream end-user
markets, and generally consists of natural gas gathering,
transportation, processing, storage and fractionation
activities. The midstream industry is generally characterized by
regional competition based on the proximity of gathering systems
and processing plants to natural gas producing wells.
The following diagram illustrates the natural gas gathering,
processing, fractionation, storage and transportation process.
We supply Enterprise Products Partners and our other customers
with several gathering, transportation, and storage services for
their natural gas, NGL and petrochemical products.
Natural
Gas Gathering
Once a well has been completed, the well is connected to a
gathering system. Gathering systems typically consist of a
network of small diameter pipelines and, if necessary,
compression systems that collect natural gas from points near
producing wells and transport it to larger pipelines for further
transmission. Offshore gathering uses a similar process, but
production platforms provide production handling services, which
in the case of a well producing a mixture of oil and gas
involves the separation of natural gas from the oil and water
before the natural gas enters the gathering lateral. Gathering
laterals then connect to a main or trunk line of larger diameter
pipe. The mainline then transports the natural gas collected
from the various laterals to an onshore location, typically a
treating facility or gas processing plant. Our Natural Gas
Pipelines & Services business segment provides for the
gathering, transmission, and storage of natural gas in
Louisiana, and currently consists of over 1,000 miles of
onshore natural gas pipelines.
Natural
Gas Treating
Natural gas has a varied composition depending on the field, the
formation and the reservoir from which it is produced. Treating
plants remove carbon dioxide and hydrogen sulfide from natural
gas to ensure that it meets pipeline quality specifications. The
principal component of natural gas is methane, but most natural
gas also contains varying amounts of NGLs including ethane,
propane, normal butane, isobutane and natural gasoline. NGLs
have economic value and are utilized as a feedstock in the
petrochemical and oil refining industries or directly as a
heating, engine or industrial fuel. Once separated from the
natural gas, NGLs must be handled and transported to its end
users through a dedicated pipeline system.
Natural
Gas Transportation
Natural gas transportation pipelines receive natural gas from
other mainline transportation pipelines and gathering systems
and deliver the processed natural gas to industrial end-users
and utilities and to other pipelines. Our Natural Gas
Pipelines & Services business segment currently engages
in natural gas transportation.
NGL
Fractionation
NGL fractionation facilities separate mixed NGL streams into
discrete NGL products, including ethane, propane, normal butane,
isobutane, natural gasoline and propylene, which are also called
“purity NGLs.” The three primary sources of mixed NGLs
fractionated in the United States are (i) domestic natural
gas processing plants, (ii) domestic crude oil refineries
and (iii) imports of butane and propane mixtures. NGLs are
fractionated by heating mixed NGL streams and passing them
through a series of distillation towers, in order to take
advantage of the differing boiling points of the various NGL
products. As the temperature of the NGL stream is increased, the
lightest (lowest boiling point) NGL product boils off to the top
of the tower where it is condensed and routed to storage. The
mixture from the bottom of the first tower is then moved into
the next tower where the process is repeated, and a heavier NGL
product is separated and stored. This process is repeated until
the NGLs have been separated into all of their components. Since
the fractionation process requires large quantities of heat,
energy costs are a major component of the total cost of
fractionation.
NGL
Transportation
NGLs are transported to market by means of pipelines,
pressurized barges, rail car and tank trucks. The method of
transportation utilized depends on, among other things, the
existing resources of the transporter, the locations of the
production points and the delivery points, cost-efficiency and
the quantity of NGLs being transported. Pipelines are generally
the most cost-efficient mode of transportation when large,
steady volumes of NGLs are to be delivered. Our Petrochemical
Pipeline Services segment consists of two petrochemical pipeline
systems with an aggregate of 284 miles of pipeline that
provide for the transportation of propylene in Texas and
Louisiana.
In general, refinery-grade propylene (a mixture of propane and
propylene) is separated into either polymer-grade propylene or
chemical-grade propylene along with by-products of propane and
mixed butane. Polymer-grade propylene can also be produced from
chemical-grade propylene feedstock. Chemical-grade propylene is
also a by-product of olefin (ethylene) production. The demand
for polymer-grade propylene is attributable to the manufacture
of polypropylene, which has a variety of end uses, including
packaging film, fiber for carpets and upholstery and molded
plastic parts for appliance, automotive, houseware and medical
products. Chemical-grade propylene is a basic petrochemical used
in plastics, synthetic fibers and foams.
After NGLs are fractionated, the fractionated products are
stored for customers when they are unable or do not wish to take
immediate delivery. NGL storage customers may include both NGL
producers, who sell to end users, and NGL end users, such as
retail propane companies and petrochemical facilities. Both the
producers and the end users seek to store NGL products to ensure
an adequate supply for their respective customers over the
course of the year, particularly during periods of increased
demand. We maintain NGL storage facilities as part of our
NGL & Petrochemical Storage Services business segment
that help us meet this industry need.
Our NGL & Petrochemical Storage Services segment
consists of three integrated and strategically located
underground storage facilities in Mont Belvieu, Texas, which we
refer to as Mont Belvieu East, West and North storage
facilities. We have multiple pipelines that interconnect these
facilities, and each facility is comprised of a network of
caverns located several hundred feet below ground. These
facilities include 33 storage caverns with an aggregate
underground storage capacity of approximately 100 MMBbls,
and a brine system with approximately 20 MMBbls of
above-ground storage pit capacity and two brine production wells.
These assets, known as Mont Belvieu Caverns, accept, store and
deliver NGLs and petrochemical products, such as ethane and
propane, for industrial customers located along the upper Texas
Gulf Coast. This area has the largest concentration of
petrochemical plants and refineries in the United States. The
storage facilities are interconnected by multiple pipelines to
other producing and offtake facilities throughout the Gulf
Coast, including the largest NGL import/export facility in this
region owned by Enterprise Products Partners, as well as
connections to the Rocky Mountain and Midwest regions via the
Seminole pipeline and to the Louisiana Gulf Coast via the
Lou-Tex NGL pipeline, which are NGL pipelines owned by
Enterprise Products Partners.
•
Mont Belvieu East Facility. The Mont Belvieu
East facility is the largest of the three facilities. This
facility consists of 13 storage caverns available for service
with an underground storage capacity of approximately
55 MMBbls and above-ground brine pit capacity of
approximately 10 MMBbls. This facility also has two brine
production wells.
•
Mont Belvieu West Facility. The Mont Belvieu
West facility consists of ten caverns available for service with
an underground storage capacity of approximately 15 MMBbls
and above-ground brine pit capacity of approximately
2 MMBbls.
•
Mont Belvieu North Facility. The Mont Belvieu
North facility consists of ten caverns available for service
with an underground storage capacity of approximately
30 MMBbls and above-ground brine pit capacity of
approximately 8 MMBbls.
Mont Belvieu Caverns derives essentially all of its revenues
from four main sources. These sources are:
•
storage reservation fees;
•
excess storage fees;
•
throughput fees; and
•
brine production and storage.
We charge our customers monthly storage reservation fees to
reserve a specific storage capacity in our underground caverns.
The customers pay reservation fees based on the quantity of
capacity reserved rather than on the amount of reserved capacity
actually utilized. When a customer exceeds its reserved
capacity, we charge those customers an excess storage fee. In
addition, we charge our customers throughput fees based on
volumes injected and withdrawn from the storage facility.
Lastly, brine production revenues are derived from customers
that use brine in the production of feedstocks for production of
chlorine and caustic soda, which is
used in the production of PVC and for industrial products used
in crude oil production and fractionation. Brine is produced by
injecting fresh water into the well to create cavern space
within the salt dome. This process enables brine to be produced
for our customer as well as for developing new wells for product
storage.
The picture below depicts a typical storage cavern. Mont Belvieu
Caverns receives NGL and petrochemical products from related and
third party pipelines and facilities. As this product is
injected into the well it displaces brine that is then
transferred to the above-ground storage pit. When it is time to
redeliver the product, brine is then injected back into the well
displacing the product being stored. This product is delivered
to third party pipelines or other facilities.
During 2005 and 2006, we constructed additional brine production
capacity and above-ground storage reservoirs at Mont Belvieu.
These projects are expected to be completed during the first
quarter of 2007. We will retain $9.3 million from the
proceeds of this offering to fund our 66% share of
estimated capital expenditures to complete these projects.
Through December 31, 2006, we recorded total capital
expenditures of $71.5 million related to these projects.
Customers
Our customers include a broad range of NGL and petrochemical
producers and consumers, including many of the petrochemical
facilities and refineries in the Texas Gulf Coast and the
Louisiana Gulf Coast. Our five largest third-party customers,
which accounted for 38% of our total storage revenues for the
nine months ended September 30, 2006, were ExxonMobil,
Chevron/Phillips, Dow, Shell and Westlake Petrochemicals. Our
underground storage services to Enterprise Products Partners for
the storage of NGLs and petrochemicals accounted for 34% of our
total storage revenues for the nine months ended
September 30, 2006.
We have a broad range of customers with contract terms that vary
from
month-to-month
to long-term contracts with durations of one to ten years. We
currently offer our customers, in various quantities and at
varying terms, two main types of storage contracts:
multi-product fungible storage and segregated product storage.
Multi-product fungible storage allows customers to store any
combination of fungible products. Segregated product storage
allows customers to store non-fungible products such as
propylene, ethylene and naphtha. Segregated storage allows a
customer to reserve an entire storage cavern and have its own
product injected and withdrawn without having its product
commingled. We evaluate pricing, volume and availability for
storage on a
case-by-case
basis.
Enterprise Products OLP has seven contracts for storage with
Mont Belvieu Caverns that include multi-product fungible storage
for its NGL marketing activities, and for feedstocks for its
isomerization, iso-octane, NGL fractionation, and propylene
fractionation businesses and segregated product storage for
polymer grade propylene that is produced at propylene
fractionation facilities. These contracts have a duration of
five to ten years. Please read “Certain Relationships and
Related Party Transactions.”
For the years ended December 31, 2005, 2004 and 2003, we
recorded $17.6 million, $17.0 million and
$17.3 million, respectively, in storage revenues from
Enterprise Products Partners. For the nine months ended
September 30, 2006 and 2005, we recorded $14.8 million
and $13.9 million, respectively, in storage revenues from
Enterprise Products Partners.
Seasonality
We operate our NGL and related product storage facilities based
on the needs and requirements of our customers. We usually
experience an increase in the demand for storage services during
the spring and summer months due to increased feedstock storage
requirements for motor gasoline production and a decrease during
the fall and winter months when propane inventories are being
drawn for heating needs. In general, our import volumes peak
during the spring and summer months and our export volumes are
at their highest levels during the winter months. Typically, we
do not experience any significant seasonality with our
petrochemical customers because those customers withdraw and
inject petrochemicals on a regular basis.
Competition
Our competitors in the NGL, petrochemical and related product
storage business are integrated major oil companies, chemical
companies and other storage and pipeline companies. We compete
against Mont Belvieu Storage Partners, L.P., Targa Resources,
Texas Brine and ONEOK in the Gulf Coast region. The principal
competitive factors affecting our product storage business are
storage fees, quantity and location of pipeline connections and
operational dependability. We believe that the fees we charge
our customers are competitive with those charged by other
storage operators because we have historically been able to
renew existing contracts as they mature, yielding many
long-standing relationships. We are distinguished from our
competitors by the location and quantity of our pipeline
connections. The number of pipeline connections gives us
flexibility to offer a wide variety of receipt and delivery
options to customers and meet their requests on an efficient
basis. Our pipeline connections to the petrochemical plants, NGL
fractionators and imports from the Houston ship channel allow us
to effectively compete in this business because these are the
services required by our customers. In addition, we
differentiate ourselves through our emphasis on operational
dependability that consists of a focus on maintaining our
facilities.
NGL
and Petrochemical Sources and Transportation
Options
We generally receive the NGLs and petrochemicals that we inject
into our facilities, and our customers generally choose to
transport the NGLs that we withdraw from our facilities, through
the intrastate and interstate NGL and petrochemical pipelines
that interconnect with our storage facilities, including Black
Lake, Lakemont, Lou-Tex NGL Pipeline, Skelly-Belvieu, Cypress,
Seadrift, Chaparral, West Texas and Panola. We
are also connected to some of Enterprise Products Partners’
pipelines, including the Seminole pipeline, the Port Neches
Pipeline and the Channel Pipeline system. In addition we are
also connected to the truck and rail loading and unloading
facilities owned by Enterprise Products Partners. We are also
connected to numerous other pipelines through several
interconnecting pipelines to ARCO Junction, which is a large
pipeline hub in Mont Belvieu, Texas. We are also connected to
multiple third-party pipelines owned by Equistar, ExxonMobil,
ONEOK, Huntsman, ChevronPhillips, Dow, Valero and Shell. In
addition, we are connected to all of the NGL fractionators in
Mont Belvieu that are owned by Enterprise Products Partners,
Targa, ONEOK and Gulf Coast Fractionators. We also receive
specialized NGL products from the ExxonMobil Fractionator at
Beaumont, Texas and the ConocoPhillips Fractionator at Sweeny,
Texas.
Mont
Belvieu Expansion Opportunities
We are evaluating several projects to better integrate the three
Mont Belvieu facilities. These projects include additional
pipelines to more efficiently connect the facilities and
additional entries into certain wells to increase flow rates. We
are also evaluating projects that would allow us to store
natural gas. The contemplated Mont Belvieu expansion project
(the “Mont Belvieu Expansion”) is currently
anticipated to include new entries into existing wells, the
conversion of existing wells to store natural gas and the
installation of new piping and certain related facilities, which
may be commenced during 2007 in the estimated range of $25 to
$75 million. Additional expenditures of up to
$200 million may be made during 2008 and 2009. Pursuant to
the Mont Belvieu limited liability company agreement, Enterprise
Products OLP may, in its sole discretion, fund a portion of any
costs related to these projects. Additionally, we may finance
any such projects through borrowings under our new revolving
credit facility or the issuance of debt or additional equity.
For a further description of our agreements with Enterprise
Products Partners relating to these potential expansion
opportunities, please read “Certain Relationships and
Related Party Transactions — Mont Belvieu Caverns
Limited Liability Company Agreement — Future Mont
Belvieu Caverns Expansion Capital.”
Import/Export
Business
Enterprise Products Partners has a growing import/export
business in which it imports various NGL products and transports
these to and from our facilities in Mont Belvieu, Texas. These
products can be stored in our underground storage facilities for
our customers. Enterprise Products Partners is in the process of
expanding this import/export capability and expects to be
completed in the fourth quarter of 2006.
Our Natural Gas Pipelines & Services segment consists
of the Acadian Gas system, which is an onshore natural gas
pipeline system that gathers, transports, stores and markets
natural gas in Louisiana. The Acadian Gas system links natural
gas supplies from onshore and offshore Gulf of Mexico
developments (including offshore pipelines, continental shelf
and deepwater production) with local gas distribution companies,
electric generation plants and industrial customers, located
primarily in the natural gas market area of the Baton
Rouge — New Orleans — Mississippi River
corridor. In the aggregate, the Acadian Gas system includes over
1,000 miles of high-pressure transmission lines and
connected lateral segments with an aggregate throughput capacity
of approximately one Bcf/d and three Bcf of storage capacity.
The Acadian Gas system has over 150 physical end-user market
direct connections. In addition, the system interconnects with
12 interstate and 4 intrastate pipelines through 50 separate
interconnections, has a bi-directional interconnect with the
largest U.S. natural gas marketplace at the Henry Hub, and
is directly connected to six merchant and utility electric
generation facilities with over 6,000 megawatts of generating
capacity. The numerous interconnections allow the Acadian Gas
system to leverage basis differentials across the South
Louisiana pipeline network, maintain a diversified supply
portfolio and create capacity and transportation opportunities
for its shippers. The Acadian Gas system’s bi-directional
interconnect with the Henry Hub provides physical and financial
pricing flexibility, in addition to facilitating access to the
many buyers and sellers of natural gas at the hub.
The Acadian Gas system includes the following assets:
•
Acadian Pipeline. The Acadian pipeline is
located in southern Louisiana and consists of approximately
438 miles of high-pressure transmission lines and smaller
diameter lateral and gathering lines ranging from 12 inches
to 24 inches in diameter. The Acadian pipeline receives
natural gas at numerous interconnections with natural gas
production facilities and from third-party pipelines and
delivers the natural gas to customers’ facilities in
southern Louisiana. Through numerous interconnections with other
pipelines, including receipt and delivery capability at the
Henry Hub, the Acadian pipeline has the capability to deliver
gas to markets that it does not physically reach. The Acadian
pipeline has a throughput capacity of approximately
650 MMcf/d. The Acadian pipeline maintains multiple active
interconnects with the Cypress pipeline to facilitate gas
deliveries between the systems as may be required to meet
customer needs.
•
Cypress Pipeline. The Cypress pipeline is
located in south central Louisiana and consists of approximately
577 miles of transmission lines and smaller diameter
lateral and gathering lines ranging from 10 inches to
22 inches in diameter. This pipeline has interconnections
with many of the interstate and intrastate pipeline systems
operating in southern Louisiana and has a throughput capacity of
approximately 350 MMcf/d. The Cypress pipeline was
originally built to gather onshore Louisiana natural gas
supplies and to provide natural gas pipeline service to the
greater Baton Rouge industrial market, in particular, the
ExxonMobil Baton Rouge Refinery. Through the 1950’s and
1960’s, it was expanded to access the interstate pipeline
supply network and the Geismar, Louisiana and Donaldsonville,
Louisiana industrial market areas. The Cypress pipeline also has
the capability to access deepwater gas production through an
interconnect with the Nautilus Gas Pipeline system and numerous
third-party pipelines.
•
Evangeline Pipeline. The Evangeline pipeline
is a 27-mile
pipeline extending from Taft, Louisiana to Westwego, Louisiana.
The Evangeline pipeline, which consists mainly of transmission
lines ranging from 20 inches to 26 inches in diameter,
connects with three Entergy Louisiana natural gas fired electric
generation stations, the Acadian pipeline and a pipeline owned
by the Columbia Gulf Transmission Company. We indirectly own
approximately 49.5% of the ownership interests in the Evangeline
pipeline. A subsidiary of ConocoPhillips and a private investor
own the remaining interests in Evangeline.
•
Underground Storage Facility. The storage
assets in the Acadian Gas system consist of a leased underground
natural gas storage facility located at the center of the
Acadian Pipeline system near Napoleonville, Louisiana. The
storage facility has approximately 3.0 Bcf of storage
capacity,
220 MMcf/d
of withdrawal capacity and a maximum of 80 MMcf/d of
injection capacity. This facility is designed to handle high
levels of injections and withdrawals of natural gas to meet load
swings and to cover major supply interruption events, such as
hurricanes and temporary losses of production. In addition, the
storage facility permits sustained periods of high natural gas
deliveries and has the ability to switch quickly from full
injection to full withdrawal. An affiliate of Shell is leasing
the storage facility to Acadian Gas through December 31,2012. The term of this contract does not provide for an
additional renewal period. However, Shell has agreed to enter
into diligent negotiations with us under similar terms and
conditions for an extension if we wish to extend the lease
agreement beyond December 2012. Acadian Gas is the operator of
this underground storage facility and owns 75% of its leased
storage, withdrawal and injection capacity. A third party owns
the remaining 25% interest.
System
Throughput
Natural gas throughput on the Acadian Gas system consists of a
combination of natural gas sales volumes owned by us and
transportation volumes delivered on behalf of third-party
shippers, with marketing volumes and transportation volumes
representing approximately 38% and 62%, respectively, of the
average daily gas
volumes for the first nine months of 2006. The following table
summarizes Acadian Gas system’s sales and transportation
volumes for the periods indicated:
Average
Gas Sales and Transportation Volumes (Bbtu/d)
The Acadian Gas system transported approximately 773 Bbtu/d
of natural gas to its customers during the first
nine months of 2006. We have long-standing relationships
with a majority of our customers. Many of our customers purchase
and transport a substantial portion of their natural gas
requirements through the Acadian Gas system and for some
customers our pipelines are the only access point for their
natural gas supplies. Our customers include:
•
electric generating facilities, such as those owned by Entergy
Louisiana and Calpine Corporation;
•
integrated refining and petrochemical facilities, such as
ExxonMobil’s Baton Rouge Complex;
•
local distribution companies and various city and parish
systems; and
•
other industrial and commercial customers of varying size.
The Acadian Gas system has a diversified customer base, with its
largest customer representing only 9% of its total revenue in
2005 and the top ten customers representing only 40% of its
total revenue in 2005.
In addition to its marketing gas activities, the Acadian Gas
system provides fee-based gas transportation services for
producers and gas marketing companies under intrastate and
interruptible NGPA Section 311 transportation contracts.
The primary term of these transportation service contracts may
vary from
month-to-month
to longer-term contracts, with durations typically of one to
three years. The revenues derived from these gas transportation
contracts are based on the quantities of gas delivered
multiplied by the per-unit transportation rate paid. Based on
volumes moved, the most significant shippers on the Acadian Gas
system include ExxonMobil, Coral Energy Resources, BP Energy and
BG Energy Merchants. These shippers transport gas on the Acadian
Gas system to meet the natural gas requirements of their
affiliated industrial and power generation facilities, and to
market commodity gas services to third parties. ExxonMobil is
the most significant long-term shipper on the Acadian Gas
system, and we entered into a long-term gas transportation
agreement with ExxonMobil in 1993 in conjunction with our
acquisition of the Cypress pipeline, which was formerly owned
and operated by ExxonMobil. The primary term of this agreement
expired on December 1, 2006, but the parties entered into
an amendment to extend the term until November 2009. During the
nine months ended September 30, 2006, ExxonMobil shipped
approximately 143 Bbtu/d on the Acadian Gas system
utilizing our system as the primary fuel gas pipeline service
provider for its Baton Rouge Refinery and Chemical complex.
Natural
Gas Sales
The Acadian Gas system is currently connected to approximately
116 customers with an approximate total gas requirement of over
3.0 Bcf/d. The Acadian Gas system has maintained active and
long-term relationships, and currently has long-term natural gas
sales or transportation contracts, with most of these customers.
Our natural gas sales arrangements are implemented under
contracts with market-based pricing indices that correspond to
the pricing indices utilized in our gas purchasing activities.
The majority of gas sales on the Acadian Gas system are made
pursuant to long-term contracts, most of which are at least one
year in duration. Gas sales are also made under short-term
agreements, which generally range from one day to one month.
Much of our gas sales volume is under agreements that provide
for minimum annual volumes to be delivered at Henry Hub indexed
market prices (determined monthly), plus a predetermined
adjustment or differential. The Acadian Gas system has
historically received higher margins under long-term contracts
that provide customers with supply certainty as well as value
added services to ensure gas supplies through dedicated
facilities. These additional services are necessary to
accommodate large swings in a customers’ natural gas
requirement, which may vary hourly, daily and monthly.
The Acadian Gas system’s most significant natural gas sales
contract is a
21-year
arrangement with Evangeline, which was entered into in 1991, and
includes minimum annual quantities. Evangeline uses these
natural gas volumes to meet its own supply obligation under a
corresponding sales agreement with Entergy Louisiana, its only
customer. Under the Entergy Louisiana gas sales contract,
Evangeline is obligated to make available for sale and deliver
to Entergy Louisiana certain specified minimum quantities of gas
on a hourly, daily, monthly and annual basis. The gas sales
contract provides for minimum annual quantities of
36.75 Bbtus until the contract expires on January 1,2013 (which is coterminous with the natural gas purchase
commitment with ConocoPhillips described below). Please read
“— Evangeline Long-Term Debt” below for a
discussion regarding the use of proceeds by Evangeline from
these natural gas sales.
In connection with Acadian Gas’ gas sales contract with
Evangeline, a portion of the revenues received are attributable
to a “seller’s margin” agreement contained with
the contract. The “seller’s margin” set forth in
the contract is a fixed dollar amount paid per MMBtu per month
in the first contract year and adjusted upwards in successive
years. Seller’s margin is used to calculate fees incurred
on the contract when a buyer exercises an option to reduce the
minimum annual quantity or when firm gas is delivered pursuant
to the contract.
The electric utility and industrial customers of Acadian Gas
system normally consume the natural gas in their own operations
for fuel or feedstock, while local distribution companies and
city-gate systems generally resell the natural gas to the
customers of their respective gas pipeline systems.
Natural
Gas Purchases
The Acadian Gas system currently purchases gas supply from 41
different gas producers through 59 separate gas production
receipt locations. Substantially all of the Acadian Gas
system’s natural gas requirements are purchased under
contracts that contain market-responsive pricing provisions. The
Acadian Gas system’s most significant long-term gas
purchase commitment is with ConocoPhillips, which was entered
into in 1991 as part of the formation of Evangeline Gas Pipeline
Company, L.P. This gas purchase contract expires on
January 1, 2013 (which is coterminous with the natural gas
sales agreement with Evangeline described above) and provides
for minimum annual quantities of natural gas to be purchased by
the Acadian Gas system, similar in structure to the minimum
annual obligations between Acadian Gas system and Evangeline,
and the corresponding obligations between Evangeline and Entergy
Louisiana. The pricing terms of the gas purchase contract and
the Entergy Louisiana gas sales contract are based on a
weighted-average cost of natural gas each month (subject to
certain market index price ceilings and incentive margins), plus
a pre-determined margin. The amount of natural gas purchased
pursuant to this contract totaled 17.4 Bbtus in 2005,
18.2 Bbtus in 2004 and 18.2 Bbtus in 2003. The amounts
paid by the Acadian Gas System for natural gas purchased under
this contract totaled $148.3 million in 2005,
$112.7 million in 2004 and $100.3 million in 2003.
Natural
Gas Interconnections
General. The Acadian Gas system procures gas
supply from natural gas production facilities, third party
natural gas pipelines, and market center pipeline hubs such as
the Henry Hub and the Nautilus Hub operated by third parties.
The Acadian Gas system has approximately 50 separate
pipeline-to-pipeline
interconnects with 12 interstate pipeline systems, and four
unaffiliated intrastate pipeline systems. These third-party gas
supplies in support of Acadian Gas system’s gas marketing
activities and as receipt volumes for gas
transportation activities may be sourced from any of these
locations as pipeline pressures, facility interconnect
capacities and landed gas pricing levels will dictate.
The Henry Hub. The Acadian Gas system includes
a bi-directional interconnect with the Henry Hub which is
generally considered to be one of the most liquid natural gas
market locations in North America. The Henry Hub has
interconnects with nine interstate and four intrastate pipelines
providing shippers with access to pipelines reaching markets in
the Midwest, Northeast, Southeast, and Gulf Coast regions of the
United States. The Henry Hub is also the delivery point for the
New York Mercantile Exchange (NYMEX) natural gas futures
contract with NYMEX deliveries occurring at the Henry Hub being
handled the same as cash-market transactions, thereby providing
the connected Henry Hub participants with additional market
flexibility.
The Nautilus Hub. The Acadian Gas system is
also connected to the Nautilus Hub, which is the terminal end of
the Nautilus Gas Pipeline system. The Nautilus Gas Pipeline
system is a
101-mile,
30-inch
FERC- regulated gas transmission system that gathers deepwater
Gulf of Mexico natural gas production for delivery onshore in
St. Mary Parish, Louisiana at the Neptune natural gas processing
plant, which is operated by Enterprise Products Partners. After
natural gas is processed at the Neptune facility, it is
redelivered into the Nautilus Hub which has seven separate
interconnects with interstate and intrastate gas pipeline
systems, including the Acadian Gas system.
Evangeline
Long-Term Debt
In connection with the acquisition of the Entergy Louisiana
natural gas sales contract and construction of the Evangeline
pipeline, Evangeline entered into a long-term debt arrangement
consisting of 9.9% fixed interest rate senior secured notes due
December 2010, or the Series B Notes, and a
$7.5 million subordinated note payable to Evangeline
Northwest Corporation, or the ENC Note. The Series B notes
are collateralized by: (i) Evangeline’s property,
plant and equipment; (ii) proceeds from the Entergy
Louisiana natural gas sales contract; and (iii) a debt
service reserve requirement. Scheduled principal repayments on
the Series B notes are $5 million annually through
2009 with a final repayment in 2010 of approximately
$3.2 million. Evangeline incurred the ENC Note obligations
in connection with its acquisition of the Entergy Louisiana
natural gas sales contract in 1991. The ENC Note is subject to a
subordination agreement which prevents the repayment of
principal and accrued interest on the note until such time as
the Series B note holders are either fully cash secured
through debt service accounts or have been completely repaid.
Substantially all of the net proceeds received by Evangeline
from its contracts with Entergy Louisiana are used to pay off
the Series B notes and ENC Note.
Entergy
Louisiana’s Option
Entergy Louisiana has the option to purchase the Evangeline
pipeline system for a nominal price, plus the complete
performance and compliance with the gas sales contract. The
option period begins on the earlier of July 1, 2010 or upon
the payment in full of the Series B Notes and the ENC Note,
and terminates on December 31, 2012. We cannot know when,
or if, Entergy Louisiana will exercise this option. Factors that
may influence Entergy Louisiana’s decision include, but are
not limited to, Entergy Louisiana’s future business plans,
natural gas procurement strategies, required regulatory
approvals, and the pipeline system’s residual value, if
any, at the time the option is exercisable.
Commodity
Price Risk
With regard to physical marketing gas activities, the Acadian
Gas system purchases gas in quantities and under pricing terms
that mirror its sales obligations. Within the transportation
services function, the Acadian Gas system transports quantities
of gas on behalf of others, with those shippers being
responsible for managing any commodity price risk that may be
associated with matching gas purchases with gas sale. The
Acadian Gas system does not engage in any type of commodity
hedging, nor any futures, options, or basis trading for the
purpose of attempting to create or optimize a proprietary
trading position. Accordingly, the Acadian Gas system does not
manage or utilize a strategy that would involve trading of
financial positions. Certain physical customers of the Acadian
Gas system will from time to time request the ability to control
the
volatility inherent in a monthly indexed natural gas sales
arrangement, which requires that the Acadian Gas system take a
position in the futures market corresponding to the hedge
request of that customer. When this transaction takes place, it
is only at the request of the customer, and only in a volume and
for a time period that corresponds to coverage of that
customer’s request, and as it would relate to that
customer’s physical delivery contract with the Acadian Gas
system.
Seasonality
Typically, the Acadian Gas system experiences higher throughput
rates during the summer months as gas-fired power generation
facilities increase output to satisfy residential and commercial
demand for electricity for air conditioning. Likewise,
seasonality impacts the timing of injections and withdrawals at
our natural gas storage facility. In the winter months, natural
gas is needed as fuel for residential and commercial heating,
generally increasing the need for deliveries to local
distribution companies and city-gate stations.
Competition
Our Acadian Gas system competes with several onshore natural gas
pipelines in the South Louisiana market on the basis of
price (in terms of transportation fees or natural gas selling
prices), location, service, reliability and flexibility. The
transportation fees and natural gas sales prices we charge our
customers are competitive with those charged by other onshore
pipelines in the area because we rely on certain published
indices for our pricing. We are distinguished from our
competitors within the onshore South Louisiana market because of
our long-standing customer relationships. Due to the limited
number of alternative delivery pipeline connections to those
customers, we have been able to retain our customers for many
years. Our competitors have the ability to connect into various
customers on our pipeline but at a higher cost due to new
pipelines and other related facilities. It is critical to the
customers in the region that we provide reliable service to
enable our customers flexibility of supply through the many
connections to our system. Because of our location and
long-standing presence in South Louisiana, we are able to
compete effectively in this market.
Our Petrochemical Pipeline Services segment consists of two
petrochemical pipeline systems with an aggregate of 284 miles of
pipeline that provide for the transportation of propylene in
Texas and Louisiana. This segment includes the following assets:
•
Lou-Tex Propylene Pipeline. The Lou-Tex
Propylene pipeline consists of a
263-mile,
10-inch
pipeline used to transport chemical-grade propylene between
Sorrento, Louisiana and Mont Belvieu, Texas. Currently, this
pipeline is used to transport chemical-grade propylene from
production facilities in Louisiana to customers in Louisiana and
Texas under transportation contracts that Enterprise Products
OLP has with Shell and ExxonMobil. The chemical-grade propylene
transported for Shell originates from the Shell Sorrento
underground storage facility and is delivered to various
delivery points between an underground storage facility in
Sorrento, Louisiana and an underground storage facility in Mont
Belvieu, Texas owned by Mont Belvieu Caverns. The delivery
points on the Lou-Tex Propylene pipeline include Vulcan,
Westlake Lake Charles, Beaumont Novus, and Shell’s Texas
chemical grade propylene delivery system. The chemical-grade
propylene delivered for Exxon originates from the Exxon Baton
Rouge refining and chemical complex and is delivered to an
underground storage well in Mont Belvieu, Texas owned by Mont
Belvieu Caverns. The Lou-Tex Propylene pipeline was constructed
in 1997 and acquired by Enterprise Products Partners in March
2000 from an affiliate of Shell.
•
Sabine Propylene Pipeline. The Sabine
Propylene pipeline consists of a
21-mile,
8-inch
pipeline used to transport polymer-grade propylene that begins
in Groves, Texas and terminates at a connection to Enterprise
Products Partners’ Lake Charles propylene line in Cameron
Parish, Louisiana. The polymer-grade propylene transported for
Shell originates from the TOTAL/BASF Port Arthur cracker
facility
and is delivered to the Basell polypropylene facility in Lake
Charles, Louisiana. The pipeline was constructed by Enterprise
Products Partners and placed in service in 2002.
Customers. Shell and ExxonMobil are the only
customers that use the Lou-Tex Propylene pipeline. Shell is the
only customer that uses the Sabine Propylene pipeline.
Contracts. Enterprise Products Partners has
entered into separate product exchange agreements with Shell and
ExxonMobil involving the use of our Sabine Propylene and Lou-Tex
Propylene pipelines. Concurrently with the closing of this
offering, Enterprise Products Partners will assign these
exchange agreements to us. Through these exchange agreements, we
will agree to receive propylene product in one location and
deliver it to another location.
•
Shell Exchange Agreements. We will become a
party to separate product exchange agreements with Shell for the
use of the Lou-Tex Propylene and Sabine Propylene pipelines. The
term of the Lou-Tex Propylene pipeline agreement expires on
March 1, 2020, but will continue on an annual basis subject
to termination by either party. The exchange fees paid by Shell
are fixed until such time as a published power index in
Louisiana becomes available and the parties agree to use such
index. The term of the Sabine Propylene pipeline agreement
expires on November 1, 2011, but will continue on an annual
basis subject to termination by either party. The exchange fees
paid by Shell are adjusted yearly based on the
U.S. Department of Labor wage index and the yearly
operating costs of the Sabine Propylene pipeline. Shell is
obligated to meet minimum delivery requirements under the
Lou-Tex Propylene and Sabine Propylene agreements. If Shell
fails to meet such minimum delivery requirements, it will be
obligated to pay a deficiency fee to us.
•
Exxon Exchange Agreement. We will become a
party to a product exchange agreement with ExxonMobil for the
use of the Lou-Tex Propylene pipeline. The term of the Lou-Tex
Propylene exchange agreement expires on June 1, 2008, but
will continue on a monthly basis subject to termination by
either party. The exchange fees paid by ExxonMobil are based on
the volume of chemical grade propylene delivered to Enterprise
Products Partners and us.
Enterprise Products Partners will assign the exchange agreements
for the use of the Lou-Tex Propylene and Sabine Propylene
pipelines with Shell and ExxonMobil to us concurrently with the
closing of this offering. Prior to 2004, the Sabine Propylene
pipeline was regulated by the FERC. The Lou-Tex Propylene
pipeline was also subject to the FERC’s jurisdiction until
2005. For the periods in which the Sabine Propylene pipeline and
the Lou-Tex Propylene pipeline were subject to FERC regulations,
related party revenues with Enterprise Products Partners were
based on the maximum tariff rate allowed for each system. We
continued to charge Enterprise Products Partners such maximum
transportation rates after both entities were declared exempt
from FERC oversight. The assignment of these contracts to us
concurrently with the closing of this offering will make the
tariff charged by us to equal the rates charged to ExxonMobil
and Shell.
The maximum number of barrels that these systems can transport
per day depends on the operating balance achieved at a given
time between various segments of the systems. Because the
balance is dependent upon the mix of receipt and delivery
capabilities, the exact capacities of the systems cannot be
stated. We measure the utilization rates of our NGL and
petrochemical pipelines in terms of throughput (on a net basis
in accordance with our ownership interest).
Seasonality
Our propylene transportation business has historically exhibited
little seasonality.
Competition
Our petrochemical pipelines encounter competition from fully
integrated oil companies and various petrochemical companies in
the Gulf Coast market. Our petrochemical transportation
competitors have varying levels of financial and personnel
resources, and competition generally revolves around price,
service, logistics and location. We differentiate ourselves from
the larger oil and petrochemical companies primarily through the
location of our pipelines and dedication of our pipelines to a
single product service. Our petrochemical pipelines are in
single product service due to the required purity of the product
being shipped. Because there are no other pipelines in our
market area which ship the same single product, we are able to
compete against our larger competitors for this service. In the
future, a competitor could change service of an existing
pipeline to ship single products, but they would have to incur
additional costs to connect to our customers.
Our NGL Pipeline Services segment consists of a
290-mile
intrastate pipeline system and related interconnections to be
used to transport NGLs from two fractionation facilities located
in South Texas to Mont Belvieu, Texas. The South Texas NGL
pipeline system became operational and began transporting NGLs
in January 2007 after undergoing modifications, extensions and
interconnections which we refer to as Phase I. Enterprise
Products Partners purchased the
223-mile
segment of pipeline, ranging from 12 inches to
16 inches in diameter, from ExxonMobil Pipeline Company in
August 2006. This segment of the South Texas NGL pipeline system
originates in Corpus Christi, Texas and extends to Pasadena,
Texas. Currently, the capacity of the 223-mile pipeline we
purchased from ExxonMobil Pipeline Company is approximately
100,000 Bbls/d and expandable to 175,000 Bbls/d.
During Phase I:
(1) we will construct approximately 13 miles of
pipeline and utilize an existing 32-mile pipeline to complete
pipeline laterals to connect the two fractionation facilities to
the 223-mile
segment of our South Texas NGL pipeline system; and
(2) we have entered into a lease with TEPPCO Partners for a
12-mile,
10-inch
interconnecting pipeline extending from Pasadena, Texas to
Baytown, Texas. The primary term of the pipeline lease will
expire on September 15, 2007, and will continue on a
month-to-month
basis subject to termination by either party upon
60 days’ notice.
During January 2007, an affiliate of Enterprise Products
Partners acquired an additional
10-mile,
18-inch
segment of pipeline from an affiliate of TEPPCO Partners, which
connects the leased TEPPCO pipeline to Mont Belvieu, Texas. The
purchase of the
10-mile
segment of
18-inch
pipeline from TEPPCO Partners was for an aggregate purchase
price of $8 million. This pipeline will be among the assets
owned by South Texas NGL at the closing of this offering.
During Phase II, we will construct 21 miles of
18-inch
pipeline to replace the leased
12-mile,
10-inch
pipeline and the
12-inch
segments of the pipeline acquired from ExxonMobil. The
Phase II upgrade will provide a significant increase in
pipeline capacity and is expected to be operational during the
third quarter of 2007.
The sole customer of our NGL Pipeline Services segment is
Enterprise Products Partners, which will use the South Texas NGL
pipeline system to ship NGLs processed at the Shoup
fractionation plant in Corpus Christi, Texas, the Armstrong
fractionation plant located near Victoria, Texas and NGLs
purchased from third parties in South Texas to Mont Belvieu,
Texas. We have entered into a ten-year transportation contract
with Enterprise Products Partners that includes all of the
volumes of NGLs transported on the South Texas NGL pipeline
system. Under this contract, Enterprise Products Partners will
pay us a dedication fee of no less than $0.02 per gallon
for all NGLs produced at the Shoup and Armstrong fractionation
plants whether or not Enterprise Products Partners ships any
NGLs on the South Texas NGL pipeline system. We will not take
title to the products transported on the South Texas NGL
pipeline system; rather, Enterprise Products Partners will
retain title and the associated commodity risk.
Revenues
Revenues from the dedication fee of no less than $0.02 per
gallon of NGLs produced at Enterprise Products Partners’
Shoup and Armstrong fractionation plants will represent
substantially all of the revenues for our NGL Pipeline Services
Segment and South Texas NGL pipeline system. These NGL volumes
have varied during recent periods and may vary in the future.
Because the South Texas NGL pipeline system provides
transportation services to Enterprise Products Partners on a
dedicated fee basis, the results of our operations are dependent
upon the level of production of NGLs from the Shoup and
Armstrong fractionation plants. If one of the plants shuts down
or otherwise reduces production, our revenues would decrease.
Seasonality
Our NGL Pipeline Services segment will not exhibit a significant
degree of seasonality.
The sources of the NGLs to be transported on our NGL pipeline
system originates primarily from the Shoup fractionation plant
located in Corpus Christi, Texas and the Armstrong fractionation
plant located 26 miles north of Victoria, Texas.
•
Shoup Fractionation Plant. The Shoup
fractionation plant, located in Corpus Christi, Texas, separates
a mixed NGL stream into its components such as purity ethane,
propane, mixed butane and natural gasoline. The fractionator has
a capacity of 69,000 Bbls/d and produces purity ethane,
propane and butane/gasoline streams. The facility fractionates
mixed NGLs from 6 gas processing plants located throughout South
Texas and delivered to the fractionation plant by approximately
350 miles of NGL gathering pipelines.
•
Armstrong Fractionation Plant. The Armstrong
fractionation plant is located adjacent to the Armstrong gas
processing plant in Dewitt County, Texas. The fractionator has a
capacity of 18,000 Bbls/d and fractionates mixed NGLs sourced
from the Armstrong processing plant exclusively. The facility
produces purity ethane, propane, mixed butane and natural
gasoline. The Armstrong gas processing plant is a double train
expander facility with approximately 250 MMcf/d of
processing capacity.
The Shoup and Armstrong fractionation plants produced the
following aggregate amounts of NGLs during the periods set forth
below:
NGLs Produced
Period
(Bbls/d)
2003
56,752
2004
66,557
2005
64,505
2006 (nine months ended
September 30)
65,884
Natural
Gas Supply
The natural gas that supplies the gas processing plants which
provide the NGLs for the South Texas NGL pipeline system is
sourced from the prolific Texas Gulf Coast producing area.
Production trends based on 2005 EIA data show a 1% per year
increase over the last 25 years. New drilling permits (per
IHS Inc.) and rig counts (per Baker Hughes) have also increased
5% per year over the last three years. The EIA report on
production of rich gas also shows an annual average increase of
1% over the last 25 years. New resources of rich gas may
exist in the Cretaceous sands of southwest Texas and the
Oligocene Vicksburg below 14,000’ of South Texas. In the
middle Gulf Coast, rich Wilcox gas is found in the
10,000-15,000’
depth range. Shale gas may also have a large potential in these
areas with expected high liquids content.
We do not have any employees. EPCO employs most of the persons
necessary for the operation of our business. At
September 30, 2006, EPCO had approximately
80 dedicated employees and 176 employees that share a
portion of their time in the management and operations of our
business, none of whom were members of a union. We will continue
to reimburse EPCO for the costs of all employees providing
services to us. For a detailed discussion of our related party
transactions with EPCO, please read “Certain Relationships
and Related Party Transactions.” In addition to EPCO
employees, we will engage various contract maintenance and other
personnel who will support our operations.
We are subject to extensive federal, state and local laws and
regulations, as well as orders of regulatory bodies pursuant
thereto, governing a wide variety of matters, including
environmental quality and pollution control, community
right-to-know,
safety and other matters. These laws and regulations may, in
certain instances, require us to restrict the way we handle or
dispose of our wastes, limit or prohibit construction activities
in environmentally sensitive areas, remedy the environmental
effects of the disposal or release of certain substances at
current and former operating sites or halt the operations of
facilities deemed in non-compliance with permits issued pursuant
to such environmental laws and regulations.
We may incur significant costs and liabilities in order to
comply with existing environmental laws and regulations. It is
also possible that other developments, such as claims for
damages to property, employees, other persons and the
environment resulting from current or past operations, could
result in substantial costs and liabilities in the future. It is
possible that new information or future developments, such as
increasingly strict environmental laws, could require us to
reassess our potential exposure related to environmental
matters. Although we do not believe that compliance with
federal, state or local environmental laws and regulations will
have a material adverse effect on our business, financial
position or results of operations, we cannot assure you that the
development or discovery of new facts or conditions will not
cause us to incur significant costs. As this information becomes
available, or other relevant developments occur, we will make
accruals accordingly. For a summary of our significant
environmental-related accruals, please read Note 2 of the
Notes
to Combined Financial Statements of Duncan Energy Partners
Predecessor included elsewhere in this prospectus.
We have ongoing programs designed to keep our pipelines and
storage facility in compliance with environmental and safety
requirements, and we believe that our facilities are in material
compliance with the applicable regulatory requirements. As of
September 30, 2006, we had a reserve of approximately
$0.2 million included in other current liabilities for
remediation of ground contamination related to the Acadian Gas
system. Below is a discussion of the material environmental laws
and regulations that relate to our business.
Specific
Environmental Laws and Regulations
Pipelines. Pursuant to the Pipeline Safety
Improvement Act of 2002, the DOT has adopted regulations
requiring pipeline operators to develop integrity management
programs for transportation pipelines located where a leak or
rupture could do the most harm in “high consequence
areas.” The regulations require operators to perform
ongoing assessments of pipeline integrity, identify and
characterize applicable threats to pipeline segments that could
impact a high consequence area, and repair and remediate the
pipeline as necessary.
Several other federal and state environmental statutes and
regulations may pertain specifically to the operations of our
pipelines. Among these, the Hazardous Materials Transportation
Act regulates materials capable of posing an unreasonable risk
to health, safety and property when transported in commerce, and
the Natural Gas Pipeline Safety Act and the Hazardous Liquid
Pipeline Safety Act authorize the development and enforcement of
regulations governing pipeline transportation of natural gas and
NGLs. Although federal jurisdiction is exclusive over regulated
pipelines, the statutes allow states to impose additional
requirements for intrastate lines if compatible with federal
programs. New Mexico, Texas and Louisiana have developed
regulatory programs that parallel the federal program for the
transportation of natural gas and NGLs by pipelines. For
example, our intrastate gas pipelines and gas storage operations
in Louisiana are subject to state regulations issued by the
Louisiana Public Service Commission and the Louisiana Department
of Natural Resources. Within the Louisiana Department of Natural
Resources, the Office of Conservation has the authority to
regulate all pipeline interconnections, transportation and
construction or abandonment of facilities, and the Office of
Pipeline Safety monitors the implementation of the DOT and
Louisiana pipeline safety regulations.
Solid Waste. The operations of our pipelines
may generate both hazardous and nonhazardous solid wastes that
are subject to the requirements of the Resource Conservation and
Recovery Act and its regulations, and other federal and state
statutes and regulations. Further, it is possible that some
wastes that are currently classified as nonhazardous, via
exemption or otherwise, perhaps including wastes currently
generated during pipeline operations, may, in the future, be
designated as “hazardous wastes,” which would then be
subject to more rigorous and costly treatment, storage,
transportation and disposal requirements. Such changes in the
regulations may result in additional expenditures or operating
expenses for us.
Hazardous Substances. The Comprehensive
Environmental Response, Compensation and Liability Act, or
CERCLA, and comparable state statutes, also known as
“Superfund” laws, impose liability, without regard to
fault or the legality of the original conduct, on certain
classes of persons that cause or contribute to the release of a
“hazardous substance” into the environment. These
persons include the current owner or operator of a site, the
past owner or operator of a site, and companies that transport,
dispose of, or arrange for the disposal of the hazardous
substances found at the site. CERCLA also authorizes the
Environmental Protection Agency or state agency, and in some
cases, third parties, to take actions in response to threats to
the public health or the environment and to seek to recover from
the responsible classes of persons the costs they incur. Despite
the “petroleum exclusion” of CERCLA
Section 101(14) that currently encompasses crude oil,
refined petroleum products, natural gas and NGLs, we may
nonetheless handle “hazardous substances,” within the
meaning of CERCLA or similar state statutes, in the course of
our ordinary operations.
Air. Our operations may be subject to the
Clean Air Act and other federal and state statutes and
regulations that impose certain pollution control requirements
with respect to air emissions from operations, particularly in
instances where a company constructs a new facility or modifies
an existing facility. We may be
required to incur certain capital expenditures in the next
several years for air pollution control equipment in connection
with maintaining or obtaining operating permits and approvals
addressing other air emission-related issues. However, we do not
believe these requirements will have a material adverse affect
on our operations.
Water. The Federal Water Pollution Control Act
imposes strict controls against the unauthorized discharge of
pollutants, including produced waters and other oil and natural
gas wastes, into navigable waters. It provides for civil and
criminal penalties for any unauthorized discharges of oil and
other substances and, along with the Oil Pollution Act of 1990,
or OPA, imposes substantial potential liability for the costs of
oil or hazardous substance removal, remediation and damages.
Similarly, the OPA imposes liability for the discharge of oil
into or upon navigable waters or adjoining shorelines. State
laws for the control of water pollution also provide varying
civil and criminal penalties and liabilities in the case of an
unauthorized discharge of pollutants into state waters.
Worker Safety and Hazard Communication. We are
subject to the requirements of the Occupational Safety and
Health Act, or OSHA, and comparable state statutes. These laws
and the implementing regulations strictly govern the protection
of the health and safety of employees. OSHA, the Emergency
Planning and Community
Right-to-Know
Act and comparable state statutes require those entities that
operate facilities for us to organize and disseminate
information to employees, state and local organizations, and the
public about the hazardous materials used in its operations and
its emergency planning.
Regulation
of Our Intrastate Natural Gas Pipelines and
Services
At the federal level, our gas pipelines and gas storage
facilities are subject to regulations of the FERC under the
Natural Gas Policy Act of 1978, or the NGPA. Our natural gas
intrastate systems provide transportation and storage pursuant
to Section 311 of the NGPA and Section 284 of the
FERC’s regulations. Under Section 311 of the NGPA, an
intrastate pipeline company may transport gas for an interstate
pipeline company or any local distribution company served by an
interstate pipeline. We are required to provide these services
on an open and nondiscriminatory basis and to make certain rate
and other filings and reports in compliance with the
regulations. The rates for Section 311 service can be
established by the FERC or the respective state agency. The
associated rates may not exceed a fair and equitable rate and
are subject to challenge.
In the past, the FERC has approved market-based rates for
Section 311 storage service for the storage facility in
Louisiana. Recently, we filed petitions for each of our Acadian
and Cypress pipelines requesting approval of increased rates for
interruptible transportation service performed under
Section 311, to be effective October 1, 2006, subject
to refund. Each of these petitions was protested by a single
shipper. We did not place the proposed rates for the Acadian and
Cypress pipelines into effect on October 1, 2006.
Therefore, there are no currently effective rates that are
subject to refund, although the currently effective rates remain
subject to complaint by all shippers. We are currently engaged
in settlement discussions with the shipper and the FERC staff to
establish the proposed rates for the Acadian and Cypress
pipelines. Any settlement agreement between the parties must be
approved by the FERC. The Louisiana Public Service Commission
also reviews and approves rates for pipelines providing
Section 311 service in Louisiana. For example, the
Louisiana Public Service Commission regulates Acadian Gas’s
city gate sales. We also have a natural gas underground storage
facility in Louisiana that is subject to state regulation. In
addition to the above-regulations, the natural gas industry has
historically been subject to numerous other forms of federal,
state and local regulation.
Regulation
of Our Petrochemical Pipeline Services
Our interstate Lou-Tex Propylene and Sabine Propylene pipelines
are common carrier pipelines regulated by the Surface
Transportation Board or STB under the current version of the
ICA. The ICA and its implementing regulations give the STB
authority to regulate the rates we charges for service on the
propylene pipelines and generally require that our rates and
practices be just and reasonable and nondiscriminatory.
The majority of the natural gas pipelines in the Acadian Gas
system are intrastate common carrier pipelines that are subject
to various Louisiana state laws and regulations that affect the
rates it charges and the terms of service. We also have a
natural gas underground storage facility in Louisiana that is
subject to state regulations.
For additional information regarding the potential impact of
federal, state or local regulatory measures on our business,
please read “Risk Factors.”
Our real property holdings fall into two basic categories:
(1) parcels that we own in fee, such as the land and
underlying storage caverns at Mont Belvieu, Texas and
(2) parcels in which our interest derives from leases,
easements,
rights-of-way,
permits or licenses from landowners or governmental authorities
permitting the use of such land for our operations. The fee
sites upon which our major facilities are located have been
owned by us or our predecessors in title for many years without
any material challenge known to us relating to title to the land
upon which the assets are located, and we believe that we have
satisfactory title to such fee sites. We have no knowledge of
any challenge to the underlying fee title of any material lease,
easement,
right-of-way
or license held by us or to our title to any material lease,
easement,
right-of-way,
permit or license, and we believe that we have satisfactory
title to all of our material leases, easements,
rights-of-way
and licenses.
Some of the leases, easements, rights-of-way, permits and
licenses to be transferred to us require the consent of the
grantor of such rights. Our general partner expects to obtain,
prior to the closing of this offering, sufficient third-party
consents, permits and authorizations for the transfer of the
assets necessary to enable us to operate our business in all
material respects as described in this prospectus. With respect
to any material consents, permits or authorizations that have
not been obtained prior to closing of this offering, the closing
of this offering will not occur unless reasonable basis exist
that permit our general partner to conclude that such consents,
permits or authorizations will be obtained within a reasonable
period following the closing, or the failure to obtain such
consents, permits or authorizations will have no material
adverse effect on the operation of our business.
On occasion, we are named as a defendant in litigation relating
to our normal business operations, including regulatory and
environmental matters. Although we are insured against various
business risks to the extent we believe is prudent, the nature
and amount of such insurance may not be adequate, in every case,
to indemnify us against liabilities arising from future legal
proceedings as a result of our ordinary business activity.
In 1997, Acadian Gas, along with numerous other energy
companies, were named defendants in actions brought by Jack
Grynberg on behalf of the U.S. Government under the False
Claims Act. Generally, these complaints allege an industry-wide
conspiracy to underreport the heating value as well as the
volumes of the natural gas produced from federal and Native
American lands, which deprived the U.S. Government of
royalties. The plaintiff in this case seeks royalties that he
contends the government should have received had the volume and
heating value been differently measured, analyzed, calculated
and reported, together with interest, treble damages, civil
penalties, expenses and future injunctive relief to require the
defendants to adopt allegedly appropriate gas measurement
practices. These matters have been consolidated for pretrial
purposes (In re: Natural Gas Royalties Qui Tam Litigation,
U.S. District Court for the District of Wyoming, filed June
1997). On October 20, 2006, the U.S. District Court
dismissed all of Grynberg’s claims with prejudice.
We are not aware of any other significant litigation, pending or
threatened, that may have a significant adverse effect on our
financial position or results of operations.
As is commonly the case with publicly traded limited
partnerships, we do not directly employ any of the persons
responsible for the management or operations of our business.
These functions are performed by the employees of EPCO pursuant
to an administrative services agreement under the direction of
the Board of Directors and executive officers of our general
partner. For a description of the administrative services
agreement, please read “Certain Relationships and Related
Party Transactions.”
Our general partner is liable for all debts we incur (to the
extent not paid by us), except to the extent that such
indebtedness or other obligations are non-recourse to our
general partner. Whenever possible, our general partner intends
to make any such indebtedness or other obligations non-recourse
to itself and its general partner.
We are committed to sound principles of governance. Such
principles are critical for us to achieve our performance goals,
and maintain the trust and confidence of investors, employees,
suppliers, business partners and stakeholders. The following is
a brief description of certain existing practices we use to
maintain strong governance principles.
Independence of Board Members. A key element
for strong governance is independent members of the board of
directors. Pursuant to the NYSE listing standards, a director
will be considered independent if the board determines that he
or she does not have a material relationship with our general
partner or us (either directly or as a partner, unitholder or
officer of an organization that has a material relationship with
Enterprise Products GP or us). Based on the foregoing, the Board
has affirmatively determined that
William A. Bruckmann, III, Larry J. Casey
and Joe D. Havens are “independent” under the
NYSE rules.
Heightened Independence for Audit, Conflicts and Governance
Committee Members. As required by the
Sarbanes-Oxley Act of 2002, the SEC adopted rules that direct
national securities exchanges and associations to prohibit the
listing of securities of a public company if members of its
audit committee do not satisfy a heightened independence
standard. In order to meet this standard, a member of an audit
committee may not receive any consulting fee, advisory fee or
other compensation from the public company other than fees for
service as a director or committee member and may not be
considered an affiliate of the public company. Neither our
general partner nor any individual member of its Audit,
Conflicts and Governance Committee has relied on any exemption
in the NYSE rules to establish such individual’s
independence. Based on the foregoing criteria, the Board of
Directors of our general partner has affirmatively determined
that all members of its Audit, Conflicts and Governance
Committee satisfy this heightened independence requirement.
Audit Committee Financial Expert. An audit
committee plays an important role in promoting effective
corporate governance, and it is imperative that members of an
audit committee have requisite financial literacy and expertise.
As required by the Sarbanes-Oxley Act of 2002, SEC rules require
that a public company disclose whether or not its audit
committee has an “audit committee financial expert” as
a member. An “audit committee financial expert” is
defined as a person who, based on his or her experience,
satisfies all of the following attributes:
•
An understanding of generally accepted accounting principles and
financial statements.
•
An ability to assess the general application of such principles
in connection with the accounting for estimates, accruals, and
reserves.
•
Experience preparing, auditing, analyzing or evaluating
financial statements that present a breadth and level of
complexity of accounting issues that are generally comparable to
the breadth and level of complexity of issues that can
reasonably be expected to be raised by our financial statements,
or experience actively supervising one or more persons engaged
in such activities.
An understanding of internal controls and procedures for
financial reporting.
•
An understanding of audit committee functions.
Based on the information presented, the Board of Directors has
affirmatively determined
that
satisfies the definition of “audit committee financial
expert.”
Executive Sessions of Board. The Board of
Directors of our general partner holds regular executive
sessions in which non-management board members meet without any
members of management present. The purpose of these executive
sessions is to promote open and candid discussion among the
non-management directors. During such executive sessions, one
director is designated as the “Presiding Director,”
who is responsible for leading and facilitating such executive
sessions. The Presiding Director will be the Chairman of the
Audit, Conflicts and Governance Committee.
In accordance with the rules of the NYSE, we have designated our
toll-free, confidential Hotline as the method for interested
parties to communicate with the Presiding Director, alone, or
with the non-management Directors of our general partner as a
group. All calls to this Hotline are reported to the Chairman of
the Audit, Conflicts and Governance Committee of our general
partner, who is responsible for communicating any necessary
information to the other non-management directors as a group.
The number of our confidential Hotline is 877-888-0002. The
Hotline is operated by The Network, an independent contractor
that specializes in providing feedback and reporting services to
more than 1,000 companies in a variety of industries.
Committees
of Board of Directors
After giving effect to this offering, the Board of Directors of
our general partner will have one committee, the Audit,
Conflicts and Governance Committee, which we refer to in this
prospectus as the ACG Committee.
Audit,
Conflicts and Governance Committee
In accordance with NYSE rules and Section 3(a)(58)(A) of
the Exchange Act, the Board of Directors of our general partner
has named three of its members to serve on its ACG Committee.
The members of the ACG Committee are independent directors, free
from any relationship with us or any of our subsidiaries that
would interfere with the exercise of independent judgment.
The members of the ACG Committee must have a basic understanding
of finance and accounting and be able to read and understand
fundamental financial statements, and at least one member of the
committee shall have accounting or related financial management
expertise. The members of the ACG Committee will be Messrs.
Bruckmann, Casey and Havens. The primary responsibilities of the
ACG Committee include:
•
monitoring the integrity of our financial reporting process and
related systems of internal control;
•
ensuring our legal and regulatory compliance and that of our
general partner;
•
overseeing the independence and performance of our independent
public accountants;
•
approving all services performed by our independent public
accountants;
•
providing for an avenue of communication among the independent
public accountants, management, internal audit function and the
Board of Directors;
•
encouraging adherence to and continuous improvement of our
policies, procedures and practices at all levels; and
•
reviewing areas of potential significant financial risk to our
businesses.
Under our partnership agreement, the ACG Committee serves the
function of the Audit and Conflicts Committee referred to
therein and has the authority to review specific matters as to
which the Board of Directors believes there may be a conflict of
interests in order to determine if the resolution of such
conflict proposed by our general partner is fair and reasonable
to us. Any matters approved by the ACG Committee
are conclusively deemed to be fair and reasonable to our
business, approved by all of our partners and not a breach by
our general partner or its Board of Directors of any duties they
may owe us or our unitholders.
Pursuant to its formal written charter, the ACG Committee has
the authority to conduct any investigation appropriate to
fulfilling its responsibilities, and it has direct access to our
independent public accountants as well as any EPCO personnel
whom it deems necessary in fulfilling its responsibilities. The
ACG Committee has the ability to retain, at our expense, special
legal, accounting or other consultants or experts it deems
necessary in the performance of its duties.
The ACG Committee is also appointed by the Board to assist the
Board in fulfilling its oversight responsibilities. The ACG
Committee’s primary duties and responsibilities are to
develop and recommend to the Board a set of governance
principles applicable to us, review the qualifications of
candidates for Board membership, screen and interview possible
candidates for Board membership and communicate with members of
the Board regarding Board meeting format and procedures.
Governance
Guidelines
Governance guidelines, together with committee charters, provide
the framework for effective governance. The Board of Directors
of our general partner has adopted the Governance Guidelines of
Duncan Energy Partners, which address several matters, including
qualifications for directors, responsibilities of directors,
retirement of directors, the composition and responsibility of
committees, the conduct and frequency of board and committee
meetings, management succession, director access to management
and outside advisors, director compensation, director
orientation and continuing education, and annual self-evaluation
of the board. The Board of Directors of our general partner
recognizes that effective governance is an on-going process, and
thus, the Board will review the Governance Guidelines of Duncan
Energy Partners annually or more often as deemed necessary.
Code
of Conduct
Our general partner has adopted a “Code of Conduct”
that applies to all directors, officers and employees. This code
sets out our requirements for compliance with legal and ethical
standards in the conduct of our business, including general
business principles, legal and ethical obligations, compliance
policies for specific subjects, obtaining guidance, the
reporting of compliance issues and discipline for violations of
the code.
Code
of Ethics
Our general partner has adopted a code of ethics, the “Code
of Ethical Conduct for Senior Financial Officers and
Managers,” that applies to our CEO, CFO, Principal
Accounting Officer and senior financial and other managers. In
addition to other matters, this code of ethics establishes
policies to prevent wrongdoing and to promote honest and ethical
conduct, including ethical handling of actual and apparent
conflicts of interest, compliance with applicable laws, rules
and regulations, full, fair, accurate, timely and understandable
disclosure in public communications and prompt internal
reporting violations of the code.
Web
Access
We provide access through our website at www.deplp.com to
current information relating to governance, including the Audit,
Conflicts and Governance Committee Charter, the Code of Ethical
Conduct for Senior Financial Officers and Managers, the
Governance Guidelines of Duncan Energy Partners and other
matters impacting our governance principles. You may also
contact our investor relations department at (866) 230-0745
for printed copies of these documents free of charge.
Indemnification
of Directors and Officers
Under our limited partnership agreement and subject to specified
limitations, we will indemnify to the fullest extent permitted
by Delaware law, from and against all losses, claims, damages or
similar events (i) our general partner, any affiliate of
our general partner, (ii) any person who is or was a
member, director officer,
fiduciary or trustee of our partnership and our subsidiaries, or
of our general partner and its affiliates and (iii) any
person who is or was serving at the request of our general
partner as a director, officer, member, partner, fiduciary or
trustee of another person.
The following table sets forth the name, age and position of
each of the directors and executive officers of our general
partner at January 19, 2007. Each member of the Board of
Directors of our general partner serves until such member’s
death, resignation or removal. The executive officers of our
general partner are elected for one-year terms and may be
removed, with or without cause, only by the Board of Directors.
Our unitholders do not elect the officers or directors of our
general partner. Dan. L. Duncan, through his indirect control of
our general partner, has the ability to elect, remove and
replace at any time, all of the officers and directors of our
general partner. Each of the individuals listed below, including
Mr. Duncan, is an executive officer of our general partner.
Name
Age
Position with DEP Holdings
Dan L. Duncan
74
Director and Chairman
Richard H. Bachmann
54
Director, President and Chief
Executive Officer
Michael A. Creel
53
Director, Executive Vice President
and Chief Financial Officer
Gil H. Radtke
45
Director, Senior Vice President
and Chief Operating Officer
W. Randall Fowler
50
Director, Senior Vice President
and Treasurer
Michael J. Knesek
52
Senior Vice President, Principal
Accounting Officer and Controller
William A. Bruckmann, III
55
Director Nominee
Larry J. Casey
74
Director Nominee
Joe D. Havens
77
Director Nominee
Because we are a limited partnership and meet the definition of
a “controlled company” under the listing standards of
the NYSE, we are not required to comply with certain
requirements of the NYSE. Accordingly, we have elected to not
comply with Section 303A.01 of the NYSE Listed Company
Manual, which would require that the Board of Directors of our
general partner be comprised of a majority of independent
directors. In addition, we have elected to not comply with
Sections 303A.04 and 303A.05 of the NYSE Listed Company
Manual, which would require that the Board of Directors of our
general partner maintain a Nominating Committee and a
Compensation Committee, each consisting entirely of independent
directors.
Dan L. Duncan was elected Chairman and a Director of our
general partner in October 2006, Chairman and a Director of EPE
Holdings in August 2005 and Chairman and a Director of
Enterprise Products GP in April 1998. Mr. Duncan has served
as Chairman and a Director of the general partner of Enterprise
Products OLP in December 2003 and as Chairman of EPCO since 1979.
Richard H. Bachmann was elected President, Chief
Executive Officer and a Director of our general partner in
October 2006 and a Director of EPE Holdings and Enterprise
Products GP in February 2006. Mr. Bachmann previously
served as a Director of Enterprise Products GP from June 2000 to
January 2004. Mr. Bachmann was elected Executive Vice
President, Chief Legal Officer and Secretary of Enterprise
Products GP and of EPCO, and a Director of EPCO, in January
1999. In November 2006, Mr. Bachmann was appointed as an
independent manager of Constellation Energy Partners LLC.
Mr. Bachmann serves as a member of the audit, compensation
and nominating and governance committee of Constellation Energy
Partners LLC.
Michael A. Creel was elected Executive Vice President,
Chief Financial Officer and a Director of our general partner in
October 2006. Also, he was elected Executive Vice President of
Enterprise Products GP and EPCO in January 2001, after serving
as a Senior Vice President of Enterprise Products GP and EPCO
from
November 1999 to January 2001. Mr. Creel, a certified
public accountant, served as Chief Financial Officer of EPCO
from June 2000 through April 2005 and was named Chief Operating
Officer of EPCO in April 2005. In June 2000, Mr. Creel was
also named Chief Financial Officer of Enterprise Products GP.
Mr. Creel has served as a Director of the general partner
of Enterprise Products OLP since December 2003, and has served
as President, Chief Executive Officer and a Director of EPE
Holdings since August 2005. Mr. Creel was elected a
Director of Edge Petroleum Corporation (a publicly traded oil
and natural gas exploration and production company) in October
2005 and a Director of Enterprise Products GP in February 2006.
Gil H. Radtke was elected Senior Vice President, Chief
Operating Officer and a Director of our general partner in
October 2006 and Senior Vice President of Enterprise Products GP
in February 2002. Mr. Radtke joined Enterprise Products
Partners in connection with their purchase of
Diamond-Koch’s storage and propylene fractionation assets
in January and February 2002. Before joining Enterprise Products
Partners, 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.
W. Randall Fowler was elected Senior Vice President,
Treasurer and a Director of our general partner in October 2006
and a Director of EPE Holdings and Enterprise Products GP in
February 2006. Mr. Fowler was elected Senior Vice President
and Treasurer of Enterprise Products GP in February 2005 and
Chief Financial Officer of EPCO in April 2005. Mr. Fowler,
a certified public accountant (inactive), joined Enterprise
Products Partners as Director of Investor Relations in January
1999 and served as Treasurer and a Vice President of Enterprise
Products GP and EPCO from August 2000 to February 2005.
Mr. Fowler has served as Senior Vice President and Chief
Financial Officer of EPE Holdings since August 2005.
Michael J. Knesek, a certified public accountant, was
elected Senior Vice President, Principal Accounting Officer and
Controller of our general partner in October 2006. He was also
elected Senior Vice President and Principal Accounting Officer
of Enterprise Products GP in February 2005. Previously,
Mr. Knesek served as Principal Accounting Officer and a
Vice President of Enterprise Products GP from August 2000 to
February 2005. Mr. Knesek has served as Senior Vice
President and Principal Accounting Officer of EPE Holdings since
August 2005. Mr. Knesek has been the Controller and a Vice
President of EPCO since 1990.
William A. Bruckmann, III, director nominee, has
been self-employed as a consultant and private investor since
April 2004. From September 2002 to April 2004,
Mr. Bruckmann served as a financial advisor with
UBS Securities, Inc. He is a former managing director at
Chase Securities, Inc. and has more than 25 years of
banking experience, starting with Manufacturers Hanover Trust
Company, where he became a senior officer in 1985.
Mr. Bruckmann later served as managing director, sector
head of the Manufacturers Hanover’s gas pipeline and
midstream practices through the acquisition of Manufacturers
Hanover by Chemical Bank and the acquisition of Chemical Bank by
Chase Bank. Mr. Bruckmann also served as a director of
Williams Energy Partners L.P. from May 2001 to
June 2003. Mr. Bruckmann will serve on our Audit,
Conflicts and Governance Committee.
Larry J. Casey, director nominee, has been a private
investor managing real estate and personal investments since he
retired in 1982 from a career in the energy industry. In 1974,
Mr. Casey founded Xcel Products Company, a natural gas
liquids and petrochemical trading company. Also in 1974, he
founded Xral Underground Storage, the first privately-owned
underground merchant storage facility for natural gas liquids
and specialty chemicals at Mont Belvieu, Texas. Mr. Casey
sold these companies in 1982. Mr. Casey will serve on our
Audit, Conflicts and Governance Committee.
Joe D. Havens, director nominee, is an entrepreneur
engaged in the energy, banking and real estate industries.
Mr. Havens founded Enterprise Petroleum Company, Inc., the
predecessor to EPCO, in 1968, and sold his interest in the
successor entity and related businesses to Mr. Duncan in
1990. Mr. Havens has also served on the board of directors
of the First Commerce Bank of Corpus Christi, a private bank,
since 1991, and currently serves as that board’s Chairman.
Mr. Havens will serve on our Audit, Conflicts and
Governance Committee.
We do not directly employ any of the persons responsible for
managing or operating our business. Instead, we are managed by
our general partner, DEP Holdings, the executive officers of
which are employees of EPCO. Our reimbursement for the
compensation of executive officers is governed by the
administrative services agreement with EPCO. Please read
“Certain Relationships and Related Party
Transactions — Administrative Services Agreement”
for a description of the administrative services agreement.
None of the named executive officers of our general partner were
allocated compensation with respect to our specific operations
during 2005 and 2006. Since the named executive officers of our
general partner were allocated compensation with respect to
Enterprise Products Partners, as a whole, and/or Enterprise GP
Holdings, with respect to our specific operations during these
periods, we cannot indicate historical or projected salaries or
other elements of compensation that could have been allocated or
will be paid by EPCO and allocated to us pursuant to the
administrative services agreement. We expect that each of these
named executive officers will continue to perform services for
Enterprise Products Partners and other affiliates after the
consummation of this offering.
Compensation
Discussion and Analysis
We do not directly employ any of the persons responsible for
managing our business and we have no compensation committee. We
are managed by our general partner, DEP Holdings, LLC, the
executive officers of which are employees of EPCO. Our
reimbursement for the compensation of executive officers is
governed by the administrative services agreement with EPCO, and
is generally based on time allocated during a period to the
activities of EPCO or the EPCO affiliates who reimburse EPCO
pursuant to this agreement.
During 2006, none of our executive officers had any of their
time or compensation allocated specifically to our assets or
business. Following the consummation of this offering, we
currently expect our Chief Executive Officer (our principal
executive officer), our Chief Financial Officer (our principal
financial officer) and the three other persons
(Messrs. Radtke, Fowler and Knesek) that we expect would
constitute our most highly compensated executive officers at
December 31, 2006 (collectively, the “named executive
officers”) will have substantially less than a majority of
their time and compensation allocated to us, other than
Mr. Radtke, who we expect may have a majority of his time
allocated to us. Compensation paid or awarded by us in 2007 with
respect to our named executive officers will reflect only the
portion of compensation paid by EPCO that is allocated to us
pursuant to the administrative services agreement, including an
allocation of a portion of equity-based awards for the equity of
Enterprise Products Partners, Enterprise GP Holdings and the
Employee Partnership discussed below.
Dan L. Duncan controls EPCO and has ultimate decision-making
authority with respect to compensation of our named executive
officers. The following elements of compensation, and
EPCO’s decisions with respect to determinations on
payments, will not be subject to approvals by our board or our
audit and conflicts committee. Awards under Enterprise Products
Partners’ long-term incentive plan will be approved by the
audit and conflicts committee of its general partner. Our
general partner, the general partner of Enterprise Products
Partners and the general partner of Enterprise GP Holdings have
no separate compensation committees.
The elements of EPCO’s compensation program discussed
below, along with EPCO’s other rewards (for example,
benefits, work environment, career development), are intended to
provide a total rewards package designed to drive performance
and reward contributions in support of the business strategies
of EPCO and its affiliates at the partnership and individual
levels. During 2006, EPCO did not use any elements of
compensation based on specific performance-based criteria and
did not have any other specific performance-based objectives.
The primary elements of EPCO’s compensation program are a
combination of annual cash and long-term equity-based
compensation. During 2006, elements of compensation for our
named executive officers consisted of the following:
Long-term incentive unit option/restricted unit plan of
Enterprise Products Partners;
•
EPE Unit Partnership — ownership of Class B
limited partner interests in EPE Unit L.P.; and
•
Other compensation, including very limited perquisites.
With respect to compensation objectives and decisions regarding
our named executive officers during 2006, Mr. Duncan sought
and received (and with respect to discretionary cash awards
relating to 2006 paid during 2007 will seek and receive)
recommendations of Robert G. Phillips, the Chief Executive
Officer of Enterprise Products Partners, after preliminary
formulation of such recommendation by him and the Senior Vice
President of Human Resources for EPCO with respect to employees
other than Mr. Phillips. EPCO takes note of market data for
determining relevant compensation levels and compensation
program elements through the review of and, in certain cases,
participation in, various relevant compensation surveys. EPCO
considered market data in a
2004-2005
survey prepared for EPCO by an outside compensation consultant,
but did not otherwise consult with compensation consultants with
respect to determining 2006 compensation for our named executive
officers. During late 2006, EPCO engaged an outside compensation
consultant to prepare a report that it expects to consider when
determining future compensation, but EPCO does not expect to use
this report with respect to decisions on discretionary annual
cash compensation with respect to 2006 performance for any of
our named executive officers. Mr. Duncan and EPCO do not
use any formula or specific performance-based criteria for our
named executive officers in connection with services performed
for us, Enterprise Products Partners or their affiliates. All
compensation determinations are discretionary and, as noted
above, subject to Mr. Duncan’s ultimate
decision-making authority.
As discussed above, the portion of 2007 base salaries paid by
EPCO allocable to us and reported as compensation to our named
executive officers by us after the consummation of this offering
will be based on the percentage of time allocated by the
officers to our business in accordance with the administrative
services agreement. EPCO is expected to base these salaries on
historical salaries paid to our named executive officers, market
data and responsibilities of our named executive officers that
may or may not be related to our business.
The discretionary cash awards to each of the named executive
officers for Enterprise Products Partners for the year ended
December 31, 2006, including our named executive officers,
will be determined by consultation among Mr. Duncan,
Mr. Phillips and the Senior Vice President of Human
Resources for EPCO, and subject to Mr. Duncan’s final
determination. The cash awards, in combination with base
salaries, are intended to yield competitive total cash
compensation levels for the executive officers and drive
performance in support of our business strategies, as well as
the performance of Enterprise Products Partners and other EPCO
affiliates for which our named executive officers perform
services. The portion of any discretionary cash awards paid by
EPCO allocable to us and reported as compensation to these
executive officers by us will be based on the administrative
services agreement. It is EPCO’s general policy to pay
these awards during the first quarter.
The 2006 equity-based awards under Enterprise Products
Partners’ long-term incentive unit option/restricted unit
plan of each of our named executive officers were determined by
consultation among Mr. Duncan, Mr. Phillips and the
Senior Vice President of Human Resources for EPCO, and were
approved by the audit and conflicts committee of the general
partner of Enterprise Products Partners. The equity-based awards
are intended to align the long-term interests of the executive
officers of Enterprise Products Partners with those of its
unitholders. As discussed above, none of the 2006 equity-based
awards to our named executive officers have been allocated to us
as of the date of this prospectus, and a portion of any awards
under this plan will be allocable to us pursuant to the
administrative services agreement. It is EPCO’s general
policy to recommend, and the audit and conflicts committee of
the general partner of Enterprise Products Partner generally
approves, these grants to current employees during the second
quarter.
Some of our named executive officers are Class B limited
partners of EPE Unit L.P. (the “Employee
Partnership”). These interests were awarded and issued to
these executive officers during 2005 in connection with the
initial public offering of Enterprise GP Holdings L.P. and
provide additional long-term incentives for
these officers with respect to our operations. These
Class B limited partner interests entitle the holders to
participate in the appreciation in value of units of Enterprise
GP Holdings with an original value of approximately
$51 million owned by the Employee Partnership through the
vesting date on December 5, 2011, and these Class B
limited partner interests are subject to forfeiture. At
December 31, 2006, the persons we expect would have
constituted our named executive officers’ approximate
percentage interests in the total profits interest of the
Employee Partnership were approximately as follows: Richard H.
Bachmann — 7.2%; Michael A. Creel — 7.2%;
Gil H. Radtke — 2.4%; W. Randall Fowler —
4.8%; and Michael J. Knesek — 2.4%. If the Employee
Partnership had been liquidated at December 31, 2006, the
estimated value of the total profits interest would have been
approximately $14.4 million, of which each named executive
officer would have received his proportionate share. Since
Enterprise GP Holdings will have an indirect interest in us
through its interests in Enterprise Products Partners, our named
executive officers may derive some benefit on these interests
from our results of operations. The portion of any expenses paid
by EPCO attributable to the interests owned by our named
executive officers in the Employee Partnership will be allocated
to us under the administrative services agreement as a non-cash
expense. We, Enterprise Products Partners and Enterprise
Products GP will not reimburse EPCO, the Employee Partnership or
any of their affiliates or partners, through the administrative
services agreement or otherwise, for any expenses related to the
Employee Partnership, the contribution of $51 million to
the Employee Partnership or the purchase of the units of
Enterprise GP Holdings by the Employee Partnership.
EPCO generally does not pay for perquisites for any of our named
executive officers, other than reimbursement of certain club
membership dues and parking, and expects to continue its policy
of covering very limited perquisites allocable to our named
executive officers. EPCO also makes matching contributions under
its 401(k) plan for the benefit of our named executive officers
in the same manner as for other EPCO employees.
We believe that each of the base salary, cash awards, and equity
awards fit the overall compensation objectives of us and of
Enterprise Products Partners, as stated above, i.e., to provide
competitive compensation opportunities to align and drive
employee performance toward the creation of sustained long-term
unitholder value, which will also allow us to attract, motivate
and retain high quality talent with the skills and competencies
required by us. In addition, the ongoing participation of the
named executive officers in the Employee Partnership provides
these executive officers with continued incentives through the
participation in increases in the per unit price of units of
Enterprise GP Holdings as the indirect general partner and
limited partner of Enterprise Products Partners, as well its
indirect ownership interests in us and our subsidiaries.
Compensation
Committee Interlocks and Insider Participation
As stated above, the compensation of the executive officers of
our general partner is paid by EPCO, and we reimburse EPCO for
that portion of its compensation expense that is related to our
business, pursuant to the administrative services agreement. No
compensation expense is borne by us with respect to
Mr. Duncan.
Commitments
under Equity Compensation Plans of EPCO
Under the administrative services agreement, we reimburse EPCO
for the compensation of all operations personnel it employs on
our behalf. This includes the costs attributable to equity-based
awards granted to these personnel to the extent our Board adopts
an equity-based plan for our common units. When these employees
exercise unit options, we reimburse EPCO for the difference
between the strike price paid by the employee and the actual
purchase price paid by EPCO for the units awarded to the
employee. We may reimburse EPCO for these costs by either
furnishing cash, reissuing treasury units or by issuing new
units. This compensation will also include a percentage of
similar costs attributable to equity-based awards granted to our
personnel with respect to any equity of Enterprise Products
Partners and Enterprise GP Holdings. We will reimburse EPCO for
these costs in cash.
Neither we nor DEP Holdings, our general partner, provide any
additional compensation to employees of EPCO who serve as
directors of our general partner. The employees of EPCO
currently serving as directors are Messrs. Duncan,
Bachmann, Creel, Radtke, and Fowler.
After the consummation of this offering, our independent
directors will be Messrs. Bruckmann, Casey and Havens. Our
general partner is responsible for compensating these directors
for their services. Its standard compensation arrangement is as
follows:
•
Each independent director receives $50,000 in cash annually.
•
If the individual serves as chairman of a committee of the Board
of Directors, then he receives an additional $7,500 in cash
annually.
The following table sets forth certain information regarding the
beneficial ownership of our common units prior to and as of the
closing of this offering by:
•
each person known by our general partner to beneficially own
more than 5% of our common units;
•
each of the named executive officers of our general partner;
•
all of the current directors of our general partner; and
•
all of the current directors and executive officers of our
general partner as a group.
All information with respect to beneficial ownership has been
furnished by the respective directors or officers, as the case
may be. Each person has sole voting and dispositive power over
the common units shown unless otherwise indicated below.
Common Units
Common Units
Beneficially Owned
Beneficially Owned
Prior to Offering
After Offering
Name of Beneficial Owner:
Units
Percent
Units
Percent
Enterprise Products OLP(1)
0
100
%
7,301,571
36.0
%
Dan L. Duncan(1)(2)
0
0
%
7,301,571
36.0
%
Richard H. Bachmann
0
0
%
0
0
%
Michael A. Creel
0
0
%
0
0
%
Gil H. Radtke
0
0
%
0
0
%
W. Randall Fowler
0
0
%
0
0
%
Michael J. Knesek
0
0
%
0
0
%
All directors and executive
officers as a group (6 persons)
0
100
%
7,301,571
36.0
%
(1)
Prior to this offering, Enterprise Products OLP owned a 98%
limited partner interest in us. In connection with the closing
of this offering and the contribution of assets by Enterprise
Products OLP to us, we will issue to Enterprise Products OLP
7,301,571 common units representing approximately 36.0% of
the outstanding common units at the closing of this offering (or
approximately 26.4% if the underwriters’ option to purchase
additional units is exercised in full).
(2)
Includes common units owned by Enterprise Products OLP, for
which Mr. Duncan disclaims beneficial ownership other than
to the extent of his direct or indirect percentage interest in
Enterprise Products OLP.
Enterprise Products Partners, Enterprise GP Holdings and TEPPCO
and their respective general partners, which are controlled by
affiliates of EPCO.
Unless noted otherwise, our agreements with EPCO, Enterprise
Products Partners and their affiliates are not the result of
arm’s length transactions. As a result, we cannot provide
assurance that the terms and provisions of such agreements are
at least as favorable to us as we could have obtained from
unaffiliated third parties.
EPCO is a private company owned in part and controlled by Dan L.
Duncan, who is also a director and Chairman of our general
partner, EPE Holdings and Enterprise Products GP.
Mr. Duncan owns 50.4% of the voting stock of EPCO. The
remaining shares of EPCO capital stock are held primarily by
trusts for the benefit of members of Mr. Duncan’s
family.
We and our general partner are separate legal entities from EPCO
and their other affiliates, with assets and liabilities that are
separate from those of EPCO and their other affiliates. However,
EPCO depends on the cash distributions it receives from
Enterprise Products Partners (including its retained interests
in our subsidiaries), Enterprise GP Holdings and other
investments to fund its other operations and to meet its debt
obligations.
Relationship with Enterprise Products
Partners. Enterprise Products Partners was the
shipper of record on our Sabine Propylene and Lou-Tex Propylene
pipelines. We recorded $33.9 million, $40.9 million
and $42.3 million of related party pipeline transportation
revenues from Enterprise Products Partners for the years ended
December 31, 2005, 2004 and 2003, respectively. We recorded
$28.2 million and $25.1 million of such related party
revenues during the nine months ended September 30, 2006
and 2005, respectively.
Prior to 2004, Sabine Propylene was regulated by the FERC. Our
Lou-Tex Propylene pipeline was also subject to the FERC’s
jurisdiction until 2005. For the periods in which Sabine
Propylene and Lou-Tex Propylene were subject to FERC
regulations, related party revenues with Enterprise Products
Partners were based on the maximum tariff rate allowed for each
system. We continued to charge Enterprise Products Partners such
maximum transportation rates after both entities were declared
exempt from FERC oversight.
Enterprise Products Partners has entered into agreements with
third parties involving use of the Sabine Propylene and Lou-Tex
Propylene pipelines. Enterprise Products Partners recorded
$15.4 million, $14.2 million and $15.1 million in
revenues for the years ended December 31, 2005, 2004 and
2003, respectively, in connection with such agreements.
Enterprise Products Partners third-party revenues from these
agreements were $11.7 million and $11.4 million during
the nine months ended September 30, 2006 and 2005,
respectively. Apart from such agreements, Enterprise Products
Partners did not utilize the Sabine Propylene and Lou-Tex
Propylene assets. Concurrently with the closing of this
offering, Enterprise Products Partners will assign to us certain
agreements with third parties involving the use of our Sabine
Propylene and Lou-Tex Propylene pipelines but will remain
jointly and severally liable on those agreements.
Our related party revenues from Enterprise Products Partners
also include the sale of natural gas. Our natural gas sales to
Enterprise Products Partners were $35.8 million,
$21.7 million and $13.8 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Our related
party operating costs and expenses
include the cost of natural gas Enterprise Products Partners
sold to us. Such amounts were $25.3 million,
$3.8 million and none for the years ended December 31,2005, 2004 and 2003, respectively.
Our natural gas sales to Enterprise Products Partners were
$47.5 million and $24.2 million during the
nine months ended September 30, 2006 and 2005,
respectively. Our natural gas purchases from Enterprise Products
Partners were $16.2 million and $12.0 million for the
nine months ended September 30, 2006 and 2005,
respectively.
In addition, Enterprise Products Partners has furnished letters
of credit on behalf of Evangeline’s debt service
requirements. At December 31, 2005 and September 30,2006, such outstanding letters of credit totaled
$1.2 million.
We also provide underground storage services to Enterprise
Products Partners for the storage of NGLs and petrochemicals.
For the years ended December 31, 2005, 2004 and 2003, we
recorded $17.6 million, $17 million and
$17.3 million, respectively, in storage revenue from
Enterprise Products Partners. Such revenues were
$14.8 million and $13.9 million for the
nine months ended September 30, 2006 and 2005,
respectively.
Mont Belvieu Caverns will continue to provide storage services
to Enterprise Products OLP for several lines of its business,
including:
•
NGL marketing;
•
butane isomerization;
•
octane enhancement;
•
propylene fractionation; and
•
NGL fractionation.
Upon the closing of this offering, Mont Belvieu Caverns will
enter into several storage service agreements with Enterprise
Products OLP. The initial terms of these agreements will
commence on the closing of this offering and end on
December 31, 2016. These agreements include rates
comparable to those rates charged to third parties with service
contracts of similar size and duration. At the closing of this
offering, an affiliate of Enterprise Products Partners will
assign a ground lease to Mont Belvieu Caverns. Under this ground
lease, Enterprise Products Partners, as lessee, will be required
to pay a monthly rental fee to Mont Belvieu Caverns, as lessor.
The initial term of this ground lease commenced on
January 17, 2002 and continues until the earlier to occur
of (i) December 31, 2100 and (ii) termination by
the lessee, for any reason, of its operations on the leased
premises as permitted under the ground lease.
We have participated in the Enterprise Products Partners cash
management program for all periods presented.
We expect that certain commercial arrangements with Enterprise
Products Partners will change once the Partnership completes its
initial public offering. These changes will include:
•
Through the direct assignment of contracts, a reduction in
transportation rates previously charged Enterprise Products
Partners for usage of the Lou-Tex Propylene and Sabine Propylene
pipelines to the levels Enterprise Products Partners
realizes from third-party shippers on these systems. On an
unaudited pro forma basis, the expected reduction in combined
revenues would be $16.5 million for the nine months ended
September 30, 2006 and $18.4 million for the year
ended December 31, 2005.
•
An increase in storage fees charged Enterprise Products Partners
by Mont Belvieu Caverns related to the storage activities of
Enterprise Products Partners’ octane enhancement,
isomerization and NGL and petrochemical marketing businesses.
Historically, such intercompany charges were below market and
eliminated in the consolidated revenues and costs and expenses
of Enterprise Products Partners. Prospectively, such rates will
be market-related. On an unaudited pro forma basis, the expected
increase in combined revenues would be $9.8 million for the
nine months ended September 30, 2006 and $11.6 million
for the year ended December 31, 2005.
In connection with storage agreements for a variety of products
which will be entered into between Enterprise Products Partners
and Mont Belvieu Caverns concurrently with the closing of this
offering Enterprise Products Partners will agree to the
allocation of all storage well measurement gains and losses
relating to these products. In addition, the limited liability
company agreement for Mont Belvieu Caverns will specially
allocate to Enterprise Products Partners any items of income and
gain or loss and deduction relating to measurement losses and
measurement gains, including amounts that Mont Belvieu Caverns
may retain or deduct as handling losses. Enterprise Products
Partners will also be required to contribute cash to Mont
Belvieu Caverns, or will be entitled to receive distributions
from Mont Belvieu Caverns, based on the then-current net
measurement gains or measurement losses. As a result, we will
continue to record measurement gains and losses associated with
the operation of our Mont Belvieu storage facility after the
closing date of this offering on a consolidated basis as
operating costs and expenses. However, these measurement gains
and losses should not affect our net income or have a
significant impact on us with respect to our cash flows from
operating activities and, accordingly, no reserve account will
be established by us for measurement losses on our balance
sheet. On an unaudited pro forma basis, the expected decrease in
operating costs and expenses would be is $1.5 million for
the nine months ended September 30, 2006 and
$3.1 million for the year ended December 31, 2005. The
pro forma decrease in operating costs and expenses reflects the
removal of historical net measurement losses.
•
Upon the closing of this offering, we will enter into a ten-year
transportation contract with Enterprise Products Partners that
will include all of the volumes of NGLs transported on the South
Texas NGL pipeline system. Under this contract, Enterprise
Products Partners will pay us a dedication fee of no less than
$0.02 per gallon for all NGLs produced at the Shoup and
Armstrong fractionation plants whether or not Enterprise
Products Partners ships any NGLs on the South Texas NGL pipeline
system. We will not take title to the products transported on
the South Texas NGL pipeline system; rather, Enterprise Products
Partners will retain title and the associated commodity risk.
During January 2007, an affiliate of Enterprise purchased from
an affiliate of TEPPCO Partners a
10-mile,
18-inch
segment of pipeline. The purchase of the
10-mile
segment of pipeline from the affiliate of TEPPCO Partners was
for an aggregate purchase price of $8 million. This
pipeline will be among the assets owned by South Texas NGL at
the closing of this offering.
We have entered into a lease with TEPPCO Partners for a
12-mile,
10-inch
interconnecting pipeline extending from Pasadena, Texas to
Baytown, Texas. The primary term of this lease will expire on
September 15, 2007, and will continue on a month-to-month
basis subject to termination by either party upon
60 days’ notice. This pipeline is being leased by us
in connection with operations on our South Texas NGL pipeline
until we complete the construction of a parallel pipeline.
We sell natural gas to Evangeline, which, in turn, uses such
natural gas to satisfy its sales commitments to Entergy
Louisiana. Our sales of natural gas to Evangeline totaled
$331.5 million, $241.4 million and $214.2 million
for the years ended December 31, 2005, 2004 and 2003,
respectively. Our sales of natural gas to Evangeline totaled
$233.0 million and $224.0 million during the nine
months ended September 30, 2006 and 2005, respectively.
Additionally, we have a service agreement with Evangeline
whereby we provide Evangeline with construction, operations,
maintenance and administrative support related to its pipeline
system. Evangeline paid us $0.4 million, $0.5 million
and $0.4 million for such services during the years ended
December 31, 2005, 2004 and 2003, respectively. Evangeline
paid us $0.3 million and $0.3 million during the nine
months ended September 30, 2006 and 2005, respectively.
Pursuant to a contribution, conveyance and assumption agreement,
Enterprise Products Partners, Enterprise Products OLP and
certain of their affiliates have agreed to contribute to us 66%
of the equity interests in Mont Belvieu Caverns, Acadian Gas,
Sabine Propylene, Lou-Tex Propylene and South Texas NGL.
As consideration for these assets and agreements, including the
reimbursement to us for capital expenditures, we have agreed to
distribute an aggregate cash amount equal to
(1) $198.9 million plus (2) the net proceeds to
us from this offering (after giving effect to underwriting
discounts and commissions, the structuring fee and
$2.9 million of other estimated net offering expenses)
minus (3) 66% of the difference between
(a) $101.7 million and (b) all construction and
acquisition costs paid by us prior to the closing of this
offering with respect to (i) the South Texas NGL pipeline
(excluding the original purchase costs of approximately
$97.7 million) and (ii) the expansion of Mont Belvieu
brine production capacity and above-ground storage reservoirs,
and to issue 7,301,571 common units, representing approximately
36.0% of the common units to be outstanding immediately after
this offering and a 2% general partner interest to Enterprise
Products OLP.
Upon the closing of this offering, we and certain of our
subsidiaries will enter into an Omnibus Agreement with
Enterprise Products OLP that will govern our relationship with
them on the following matters:
•
indemnification for certain environmental liabilities, tax
liabilities and
right-of-way
defects;
•
reimbursement of certain expenditures for South Texas NGL and
Mont Belvieu Caverns;
•
a right of first refusal to Enterprise Products OLP on the
equity interests in our current and future subsidiaries and a
right of first refusal on the material assets of these entities,
other than sales of inventory and other assets in the ordinary
course of business; and
•
a preemptive right with respect to equity securities issued by
certain of our subsidiaries, other than as consideration in an
acquisition or in connection with a loan or debt financing.
Indemnification
for Environmental and Related Liabilities
Enterprise Products OLP agreed to indemnify us after the closing
of our initial public offering against certain environmental and
related liabilities arising out of or associated with the
operation of the assets before the closing date of our initial
public offering. These liabilities include both known and
unknown environmental and related liabilities. This
indemnification obligation will terminate three years after the
closing of our initial public offering. There is an aggregate
cap of $15.0 million on the amount of indemnity coverage.
In addition, we are not entitled to indemnification until the
aggregate amounts of claims exceed $250,000. Liabilities
resulting from a change of law after the closing of our initial
public offering are excluded from the environmental indemnity by
Enterprise Products OLP for the unknown environmental
liabilities.
Enterprise Products OLP will also indemnify us for liabilities
related to:
•
certain defects in the easement rights or fee ownership
interests in and to the lands on which any assets contributed to
us in connection with our initial public offering are located
and failure to obtain certain consents and permits necessary to
conduct our business that arise within three years after the
closing of our initial public offering; and
•
certain income tax liabilities attributable to the operation of
the assets contributed to us in connection with our initial
public offering prior to the time they were contributed.
Reimbursement
for Certain Expenditures
Enterprise Products OLP has agreed to make additional
contributions to us as reimbursement for our 66% share of excess
construction costs, if any, above (i) the
$28.6 million of estimated capital expenditures to complete
planned expansions on the South Texas NGL pipeline and
(ii) $14.1 million of estimated construction costs for
additional planned brine production capacity and above-ground
storage reservoir projects at
Mont Belvieu. We currently estimate the costs to complete
planned expansions of the South Texas NGL pipeline after the
closing of this initial public offering will be approximately
$28.6 million, of which our 66% share will be approximately
$18.9 million. We will retain cash in an amount equal to
our share of these estimated costs from the proceeds of this
offering in order to fund our share of the planned expansion
costs. Enterprise Products OLP will also make a capital
contribution to South Texas NGL for its 34% interest upon a
capital call from South Texas NGL.
Amendments
The omnibus agreement may not be amended without the prior
approval of the conflicts committee if the proposed amendment
will, in the reasonable discretion of our general partner,
adversely affect holders of our common units.
Competition
Neither Enterprise Products OLP nor any of its affiliates will
be restricted under the omnibus agreement from competing with
us. Except as otherwise expressly agreed in the administrative
services agreement, Enterprise Products OLP and any of its
affiliates may acquire, construct or dispose of additional
midstream or other assets in the future without any obligation
to offer us the opportunity to purchase or construct those
assets. These agreements are in addition to other agreements
relating to business opportunities and potential conflicts of
interest set forth on our administrative services agreement with
Enterprise Products Partners, EPCO and other affiliates of EPCO.
Please read “ — Administrative Services
Agreement” below.
Provisions relating to Measurement Gains and
Losses. The limited liability company agreement
of Mont Belvieu Caverns will specially allocate any items of
income and gain or loss and deduction relating to net
measurement losses and measurement gains to Enterprise Products
OLP. Measurement gains means items of Mont Belvieu Caverns’
income or gain relating to the return by Mont Belvieu Caverns to
customers of natural gas, natural gas liquids or other products
measured into storage, including amounts that Mont Belvieu
Caverns may retain or deduct as handling losses on such product
transferred into storage. Measurement losses means items of Mont
Belvieu Caverns’ loss or deduction relating to the return
by Mont Belvieu Caverns to customers of natural gas, natural gas
liquids or other products measured into storage. Net measurement
gains or measurement losses shall be calculated on an aggregate
basis from the closing date of this offering through the
applicable measurement date.
Within 10 days following any notice by Mont Belvieu Caverns
of any net measurement losses as of the end of any month,
Enterprise Products OLP will be required to contribute cash to
Mont Belvieu Caverns in an amount equal to any net measurement
losses set forth in such notice. In the event Enterprise
Products OLP fails to make a required contribution, Mont Belvieu
Caverns may withhold distributions, will have a lien on the
partnership interest of Enterprise Products OLP and charge
Enterprise Products OLP for costs and any applicable interest
incurred in connection with the funding of the required
contribution amount.
Within 45 days following the end of any fiscal quarter,
Mont Belvieu Caverns will distribute to Enterprise Products OLP
a cash amount equal to any net measurement gains. To the extent
practicable and requested by Enterprise Products OLP, Mont
Belvieu Caverns and Enterprise Products OLP will also establish
reasonable procedures for prompt distribution from time to time
of any net measurement gains prior to 45 days following the
end of any fiscal quarter.
Future Mont Belvieu Caverns Expansion
Capital. Pursuant to the Mont Belvieu Caverns
limited liability company agreement, Enterprise Products OLP
may, in its sole discretion, fund a portion of any costs related
to potential expansion projects. We are currently contemplating
expansion projects at Mont Belvieu Caverns, which may include
new entries into existing wells, the conversion of existing
wells to store natural gas and the installation of new piping
and certain related facilities, which may be commenced during
2007 in the estimated range of $25 to $75 million.
Additional expenditures of up to $200 million may be made
during 2008 and 2009.
The Mont Belvieu Caverns limited liability company agreement
will provide that:
•
We and Enterprise Products OLP will share in revenue from Mont
Belvieu Caverns based on a formula which takes into account the
total deemed capital contributed by each to Mont Belvieu
Caverns. As of the closing date of this offering, the amount
contributed by each of us and Enterprise Products OLP will be
based on the relative percentage interests of the parties and
the book value of capital expenditures made through the closing
date of this offering, including projects for expansions or
other capital expenditures made to Mont Belvieu Caverns prior to
the closing of this offering. After the closing date of this
offering, Enterprise Products OLP may, in its sole discretion,
fund the Mont Belvieu Expansion costs as set forth below.
•
With respect to future expansions to Mont Belvieu Caverns, each
party to the agreement can contribute to such additional
expansions up to its respective sharing ratio. To the extent one
party decides not to participate in the additional expansion,
then the other party may fund the expansion and receive a
corresponding increase in its sharing ratio. However, from the
date any expenditures are made by Enterprise Products OLP and
not the other parties for Mont Belvieu Expansion costs until the
date that any pipeline or storage portion of any Mont Belvieu
Expansion is placed in service and written notice of such
placement into service is given by the general partner to
Enterprise Products OLP (the “Initial Commencement
Date”), we will remain entitled to distributions from Mont
Belvieu Caverns in accordance with our initial sharing ratios,
and Enterprise Products OLP will not be entitled to any
additional distributions other than its initial sharing ratio.
Upon the Initial Commencement Date and until 90 days
thereafter, Enterprise Products OLP will be entitled to receive
100% of the incremental cash flow of Mont Belvieu Caverns which
is generated by the incremental revenue attributable to those
portions of the storage or pipeline portions of Mont Belvieu
Expansion which have been placed in service and funded by
Enterprise Products OLP, but Enterprise Products OLP will not be
entitled to any other distributions which do not relate to such
incremental cash flow. If we do not reimburse Enterprise
Products OLP (or make a contribution to Mont Belvieu Caverns and
cause Mont Belvieu Caverns to reimburse Enterprise Products OLP)
for an amount equal to (i) (A) the amount of
contributions made by Enterprise Products OLP for Mont Belvieu
Expansion costs plus (B) the effective cost of capital to
Enterprise Products OLP (based on weighted average interest rate
of Enterprise Products OLP incurred for borrowings made during
such period until payment is made to Enterprise Products OLP),
less (C) any amounts received by Enterprise Products OLP in
accordance with the foregoing provisions for incremental cash
flow generated by the Mont Belvieu Expansion which have been
placed in service and funded by Enterprise Products OLP,
multiplied by (ii) its sharing ratio, on or before the date
90 days after the Initial Commencement Date, the sharing
ratios of the parties shall be adjusted.
•
If we fund our portion of additional Mont Belvieu Expansion
expenditures (or any other expenditures for which a contribution
of partners is made) and Enterprise Products OLP fails to
contribute its portion, the sharing ratios shall be adjusted at
the time such contribution is made.
At or prior to the closing of this offering, we and our general
partner will become party to the existing administrative
services agreement with EPCO, Enterprise Products Partners and
its general partner, Enterprise GP Holdings and its general
partner, TEPPCO Partners and its general partner, and certain
affiliated entities. We have no employees. All of our operating
functions are performed by employees of EPCO pursuant to the
administrative services agreement. EPCO also provides general
and administrative support services to us in accordance with the
administrative services agreement. The significant terms of the
administrative services agreement are as follows:
•
EPCO provides administrative, management, engineering and
operating services as may be necessary to manage and operate our
businesses, properties and assets (in accordance with prudent
industry practices). EPCO will employ or otherwise retain the
services of such personnel as may be necessary to provide such
services. Certain employees who perform services for South Texas
NGL and Mont Belvieu Caverns are also dedicated by EPCO for such
services.
We are required to reimburse EPCO for its services in an amount
equal to the sum of all costs and expenses incurred by EPCO
which are directly or indirectly related to our business or
activities (including EPCO expenses reasonably allocated to us).
In addition, we have agreed to pay all sales, use, excise, value
added or similar taxes, if any, that may be applicable with
respect to services provided by EPCO.
•
EPCO allows us to participate as named insureds in its overall
insurance program with the associated premiums and related costs
being allocated to us. We reimbursed EPCO $1.7 million,
$2.3 million and $2.2 million for insurance costs for
the years ended December 31, 2005, 2004 and 2003,
respectively. Such reimbursements were $1.0 million and
$1.1 million for the nine months ended September 30,2006 and 2005, respectively.
Our operating costs and expenses for the years ended
December 31, 2005, 2004 and 2003 include reimbursement
payments to EPCO for the costs it incurs to operate our
facilities, including compensation of employees. We reimburse
EPCO for actual direct and indirect expenses it incurs related
to the operation of our assets. Our reimbursements to EPCO for
operating costs and expenses were $35.7 million,
$25.6 million and $25.3 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Such
reimbursements were $25.8 million and $28.5 million
for the nine months ended September 30, 2006 and 2005,
respectively.
Likewise, our general and administrative costs include amounts
we reimburse to EPCO for administrative services, including
compensation of employees. In general, our reimbursement to EPCO
for administrative services is either (i) on an actual
basis for direct expenses it may incur on our behalf (e.g., the
purchase of office supplies) or (ii) based on an allocation
of such charges between the various parties to administrative
services agreement based on the estimated use of such services
by each party (e.g., the allocation of general legal or
accounting salaries based on estimates of time spent on each
entity’s business and affairs). Our reimbursements to EPCO
for general and administrative costs were $3.9 million,
$4.2 million and $4.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Our
reimbursements to EPCO for general and administrative costs were
$2.4 million and $3.1 million during the nine months
ended September 30, 2006 and 2005, respectively.
A small number of key employees devote a portion of their time
to our operations and affairs and participate in long-term
incentive compensation plans managed by EPCO. These plans
include the issuance of restricted units of Enterprise Products
Partners and limited partner interests in EPE Unit L.P. The
amount of equity-based compensation allocable to our businesses
was $26 thousand for the year ended December 31, 2005 and
$52 thousand for the nine months ended September 30, 2006.
Such amounts are immaterial to our combined financial position,
results of operations and cash flows.
The administrative services agreement addresses potential
conflicts that may arise among us and our general partner,
Enterprise Products Partners and its general partner, Enterprise
GP Holdings and its general partner, and the EPCO Group, which
includes EPCO and its affiliates (but does not include the
aforementioned entities and their controlled affiliates) The
administrative services agreement provides, among other things,
that:
•
if a business opportunity to acquire equity securities is
presented to the EPCO Group, us and our general partner,
Enterprise Products Partners and its general partner, or
Enterprise GP Holdings and its general partner, then Enterprise
GP Holdings will have the first right to pursue such
opportunity. “Equity securities” are defined to
include:
•
general partner interests (or securities which have
characteristics similar to general partner interests) and
incentive distribution rights or similar rights in publicly
traded partnerships or interests in “persons” that own
or control such general partner or similar interests
(collectively, “GP Interests” ) and securities
convertible, exercisable, exchangeable or otherwise representing
ownership or control of such GP Interests; and
•
incentive distribution rights and limited partner interests (or
securities which have characteristics similar to incentive
distribution rights or limited partner interests) in publicly
traded partnerships or interests in “persons” that own
or control such limited partner or similar interests
(collectively, “non-
GP Interests”); provided that such non-GP Interests are
associated with GP Interests and are owned by the owners of GP
Interests or their respective affiliates.
Enterprise GP Holdings will be presumed to desire to acquire the
equity securities until such time as its general partner advises
the EPCO Group, Enterprise Products GP and us that it has
abandoned the pursuit of such business opportunity. In the event
that the purchase price of the equity securities is reasonably
likely to exceed $100 million, the decision to decline the
acquisition will be made by the Chief Executive Officer of EPE
Holdings after consultation with and subject to the approval of
the Audit and Conflicts Committee of EPE Holdings. If the
purchase price is reasonably likely to be less than such
threshold amount, the Chief Executive Officer of EPE Holdings
may make the determination to decline the acquisition without
consulting the Audit and Conflicts Committee of EPE Holdings. In
the event that Enterprise GP Holdings abandons the acquisition
and so notifies the EPCO Group, Enterprise Products GP and our
general partner, Enterprise Products Partners will have the
second right to the pursue such acquisition either for itself
or, if desired by Enterprise Products Partners in its sole
discretion, for the benefit of us. In the event that Enterprise
Products Partners affirmatively directs the opportunity to us,
we may pursue such acquisition. Enterprise Products Partners
will be presumed to desire to acquire the equity securities
until such time as Enterprise Products GP advises the EPCO Group
Holdings that Enterprise Products Partners has abandoned the
pursuit of such acquisition. In determining whether or not to
pursue the acquisition, Enterprise Products Partners will follow
the same procedures applicable to Enterprise GP Holdings, as
described above but utilizing Enterprise Products GP’s
Chief Executive Officer and Audit and Conflicts Committee. In
the event that Enterprise Products Partners abandons the
acquisition for itself and for us and so notifies the EPCO Group
and our general partner, the EPCO Group may pursue the
acquisition without any further obligation to any other party or
offer such opportunity to other affiliates.
•
if any business opportunity not covered by the preceding bullet
point is presented to the EPCO Group, Enterprise GP Holdings,
EPE Holdings, Enterprise Products GP, Enterprise Products
Partners, our general partner or us, Enterprise Products
Partners will have the first right to pursue such opportunity
either for itself or, if desired by Enterprise Products Partners
in its sole discretion, for the benefit of us. Enterprise
Products Partners will be presumed to desire to pursue the
business opportunity until such time as Enterprise Products GP
advises the EPCO Group, EPE Holdings and our general partner
that Enterprise Products Partners has abandoned the pursuit of
such business opportunity. In the event that the purchase price
or cost associated with the business opportunity is reasonably
likely to exceed $100 million, the decision to decline the
business opportunity will be made by the Chief Executive Officer
of Enterprise Products GP after consultation with and subject to
the approval of the Audit and Conflicts Committee of Enterprise
Products GP. If the purchase price or cost is reasonably likely
to be less than such threshold amount, the Chief Executive
Officer of Enterprise Products GP may make the determination to
decline the business opportunity without consulting Enterprise
Products GP’s Audit and Conflicts Committee. In the event
that Enterprise Products Partners affirmatively directs the
business opportunity to us, we may pursue such business
opportunity. In the event that Enterprise Products Partners
abandons the business opportunity for itself and for us and so
notifies the EPCO Group, EPE Holdings and our general partner,
Enterprise GP Holdings will have the second right to pursue such
business opportunity, and will be presumed to desire to do so,
until such time as EPE Holdings shall have determined to abandon
the pursuit of such opportunity in accordance with the
procedures described above, and shall have advised the EPCO
Group that Enterprise GP Holdings has abandoned the pursuit of
such acquisition. In the event that Enterprise GP Holdings
abandons the acquisition and so notifies the EPCO Group, the
EPCO Group may either pursue the business opportunity or offer
the business opportunity to EPCO Holdings or TEPPCO, TEPPCO GP
and their controlled affiliates without any further obligation
to any other party or offer such opportunity to other affiliates.
None of the EPCO Group, Enterprise GP Holdings, EPE Holdings,
Enterprise Products GP, Enterprise Products Partners, our
general partner or us have any obligation to present business
opportunities to TEPPCO, TEPPCO GP or their controlled
affiliates, and TEPPCO, TEPPCO GP and their controlled
affiliates have no obligation to present business opportunities
to the EPCO Group, Enterprise GP Holdings, EPE Holdings,
Enterprise Products GP, Enterprise Products Partners, our
general partner or us.
The administrative services agreement also outlines an overall
corporate governance structure and provides policies and
procedures to address potential conflicts of interest among the
parties to the administrative services agreement, including
protection of the confidential information of each party from
the other parties and the sharing of EPCO employees between the
parties. Specifically, the administrative services agreement
provides, among other things, that:
•
there shall be no overlap in the independent directors of
Enterprise Products GP, EPE Holdings, our general partner and
TEPPCO GP;
•
there shall be no sharing of EPCO employees performing
commercial and development activities involving certain defined
potential overlapping assets between us, Enterprise GP Holdings,
Enterprise Products Partners, and EPCO and its other affiliates
(excluding TEPPCO and subsidiaries) on one hand and TEPPCO and
its subsidiaries and TEPPCO GP on the other hand; and
•
certain screening procedures are to be followed if an EPCO
employee performing commercial and development activities
becomes privy to commercial information relating to a potential
overlapping asset of any entity for which such employee does not
perform commercial and development activities.
General. Conflicts of interest exist and may
arise in the future as a result of the relationships among us,
Enterprise Products Partners, Enterprise GP Holdings, TEPPCO
Partners and our and their respective general partners and
affiliates. Our general partner, DEP Holdings, is controlled
indirectly by Enterprise Products Partners. Through Dan L.
Duncan’s indirect control of the general partners of
Enterprise Products Partners, Enterprise GP Holdings, TEPPCO
Partners and us, Mr. Duncan has the ability to elect,
remove and replace the directors and officers of the general
partners of Enterprise Products Partners, Enterprise GP
Holdings, TEPPCO Partners and us. The assets of our general
partner and Enterprise Products Partners, Enterprise GP
Holdings, TEPPCO Partners and us overlap in certain areas, which
may result in various conflicts of interest in the future.
Our general partner’s directors and officers have fiduciary
duties to manage our business in a manner beneficial to us and
our partners. Some of the executive officers and non-independent
directors of our general partner also serve as executive
officers or directors of the general partners of Enterprise
Products Partners, Enterprise GP Holdings and TEPPCO Partners.
As a result, they have fiduciary duties to manage the business
of Enterprise Products Partners, Enterprise GP Holdings and
TEPPCO Partners, respectively, in a manner beneficial to such
entities and their respective partners. Consequently, these
directors and officers may encounter situations in which their
fiduciary obligations to Enterprise Products Partners,
Enterprise GP Holdings or TEPPCO Partners, on the one hand, and
us, on the other hand, are in conflict.
It is not possible to predict the nature or extent of these
potential future conflicts of interest at this time, nor is it
possible to determine how we will address and resolve any such
future conflicts of interest. However, the resolution of these
conflicts may not always be in our best interest or that of our
unitholders. We do not currently intend to take any action which
would limit the ability of Enterprise Products Partners,
Enterprise GP Holdings or TEPPCO Partners to pursue their
business strategies.
Administrative Services Agreement. At or prior
to the closing of this offering, we and our general partner will
become party to an existing administrative services agreement
with EPCO, Enterprise Products Partners, and its general
partner, Enterprise GP Holdings and its general partner, TEPPCO
Partners, and its general partner, and certain affiliated
entities. The administrative services agreement will address
potential conflicts that may arise among us and our general
partner, Enterprise Products Partners and its general partner,
Enterprise GP Holdings and its general partner, TEPPCO Partners
and its general partner, and the EPCO Group, which includes EPCO
and its affiliates (excluding us, our general partner,
Enterprise Products Partners and its subsidiaries, Enterprise
Products GP, Enterprise GP Holdings, EPE Holdings, and TEPPCO
Partners, its general partner and their controlled affiliates).
Please read “Certain Relationships and Related Party
Transactions — Administrative Services Agreement.”
Conflicts Between Our General Partner and its Affiliates and
Our Partners. Whenever a conflict arises between
our general partner or its affiliates, on the one hand, and us
or any other partner, on the other hand, our general partner
will resolve that conflict. Our partnership agreement contains
provisions that modify and limit our general partner’s
fiduciary duties to our unitholders. Our partnership agreement
also restricts the remedies available to unitholders for actions
taken that, without those limitations, might constitute breaches
of fiduciary duty.
Our general partner will not be in breach of its obligations
under the partnership agreement or its duties to us or our
unitholders if the resolution of the conflict is or is deemed to
be, fair and reasonable to the Partnership. Any resolution shall
be deemed fair and reasonable if it is:
•
approved by a majority of the members of the audit and conflicts
committee; or
•
on terms no less favorable to us than those generally being
provided to or available from unrelated third parties.
Our general partner may, but is not required to, seek the
approval of such resolution from the audit and conflicts
committee of its board of directors. It will be presumed that
the resolution of any conflicts of interest by our audit and
conflicts committee and our general partner is not made in bad
faith, and in any proceeding brought by or on behalf of any
limited partner or the partnership, the person bringing or
prosecuting such proceeding will have the burden of overcoming
such presumption. The audit and conflicts committee may consider
any factors it determines in good faith to consider when
resolving a conflict, including taking into account the totality
of the relationships among the parties involved, including other
transactions that may be particularly favorable or advantageous
to us.
Conflicts of interest could arise in the situations described
below, among others.
Actions
taken by our general partner may affect the amount of cash
available for distribution to unitholders.
The amount of cash that is available for distribution to our
unitholders is affected by decisions of our general partner
regarding such matters as:
•
amount and timing of cash expenditures (including expansion
projects at Mont Belvieu or other subsidiaries that may be
funded through the construction phase by Enterprise Products
Partners and acquired or contributed to us at a later date);
•
assets sales or acquisitions;
•
borrowings;
•
the issuance of additional common units; and
•
the creation, reduction or increase of reserves in any quarter.
We
will reimburse EPCO and its affiliates for
expenses.
We will reimburse EPCO and its affiliates for costs incurred in
managing and operating us, including costs incurred in rendering
staff and support services to us. The partnership agreement
provides that our general partner will determine the expenses
that are allocable to us. Our general partner may do so in any
manner it determines. Please read “Certain Relationships
and Related Party Transactions.”
Our
general partner intends to limit its liability regarding our
obligations.
Our general partner intends to limit its liability under
contractual arrangements so that the other party has recourse
only to our assets, and not against our general partner or its
assets or any affiliate of our general partner or its assets.
Our partnership agreement provides that any action taken by our
general partner to limit its liability or our liability is not a
breach of our general partner’s fiduciary duties, even if
we could have obtained more favorable terms without the
limitation on liability.
Unitholders
will have no right to enforce obligations of our general partner
and its affiliates under agreements with us.
Any agreements between us on the one hand, and our general
partner and its affiliates, on the other, will not grant to the
unitholders, separate and apart from us, the right to enforce
the obligations of our general partner and its affiliates in our
favor.
Contracts
between us, on the one hand, and our general partner and its
affiliates, on the other, will not be the result of
arm’s-length negotiations for the benefit of our
unitholders.
Our partnership agreement allows our general partner to
determine any amounts to reimburse itself or its affiliates for
any services rendered to us. Our general partner may also enter
into additional contractual arrangements with any of its
affiliates on our behalf. Neither our partnership agreement nor
any of the other
agreements, contracts and arrangements between us, on the one
hand, and our general partner and its affiliates, on the other,
are or will be the result of arm’s-length negotiations for
the benefit of our unitholders.
As described in this prospectus, we will be a party to a number
of agreements with our general partner and its affiliates at the
time of the closing of this offering. These contracts include
the administrative services agreement, storage agreements and
transportation agreements.
Our general partner will determine the terms of any of these
transactions or amendments to existing agreements entered into
after the sale of the common units offered in this offering.
Our
common units are subject to our general partner’s limited
call right.
If at any time our general partner and its affiliates own 80% or
more of the common units, our general partner will have the
right, but not the obligation, which it may assign to any of its
affiliates or to us, to acquire all, but not less than all, of
the common units held by unaffiliated persons at a price not
less than their then-current market price. As a result,
unitholders may be required to sell their common units at an
undesirable time or price and may not receive any return on
their investment. At the completion of this offering and
assuming no exercise of the underwriters’ option to
purchase additional common units, our general partner and its
affiliates will own approximately 36.0% of our outstanding
common units. Please read “Description of Material
Provisions of Our Partnership Agreement — Limited Call
Right.”
We may
not choose to retain separate counsel for ourselves or for the
holders of our common units.
The attorneys, independent auditors and others who have
performed services for us regarding the offering have been
retained by our general partner, its affiliates and us and may
continue to be retained by our general partner, its affiliates
and us after the offering. Attorneys, independent auditors and
others who will perform services for us in the future will be
selected by our general partner or our audit and conflicts
committee and may also perform services for our general partner
and its affiliates. We may, but are not required to, retain
separate counsel for ourselves or the holders of common units in
the event of a conflict of interest arising between our general
partner and its affiliates, on the one hand, and us or the
holders of common units, on the other, after the sale of the
common units offered in this prospectus, depending on the nature
of the conflict. We do not intend to do so in most cases.
Our
general partner’s affiliates may compete with
us.
Our partnership agreement provides that our general partner will
be restricted from engaging in any business activities other
than acting as our general partner and those activities
incidental to its ownership of interests in us. Except as
provided in our partnership agreement and subject to certain
business opportunity agreements, affiliates of our general
partner are not prohibited from engaging in other businesses or
activities, including those that might be in direct competition
with us. Please read “Certain Relationships and Related
Party Transactions — Administrative Services
Agreement.”
Shared Personnel. Our general partner will
manage our operations and activities. Under the amended and
restated administrative services agreement, EPCO will provide
all employees and administrative, operational and other services
for us. All of our general partner’s executive officers
will, and certain other EPCO employees assigned to our
operations may, also perform services for EPCO, Enterprise
Products Partners, Enterprise GP Holdings, TEPPCO Partners and
their affiliates. The services performed by these shared
personnel will generally be limited to non-commercial functions,
including but not limited to human resources, information
technology, financial and accounting services and legal
services. We will adopt policies and procedures to protect and
prevent inappropriate disclosure by shared personnel of
commercial and other non-public information relating to us,
Enterprise Products Partners, Enterprise GP Holdings and TEPPCO
Partners.
Because our general partner’s executive officers allocate
time among EPCO, us, Enterprise Products Partners, Enterprise GP
Holdings and TEPPCO Partners, these officers face conflicts
regarding the allocation of their time, which may adversely
affect our business, results of operations and financial
condition.
Compensation Arrangements. Dan L. Duncan, as
the control person of EPCO and the control person of our general
partner and the general partners of Enterprise Products
Partners, Enterprise GP Holdings, and TEPPCO Partners, is
responsible for establishing the compensation arrangements for
all EPCO employees, including employees who provide services to
us, Enterprise Products Partners, Enterprise GP Holdings and
TEPPCO Partners.
Our general partner is accountable to us and our unitholders as
a fiduciary. Fiduciary duties owed to unitholders by our general
partner are prescribed by law and the partnership agreement. The
Delaware Revised Uniform Limited Partnership Act, which we refer
to in this prospectus as the Delaware Act, provides that
Delaware limited partnerships may, in their partnership
agreements, restrict, eliminate or otherwise modify the
fiduciary duties otherwise owed by a general partner to limited
partners and the partnership.
Our partnership agreement contains various provisions modifying
and restricting the fiduciary duties that might otherwise be
owed by our general partner. We have adopted these provisions to
allow our general partner to take into account the interests of
other parties in addition to our interests when resolving
conflicts of interest. These modifications are detrimental to
the unitholders because they restrict the remedies available to
unitholders for actions that, without those limitations, might
constitute breaches of fiduciary duty, as described below. The
following is a summary of the material restrictions of the
fiduciary duties owed by our general partner to the limited
partners:
State law fiduciary duty standards
Fiduciary duties are generally considered to include an
obligation to act in good faith and with due care and loyalty.
The duty of care, in the absence of a provision in a partnership
agreement providing otherwise, would generally require a general
partner to act for the partnership in the same manner as a
prudent person would act on his own behalf. The duty of loyalty,
in the absence of a provision in a partnership agreement
providing otherwise, would generally prohibit a general partner
of a Delaware limited partnership from taking any action or
engaging in any transaction where a conflict of interest is
present.
Partnership agreement modified standards
Our partnership agreement contains provisions that waive or
consent to conduct by our general partner and its affiliates
that might otherwise raise issues about compliance with
fiduciary duties or applicable law. For example, our partnership
agreement provides that when our general partner is acting in
its capacity as our general partner, as opposed to in its
individual capacity, it must act in a manner not in bad faith
and will not be subject to any other standard under applicable
law. In addition, when our general partner is acting in its
individual capacity, as opposed to in its capacity as our
general partner, it may act without any fiduciary obligation to
us or the unitholders whatsoever. These standards reduce the
obligations to which our general partner would otherwise be
held, including the duties of due care and loyalty.
Our partnership agreement generally provides that affiliated
transactions and resolutions of conflicts of interest that are
not approved by the audit and conflicts committee of the board
of directors of our general partner must be:
• on terms no less favorable to us than those
generally being provided to or available from unrelated third
parties; or
• “fair and reasonable” to us, which may
take into account the totality of the relationships between the
parties involved (including other transactions that may be
particularly favorable or advantageous, or unfavorable or
disadvantageous, to us).
If our general partner does not seek approval from the audit and
conflicts committee and its board of directors determines that
the resolution or course of action taken with respect to the
conflict of interest satisfies either of the standards set forth
in the bullet points above, then it will be presumed that, in
making its decision, the resolution of any conflicts of interest
by our general partner and the audit and conflicts committee was
not made in bad faith, and in any proceeding brought by or on
behalf of any limited partner or the partnership, the person
bringing or prosecuting such proceeding will have the burden of
overcoming such presumption. These standards reduce the
obligations to which our general partner would otherwise be held.
In addition to the other more specific provisions limiting the
obligations of our general partner, our partnership agreement
further provides that our general partner and its officers and
directors will not be liable for monetary damages to us, our
limited partners or assignees for losses sustained or
liabilities incurred as a result of any act or omissions unless
there has been a final and non-appealable judgment by a court of
competent jurisdiction determining that such indemnitee acted in
bad faith or engaged in fraud, willful misconduct or, in the
case of a criminal matter, acted with knowledge that the
indemnitee’s conduct was unlawful.
Rights and remedies of unitholders
The Delaware Act generally provides that a limited partner may
institute legal action on behalf of the partnership to recover
damages from a third party where a general partner has refused
to institute the action or where an effort to cause a general
partner to do so is not likely to succeed. These actions include
actions against a general partner for breach of its fiduciary
duties or of the partnership agreement. In addition, the
statutory or case law of some jurisdictions may permit a limited
partner to institute legal action on behalf of himself and all
other similarly situated limited partners to recover damages
from a general partner for violations of its fiduciary duties to
the limited partners.
In order to become one of our limited partners, a unitholder is
required to agree to be bound by the provisions in the
partnership agreement, including the provisions discussed above.
This is in accordance with the policy of the Delaware Act
favoring the principle of freedom of contract and the
enforceability of partnership agreements. The failure of a
limited partner or assignee to sign a partnership agreement does
not render the partnership agreement unenforceable against that
person.
We are required to indemnify our general partner and its
officers, directors and managers, to the fullest extent
permitted by law, against liabilities, costs and expenses
incurred by our general partner or these other persons. This
indemnification is required unless there has been a final and
non-appealable judgment by a court of competent jurisdiction
determining that these persons acted in bad faith or engaged in
fraud, willful misconduct or, in the case of a criminal matter,
that these persons acted with knowledge that their conduct was
unlawful. Thus, our general partner could be indemnified for its
negligent acts if it met the requirements set forth above. In
the opinion of the Commission, indemnification provisions that
purport to include indemnification for liabilities arising under
the Securities Act are contrary to public policy and are,
therefore, unenforceable. If you have questions regarding the
fiduciary duties of our general partner, you should consult with
your own counsel. Please read “Description of Material
Provisions of Our Partnership Agreement —
Indemnification.”
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
and our general partner in and to cash distributions, please
read “Cash Distribution Policy and Restrictions on
Distributions.”
Our common units have been approved, subject to official notice
of issuance, for listing on the NYSE under the symbol
“DEP.” Any additional common units we issue will also
be listed on the NYSE.
Mellon Investor Services LLC will serve as registrar and
transfer agent for the common units. We pay all fees charged by
the transfer agent for transfers of common units, except the
following that must be paid by unitholders:
•
surety bond premiums to replace lost or stolen certificates,
taxes and other governmental charges;
•
special charges for services requested by a holder of a common
unit; and
•
other similar fees or charges.
There will be no charge to common unitholders for disbursements
of our cash distributions. We will indemnify the transfer agent,
its agents and each of their stockholders, directors, officers
and employees against all claims and losses that may arise out
of acts performed or omitted for its activities in that
capacity, except for any liability due to any gross negligence
or intentional misconduct of the indemnified person or entity.
The transfer agent may at any time resign, by notice to us, or
be removed by us. The resignation or removal of the transfer
agent will become effective upon our appointment of a successor
transfer agent and registrar and its acceptance of the
appointment. If no successor has been appointed and has accepted
the appointment within 30 days after notice of the
resignation or removal, our general partner may act as the
transfer agent and registrar until a successor is appointed.
By transfer of our common units in accordance with our
partnership agreement, each transferee of our common units will
be admitted as a common unitholder with respect to the units
transferred when such transfer and admission is reflected in our
books and records. Additionally, each transferee of our units:
•
becomes the record holder of the units;
•
represents that the transferee has the capacity, power and
authority to enter into and become bound by our partnership
agreement;
•
automatically agrees to be bound by the terms and conditions of,
and is deemed to have executed, our partnership agreement;
•
grants powers of attorney to the officers of our general partner
and any liquidator of our partnership as signified in our
partnership agreement;
•
gives the consents and approvals contained in our partnership
agreement, such as the approval of all transactions and
agreements that we are entering into in connection with our
formation and this offering.
An assignee will become a limited partner of our partnership for
the transferred common units automatically upon the recording of
the transfer on our books and records.
We may, at our discretion, treat the nominee holder of a common
unit as the absolute owner. In that case, the beneficial
holder’s rights are limited solely to those that it has
against the nominee holder as a result of any agreement between
the beneficial owner and the nominee holder.
Common units are securities and are transferable according to
the laws governing transfers of securities. In addition to other
rights acquired upon transfer, the transferor gives the
transferee the right to become a limited partner in our
partnership for the transferred common units.
Until a common unit has been transferred on our books, we and
the transfer agent, notwithstanding any notice to the contrary,
may treat the record holder of the common unit as the absolute
owner for all purposes, except as otherwise required by law or
stock exchange regulations.
The following is a summary of the material provisions of our
partnership agreement. The form of our partnership agreement is
included as Appendix A in this prospectus.
We summarize the following provisions of our partnership
agreement elsewhere in this prospectus:
•
with regard to distributions of available cash, please read
“Cash Distribution Policy and Restrictions on
Distributions;”
•
with regard to fiduciary duties of our general partner, please
read “Conflicts of Interest, Business Opportunity
Agreements and Fiduciary Duties;”
•
with regard to rights of holders of common units, please read
“Description of Our Common Units;” and
•
with regard to allocations of taxable income and other matters,
please read “Material Tax Consequences.”
Under our partnership agreement, we are permitted to engage in
any business activity that is approved by our general partner
and that lawfully may be conducted by a limited partnership
organized under Delaware law and, in connection therewith, to
exercise all of the rights and powers conferred upon us pursuant
to the agreements relating to such business activity; provided,
however, that our general partner shall not cause us to engage,
directly or indirectly in any business activity that our general
partner determines would cause us to be treated as an
association taxable as a corporation or otherwise taxable as an
entity for federal income tax purposes. Affiliates of our
general partner generally will not be obligated to present to us
or our general partner any business opportunities unless and
until the business opportunities have been rejected by other
publicly traded affiliates of our general partner, including
Enterprise GP Holdings and Enterprise Products Partners. For a
further description of limits on our business, please read
“Certain Relationships and Related Party
Transactions — Administrative Services Agreement.”
Each limited partner, and each person who acquires a common unit
from a unitholder, by accepting the common unit, automatically
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 to
amend, and to make consents and waivers under, our partnership
agreement. Please read “— Amendments to Our
Partnership Agreement.”
Our partnership agreement specifies the manner in which we will
make cash distributions to holders of our common units and other
partnership securities as well as to our general partner in
respect of its general partner interest. For a description of
these cash distribution provisions, please read “Cash
Distribution Policy and Restrictions on Distributions.”
Common unitholders are not obligated to make additional capital
contributions, except as described below under
“— Limited Liability.”
Our general partner has the right, but not the obligation, to
contribute a proportionate amount of capital to us to maintain
its 2% general partner interest if we issue additional units.
Our general partner’s 2% interest, and the percentage of
our cash distributions to which it is entitled, will be
proportionately reduced if we issue
additional units in the future and our general partner does not
contribute a proportionate amount of capital to us to maintain
its 2% general partner interest. Our general partner will be
entitled to make a capital contribution in order to maintain its
2% general partner interest in the form of the contribution to
us of common units based on the current market value of the
contributed common units.
Assuming that a limited partner does not participate in the
control of our business within the meaning of 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 possible exceptions, to the amount
of capital he is obligated to contribute to us for his common
units plus his share of any undistributed profits and assets. If
it were determined, however, that the right, or exercise of the
right, by the limited partners as a group:
•
to remove or replace the general partner;
•
to approve some amendments to the partnership agreement; or
•
to take other action under the partnership agreement;
constituted “participation in the control” of our
business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for our obligations
under the laws of Delaware, to the same extent as the general
partner. This liability would extend to persons who transact
business with us and reasonably believe that the limited partner
is a general partner. Neither our partnership agreement nor the
Delaware Act specifically provides for legal recourse against
the general partner if a limited partner were to lose limited
liability through any fault of the general partner. While this
does not mean that a limited partner could not seek legal
recourse, we know of no precedent for this type of a claim in
Delaware case law.
Under the Delaware Act, a limited partnership may not make a
distribution to a partner if, after the distribution, all
liabilities of the limited 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, would exceed the fair
value of the assets of the limited partnership. For the purpose
of determining the fair value of the assets of a limited
partnership, the Delaware Act provides that the fair value of
property subject to liability for which recourse of creditors is
limited shall be included in the assets of the limited
partnership only to the extent that the fair value of that
property exceeds 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 shall be liable to the limited
partnership for the amount of the distribution for three years.
Under the Delaware Act, a substituted limited partner of a
limited partnership is liable for the obligations of his
assignor to make contributions to the partnership, except that
such person is not obligated for liabilities unknown to him at
the time he became a limited partner and that could not be
ascertained from the partnership agreement.
Limitations on the liability of limited partners for the
obligations of a limited partner have not been clearly
established in many jurisdictions. If in the future, by our
ownership in an operating company or otherwise, it is determined
that we conduct business in any state without compliance with
the applicable limited partnership or limited liability company
statute, or that the right or exercise of the right by the
limited partners as a group to remove or replace the general
partner, to approve some amendments to our partnership
agreement, or to take other action under our partnership
agreement constituted “participation in the control”
of our business for purposes of the statutes of any relevant
jurisdiction, then the limited partners could be held personally
liable for our obligations under the law of that jurisdiction to
the same extent as the general partner under the circumstances.
We will operate in a manner that the general partner considers
reasonable and necessary or appropriate to preserve the limited
liability of the limited partners.
The following is a summary of the unitholder vote required for
the matters specified below. In voting their common units,
affiliates of our general partner will have no fiduciary duty or
obligation whatsoever to us
or the limited partners, including any duty to act in good faith
or in the best interests of us or the limited partners.
Issuance of additional common units or other equity interests
No approval right.
Amendment of our partnership agreement
Certain amendments may be made by our general partner without
the approval of our unitholders. Other amendments generally
require the approval of holders of a majority of our outstanding
common units. Please read “— Amendments to Our
Partnership Agreement.”
Merger of our partnership or the sale of all or substantially
all of our assets
Holders of a majority of our outstanding common units in certain
circumstances. Please read “— Merger, Sale or
Other Disposition of Assets.”
Dissolution of our partnership
Holders of a majority of our outstanding common units. Please
read “— Termination or Dissolution.”
Reconstitution of our partnership upon dissolution
Holders of a majority of our outstanding common units. Please
read “— Termination or Dissolution.”
Withdrawal of our general partner
Under most circumstances, the approval of holders of a majority
of the common units, excluding common units held by our general
partner and its affiliates, is required for the withdrawal of
the general partner prior to December 31, 2016 in a manner
that would cause a dissolution of our partnership. Please read
“— Withdrawal or Removal of Our General
Partner.”
Removal of our general partner
Holders of not less than
662/3%
of the outstanding common units, including common units held by
our general partner and its affiliates. Please read
“— Withdrawal or Removal of Our General
Partner.”
Transfer of the general partner interest
Our general partner may transfer all, but not less than all, of
its general partner interest in us without a vote of our
unitholders to (i) an affiliate (other than an individual)
or (ii) another entity in connection with its merger or
consolidation with or into, or sale of all or substantially all
of its assets to, such person. The approval of holders of a
majority of the common units, excluding common units held by the
general partner and its affiliates, is required in other
circumstances for a transfer of the general partner interest to
a third party prior to December 31, 2016. Please read
“— Transfer of General Partner Interest.”
Transfer of ownership interests in our general partner
No approval required at any time. Please read
“— Transfer of Ownership Interests in Our
General Partner.”
Our partnership agreement authorizes us to issue an unlimited
number of additional limited partner interests and other equity
securities that may be senior to our common units on terms and
conditions established by our general partner in its sole
discretion without the approval of our unitholders.
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 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, as determined by our general partner, may have
special voting rights to which common units are not entitled. In
addition, our partnership agreement does not prohibit the
issuance by our subsidiaries of equity securities, which may
effectively rank senior to the common units.
Upon issuance of additional common units or other partnership
securities, our general partner will be entitled, but will not
be required, to make additional capital contributions to the
extent necessary to maintain its 2% general partner interest in
us. If the general partner does not make additional capital
contributions to maintain its 2% general partner interest in us,
its interest will be decreased to its pro rata portion of its
relative capital account. Please read
“— Liquidation and Distribution of
Proceeds.” Our general partner and its affiliates have the
right, which they may from time to time assign in whole or in
part to any of their affiliates, to purchase common 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
limited partner percentage interests in us that existed
immediately prior to the issuance. Our general partner and its
affiliates will hold approximately 36.0% of our outstanding
common units after this offering (or approximately 26.4% if the
underwriters exercise their option to purchase additional common
units in full). 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 may be proposed only by
or with the consent of our general partner. However, our general
partner will have no duty or obligation to propose any amendment
and may decline to do so free of any fiduciary duty or
obligation whatsoever to us or the limited partners. In order to
adopt a proposed amendment, other than the amendments discussed
below, our general partner is required to seek written approval
of the holders of the number of common units required to approve
the amendment or call a meeting of the limited partners to
consider and vote upon the proposed amendment. Except as
described below, an amendment must be approved by holders of a
majority of our outstanding common units.
Prohibited
Amendments
No amendment may be made that would:
(1) enlarge the obligations of any limited partner without
its consent, unless approved by holders of at least a majority
of the type or class of limited partner interests so
affected; or
(2) enlarge the obligations of, restrict in any way any
action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by us to our
general partner or any of its affiliates without the consent of
our general partner, which may be given or withheld at its
option.
The provision of our partnership agreement preventing the
amendments having the effects described in clauses (1) or
(2) above can be amended upon the approval of the holders
of at least 90% of the outstanding common units.
Our general partner may generally make amendments to our
partnership agreement without the approval of any limited
partner to reflect:
(1) a change in the name of the partnership, the location
of the partnership’s principal place of business, the
partnership’s registered agent or its registered office;
(2) the admission, substitution, withdrawal or removal of
partners in accordance with our partnership agreement;
(3) a change that our general partner determines to be
necessary or appropriate for the partnership to qualify or to
continue our qualification as a limited partnership or a
partnership in which the limited partners have limited liability
under the laws of any state or to ensure that none of us or our
subsidiaries will be treated as an association taxable as a
corporation or otherwise taxed as an entity for federal income
tax purposes;
(4) an amendment that is necessary, in the opinion of our
counsel, to prevent the partnership or our general partner or
its directors, officers, agents or trustees, from in any manner
being subjected to the provisions of the Investment Company Act
of 1940, the Investment Advisors Act of 1940, or “plan
asset” regulations adopted under the Employee Retirement
Income Security Act of 1974, whether or not substantially
similar to plan asset regulations currently applied or proposed;
(5) an amendment that the general partner determines to be
necessary or appropriate in connection with the authorization of
issuance of any class or series of partnership securities;
(6) any amendment expressly permitted in our partnership
agreement to be made by our general partner acting alone;
(7) an amendment effected, necessitated or contemplated by
a merger agreement that has been approved under the terms of our
partnership agreement;
(8) any amendment that our general partner determines to be
necessary or appropriate for the formation by the partnership
of, or its investment in, any corporation, partnership or other
entity, as otherwise permitted by our partnership agreement;
(9) a change in our fiscal year or taxable year and related
changes;
(10) certain mergers or conveyances set forth in our
partnership agreement; and
(11) any other amendments substantially similar to any of
the matters described in (1) through (10) above.
In addition, our general partner may make amendments to our
partnership agreement without the approval of any limited
partner or if our general partner determines that those
amendments:
(1) do not adversely affect our limited partners (or any
particular class of limited partners) in any material respect;
(2) are necessary or appropriate to satisfy any
requirements, conditions or guidelines contained in any opinion,
directive, order, ruling or regulation of any federal or state
agency or judicial authority or contained in any federal or
state statute;
(3) are necessary or appropriate to facilitate the trading
of limited partner interests or to comply with any rule,
regulation, guideline or requirement of any securities exchange
on which the limited partner interests are or will be listed for
trading, compliance with any of which our general partner deems
to be in the partnership’s best interest and the best
interest of our limited partners;
(4) are necessary or advisable for any action taken by our
general partner relating to splits or combinations of units
under the provisions of our partnership agreement; or
(5) are required to effect the intent of the provisions of
our partnership agreement or are otherwise contemplated by our
partnership agreement.
Our general partner will not be required to obtain an opinion of
counsel that an amendment will not result in a loss of limited
liability to the limited partners or result in us or our
subsidiaries being treated as an entity for federal income tax
purposes in connection with any of the amendments described
under “— Amendments to Our Partnership
Agreement — No Unitholder Approval.” No other
amendments to our partnership agreement will become effective
without the approval of holders of at least 90% of the
outstanding common units unless we first obtain an opinion of
counsel to the effect that the amendment will not affect the
limited liability under applicable law of any of our limited
partners. Any amendment that reduces the voting percentage
required to take any action must be approved by the affirmative
vote of limited partners constituting not less than the voting
requirement sought to be reduced.
Our partnership agreement generally prohibits our general
partner, without the prior approval of holders of a majority of
our outstanding common units, from causing us to, among other
things, sell, exchange or otherwise dispose of all or
substantially all of our assets in a single transaction or a
series of related transactions, including by way of merger,
consolidation or other combination, or approving on our behalf
the sale, exchange or other disposition of all or substantially
all of the assets of our subsidiaries. Our general partner may,
however, mortgage, pledge, hypothecate or grant a security
interest in all or substantially all of our assets without that
approval. Our general partner may also sell all or substantially
all of our assets under a foreclosure or other realization upon
those encumbrances without that approval. Finally, our general
partner may consummate any merger without the prior approval of
our unitholders if we are the surviving entity in the
transaction, our general partner has received an opinion of
counsel regarding limited liability and tax matters, the
transaction would not result in a material amendment to the
partnership agreement, each of our units will be an identical
unit of our partnership following the transaction, and the
partnership securities to be issued do not exceed 20% of our
outstanding partnership securities immediately prior to the
transaction.
If the conditions specified in our partnership agreement are
satisfied, our general partner, without the approval of our
unitholders, may convert us into a new limited liability entity
or merge us or any of our subsidiaries into, or convey some or
all of our assets to, a newly formed entity if the sole purpose
of that conversion, merger or conveyance is to effect a mere
change in our legal form into another limited liability entity.
The unitholders are not entitled to dissenters’ rights of
appraisal under our partnership agreement or applicable Delaware
law in the event of a conversion, merger or consolidation, a
sale of substantially all of our assets or any other transaction
or event.
We will continue as a limited partnership until terminated under
our partnership agreement. We will dissolve upon:
(1) the election of our general partner to dissolve us, if
approved by a majority of the members of our general
partner’s audit and conflicts committee and the holders of
a majority of our outstanding common units;
(2) there being no limited partners, unless we are
continued without dissolution in accordance with applicable
Delaware law;
(3) the entry of a decree of judicial dissolution of our
partnership; or
(4) the withdrawal or removal of our general partner or any
other event that results in its ceasing to be our general
partner other than by reason of a transfer of its general
partner interest in accordance with our partnership agreement or
withdrawal or removal following approval and admission of a
successor.
Upon a dissolution under clause (4) above, the holders of a
majority of our outstanding common units may also elect, within
specific time limitations, to continue our business on the same
terms and conditions described in our partnership agreement by
appointing a successor general partner an entity approved by the
holders of a majority of our outstanding common units, excluding
those common units held by our general partner and its
affiliates, subject to receipt by us of an opinion of counsel to
the effect that:
•
the action would not result in the loss of limited liability of
any limited partner; and
•
we would not be treated as an association taxable as a
corporation or otherwise be taxable as an entity for federal
income tax purposes upon the exercise of that right to continue.
Upon our dissolution, unless we are 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 the liquidator deems necessary or desirable,
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 their 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 undue loss to
our partners, our general partner may distribute assets in kind
to our partners.
Except as described below, our general partner has agreed not to
withdraw voluntarily as our general partner prior to
December 31, 2016 without obtaining the approval of a
majority of the members of our audit and conflicts committee and
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 regarding limited liability and
tax matters. On or after December 31, 2016, 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 common units,
excluding the common units held by the withdrawing general
partner and its affiliates, 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 (i) a majority of the audit and conflicts
committee of our general partner and (ii) holders of not
less than
662/3%
of our outstanding common units, including common units held by
our general partner and its affiliates, and we receive an
opinion of counsel regarding limited liability and tax matters.
In addition, if our general partner is removed as our general
partner under circumstances where cause does not exist and
common units held by our general partner and its affiliates are
not voted in favor of such removal, 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.
Any removal of this kind is also subject to the approval of a
successor general partner by a majority of our outstanding
common units, including those held by our general partner and
its affiliates. The ownership of more than
331/3%
of the outstanding common units by our general partner and its
affiliates would give it the practical ability to prevent its
removal. Upon completion of this offering, affiliates of our
general partner will own approximately 36.0% of the outstanding
common units (or approximately 26.4% if the underwriters
exercise their option to purchase additional common units in
full).
In the event of removal of a general partner under circumstances
where cause exists or withdrawal of a general partner where that
withdrawal violates our partnership agreement, a successor
general partner will have the option to purchase the general
partner interest of the departing general partner for a cash
payment equal to its fair market value. Under all other
circumstances where a general partner withdraws or is removed by
the limited partners, the departing general partner will have
the option to require the successor general partner to purchase
the general partner interest of the departing general partner
for a cash payment equal to its fair market value. In each case,
this fair market value will be determined by agreement between
the departing general partner and the successor general partner.
If no agreement is reached within 30 days of the departing
general partner’s departure, an independent investment
banking firm or other independent expert selected by the
departing general partner and the successor general partner will
determine the fair market value. Or, if the departing general
partner and the successor general partner cannot agree upon an
expert, then an expert chosen by agreement of the experts
selected by each of them will determine the fair market value.
If the option described above is not exercised by either the
departing general partner or the successor general partner, the
departing general partner’s general partner interest will
automatically convert into common units equal to the fair market
value of those interests as determined by an investment banking
firm or other independent expert selected in the manner
described in the preceding paragraph.
In addition, we will be required to reimburse the departing
general partner for all amounts due the departing general
partner, including, without limitation, all employee-related
liabilities, including severance liabilities, incurred for the
termination of any employees employed by the departing general
partner or its affiliates for our benefit.
Except for transfer by our general partner of all, but not less
than all, of its general partner interest in us to:
•
an affiliate of the general partner (other than an
individual); or
•
another entity as part of the merger or consolidation of the
general partner with or into another entity or the transfer by
the general partner of all or substantially all of its assets to
another entity,
our general partner may not transfer all or any part of its
general partner interest in us to another entity prior to
December 31, 2016 without the approval of holders of a
majority of the common units outstanding, excluding common units
held by our general partner and its affiliates. As a condition
of this transfer, the transferee must assume the rights and
duties of our general partner, agree to be bound by the
provisions of the partnership agreement, and furnish an opinion
of counsel regarding limited liability and tax matters.
Our general partner and it affiliates may at any time transfer
common units to one or more persons without unitholder approval.
At any time, Enterprise Products OLP may sell or transfer all or
part of its ownership interest in our general partner without
the approval of our unitholders.
Our partnership agreement contains specific provisions that are
intended to discourage a person or group from attempting to
remove our general partner as general partner or otherwise
change management. If any person or group other than our general
partner and its affiliates acquires beneficial ownership of 20%
or more of any class of common units, that person or group loses
voting rights on all of its common units. This loss of voting
rights does not apply to any person or group that acquires the
common units from our general partner or its affiliates and any
transferees of that person or group approved by our general
partner or to any person or group who acquires the common units
with the prior approval of the board of directors of our general
partner.
If at any time our general partner and its affiliates hold 80%
or more of the outstanding limited partner interests of any
class, our general partner will have the right, but not the
obligation, which it may assign in whole or in part to any of
its affiliates or us, to acquire all, but not less than all, of
the remaining limited partner interests of the class held by
unaffiliated persons as of a record date to be selected by our
general partner, on at least 10 but not more than
60 days’ notice. The purchase price in the event of
this purchase is the greater of:
•
the highest price paid by either our general partner or any of
its affiliates for any limited partners interests of the class
purchased within the 90 days preceding the date our general
partner first mails notice of its election to purchase the
limited partner interests; and
•
the current market price of the limited partner interests of the
class as of the date three days prior to the date that notice is
mailed.
As a result of our general partner’s right to purchase
outstanding limited partner interests, a holder of limited
partner interests may have his limited partner interests
purchased at an undesirable time or price. The tax consequences
to a unitholder of the exercise of this call right are the same
as a sale by that unitholder of his common units in the market.
Please read “Material Tax Consequences —
Disposition of Common Units.”
Upon completion of this offering, affiliates of our general
partner will own approximately 7,301,571 of our common units,
representing approximately 36.0% of our outstanding common units
(or 5,351,571 common units representing approximately 26.4% of
our outstanding common units if the underwriters exercise their
option to purchase additional common units in full).
Except as described below regarding a person or group owning 20%
or more of common units then outstanding, unitholders on the
record date will be entitled to notice of, and to vote at,
meetings of our limited partners and to act upon matters for
which approvals may be solicited. Common units that are owned by
non-citizen assignees will be voted by our general partner and
our general partner will distribute the votes on those common
units in the same ratios as the votes of limited partners on
other common units are cast.
Our general partner does not anticipate that any meeting of
unitholders will be called in the foreseeable future. Any action
that is required or permitted to be taken by our unitholders may
be taken either at a meeting of the unitholders or without a
meeting if consents in writing describing the action so taken
are signed by holders of the number of common units as would be
necessary to authorize or take that action at a meeting.
Meetings of the unitholders may be called by our general partner
or by unitholders owning at least 20% of the outstanding common
units. Unitholders may vote either in person or by proxy at
meetings. The holders of a majority of the outstanding common
units, represented in person or by proxy, will constitute a
quorum unless any action by the unitholders requires approval by
holders of a greater percentage of the common units, in which
case the quorum will be the greater percentage.
Each record holder of a common unit has a vote according to his
percentage interest in us, although additional limited partner
interests having special voting rights could be issued. Please
read “— Issuance of Additional Securities”
above. However, if at any time any person or group, other than
our general partner and its affiliates, or a direct or
subsequently approved transferee of our general partner or its
affiliates, acquires, in the aggregate, beneficial ownership of
20% or more of any class of units then outstanding, that person
or group will lose voting rights on all of its units and the
units may not be voted on any matter and will not be considered
to be outstanding when sending notices of a meeting of
unitholders, calculating required votes, determining the
presence of a quorum or for other similar purposes. Common units
held in nominee or street name account will be voted by the
broker or other nominee in accordance with the instruction of
the beneficial owner unless the arrangement between the
beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy material required
or permitted to be given or made to record holders of common
units under our partnership agreement will be delivered to the
record holder by us or by the transfer agent.
By transfer of common units in accordance with our partnership
agreement, each transferee of common units shall be admitted as
a limited partner with respect to the transferred units when
such transfer and admission is reflected in our books and
records. Except as described under “— Limited
Liability,” the common units will be fully paid, and
unitholders will not be required to make additional
contributions.
If we are or become subject to federal, state or local laws or
regulations that, in the reasonable determination of our general
partner, create a substantial risk of cancellation or forfeiture
of any property that we have an interest in because of the
nationality, citizenship or other related status of any limited
partner, we may redeem the common units held by the limited
partner at their current market price. In order to avoid any
cancellation or forfeiture, our general partner may require each
limited partner to furnish information about his nationality,
citizenship or related status. If a limited partner fails to
furnish information about his nationality, citizenship or other
related status within 30 days after a request for the
information or our general partner determines after receipt of
the information that the limited partner is not an eligible
citizen, the limited partner may be treated as a non-citizen
assignee. A non-citizen assignee is entitled to an interest
equivalent to that of a limited partner for the right to share
in allocations and distributions from us, including liquidating
distributions. A non-citizen assignee does not have the right to
direct the voting of his common units and may not receive
distributions in kind upon our liquidation.
Under our partnership agreement, in most circumstances, we will
indemnify the following persons, to the fullest extent permitted
by law, subject to certain limitations expressly provided in our
partnership agreement, from and against all losses, claims,
damages or similar events:
(1) our general partner;
(2) any departing general partner;
(3) any person who is or was an affiliate of our general
partner or any departing general partner;
(4) any person who is or was an officer, director, member,
partner, fiduciary or trustee of any entity described in (1),
(2) or (3) above;
(5) any person who is or was serving as an officer,
director, member, partner, fiduciary or trustee of another
person at the request of the general partner or any departing
general partner; and
(6) any person designated by our general partner.
This indemnification is required unless there has been a final
and non-appealable judgment by a court of competent jurisdiction
determining that these indemnitees acted in bad faith or engaged
in fraud, willful misconduct or, in the case of a criminal
matter, acted with knowledge that the indemnitee’s conduct
was unlawful.
Any indemnification under these provisions will only be out of
our assets. Unless it otherwise agrees, our general partner will
not be personally liable for, or have any obligation to
contribute or loan funds or assets to us to enable us to
effectuate, indemnification. We may 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 the
partnership agreement.
As discussed elsewhere in this prospectus, our partnership
agreement provides contractual procedures for the resolution of
certain conflicts of interest that are binding on all partners
and modifies certain fiduciary duties otherwise applicable under
Delaware law.
Unless otherwise expressly provided in our partnership
agreement, whenever a potential conflict of interest exists or
arises between our general partner or any of its affiliates, on
the one hand, and us, any of our subsidiaries or any partner, on
the other hand, any resolution or course of action by the
general partner or its affiliates in respect of such conflict of
interest shall be permitted and deemed approved by all partners,
and shall not constitute a breach of our partnership agreement
or of any agreement contemplated thereby, or of any duty stated
or implied by law or equity, if the resolution or course of
action in respect of such conflict of interest is or, by
operation of the partnership agreement is deemed to be, fair and
reasonable to us; provided that, any conflict of interest
and any resolution of such conflict of interest shall be, or be
deemed to be, fair and reasonable to us if such conflict of
interest or resolution is (i) approved by “Special
Approval” (i.e., by a majority of the members of the Audit
and Conflicts Committee), or (ii) on terms no less
favorable to us than those generally being provided to or
available from unrelated third parties. The Audit and Conflicts
Committee (in connection with Special Approval) shall be
authorized in connection with its resolution of any conflict of
interest to consider (i) the relative interests of any
party to such conflict, agreement, transaction or situation and
the benefits and burdens relating to such interest;
(ii) the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to us); (iii) any customary or
accepted industry practices and any customary or historical
dealings with a particular Person; (iv) any applicable
generally accepted accounting or engineering practices or
principles; (v) the relative cost of capital of the parties
and the consequent rates of return to the equity holders of the
party; and (vi) such additional factors as the Audit and
Conflicts Committee determines in its sole discretion to be
relevant, reasonable or appropriate under the circumstances.
Nothing contained in the partnership agreement, however, is
intended to nor shall it be construed to require the Audit and
Conflicts Committee to consider the interests of any person
other than the Partnership. In the absence of bad faith by the
Audit and Conflicts Committee or our general partner, the
resolution, action or terms so made, taken or provided
(including granting Special Approval) by the Audit and Conflicts
Committee or our general partner with respect to such matter
shall be conclusive and binding on all persons (including all
partners) and shall not constitute a breach of the partnership
agreement, or any other agreement contemplated thereby, or a
breach of any standard of care or duty imposed in the
partnership agreement or under the Delaware Revised Uniform
Limited Partnership Act or any other law, rule or regulation. It
shall be presumed that the resolution, action or terms made,
taken or provided by the Audit and Conflicts Committee or our
general partner was not made, taken or provided in bad faith,
and in any proceeding brought by any limited partner or by or on
behalf of such limited partner or any other limited partner or
us challenging such resolution, action or terms, the person
bringing or prosecuting such proceeding shall have the burden of
overcoming such presumption.
Whenever our general partner makes a determination or takes or
declines to take any other action, or any of its affiliates
causes it to do so, in its capacity as our general partner as
opposed to in its individual capacity, whether under our
partnership agreement, or any other agreement contemplated
thereby or otherwise, then unless another express standard is
provided for in our partnership agreement, our general partner,
or such affiliates causing it to do so, shall make such
determination or take or decline to take such other action in a
manner that is not in bad faith and shall not be subject to any
other or different standards imposed by our partnership
agreement, any other agreement contemplated thereby or under the
Delaware Revised Uniform Limited Partnership Act or any other
law, rule or regulation or at equity.
Our partnership agreement requires us to reimburse our general
partner for all direct and indirect expenses it incurs or
payments it makes on our behalf and all other expenses allocable
to us or otherwise incurred by our general partner in connection
with operating our business. These expenses include salary,
bonus, incentive compensation and other amounts paid to persons
who perform services for us or our general partner and
expenses allocated to us or otherwise incurred by our general
partner in connection with operating our business. The general
partner is entitled to determine in good faith the expenses that
are allocable to us.
Our general partner is required to keep appropriate books of our
business at our principal offices. The books will be maintained
for both tax and financial reporting purposes on an accrual
basis. For tax and fiscal reporting purposes, our fiscal year is
the calendar year.
We will furnish or make available to record holders of common
units, within 120 days after the close of each fiscal year,
an annual report containing audited financial statements and a
report on those financial statements by our independent public
accountants. Except for our fourth quarter, we will also furnish
or make available summary financial information within
90 days after the close of each quarter.
We will furnish each record holder of a common unit with
information reasonably required for tax reporting purposes
within 90 days after the close of each calendar year. This
information is expected to be furnished in summary form so that
some complex calculations normally required of partners can be
avoided. Our ability to furnish this summary information to
unitholders will depend on the cooperation of unitholders in
supplying us with specific information. Every unitholder will
receive information to assist him in determining his federal and
state tax liability and filing his federal and state income tax
returns, regardless of whether he supplies us with information.
A limited partner can, for a purpose reasonably related to the
limited partner’s interest as a limited partner, upon
reasonable demand stating the purpose of such demand and at his
own expense, obtain:
•
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, could damage our business or which
we are required by law or by agreements with third parties to
keep confidential.
Under our partnership agreement, we have agreed to register for
resale under the Securities Act and applicable state securities
laws any common 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 costs and expenses incidental to any such registration and
offering on behalf of our general partner or its affiliates,
excluding underwriting discounts and commissions. Please also
read “Common Units Eligible for Future Sale.”
After the sale of the common units offered by this prospectus,
our general partner or its affiliates, will hold an aggregate of
7,301,571 common units, representing approximately 36.0% of our
outstanding common units (or 5,351,571 common units,
representing approximately 26.4% of our outstanding common units
if the underwriters’ option to purchase additional common
units is exercised in full). The sale of these common units
could have an adverse impact on the price of the common units or
on any trading market that may develop.
The common units sold in this offering will generally be freely
transferable without restriction or further registration under
the Securities Act, except that any common units held by an
“affiliate” of ours may not be resold publicly except
in compliance with the registration requirements of the
Securities Act or under an exemption under Rule 144 or
otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer to be sold into the market in an amount
that does not exceed, during any three-month period, the greater
of:
•
1% of the total number of the securities outstanding; or
•
the average weekly reported trading volume of the common units
for the four calendar weeks prior to the sale.
Sales under Rule 144 are also subject to specific manner of
sale provisions, holding period requirements, notice
requirements, and the availability of current public information
about us. A person who is not deemed to have been an affiliate
of ours at any time during the three months preceding a sale,
and who has beneficially owned his common units for at least two
years, would be entitled to sell common units under
Rule 144 without regard to the current public information
requirements, volume limitations, manner of sale provisions, and
notice requirements of Rule 144.
The partnership agreement provides that we may issue an
unlimited number of limited partner interests without a vote of
the unitholders. Such common units may be issued on the terms
and conditions established by our general partner. Any issuance
of additional common units would result in a corresponding
decrease in the proportionate ownership interest in us
represented by, and could adversely affect the cash
distributions to, and market price of, common units then
outstanding. Please read “Description of Material
Provisions of Our Partnership Agreement — Issuance of
Additional Securities.”
Under the partnership agreement, our general partner and its
affiliates have the right to cause us to register under the
Securities Act and applicable state securities laws the offer
and sale of any common units that they hold. Subject to the
terms and conditions of the partnership agreement, these
registration rights allow our general partner and its affiliates
or their assignees holding any common units to require
registration of any of these common units and to include any of
these common units in a registration by us of other common
units, including common units offered by us or by any
unitholder. Our general partner will continue to have these
registration rights for two years following its withdrawal or
removal as our general partner. In connection with any
registration of this kind, we will indemnify each unitholder
participating in the registration and its officers, directors,
and controlling persons from and against any liabilities under
the Securities Act or any applicable state securities laws
arising from the registration statement or prospectus. We will
bear all costs and expenses incidental to any registration,
excluding any underwriting discounts and commissions. Except as
described below, our general partner and its affiliates may sell
their common units in private transactions at any time, subject
to compliance with applicable laws.
We, certain of our affiliates and the directors and executive
officers of our general partner have agreed not to sell any
common units they beneficially own for a period of 180 days
from the date of this prospectus. Please read
“Underwriting” for a description of these
lock-up
provisions.
This section is a discussion of the material tax considerations
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, is the
opinion of Andrews Kurth LLP, counsel to our general partner and
us, insofar as it relates to matters of United States federal
income tax law and legal conclusions with respect to those
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. Unless the context otherwise
requires, references in this section to “us” or
“we” are references to Duncan Energy Partners L.P. and
our operating partnership.
The following discussion does not address 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), employee
benefit plans or mutual funds. Accordingly, we urge each
prospective unitholder to 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 the 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 Andrews Kurth LLP and are
based on the accuracy of the representations made by us and our
general partner.
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 of Andrews Kurth LLP. 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 in this discussion
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, principally legal, accounting and related fees, will
result in a reduction in cash available for distribution to our
unitholders and our general partner and thus will be borne
indirectly by our unitholders and our 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, Andrews Kurth LLP has not
rendered an opinion with respect to the following specific
federal income tax issues: 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”); 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 whether our method for depreciating
Section 743 adjustments is sustainable in certain cases
(please read “— Tax Consequences of Unit
Ownership — Section 754 Election” and
“— Uniformity of Units”).
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 year consists of “qualifying
income.” Qualifying income includes income and gains
derived from the exploration,
development, mining or production, processing, refining,
transportation, storage and marketing of crude oil, natural gas
and products thereof. 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 capital assets held for the production of
income that otherwise constitutes qualifying income. We estimate
that less than 6% of our current income is not qualifying
income; however, this estimate could change from time to time.
Based on and subject to this estimate, the factual
representations made by us and our general partner and a review
of the applicable legal authorities, Andrews Kurth LLP is of the
opinion that at least 90% of our current gross income
constitutes qualifying income. The portion of our income that is
qualifying income can change from time to time.
No ruling has been or will be sought from the IRS and the IRS
has made no determination as to our status 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 Andrews Kurth LLP
that, based upon the Internal Revenue Code, its regulations,
published revenue rulings and court decisions and the
representations described below, we will be classified as a
partnership and our operating partnership will be disregarded as
an entity separate from us for federal income tax purposes.
In rendering its opinion, Andrews Kurth LLP has relied on
factual representations made by us and our general partner. The
representations made by us and our general partner upon which
Andrews Kurth LLP has relied include:
•
Neither we nor our operating partnership has elected nor will
elect to be treated as a corporation; and
•
For each taxable year, more than 90% of our gross income will be
income that Andrews Kurth LLP 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 that is determined by the IRS to be inadvertent and that
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 deemed 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 Andrews Kurth LLP’s
opinion that we will be classified as a partnership for federal
income tax purposes.
Unitholders who have become limited partners of Duncan Energy
Partners L.P. will be treated as partners of Duncan Energy
Partners L.P. for federal income tax purposes. Also, unitholders
whose common units are held in street name or by a nominee and
who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their common
units will be treated as partners of Duncan Energy Partners L.P.
for federal income tax purposes.
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.”
Items of our income, gain, loss and deduction 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 appear to be fully taxable as ordinary
income. These holders are urged to consult their own tax
advisors with respect to their tax consequences of holding
common units in Duncan Energy Partners L.P. The references to
“unitholders” in the discussion that follows are to
persons who are treated as partners in Duncan Energy Partners
L.P. for federal income tax purposes.
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, except to the extent
the amount of any such cash distribution exceeds his tax basis
in his common units immediately before the distribution. Our
cash distributions in excess of a unitholder’s tax basis in
his common units 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 our
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 Section 751 of 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, which will equal the excess of
the non-pro rata portion of that distribution over the
unitholder’s tax basis for the share of Section 751
Assets deemed relinquished in the exchange.
Ratio of Taxable Income to Distributions. We
estimate that a purchaser of common units in this offering who
owns those common units from the date of closing of this
offering through the record date for distributions for the
period ending December 31, 2009, will be allocated on a
cumulative basis an amount of federal taxable income for that
period that will be less than 20% of the cash distributed with
respect to that period. We anticipate that after the taxable
year ending December 31, 2009, the ratio of allocable
taxable income to cash distributions to the unitholders will
increase. These estimates are based upon the assumption that
gross income from operations will approximate the amount
required to make the minimum quarterly distribution on all units
and other assumptions with respect to capital expenditures, cash
flow, net working capital 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 tax reporting
positions that we will adopt and with which the IRS could
disagree. Accordingly, we cannot assure you that these estimates
will prove to be correct. The
actual percentage of distributions that will constitute taxable
income could be higher or lower than our estimation above, and
any differences could be material and could materially affect
the value of the common units. For example, the ratio of
allocable taxable income to cash distributions to a purchaser of
common units in this offering will be greater, and perhaps
substantially greater if:
•
gross income from operations exceeds the amount required to make
the minimum quarterly distribution on all units, yet we only
distribute the minimum quarterly distribution on all
units; or
•
we make a future offering of common units and use the proceeds
of the offering in a manner that does not produce substantial
additional deductions during the period described above, such as
to repay indebtedness outstanding at the time of the offering or
to acquire property that is not eligible for depreciation or
amortization for federal income tax purposes or that is
depreciable or amortizable at a rate significantly slower than
the rate applicable to our assets at the time of this offering.
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 that
is recourse to our 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 or for 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 amount 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 as a deduction in a
later year 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 are permitted to 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
only be available to offset 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 a
unitholder’s 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 the unitholder 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
of our 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 investment income to its
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, local or foreign 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 our 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 our 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 unitholder in which event the
unitholder 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 our 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 our
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 our general partner and the unitholders in accordance with
their percentage interests in us to the extent of their positive
capital accounts and, second, to our 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 this offering. In addition, items of recapture income will be
allocated to the extent possible to the unitholder 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 such amount and manner as is needed 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
•
the rights of all the partners to distributions of capital upon
liquidation.
Andrews Kurth LLP 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 treated for tax purposes as
a partner with respect to those units during the period of the
loan and may recognize gain or loss from the disposition. As a
result, during this period:
•
any 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.
Andrews Kurth LLP 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
are urged to modify any applicable brokerage account agreements
to prohibit their brokers from loaning their units. The IRS has
announced that it is 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. Prospective unitholders are urged to 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 is
currently 35% and the maximum United States federal income tax
rate for net capital gains of an individual is currently 15% if
the asset disposed of was held for more than 12 months at
the time of disposition.
Section 754 Election. We will make the
election permitted by Section 754 of the Internal Revenue
Code. That election is irrevocable without the consent of the
IRS. The election will generally permit 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.
Where the remedial allocation method is adopted (which we will
adopt, except as our general partner otherwise determines with
respect to certain goodwill properties), the Treasury
Regulations under Section 743 of the Internal Revenue Code
require a portion of the Section 743(b) adjustment
attributable to recovery property to be depreciated over the
remaining cost recovery period for the Section 704(c)
built-in gain. Under Treasury
Regulation Section 1.167(c)-1(a)(6),
a Section 743(b) adjustment attributable to property
subject to depreciation under Section 167 of the 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 the Treasury
Regulations. Please read “— Uniformity of
Units.”
Although Andrews Kurth LLP is unable to opine as to the validity
of this approach because there is no controlling 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 Treasury
Regulations under Section 743 of the Internal Revenue Code
but is arguably inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets, and Treasury Regulation Section 1.197-2(g)(3). 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
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
“— 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 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. A basis adjustment is required regardless of
whether a Section 754 election is made in the case of a
transfer of an interest in us if we have a substantial built-in
loss immediately after the transfer, or if we distribute
property and have a substantial basis reduction. Generally a
basis reduction or a built-in loss is substantial if it exceeds
$250,000.
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 we allocated to our tangible
assets to goodwill instead. Goodwill, an intangible asset, is
generally nonamortizable or 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.
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 this offering will be borne by
our general partner and its affiliates. 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. Because our general partner may determine not
to adopt the remedial method of allocation with respect to any
difference between the tax basis and the fair market value of
goodwill immediately prior to this or any future offering, we
may not be entitled to any amortization deductions with respect
to any goodwill conveyed to us on formation or held by us at the
time of any future offering. 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 common
unitholder 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. 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 we incur 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 we may be able to amortize, and as
syndication expenses, which we may not amortize. The
underwriting discounts and commissions we incur will be treated
as syndication expenses.
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.
Recognition of Gain or Loss. Gain or loss will
be recognized on a sale of units equal to the difference between
the unitholder’s 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 15%. However, a
portion of this gain or loss 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
on 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 losses 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 gains 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, which generally means that the tax
basis allocated to the interest sold equals an amount that bears
the same relation to the partner’s tax basis in his entire
interest in the partnership as the value of the interest sold
bears to the value of the partner’s entire interest in the
partnership. 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 regulations, may designate specific common
units sold for purposes of determining the holding period of
units transferred. A unitholder 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. A unitholder considering the purchase of
additional units or a sale of common units purchased in separate
transactions is urged to consult his tax advisor as to the
possible consequences of this ruling and application of the
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 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
the 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, which we refer to in this
prospectus as 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, Andrews Kurth LLP 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 any of his units, other than through a broker, generally
is required to notify us in writing of that sale within
30 days after the sale (or, if earlier, January 15 of the
year following the sale). A purchaser of units who purchases
units from another unitholder generally is required to notify us
in writing of that purchase within 30 days after the
purchase. We are required to notify the IRS of that transaction
and to furnish specified information to the transferor and
transferee. Failure to notify us of a purchase may, in some
cases, lead to the imposition of penalties. 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 who will satisfy such requirement.
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 different from our taxable year, 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
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.
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)
and Treasury
Regulation Section 1.197-2(g)(3).
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 of the
Internal Revenue Code, even though that position may be
inconsistent with Treasury
Regulation Section 1.167(c)-1(a)(6),
which is not expected to directly apply to a material portion of
our assets, and Treasury Regulations
Section 1.197-2(g)(3).
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. Our counsel, Andrews Kurth
LLP, is unable to opine on the validity of any of these
positions. 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.”
Ownership of units by employee benefit plans, other tax-exempt
organizations, non-resident aliens, foreign corporations, and
other foreign persons 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.
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. Moreover, under rules applicable to publicly
traded partnerships, we will withhold tax at the highest
applicable effective tax rate from 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. A change in applicable law may require
us to change these procedures.
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,”
that is 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.
Information Returns and Audit Procedures. We
intend to furnish to each unitholder, within 90 days after
the close of each taxable year, specific tax information,
including a
Schedule K-1,
which describes each
unitholder’s 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 each unitholder’s share of
income, gain, loss and deduction. We cannot assure you that
those positions will in all cases yield a result that conforms
to the requirements of the Internal Revenue Code, Treasury
Regulations or administrative interpretations of the IRS.
Neither we nor Andrews Kurth LLP 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. Our 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.
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:
(1) the name, address and taxpayer identification number of
the beneficial owner and the nominee;
(2) whether the beneficial owner is
(a) a person that is not a United States person,
(b) a foreign government, an international organization or
any wholly owned agency or instrumentality of either of the
foregoing, or
(c) a tax-exempt entity;
(3) the amount and description of units held, acquired or
transferred for the beneficial owner; and
(4) 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.
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.
For individuals, 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. 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.
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 and to
take other actions as may be appropriate to permit unitholders
to avoid liability for this penalty. More stringent rules apply
to “tax shelters,” which we do not believe includes us.
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. If the
valuation claimed on a return is 400% or more than the correct
valuation, the penalty imposed increases to 40%.
Reportable Transactions. If we were to engage
in a “reportable transaction,” we (and possibly you
and others) would be required to make a detailed disclosure of
the transaction to the IRS. A transaction may be a reportable
transaction based upon any of several factors, including the
fact that it is a type of tax avoidance transaction publicly
identified by the IRS as a “listed transaction” or
that it produces certain kinds of losses in excess of
$2 million. Our participation in a reportable transaction
could increase the likelihood that our federal income tax
information return (and possibly your tax return) would be
audited by the IRS. Please read “— Information
Returns and Audit Procedures” above.
Moreover, if we were to participate in a reportable transaction
with a significant purpose to avoid or evade tax, or in any
listed transaction, you may be subject to the following
provisions of the American Jobs Creation Act of 2004:
•
accuracy-related penalties with a broader scope, significantly
narrower exceptions, and potentially greater amounts than
described above at “— Accuracy-related
Penalties,”
•
for those persons otherwise entitled to deduct interest on
federal tax deficiencies, nondeductibility of interest on any
resulting tax liability, and
•
in the case of a listed transaction, an extended statute of
limitations.
We do not expect to engage in any “reportable
transactions.”
In addition to federal income taxes, you likely will be subject
to other taxes, such as state and local income taxes,
unincorporated business taxes, and estate, inheritance or
intangible taxes that may be imposed
by the various jurisdictions in which 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. We will initially own property or do business
in Louisiana and Texas. Louisiana currently imposes a personal
income tax on individuals. We may also own property or do
business in other jurisdictions in the future. Although you may
not be required to file a return and pay taxes in some
jurisdictions because your income from that jurisdiction falls
below the filing and payment requirement, you will be required
to file income tax returns and to pay income taxes in many of
these jurisdictions in which we do business or own property and
may be subject to penalties for failure to comply with those
requirements. In some jurisdictions, tax losses may not produce
a tax benefit in the year incurred and may not be available to
offset income in subsequent taxable years. Some of the
jurisdictions 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 jurisdiction.
Withholding, the amount of which may be greater or less than a
particular unitholder’s income tax liability to the
jurisdiction, generally does not relieve a nonresident
unitholder from the obligation to file an income tax return.
Amounts withheld will 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.
It is the responsibility of each unitholder to investigate
the legal and tax consequences, under the laws of pertinent
jurisdictions, of his investment in us. Accordingly, each
prospective unitholder is urged to consult, and depend on, 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. Andrews Kurth LLP has not rendered
an opinion on the state, local or foreign tax consequences of an
investment in us.
If the underwriters exercise all or any portion of their option
to purchase additional common units, we will issue up to
1,950,000 additional common units, and we will redeem an equal
number of common units from Enterprise Products OLP, which may
be deemed to be a selling unitholder and an underwriter in this
offering for the common units that would be issued upon the
exercise of the underwriters’ option to purchase additional
units. The redemption price per common unit will be equal to the
price per common unit (net of underwriting discounts and a
structuring fee) sold to the underwriters upon exercise of their
option.
The following table sets forth information concerning the
ownership of common units by Enterprise Products OLP. The
numbers in the table are presented assuming:
•
the underwriters’ option to purchase additional units is
not exercised; and
•
the underwriters exercise their option to purchase additional
units in full.
Assuming
Assuming
Underwriters’
Underwriters’
Option is
Option is
Exercised
Name of Selling Unitholder
Not Exercised
Percent(1)
in Full
Percent(1)
Enterprise Products Operating L.P.
common units
7,301,571
36.0
%
5,351,571
26.4
%
(1)
Percentage of total common units outstanding, but excluding an
initial 414,318 general partner units representing a 2% general
partner interest.
Lehman Brothers Inc. and UBS Securities LLC are acting as
representatives of the underwriters and joint book-running
managers. Under the terms of an underwriting agreement, which
will be filed as an exhibit to this registration statement, each
of the underwriters named below has severally agreed to purchase
from us the respective number of common units shown opposite its
name below:
Number of
Underwriters
Common Units
Lehman Brothers Inc.
UBS Securities LLC
Citigroup Global Markets Inc.
Goldman, Sachs & Co.
Morgan Stanley & Co.
Incorporated
Wachovia Capital Markets, LLC
A.G. Edwards & Sons,
Inc.
J.P. Morgan Securities Inc.
Merrill Lynch, Pierce,
Fenner & Smith
Incorporated
Raymond James &
Associates, Inc.
RBC Capital Markets Corporation
Sanders Morris Harris Inc.
Scotia Capital (USA) Inc.
Natexis Bleichroeder Inc.
Banc of America Securities LLC
Total
13,000,000
The underwriting agreement provides that the underwriters’
obligation to purchase the common units depends on the
satisfaction of the conditions contained in the underwriting
agreement including:
•
the obligation to purchase all of the common units offered
hereby if any of the common units are purchased;
•
the representations and warranties made by us to the
underwriters are true;
•
there has been no material change in our financial condition or
in the financial markets; and
•
we deliver customary closing documents to the underwriters.
Commissions
and Expenses
The following table summarizes the underwriting discounts and
commissions we will pay to the underwriters. These amounts are
shown assuming both no exercise and full exercise of the
underwriters’ option to purchase additional common units.
The underwriting fee is the difference between the initial price
to the public and the amount the underwriters pay to us for the
common units.
No Exercise
Full Exercise
Per Unit
$
$
Total
$
$
The representatives have advised us that the underwriters
propose to offer the common units directly to the public at the
public offering price on the cover of this prospectus and to
selected dealers, which may include the underwriters, at such
offering price less a selling concession not in excess of
$ per unit. After the
offering, the representatives may change the offering price and
other selling terms.
The expenses of the offering that are payable by us are
estimated to be $3,400,000 (excluding underwriting discounts and
commissions and the structuring fee described below). The
underwriters have agreed to reimburse us for up to $520,000 of
our expenses incurred in connection with the offering of
13,000,000 common units. In no event will the maximum
amount of compensation to be paid to NASD members in connection
with this offering exceed 10% plus 0.5% for bona fide due
diligence.
We will pay a fee equal to $1,000,000 to Lehman Brothers Inc. in
consideration of advice rendered regarding the structure of this
offering and our partnership.
Option to
Purchase Additional Common Units
We have granted the underwriters an option exercisable for
30 days after the date of the underwriting agreement to
purchase, from time to time, in whole or in part, up to an
aggregate of 1,950,000 common units at the public offering
price less underwriting discounts and commissions. This option
may be exercised if the underwriters sell more than
13,000,000 common units in connection with this offering.
To the extent that this option is exercised, each underwriter
will be obligated, subject to certain conditions, to purchase
its pro rata portion of these additional common units based on
the underwriter’s percentage underwriting commitment in the
offering as indicated in the table at the beginning of this
Underwriting section.
Lock-Up
Agreements
We, certain of our affiliates and all of the directors and
executive officers of our general partner have agreed that,
without the prior written consent of the representatives, we and
they will not directly or indirectly, offer, pledge, announce
the intention to sell, sell, contract to sell, sell an option or
contract to purchase, purchase any option or contract to sell,
grant any option, right or warrant to purchase, or otherwise
transfer or dispose of any common units or any securities which
may be converted into or exchanged for any common units, enter
into any swap or other agreement that transfers, in whole or in
part, any of the economic consequences of ownership of the
common units, make any demand for or exercise any right or file
or cause to be filed a registration statement with respect to
the registration of any common units or securities convertible
or exchangeable into common units or any of our other securities
or publicly disclose the intention to do any of the foregoing
for a period of 180 days from the date of this prospectus
other than permitted transfers.
The 180-day
restricted period described in the preceding paragraph will be
extended if:
•
during the last 17 days of the
180-day
restricted periods we issue an earnings release or announce
material news or a material event; or
•
prior to the expiration of the
180-day
restricted period, we announce that we will release earnings
results during the
16-day
period beginning on the last day of the
180-day
period,
in which case the restrictions described in the preceding
paragraph will continue to apply until the expiration of the
18-day
period beginning on the issuance of the earnings release or the
announcement of the material news or material event.
The restrictions described in this paragraph do not apply to:
•
the issuance and sale of common units by us to the underwriters
pursuant to the underwriting agreement; or
•
the issuance and sale of common units, phantom units, restricted
units and options under our existing employee benefits plans,
including sales pursuant to “cashless-broker”
exercises of options to purchase common units in accordance with
such plans as consideration for the exercise price and
withholding taxes applicable to such exercises.
The representatives, in their sole discretion, may release the
common units and other securities subject to the
lock-up
agreements described above in whole or in part at any time with
or without notice. When determining whether or not to release
common units and other securities from
lock-up
agreements, the
representatives will consider, among other factors, the
holder’s reasons for requesting the release, the number of
common units and other securities for which the release is being
requested and market conditions at the time.
As described below under “Directed Unit Program,” any
participants in the Directed Unit Program shall be subject to a
180-day lock-up with respect to any common units sold to them
pursuant to that program. This lock-up will have similar
restrictions and an identical extension provision as the lock-up
agreement described above. Any common units sold in the Directed
Unit Program to our general partner’s directors or officers
will be subject to the lock-up agreement described above.
Offering
Price Determination
Prior to this offering, there has been no public market for our
common units. The initial public offering price was negotiated
between the representative and us. In determining the initial
public offering price of our common units, the representative
considered:
•
the history and prospects for the industry in which we compete;
•
our financial information;
•
the ability of our management and our business potential and
earnings prospects;
•
the prevailing securities markets at the time of this
offering; and
•
the recent market prices of, and the demand for, publicly traded
common units of generally comparable entities.
Indemnification
We, our general partner, certain of its affiliates and
Enterprise Products Partners have agreed to indemnify the
underwriters against certain liabilities, including liabilities
under the Securities Act of 1933 and liabilities incurred in
connection with the directed unit program referred to below, and
to contribute to payments that the underwriters may be required
to make for these liabilities.
Directed
Unit Program
At our request, Lehman Brothers Inc. has established a Directed
Unit Program under which they have reserved up to
650,000 common units offered hereby at the public offering
price for officers, directors, employees and certain other
persons associated with us. The number of common units available
for sale to the general public will be reduced to the extent
such persons purchase common units reserved under the Directed
Unit Program. The common units reserved for sale under the
Directed Unit Program will be subject to a
180-day
lock-up
agreement. This 180-day restricted period will be extended with
respect to our issuance of an earnings release or if a material
news or a material event relating to us occurs, in the same
manner as described above under “Lock-Up Agreements.”
Any reserved common units not so purchased will be offered by
the underwriters to the general public on the same basis as the
other common units offered hereby.
Stabilization,
Short Positions and Penalty Bids
The underwriters may engage in stabilizing transactions, short
sales and purchases to cover positions created by short sales,
and penalty bids or purchases for the purpose of pegging, fixing
or maintaining the price of the common units, in accordance with
Regulation M under the Securities Exchange Act of 1934:
•
Stabilizing transactions permit bids to purchase the underlying
security so long as the stabilizing bids do not exceed a
specified maximum.
•
A short position involves a sale by the underwriters of common
units in excess of the number of units the underwriters are
obligated to purchase in the offering, which creates the
syndicate short position. This short position may be either a
covered short position or a naked short position. In a covered
short position, the number of common units involved in the sales
made by the underwriters in excess of the
number of units they are obligated to purchase is not greater
than the number of units that they may purchase by exercising
their option to purchase additional common units. In a naked
short position, the number of units involved is greater than the
number of units in their option to purchase additional common
units. The underwriters may close out any short position by
either exercising their option to purchase additional common
units and/or
purchasing common units in the open market. In determining the
source of common units to close out the short position, the
underwriters will consider, among other things, the price of
units available for purchase in the open market as compared to
the price at which they may purchase units through their option
to purchase additional common units. A naked short position is
more likely to be created if the underwriters are concerned that
there could 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.
•
Syndicate covering transactions involve purchases of the common
units in the open market after the distribution has been
completed in order to cover syndicate short positions.
•
Penalty bids permit the representatives to reclaim a selling
concession from a syndicate member when the common units
originally sold by the syndicate member are purchased in a
stabilizing or syndicate covering transaction to cover syndicate
short positions.
These stabilizing transactions, syndicate covering transactions
and penalty bids may have the effect of raising or maintaining
the market price of our common units or preventing or retarding
a decline in the market price of the common units. As a result,
the price of the common units may be higher than the price that
might otherwise exist in the open market. These transactions may
be effected on the New York Stock Exchange or otherwise and, if
commenced, may be discontinued 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 representatives
will engage in these stabilizing transactions or that any
transaction, once commenced, will not be discontinued without
notice.
Electronic
Distribution
A prospectus in electronic format may be made available on the
Internet sites or through other online services maintained by
one or more of the underwriters
and/or
selling group members participating in this offering, or by
their affiliates. In those cases, prospective investors may view
offering terms online and, depending upon the particular
underwriter or selling group member, prospective investors may
be allowed to place orders online. The underwriters may agree
with us to allocate a specific number of common units for sale
to online brokerage account holders. Any such allocation for
online distributions will be made by the representatives on the
same basis as other allocations.
Other than the prospectus in electronic format, the information
on any underwriter’s or selling group member’s web
site and any information contained in any other web site
maintained by an underwriter or selling group member is not part
of the prospectus or the registration statement of which this
prospectus forms a part, has not been approved
and/or
endorsed by us or any underwriter or selling group member in its
capacity as underwriter or selling group member and should not
be relied upon by investors.
New York
Stock Exchange
Our common units have been approved for listing, subject to
official notice of issuance, on the New York Stock Exchange
under the symbol “DEP.” In connection with that
listing, the underwriters have undertaken to sell the minimum
number of common units to the minimum number of beneficial
owners necessary to meet the NYSE listing requirements.
Discretionary
Sales
The underwriters have advised us that they do not intend to
confirm sales to discretionary accounts that exceed 5% of the
total number of common units offered by them.
If you purchase common units offered in this prospectus, you may
be required to pay stamp taxes and other charges under the laws
and practices of the country of purchase, in addition to the
offering price listed on the cover page of this prospectus.
Relationships/NASD
Conduct Rules
Certain of the underwriters may in the future perform investment
banking and advisory services for us from time to time for which
they may in the future receive customary fees and expenses.
Affiliates of Lehman Brothers Inc., UBS Securities LLC,
Citigroup Global Markets Inc., Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated, Wachovia Capital
Markets, LLC, J.P. Morgan Securities Inc., Merrill Lynch,
Pierce, Fenner & Smith Incorporated, RBC Capital
Markets Corporation, Scotia Capital (USA) Inc. and Banc of
America Securities LLC are lenders under our new
$300 million revolving credit facility.
In addition, certain of the underwriters and their affiliates
have performed, and may in the future perform, investment
banking, commercial banking and advisory services for Enterprise
Products Partners, EPCO, Inc. and their affiliates for which
they have received or will receive customary fees and expenses.
For instance, affiliates of Lehman Brothers Inc., UBS Securities
LLC, Citigroup Global Markets Inc., Goldman, Sachs & Co.,
Morgan Stanley & Co. Incorporated, Wachovia Capital Markets,
LLC, J.P. Morgan Securities Inc., Merrill Lynch, Pierce,
Fenner & Smith Incorporated, RBC Capital Markets
Corporation, Scotia Capital (USA) Inc. and Banc of America
Securities LLC are lenders under Enterprise Products
Partners’ revolving credit facility, and each of the
underwriters has served as an underwriter of certain offerings
of debt and common units by Enterprise Products Operating,
Enterprise Products Partners or the general partner of
Enterprise Products Partners.
Because the National Association of Securities Dealers, Inc., or
NASD, views the common units offered by this prospectus as
interests in a direct participation program, this offering is
being made in compliance with Rule 2810 of the NASD’s
Conduct Rules. Investor suitability with respect to the common
units should be judged similarly to the suitability with respect
to other securities that are listed for trading on a national
securities exchange.
The validity of the common units will be passed upon for us by
Andrews Kurth LLP, Houston, Texas and for the underwriters by
Baker Botts L.L.P., Houston, Texas.
The combined financial statements of Duncan Energy Partners
Predecessor as of September 30, 2006 and December 31,2005 and 2004 and for the nine month period ended
September 30, 2006 and for each of the three years in the
period ended December 31, 2005, and the related financial
statement schedule included in this prospectus have been audited
by Deloitte & Touche LLP, an independent registered public
accounting firm, as stated in their report included in this
prospectus (which report expresses an unqualified opinion and
includes an explanatory paragraph relating to the preparation of
the combined financial statements of Duncan Energy Partners
Predecessor from the separate records maintained by Enterprise
Products Partners L.P.) and are included in reliance upon the
report of such firm given upon their authority as experts in
accounting and auditing.
The balance sheet of Duncan Energy Partners L.P. as of
September 30, 2006 and the balance sheet of DEP Holdings,
LLC as of October 31, 2006 included in this prospectus have
been audited by Deloitte & Touche LLP, an independent
registered public accounting firm, as stated in their reports
which are included in this prospectus, and are included in
reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
We have filed with the Commission a registration statement on
Form S-1
regarding the common units offered by this prospectus. This
prospectus does not contain all of the information found in the
registration statement. For further information regarding us and
the common units offered by this prospectus, you should review
the full registration statement, including its exhibits and
schedules, filed under the Securities Act of 1933, as amended.
The registration statement of which this prospectus constitutes
a part, including its exhibits and schedules, may be inspected
and copied at the public reference room maintained by the
Commission at Judiciary Plaza, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. Copies of the
materials may also be obtained from the Commission at prescribed
rates by writing to the public reference room maintained by the
Commission at Judiciary Plaza, 100 F Street, N.E.,
Room 1580, Washington, D.C. 20549. You may obtain
information on the operation of the public reference room by
calling the Commission at
1-800-SEC-0330.
The Commission maintains a website on the Internet at
http://www.sec.gov. Our registration statement, of which this
prospectus constitutes a part, can be downloaded at no cost from
the Commission’s web site. We intend to furnish our
unitholders annual reports containing our audited financial
statements and furnish or make available quarterly reports
containing our unaudited interim financial information for the
first three fiscal quarters of each of our fiscal years.
This prospectus contains various forward-looking statements and
information that are based on our beliefs and those of our
general partner, as well as assumptions made by and information
currently available to us. These forward-looking statements are
identified as any statement that does not relate strictly to
historical or current facts. In particular, a significant amount
of information included under “Cash Distribution Policy and
Restrictions on Distributions” is comprised of
forward-looking statements. When used in this prospectus, words
such as “anticipate,”“project,”“expect,”“plan,”“goal,”“forecast,”“intend,”“could,”“should,”“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 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.
The unaudited pro forma condensed combined financial statements
are based upon the historical combined balance sheet and results
of combined operations of Duncan Energy Partners Predecessor set
forth elsewhere in this prospectus. Duncan Energy Partners L.P.
(the “Partnership”) will own and operate the business
of the Duncan Energy Partners Predecessor effective with the
closing of this initial public offering. Since the transactions
are considered to be a reorganization of entities under common
control, we will record these investments at the historical cost
basis of each, as recognized by Enterprise Products Partners at
the date of purchase. Unless the context otherwise requires,
references in the following pro forma financial statements
include the Partnership and its operating company. The unaudited
pro forma condensed combined financial statements for the
Partnership have been derived from the historical combined
financial statements of the Duncan Energy Partners Predecessor
set forth elsewhere in this prospectus and are qualified in
their entirety by reference to such historical combined
financial statements and the related notes contained therein.
The pro forma condensed combined financial statements have been
prepared on the basis that the Partnership will be treated as a
partnership for federal income tax purposes. The unaudited pro
forma condensed combined financial statements should be read in
conjunction with the notes accompanying these pro forma
condensed combined financial statements and with the historical
combined financial statements and related notes of Duncan Energy
Partners Predecessor set forth elsewhere in this prospectus.
The unaudited pro forma condensed combined balance sheet and the
pro forma condensed statement of combined operations were
derived by adjusting the historical combined financial
statements of the Duncan Energy Partners Predecessor. The
adjustments were based upon currently available information and
certain estimates and assumptions; therefore, actual adjustments
will differ from the pro forma adjustments. However, management
believes that the assumptions provide a reasonable basis for
presenting the significant effects of the transactions as
contemplated and that the pro forma adjustments give appropriate
effect to those assumptions and are properly applied in the
unaudited pro forma condensed combined financial statements.
The unaudited pro forma condensed combined financial statements
are not necessarily indicative of the results that actually
would have occurred if the Partnership had assumed the
operations of the Duncan Energy Partners Predecessor on the
dates indicated or which would be obtained in the future.
1. Basis
of Presentation, the Offering and Other Transactions.
The historical financial information is derived from the
historical combined financial statements of Duncan Energy
Partners Predecessor. The unaudited pro forma condensed combined
statements of combined operations for the nine months ended
September 30, 2006 and for the year ended December 31,2005 assume the pro forma transactions noted herein occurred at
the beginning of each year presented. The unaudited pro forma
condensed combined balance sheet presents the financial effects
of the pro forma transactions noted herein as if they had
occurred on September 30, 2006.
The pro forma financial statements reflect the following
significant transactions:
•
The expenditure of $31.2 million (including $8 million
to acquire a pipeline asset from TEPPCO Partners) required to
modify our South Texas NGL pipeline and construct additional
pipelines in order to place this system in operation in January
2007. The pro forma financial statements do not reflect
estimated additional capital expenditures of $28.6 million
that will be made by South Texas NGL to complete planned
expansions to this system subsequent to the closing of this
offering. We will retain cash in an amount equal to our share of
the additional capital expenditures (approximately
$18.9 million) from the net proceeds of this offering in
order to fund our share of the planned expansion costs. The pro
forma combined results of operations for the nine months ended
September 30, 2006 and December 31, 2005 do not
reflect any results attributable to the historical activities of
our South Texas NGL pipeline.
•
The expenditure of $21.3 million in connection with the
construction of additional brine production capacity and
above-ground storage reservoirs at Mont Belvieu. The pro forma
financial data does not reflect estimated additional capital
expenditures of $14.1 million that will be made by Mont
Belvieu Caverns subsequent to December 31, 2006 to complete
these projects. We will retain cash in an amount equal to our
66% share (approximately $9.3 million) of these
additional capital expenditures from the net proceeds of this
offering in order to fund our share of the planned expansion
costs.
•
The contribution of a 66% interest in each of the following
entities, all of which are wholly-owned subsidiaries of
Enterprise Products Partners, and the retention by Enterprise
Products Partners of a 34% interest in these entities:
•
Mont Belvieu Caverns, L.P. (which will be converted into
a limited liability company in January 2007 prior to its
contribution to the Partnership)(“Mont Belvieu
Caverns”), which receives, stores and delivers NGLs and
petrochemical products for industrial customers located along
the upper Texas Gulf Coast;
•
Acadian Gas, LLC (“Acadian Gas”), which
gathers, transports, stores and markets natural gas in Louisiana
utilizing over 1,000 miles of high-pressure transmission
lines and lateral and gathering lines and a leased storage
cavern;
•
Sabine Propylene Pipeline L.P. (“Sabine
Propylene”), which transports polymer-grade propylene from
Port Arthur, Texas to a pipeline interconnect located in Cameron
Parish, Louisiana;
•
Enterprise Lou-Tex Propylene Pipeline L.P. (“Lou-Tex
Propylene”), which transports chemical-grade propylene
between Sorrento, Louisiana and Mont Belvieu, Texas; and
•
South Texas NGL Pipelines, LLC (“South Texas
NGL”), which will transport NGLs from Corpus Christi, Texas
to Mont Belvieu, Texas. The pipeline system currently owned,
together with pipelines being acquired and being constructed by
South Texas NGL, is undergoing modifications to enable it to
transport NGL products for Enterprise Products Partners
beginning in January 2007. Estimated
additional capital expenditures of $28.6 million will be
spent in 2007 to complete planned expansions to this system.
•
The revision of related party storage contracts between the
Partnership and Enterprise Products Partners to
(i) increase certain storage fees paid by Enterprise
Products Partners and (ii) reflect the allocation to
Enterprise Products Partners of all storage measurement gains
and losses relating to products under these agreements, and the
execution of a limited liability company agreement for Mont
Belvieu Caverns providing for special allocations to Enterprise
Products Partners and other agreements relating to other
measurement gains and losses.
•
The assignment to us of certain third party agreements that
effectively reduce tariff rates previously charged by Lou-Tex
Propylene and Sabine Propylene to Enterprise Products Partners
for the transport of propylene volumes.
•
The borrowing of $200 million under a new revolving credit
facility by us.
•
The issuance and sale of 13,000,000 common units by us in this
offering.
•
The payment of estimated underwriting discounts and commissions,
a structuring fee and other offering expenses.
•
The use of net proceeds from the borrowing and this offering as
consideration for the contributed ownership interests in Mont
Belvieu Caverns, Acadian Gas, Lou-Tex Propylene, Sabine
Propylene and South Texas NGL from Enterprise Products Partners.
2.
Pro Forma
Adjustments and Assumptions
The pro forma adjustments made to the historical combined
financial statements of Duncan Energy Partners Predecessor are
as follows:
(a) Reflects the estimated costs to (i) modify our
South Texas NGL pipeline and construct additional pipelines in
order to place this system in operation in January 2007 and
(ii) construct additional brine production capacity and
above-ground storage reservoirs at Mont Belvieu. In August 2006,
Enterprise Products Partners purchased 223 miles of NGL
pipelines extending from Corpus Christi, Texas to Pasadena,
Texas from ExxonMobil Pipeline Company. The purchase price for
this asset was approximately $97.7 million and is reflected
as a contribution to us in our historical combined balance sheet
at September 30, 2006. This pipeline system will be used to
transport mixed NGLs from Enterprise Products Partners’
facilities in South Texas to Mont Belvieu, Texas. The total
estimated cost to acquire and construct the additional pipelines
that will complete this system is $66.3 million, of which
$6.5 million was spent through September 30, 2006. We
expect that South Texas NGL will make additional capital
contributions of $31.2 million, including approximately
$8 million to purchase a
10-mile
pipeline from an affiliate, TEPPCO Partners, to make this
pipeline system operational prior to the closing of this
offering.
We expect that it will cost an additional $28.6 million to
complete planned expansions of the South Texas NGL pipeline
after the closing of this offering, of which our 66% share will
be approximately $18.9 million. This additional cost is not
reflected in the pro forma combined balance sheet as property,
plant and equipment, because we expect to use cash on hand from
the proceeds of this offering to fund these costs.
Apart from Enterprise Products Partners’ acquisition of the
pipeline from ExxonMobil Pipeline Company and the
$6.5 million of subsequent expenditures through
September 30, 2006 by South Texas NGL to modify this
pipeline, the Company’s historical financial information
does not reflect any
transactions related to this NGL pipeline system. Furthermore,
the pro forma adjustments are limited to those required to
present an estimate of owners’ net investment immediately
prior to the Company’s initial public offering. The pro
forma combined results of operations do not reflect any results
or depreciation attributable to the historical activities of
these pipelines.
With respect to the pipeline acquired in August 2006, the seller
has informed us that no discrete and separable financial
information existed for this pipeline, which was comprised of
two separately operated pipelines prior to our purchase. The
seller had previously utilized these pipelines in different
service than our anticipated use of the pipelines. With respect
to the
10-mile
pipeline to be purchased from TEPPCO Partners, L.P., this
pipeline asset was part of their mainline service and operated
by different management. No financial statement information is
available for this minor component asset. There is no meaningful
financial data available regarding the prior use of these
pipelines by the sellers that would be meaningful to our
investors. In addition, such data, if available, would not
assist investors in understanding either the evolution of the
business (which is a new NGL transportation network) nor the
track record of management (which will be different).
This pro forma adjustment also reflects the expenditure of
$21.3 million in connection with the construction of
additional brine production capacity and above-ground storage
reservoirs at Mont Belvieu. The pro forma financial data does
not reflect estimated additional capital expenditures of
$14.1 million that will be made by Mont Belvieu Caverns
subsequent to December 31, 2006 to complete these projects.
We will retain cash in an amount equal to our 66% share
(approximately $9.3 million) of the additional capital
expenditures from the net proceeds of this offering in order to
fund our share of the planned construction costs. Our historical
property, plant and equipment amounts at September 30, 2006
include expenditures of $38.2 million for these projects.
Collectively, the pro forma adjustments results in a increase of
$52.5 million in property, plant and equipment and a
corresponding increase in owners’ net investment for
amounts estimated to be spent prior to the closing of this
offering.
(b) Reflects a reduction in related party transportation
rates we charge Enterprise Products Partners for usage of the
Lou-Tex Propylene and Sabine Propylene pipelines. Enterprise
Products Partners was the shipper of record on these two
pipelines. Historically, Enterprise Products Partners was
charged the maximum tariff rate for using these assets, which
involved contracting with third parties to ship volumes on these
pipelines under exchange agreements. Apart from such exchange
agreements, Enterprise Products Partners did not utilize the
Sabine Propylene and Lou-Tex Propylene assets. Concurrently with
the closing of this offering, Enterprise Products Partners will
assign certain agreements with third parties involving the use
of our Sabine Propylene and Lou-Tex Propylene pipelines to us
but will remain jointly and severally liable on those agreements.
In general, the revenues Enterprise Products Partners recognized
in connection with such third party exchange agreements were
less than the maximum tariff rate it paid us. In connection with
our initial public offering, the transportation rates we charge
Enterprise Products Partners for using the Lou-Tex Propylene and
Sabine Propylene pipeline will be reduced to equal the amounts
Enterprise Products Partners collects from third parties under
its exchange agreements.
The pro forma reduction in revenues was $16.5 million for
the nine months ended September 30, 2006 and
$18.4 million for the year ended December 31, 2005.
(c) Reflects an increase in related party storage fees
charged to Enterprise Products Partners attributable to the use
by its NGL fractionation, isomerization, and other businesses of
the storage facilities owned by Mont Belvieu Caverns.
Historically, such intercompany charges were below market and
eliminated in the consolidated revenues and costs and expenses
of Enterprise Products Partners. Prospectively, such rates will
be market related.
The pro forma increase in revenues is $9.8 million for the
nine months ended September 30, 2006 and $11.6 million
for the year ended December 31, 2005.
(d) Reflects the allocation to Enterprise Products Partners
of measurement well gains and losses relating to products under
storage agreements between Enterprise Products Partners and Mont
Belvieu Caverns and the execution of a limited liability company
agreement with Mont Belvieu Caverns providing for special
allocations to Enterprise Products Partners and other agreements
relating to other measurement gains and losses.
The pro forma decrease in operating costs and expenses
reflecting the removal of such historical net measurement
related losses is $1.5 million for the nine months ended
September 30, 2006 and $3.1 million for the year ended
December 31, 2005. The pro forma balance sheet at
September 30, 2006 reflects the removal of the related
measurement reserve account, the balance of which was
$1.8 million at September 30, 2006.
(e) Reflects the estimated general and administrative costs
of the Partnership, exclusive of such costs of its subsidiaries.
These estimated costs include accounting, legal and similar
public company costs to be incurred by the Partnership in
connection with the management and administration of its
business activities. These costs include estimated related party
amounts payable to EPCO, Inc. in connection with the
administrative services agreement. For additional information
regarding the administrative services agreement, please read
“Certain Relationships and Related Party
Transactions — Administrative Services Agreement.”
The pro forma increase in general and administrative costs is
$1.9 million for the nine months ended September 30,2006 and $2.5 million for the year ended December 31,2005.
(f) Reflects the borrowing of $200 million under a
variable rate revolving credit facility by the Partnership. For
pro forma presentation purposes, we have assumed (i) a
variable interest rate of 6.5% charged by this facility,
(ii) $1.1 million of debt issuance costs and
(iii) maturity date in four years.
Pro forma cash interest expense is $9.7 million for the
nine months ended September 30, 2006 and $13 million
for the year ended December 31, 2005. If the variable
interest rate we assumed in these calculations was 1/8% higher,
pro forma cash interest expense would have been
$9.9 million for the nine months ended September 30,2006 and $13.3 million for the year ended December 31,2005. Pro forma interest expense includes non-cash amortization
of debt issuance costs of $0.2 million for the nine months
ended September 30, 2006 and $0.3 million for the year
ended December 31, 2005.
(g) Reflects the retention by Enterprise Products Partners
(the sponsor of the Partnership) of an ownership interest in the
Partnership’s consolidated subsidiaries, which will be Mont
Belvieu Caverns, Acadian Gas, Lou-Tex Propylene, Sabine
Propylene and South Texas NGL. The parent will own a 34%
interest in each of the Partnership’s subsidiaries and will
be allocated a portion of the earnings and cash flows of each
subsidiary in accordance with this ownership percentage.
However, the parent’s 34% earnings allocation with respect
to Mont Belvieu Caverns is after any special allocations to the
parent related to the subsidiary’s net measurement gain or
loss each period.
In addition, the pro forma adjustments reflect the
sponsor’s ownership of the Partnership’s 2% general
partner and approximately 36% of its outstanding common units
(assuming no exercise of the underwriter’s overallotment
option with respect to this proposed offering). For financial
reporting purposes, the ownership interests of Enterprise
Products Partners are deemed to represent the parent (or
sponsor) interest in the pro forma results of operations and
financial position of the Partnership.
The following table presents the calculation of parent interest
in the pro forma net assets of the Partnership and its
subsidiaries at September 30, 2006 after giving effect to
this proposed offering (before any exercise of the
underwriters’ option to purchase additional common units):
Historical net assets of Duncan
Energy Partners Predecessor
$
662,131
Pro forma adjustments to balance
sheet accounts:
South Texas NGL capital
expenditures (see Note (a))
31,241
Mont Belvieu Caverns capital
expenditures (see Note (a))
21,279
Mont Belvieu Caverns measurement
loss (see Note (d))
1,814
Pro forma net assets before
proposed initial public offering
716,465
Less Partnership payment to parent
for ownership interests (see Note (i))
(411,232
)
Parent’s interest retained in
net assets (approximately $243.6 million) and general
partner interest and common units of Duncan Energy Partners
$
305,233
The pro forma balance sheet adjustment reclassifies the
$716.5 million of net assets of the Partnership prior to
its proposed initial public offering to parent interest.
The following table presents the calculation of parent’s
share in the pro forma income of the Partnership and its
subsidiaries for the periods indicated after giving effect to
this proposed offering (before any exercise of the
underwriters’ option to purchase additional common units):
Units
Percent
Units to be sold by the
Partnership in its proposed initial public offering (see
Note (h))
13,000.0
62.8
%
Units issued by the Partnership to
parent in connection with the Partnership’s acquisition of
ownership interests (see Note (i))
Special earnings allocation by
Mont Belvieu Caverns of storage net measurement loss to parent
(991
)
(2,122
)
Parent 2% general partner interest
in Partnership
240
186
Parent interest attributable to
its ownership of 36% of the Partnership’s units
4,226
3,284
Total parent interest of
Enterprise Products Partners
$
15,733
$
14,274
The pro forma income statement reflects an increase in
Partnership interest expense of $15.7 million for the nine
months ended September 30, 2006 and $14.3 million for
the year ended December 31, 2005.
(h) Reflects the proposed sale of 13,000,000 common
units by the Partnership in this initial public offering at an
assumed offering price of $20.00 per unit. Total net
proceeds received from the sale of these units is approximately
$240.5 million after deducting applicable underwriting
discounts, commissions, structuring fees and other offering
expenses of $19.5 million.
Pro forma basic and diluted income per unit is determined by
dividing as adjusted income from continuing operations (which
excludes the parent’s interest) by the number of common
units sold in this offering. This pro forma adjustment does not
include the receipt of any proceeds from the exercise of the
underwriters’ overallotment option.
(i) Reflects the use of $411.2 million of cash,
including proceeds from the proposed initial public offering
described in Note (h) and the borrowing in Note (f), by the
Partnership to purchase ownership interests in Mont Belvieu
Caverns, Acadian Gas, Lou-Tex Propylene, Sabine Propylene and
South Texas NGL from Enterprise Products Partners (the parent
and sponsor). In addition to the cash consideration paid
Enterprise Products Partners, the Partnership will issue
Enterprise Products Partners 7,301,571 limited partner units
representing approximately 36% of the outstanding common units
before the exercise of the underwriters’ overallotment
option.
We will retain approximately $28.2 million of the estimated
net proceeds from this offering to fund our 66% share of the
estimated 2007 capital expenditures for planned expansions of
our South Texas NGL pipeline system and Mont Belvieu brine
production capabilities and above-ground storage reservoirs.
This assumes that $52.5 million of capital expenditures for
additional acquisition and construction work related to these
projects have been paid prior to the closing date of this
offering. See Note (a).
The following table presents the pro forma impact on Duncan
Energy Partners’ Predecessor combined liabilities and
equity as of September 30, 2006 had the distribution of
$411.2 million been accrued at that date:
Duncan
Energy Partners
Predecessor —
Duncan
Pro Forma
Pro Forma
Energy Partners
Accrual of
Accrual of
Predecessor —
Distribution
Distribution
Historical
Payable to Parent
Payable to Parent
Liabilities and
Equity
Current liabilities
Accounts payable and accrued
expenses
$
74,409
$
74,409
Distribution payable to owners
$
411,232
411,232
Other current liabilities
9,582
9,582
Total current liabilities
83,991
411,232
495,223
Other long-term
liabilities
1,033
1,033
Equity
Owners’ net investment
662,131
(411,232
)
250,899
Total liabilities/owners’ net
investment
$
747,155
$
—
$
747,155
The following table reconciles owners’ net investment as
shown in the preceding table to the Parent’s interest in
the Partnership on an as adjusted pro forma basis at
September 30, 2006 as presented in the Partnership’s
Unaudited Pro Forma Condensed Combined Balance Sheet:
Enterprise Products GP, LLC, general partner of
Enterprise Products Partners L.P.:
We have audited the accompanying combined balance sheets of
Duncan Energy Partners Predecessor (the “Company”) as
of September 30, 2006 and December 31, 2005 and 2004,
and the related statements of combined operations and
comprehensive income, combined owners’ net investment, and
combined cash flows for the nine months ended September 30,2006 and for each of the three years in the period ended
December 31, 2005. Our audits also included the financial
statement schedule listed in the Index at
page F-1.
These financial statements and financial statement schedule are
the responsibility of the Company’s management. Our
responsibility is to express an opinion on these financial
statements and financial statement schedule based on our audits.
We conducted our audits in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are
free of material misstatement. The Company is not required to
have, nor were we engaged to perform, an audit of its internal
control over financial reporting. Our audits included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Company’s internal control over
financial reporting. Accordingly, we express no such opinion. An
audit also includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our opinion, such combined financial statements present
fairly, in all material respects, the combined financial
position of Duncan Energy Partners Predecessor at
September 30, 2006 and December 31, 2005 and 2004, and
the combined results of its operations and its cash flows for
the nine months ended September 30, 2006 and for each of
the three years in the period ended December 31, 2005, in
conformity with accounting principles generally accepted in the
United States of America. Also, in our opinion, such financial
statement schedule, when considered in relation to the basic
combined financial statements taken as a whole, presents fairly
in all material respects the information set forth therein.
The accompanying combined financial statements have been
prepared from the separate records maintained by Enterprise
Products Partners L.P. and may not necessarily be indicative of
the conditions that would have existed or the results of
operations if the Company had been operated as an unaffiliated
entity. Portions of certain expenses represent allocations made
from, and are applicable to Enterprise Products Partners L.P. or
affiliates including EPCO, Inc.
Background
and Basis of Financial Statement Presentation
Unless the context requires otherwise, references to
“we,”“us,”“our” or “the
Company” are intended to mean and include the combined
businesses and operations of Duncan Energy Partners Predecessor.
References to “Enterprise Products Partners” mean the
consolidated business and operations of Enterprise Products
Partners L.P. Enterprise Products Partners is a publicly traded
Delaware limited partnership, the common units of which are
listed on the New York Stock Exchange.
Predecessor
Company
Duncan Energy Partners Predecessor is engaged in the
business of (i) receiving, storing and delivering natural
gas liquids (“NGLs”) and petrochemical products,
(ii) gathering, transporting, storing and marketing natural
gas and (iii) transporting propylene. The principal
business entities included in the historical combined financial
statements of Duncan Energy Partners Predecessor are (on a 100%
basis): (i) Mont Belvieu Caverns, L.P. (which will
be converted into a limited liability company named Mont
Belvieu Caverns, LLC (“Mont Belvieu Caverns”), a
Delaware limited partnership; (ii) Acadian Gas, LLC
(“Acadian Gas”), a Delaware limited liability
company; (iii) Enterprise Lou-Tex Propylene Pipeline
L.P. (“Lou-Tex Propylene”), a Delaware limited
partnership, including its general partner; (iv) Sabine
Propylene Pipeline L.P. (“Sabine Propylene”), a
Delaware limited partnership, including its general partner; and
(v) South Texas NGL Pipelines, LLC (“South
Texas NGL”). The following is a brief description of the
operations of each business comprising the Company including the
new South Texas NGL operations to be included subsequent to
these statements:
•
Mont Belvieu Caverns owns and operates 33 salt dome caverns
located in Mont Belvieu, Texas, with an underground storage
capacity of approximately 100 million barrels
(“MMBbls”). Mont Belvieu Caverns receives, stores and
delivers NGLs and petrochemical products for industrial
customers located along the upper Texas Gulf Coast.
•
Acadian Gas gathers, transports, stores and markets natural gas
in Louisiana utilizing over 1,000 miles of high-pressure
transmission lines and lateral and gathering lines with an
aggregate throughput capacity of one Bcf/d including a
27-mile
pipeline owned by its joint venture affiliate Evangeline Gas
Pipeline, L.P., (“Evangeline”) and a leased storage
cavern with three Bcf of storage capacity, (see Note 4).
•
Lou-Tex Propylene owns a
263-mile
pipeline used to transport chemical-grade propylene between
Sorrento, Louisiana and Mont Belvieu, Texas.
•
Sabine Propylene owns a
21-mile
pipeline used to transport polymer-grade propylene from Port
Arthur, Texas to a pipeline interconnect in Cameron Parish,
Louisiana on a
transport-or-pay
basis.
•
South Texas NGL will own a
223-mile
pipeline extending from Corpus Christi, Texas to Pasadena, Texas
that was purchased by Enterprise Products Partners in August
2006 for $97.7 million. This pipeline (along with others to
be constructed or acquired) will be used to transport NGLs from
two of Enterprise Products Partners’ facilities located in
South Texas to Mont Belvieu, Texas beginning in January 2007.
The total estimated cost to acquire and construct the additional
pipelines that will complete this system is $66.3 million
(unaudited), which includes an approximate $8 million
(unaudited) pipeline asset purchase from an affiliate. Apart
from Enterprise Products Partners’ acquisition of the
pipeline from ExxonMobil Pipeline Company and the
$6.5 million of subsequent expenditures through
September 30, 2006 by South Texas NGL to modify this
pipeline, the Company’s historical combined financial
statements do not reflect any transactions related to this asset.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Basis
of Financial Statement Presentation
The accompanying combined financial statements and related notes
of the Company have been prepared from Enterprise Products
Partners’ separate historical accounting records related to
Mont Belvieu Caverns, Acadian Gas, Lou-Tex Propylene and Sabine
Propylene. These combined financial statements have been
prepared using Enterprise Products Partners’ historical
basis in each entity’s assets and liabilities and
historical results of operations. The combined financial
statements may not necessarily be indicative of the conditions
that would have existed or the results of operations if the
Company had been operated as an unaffiliated entity.
Transactions between the Company and related parties such as
Enterprise Products Partners and EPCO, Inc. (“EPCO”)
have been identified in the combined statements (see
Note 6).
We view the accompanying combined financial statements as the
predecessor of Duncan Energy Partners L.P. (the
“Partnership”), a Delaware limited partnership formed
on September 29, 2006. The Partnership was formed to
acquire ownership interests in Mont Belvieu Caverns, Acadian
Gas, Lou-Tex Propylene, Sabine Propylene and South Texas NGL.
These ownership interests will be acquired by the Partnership in
connection with its proposed initial public offering of common
units. We believe the combined historical financial statements
of the Company are relevant for investors evaluating an
investment decision in the Partnership.
Our combined financial statements reflect the accounts of
subsidiaries in which we have a controlling interest, after the
elimination of all significant intercompany accounts and
transactions. In the opinion of management, all adjustments
necessary for a fair presentation of the combined financial
statements, in accordance with accounting principles generally
accepted in the United States of America (generally referred as
“GAAP”), have been made. The combined statements of
operations and cash flows for the nine months ended
September 30, 2005 are unaudited. These unaudited interim
combined financial statements have been prepared in accordance
with accounting principles generally accepted in the United
States. In the opinion of management, the unaudited interim
combined financial statements have been prepared on the same
basis as the audited combined financial statements and include
all adjustments necessary to present fairly the financial
position and results of operations for the respective interim
periods. Interim financial results are not necessarily
indicative of the results to be expected for an annual period.
The Company has operated within the Enterprise Products Partners
cash management program for all periods presented. For purposes
of presentation in the Statements of Combined Cash Flows, cash
flows from financing activities represent transfers of excess
cash from the Company to Enterprise Products Partners equal to
cash provided by operations less cash used in investing
activities. Such transfers of excess cash are shown as
distributions to owners in the Statements of Combined
Owners’ Net Investment. As a result, the combined financial
statements do not present cash balances for any of the periods
presented.
Because a single direct owner relationship does not exist among
these combined entities, the net investment in these entities
(“owners’ net investment”) is shown in lieu of
parent or owners’ equity in the combined financial
statements. Enterprise Products Partners indirectly owned all of
the equity interests of our subsidiaries during the periods
presented.
Partnership
Organization
As noted previously, the Partnership will acquire ownership
interests in the Company’s businesses, as specified below,
from Enterprise Products Partners. Initially, the organizational
limited partner of the Partnership is Enterprise Products
Operating L.P. (the “Enterprise Products OLP”), which
owns 98% of the Partnership. DEP Holdings, LLC (the
“General Partner”) is the 2% general partner of the
Partnership. The General Partner will be responsible as general
partner for managing all of the Partnership’s operations
and activities. EPCO will provide all employees and certain
administrative services for us. Enterprise Products OLP is a
wholly owned subsidiary of Enterprise Products Partners L.P. The
Partnership, the General Partner, Enterprise Products OLP and
Enterprise Products Partners are affiliates under common control
of Dan L.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Duncan, the Chairman and controlling shareholder of EPCO and its
affiliates. EPCO will provide employees to the General Partner,
the Partnership and its subsidiaries pursuant to an
administrative services agreement.
In the fourth quarter of 2006, the Partnership filed a
registration statement for its initial public offering of
limited partner common units which it expects to close in early
2007. In connection with the initial public offering, the
Partnership will acquire a 66% interest in the following
companies, all of which are indirect wholly-owned subsidiaries
of Enterprise Products Partners:
•
Mont Belvieu Caverns;
•
Acadian Gas;
•
Lou-Tex Propylene;
•
Sabine Propylene; and
•
South Texas NGL in 2007.
Enterprise Products Partners has owned controlling interests and
operated the underlying assets of Mont Belvieu Caverns, Acadian
Gas, Lou-Tex Propylene and Sabine Propylene for several years.
Enterprise Products Partners will retain the ownership interests
in these four entities (as well as the recently acquired South
Texas NGL) that are not being acquired by the Partnership.
Enterprise Products Partners and its subsidiaries, including
Enterprise Products OLP, will continue to operate the assets of
each of these businesses. Enterprise Products OLP will control
the Partnership’s general partner and remain a significant
owner of new limited partner common unit interests in the
Partnership after the initial public offering.
2.
Summary
of Significant Accounting Policies
Allowance
for Doubtful Accounts
Our allowance for doubtful accounts balance is generally
determined based on specific identification and estimates of
future uncollectible accounts, as appropriate. Our procedure for
recording an allowance for doubtful accounts is based on
(i) our historical experience, (ii) the financial
stability of our customers and (iii) the levels of credit
granted to customers. In addition, we may also increase the
allowance account in response to the specific identification of
customers involved in bankruptcy proceedings and those
experiencing other financial difficulties. We routinely review
estimates used to develop this reserve to ascertain that we have
recorded sufficient amounts to cover potential losses. Our
allowance for doubtful accounts was $3.4 million and
$3.5 million at December 31, 2005 and 2004,
respectively. At September 30, 2006, our allowance for
doubtful accounts was $0.4 million. The reduction in the
allowance for doubtful accounts is due to final receipts and
adjustments related to a customer involved in a bankruptcy
proceeding.
Contingencies
Certain conditions may exist as of the date our financial
statements are issued, which may result in a loss to us, but
which will only be resolved when one or more future events occur
or fail to occur. Our management and legal counsel evaluate such
contingent liabilities, and such evaluations inherently involve
an exercise in judgment. In assessing loss contingencies, our
legal counsel evaluates the perceived merits of legal
proceedings that are pending against us and unasserted claims
that may result in proceedings, if any, as well as the perceived
merits of the amount of relief sought or expected to be sought
therein from each.
If the assessment of a contingency indicates that it is probable
that a material loss has been incurred and the amount of
liability can be estimated, then the estimated liability is
accrued in our financial statements. If the assessment indicates
that a potential material loss contingency is not probable but
is reasonably possible, or is probable but cannot be estimated,
then the nature of the contingent liability, together with an
estimate of the range of possible loss if determinable, is
disclosed.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Loss contingencies considered remote are generally not disclosed
unless they involve guarantees, in which case the guarantees
would be disclosed.
Deferred
Revenue
In our storage business, we occasionally bill customers in
advance of the periods in which we provide storage services. We
record such amounts as deferred revenue. We recognize these
revenues ratably over the applicable service period. Our
deferred revenue was $0.3 million and $1.2 million at
December 31, 2005 and 2004, respectively. At
September 30, 2006, our deferred revenue was
$1.2 million.
Deposits
from Customers
Natural gas customers that pose a credit risk are required to
make a prepayment (i.e., a deposit) to us in connection with
sales transactions. Deposits from customers were
$0.4 million and $4.6 million at December 31,2005 and 2004, respectively. At September 30, 2006,
deposits from customers were less than $0.1 million.
Dollar
Amounts
Dollar amounts presented in the tabular data within these
footnote disclosures are stated in thousands of dollars.
Earnings
per Unit
We have not included earnings per unit data since we do not have
any outstanding units.
Environmental
Costs
Environmental costs for remediation are accrued based on
estimates of known remediation requirements. Such accruals are
based on management’s estimate of the ultimate cost to
remediate a site. Ongoing environmental compliance costs are
charged to expense as incurred. Expenditures to mitigate or
prevent future environmental contamination are capitalized. Our
operations include activities that are subject to federal and
state environmental regulations.
Expenses for environmental compliance and monitoring were
$0.3 million, $0.2 million and $0.2 million
during 2005, 2004 and 2003, respectively. For the nine months
ended September 30, 2006 and 2005 (unaudited), expenses for
environmental compliance and monitoring were $0.1 million
and $0.1 million, respectively. Our reserve for
environmental remediation projects totaled $0.2 million at
September 30, 2006.
Equity-Based
Compensation
As is commonly the case with publicly traded limited
partnerships, we do not directly employ any of the persons
responsible for the management and operations of our businesses.
These functions are performed by employees of EPCO pursuant to
an administrative services agreement (see
Note 6) under the direction of the Board of Directors
and executive officers of Enterprise Products OLPGP, Inc., the
general partner of Enterprise Products OLP.
Certain key employees also participate in long-term incentive
compensation plans managed by EPCO. These plans include the
issuance of restricted units of Enterprise Products Partners and
limited partner interests in EPE Unit L.P. Prior to
January 1, 2006, EPCO accounted for these awards using the
provisions of Accounting Principles Board Opinion 25,
“Accounting for Stock Issued to Employees.” On
January 1, 2006, EPCO adopted SFAS 123(R),
“Accounting for Stock-Based Compensation,” to
account for its equity awards. Upon adoption of this accounting
standard, we recognized a cumulative effect of change in
accounting
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
principal of $9 thousand (a benefit). Such awards are
immaterial to our combined financial position, results of
operation, and cash flows.
The amount of equity-based compensation allocable to the
Company’s businesses was $26 thousand for the year ended
December 31, 2005, and $52 thousand for the nine
months ended September 30, 2006.
Based on information currently available, we expect that the
Partnership’s reimbursement to EPCO in connection with
long-term incentive compensation plans will be immaterial to our
financial position and results of operations over the next five
years.
Estimates
Preparing our combined financial statements in conformity with
GAAP requires management to make estimates and assumptions that
affect reported amounts of assets and liabilities and disclosure
of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and
expenses during a given period. Our actual results could differ
from these estimates.
Exit
and Disposal Costs
Exit and disposal costs are charges associated with an exit
activity not associated with a business combination or with a
disposal activity covered by Statement of Financial Accounting
Standard (“SFAS”) 144, “Accounting for the
Impairment or Disposal of Long-Lived Assets.” Examples
of these costs include (i) termination benefits provided to
current employees that are involuntarily terminated under the
terms of a benefit arrangement that, in substance, is not an
ongoing benefit arrangement or an individual deferred
compensation contract, (ii) costs to terminate a contract
that is not a capital lease, and (iii) costs to consolidate
facilities or relocate employees. In accordance with
SFAS 146, “Accounting for Costs Associated with
Exit and Disposal Activities,” we recognize such costs
when they are incurred rather than at the date of our commitment
to an exit or disposal plan. We have not recognized any such
costs for the periods presented.
Fair
Value Information
Due to their short-term nature, accounts receivable, accounts
payable and accrued expenses are carried at amounts which
reasonably approximate their fair values. The fair values
associated with our commodity financial instruments were
developed using available market information and appropriate
valuation techniques. The following table presents the estimated
fair values of our financial instruments at the dates indicated:
Represent commodity financial instrument transactions that have
either (i) not settled or (ii) settled and not been
invoiced. Settled and invoiced transactions are reflected in
either accounts receivable or accounts payable depending on the
outcome of the transaction.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Financial
Instruments
We use financial instruments in our Acadian Gas operations, to
secure certain fixed price natural gas sales contracts (referred
to as “customer fixed-price arrangements”). We also
enter into a limited number of cash flow hedges in connection
with the Acadian Gas business. We recognize such instruments on
the balance sheet as assets or liabilities based on an
instrument’s fair value. Fair value is generally defined as
the amount at which the financial instrument could be exchanged
in a current transaction between willing parties, not in a
forced or liquidation sale. Changes in fair value of financial
instrument contracts are recognized currently in earnings unless
specific hedge accounting criteria are met.
To qualify as a hedge, the item to be hedged must expose us to
commodity price risk and the hedging instrument must reduce the
exposure and meet the hedging requirements of SFAS 133,
“Accounting for Derivative Instruments and Hedging
Activities” (as amended and interpreted). We formally
designate such financial instruments as hedges and document and
assess the effectiveness of the hedge at inception and on a
quarterly basis. Any ineffectiveness is immediately recognized
in earnings. Our customer fixed-price arrangements do not
qualify for hedge accounting under SFAS 133; therefore,
these instruments are accounted for using a
mark-to-market
approach each reporting period.
If a financial instrument meets the criteria of a cash flow
hedge, gains and losses from the instrument are recorded in
other comprehensive income. Gains and losses on cash flow hedges
are reclassified from other comprehensive income to earnings
when the forecasted transaction occurs or, as appropriate, over
the economic life of the underlying asset. If the financial
instrument meets the criteria of a fair value hedge, gains and
losses from the instrument will be recorded on the income
statement to offset corresponding losses and gains of the hedged
item. A contract designated as a hedge of an anticipated
transaction that is no longer likely to occur is immediately
recognized in earnings.
Impairment
Testing for Long-Lived Assets
Long-lived assets (including intangible assets with finite
useful lives and property, plant and equipment) are reviewed for
impairment whenever events or changes in circumstances indicate
that the carrying amount of such assets may not be recoverable.
Long-lived assets with carrying values that are not expected to
be recovered through future cash flows are written down to their
estimated fair values in accordance with SFAS 144. The
carrying value of a long-lived asset is deemed not recoverable
if it exceeds the sum of undiscounted cash flows expected to
result from the use and eventual disposition of the asset. If
the carrying value of a long-lived asset exceeds the sum of its
undiscounted cash flows, a non-cash asset impairment charge is
recognized equal to the excess of the asset’s carrying
value over its estimated fair value. Fair value is defined as
the estimated amount at which an asset or liability could be
bought or settled, respectively, in an arm’s-length
transaction. We measure fair value using market prices or, in
the absence of such data, appropriate valuation techniques. We
had no such impairment charges during the periods presented.
Impairment
Testing for Unconsolidated Affiliate
We evaluate our equity method investments for impairment
whenever events or changes in circumstances indicate that there
is a potential loss in value of the investment (other than a
temporary decline). Examples of such events or changes in
circumstances include a history of investee operating losses or
long-term adverse changes in the investee’s industry. If we
determine that a loss in the investment’s value is
attributable to an event other than temporary decline, we adjust
the carrying value of the investment to its fair value through a
charge to earnings. We had no such impairment charges during the
periods presented.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Inventories
Our inventory consists of natural gas volumes valued at the
lower of average cost or market, with “market”
determined by industry posted prices. We capitalize as a cost of
inventory shipping and handling charges directly related to
volumes we purchase from third parties. As volumes are sold and
delivered out of inventory, the average cost of these products
is charged to operating costs and expenses. Shipping and
handling fees associated with products we sell and deliver to
customers are charged to operating costs and expenses as
incurred.
At December 31, 2005 and 2004, the value of our natural gas
inventory was $9.9 million and $4.8 million,
respectively. At September 30, 2006, the value was
$13.6 million. As a result of fluctuating market
conditions, we recognize lower of average cost or market
(“LCM”) adjustments when the historical cost of our
inventory exceeds its net realizable value. These non-cash
adjustments are recorded as a component of operating costs and
expenses. For the years ended December 31, 2005 and 2003,
we recognized LCM adjustments of approximately $3.2 million
and $1.3 million, respectively. No LCM adjustments were
required during 2004 and during the nine months ended
September 30, 2006.
Investments
in Unconsolidated Affiliate
We initially evaluate our ownership of financial interests in a
business enterprise for consolidation consideration purposes
related to variable interest entities. Then investment interests
in which we own 3% to 50% and exercise significant influence
over the investee’s operating and financial policies are
accounted for using the equity method. If the investee is
organized as a limited liability company and maintains separate
ownership accounts for its members, we account for our
investment using the equity method if our ownership interest is
between 3% and 50%. For all other types of investees, we apply
the equity method of accounting if our ownership interest is
between 20% and 50%. Our proportionate share of profits and
losses from transactions with our equity method unconsolidated
affiliate is eliminated in combination. If our ownership
interest in an investee does not provide us with either control
or significant influence over the investee, we account for the
investment using the cost method.
We include equity earnings from our unconsolidated affiliate,
Evangeline, in our measure of segment gross operating margin and
combined operating income due to the integrated nature of its
operations with that of Acadian Gas. See Note 4 for
information regarding our equity method investment.
New
accounting pronouncements
Emerging Issues Task Force (“EITF”) 04-13,
“Accounting for Purchases and Sales of Inventory with the
Same Counterparty.” This accounting guidance
requires that two or more inventory transactions with the same
counterparty be viewed as a single non-monetary transaction, if
the transactions were entered into in contemplation of one
another. Exchanges of inventory between entities in the same
line of business should be accounted for at fair value or
recorded at carrying amounts, depending on the classification of
such inventory. This guidance was effective April 1, 2006,
and our adoption of this guidance had no impact on our combined
financial position, results of operations or cash flows.
EITF 06-3,
“How Taxes Collected From Customers and Remitted to
Governmental Authorities Should Be Presented in the Income
Statement (That Is, Gross versus Net
Presentation).”This accounting guidance
requires companies to disclose their policy regarding the
presentation of tax receipts on the face of their income
statements. This guidance specifically applies to taxes imposed
by governmental authorities on revenue-producing transactions
between sellers and customers (gross receipts taxes are
excluded). This guidance is effective January 1, 2007. As a
matter of policy, we report such taxes on a net basis.
Financial Accounting Standards Board Interpretation
(“FIN”) No. 48, “Accounting for Uncertainty
in Income Taxes, an Interpretation of SFAS 109, Accounting
for Income Taxes.” FIN 48 provides that
the tax
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
effects of an uncertain tax position should be recognized in a
company’s financial statements if the position taken by the
entity is more likely than not sustainable, if it were to be
examined by an appropriate taxing authority, based on technical
merit. After determining a tax position meets such criteria, the
amount of benefit to be recognized should be the largest amount
of benefit that has more than a 50 percent chance of being
realized upon settlement. The provisions of FIN 48 are
effective for fiscal years beginning after December 15,2006. This standard will have no impact on our financial
statements.
Statement of Financial Accounting Standards
(“SFAS”) 155, “Accounting for Certain Hybrid
Financial Instruments.” This
accounting standard amends SFAS 133, Accounting for
Derivative Instruments and Hedging Activities, amends
SFAS 140, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities, and
resolves issues addressed in Statement 133 Implementation
Issue D1, Application of Statement 133 to Beneficial
Interests to Securitized Financial Assets. A hybrid
financial instrument is one that embodies both an embedded
derivative and a host contract. For certain hybrid financial
instruments, SFAS 133 requires an embedded derivative
instrument be separated from the host contract and accounted for
as a separate derivative instrument. SFAS 155 amends
SFAS 133 to provide a fair value measurement alternative
for certain hybrid financial instruments that contain an
embedded derivative that would otherwise be recognized as a
derivative separately from the host contract. For hybrid
financial instruments within its scope, SFAS 155 allows the
holder of the instrument to make a one-time, irrevocable
election to initially and subsequently measure the instrument in
its entirety at fair value instead of separately accounting for
the embedded derivative and host contract. We are evaluating the
effect of this recent guidance, which is effective
January 1, 2007 for the Partnership.
SFAS 157, “Fair Value
Measurements.” This accounting standard
defines fair value, establishes a framework for measuring fair
value in generally accepted accounting principles, and expands
disclosures about fair value measurements. SFAS 157 applies
only to fair-value measurements that are already required or
permitted by other accounting standards and is expected to
increase the consistency of those measurements. The statement
emphasizes that fair value is a market-based measurement that
should be determined based on the assumptions that market
participants would use in pricing an asset or liability.
Companies will be required to disclose the extent to which fair
value is used to measure assets and liabilities, the inputs used
to develop the measurements, and the effect of certain of the
measurements on earnings (or changes in net assets) for the
period. SFAS 157 is effective for fiscal years beginning
after December 15, 2007 and we will be required to adopt
SFAS 157 as of January 1, 2008. We are currently
evaluating the impact of adopting SFAS 157 on our financial
position, results of operations, and cash flows.
Staff Accounting Bulletin (“SAB”) No. 108,
“Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial
Statements.” SAB 108 addresses how the
effects of prior-year uncorrected misstatements should be
considered when quantifying misstatements in current-year
financial statements. The SAB requires registrants to quantify
misstatements using both the balance-sheet and income-statement
approaches and to evaluate whether either approach results in
quantifying an error that is material in light of relevant
quantitative and qualitative factors. When the effect of initial
adoption is determined to be material, SAB 108 allows
registrants to record that effect as a cumulative-effect
adjustment to
beginning-of-year
retained earnings. The requirements are effective for annual
financial statements covering the first fiscal year ending after
November 15, 2006. Additionally, the nature and amount of
each individual error being corrected through the
cumulative-effect adjustment, when and how each error arose, and
the fact that the errors had previously been considered
immaterial is required to be disclosed. We are required to adopt
SAB 108 for our current fiscal year ending
December 31, 2006. We do not expect the adoption of
SAB 108 to have a material impact on our financial
statements.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Natural
Gas Imbalances
Natural gas imbalances result when a customer injects more or
less gas into a pipeline than it withdraws. Our imbalance
receivables and payables are valued at market price. At
December 31, 2005 and 2004, our imbalance receivables were
$1.6 million and $1.8 million, respectively. At
September 30, 2006, they were $1.9 million. Imbalance
receivables are reflected as a component of “Accounts
receivable — trade” on our Combined Balance
Sheets. At December 31, 2005 and 2004, our imbalance
payable was $2.9 million and $0.5 million
respectively. At September 30, 2006, it was
$0.5 million. Imbalance payable is reflected as a component
of “Accrued gas payables” on our Combined Balance
Sheets.
Owner’s
net investment
In August 2006, Enterprise Products Partners purchased a
pipeline for approximately $97.7 million in cash, and will
contribute this pipeline to South Texas NGL. This contribution
is reflected as a non-cash contribution on the Statement of
Combined Owners’ Net Investment.
Property,
Plant and Equipment
Property, plant and equipment is recorded at cost. Expenditures
for major additions and improvements are capitalized and minor
replacements, maintenance, and repairs are charged to expense as
incurred. We use the expense-as-incurred method for planned
major maintenance activities.
When property and equipment are retired or otherwise disposed
of, the cost and accumulated depreciation are removed from the
accounts and any resulting gain or loss is included in results
of operations for the respective period. We record depreciation
over the estimated useful lives of our assets primarily using
the straight-line method for financial statement purposes. We
use other depreciation methods (generally accelerated) for tax
purposes where appropriate.
We account for asset retirement obligations (“AROs”)
using SFAS 143, “Accounting for Asset Retirement
Obligations,” as interpreted by FIN 47,
“Accounting for Conditional Asset Retirement
Obligations.” Asset retirement obligations are legal
obligations associated with the retirement of a tangible
long-lived asset that result from the asset’s acquisition,
construction, development
and/or
normal operation. An ARO is initially measured at its estimated
fair value. Upon initial recognition of an ARO, we record an
increase to the carrying amount of the related long-lived asset
and an offsetting ARO liability. We depreciate the combined cost
of the asset and the capitalized asset retirement obligation
using a systematic and rational allocation method over the
period during which the long-lived asset is expected to provide
benefits. After the initial period of ARO recognition, the ARO
liability will change as a result of either the passage of time
or revisions to the original estimates of either the amounts of
estimated cash flows or their timing. Changes due to the passage
of time increase the carrying amount of the liability because
there are fewer periods remaining from the initial measurement
date until the settlement date; therefore, the present value of
the discounted future settlement amount increases. These changes
are recorded as a period cost called accretion expense. Upon
settlement, our ARO obligations will be extinguished at either
the recorded amount or we will incur a gain or loss on the
difference between the recorded amount and the actual settlement
cost.
See Note 3 for additional information regarding our
property, plant and equipment and related AROs.
Provision
for Income Taxes
Our entities are organized as pass-through entities for income
tax purposes. As a result, the owners of such entities are
responsible for federal income taxes on their share of each
entity’s taxable income.
In May 2006, the State of Texas substantially revised its
existing state franchise tax. The revised tax (the “Texas
Margin Tax”) becomes effective for franchise tax reports
due on or after January 1, 2008. In general,
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
legal entities that conduct business in Texas and benefit from
limited liability protection are subject to the Texas Margin
Tax. As a result of the change in tax law, management believes
that our tax status in the State of Texas will change such that
we will become subject to the Texas Margin Tax. We recorded an
estimated deferred tax liability of $21 thousand for the Texas
Margin Tax in June 2006.
Revenue
Recognition
We recognize revenue using the following criteria:
(i) persuasive evidence of an exchange arrangement exists,
(ii) delivery has occurred or services have been rendered,
(iii) the buyer’s price is fixed or determinable and
(iv) collectibility is reasonably assured.
Our underground storage business generates revenues from
contracts related to daily storage capacity reservation
agreements and excess storage fees. With respect to daily
storage contracts, we collect a fee based on the number of days
a customer has volumes in storage multiplied by a storage rate
for each product. Under these contracts, revenue is recognized
ratably over the length of the storage period based on the
storage fees specified in each contract. In addition, we receive
revenues from the sale of brine gathering at the storage
location.
With respect to capacity reservation agreements, we collect a
fee for reserving space (typically in millions of barrels) for a
customer’s product in our underground storage wells. Under
these agreements, revenue is recognized ratably over the
specified reservation period. If a customer stores less than the
reservation amount, we recognize the applicable reservation fee
over the term of the arrangement. We also collect excess storage
fees when customers exceed their reservation amounts. Such
excess storage fees are recognized in the period of occurrence.
Revenues from daily storage capacity reservation agreements and
excess storage fees are based upon market-related prices as
determined by the individual agreements. Based on information
currently available, we expect capacity reservation revenues of
$28.3 million for 2006, $8.6 million for 2007,
$7.3 million for 2008, $7.1 million for 2009 and
$5.7 million for 2010.
Our natural gas pipelines and services, and our petrochemical
pipeline services generate revenues from transportation
agreements where shippers are billed a fee per unit of volume
transported (typically in MMBtus for natural gas and MBPD for
petrochemicals) multiplied by the volume delivered. The
transportation fees charged under these arrangements are
contractual. Revenues associated with these fee-based contracts
are recognized when volumes have been physically delivered to
our customer through the pipeline. We also have natural gas
sales contracts whereby revenue is recognized when we purchase
and then resell and deliver a volume of natural gas to a
customer. Revenues from these sales contracts are based upon
market-related prices as determined by the individual
agreements. However, prior to 2004, Sabine Propylene was
regulated by the Federal Energy Regulatory Commission
(“FERC”). Our Lou-Tex Propylene pipeline was also
subject to the FERC’s jurisdiction until 2005. The revenues
recorded by Sabine Propylene and Lou-Tex Propylene during the
period in which each was regulated were based on the maximum
tariff rates approved by regulatory agencies. All the
petrochemical pipeline revenues are with related parties (see
Note 6).
Start-Up
and Organization Costs
Start-up
costs and organization costs are expensed as incurred.
Start-up
costs are defined as one-time activities related to opening a
new facility, introducing a new product or service, conducting
activities in a new territory, pursuing a new class of customer,
initiating a new process in an existing facility, or some new
operation. Routine ongoing efforts to improve existing
facilities, products or services are not
start-up
costs. Organization costs include legal fees, promotional costs
and similar charges incurred in connection with the formation of
a business. We did not record any such costs during the periods
presented.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Storage
gains and losses
Storage well gains and losses occur when product movements into
a storage well are different than those redelivered to
customers. In general, such variations result from difficulties
in precisely measuring significant volumes of liquids at varying
flow rates and temperatures. It is expected that substantially
all product delivered into a storage well will be withdrawn over
time. A measurement loss in one period is expected to be offset
by a measurement gain in a subsequent period, unless product is
physically lost in a storage well due to problems with cavern
integrity. We did not experience any significant net losses
resulting from problems with cavern integrity during the three
years ended December 31, 2005.
Since we expect that storage gains and losses will approximate
each other over time, storage gains or losses are charged to a
storage imbalance account during the month such imbalances are
created based on current pricing. The reserve is increased by
measurement gains and loss accruals and decreased by measurement
losses. On an annual basis, the storage imbalance reserve
account is reviewed for reasonableness based on historical
measurement gains and losses and adjusted accordingly through a
charge to earnings. At December 31, 2005 and 2004, our
storage imbalance account was $4.5 million and
$3.5 million. At September 30, 2006, our storage
imbalance was $1.8 million. Net measurement losses of
$2.0 million, $2.2 million and $1.5 million were
charged to the reserve during the years ended December 31,2005, 2004 and 2003, respectively, and $2.7 million and
$1.9 million for the nine months ended September 30,2006 and 2005 (unaudited), respectively. Operating costs and
expenses reflect well loss accruals of $3.1 million,
$0.6 million and $2.4 million for the years ended
December 31, 2005, 2004 and 2003, respectively, and $0 and
$2.5 million for the nine months ended September 30,2006 and 2005 (unaudited), respectively.
In addition operating gains and losses due to measurement
variances for product movements to and from storage wells
relating primarily to pipeline and well connection activities
are included in our financial statements. Many of our customer
storage arrangements allow us to retain a small amount of liquid
volumes to help offset any measurement losses. These variances
are estimated and settled at current prices each reporting
period as a net credit or charge to operating costs and
expenses. We do not retain inventory volumes. The net amounts
for each of the years ended December 31, 2005, 2004 and
2003 were a $2.1 million charge, $0.2 million credit
and $1.4 million credit, respectively, and a
$1.0 million charge and a $3.2 million charge for the
nine months ended September 30, 2006 and 2005 (unaudited),
respectively.
Supplemental
Cash Flow Information
On certain of our capital projects, third parties are obligated
to reimburse us for all or a portion of project expenditures
based on activities initiated by the party. The majority of such
arrangements are associated with projects related to pipeline
construction and well tie-ins. We received $1.8 million,
$1.6 million and $0.8 million as contributions in aid
of our construction costs during the years ended
December 31, 2005, 2004 and 2003, respectively, and
$0.8 million and $1.5 million during the nine months
ended September 30, 2006 and 2005 (unaudited), respectively.
We incurred liabilities for construction in progress and
property additions that had not been paid at December 31,2005, 2004 and 2003 of $4.8 million, $1.4 million and
$0.2 million, respectively. For the nine months ended
September 30, 2006, $2.3 million construction in
progress and property additions had not been paid.
In January 2002, we acquired a number of storage wells from a
third-party seller. The purchase price we paid included four
wells that were later determined not usable for storage. We
received a $10 million refund of the purchase price from
the seller, which is reflected as “Cash refund from prior
business combination” on our Statements of Combined Cash
Flows.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
3.
Property,
Plant and Equipment
Our property, plant and equipment values and accumulated
depreciation balances were as follows at the dates indicated:
Estimated Useful
At September 30,
At December 31,
Life in Years
2006
2005
2004
Natural gas and petrochemical
pipelines and related equipment(1)
5-35
(4)
$
346,617
$
343,843
$
340,813
Underground storage wells and
related assets(2)
5-35
(5)
306,567
260,976
251,858
NGL pipelines and related
equipment(6)
5-35
98,129
Transportation equipment(3)
3-10
1,260
1,102
923
Land
15,750
14,743
14,689
Construction in progress
26,293
15,063
3,259
Total
794,616
635,727
611,542
Less accumulated depreciation
138,600
123,530
104,428
Property, plant and equipment, net
$
656,016
$
512,197
$
507,114
(1)
Includes natural gas and petrochemical pipelines, office
furniture and equipment, buildings, and related assets.
(2)
Underground storage facilities include underground product
storage caverns and related integral specific assets such as
pipes and compressors.
(3)
Transportation equipment includes vehicles and similar assets
used in our various operations.
(4)
In general, the estimated useful lives of major components of
this category are: pipelines, 18-35 years (with some
equipment at 5 years); office furniture and equipment,
3-20 years; and buildings 20-35 years.
(5)
In general, the estimated useful live of underground storage
facilities is 20-35 years (with some components at
5 years).
(6)
Initial contribution from Enterprise Products Partners. In
general, the estimated useful live of NGL pipelines will be
20-35 years (with some equipment at 5 years).
Depreciation expense for the years ended December 31, 2005,
2004 and 2003 was $19.2 million, $18.1 million and
$17.6 million, respectively, and $15.4 million and
$14.2 million for the nine months ended September 30,2006 and 2005 (unaudited), respectively.
At December 31, 2005, we recorded conditional AROs in
connection with certain
right-of-way
agreements, leases and regulatory requirements. Conditional AROs
are obligations in which the timing
and/or
amount of settlement are uncertain. None of our assets are
legally restricted for purposes of settling AROs. Our accrued
liability for AROs was approximately $0.6 million at
December 31, 2005 and $0.7 million at
September 30, 2006.
We recorded a cumulative effect of a change in accounting
principle of $0.6 million in connection with our
implementation of FIN 47 in December 2005, which represents
the depreciation and accretion expense we would have recognized
had we recorded these conditional AROs when incurred. The pro
forma effects of our adoption of FIN 47 are not presented
due to the immaterial nature of these amounts to our financial
statements. Based on information currently available, we
estimate that annual accretion expense will approximate
$0.1 million for each of the years 2006 through 2010.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
4.
Investments
in and Advances to Unconsolidated Affiliate —
Evangeline
Acadian Gas, through a wholly owned subsidiary, owns a
collective 49.51% equity interest in Evangeline, which consists
of a 45% direct ownership interest in Evangeline Gas Pipeline,
L.P. (“EGP”) and a 45.05% direct interest in
Evangeline Gas Corp. (“EGC”). EGC also owns a 10%
direct interest in EGP. Third parties own the remaining equity
interests in EGP and EGC. Acadian Gas does not have a
controlling interest in the Evangeline entities, but does
exercise significant influence on Evangeline’s operating
policies. Acadian Gas accounts for its financial investment in
Evangeline using the equity method since it is not the primary
beneficiary of a variable interest.
At December 31, 2005 and 2004, the carrying value of our
investment in Evangeline was $2.4 million and
$2.0 million, respectively. At September 30, 2006, the
carrying value of our investment was $3.1 million. Our
Combined Statements of Operations reflect equity earnings from
Evangeline of $0.3 million, $0.2 million and
$0.1 million for the years ended December 31, 2005,
2004 and 2003, respectively, and $0.6 million and
$0.3 million for the nine month’s ended September 30,2006 and 2005 (unaudited), respectively. Our investment in
Evangeline is classified within our Natural Gas
Pipelines & Services business segment.
Evangeline owns a
27-mile
natural gas pipeline system extending from Taft, Louisiana to
Westwego, Louisiana that connects three electric generation
stations owned by Entergy Louisiana (“Entergy”).
Evangeline’s most significant contract is a
21-year
natural gas sales agreement with Entergy. Evangeline is
obligated to make
available-for-sale
and deliver to Entergy certain specified minimum contract
quantities of natural gas on an hourly, daily, monthly and
annual basis. The sales contract provides for minimum annual
quantities of 36.75 billion British thermal units
(“Bbtus”), until the contract expires on
January 1, 2013. Quantities delivered to Entergy for the
years ended December 31, 2005, 2004 and 2003 under the
contract totaled 37.61 Bbtus, 36.75 Bbtus and 36.75 Bbtus,
respectively.
The sales contract contains provisions whereby Entergy is
obligated to pay Evangeline a minimum fee each period, whether
or not it is able to take delivery of natural gas volumes. The
following table presents these minimum amounts for the annual
periods presented:
2006
$
7,008
2007
6,507
2008
6,478
2009
6,450
2010
6,421
Thereafter
12,755
Total
$
45,619
In connection with the Entergy sales contract, Evangeline has
entered into a natural gas purchase contract with Acadian Gas
that contains annual purchase provisions. The minimum annual
purchase quantities under this contract correspond to the
aforementioned Entergy natural gas sales contract. The pricing
terms of the sales agreement with Entergy and Evangeline’s
purchase agreement with Acadian Gas are based on a
weighted-average cost of natural gas each month (subject to
certain market index price ceilings and incentive margins) plus
a predetermined margin. Due to this pricing methodology,
Evangeline’s monthly net sales margin under the Entergy gas
sales contract is essentially fixed.
Entergy has the option to purchase the Evangeline pipeline
system or an equity interest in Evangeline. In 1991, Evangeline
entered into an agreement with Entergy whereby Entergy was
granted the right to acquire Evangeline’s pipeline system
for a nominal price, plus the complete performance and
compliance with the natural gas sales contract. The option
period begins the earlier of July 1, 2010 or upon the
payment in full of Evangeline’s Series B notes as
discussed below. It terminates on December 31, 2012. We
cannot ascertain
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
when, or if, Entergy will exercise this option. This uncertainty
results from factors which include Entergy’s management
decisions and regulatory approvals that may be required for
Entergy to acquire Evangeline’s assets at the time the
option is exercisable.
At September 30, 2006 and December 31, 2005, long-term
debt for Evangeline consisted of (i) $23.2 million in
principal amount of 9.9% fixed interest rate senior secured
notes due December 2010 (the “Series B” notes)
and (ii) a $7.5 million subordinated note payable to
an affiliate of the other co-venture participant (the “ENC
Note”). The Series B notes are collateralized by
(i) Evangeline’s property, plant and equipment;
(ii) proceeds from its Entergy natural gas sales contract;
and (iii) a debt service reserve requirement. Scheduled
principal repayments on the Series B notes are
$5 million annually through 2009 with a final repayment in
2010 of approximately $3.2 million. The trust indenture
governing the Series B notes contains covenants such as
requirements to maintain certain financial ratios. Evangeline
was in compliance with such covenants during the periods
presented.
Evangeline incurred the ENC Note obligations in connection with
its acquisition of the Entergy natural gas sales contract in
1991 and formation of the venture. The ENC Note is subject to a
subordination agreement which prevents the repayment of
principal and accrued interest on the note until such time as
the Series B note holders are either fully cash secured
through debt service accounts or have been completely repaid.
Variable rate interest accrues on the subordinated note at a
LIBOR rate plus 0.5%. Variable interest rates charged on this
note at September 30, 2006 was 6.08% and at
December 31, 2005 and 2004 were 4.23% and 1.83%,
respectively. At September 30, 2006 and December 31,2005 and 2004, the amount of accrued but unpaid interest on the
ENC Note is approximately $7.7, $7.1 and $6.6 million,
respectively.
Summarized financial information of Evangeline is presented
below.
At September 30, 2006 and at December 31, 2005 our
intangible assets consisted primarily of renewable storage
contracts with various customers that we acquired in connection
with the purchase of storage caverns
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
from a third party in January 2002. Due to the renewable nature
of these contracts, we amortize them on a straight-line basis
over the estimated remaining economic life of the storage assets
to which they relate.
The gross value of these intangible assets was $8.1 million
at inception. At December 31, 2005 and 2004, the carrying
values of these intangible assets were $7.2 million and
$7.4 million, respectively. At September 30, 2006 the
carrying value of these intangible assets was $7.0 million.
We recorded $0.2 million in amortization expense associated
with these intangible assets for all periods presented. Based on
information currently available, we estimate that amortization
expense associated with existing intangible assets will
approximate $0.2 million per year for each of the years
2006 through 2010.
6.
Related
Party Transactions
The following table summarizes our related party transactions
for the periods indicated:
September 30,
For Year Ended December 31
2006
2005
2005
2004
2003
(Unaudited)
Revenues
Enterprise Products Partners and
affiliates
$
90,463
$
63,187
$
87,307
$
79,611
$
73,418
Evangeline
232,986
224,011
331,522
241,400
214,200
Total
$
323,449
$
287,198
$
418,829
$
321,011
$
287,618
Operating costs and
expenses
EPCO
$
25,809
$
28,523
$
35,659
$
25,609
$
25,314
Enterprise Products Partners and
affiliates
16,199
12,022
25,315
3,801
Evangeline
4
4
4
Total
$
42,008
$
40,549
$
60,978
$
29,410
$
25,318
General and administrative
costs
EPCO
$
2,388
$
3,118
$
3,937
$
4,228
$
4,901
Relationship
with Enterprise Products Partners
Enterprise Products Partners was the shipper of record on our
Sabine Propylene and Lou-Tex Propylene pipelines. We recorded
$33.9 million, $40.9 million and $42.3 million of
related party pipeline transportation revenues from Enterprise
Products Partners on these pipelines for the years ended
December 31, 2005, 2004 and 2003, respectively, and
$28.2 million and $25.1 million for the nine months
ended September 30, 2006 and 2005 (unaudited),
respectively. For the periods in which Sabine Propylene and
Lou-Tex Propylene were subject to FERC regulations, such related
party revenues were based on the maximum tariff rate allowed for
each system. We continued to charge Enterprise Products Partners
such maximum transportation rates after both entities were
declared exempt from FERC oversight.
Enterprise Products Partners has entered into agreements with
third parties involving use of the Sabine Propylene and Lou-Tex
Propylene pipelines. Enterprise Products Partners recorded
$15.4 million, $14.2 million and $15.1 million in
revenues for the years ended December 31, 2005, 2004 and
2003, respectively, and $11.7 million and
$11.4 million for the nine months ended September 30,2006 and 2005 (unaudited), respectively, in connection with such
agreements. Apart from such agreements, Enterprise Products
Partners did not utilize the Sabine Propylene and Lou-Tex
Propylene assets. Enterprise Products Partners has assigned
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
certain agreements with third parties involving the use of our
Sabine Propylene and Lou-Tex Propylene pipelines to us but
remains jointly and severally liable on those agreements.
Our related party revenues from Enterprise Products Partners and
affiliates also include the sale of natural gas of
$35.8 million, $21.7 million and $13.8 million
for the years ended December 31, 2005, 2004 and 2003,
respectively, and $47.5 million and $24.2 million for
the nine months ended September 30, 2006 and 2005
(unaudited), respectively. Our related party operating costs and
expenses include the cost of natural gas Enterprise Products
Partners sold to us. Such amounts were $25.3 million,
$3.8 million and none for the years ended December 31,2005, 2004 and 2003, respectively, and $16.2 million and
$12.0 million for the nine months ended September 30,2006 and 2005 (unaudited), respectively. In addition, Enterprise
Products Partners has furnished letters of credit on behalf of
Evangeline’s debt service requirements. At
December 31, 2005, such outstanding letters of credit
totaled $1.2 million.
We also provide underground storage services to Enterprise
Products Partners for the storage of NGLs and petrochemicals. At
December 31, 2005, 2004 and 2003, we recorded
$17.6 million, $17.0 million and $17.3 million,
respectively, in storage revenue from Enterprise Products
Partners. Such revenues were $14.8 million and
$13.9 million for the nine months ended September 30,2006 and 2005 (unaudited), respectively.
We expect that certain commercial arrangements with Enterprise
Products Partners will change once the Partnership completes its
initial public offering. These changes will include:
•
The reduction in transportation rates previously charged by us
to Enterprise Products Partners for usage of the Lou-Tex
Propylene and Sabine Propylene pipelines to the
levels Enterprise Products Partners realizes from the
third-party shippers on these systems.
•
An increase in storage fees charged Enterprise Products Partners
by Mont Belvieu Caverns related to the storage activities of
Enterprise Products Partners’ octane enhancement,
isomerization and NGL and petrochemical marketing businesses.
Historically, such intercompany charges were below market and
eliminated in the consolidated revenues and costs and expenses
of Enterprise Products Partners. Prospectively, such rates will
be market-related.
•
The well measurement gains and losses associated with products
delivered by Enterprise Products Partners under storage
agreements with us will be allocated to Enterprise Products
Partners. In addition, in connection with its retained equity
investment in Mont Belvieu Caverns, Enterprise Products Partners
will be specially allocated measurement gains and losses. See
Note 2 for additional information regarding our storage
gains and losses.
The Company has operated within the Enterprise Products Partners
cash management program for all periods presented. For purposes
of presentation in the Statements of Combined Cash Flows, cash
flows from financing activities represent transfers of excess
cash from the Company to Enterprise Products Partners equal to
cash provided by operations less cash used in investing
activities. Such transfers of excess cash are shown as
distributions to owners in the Statements of Combined
Owners’ Net Investment. As a result, the combined financial
statements do not present cash balances for any of the periods
presented.
Relationship
with EPCO
We have no employees. All of our operating functions are
performed by employees of EPCO pursuant to an administrative
services agreement. EPCO also provides general and
administrative support services to us in accordance with the
administrative services agreement. We, Enterprise Products
Partners and the other
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
affiliates of EPCO are parties to the administrative services
agreement. The significant terms of the administrative services
agreement are as follows:
•
EPCO provides administrative, management, engineering and
operating services as may be necessary to manage and operate our
businesses, properties and assets (in accordance with prudent
industry practices). EPCO will employ or otherwise retain the
services of such personnel as may be necessary to provide such
services.
•
We are required to reimburse EPCO for its services in an amount
equal to the sum of all costs and expenses incurred by EPCO
which are directly or indirectly related to our business or
activities (including EPCO expenses reasonably allocated to us).
In addition, we have agreed to pay all sales, use, excise, value
added or similar taxes, if any, which may be applicable with
respect to services provided by EPCO.
•
EPCO allows us to participate as named insureds in its overall
insurance program with the associated premiums and related costs
being allocated to us. We reimbursed EPCO $1.7 million,
$2.3 million and $2.2 million for insurance costs for
the years ended December 31, 2005, 2004 and 2003,
respectively. Such reimbursements were $1.0 million and
$1.1 million for the nine months ended September 30,2006 and 2005 (unaudited), respectively.
•
Our operating costs and expenses for the years ended
December 31, 2005, 2004 and 2003 include reimbursement
payments to EPCO for the costs it incurs to operate our
facilities, including compensation of employees. We reimburse
EPCO for actual direct and indirect expenses it incurs related
to the operation of our assets. Our reimbursements to EPCO for
operating costs and expenses were $35.7 million,
$25.6 million and $25.3 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Such
reimbursements were $25.8 million and $28.5 million
for the nine months ended September 30, 2006 and 2005
(unaudited), respectively.
Likewise, our general and administrative costs include amounts
we reimburse to EPCO for administrative services, including
compensation of employees. In general, our reimbursement to EPCO
for administrative services is either (i) on an actual
basis for direct expenses it may incur on our behalf (e.g., the
purchase of office supplies) or (ii) based on an allocation
of such charges between the various parties to administrative
services agreement based on the estimated use of such services
by each party (e.g., the allocation of general legal or
accounting salaries based on estimates of time spent on each
entity’s business and affairs). Our reimbursements to EPCO
for general and administrative costs were $3.9 million,
$4.2 million and $4.9 million for the years ended
December 31, 2005, 2004 and 2003, respectively. Such
reimbursements to EPCO for such costs were $2.4 million and
$3.1 million during the nine months ended
September 30, 2006 and 2005 (unaudited), respectively.
A small number of key employees devote a portion of their time
to the Company’s operations and affairs and participate in
long-term incentive compensation plans managed by EPCO. These
plans include the issuance of restricted units of Enterprise
Products Partners and limited partner interests in EPE Unit L.P.
The amount of equity-based compensation allocable to the
Company’s businesses was $26 thousand for the year ended
December 31, 2005 and $52 thousand for the nine months
ended September 30, 2006. Such amount is immaterial to our
combined financial position, results of operations and cash
flows.
Relationship
with Evangeline
We sell natural gas to Evangeline, which, in turn, uses such
natural gas to satisfy its sales commitments to Entergy. Our
sales of natural gas to Evangeline totaled $331.5 million,
$241.4 million and $214.2 million for the years ended
December 31, 2005, 2004 and 2003, respectively, and
$233.0 million and $224.0 million for the nine months
ended September 30, 2006 and 2005 (unaudited), respectively.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Additionally, we have a service agreement with Evangeline
whereby we provide Evangeline with construction, operations,
maintenance and administrative support related to its pipeline
system. Evangeline paid us $0.4 million, $0.5 million
and $0.4 million for such services for the years ended
December 31, 2005, 2004 and 2003, respectively, and
$0.3 million and $0.3 million for the nine months
ended September 30, 2006 and 2005 (unaudited), respectively.
7.
Business
Segments
We classify our midstream energy operations in three reportable
business segments: NGL & Petrochemical Storage
Services, Natural Gas Pipelines & Services, and
Petrochemical Pipeline Services. We will report an additional
business segment, NGL Pipeline Services, in the future to
encompass our South Texas NGL pipeline business. Our business
segments are generally organized and managed according to the
type of services rendered (or technology employed) and products
produced
and/or sold.
We evaluate segment performance based on the non-GAAP financial
measure of gross operating margin. Gross operating margin
(either in total or by individual segment) 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 business segments. We believe that
investors benefit from having access to the same financial
measures that our management uses in evaluating segment results.
The GAAP measure most directly comparable to total segment gross
operating margin is operating income. Our non-GAAP financial
measure of total segment gross operating margin should not be
considered as an alternative to GAAP operating income.
We define total (or combined) segment gross operating margin as
operating income before: (i) depreciation, amortization and
accretion expense; (ii) gains and losses on the sale of
assets; and (iii) general and administrative expenses.
Gross operating margin is exclusive of other income and expense
transactions, provision for income taxes, minority interest,
extraordinary charges and the cumulative effect of changes in
accounting principles. Gross operating margin by segment is
calculated by subtracting segment operating costs and expenses
(net of the adjustments noted above) from segment revenues, with
both segment totals before the elimination of any intersegment
and intrasegment transactions. Our combined revenues reflect the
elimination of all material intercompany transactions.
We include equity earnings from Evangeline in our measurement of
segment gross operating margin and operating income. Our equity
investments in midstream energy operations such as those
conducted by Evangeline are a vital component of our long-term
business strategy and important to the operations of Acadian
Gas. This method of operation enables us to achieve favorable
economies of scale relative to our level of investment and also
lowers our exposure to business risks compared the profile we
would have on a stand-alone basis. Our equity investments are
within the same industry as our combined operations, thus we
believe treatment of earnings from our equity method investee as
a component of gross operating margin and operating income is
appropriate.
Our combined revenues were earned in the United States. Our
underground storage wells in Southeast Texas receive, store and
deliver NGLs and petrochemical products for refinery and other
customers along the upper Texas Gulf Coast. Our Acadian Gas
operations gather, transport, store and market natural gas to
customers primarily in Louisiana. Our petrochemical pipelines
provide propylene transportation services to shippers in
southeast Texas and southwestern Louisiana.
Combined property, plant and equipment and investments in and
advances to our unconsolidated affiliate are allocated to each
segment based on the primary operations of each asset or
investment. The principal reconciling item between combined
property, plant and equipment and the total value of segment
assets is
construction-in-progress.
Segment assets represent the net carrying value of assets that
contribute to the gross operating margin of a particular
segment. Since assets under construction generally do not
contribute to
Add: Equity in income of
unconsolidated affiliate(1)
624
280
331
231
131
Depreciation, amortization
and accretion in operating costs and expenses(2)
15,468
14,253
19,453
18,374
17,882
Loss (gain) on sale of
assets in operating costs and expenses(2)
(17
)
2
5
(7
)
Total segment gross operating
margin
$
58,198
$
49,611
$
64,142
$
81,985
$
76,473
(1)
These amounts are taken from our Statements of Combined
Operations and Comprehensive Income.
(2)
These non-cash expenses are taken from the operating activities
section of our Statements of Combined Cash Flows.
A reconciliation of total segment gross operating margin to
operating income and income before the cumulative effect of a
change in accounting principle follows:
Revenues from the purchase and resale of natural gas included in
Natural Gas Pipelines & Services segment, accounted for
90%, 87% and 85% of total combined revenues for the years ended
December 31, 2005, 2004 and 2003, respectively, and 89% and
90% for the nine months ended September 30, 2006 and 2005
(unaudited), respectively. The cost of natural gas sales
accounted for 92%, 91% and 90% of total combined operating costs
and expenses for the years ended December 31, 2005, 2004
and 2003, respectively, and 92% and 91% for the nine months
ended September 30, 2006 and 2005 (unaudited), respectively.
Revenues from Enterprise Products Partners accounted for 9%, 11%
and 11% of total combined revenues for the years ended
December 31, 2005, 2004 and 2003, respectively, and 12% and
10% for the nine months ended September 30, 2006 and 2005
(unaudited), respectively. Enterprise Products Partners
accounted for 100% of the revenues recorded by our Petrochemical
Pipeline Services segment. Storage revenues from Enterprise
Products Partners accounted for 33%, 34% and 35% of
NGL & Petrochemical Storage Services segment in 2005,
2004 and 2003, respectively, and 34% and 38% for the nine months
ended September 30, 2006 and 2005 (unaudited), respectively.
Revenues from Evangeline, our unconsolidated affiliate (see
Note 4), accounted for 35%, 32% and 32% of total combined
revenues for the years ended December 31, 2005, 2004 and
2003, respectively, and 31% and 34% for the nine months ended
September 30, 2006 and 2005 (unaudited), respectively. See
Note 6 for information regarding our related party
transactions.
We did not have any third party customers that exceeded 10% of
our combined revenues for 2005; however, ExxonMobil
Gas & Power Marketing Company (“EOM”)
accounted for 9.3% of Natural Gas Pipelines & Services
segment revenue and 9.1% of combined revenues. In 2004, CF
Industries, Inc. accounted for 12% of Natural Gas
Pipelines & Services segment revenue and 11% of
combined revenues. In 2003, EOM accounted for 13% of Natural Gas
Pipelines & Services segment revenue and 12% of
combined revenues.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
8.
Financial
Instruments
In addition to its natural gas transportation business, Acadian
Gas engages in the purchase and sale of natural gas to third
party customers in the Louisiana area. The price of natural gas
fluctuates in response to changes in supply, market uncertainty,
and a variety of additional factors that are beyond our control.
We may use commodity financial instruments such as futures,
swaps and forward contracts to mitigate such risks. In general,
the types of risks we attempt to hedge are those related to the
variability of future earnings and cash flows resulting from
changes in applicable commodity prices. The commodity financial
instruments we utilize may be settled in cash or with another
financial instrument. As a matter of policy, we do not use
financial instruments for speculative (or “trading”)
purposes.
Acadian Gas enters into a small number of cash flow hedges in
connection with its purchase of natural gas
held-for-sale.
In addition, Acadian Gas enters into a limited number of
offsetting financial instruments that effectively fix the price
of natural gas for certain of its customers. Historically, the
use of commodity financial instruments by Acadian Gas was
governed by policies established by the general partner of
Enterprise Products Partners. The objective of this policy was
to assist Acadian Gas in achieving its profitability goals while
maintaining a portfolio with an acceptable level of risk,
defined as remaining within the position limits established by
the general partner. In general, Acadian Gas may enter into risk
management transactions to manage price risk, basis risk,
physical risk or other risks related to its commodity positions
on both a short-term (less than 30 days) and long-term
basis, not to exceed 24 months.
The general partner of Enterprise Products Partners monitored
the hedging strategies associated with the physical and
financial risks of Acadian Gas (such as those mentioned
previously), approved specific activities subject to the policy
(including authorized products, instruments and markets) and
established specific guidelines and procedures for implementing
and ensuring compliance with the policy. DEP Holdings, our
general partner, will continue such policies in the future.
Due to the limited number and nature of the financial
instruments utilized by Acadian Gas, the effect on the portfolio
of a hypothetical 10% movement in the underlying quoted market
prices of natural gas is negligible December 31, 2005 and
2004. The fair value of our commodity financial instrument
portfolio was a liability of $0.1 million at
December 31, 2005, a liability of $0.3 million at
December 31, 2004, and a negligible amount at
September 30, 2006.
We recorded losses of $0.2 million and $0.8 million
related to our commodity financial instruments for the years
ended December 31, 2005 and 2003, respectively. For the
nine months ended September 30, 2005 (unaudited), we
recorded loss of $0.2 million. We recorded gains of
$0.2 million for the year ended December 31, 2004 and
$0.3 million for the nine months ended September 30,2006 from our commodity financial instruments.
9.
Commitments
and Contingencies
Litigation
On occasion, we are named as a defendant in litigation relating
to our normal business operations, including regulatory and
environmental matters. Although we insure against various
business risks to the extent we believe it is prudent, there is
no assurance that the nature and amount of such insurance will
be adequate, in every case, to indemnify us against liabilities
arising from future legal proceedings as a result of our
ordinary business activity.
In 1997, Acadian Gas, along with numerous other energy
companies, was named a defendant in actions brought by Jack
Grynberg on behalf of the U.S. Government under the False
Claims Act. Generally, these complaints allege an industry-wide
conspiracy to underreport the heating value, as well as the
volumes, of natural gas produced from federal and Native
American lands. The complaint alleges that the
U.S. Government
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
was deprived of royalties as a result of this conspiracy. The
plaintiff in this case seeks royalties that he contends the
U.S. government should have received had the heating value
and volume been differently measured, analyzed, calculated and
reported, together with interest, treble damages, civil
penalties, expenses and future injunctive relief to require the
defendants to adopt allegedly appropriate gas measurement
practices. These matters have been consolidated for pretrial
purposes (In re: Natural Gas Royalties Qui Tam
Litigation, U.S. District Court for the District of
Wyoming, filed June 1997). On October 20, 2006, the U.S.
District Court dismissed all of Grynberg’s claims with
prejudice.
We are not aware of any other significant litigation, pending or
threatened, that may have a significant adverse effect on our
financial position or results of operations.
Redelivery
Commitments
We transport and store natural gas and store NGL and
petrochemical products for third parties under various
contracts. Under the terms of these agreements, we are generally
required to redeliver volumes to the owner on demand. We are
insured for any physical loss of such volumes resulting from
catastrophic events. At December 31, 2005 and 2004, NGL and
petrochemical products aggregating 15.2 million barrels and
13.5 million barrels, respectively, were due to be
redelivered to their owners along with 730 billion BBtus
and 728 BBtus, respectively, of natural gas.
Contractual
Obligations
The following table summarizes our significant contractual
obligations at December 31, 2005. There have been no
material changes in the nature or amounts of such obligations
subsequent to December 31, 2005 other than the capital
expenditures related to South Texas NGL — see
Note 1.
Payment or Settlement Due by Period
Less Than
1-3
3-5
More Than
Contractual Obligations
Total
1 Year
Years
Years
5 Years
(2006)
(2007-2008)
(2009-2010)
Beyond 2010
Operating leases:
Underground natural gas storage
cavern
$
3,276
$
468
$
936
$
936
$
936
Right-of-way
agreements
$
533
$
79
$
159
$
26
$
269
Purchase obligations:
Product purchase commitments:
Estimated payment obligations:
Natural gas
$
1,518,016
$
216,690
$
433,973
$
433,380
$
433,973
Other
$
7,480
$
2,138
$
4,282
$
1,060
Underlying major volume
commitments:
Natural gas (in BBtus)
127,850
18,250
36,550
36,500
36,550
Capital expenditure commitments
$
616
$
616
Other long-term liabilities
$
608
$
608
Total
$
1,530,529
$
219,991
$
439,350
$
435,402
$
435,786
Operating leases. We lease certain property,
plant and equipment under non-cancelable and cancelable
operating leases. Amounts shown in the preceding table represent
our minimum cash lease payment obligations under operating
leases with terms in excess of one year for the periods
indicated.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
Acadian Gas leases an underground natural gas storage cavern
that is integral to its operations. The primary use of this
cavern is to store natural gas
held-for-sale
on a demand basis by Acadian Gas. The current term of the cavern
lease expires in December 2012. The term of this contract does
not provide for an additional renewal period, but it requires
the lessor to enter into negotiations with us under similar
terms and conditions if we wish to extend the lease agreement
beyond December 2012.
In addition, our pipeline operations have entered into leases
for land held pursuant to
right-of-way
agreements. Our significant
right-of-way
agreements have original terms that range from five to
50 years and include renewal options that could extend the
agreements for up to an additional 25 years. Our rental
payments are generally at fixed rates, as specified in the
individual contracts, and may be subject to escalation
provisions for inflation and other market-determined factors.
Lease expense is charged to operating costs and expenses on a
straight line basis over the period of expected economic
benefit. Contingent rental payments, if any, are expensed as
incurred. In general, we are required to perform routine
maintenance on the underlying leased assets. In addition,
certain leases give us the option to make leasehold
improvements. Maintenance and repairs of leased assets
attributable to our operations are charged to expense as
incurred. We have not made any significant leasehold
improvements during the periods presented. Lease expense
included in operating income was $1.2 million for each of
the years ended December 31, 2005, 2004 and 2003, and
$0.9 million and $1.0 million for the nine months
ended September 30, 2006 and 2005 (unaudited), respectively.
Purchase Obligations. We define purchase
obligations as agreements to purchase goods or services that are
enforceable and legally binding (unconditional) on us that
specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable price
provisions; and the approximate timing of the transactions.
Acadian Gas has a product purchase commitment for the purchase
of natural gas in Louisiana from the co-venture party in
Evangeline (see Note 4). This purchase agreement expires in
January 2013. Our purchase price under this contract
approximates the market price of natural gas at the time we take
delivery of the volumes. The preceding table shows the volume we
are committed to purchase and an estimate of our future payment
obligations for the periods indicated. Our estimated future
payment obligations are based on the contractual price at
December 31, 2005 applied to all future volume commitments.
Actual future payment obligations may vary depending on market
prices at the time of delivery.
At December 31, 2005, we do not have any product purchase
commitments with fixed or minimum pricing provisions having
remaining terms in excess of one year.
We also have short-term payment obligations relating to capital
projects we have initiated. These commitments represent
unconditional payment obligations that we have agreed to pay
vendors for services to be rendered or products to be delivered
in connection with our capital spending programs. The preceding
table shows these capital project commitments for the periods
indicated.
Other Long-Term Liabilities. We have recorded
long-term liabilities on our combined balance sheet reflecting
amounts we expect to pay in future periods beyond one year.
These liabilities primarily represent the present value of our
asset retirement obligations. Amounts shown in the preceding
table represent our best estimate as to the timing of
settlements based on information currently available.
NOTES TO
COMBINED FINANCIAL
STATEMENTS — (Continued)
10.
Significant
Risks and Uncertainties
Nature
of Operations
Our combined results of operations, cash flows and financial
position may be adversely affected by a variety of factors
affecting our industry and specific businesses, including:
•
a reduction in demand for NGL and petrochemical storage services
provided by Mont Belvieu Caverns caused by fluctuations in NGL
and petrochemical prices and production due to weather and other
natural and economic forces;
•
a reduction in demand for natural gas transportation services
and natural gas consumption in the areas served by Acadian
Gas; or
•
a reduction in propylene transportation volumes by shippers on
the petrochemical pipelines owned by Lou-Tex Propylene and
Sabine Propylene.
In general, a reduction in demand for NGL and petrochemical
products and natural gas by the petrochemical, refining or
heating industries could result from (i) a general downturn
in economic conditions, (ii) reduced demand by consumers
for the end products made with products we handle,
(iii) increased governmental regulations or (iv) other
reasons.
Credit
Risk Due to Industry Concentration
A substantial portion of our revenues are derived from companies
in the domestic natural gas, NGL and petrochemical industries.
This concentration could affect our overall exposure to credit
risk since these customers may be affected by similar economic
or other conditions. We generally do not require collateral for
our accounts receivable; however, we do attempt to negotiate
offset, prepayment, or automatic debit agreements with customers
that are deemed to be credit risks in order to minimize our
potential exposure to any defaults.
Counterparty
Risk with Respect to Financial Instruments
In those situations where we are exposed to credit risk in our
financial instrument transactions, we analyze the
counterparty’s financial condition prior to entering into
an agreement, establish credit
and/or
margin limits and monitor the appropriateness of these limits on
an ongoing basis. Generally, we do not require collateral nor do
we anticipate nonperformance by our counterparties.
Weather-Related
Risks
Our assets are located along the U.S. Gulf Coast in Texas
and Louisiana, which are areas prone to suffer tropical weather
events such as hurricanes. If we were to experience a
significant weather-related loss for which we were not fully
insured, it could have a material impact on our combined
financial position, results of operations and cash flows.
Likewise, if any of our significant customer or supplier groups
experience losses related to storm events, it could have a
material impact on our combined financial position, results of
operations and cash flows.
We have audited the accompanying balance sheet of Duncan Energy
Partners L.P. (the “Partnership”) as of
September 30, 2006. This financial statement is the
responsibility of the Partnership’s management. Our
responsibility is to express an opinion on this financial
statement based on our audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. The Partnership is not required
to have, nor were we engaged to perform, an audit of its
internal control over financial reporting. Our audit included
consideration of internal control over financial reporting as a
basis for designing audit procedures that are appropriate in the
circumstances, but not for the purpose of expressing an opinion
on the effectiveness of the Partnership’s internal control
over financial reporting. Accordingly, we express no such
opinion. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statement, assessing the accounting principles used and
significant estimates made by management, as well as evaluating
the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, such balance sheet presents fairly, in all
material respects, the financial position of the Partnership at
September 30, 2006, in conformity with accounting
principles generally accepted in the United States of America.
Duncan Energy Partners L.P. (the
“Partnership”) was formed on September 29, 2006
as a Delaware limited partnership to acquire ownership interests
in midstream energy businesses from subsidiaries of Enterprise
Products Partners L.P. These ownership interests will be
acquired by the Partnership in connection with its anticipated
initial public offering to be completed in the first quarter of
2007.
The business of the Partnership will initially consist of
(i) receiving, storing and delivering natural gas liquids
(“NGLs) and petrochemical products, (ii) gathering,
transporting, storing and marketing natural gas and
(iii) transporting NGLs and propylene. The Partnership will
acquire a 66% interest in the following companies, all of which
are wholly-owned subsidiaries of Enterprise Products Partners
L.P. at September 30, 2006:
•
Mont Belvieu Caverns, L.P. (“Mont Belvieu
Caverns”), which receives, stores and delivers NGLs and
petrochemical products for industrial customers located along
the upper Texas Gulf Coast;
•
Acadian Gas, LLC (“Acadian Gas”),
which gathers, transports, stores and markets natural gas in
Louisiana utilizing over 1,000 miles of natural gas
transmission and gathering pipelines and a leased storage cavern;
•
Enterprise Lou-Tex Propylene Pipeline
L.P. (“Lou-Tex Propylene”), which
transports chemical-grade propylene between Sorrento, Louisiana
and Mont Belvieu, Texas;
•
Sabine Propylene Pipeline L.P. (“Sabine
Propylene”), which transports polymer-grade propylene
between Port Arthur, Texas and a pipeline interconnect located
in Cameron Parish, Louisiana; and
•
South Texas NGL Pipelines, LLC (“South
Texas NGL”), which will transport NGLs from Corpus Christi,
Texas to Mont Belvieu, Texas. A
223-mile
pipeline that will form the largest part of a pipeline system
was purchased by Enterprise Products Partners in August 2006,
and the Partnership is constructing and acquiring additional
pipeline assets to enable it to transport NGL products beginning
in January 2007. Additional expansions to this system are
scheduled to be completed during 2007.
Enterprise Products Partners L.P. will control of the
Partnership’s 2% general partner, DEP Holdings, LLC (the
“General Partner”), which will direct the operations
of the Partnership. Enterprise Products Operating L.P. (a wholly
owned subsidiary of Enterprise Products Partners L.P.) is the
organizational limited partner of the Partnership. The
Partnership, the General Partner, Enterprise Products Operating
L.P. and Enterprise Products Partners L.P. are affiliates and
under common control of Dan L. Duncan, the Chairman and
controlling shareholder of EPCO, Inc.
Deferred
offering costs
Direct offering costs representing specific legal, accounting,
and other third party services incurred to date in connection
with the anticipated initial public offering of the Partnership
will be deferred and charged against the gross proceeds of the
offering. Offering costs paid by related parties prior to the
offering will be reimbursed from the proceeds of the offering.
At this time there are no other obligations for organizational
costs intended to be reimbursed to related parties.
Receivable
from partners
The General Partner and Enterprise Products Operating L.P. made
their initial cash capital contributions of $60 and $2,940,
respectively, subsequent to September 30, 2006.
We have audited the accompanying balance sheet of DEP Holdings,
LLC (the “General Partner”) as of October 31,2006. This financial statement is the responsibility of the
General Partner’s management. Our responsibility is to
express an opinion on this financial statement based on our
audit.
We conducted our audit in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statement is
free of material misstatement. The General Partner is not
required to have, nor were we engaged to perform, an audit of
its internal control over financial reporting. Our audit
included consideration of internal control over financial
reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the General
Partner’s internal control over financial reporting.
Accordingly, we express no such opinion. An audit also includes
examining, on a test basis, evidence supporting the amounts and
disclosures in the financial statement, assessing the accounting
principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, such balance sheet presents fairly, in all
material respects, the financial position of the General Partner
at October 31, 2006, in conformity with accounting
principles generally accepted in the United States of America.
DEP Holdings, LLC ( the “General
Partner”) is a Delaware limited liability company that was
formed on September 29, 2006, to own a 2% general partner
interest in Duncan Energy Partners L.P. (the
“Partnership”), a Delaware limited partnership.
The General Partner is wholly owned by Enterprise Products
Operating L.P., a wholly owned subsidiary of Enterprise Products
Partners L.P.
On October 20, 2006, Enterprise Products Operating L.P.
contributed $1,000 to the General Partner, which used $60 of
such funds to acquire a general partner interest in the
Partnership. The Partnership was formed on September 29,2006 and its initial purpose is to acquire ownership interests
in midstream energy businesses of Enterprise Products Partners
L.P. Such ownership interests will be acquired by the
Partnership in connection with an anticipated initial public
offering by the Partnership. The Partnership, the General
Partner, Enterprise Products Operating L.P. and Enterprise
Products Partners L.P. are affiliates and under common control
of Dan L. Duncan, the Chairman and controlling shareholder of
EPCO, Inc.
AMENDED
AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF DUNCAN ENERGY PARTNERS L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP OF
DUNCAN ENERGY PARTNERS L.P. dated effective as
of ,
2007, is entered into by and among DEP Holdings, LLC, a Delaware
limited liability company, as the General Partner, together with
any other Persons who become Partners in the Partnership or
parties hereto as provided herein. In consideration of the
covenants, conditions and agreements contained herein, the
parties hereto hereby agree as follows:
ARTICLE I
Definitions
1.1 Definitions. The definitions
listed on Attachment I shall be for all purposes, unless
otherwise clearly indicated to the contrary, applied to the
terms used in this Agreement.
1.2 Construction. Unless the
context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or
neuter forms, and the singular form of nouns, pronouns and verbs
shall include the plural and vice versa; (b) references to
Articles and Sections refer to Articles and Sections of this
Agreement; (c) the terms “include”,
“includes”, “including” or words of like
import shall be deemed to be followed by the words “without
limitation”; and (d) the terms “hereof”,
“herein” or “hereunder” refer to this
Agreement as a whole and not to any particular provision of this
Agreement. The table of contents and headings contained in this
Agreement are for reference purposes only, and shall not affect
in any way the meaning or interpretation of this Agreement.
ARTICLE II
Organization
2.1 Formation. The Partnership has
been previously formed as a limited partnership pursuant to the
provisions of the Delaware Act. The General Partner and the
Limited Partners hereby amend and restate in its entirety the
Agreement of Limited Partnership of Duncan Energy Partners L.P.,
dated as of September 29, 2006. Subject to the provisions
of this Agreement, the General Partner and the Limited Partners
hereby continue the Partnership as a limited partnership
pursuant to the provisions of the Delaware Act. This amendment
and restatement shall become effective on the date of this
Agreement. Except as expressly provided to the contrary in this
Agreement, the rights, duties (including fiduciary duties),
liabilities and obligations of the Partners and the
administration, dissolution and termination of the Partnership
shall be governed by the Delaware Act. All
Partnership Interests shall constitute personal property of
the owner thereof for all purposes.
2.2 Name. The name of the
Partnership shall be “Duncan Energy Partners L.P.” The
Partnership’s business may be conducted under any other
name or names as determined by the General Partner, including
the name of the General Partner. The words “Limited
Partnership,”“L.P.,”“Ltd.” or similar
words or letters shall be included in the Partnership’s
name where necessary for the purpose of complying with the laws
of any jurisdiction that so requires. The General Partner may
change the name of the Partnership at any time and from time to
time and shall notify the Limited Partners of such change in the
next regular communication to the Limited Partners.
2.3 Registered Office; Registered Agent; Principal
Office; Other Offices. Unless and until changed
by the General Partner, the registered office of the Partnership
in the State of Delaware shall be located at 1209 Orange Street,
New Castle County, Wilmington, Delaware19801, and the
registered agent for service of process on the Partnership in
the State of Delaware at such registered office shall be The
Corporation Trust Company. The principal office of the
Partnership shall be located at 1100 Louisiana Street,
10th Floor,
Houston, Texas77002 or such other place as the General Partner
may from time to time designate by notice to the Limited
Partners. The Partnership may maintain offices at such other
place or places within or outside the State of Delaware as the
General Partner deems necessary or appropriate. The address of
the General Partner
shall be 1100 Louisiana Street,
10th Floor,
Houston, Texas77002 or such other place as the General Partner
may from time to time designate by notice to the Limited
Partners.
2.4 Purpose and Business. The
purpose and nature of the business to be conducted by the
Partnership shall be (a) to engage directly in, or form,
hold and dispose of any corporation, partnership, joint venture,
limited liability company or other arrangement to engage
indirectly in, any business activity that is approved by the
General Partner and that lawfully may be conducted by a limited
partnership organized pursuant to the Delaware Act and, in
connection therewith, to exercise all of the rights and powers
conferred upon the Partnership pursuant to the agreements
relating to such business activity, and (b) to do anything
necessary or appropriate to the foregoing, including the making
of capital contributions or loans to any Group Member;
provided, however, that the General Partner shall not
cause the Partnership to engage, directly or indirectly in any
business activity that the General Partner determines would
cause the Partnership or the Operating Partnership to be treated
as an association taxable as a corporation or otherwise taxable
as an entity for federal income tax purposes. To the fullest
extent permitted by law, the General Partner shall have no duty
or obligation to propose or approve, and may decline to propose
or approve, the conduct by the Partnership of any business free
of any fiduciary duty or obligation whatsoever to the
Partnership or any Limited Partner and, in declining to so
propose or approve, shall not be required to act in good faith
or pursuant to any other standard imposed by this Agreement, any
other agreement contemplated hereby (including the
Administrative Services Agreement) or under the Delaware Act or
any other law, rule or regulation or at equity.
2.5 Powers. The Partnership shall
be empowered to do any and all acts and things necessary,
appropriate, proper, advisable, incidental to or convenient for
the furtherance and accomplishment of the purposes and business
described in Section 2.4 and for the protection and
benefit of the Partnership.
(a) Each Limited Partner hereby constitutes and appoints
the General Partner and, if a Liquidator (other than the General
Partner) shall have been selected pursuant to
Section 12.3, the Liquidator, severally (and any
successor to either thereof by merger, transfer, assignment,
election or otherwise) and each of their authorized officers and
attorneys-in-fact,
as the case may be, with full power of substitution, as his true
and lawful agent and
attorney-in-fact,
with full power and authority in his name, place and stead, to:
(i) execute, swear to, acknowledge, deliver, file and
record in the appropriate public offices (A) all
certificates, documents and other instruments (including this
Agreement and the Certificate of Limited Partnership and all
amendments or restatements hereof or thereof) that the General
Partner or the Liquidator determines to be necessary or
appropriate to form, qualify or continue the existence or
qualification of the Partnership as a limited partnership (or a
partnership in which the limited partners have limited
liability) in the State of Delaware and in all other
jurisdictions in which the Partnership may conduct business or
own property; (B) all certificates, documents and other
instruments that the General Partner or the Liquidator
determines to be necessary or appropriate to reflect, in
accordance with its terms, any amendment, change, modification
or restatement of this Agreement; (C) all certificates,
documents and other instruments (including conveyances and a
certificate of cancellation) that the General Partner or the
Liquidator determines to be necessary or appropriate to reflect
the dissolution and liquidation of the Partnership pursuant to
the terms of this Agreement; (D) all certificates,
documents and other instruments relating to the admission,
withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X,
XI or XII; (E) all certificates, documents
and other instruments relating to the determination of the
rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to
Section 5.6; and (F) all certificates,
documents and other instruments (including agreements and a
certificate of merger) relating to a merger, consolidation or
conversion of the Partnership pursuant to
Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and
record all ballots, consents, approvals, waivers, certificates,
documents and other instruments that the General Partner or the
Liquidator determines to be necessary or appropriate to
(A) make, evidence, give, confirm or ratify any vote,
consent, approval, agreement or other action that is made or
given by the Partners hereunder or is consistent with the terms
of this Agreement or (B) effectuate the terms or intent of
this Agreement; provided, that when required by
Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners
or of the Limited Partners of any class or series required to
take any action, the General Partner and the Liquidator may
exercise the power of attorney made in this
Section 2.6(a)(ii) only after the necessary vote,
consent or approval of the Limited Partners or of the Limited
Partners of such class or series, as applicable.
Nothing contained in this Section 2.6(a) shall be
construed as authorizing the General Partner to amend this
Agreement except in accordance with Article XIII or
as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to
be irrevocable and a power coupled with an interest, and it
shall survive and, to the maximum extent permitted by law, not
be affected by the subsequent death, incompetency, disability,
incapacity, dissolution, bankruptcy or termination of any
Limited Partner and the transfer of all or any portion of such
Limited Partner’s Partnership Interest and shall
extend to such Limited Partner’s heirs, successors, assigns
and personal representatives. Each such Limited Partner hereby
agrees to be bound by any representation made by the General
Partner or the Liquidator acting in good faith pursuant to such
power of attorney; and each such Limited Partner, to the maximum
extent permitted by law, hereby waives any and all defenses that
may be available to contest, negate or disaffirm the action of
the General Partner or the Liquidator taken in good faith under
such power of attorney. Each Limited Partner shall execute and
deliver to the General Partner or the Liquidator, within
15 days after receipt of the request therefor, such further
designation, powers of attorney and other instruments as the
General Partner or the Liquidator may request in order to
effectuate this Agreement and the purposes of the Partnership.
2.7 Term. The term of the
Partnership commenced upon the filing of the Certificate of
Limited Partnership in accordance with the Delaware Act and
shall continue in existence until the dissolution of the
Partnership in accordance with the provisions of
Article XII. The existence of the Partnership as a
separate legal entity shall continue until the cancellation of
the Certificate of Limited Partnership as provided in the
Delaware Act.
2.8 Title to Partnership
Assets. Title to Partnership assets, whether
real, personal or mixed and whether tangible or intangible,
shall be deemed to be owned by the Partnership as an entity, and
no Partner, individually or collectively, shall have any
ownership interest in such Partnership assets or any portion
thereof. Title to any or all of the Partnership assets may be
held in the name of the Partnership, the General Partner or one
or more third party nominees, as the General Partner may
determine. The General Partner hereby declares and warrants that
any Partnership assets for which record title is held in the
name of the General Partner or one or more third party nominees
shall be held by the General Partner or such third party nominee
for the use and benefit of the Partnership in accordance with
the provisions of this Agreement; provided, however, that
the General Partner shall use reasonable efforts to cause record
title to such assets (other than those assets in respect of
which the General Partner determines that the expense and
difficulty of conveyancing makes transfer of record title to the
Partnership impracticable) to be vested in the Partnership as
soon as reasonably practicable; provided, further, that,
prior to the withdrawal or removal of the General Partner or as
soon thereafter as practicable, the General Partner shall use
reasonable efforts to effect the transfer to the Partnership of
record title to all Partnership assets held by the General
Partner, and, prior to any such transfer, will provide for the
use of such assets in a manner satisfactory to the General
Partner. All Partnership assets shall be recorded as the
property of the Partnership in its books and records,
irrespective of the name in which record title to such
Partnership assets is held.
2.9 Certain Undertakings Relating to the
Separateness of the Partnership.
(a) Separateness Generally. The
Partnership shall conduct its business and operations separate
and apart from those of any other Person, other than the General
Partner and the Partnership Group, in accordance with this
Section 2.9.
(b) Separate Records. The
Partnership shall (i) maintain its books and records and
its accounts separate from those of any other Person, other than
the General Partner and the Partnership Group,
(ii) maintain its financial records, which will be used by
it in its ordinary course of business, showing its assets and
liabilities separate and apart from those of any other Person,
other than the General Partner and the Partnership’s
consolidated Subsidiaries, (iii) not have its assets
and/or
liabilities included in a consolidated financial statement of
any Affiliate of the General Partner unless the General Partner
shall cause appropriate notation to be made on such
Affiliate’s consolidated financial statements to indicate
the separateness of the Partnership and the General Partner and
their assets and liabilities from such Affiliate and the assets
and liabilities of such Affiliate, and to indicate that the
assets and liabilities of the Partnership and the General
Partner are not available to satisfy the debts and other
obligations of such Affiliate, and (iv) file its own tax
returns separate from those of any other Person, except to the
extent that the Partnership is treated as a “disregarded
entity” for tax purposes or is not otherwise required to
file tax returns under applicable law or is required under
applicable law to file a tax return which is consolidated with
another Person.
(c) Separate Assets. The
Partnership shall not commingle or pool its funds or other
assets with those of any other Person, except its consolidated
Subsidiaries and the General Partner, and shall maintain its
assets in a manner that is not costly or difficult to segregate,
ascertain or otherwise identify as separate from those of any
other Person.
(d) Separate Name. The
Partnership shall (i) conduct its business in its own name
or in the names of one or more of its Subsidiaries or the
General Partner, (ii) use separate stationery, invoices,
and checks, (iii) correct any known misunderstanding
regarding its separate identity, and (iv) generally hold
itself out as an entity separate from any other Person, other
than the General Partner and the Partnership’s Subsidiaries.
(e) Separate Credit. The
Partnership (i) shall pay its obligations and liabilities
from its own funds (whether on hand or borrowed),
(ii) shall maintain adequate capital in light of its
business operations, (iii) shall not pledge its assets for
the benefit of any other Person or guarantee or become obligated
for the debts of any other Person, except its Subsidiaries,
(iv) shall not hold out its credit as being available to
satisfy the obligations or liabilities of any other Person,
except its Subsidiaries, (v) shall not acquire obligations
or debt securities (other than those assumed and paid off on the
Closing Date pursuant to the Contribution Agreement) of EPCO or
its Affiliates (other than the members of the Partnership Group)
including the MLP, the MLP General Partner or their subsidiaries
or TEPPCO, the TEPPCO General Partner or their subsidiaries,
(vi) shall not make loans, advances or capital
contributions to any Person, except its Subsidiaries, and
(vii) shall use its commercially reasonable efforts to
cause the operative documents under which the Partnership or any
of its Subsidiaries borrows money, is an issuer of debt
securities, or guarantees any such borrowing or issuance, to
contain provisions to the effect that (A) the lenders or
purchasers of debt securities, respectively, acknowledge that
they have advanced funds or purchased debt securities,
respectively, in reliance upon the separateness of the
Partnership and the General Partner from each other and from any
other Person, including any Affiliate of the General Partner and
(B) the Partnership and the General Partner have assets and
liabilities that are separate from those of other Persons,
including any Affiliate of the General Partner; provided,
that, the Partnership may engage in any transaction
described in clauses (v) or (vi) of this
Section 2.9(e) if prior Special Approval has been
obtained for such transaction and either (y) the Audit and
Conflicts Committee has determined (by Special Approval) that
the borrower or recipient of the credit support is not then
insolvent and will not be rendered insolvent as a result of such
transaction or (z) in the case of transactions described in
clause (v), such transaction is completed through a
public auction or a National Securities Exchange.
(f) Separate Formalities. The
Partnership shall (i) observe all partnership formalities
and other formalities required by its organizational documents,
the laws of the jurisdiction of its formation, or other laws,
rules, regulations and orders of governmental authorities
exercising jurisdiction over it, (ii) engage in
transactions with EPCO and its Affiliates (other than the
General Partner or the members of the Partnership Group) or the
MLP, the MLP General Partner or their subsidiaries or TEPPCO,
the TEPPCO General Partner or their subsidiaries in conformity
with the requirements of Section 7.9, and
(iii) subject
to the terms of the Administrative Services Agreement, promptly
pay, from its own funds, and on a current basis, a fair and
reasonable share of general and administrative expenses, capital
expenditures, and costs for shared services performed by EPCO or
Affiliates of EPCO (other than the General Partner or the
members of the Partnership Group). Each material contract
between the Partnership, the General Partner or a member of the
Partnership Group, on the one hand, and EPCO or Affiliates of
EPCO (other than the General Partner or the members of the
Partnership Group), on the other hand, shall be in writing.
(g) No Effect. Failure by the
General Partner or the Partnership to comply with any of the
obligations set forth above shall not affect the status of the
Partnership as a separate legal entity, with its separate assets
and separate liabilities. The General Partner and the
Partnership may be consolidated for financial reporting purposes
with Enterprise Products Partners L.P. and its subsidiaries;
provided, however, that such consolidation shall not affect the
status of the Partnership as a separate legal entity with its
separate assets and separate liabilities.
ARTICLE III
Rights
of Limited Partners
3.1 Limitation of Liability. The
Limited Partners shall have no liability under this Agreement
except as expressly provided in this Agreement or the Delaware
Act.
3.2 Management of Business. No
Limited Partner, in its capacity as such, shall participate in
the operation, management or control (within the meaning of the
Delaware Act) of the Partnership’s business, transact any
business in the Partnership’s name or have the power to
sign documents for or otherwise bind the Partnership. Any action
taken by any Affiliate of the General Partner or any officer,
director, employee, member, manager, general partner, agent or
trustee of the General Partner or any of its Affiliates, or any
officer, director, employee, member, manager, general partner,
agent or trustee of a Group Member, in its capacity as such,
shall not be deemed to be participation in the control of the
business of the Partnership by a limited partner of the
Partnership (within the meaning of
Section 17-303(a)
of the Delaware Act) and shall not affect, impair or eliminate
the limitations on the liability of the Limited Partners under
this Agreement.
3.3 Outside Activities of the Limited
Partners. Subject to the provisions of
Section 7.5 and the Administrative Services
Agreement, which shall continue to be applicable to the Persons
referred to therein, regardless of whether such Persons shall
also be Limited Partners, any Limited Partner shall be entitled
to and may have business interests and engage in business
activities in addition to those relating to the Partnership,
including business interests and activities in direct
competition with the Partnership Group. Neither the Partnership
nor any of the other Partners shall have any rights by virtue of
this Agreement in any business ventures of any Limited Partner.
3.4 Rights of Limited Partners.
(a) In addition to other rights provided by this Agreement
or by applicable law, and except as limited by
Section 3.4(b), each Limited Partner shall have the
right, for a purpose reasonably related to such Limited
Partner’s interest as a Limited Partner in the Partnership,
upon reasonable written demand stating the purpose of such
demand and at such Limited Partner’s own expense:
(i) to obtain true and full information regarding the
status of the business and financial condition of the
Partnership;
(ii) promptly after its becoming available, to obtain a
copy of the Partnership’s federal, state and local income
tax returns for each year;
(iii) to obtain a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to obtain a copy of this Agreement and the Certificate
of Limited Partnership and all amendments thereto, together with
a copy of the executed copies of all powers of attorney pursuant
to which this Agreement, the Certificate of Limited Partnership
and all amendments thereto have been executed;
(v) to obtain true and full information regarding the
amount of cash and a description and statement of the Net Agreed
Value of any other Capital Contribution by each Partner and that
each Partner has agreed to contribute in the future, and the
date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs
of the Partnership as is just and reasonable.
(b) Notwithstanding any other provision of this Agreement,
the General Partner may keep confidential from the Limited
Partners, for such period of time as the General Partner deems
reasonable, (i) any information that the General Partner
reasonably believes to be in the nature of trade secrets or
(ii) other information the disclosure of which the General
Partner in good faith believes (A) is not in the best
interests of the Partnership Group, (B) could damage the
business of the Partnership Group or (C) that any Group
Member is required by law or by agreement with any third party
to keep confidential (other than agreements with Affiliates of
the Partnership the primary purpose of which is to circumvent
the obligations set forth in this Section 3.4).
ARTICLE IV
Certificates;
Record Holders; Transfer of Partnership Interests;
Redemption
of Partnership Interests
4.1 Certificates. Upon the
Partnership’s issuance of Common Units to any Person, the
Partnership shall issue, upon the request of such Person, one or
more Certificates in the name of such Person evidencing the
number of such Common Units being so issued. In addition,
(a) upon the General Partner’s request, the
Partnership shall issue to it one or more Certificates in the
name of the General Partner evidencing its interests in the
Partnership and (b) upon the request of any Person owning
any Partnership Securities, the Partnership shall issue to such
Person one or more Certificates evidencing such Partnership
Securities. Certificates shall be executed on behalf of the
Partnership by the Chairman of the Board, President or any
Executive Vice President or Vice President and the Secretary or
any Assistant Secretary of the General Partner. No Unit
Certificate shall be valid for any purpose until it has been
countersigned by the Transfer Agent; provided, however,
that if the General Partner elects to issue Units in global
form, the Unit Certificates shall be valid upon receipt of a
certificate from the Transfer Agent certifying that the Units
have been duly registered in accordance with the directions of
the Partnership.
4.2 Mutilated, Destroyed, Lost or Stolen
Certificates.
(a) If any mutilated Certificate is surrendered to the
Transfer Agent, the appropriate officers of the General Partner
on behalf of the Partnership shall execute, and the Transfer
Agent shall countersign and deliver in exchange therefor, a new
Certificate evidencing the same number and type of Partnership
Securities as the Certificate so surrendered.
(b) The appropriate officers of the General Partner on
behalf of the Partnership shall execute and deliver, and the
Transfer Agent shall countersign a new Certificate in place of
any Certificate previously issued if the Record Holder of the
Certificate:
(i) makes proof by affidavit, in form and substance
satisfactory to the General Partner, that a previously issued
Certificate has been lost, destroyed or stolen;
(ii) requests the issuance of a new Certificate before the
General Partner has notice that the Certificate has been
acquired by a purchaser for value in good faith and without
notice of an adverse claim;
(iii) if requested by the General Partner, delivers to the
General Partner a bond, in form and substance satisfactory to
the General Partner, with surety or sureties and with fixed or
open penalty as the General Partner may direct to indemnify the
Partnership, the Partners, the General Partner and
the Transfer Agent against any claim that may be made on account
of the alleged loss, destruction or theft of the
Certificate; and
(iv) satisfies any other reasonable requirements imposed by
the General Partner.
If a Limited Partner fails to notify the General Partner within
a reasonable period of time after he has notice of the loss,
destruction or theft of a Certificate, and a transfer of the
Limited Partner Interests represented by the Certificate is
registered before the Partnership, the General Partner or the
Transfer Agent receives such notification, the Limited Partner
shall be precluded from making any claim against the
Partnership, the General Partner or the Transfer Agent for such
transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate
under this Section 4.2, the General Partner may
require the payment of a sum sufficient to cover any tax or
other governmental charge that may be imposed in relation
thereto and any other expenses (including the fees and expenses
of the Transfer Agent) reasonably connected therewith.
4.3 Record Holders. The Partnership
shall be entitled to recognize the Record Holder as the Partner
with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to
or interest in such Partnership Interest on the part of any
other Person, regardless of whether the Partnership shall have
actual or other notice thereof, except as otherwise provided by
law or any applicable rule, regulation, guideline or requirement
of any National Securities Exchange on which such
Partnership Interests are listed or admitted for trading.
Without limiting the foregoing, when a Person (such as a broker,
dealer, bank, trust company or clearing corporation or an agent
of any of the foregoing) is acting as nominee, agent or in some
other representative capacity for another Person in acquiring
and/or
holding Partnership Interests, as between the Partnership
on the one hand, and such other Persons on the other, such
representative Person shall be the Record Holder of such
Partnership Interest.
4.4 Transfer Generally.
(a) The term “transfer,” when used in this
Agreement with respect to a Partnership Interest, shall be
deemed to refer to a transaction (i) by which the General
Partner assigns its General Partner Interest to another Person
and includes a sale, assignment, gift, pledge, encumbrance,
hypothecation, mortgage, exchange or any other disposition by
law or otherwise or (ii) by which the holder of a Limited
Partner Interest assigns such Limited Partner Interest to
another Person who is or becomes a Limited Partner, and includes
a sale, assignment, gift, exchange or any other disposition by
law or otherwise, including any transfer upon foreclosure of any
pledge, encumbrance, hypothecation or mortgage.
(b) No Partnership Interest shall be transferred, in
whole or in part, except in accordance with the terms and
conditions set forth in this Article IV. Any
transfer or purported transfer of a Partnership Interest
not made in accordance with this Article IV shall be
null and void.
(c) Nothing contained in this Agreement shall be construed
to prevent a disposition by any stockholder, member, partner or
other owner of the General Partner of any or all of the issued
and outstanding equity interests of the General Partner.
4.5 Registration and Transfer of Limited Partner
Interests.
(a) The General Partner shall keep or cause to be kept on
behalf of the Partnership a register in which, subject to such
reasonable regulations as it may prescribe and subject to the
provisions of Section 4.5(b), the Partnership will
provide for the registration and transfer of Limited Partner
Interests. The Transfer Agent is hereby appointed registrar and
transfer agent for the purpose of registering Common Units and
transfers of such Common Units as herein provided. The
Partnership shall not recognize transfers of Certificates
evidencing Limited Partner Interests unless such transfers are
effected in the manner described in this
Section 4.5. Upon surrender of a Certificate for
registration of transfer of any Limited Partner Interests
evidenced by a Certificate, and subject to the provisions of
Section 4.5(b), the appropriate officers of the
General Partner on behalf of the Partnership shall execute and
deliver, and in the case of Common Units, the Transfer Agent
shall countersign and deliver, in the name of the holder or the
designated transferee or transferees, as required pursuant to
the holder’s instructions, one or more
new Certificates evidencing the same aggregate number and type
of Limited Partner Interests as was evidenced by the Certificate
so surrendered.
(b) Except as otherwise provided in
Section 4.9, the General Partner shall not recognize
any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for
registration of transfer. No charge shall be imposed by the
General Partner for such transfer; provided, that as a
condition to the issuance of any new Certificate under this
Section 4.5, the General Partner may require the
payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
(c) Subject to (i) the foregoing provisions of this
Section 4.5, (ii) Section 4.3,
(iii) Section 4.7,
(iv) Section 4.8, (v) with respect to any
series of Limited Partner Interests, the provisions of any
statement of designations or amendment to this Agreement
establishing such series, (vi) any contractual provisions
binding on any Limited Partner and (vii) provisions of
applicable law including the Securities Act, Limited Partnership
Interests shall be freely transferable.
4.6 Transfer of General Partner Interest.
(a) Subject to Section 4.6(c) below, prior to
December 31, 2016, the General Partner shall not transfer
all or any part of its General Partner Interest to a Person
unless such transfer (i) has been approved by the prior
written consent or vote of the holders of at least a majority of
the Outstanding Units (excluding any Common Units held by the
General Partner and its Affiliates) or (ii) is of all, but
not less than all, of its General Partner Interest to
(A) an Affiliate (other than an individual) of the General
Partner or (B) another Person (other than an individual) in
connection with the merger or consolidation of the General
Partner with or into another Person or the transfer by the
General Partner of all or substantially all of its assets to
another Person (other than an individual).
(b) Subject to Section 4.6(c) below, on or
after December 31, 2016, the General Partner may transfer
all or any of its General Partner Interest without Unitholder
approval.
(c) Notwithstanding anything contained in this Agreement to
the contrary, no transfer by the General Partner of all or any
part of its General Partner Interest to another Person or
replacement of the General Partner pursuant to
Section 10.2 shall be permitted unless (i) the
transferee or successor (as applicable) agrees to assume the
rights and duties of the General Partner under this Agreement
and to be bound by the provisions of this Agreement,
(ii) the Partnership receives an Opinion of Counsel that
such transfer or replacement would not result in the loss of
limited liability of any Limited Partner or cause the
Partnership to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not already so treated or
taxed) and (iii) such transferee or successor (as
applicable) also agrees to purchase all (or the appropriate
portion thereof, if applicable) of the partnership interest or
membership interest of the General Partner as the general
partner or managing member of each other Group Member, as
applicable (but excluding, without limitation for purposes of
clarification, any other interest or any interest owned by any
other Affiliate controlling or under common control with the
General Partner), and (iv) for so long as any Affiliate of
Duncan controls the General Partner, the organizational
documents of the owner(s) of all the General Partner Interest,
together, provide for the establishment of an “Audit and
Conflicts Committee” to approve certain matters with
respect to the General Partner and the Partnership, the
selection of “Independent Directors” as members of
such Audit and Conflicts Committee, and the submission of
certain matters to the vote of such Audit and Conflicts
Committee or to the requirement of Special Approval upon similar
terms and conditions as set forth herein or in the limited
liability company agreement of the General Partner, as the same
exists as of the date of this Agreement so as to provide the
Limited Partners and the General Partner with the same rights
and obligations as are herein contained. In the case of a
transfer or replacement pursuant to and in compliance with this
Section 4.6, the transferee or successor (as
applicable) shall, subject to compliance with the terms of
Section 10.2, be admitted to the Partnership as a
General Partner immediately prior to the transfer of the General
Partner Interest, and the business of the Partnership shall
continue without dissolution.
(a) Except as provided in Section 4.7(c) below,
but notwithstanding the other provisions of this
Article IV, no transfer of any
Partnership Interests shall be made if such transfer would
(i) violate the then applicable federal or state securities
laws or rules and regulations of the Commission, any state
securities commission or any other governmental authority with
jurisdiction over such transfer, (ii) terminate the
existence or qualification of the Partnership under the laws of
the jurisdiction of its formation, or (iii) cause the
Partnership to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not already so treated or
taxed).
(b) The General Partner may impose restrictions on the
transfer of Partnership Interests if it reviews an Opinion
of Counsel that determines that such restrictions are necessary
to avoid a significant risk of the Partnership becoming taxable
as a corporation or otherwise becoming taxable as an entity for
federal income tax purposes. The General Partner may impose such
restrictions by amending this Agreement; provided,
however, that any amendment that would result in the
delisting or suspension of trading of any class of Limited
Partner Interests on the principal National Securities Exchange
on which such class of Limited Partner Interests is then listed
or admitted for trading must be approved, prior to such
amendment being effected, by the holders of at least a majority
of the Outstanding Units of such class (or if such class has not
been so designated into Units, a majority of the Outstanding
Limited Partner Interests of such class).
(c) Nothing contained in this Article IV, or
elsewhere in this Agreement, shall preclude the settlement of
any transactions involving Partnership Interests entered
into through the facilities of any National Securities Exchange
on which such Partnership Interests are listed for trading.
Each certificate evidencing Partnership Interests shall
bear a conspicuous legend in substantially the following form:
THE HOLDER OF THIS SECURITY ACKNOWLEDGES FOR THE BENEFIT OF
DUNCAN ENERGY PARTNERS L.P. THAT THIS SECURITY MAY NOT BE SOLD,
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED IF SUCH
TRANSFER WOULD (A) VIOLATE THE THEN APPLICABLE FEDERAL OR
STATE SECURITIES LAWS OR RULES AND REGULATIONS OF THE
SECURITIES AND EXCHANGE COMMISSION, ANY STATE SECURITIES
COMMISSION OR ANY OTHER GOVERNMENTAL AUTHORITY WITH JURISDICTION
OVER SUCH TRANSFER, (B) TERMINATE THE EXISTENCE OR
QUALIFICATION OF DUNCAN ENERGY PARTNERS L.P. UNDER THE LAWS OF
THE STATE OF DELAWARE, OR (C) CAUSE DUNCAN ENERGY PARTNERS
L.P. TO BE TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION OR
OTHERWISE TO BE TAXED AS AN ENTITY FOR FEDERAL INCOME TAX
PURPOSES (TO THE EXTENT NOT ALREADY SO TREATED OR TAXED). DEP
HOLDINGS, LLC, THE GENERAL PARTNER OF DUNCAN ENERGY PARTNERS
L.P., MAY IMPOSE ADDITIONAL RESTRICTIONS ON THE TRANSFER OF THIS
SECURITY IF IT RECEIVES AN OPINION OF COUNSEL THAT SUCH
RESTRICTIONS ARE NECESSARY TO AVOID A SIGNIFICANT RISK OF DUNCAN
ENERGY PARTNERS L.P. BECOMING TAXABLE AS A CORPORATION OR
OTHERWISE BECOMING TAXABLE AS AN ENTITY FOR FEDERAL INCOME TAX
PURPOSES. THE RESTRICTIONS SET FORTH ABOVE SHALL NOT PRECLUDE
THE SETTLEMENT OF ANY TRANSACTIONS INVOLVING THIS SECURITY
ENTERED INTO THROUGH THE FACILITIES OF ANY NATIONAL SECURITIES
EXCHANGE ON WHICH THIS SECURITY IS LISTED OR ADMITTED TO TRADING.
(a) If any Group Member is or becomes subject to any
federal, state or local law or regulation that the General
Partner determines would create a substantial risk of
cancellation or forfeiture of any property in which the Group
Member has an interest based on the nationality, citizenship or
other related status of a Limited Partner, the General Partner
may request any Limited Partner to furnish to the General
Partner, within 30 days after receipt of such request, an
executed Citizenship Certification or such other
information concerning his nationality, citizenship or other
related status (or, if the Limited Partner is a nominee holding
for the account of another Person, the nationality, citizenship
or other related status of such Person) as the General Partner
may request. If a Limited Partner fails to furnish to the
General Partner within the aforementioned
30-day
period such Citizenship Certification or other requested
information or if upon receipt of such Citizenship Certification
or other requested information the General Partner determines
that a Limited Partner is not an Eligible Citizen, the
Partnership Interests owned by such Limited Partner shall
be subject to redemption in accordance with the provisions of
Section 4.9. In addition, the General Partner may
require that the status of any such Limited Partner be changed
to that of a Non-citizen Assignee and, thereupon, the General
Partner shall be substituted for such Non-citizen Assignee as
the Limited Partner in respect of his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights
in respect of Limited Partner Interests held by it on behalf of
Non-citizen Assignees, distribute the votes in the same ratios
as the votes of Partners (including the General Partner) in
respect of Limited Partner Interests other than those of
Non-citizen Assignees are cast, either for, against or
abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen
Assignee shall have no right to receive a distribution in kind
pursuant to Section 12.4 but shall be entitled to
the cash equivalent thereof, and the Partnership shall provide
cash in exchange for an assignment of the Non-citizen
Assignee’s share of any distribution in kind. Such payment
and assignment shall be treated for Partnership purposes as a
purchase by the Partnership from the Non-citizen Assignee of his
Limited Partner Interest (representing his right to receive his
share of such distribution in kind).
(d) At any time after he can and does certify that he has
become an Eligible Citizen, a Non-citizen Assignee may, upon
application to the General Partner, request that with respect to
any Limited Partner Interests of such Non-citizen Assignee not
redeemed pursuant to Section 4.9, such Non-citizen
Assignee be admitted as a Limited Partner, and upon approval of
the General Partner, such Non-citizen Assignee shall be admitted
as a Limited Partner and shall no longer constitute a
Non-citizen Assignee, and the General Partner shall cease to be
deemed to be the Limited Partner in respect of the Non-citizen
Assignee’s Limited Partner Interests.
4.9 Redemption of Partnership Interests of
Non-citizen Assignees.
(a) If at any time a Limited Partner fails to furnish a
Citizenship Certification or other information requested within
the 30-day
period specified in Section 4.8(a), or if upon
receipt of such Citizenship Certification or other information
the General Partner determines, with the advice of counsel, that
a Limited Partner is not an Eligible Citizen, the Partnership
may, unless the Limited Partner establishes to the satisfaction
of the General Partner that such Limited Partner is an Eligible
Citizen or has transferred his Partnership Interests to a Person
who is an Eligible Citizen and who furnishes a Citizenship
Certification to the General Partner prior to the date fixed for
redemption as provided below, redeem the Limited Partner
Interest of such Limited Partner as follows:
(i) The General Partner shall, not later than the
30th day before the date fixed for redemption, give notice
of redemption to the Limited Partner, at his last address
designated on the records of the Partnership or the Transfer
Agent, by registered or certified mail, postage prepaid. The
notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed
for redemption, the place of payment, that payment of the
redemption price will be made upon surrender of the Certificate
evidencing the Redeemable Interests and that on and after the
date fixed for redemption no further allocations or
distributions to which the Limited Partner would otherwise be
entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable
Interests shall be an amount equal to the Current Market Price
(the date of determination of which shall be the date fixed for
redemption) of Partnership Interests of the class to be so
redeemed multiplied by the number of Partnership Interests
of each such class included among the Redeemable Interests. The
redemption price shall be paid as determined by the General
Partner, in cash or by delivery of a promissory note of the
Partnership in
the principal amount of the redemption price, bearing interest
at the rate of 10% annually and payable in three equal annual
installments of principal together with accrued interest,
commencing one year after the redemption date.
(iii) Upon surrender by or on behalf of the Limited
Partner, at the place specified in the notice of redemption, of
the Certificate evidencing the Redeemable Interests, duly
endorsed in blank or accompanied by an assignment duly executed
in blank, the Limited Partner or his duly authorized
representative shall be entitled to receive the payment therefor.
(iv) After the redemption date, Redeemable Interests shall
no longer constitute issued and Outstanding
Partnership Interests.
(b) The provisions of this Section 4.9 shall
also be applicable to Partnership Interests held by a
Limited Partner as nominee of a Person determined to be other
than an Eligible Citizen.
(c) Nothing in this Section 4.9 shall prevent
the recipient of a notice of redemption from transferring his
Partnership Interest before the redemption date if such
transfer is otherwise permitted under this Agreement. Upon
receipt of notice of such a transfer, the General Partner shall
withdraw the notice of redemption, provided the transferee of
such Partnership Interest certifies to the satisfaction of
the General Partner in a Citizenship Certification that he is an
Eligible Citizen. If the transferee fails to make such
certification, such redemption shall be effected from the
transferee on the original redemption date.
ARTICLE V
Capital
Contributions and Issuance of Partnership Interests
5.1 Prior Contributions. In
connection with the formation of the Partnership, the General
Partner made certain Capital Contributions to the Partnership in
exchange for a 2.0% General Partner interest in the Partnership
and was admitted as the General Partner of the Partnership, and
Enterprise OLP made certain Capital Contributions to the
Partnership in exchange for a 98.0% Limited Partner Interest in
the Partnership and was admitted as a Limited Partner of the
Partnership. As of the Closing Date, the interest of the
Organizational Limited Partner shall be redeemed as provided in
the Contribution Agreement, and the initial Capital Contribution
of the Organizational Limited Partner shall be refunded.
Ninety-eight percent of any interest or other profit that may
have resulted from the investment or other use of such Initial
Capital Contributions shall be allocated and distributed to the
Organizational Limited Partner, and the balance thereof shall be
allocated and distributed to the General Partner.
5.2 Contributions by the General Partner and its
Affiliates.
(a) On the Closing Date and pursuant to the Contribution
Agreement:
(i) the General Partner shall contribute to the
Partnership, as a Capital Contribution, all of its ownership
interests in the Initial Operating Subsidiaries in exchange for
a continuation of its 2% General Partner Interest (representing
414,318 initial General Partner Units), subject to all of the
rights, privileges and duties of the General Partner under this
Agreement, in accordance with the Contribution
Agreement; and
(ii) Enterprise OLP shall contribute to the Partnership, as
a Capital Contribution, ownership interests in the Initial
Operating Subsidiaries (representing 66% of the aggregate
ownership interests in the Initial Operating Subsidiaries less
the percentage of such ownership interests being contributed by
the General Partner and its Affiliates in accordance with
Section 5.2(a)(i)), in exchange for (A) 7,301,571
Common Units and (B) the right to receive
$ million as reimbursement
for certain capital expenditures together with additional cash
for the contributed assets in accordance with the Contribution
Agreement.
(b) Upon the issuance of any additional Limited Partner
Interests by the Partnership (other than the Common Units issued
in the Initial Offering and the Common Units issued pursuant to
the Over-Allotment Option), the General Partner may, in exchange
for a proportionate number of General Partner Units, make, but
is not obligated to make, a contribution in an amount equal to
the product obtained by multiplying (i) the quotient
determined by dividing (A) the General Partner’s
Percentage Interest by (B) 100 less the General
Partner’s Percentage Interest times (ii) the amount
contributed to the Partnership by the Limited Partners in
exchange for such additional Limited Partner Interests. Except
as set forth in Sections 11.3(c) and
12.2(ii), the General Partner shall not be obligated to
make any additional Capital Contributions to the Partnership.
5.3 Contributions by the Underwriters and
Redemption of Common Units if Over-Allotment Option is
Exercised.
(a) On the Closing Date and pursuant to the Underwriting
Agreement, each Underwriter shall contribute to the Partnership
cash in an amount equal to the Issue Price per Initial Common
Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at
the Issue Price per Initial Common Unit at the Closing Date. In
exchange for such Capital Contributions by the Underwriters, the
Partnership shall issue Common Units to each Underwriter on
whose behalf such Capital Contribution is made in an amount
equal to the quotient obtained by dividing (i) such cash
contribution to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit.
(b) Upon the exercise of the Over-Allotment Option, each
Underwriter shall contribute to the Partnership cash in an
amount equal to the Issue Price per Initial Common Unit,
multiplied by the number of Common Units to be purchased by such
Underwriter at the Option Closing Date. In exchange for such
Capital Contributions by the Underwriters, the Partnership shall
issue Common Units to each Underwriter on whose behalf such
Capital Contribution was made in an amount equal to the quotient
obtained by dividing (i) the cash contributions to the
Partnership by or on behalf of such Underwriter by (ii) the
Issue Price per Initial Common Unit. If the Underwriters
exercise their Over-Allotment Option, the Partnership shall use
the net proceeds (after deducting underwriting discounts and
commissions) from such exercise to redeem from Enterprise OLP a
number of Common Units equal to the number of Common Units
issued upon exercise of the Over-Allotment Option.
(c) Upon the issuance of Common Units to the Underwriters
as provided in this Section 5.3, each such
Underwriter shall be deemed admitted as a Limited Partner with
respect to the Common Units acquired by it. Upon the further
transfer of Common Units to Persons acquiring the same from the
Underwriters as contemplated by the Underwriting Agreement, such
transferees will be admitted as a successor Limited Partners as
contemplated by Section 10.1.
5.4 Interest and Withdrawal. No
interest shall be paid by the Partnership on Capital
Contributions. No Partner shall be entitled to the withdrawal or
return of its Capital Contribution, except to the extent, if
any, that distributions made pursuant to this Agreement or upon
termination of the Partnership may be considered as such by law
and then only to the extent provided for in this Agreement.
Except to the extent expressly provided in this Agreement, no
Partner shall have priority over any other Partner either as to
the return of Capital Contributions or as to profits, losses or
distributions. Any such return shall be a compromise to which
all Partners agree within the meaning of
Section 17-502(b)
of the Delaware Act.
5.5 Capital Accounts.
(a) The Partnership shall maintain for each Partner (or a
beneficial owner of Partnership Interests held by a nominee
in any case in which the nominee has furnished the identity of
such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable
to the General Partner) owning a Partnership Interest a
separate Capital Account with respect to such
Partnership Interest in accordance with the rules of
Treasury Regulation Section 1.704-1(b)(2)(iv). Such
Capital Account shall be increased by (i) the amount of all
Capital Contributions made to the Partnership with respect to
such Partnership Interest pursuant to this Agreement and
(ii) all items of Partnership
income and gain (including income and gain exempt from tax)
computed in accordance with Section 5.5(b) and
allocated with respect to such Partnership Interest
pursuant to Section 6.1, and decreased by
(A) the amount of cash or Net Agreed Value of all actual
and deemed distributions of cash or property made with respect
to such Partnership Interest pursuant to this Agreement and
(B) all items of Partnership deduction and loss computed in
accordance with Section 5.5(b) and allocated with
respect to such Partnership Interest pursuant to
Section 6.1.
(b) For purposes of computing the amount of any item of
income, gain, loss or deduction which is to be allocated
pursuant to Article VI and is to be reflected in the
Partners’ Capital Accounts, the determination, recognition
and classification of any such item shall be the same as its
determination, recognition and classification for federal income
tax purposes (including any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5,
the Partnership shall be treated as owning directly its
proportionate share (as determined by the General Partner based
upon the provisions of the applicable Group Member Agreement or
governing, organizational or similar documents) of all property
owned by (x) any other Group Member that is classified as a
partnership for federal income tax purposes and (y) any
other partnership, limited liability company, unincorporated
business or other entity or arrangement that is classified as a
partnership for federal income tax purposes, of which a Group
Member is, directly or indirectly, a partner.
(ii) All fees and other expenses incurred by the
Partnership to promote the sale of (or to sell) a
Partnership Interest that can neither be deducted nor
amortized under Section 709 of the Code, if any, shall, for
purposes of Capital Account maintenance, be treated as an item
of deduction at the time such fees and other expenses are
incurred and shall be allocated among the Partners pursuant to
Section 6.1.
(iii) Except as otherwise provided in Treasury Regulation
Section 1.704-1(b)(2)(iv)(m),
the computation of all items of income, gain, loss and deduction
shall be made without regard to any election under
Section 754 of the Code which may be made by the
Partnership and, as to those items described in
Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross
income or are neither currently deductible nor capitalized for
federal income tax purposes. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to
Section 734(b) or 743(b) of the Code is required, pursuant
to Treasury Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment in the Capital Accounts shall be
treated as an item of gain or loss.
(iv) Any income, gain or loss attributable to the taxable
disposition of any Partnership property shall be determined as
if the adjusted basis of such property as of such date of
disposition were equal in amount to the Partnership’s
Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of
Section 704(b) of the Code, any deductions for
depreciation, cost recovery or amortization attributable to any
Contributed Property shall be determined as if the adjusted
basis of such property on the date it was acquired by the
Partnership were equal to the Agreed Value of such property.
Upon an adjustment pursuant to Section 5.5(d) to the
Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further
deductions for such depreciation, cost recovery or amortization
attributable to such property shall be determined (A) as if
the adjusted basis of such property were equal to the Carrying
Value of such property immediately following such adjustment and
(B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or,
if applicable, the remaining useful life) as is applied for
federal income tax purposes; provided, however, that, if
the asset has a zero adjusted basis for federal income tax
purposes, depreciation, cost recovery or amortization deductions
shall be determined using any method that the General Partner
may adopt.
(vi) If the Partnership’s adjusted basis in a
depreciable or cost recovery property is reduced for federal
income tax purposes pursuant to Section 48(q)(1) or
48(q)(3) of the Code, the amount of
such reduction shall, solely for purposes hereof, be deemed to
be an additional depreciation or cost recovery deduction in the
year such property is placed in service and shall be allocated
among the Partners pursuant to Section 6.1. Any
restoration of such basis pursuant to Section 48(q)(2) of
the Code shall, to the extent possible, be allocated in the same
manner to the Partners to whom such deemed deduction was
allocated.
(c) A transferee of a Partnership Interest shall
succeed to a pro rata portion of the Capital Account of the
transferor relating to the Partnership Interest so
transferred.
(d) (i) In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f), on an
issuance of additional Partnership Interests for cash or
Contributed Property, the issuance of Partnership Interests
as consideration for the provision of services or the conversion
of the General Partner’s Purchased Interest to Common Units
pursuant to Section 11.3(b), the Capital Account of
all Partners and the Carrying Value of each Partnership property
immediately prior to such issuance shall be adjusted upward or
downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized
Gain or Unrealized Loss had been recognized on an actual sale of
each such property immediately prior to such issuance and had
been allocated to the Partners at such time pursuant to
Section 6.1 in the same manner as any item of gain
or loss actually recognized during such period would have been
allocated. In determining such Unrealized Gain or Unrealized
Loss, the aggregate cash amount and fair market value of all
Partnership assets (including cash or cash equivalents)
immediately prior to the issuance of additional Partnership
Interests shall be determined by the General Partner using such
method of valuation as it may adopt; provided, however,
that the General Partner, in arriving at such valuation, must
take fully into account the fair market value of the
Partnership Interests of all Partners at such time. The
General Partner shall allocate such aggregate value among the
assets of the Partnership (in such manner as it determines) to
arrive at a fair market value for individual properties.
(ii) In accordance with Treasury
Regulation Section 1.704-1(b)(2)(iv)(f), immediately
prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is
not in redemption or retirement of a Partnership Interest),
the Capital Accounts of all Partners and the Carrying Value of
all Partnership property shall be adjusted upward or downward to
reflect any Unrealized Gain or Unrealized Loss attributable to
such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property
immediately prior to such distribution for an amount equal to
its fair market value, and had been allocated to the Partners,
at such time, pursuant to Section 6.1 in the same
manner as any item of gain or loss actually recognized during
such period would have been allocated. In determining such
Unrealized Gain or Unrealized Loss the aggregate cash amount and
fair market value of all Partnership assets (including cash or
cash equivalents) immediately prior to a distribution shall
(A) in the case of an actual distribution that is not made
pursuant to Section 12.4 or in the case of a deemed
contribution
and/or
distribution occurring as a result of a termination of the
Partnership pursuant to Section 708 of the Code, be
determined and allocated in the same manner as that provided in
Section 5.5(d)(i) or (B) in the case of a
liquidating distribution pursuant to Section 12.4,
be determined and allocated by the Liquidator using such method
of valuation as it may adopt.
5.6 Issuances of Additional Partnership
Securities.
(a) The Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights
relating to the Partnership Securities for any Partnership
purpose at any time and from time to time to such Persons for
such consideration and on such terms and conditions as the
General Partner shall determine, all without the approval of any
Limited Partners.
(b) Each additional Partnership Security authorized to be
issued by the Partnership pursuant to Section 5.6(a)
may be issued in one or more classes, or one or more series of
any such classes, with such designations, preferences, rights,
powers and duties (which may be senior to existing classes and
series of Partnership Securities), as shall be fixed by the
General Partner, including (i) the right to share in
Partnership profits and losses or items thereof; (ii) the
right to share in Partnership distributions; (iii) the
rights upon dissolution and liquidation of the Partnership;
(iv) whether, and the terms and conditions upon
which, the Partnership may or shall be required to redeem the
Partnership Security (including sinking fund provisions);
(v) whether such Partnership Security is issued with the
privilege of conversion or exchange and, if so, the terms and
conditions of such conversion or exchange; (vi) the terms
and conditions upon which each Partnership Security will be
issued, evidenced by certificates and assigned or transferred;
(vii) the method for determining the Percentage Interest as
to such Partnership Security; and (viii) the right, if any,
of each such Partnership Security to vote on Partnership
matters, including matters relating to the relative rights,
preferences and privileges of such Partnership Security.
(c) The General Partner is hereby authorized and directed
to take all actions that it determines to be necessary or
appropriate in connection with (i) each issuance of
Partnership Securities and options, rights, warrants and
appreciation rights relating to Partnership Securities pursuant
to this Section 5.6, (ii) the conversion of the
General Partner Interest into Units pursuant to the terms of
this Agreement, (iii) the admission of additional Limited
Partners and (iv) all additional issuances of Partnership
Securities. The General Partner shall determine the relative
rights, powers and duties of the holders of the Units or other
Partnership Securities being so issued. The General Partner
shall do all things necessary to comply with the Delaware Act
and is authorized and directed to do all things that it
determines to be necessary or appropriate in connection with any
future issuance of Partnership Securities or in connection with
the conversion of the General Partner Interest into Units
pursuant to the terms of this Agreement, including compliance
with any statute, rule, regulation or guideline of any federal,
state or other governmental agency or any National Securities
Exchange on which the Units or other Partnership Securities are
listed or admitted for trading.
(d) No fractional Units shall be issued by the Partnership.
5.7 Limited Preemptive
Right. Except as provided in this
Section 5.7 and in Section 5.2, and
except as may be provided as part of the terms of additional
Partnership Securities issued pursuant to Section 5.6, no
Person shall have any preemptive, preferential or other similar
right with respect to the issuance of any Partnership Security,
whether unissued, held in the treasury or hereafter created. The
General Partner shall have the right, which it may from time to
time assign in whole or in part to any of its Affiliates, to
purchase Partnership Securities from the Partnership whenever,
and on the same terms that, the Partnership issues Partnership
Securities to Persons other than the General Partner and its
Affiliates, to the extent necessary to maintain the Percentage
Interests (other than the General Partner Interest) of the
General Partner and its Affiliates equal to that which existed
immediately prior to the issuance of such Partnership Securities.
5.8 Splits and Combinations.
(a) Subject to Section 5.8(d), the Partnership
may make a Pro Rata distribution of Partnership Securities to
all Record Holders or may effect a subdivision or combination of
Partnership Securities so long as, after any such event, each
Partner shall have the same Percentage Interest in the
Partnership as before such event, and any amounts calculated on
a per Unit basis or stated as a number of Units are
proportionately adjusted retroactive to the beginning of the
Partnership.
(b) Whenever such a distribution, subdivision or
combination of Partnership Securities is declared, the General
Partner shall select a Record Date as of which the distribution,
subdivision or combination shall be effective and shall send
notice thereof at least 20 days prior to such Record Date
to each Record Holder as of a date not less than 10 days
prior to the date of such notice. The General Partner also may
cause a firm of independent public accountants selected by it to
calculate the number of Partnership Securities to be held by
each Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be
entitled to rely on any certificate provided by such firm as
conclusive evidence of the accuracy of such calculation.
(c) Promptly following any such distribution, subdivision
or combination, the Partnership may issue Certificates to the
Record Holders of Partnership Securities as of the applicable
Record Date representing the new number of Partnership
Securities held by such Record Holders, or the General Partner
may adopt such other procedures that it determines to be
necessary or appropriate to reflect such changes. If any such
combination results in a smaller total number of Partnership
Securities Outstanding, the Partnership
shall require, as a condition to the delivery to a Record Holder
of such new Certificate, the surrender of any Certificate held
by such Record Holder immediately prior to such Record Date.
(d) The Partnership shall not issue fractional Units upon
any distribution, subdivision or combination of Units. If a
distribution, subdivision or combination of Units would result
in the issuance of fractional Units but for the provisions of
Section 5.6(d) and this Section 5.8(d),
each fractional Unit shall be rounded to the nearest whole Unit
(and a 0.5 Unit shall be rounded to the next higher Unit).
5.9 Fully Paid and Non-Assessable Nature of
Limited Partner Interests. All Limited Partner
Interests issued pursuant to, and in accordance with the
requirements of, this Article V shall be fully paid
and non-assessable Limited Partner Interests in the Partnership,
except as such non-assessability may be affected by
Section 17-607
of the Delaware Act.
ARTICLE VI
Allocations
and Distributions
6.1 Allocations for Capital Account
Purposes. For purposes of maintaining the Capital
Accounts and in determining the rights of the Partners among
themselves, the Partnership’s items of income, gain, loss
and deduction (computed in accordance with
Section 5.5(b)) shall be allocated among the
Partners in each taxable year (or portion thereof) as provided
herein below.
(a) Net Income and Net Loss.
(i) Net Income. After giving effect to
the special allocations set forth in Section 6.1(c),
Net Income for each taxable year and all items of income, gain,
loss and deduction taken into account in computing Net Income
for such taxable year shall be allocated to the Partners in
accordance with their respective Percentage Interests.
(ii) Net Losses. After giving effect to
the special allocations set forth in Section 6.1(c),
Net Losses for each taxable period and all items of income,
gain, loss and deduction taken into account in computing Net
Losses for such taxable period shall be allocated to the
Partners in accordance with their respective Percentage
Interests; provided, that Net Losses shall not be
allocated pursuant to this Section 6.1(a) to the
extent that such allocation would cause any Partner to have a
deficit balance in its Adjusted Capital Account at the end of
such taxable year (or increase any existing deficit balance in
its Adjusted Capital Account), instead any such Net Losses shall
be allocated to Partners with positive Adjusted Capital Accounts
in accordance with their Percentage Interests until such
positive Adjusted Capital Accounts are reduced to zero, and
thereafter to the General Partner.
(b) Net Termination Gains and
Losses. After giving effect to the special
allocations set forth in Section 6.1(c), all items of
income, gain, loss and deduction taken into account in computing
Net Termination Gain or Net Termination Loss for such taxable
period shall be allocated in the same manner as such Net
Termination Gain or Net Termination Loss is allocated hereunder.
All allocations under this Section 6.1(b) shall be made
after Capital Account balances have been adjusted by all other
allocations provided under this Section 6.1 and after all
distributions of Available Cash provided under Section 6.3
have been made; provided, however, that solely for purposes of
this Section 6.1(b), Capital Accounts shall not be adjusted
for distributions made pursuant to Section 12.4.
(i) If a Net Termination Gain is recognized (or deemed
recognized pursuant to Section 5.5(d)), such Net
Termination Gain shall be allocated among the Partners in the
following manner (and the Capital Accounts of the Partners shall
be increased by the amount so allocated in each of the following
subclauses, in the order listed, before an allocation is made
pursuant to the next succeeding subclause):
A. First, to each Partner having a deficit balance in its
Capital Account, in the proportion that such deficit balance
bears to the total deficit balances in the Capital Accounts of
all
Partners, until each such Partner has been allocated Net
Termination Gain equal to any such deficit balance in its
Capital Account; and
B. Second, 100% to all Partners in accordance with their
Percentage Interests.
(ii) If a Net Termination Loss is recognized (or deemed
recognized pursuant to Section 5.5(d)), such Net
Termination Loss shall be allocated among the Partners in the
following manner:
A. First, 100% to all Partners in accordance with their
Percentage Interests, until the Capital Account in respect of
each Common Unit then Outstanding has been reduced to zero; and
B. Second, the balance, if any, 100% to the General Partner.
(c) Special Allocations. Notwithstanding
any other provision of this Section 6.1, the
following special allocations shall be made for such taxable
period:
(i) Partnership Minimum Gain
Chargeback. Notwithstanding any other provision
of this Section 6.1, if there is a net decrease in
Partnership Minimum Gain during any Partnership taxable period,
each Partner shall be allocated items of Partnership income and
gain for such period (and, if necessary, subsequent periods) in
the manner and amounts provided in Treasury
Regulation Sections 1.704-2(f)(6),
1.704-2(g)(2) and 1.704-2(j)(2)(i), or any successor provision.
For purposes of this Section 6.1(c), each
Partner’s Adjusted Capital Account balance shall be
determined, and the allocation of income or gain required
hereunder shall be effected, prior to the application of any
other allocations pursuant to this Section 6.1(c)
with respect to such taxable period (other than an allocation
pursuant to Sections 6.1(c)(v) and
6.1(c)(vi)). This Section 6.1(c)(i) is
intended to comply with the Partnership Minimum Gain chargeback
requirement in Treasury
Regulation Section 1.704-2(f)
and shall be interpreted consistently therewith.
(ii) Chargeback of Partner Nonrecourse Debt Minimum
Gain. Notwithstanding the other provisions of
this Section 6.1 (other than
Section 6.1(c)(i)), except as provided in Treasury
Regulation Section 1.704-2(i)(4),
if there is a net decrease in Partner Nonrecourse Debt Minimum
Gain during any Partnership taxable period, any Partner with a
share of Partner Nonrecourse Debt Minimum Gain at the beginning
of such taxable period shall be allocated items of Partnership
income and gain for such period (and, if necessary, subsequent
periods) in the manner and amounts provided in Treasury
Regulation Sections 1.704-2(i)(4)
and 1.704-2(j)(2)(ii), or any successor provisions. For purposes
of this Section 6.1(c), each Partner’s Adjusted
Capital Account balance shall be determined, and the allocation
of income or gain required hereunder shall be effected, prior to
the application of any other allocations pursuant to this
Section 6.1(c), other than
Section 6.1(c)(i) and other than an allocation
pursuant to Sections 6.1(c)(v) and
6.1(c)(vi), with respect to such taxable period. This
Section 6.1(c)(ii) is intended to comply with the
chargeback of items of income and gain requirement in Treasury
Regulation Section 1.704-2(i)(4)
and shall be interpreted consistently therewith.
(iii) Qualified Income Offset. In the
event any Partner unexpectedly receives any adjustments,
allocations or distributions described in Treasury
Regulation Sections 1.704-1(b)(2)(ii)(d)(4),
1.704-1(b)(2)(ii)(d)(5), or 1.704-1(b)(2)(ii)(d)(6), items of
Partnership income and gain shall be specially allocated to such
Partner in an amount and manner sufficient to eliminate, to the
extent required by the Treasury Regulations promulgated under
Section 704(b) of the Code, the deficit balance, if any, in
its Adjusted Capital Account created by such adjustments,
allocations or distributions as quickly as possible unless such
deficit balance is otherwise eliminated pursuant to
Section 6.1(c)(i) or (ii).
(iv) Gross Income Allocations. In the
event any Partner has a deficit balance in its Capital Account
at the end of any Partnership taxable period in excess of the
sum of (A) the amount such Partner is required to restore
pursuant to the provisions of this Agreement and (B) the
amount such Partner is deemed obligated to restore pursuant to
Treasury
Regulation Sections 1.704-2(g)
and 1.704-2(i)(5), such Partner shall be specially allocated
items of Partnership gross income and gain in
the amount of such excess as quickly as possible;
provided, that an allocation pursuant to this
Section 6.1(c)(iv) shall be made only if and to the
extent that such Partner would have a deficit balance in its
Capital Account as adjusted after all other allocations provided
for in this Section 6.1 have been tentatively made
as if this Section 6.1(c)(iv) were not in this
Agreement.
(v) Nonrecourse Deductions. Nonrecourse
Deductions for any taxable period shall be allocated to the
Partners in accordance with their respective Percentage
Interests. If the General Partner determines that the
Partnership’s Nonrecourse Deductions should be allocated in
a different ratio to satisfy the safe harbor requirements of the
Treasury Regulations promulgated under Section 704(b) of
the Code, the General Partner is authorized, upon notice to the
other Partners, to revise the prescribed ratio to the
numerically closest ratio that does satisfy such requirements.
(vi) Partner Nonrecourse
Deductions. Partner Nonrecourse Deductions for
any taxable period shall be allocated 100% to the Partner that
bears the Economic Risk of Loss with respect to the Partner
Nonrecourse Debt to which such Partner Nonrecourse Deductions
are attributable in accordance with Treasury Regulation
Section 1.704-2(i).
If more than one Partner bears the Economic Risk of Loss with
respect to a Partner Nonrecourse Debt, such Partner Nonrecourse
Deductions attributable thereto shall be allocated between or
among such Partners in accordance with the ratios in which they
share such Economic Risk of Loss.
(vii) Nonrecourse Liabilities. For
purposes of Treasury
Regulation Section 1.752-3(a)(3),
the Partners agree that Nonrecourse Liabilities of the
Partnership in excess of the sum of (A) the amount of
Partnership Minimum Gain and (B) the total amount of
Nonrecourse Built-in Gain shall be allocated among the Partners
in accordance with their respective Percentage Interests.
(viii) Code Section 754
Adjustments. To the extent an adjustment to the
adjusted tax basis of any Partnership asset pursuant to
Section 734(b) or 743(b) of the Code is required, pursuant
to Treasury
Regulation Section 1.704-1(b)(2)(iv)(m),
to be taken into account in determining Capital Accounts, the
amount of such adjustment to the Capital Accounts shall be
treated as an item of gain (if the adjustment increases the
basis of the asset) or loss (if the adjustment decreases such
basis), and such item of gain or loss shall be specially
allocated to the Partners in a manner consistent with the manner
in which their Capital Accounts are required to be adjusted
pursuant to such Section of the Treasury Regulations.
(ix) Curative Allocation.
A. Notwithstanding any other provision of this
Section 6.1, other than the Required Allocations,
the Required Allocations shall be taken into account in making
the Agreed Allocations so that, to the extent possible, the net
amount of items of income, gain, loss and deduction allocated to
each Partner pursuant to the Required Allocations and the Agreed
Allocations, together, shall be equal to the net amount of such
items that would have been allocated to each such Partner under
the Agreed Allocations had the Required Allocations and the
related Curative Allocation not otherwise been provided in this
Section 6.1. Notwithstanding the
preceding sentence, Required Allocations relating to
(1) Nonrecourse Deductions shall not be taken into account
except to the extent that there has been a decrease in
Partnership Minimum Gain and (2) Partner Nonrecourse
Deductions shall not be taken into account except to the extent
that there has been a decrease in Partner Nonrecourse Debt
Minimum Gain. Allocations pursuant to this
Section 6.1(c)(ix)(A) shall only be made with
respect to Required Allocations to the extent the General
Partner determines that such allocations will otherwise be
inconsistent with the economic agreement among the Partners.
Further, allocations pursuant to this
Section 6.1(c)(ix)(A) shall be deferred with respect
to allocations pursuant to clauses (1) and (2)
hereof to the extent the General Partner determines that such
allocations are likely to be offset by subsequent Required
Allocations.
B. The General Partner shall, with respect to each taxable
period, (1) apply the provisions of
Section 6.1(c)(ix)(A) in whatever order is most
likely to minimize the economic distortions
that might otherwise result from the Required Allocations, and
(2) divide all allocations pursuant to
Section 6.1(c)(ix)(A) among the Partners in a manner
that is likely to minimize such economic distortions.
6.2 Allocations for Tax Purposes.
(a) Except as otherwise provided herein, for federal income
tax purposes, each item of income, gain, loss and deduction
shall be allocated among the Partners in the same manner as its
correlative item of “book” income, gain, loss or
deduction is allocated pursuant to
Section 6.1.
(b) In an attempt to eliminate Book-Tax Disparities
attributable to a Contributed Property or Adjusted Property,
items of income, gain, loss, depreciation, amortization and cost
recovery deductions shall be allocated for federal income tax
purposes among the Partners as follows:
(i) (A) In the case of a Contributed Property, such
items attributable thereto shall be allocated among the Partners
in the manner provided under Section 704(c) of the Code
that takes into account the variation between the Agreed Value
of such property and its adjusted basis at the time of
contribution; and (B) any item of Residual Gain or Residual
Loss attributable to a Contributed Property shall be allocated
among the Partners in the same manner as its correlative item of
“book” gain or loss is allocated pursuant to
Section 6.1.
(ii) (A) In the case of an Adjusted Property, such
items shall (1) first, be allocated among the Partners in a
manner consistent with the principles of Section 704(c) of
the Code to take into account the Unrealized Gain or Unrealized
Loss attributable to such property and the allocations thereof
pursuant to Section 5.5(d)(i) or 5.5(d)(ii),
and (2) second, in the event such property was originally a
Contributed Property, be allocated among the Partners in a
manner consistent with Section 6.2(b)(i)(A); and
(B) any item of Residual Gain or Residual Loss attributable
to an Adjusted Property shall be allocated among the Partners in
the same manner as its correlative item of “book” gain
or loss is allocated pursuant to
Section 6.1.
(iii) The General Partner shall apply the principles of
Treasury
Regulation Section 1.704-3(d)
to eliminate Book-Tax Disparities, except as otherwise
determined by the General Partner with respect to goodwill.
(c) For the proper administration of the Partnership and
for the preservation of uniformity of the Limited Partner
Interests (or any class or classes thereof), the General Partner
shall (i) adopt such conventions as it deems appropriate in
determining the amount of depreciation, amortization and cost
recovery deductions; (ii) make special allocations for
federal income tax purposes of income (including gross income)
or deductions; and (iii) amend the provisions of this
Agreement as appropriate (A) to reflect the proposal or
promulgation of Treasury Regulations under Section 704(b)
or Section 704(c) of the Code or (B) otherwise to
preserve or achieve uniformity of the Limited Partner Interests
(or any class or classes thereof). The General Partner may adopt
such conventions, make such allocations and make such amendments
to this Agreement as provided in this Section 6.2(c)
only if such conventions, allocations or amendments would not
have a material adverse effect on the Partners, the holders of
any class or classes of Limited Partner Interests issued and
Outstanding or the Partnership, and if such allocations are
consistent with the principles of Section 704 of the Code.
(d) The General Partner may determine to depreciate or
amortize the portion of an adjustment under Section 743(b)
of the Code attributable to unrealized appreciation in any
Adjusted Property (to the extent of the unamortized Book-Tax
Disparity) using a predetermined rate derived from the
depreciation or amortization method and useful life applied to
the Partnership’s common basis of such property, despite
any inconsistency of such approach with Treasury
Regulation Section 1.167(c)-l(a)(6),
Treasury
Regulation Section 1.197-2(g)(3),
the legislative history of Section 743 of the Code or any
successor regulations thereto. If the General Partner determines
that such reporting position cannot reasonably be taken, the
General Partner may adopt depreciation and amortization
conventions under which all purchasers acquiring Limited Partner
Interests in the same month would receive depreciation and
amortization deductions, based upon the same applicable rate as
if they had purchased a direct interest in
the Partnership’s property. If the General Partner chooses
not to utilize such aggregate method, the General Partner may
use any other depreciation and amortization conventions to
preserve the uniformity of the intrinsic tax characteristics of
any Limited Partner Interests so long as such conventions would
not have a material adverse effect on the Limited Partners or
the Record Holders of any class or classes of Limited Partner
Interests.
(e) Any gain allocated to the Partners upon the sale or
other taxable disposition of any Partnership asset shall, to the
extent possible, after taking into account other required
allocations of gain pursuant to this Section 6.2, be
characterized as Recapture Income in the same proportions and to
the same extent as such Partners (or their predecessors in
interest) have been allocated any deductions directly or
indirectly giving rise to the treatment of such gains as
Recapture Income.
(f) All items of income, gain, loss, deduction and credit
recognized by the Partnership for federal income tax purposes
and allocated to the Partners in accordance with the provisions
hereof shall be determined without regard to any election under
Section 754 of the Code which may be made by the
Partnership; provided, however, that such allocations,
once made, shall be adjusted (in the manner determined by the
General Partner) to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and
deduction attributable to a transferred
Partnership Interest, shall for federal income tax
purposes, be determined on an annual basis and prorated on a
monthly basis and shall be allocated to the Partners as of the
opening of the principal National Securities Exchange on which
the Units are then traded on the first Business Day of each
month; provided, however, that such items for the period
beginning on the Closing Date and ending on the last day of the
month in which the Option Closing Date or the expiration of the
Over-Allotment Option occurs shall be allocated to the Partners
as of the opening of the National Securities Exchange on which
the Units are then traded on the first Business Day of the next
succeeding month; and provided, further, that gain or
loss on a sale or other disposition of any assets of the
Partnership other than in the ordinary course of business shall
be allocated to the Partners as of the opening of the National
Securities Exchange on which the Units are then traded on the
first Business Day of the month in which such gain or loss is
recognized for federal income tax purposes. The General Partner
may revise, alter or otherwise modify such methods of allocation
to the extent permitted or required by Section 706 of the
Code and the regulations or rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited
Partner under the provisions of this Article VI
shall instead be made to the beneficial owner of Limited Partner
Interests held by a nominee in any case in which the nominee has
furnished the identity of such owner to the Partnership in
accordance with Section 6031(c) of the Code or any other
method determined by the General Partner.
6.3 Requirement and Characterization of
Distributions; Distributions to Record Holders.
(a) Within 45 days following the end of each Quarter
commencing with the Quarter ending on March 31, 2007, an
amount equal to 100% of Available Cash with respect to such
Quarter shall, subject to
Section 17-607
of the Delaware Act, be distributed in accordance with this
Article VI by the Partnership to the Partners in
accordance with their respective Percentage Interests as of the
Record Date selected by the General Partner. All distributions
required to be made under this Agreement shall be made subject
to
Section 17-607
of the Delaware Act.
(b) Notwithstanding Section 6.3(a), in the
event of the dissolution and liquidation of the Partnership, all
receipts received during or after the Quarter in which the
Liquidation Date occurs shall be applied and distributed solely
in accordance with, and subject to the terms and conditions of,
Section 12.4.
(c) The General Partner may treat taxes paid by the
Partnership on behalf of, or amounts withheld with respect to,
all or less than all of the Partners, as a distribution of
Available Cash to such Partners.
(d) Each distribution in respect of a
Partnership Interest shall be paid by the Partnership,
directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such
Partnership Interest as of the Record Date set for such
distribution. Such payment shall constitute full payment and
satisfaction of the Partnership’s liability in respect of
such payment, regardless of any claim of any Person who may have
an interest in such payment by reason of an assignment or
otherwise.
ARTICLE VII
Management
and Operation of Business
7.1 Management.
(a) The General Partner shall conduct, direct and manage
all activities of the Partnership. Except as otherwise expressly
provided in this Agreement, all management powers over the
business and affairs of the Partnership shall be exclusively
vested in the General Partner, and no Limited Partner shall have
any management power over the business and affairs of the
Partnership. In addition to the powers now or hereafter granted
a general partner of a limited partnership under applicable law
or that are granted to the General Partner under any other
provision of this Agreement, the General Partner, subject to
Sections 2.9, 7.3 and 12.9, shall have
full power and authority to do all things and on such terms as
it determines to be necessary or appropriate to conduct the
business of the Partnership, to exercise all powers set forth in
Section 2.5 and to effectuate the purposes set forth
in Section 2.4, including the following:
(i) the making of any expenditures, the lending or
borrowing of money, the assumption or guarantee of, or other
contracting for, indebtedness and other liabilities, the
issuance of evidences of indebtedness, including indebtedness
that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or
rendering of periodic or other reports to governmental or other
agencies having jurisdiction over the business or assets of the
Partnership;
(iii) the acquisition, disposition, mortgage, pledge,
encumbrance, hypothecation or exchange of any or all of the
assets of the Partnership or the merger or other combination of
the Partnership with or into another Person (the matters
described in this clause (iii) being subject, however, to
any prior approval that may be required by
Section 7.3 and Article XIV);
(iv) the use of the assets of the Partnership (including
cash on hand) for any purpose consistent with the terms of this
Agreement, including the financing of the conduct of the
operations of the Partnership Group; subject to
Section 7.6(a), the lending of funds to other
Persons (including other Group Members); the repayment or
guarantee of obligations of other Group Members and the making
of capital contributions to any Group Member;
(v) the negotiation, execution and performance of any
contracts, conveyances or other instruments (including
instruments that limit the liability of the Partnership under
contractual arrangements to all or particular assets of the
Partnership, with the other party to the contract to have no
recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the
terms of the transaction being less favorable to the Partnership
than would otherwise be the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including
employees having titles such as “president,”“vice president,”“secretary” and
“treasurer”) and agents, outside attorneys,
accountants, consultants and contractors and the determination
of their compensation and other terms of employment or hiring;
(viii) the maintenance of such insurance for the benefit of
the Partnership Group, the Partners and the Indemnitees as it
deems necessary or appropriate (if such insurance is not
maintained pursuant to the Administrative Services Agreement);
(ix) the formation of, or acquisition of an interest in,
and the contribution of cash or property and the making of loans
to, any further limited or general partnerships, joint ventures,
limited liability companies, corporations or other relationships
(including the acquisition of interests in, and the
contributions of cash or property to, the Operating Partnership
from time to time) subject to the restrictions set forth in
Sections 2.4 and 2.9;
(x) the control of any matters affecting the rights and
obligations of the Partnership, including the bringing and
defending of actions at law or in equity and otherwise engaging
in the conduct of litigation, arbitration or mediation and the
incurring of legal expense and the settlement of claims and
litigation;
(xi) the indemnification of any Person against liabilities
and contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any
National Securities Exchange and the delisting of some or all of
the Limited Partner Interests from, or requesting that trading
be suspended on, any such exchange (subject to any prior
approval that may be required under Section 4.7);
(xiii) the purchase, sale or other acquisition or
disposition of Partnership Securities, or the issuance of
options, rights, warrants and appreciation rights relating to
Partnership Securities;
(xiv) the undertaking of any action in connection with the
Partnership’s ownership or operation of any Group Member,
including exercising on behalf and for the benefit of the
Partnership, the Partnership’s rights as the sole member of
the Operating General Partner; and
(xv) the entering into of agreements with any of its
Affiliates to render services to a Group Member or to itself in
the discharge of its duties as General Partner of the
Partnership, including the Administrative Services Agreement and
any amendments thereto.
(b) Notwithstanding any other provision of this Agreement,
any Group Member Agreement, the Delaware Act or any applicable
law, rule or regulation, each of the Partners and each other
Person who may acquire an interest in Partnership Securities
hereby (i) approves, ratifies and confirms the execution,
delivery and performance by the parties thereto of this
Agreement, the Underwriting Agreement, the Contribution
Agreement, the Administrative Services Agreement, any Group
Member Agreement of any other Group Member and the other
agreements described in or filed as a part of the Registration
Statement that are related to the transactions contemplated by
the Registration Statement; (ii) agrees that the General
Partner (on its own or through any officer of the Partnership)
is authorized to execute, deliver and perform the agreements
referred to in clause (i) of this sentence and the other
agreements, acts, transactions and matters described in or
contemplated by the Registration Statement on behalf of the
Partnership without any further act, approval or vote of the
Partners or the other Persons who may acquire an interest in
Partnership Securities; and (iii) agrees that the
execution, delivery or performance by the General Partner, any
Group Member or any Affiliate of any of them, of this Agreement
or any agreement authorized or permitted under this Agreement
(including the exercise by the General Partner or any Affiliate
of the General Partner of the rights accorded pursuant to
Article XV), shall not constitute a breach by the
General Partner of any duty that the General Partner may owe the
Partnership or the Limited Partners or any other Persons under
this Agreement (or any other agreements) or of any duty stated
or implied by law or equity.
7.2 Certificate of Limited
Partnership. The General Partner has caused the
Certificate of Limited Partnership to be filed with the
Secretary of State of the State of Delaware as required by the
Delaware Act and shall use all reasonable efforts to cause to be
filed such other certificates or documents that the General
Partner determines to be necessary or appropriate for the
formation, continuation, qualification and operation of a
limited partnership (or a partnership in which the limited
partners have limited liability) in the State of Delaware or any
other state in which the Partnership may elect to do business or
own property. To the extent that the General Partner determines
such action to be necessary or appropriate, the General Partner
shall file amendments to and restatements of the Certificate of
Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership or other
entity in which the limited partners have limited
liability) under the laws of the State of Delaware or of any
other state in which the Partnership may elect to do business or
own property. Subject to the terms of
Section 3.4(a), the General Partner shall not be
required, before or after filing, to deliver or mail a copy of
the Certificate of Limited Partnership, any qualification
document or any amendment thereto to any Limited Partner.
7.3 Restrictions on General Partner’s
Authority. Except as provided in
Articles XII and XIV, the General Partner may
not sell, exchange or otherwise dispose of, or approve on behalf
of the Partnership the sale, exchange or other disposition of,
all or substantially all of the assets of the Partnership Group,
taken as a whole, or interests owned directly or indirectly by
the Partnership, taken as a whole, in a single transaction or a
series of related transactions (including by way of merger,
consolidation or other combination or sale of ownership
interests of the Partnership’s Subsidiaries), without the
approval of holders of a majority of Outstanding Units and
Special Approval; provided however, that this provision
shall not preclude or limit the General Partner’s ability
to mortgage, pledge, hypothecate or grant a security interest in
all or substantially all of the assets of the Partnership Group
and shall not apply to any forced sale of any or all of the
assets of the Partnership Group pursuant to the foreclosure of,
or other realization upon, any such encumbrance. Without the
approval of holders of a majority of Outstanding Units, the
General Partner shall not, on behalf of the Partnership, except
as permitted under Sections 4.6, 11.1 and
11.2, elect or cause the Partnership to elect a successor
general partner of the Partnership.
7.4 Reimbursement of the General Partner.
(a) Except as provided in this Section 7.4 and
elsewhere in this Agreement, none of the General Partner or its
Affiliates shall be compensated for its services as a general
partner or managing member of any Group Member.
(b) Subject to any applicable limitations contained in the
Administrative Services Agreement, the General Partner or EPCO,
without duplication, shall be reimbursed on a monthly basis, or
such other basis as the General Partner may determine, for
(i) all direct and indirect expenses it incurs or payments
it makes on behalf of the Partnership (including amounts
incurred by EPCO under the Administrative Services Agreement and
including salary, bonus, incentive compensation and other
amounts paid to any Person, including Affiliates of the General
Partner, to perform services for the Partnership or the General
Partner in the discharge of its duties to the Partnership), and
(ii) all other expenses allocable to the Partnership or
otherwise incurred in connection with operating the
Partnership’s business (including expenses allocated to the
General Partner by its Affiliates). The General Partner shall
determine the expenses that are allocable to the Partnership.
Reimbursements pursuant to this Section 7.4 shall be
in addition to any reimbursement to the General Partner as a
result of indemnification pursuant to
Section 7.7.
(c) The General Partner, without the approval of the
Limited Partners (who shall have no right to vote in respect
thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices
(including plans, programs and practices involving the issuance
of Partnership Securities or options to purchase or rights,
warrants or appreciation rights relating to Partnership
Securities), or cause the Partnership to issue Partnership
Securities in connection with, or pursuant to, any employee
benefit plan, employee program or employee practice maintained
or sponsored by the General Partner or any of its Affiliates, in
each case for the benefit of employees of the General Partner,
any Group Member or any Affiliate, or any of them, in respect of
services performed, directly or indirectly, for the benefit of
the Partnership Group. The Partnership agrees to issue and sell
to the General Partner or any of its Affiliates, or directly to
the applicable employees, any Partnership Securities that the
General Partner or such Affiliate is obligated to provide to any
employees pursuant to any such employee benefit plans, employee
programs or employee practices. Expenses incurred by the General
Partner or such Affiliate in connection with any such plans,
programs and practices (including the net cost to the General
Partner or such Affiliate of Partnership Securities purchased by
the General Partner or such Affiliate (on behalf of the
applicable employees) from the Partnership to fulfill options or
awards under such plans, programs and practices) shall be
reimbursed in accordance with Section 7.4(b). Any
and all obligations of the General Partner under any employee
benefit plans, employee programs or employee
practices adopted by the General Partner as permitted by this
Section 7.4(c) shall constitute obligations of the
General Partner hereunder and shall be assumed by any successor
General Partner approved pursuant to Section 11.1 or
11.2 or the transferee of or successor to all of the
General Partner’s Partnership Interest as the General
Partner in the Partnership pursuant to
Section 4.6.
7.5 Outside Activities.
(a) After the Closing Date, the General Partner, for so
long as it is the general partner of the Partnership
(i) agrees that its sole business will be to act as the
general partner of the Partnership and to undertake activities
that are ancillary or related thereto (including being a limited
partner in the Partnership), and (ii) shall not engage in
any business or activity or incur any debts or liabilities
except in connection with or incidental to (A) its
performance as general partner or managing member of one or more
Group Members or as described in or contemplated by the
Registration Statement or (B) the acquiring, owning or
disposing of debt or equity securities in any Group Member.
(b) Except as specifically restricted by the Administrative
Services Agreement, each Indemnitee (other than the General
Partner) shall have the right to engage in businesses of every
type and description and other activities for profit and to
engage in and possess an interest in other business ventures of
any and every type or description, whether in businesses engaged
in or anticipated to be engaged in by any Group Member,
independently or with others, including business interests and
activities in direct competition with the business and
activities of any Group Member, and none of the same shall
constitute a breach of this Agreement or any duty expressed or
implied by law or equity to any Group Member or any Partner.
None of any Group Member, any Limited Partner nor any other
Person shall have any rights by virtue of this Agreement, any
Group Member Agreement or the partnership relationship
established hereby or thereby in any business ventures of any
Indemnitee.
(c) Subject to the terms of the Administrative Services
Agreement, but otherwise notwithstanding anything to the
contrary in this Agreement, (i) the engaging in competitive
activities by any Indemnitees (other than the General Partner)
in accordance with the provisions of this
Section 7.5 is hereby approved by the Partnership
and all Partners, (ii) it shall be deemed not to be a
breach of any fiduciary duty or any other obligation of any type
whatsoever of any Indemnitee for the Indemnitees (other than the
General Partner) to engage in such business interests and
activities in preference to or to the exclusion of the
Partnership and (iii) the General Partner and the
Indemnitees shall have no obligation hereunder or as a result of
any duty expressed or implied by law or equity to present
business opportunities to the Partnership.
(d) Notwithstanding anything to the contrary in this
Agreement or in the Administrative Services Agreement (including
provisions relating to opportunities that may be offered by
certain Indemnitees in their discretion), the doctrine of
corporate opportunity or any analogous doctrine shall not apply
to any Indemnitee (including the General Partner), and no
Indemnitee (including the General Partner) who acquires
knowledge of a potential transaction, agreement, arrangement or
other matter that may be an opportunity for the Partnership,
shall have any duty to communicate or offer such opportunity to
the Partnership, and such Indemnitee (including the General
Partner) shall not be liable to the Partnership, to any Limited
Partner or any other Person for breach of any fiduciary or other
duty by reason of the fact that such Indemnitee (including the
General Partner) pursues or acquires for itself, directs such
opportunity to another Person or does not communicate such
opportunity or information to the Partnership; provided that
such Indemnitee does not pursue, acquire or direct such
opportunity as a result of or using confidential or proprietary
information provided by or on behalf of the Partnership to such
Indemnitee, other than in accordance with the Administrative
Services Agreement.
(e) The General Partner and each of its Affiliates may
acquire Units or other Partnership Securities in addition to
those acquired on the Closing Date and, except as otherwise
provided in this Agreement, shall be entitled to exercise, at
their option, all rights of the General Partner or a Limited
Partner, as applicable, relating to such Units or other
Partnership Securities. For purposes of this
Section 7.5(e), the term “Affiliates” when
used with respect to the General Partner shall not include any
Group Member.
7.6 Loans from the General Partner; Loans or
Contributions from the Partnership; Contracts with Affiliates;
Certain Restrictions on the General Partner.
(a) The General Partner or any of its Affiliates may, but
shall be under no obligation to, lend to any Group Member, and
any Group Member may borrow from the General Partner or any of
its Affiliates, funds needed or desired by the Group Member for
such periods of time and in such amounts as the General Partner
may determine; provided, however, that in any such
case the lending party may not charge the borrowing party
interest at a rate greater than the rate that would be charged
to the borrowing party or impose terms less favorable to the
borrowing party than would be charged or imposed on the
borrowing party by unrelated lenders on comparable loans made on
an arm’s-length basis (without reference to the lending
party’s financial abilities or guarantees), all as
determined by the General Partner. Any loan made by the General
Partner or its Affiliate to a Group Member the terms of which
are approved by Special Approval shall be deemed to meet the
requirements of this Section 7.6(a). The borrowing
party shall reimburse the lending party for any costs (other
than any additional interest costs) incurred by the lending
party in connection with the borrowing of such funds. For
purposes of this Section 7.6(a) and
Section 7.6(b), the term “Group Member”
shall include any Affiliate of a Group Member that is controlled
by the Group Member.
(b) The Partnership may lend or contribute to any Group
Member, and any Group Member may borrow from the Partnership,
funds on terms and conditions determined by the General Partner.
No Group Member may lend funds to the General Partner or any of
its Affiliates (other than another Group Member).
(c) The General Partner may itself, or may enter into an
agreement, in addition to the Administrative Services Agreement,
with any of its Affiliates to, render services to a Group Member
or to the General Partner in the discharge of its duties as
general partner of the Partnership. Any services rendered to the
Group Member by the General Partner or any of its Affiliates
shall be on terms that are fair and reasonable to the Group
Member; provided, however, that the requirements of this
Section 7.6(c) shall be deemed satisfied as to
(i) any transaction approved by Special Approval,
(ii) any transaction, the terms of which are no less
favorable to the Group Member than those generally being
provided to or available from unrelated third parties, or
(iii) any transaction that, taking into account the
totality of the relationship between the parties involved
(including other transactions that may be particularly favorable
or advantageous to the Group Member), is equitable to the Group
Member. The provisions of Section 7.4 shall apply to
the rendering of services described in this
Section 7.6(c).
(d) The Partnership may transfer, and cause other Group
Members to transfer, assets to joint ventures, other
partnerships, corporations, limited liability companies or other
business entities in which it is or thereby becomes a
participant upon such terms and subject to such conditions as
are consistent with this Agreement and applicable law.
(e) Neither the General Partner nor any of its Affiliates
shall sell, transfer or convey any property to, or purchase any
property from, a Group Member, directly or indirectly, except
pursuant to transactions that are fair and reasonable to the
Group Member; provided, however, that the requirements of
this Section 7.6(e) shall be deemed to be satisfied
as to (i) the transactions effected pursuant to Sections
5.2 and 5.3 and any other transactions described in
or contemplated by the Registration Statement, (ii) any
transaction approved by Special Approval, (iii) any
transaction, the terms of which are objectively demonstrable to
be no less favorable to the Group Member than those generally
being provided to or available from unrelated third parties, or
(iv) any transaction that, taking into account the totality
of the relationship between the parties involved (including
other transactions that may be particularly favorable or
advantageous to the Partnership), is equitable to the Group
Member. With respect to any contribution of assets to the
Partnership in exchange for Partnership Securities, the Audit
and Conflicts Committee, in determining (in connection with
Special Approval) whether the appropriate number of Partnership
Securities are being issued, may take into account, among other
things, the fair market value of the assets, the liquidated and
contingent liabilities assumed, the tax basis in the assets, the
extent to which tax-only allocations to the transferor will
protect the existing partners of the Partnership against a low
tax
basis, and such other factors as the Audit and Conflicts
Committee determines to be relevant under the circumstances.
(f) The General Partner and its Affiliates will have no
obligation to permit any Group Member to use any facilities or
assets of the General Partner and its Affiliates, except as may
be provided in contracts entered into from time to time
specifically dealing with such use, nor shall there be any
obligation on the part of the General Partner or its Affiliates
to enter into such contracts.
(g) Without limitation of Sections 7.6(a)
through 7.6(f), and notwithstanding anything to the
contrary in this Agreement, the existence of the conflicts of
interest described in the Registration Statement are hereby
approved by all Partners.
7.7 Indemnification.
(a) To the fullest extent permitted by law but subject to
the limitations expressly provided in this Agreement, all
Indemnitees shall be indemnified and held harmless by the
Partnership from and against any and all losses, claims,
damages, liabilities, joint or several, expenses (including
legal fees and expenses), judgments, fines, penalties, interest,
settlements or other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any Indemnitee may be
involved, or is threatened to be involved, as a party or
otherwise, by reason of its status as an Indemnitee;
provided, that the Indemnitee shall not be indemnified
and held harmless if there has been a final and non-appealable
judgment entered by a court of competent jurisdiction
determining that, in respect of the matter for which the
Indemnitee is seeking indemnification pursuant to this
Section 7.7, the Indemnitee acted in bad faith or
engaged in fraud, willful misconduct, or in the case of a
criminal matter, acted with knowledge that the Indemnitee’s
conduct was unlawful; provided, further, no
indemnification pursuant to this Section 7.7 shall
be available to the General Partner or its Affiliates (other
than a Group Member) with respect to its or their obligations
incurred pursuant to the Underwriting Agreement, the Omnibus
Agreement or the Contribution Agreement (other than obligations
incurred by the General Partner on behalf of the Partnership).
Any indemnification pursuant to this Section 7.7
shall be made only out of the assets of the Partnership, it
being agreed that the General Partner shall not be personally
liable for such indemnification and shall have no obligation to
contribute or loan any monies or property to the Partnership to
enable it to effectuate such indemnification.
(b) To the fullest extent permitted by law, expenses
(including legal fees and expenses) incurred by an Indemnitee
who is indemnified pursuant to Section 7.7(a) in
defending any claim, demand, action, suit or proceeding shall,
from time to time, be advanced by the Partnership prior to a
determination that the Indemnitee is not entitled to be
indemnified, upon receipt by the Partnership of any undertaking
by or on behalf of the Indemnitee to repay such amount if it
shall be determined that the Indemnitee is not entitled to be
indemnified as authorized in this
Section 7.7.
(c) The indemnification provided by this
Section 7.7 shall be in addition to any other rights
to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Units
entitled to vote on such matter, as a matter of law or
otherwise, both as to actions in the Indemnitee’s capacity
as an Indemnitee, and as to actions in any other capacity
(including any capacity under the Underwriting Agreement), and
shall continue as to an Indemnitee who has ceased to serve in
such capacity and shall inure to the benefit of the heirs,
successors, assigns and administrators of the Indemnitee.
(d) The Partnership may purchase and maintain (or reimburse
the General Partner or its Affiliates for the cost of)
insurance, on behalf of the General Partner, its Affiliates and
such other Persons as the General Partner shall determine,
against any liability that may be asserted against or expense
that may be incurred by such Person in connection with the
Partnership’s activities or such Person’s activities
on behalf of the Partnership, regardless of whether the
Partnership would have the power to indemnify such Person
against such liability under the provisions of this Agreement.
(e) For purposes of this Section 7.7, the
Partnership shall be deemed to have requested an Indemnitee to
serve as fiduciary of an employee benefit plan whenever the
performance by it of its duties
to the Partnership also imposes duties on, or otherwise involves
services by, it to the plan or participants or beneficiaries of
the plan; excise taxes assessed on an Indemnitee with respect to
an employee benefit plan pursuant to applicable law shall
constitute “fines” within the meaning of
Section 7.7(a); and action taken or omitted by the
Indemnitee with respect to any employee benefit plan in the
performance of its duties for a purpose reasonably believed by
it to be in the best interest of the participants and
beneficiaries of the plan shall be deemed to be for a purpose
that is in the best interest of the Partnership.
(f) In no event may an Indemnitee subject the Limited
Partners to personal liability by reason of the indemnification
provisions set forth in this Agreement.
(g) An Indemnitee shall not be denied indemnification in
whole or in part under this Section 7.7 because the
Indemnitee had an interest in the transaction with respect to
which the indemnification applies if the transaction was
otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for
the benefit of the Indemnitees, their heirs, successors, assigns
and administrators and shall not be deemed to create any rights
for the benefit of any other Persons.
(i) No amendment, modification or repeal of this
Section 7.7 or any provision hereof shall in any
manner terminate, reduce or impair the right of any past,
present or future Indemnitee to be indemnified by the
Partnership, nor the obligations of the Partnership to indemnify
any such Indemnitee under and in accordance with the provisions
of this Section 7.7 as in effect immediately prior
to such amendment, modification or repeal with respect to claims
arising from or relating to matters occurring, in whole or in
part, prior to such amendment, modification or repeal,
regardless of when such claims may arise or be asserted, and
provided such Person became an Indemnitee hereunder prior to
such amendment, modification or repeal.
(j) THE PROVISIONS OF THE INDEMNIFICATION PROVIDED IN THIS
SECTION 7.7 ARE INTENDED BY THE PARTIES TO APPLY
EVEN IF SUCH PROVISIONS HAVE THE EFFECT OF EXCULPATING THE
INDEMNITEE FROM LEGAL RESPONSIBILITY FOR THE CONSEQUENCES OF
SUCH PERSON’S NEGLIGENCE, FAULT OR OTHER CONDUCT.
7.8 Liability of Indemnitees.
(a) Notwithstanding anything to the contrary set forth in
this Agreement, no Indemnitee shall be liable for monetary
damages to the Partnership, the Limited Partners or any other
Persons who have acquired interests in Partnership Securities,
for losses sustained or liabilities incurred as a result of any
act or omission of an Indemnitee unless there has been a final
and non-appealable judgment entered by a court of competent
jurisdiction determining that, in respect of the matter in
question, the Indemnitee acted in bad faith or engaged in fraud,
willful misconduct or, in the case of a criminal matter, acted
with knowledge that the Indemnitee’s conduct was criminal.
(b) Subject to its obligations and duties as General
Partner set forth in Section 7.1(a), the General
Partner may exercise any of the powers granted to it by this
Agreement and perform any of the duties imposed upon it
hereunder either directly or by or through its agents, and the
General Partner shall not be responsible for any misconduct or
negligence on the part of any such agent appointed by the
General Partner in good faith.
(c) Any amendment, modification or repeal of this
Section 7.8 or any provision hereof shall be
prospective only and shall not in any way affect the limitations
on the liability of the Indemnitees under this
Section 7.8 as in effect immediately prior to such
amendment, modification or repeal with respect to claims arising
from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of
when such claims may arise or be asserted.
7.9 Resolution of Conflicts of Interest; Standard
of Conduct and Modification of Duties.
(a) Unless otherwise expressly provided in this Agreement
or any Group Member Agreement, whenever a potential conflict of
interest exists or arises between the General Partner or any of
its
Affiliates, on the one hand, and the Partnership, any of its
Subsidiaries or any Partner, on the other hand, any resolution
or course of action by the General Partner or its Affiliates in
respect of such conflict of interest shall be permitted and
deemed approved by all Partners, and shall not constitute a
breach of this Agreement, any Group Member Agreement or of any
agreement contemplated herein or therein, or of any duty
expressed or implied by law or equity, if the resolution or
course of action in respect of such conflict of interest is or,
by operation of this Agreement is deemed to be, fair and
reasonable to the Partnership; provided that, any
conflict of interest and any resolution of such conflict of
interest shall be deemed fair and reasonable to the Partnership
if such conflict of interest or resolution is (i) approved
by Special Approval, or (ii) on terms no less favorable to
the Partnership than those generally being provided to or
available from unrelated third parties. The Audit and Conflicts
Committee (in connection with a Special Approval) shall be
authorized in connection with its resolution of any conflict of
interest to consider (i) the relative interests of any
party to such conflict, agreement, transaction or situation and
the benefits and burdens relating to such interest;
(ii) the totality of the relationships between the parties
involved (including other transactions that may be particularly
favorable or advantageous to the Partnership); (iii) any
customary or accepted industry practices and any customary or
historical dealings with a particular Person; (iv) any
applicable generally accepted accounting or engineering
practices or principles; (v) the relative cost of capital
of the parties and the consequent rates of return to the equity
holders of the parties; and (vi) such additional factors as
the Audit and Conflicts Committee determines in its sole
discretion to be relevant, reasonable or appropriate under the
circumstances. Nothing contained in this Agreement, however, is
intended to nor shall it be construed to require the Audit and
Conflicts Committee to consider the interests of any Person
other than the Partnership. In the absence of bad faith by the
Audit and Conflicts Committee or the General Partner, the
resolution, action or terms so made, taken or provided
(including granting Special Approval) by the Audit and Conflicts
Committee or the General Partner with respect to such matter
shall be conclusive and binding on all Persons (including all
Partners) and shall not constitute a breach of this Agreement,
of the Group Member Agreement or any other agreement
contemplated herein or therein, or a breach of any standard of
care or duty imposed herein or therein or under the Delaware Act
or any other law, rule or regulation. It shall be presumed that
the resolution, action or terms made, taken or provided by the
Audit and Conflicts Committee or the General Partner was not
made, taken or provided in bad faith, and in any proceeding
brought by any Limited Partner or by or on behalf of such
Limited Partner or any other Limited Partner or the Partnership
challenging such resolution, action or terms, the Person
bringing or prosecuting such proceeding shall have the burden of
overcoming such presumption.
(b) Whenever this Agreement or any other agreement
contemplated hereby provides that the General Partner or any of
its Affiliates is permitted or required to make a decision
(i) in its “sole discretion” or
“discretion,” that it deems “necessary or
appropriate” or under a grant of similar authority or
latitude, the General Partner or such Affiliate shall be
entitled to consider only such interest and factors as it
desires and shall have no duty or obligation to give any
consideration to any interest of, or factors affecting, the
Partnership, any Subsidiary or any Limited Partner, (ii) it
may make such decision in its sole discretion (regardless of
whether there is a reference to “sole discretion” or
“discretion”) unless another express standard is
provided for, or (iii) in “good faith” or under
another express standard, the General Partner or such Affiliate
shall act under such express standard and, with respect to
clauses (i), (ii) and (iii) of this
Section 7.9(b), shall not be subject to any other or
different standards imposed by this Agreement, any Group Member
Agreement, any other agreement contemplated hereby or thereby or
under the Delaware Act or any other law, rule or regulation or
at equity.
(c) Whenever the General Partner makes a determination or
takes or declines to take any other action, or any of its
Affiliates causes it to do so, in its individual capacity as
opposed to in its capacity as a general partner of the
Partnership, whether under this Agreement or any other agreement
contemplated hereby or otherwise, then the General Partner, or
such Affiliates causing it to do so, are entitled to make such
determination or to take or decline to take such other action
free of any fiduciary duty or obligation whatsoever to the
Partnership, any Limited Partner, and the General Partner, or
such Affiliates causing it to do so, shall not be required to
act in good faith or pursuant to any other standard imposed by
this Agreement, any other agreement contemplated hereby or under
the Delaware Act or any other law, rule
or regulation or at equity. By way of illustration and not of
limitation, whenever the phrase, “at the option of the
General Partner,” or some variation of that phrase, is used
in this Agreement, it indicates that the General Partner is
acting in its individual capacity. For the avoidance of doubt,
whenever the General Partner votes or transfers its
Partnership Interests, or refrains from voting or
transferring its Partnership Interests, it shall be acting
in its individual capacity.
(d) Notwithstanding anything to the contrary in this
Agreement, the General Partner and its Affiliates shall have no
duty or obligation, express or implied, to (i) sell or
otherwise dispose of any asset of the Partnership Group other
than in the ordinary course of business or (ii) permit the
Partnership or any other Group Member to use any facilities or
assets of the General Partner and its Affiliates, except as may
be provided in contracts entered into from time to time
specifically dealing with such use. Any determination by the
General Partner or any of its Affiliates to enter into such
contracts shall be at its option.
(e) Except as expressly set forth in this Agreement,
neither the General Partner nor any other Indemnitee shall have
any duties or liabilities, including fiduciary duties, to the
Partnership or any Limited Partner and the provisions of this
Agreement, to the extent that they restrict, eliminate or
otherwise modify the duties and liabilities, including fiduciary
duties, of the General Partner or any other Indemnitee otherwise
existing at law or in equity, are agreed by the Partners to
replace such other duties and liabilities of the General Partner
or such other Indemnitee. To the extent that, at law or in
equity, an Indemnitee has duties, including fiduciary duties,
and liabilities relating thereto to the Partnership or to the
Partners, the General Partner and any other Indemnitee acting in
connection with the Partnership’s business or affairs shall
not be liable to the Partnership or to any Partner for its good
faith reliance on the provisions of this Agreement.
(f) The Limited Partners hereby authorize the General
Partner, on behalf of the Partnership as a partner or member of
a Group Member, to approve of actions by the general partner or
managing member of such Group Member, similar to those actions
permitted to be taken by the General Partner pursuant to this
Section 7.9.
(g) Whenever a particular transaction, arrangement or
resolution of a conflict of interest is required under this
Agreement to be “fair and reasonable” to any Person,
the fair and reasonable nature of such transaction, arrangement
or resolution may be considered by the General Partner or its
Board of Directors (or any committee thereof, including the
Audit and Conflicts Committee) in the context of all similar or
related transactions.
7.10 Other Matters Concerning the General
Partner.
(a) The General Partner may rely and shall be protected in
acting or refraining from acting upon any resolution,
certificate, statement, instrument, opinion, report, notice,
request, consent, order, bond, debenture or other paper or
document believed by it to be genuine and to have been signed or
presented by the proper party or parties.
(b) The General Partner may consult with legal counsel,
accountants, appraisers, management consultants, investment
bankers and other consultants and advisers selected by it, and
any act taken or omitted to be taken in reliance upon the
opinion (including an Opinion of Counsel) of such Persons as to
matters that the General Partner reasonably believes to be
within such Person’s professional or expert competence
shall be conclusively presumed to have been done or omitted in
good faith and in accordance with such opinion.
(c) The General Partner shall have the right, in respect of
any of its powers or obligations hereunder, to act through any
of its duly authorized officers, a duly appointed attorney or
attorneys-in-fact
or the duly authorized officers of the Partnership. Each such
attorney shall, to the extent provided by the General Partner in
the power of attorney, have full power and authority to do and
perform each and every act and duty that is permitted or
required to be done by the General Partner hereunder.
7.11 Purchase or Sale of Partnership
Securities. The General Partner may cause the
Partnership to purchase or otherwise acquire Partnership
Securities. Such Partnership Securities shall be held by the
Partnership as treasury securities unless they are expressly
canceled by action of an appropriate officer of the General
Partner. As long as Partnership Securities are held by any Group
Member, such Partnership Securities shall not be considered
Outstanding for any purpose, except as otherwise provided
herein. The General Partner or any Affiliate of the General
Partner may also purchase or otherwise acquire and sell or
otherwise dispose of Partnership Securities for its own account,
subject to the provisions of Articles IV and
X.
7.12 Registration Rights of the General Partner
and its Affiliates.
(a) If (i) the General Partner or any Affiliate of the
General Partner (including for purposes of this
Section 7.12, any Person that is an Affiliate of the
General Partner at the date hereof notwithstanding that it may
later cease to be an Affiliate of the General Partner) holds
Partnership Securities that it desires to sell and
(ii) Rule 144 of the Securities Act (or any successor
rule or regulation to Rule 144) or another exemption
from registration is not available to enable such holder of
Partnership Securities (the “Holder”) to
dispose of the number of Partnership Securities it desires to
sell at the time it desires to do so without registration under
the Securities Act, then at the option and upon the request of
the Holder, the Partnership shall file with the Commission as
promptly as practicable after receiving such request, and use
all reasonable efforts to cause to become effective and remain
effective for a period of not less than six months following its
effective date or such shorter period as shall terminate when
all Partnership Securities covered by such registration
statement have been sold, a registration statement under the
Securities Act registering the offering and sale of the number
of Partnership Securities specified by the Holder; provided,
however, that the Partnership shall not be required to
effect more than three registrations pursuant to this
Section 7.12(a) and Section 7.12(b); and
provided further, however, that if the Audit and
Conflicts Committee determines in good faith that the requested
registration would be materially detrimental to the Partnership
and its Partners because such registration would
(x) materially interfere with a significant acquisition,
reorganization or other similar transaction involving the
Partnership, (y) require premature disclosure of material
information that the Partnership has a bona fide business
purpose for preserving as confidential or (z) render the
Partnership unable to comply with requirements under applicable
securities laws, then the Partnership shall have the right to
postpone such requested registration for a period of not more
than six months after receipt of the Holder’s request, such
right pursuant to this Section 7.12(a) or
Section 7.12(b) not to be utilized more than once in
any twelve-month period. Except as provided in the preceding
sentence, the Partnership shall be deemed not to have used all
reasonable efforts to keep the registration statement effective
during the applicable period if it voluntarily takes any action
that would result in Holders of Partnership Securities covered
thereby not being able to offer and sell such Partnership
Securities at any time during such period, unless such action is
required by applicable law. In connection with any registration
pursuant to the first sentence of this Section 7.12(a), the
Partnership shall (i) promptly prepare and file
(A) such documents as may be necessary to register or
qualify the securities subject to such registration under the
securities laws of such states as the Holder shall reasonably
request; provided, however, that no such qualification
shall be required in any jurisdiction where, as a result
thereof, the Partnership would become subject to general service
of process or to taxation or qualification to do business as a
foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration, and
(B) such documents as may be necessary to apply for listing
or to list the Partnership Securities subject to such
registration on such National Securities Exchange as the Holder
shall reasonably request, and (ii) do any and all other
acts and things that may be necessary or appropriate to enable
the Holder to consummate a public sale of such Partnership
Securities in such states. Except as set forth in
Section 7.12(d), all costs and expenses of any such
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(b) If any Holder holds Partnership Securities that it
desires to sell and Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another
exemption from registration is not available to enable such
Holder to dispose of the number of Partnership Securities it
desires to sell at the time it desires to do so without
registration under the Securities Act, then at the option and
upon the
request of the Holder, the Partnership shall file with the
Commission as promptly as practicable after receiving such
request, and use all reasonable efforts to cause to become
effective and remain effective for a period of not less than six
months following its effective date or such shorter period as
shall terminate when all Partnership Securities covered by such
shelf registration statement have been sold, a “shelf”
registration statement covering the Partnership Securities
specified by the Holder on an appropriate form under
Rule 415 under the Securities Act, or any similar rule that
may be adopted by the Commission; provided, however, that
the Partnership shall not be required to effect more than three
registrations pursuant to Section 7.12(a) and this
Section 7.12(b); and provided further,
however, that if the Audit and Conflicts Committee
determines in good faith that any offering under, or the use of
any prospectus forming a part of, the shelf registration
statement would be materially detrimental to the Partnership and
its Partners because such offering or use would
(x) materially interfere with a significant acquisition,
reorganization or other similar transaction involving the
Partnership, (y) require premature disclosure of material
information that the Partnership has a bona fide business
purpose for preserving as confidential or (z) render the
Partnership unable to comply with requirements under applicable
securities laws, then the Partnership shall have the right to
suspend such offering or use for a period of not more than six
months after receipt of the Holder’s request, such right
pursuant to Section 7.12(a) or this
Section 7.12(b) not to be utilized more than once in
any twelve-month period. Except as provided in the preceding
sentence, the Partnership shall be deemed not to have used all
reasonable efforts to keep the shelf registration statement
effective during the applicable period if it voluntarily takes
any action that would result in Holders of Partnership
Securities covered thereby not being able to offer and sell such
Partnership Securities at any time during such period, unless
such action is required by applicable law. In connection with
any shelf registration pursuant to this
Section 7.12(b), the Partnership shall
(i) promptly prepare and file (A) such documents as
may be necessary to register or qualify the securities subject
to such shelf registration under the securities laws of such
states as the Holder shall reasonably request; provided,
however, that no such qualification shall be required in any
jurisdiction where, as a result thereof, the Partnership would
become subject to general service of process or to taxation or
qualification to do business as a foreign corporation or
partnership doing business in such jurisdiction solely as a
result of such shelf registration, and (B) such documents
as may be necessary to apply for listing or to list the
Partnership Securities subject to such shelf registration on
such National Securities Exchange as the Holder shall reasonably
request, and (ii) do any and all other acts and things that
may be necessary or appropriate to enable the Holder to
consummate a public sale of such Partnership Securities in such
states. Except as set forth in Section 7.12(d), all
costs and expenses of any such shelf registration and offering
(other than the underwriting discounts and commissions) shall be
paid by the Partnership, without reimbursement by the Holder.
(c) If the Partnership shall at any time propose to file a
registration statement under the Securities Act for an offering
of equity securities of the Partnership for cash (other than an
offering relating solely to an employee benefit plan), the
Partnership shall use all reasonable efforts to include such
number or amount of securities held by the Holder in such
registration statement as the Holder shall request;
provided, that the Partnership is not required to make
any effort or take an action to so include the securities of the
Holder once the registration statement is declared effective by
the Commission, including any registration statement providing
for the offering from time to time of securities pursuant to
Rule 415 of the Securities Act. If the proposed offering
pursuant to this Section 7.12(c) shall be an
underwritten offering, then, in the event that the managing
underwriter or managing underwriters of such offering advise the
Partnership and the Holder in writing that in their opinion the
inclusion of all or some of the Holder’s Partnership
Securities would adversely and materially affect the success of
the offering, the Partnership shall include in such offering
only that number or amount, if any, of securities held by the
Holder that, in the opinion of the managing underwriter or
managing underwriters, will not so adversely and materially
affect the offering. Except as set forth in
Section 7.12(d), all costs and expenses of any such
registration and offering (other than the underwriting discounts
and commissions) shall be paid by the Partnership, without
reimbursement by the Holder.
(d) If underwriters are engaged in connection with any
registration referred to in this Section 7.12, the
Partnership shall provide indemnification, representations,
covenants, opinions and other assurance to
the underwriters in form and substance reasonably satisfactory
to such underwriters. Further, in addition to and not in
limitation of the Partnership’s obligation under
Section 7.7, the Partnership shall, to the fullest
extent permitted by law, indemnify and hold harmless the Holder,
its officers, directors and each Person who controls the Holder
(within the meaning of the Securities Act) and any agent thereof
(collectively, “Indemnified Persons”) from and
against any and all losses, claims, damages, liabilities, joint
or several, expenses (including legal fees and expenses),
judgments, fines, penalties, interest, settlements or other
amounts arising from any and all claims, demands, actions, suits
or proceedings, whether civil, criminal, administrative or
investigative, in which any Indemnified Person may be involved,
or is threatened to be involved, as a party or otherwise, under
the Securities Act or otherwise (hereinafter referred to in this
Section 7.12(d) as a “claim” and in the
plural as “claims”) based upon, arising out of or
resulting from any untrue statement or alleged untrue statement
of any material fact contained in any registration statement
under which any Partnership Securities were registered under the
Securities Act or any state securities or Blue Sky laws, in any
preliminary prospectus (if used prior to the effective date of
such registration statement), or in any summary or final
prospectus or in any amendment or supplement thereto (if used
during the period the Partnership is required to keep the
registration statement current), or arising out of, based upon
or resulting from the omission or alleged omission to state
therein a material fact required to be stated therein or
necessary to make the statements made therein not misleading;
provided, however, that the Partnership shall not be
liable to any Indemnified Person to the extent that any such
claim arises out of, is based upon or results from an untrue
statement or alleged untrue statement or omission or alleged
omission made in such registration statement, such preliminary,
summary or final prospectus or such amendment or supplement, in
reliance upon and in conformity with written information
furnished to the Partnership by or on behalf of such Indemnified
Person specifically for use in the preparation thereof.
(e) The provisions of Sections 7.12(a),
7.12(b) and 7.12(c) shall continue to be
applicable with respect to the General Partner (and any of the
General Partner’s Affiliates) after it ceases to be a
Partner of the Partnership, during a period of two years
subsequent to the effective date of such cessation and for so
long thereafter as is required for the Holder to sell all of the
Partnership Securities with respect to which it has requested
during such two-year period inclusion in a registration
statement otherwise filed or that a registration statement be
filed; provided, however, that the Partnership shall not
be required to file successive registration statements covering
the same Partnership Securities for which registration was
demanded during such two-year period. The provisions of
Section 7.12(d) shall continue in effect thereafter.
(f) The rights to cause the Partnership to register
Partnership Securities pursuant to this Section 7.12
may be assigned (but only with all related obligations) by a
Holder to a transferee or assignee of such Partnership
Securities, provided (i) the Partnership is, within a
reasonable time after such transfer, furnished with written
notice of the name and address of such transferee or assignee
and the Partnership Securities with respect to which such
registration rights are being assigned; and (b) such
transferee or assignee agrees in writing to be bound by and
subject to the terms set forth in this
Section 7.12.
(g) Any request to register Partnership Securities pursuant
to this Section 7.12 shall (i) specify the
Partnership Securities intended to be offered and sold by the
Person making the request, (ii) express such Person’s
present intent to offer such shares for distribution,
(iii) describe the nature or method of the proposed offer
and sale of Partnership Securities, and (iv) contain the
undertaking of such Person to provide all such information and
materials and take all action as may be required in order to
permit the Partnership to comply with all applicable
requirements in connection with the registration of such
Partnership Securities.
7.13 Reliance by Third
Parties. Notwithstanding anything to the contrary
in this Agreement, any Person dealing with the Partnership shall
be entitled to assume that the General Partner and any officer
of the General Partner authorized by the General Partner to act
on behalf of and in the name of the Partnership has full power
and authority to encumber, sell or otherwise use in any manner
any and all assets of the Partnership and to enter into any
authorized contracts on behalf of the Partnership, and such
Person shall be entitled to deal with the General Partner or any
such officer as if it were the Partnership’s sole party in
interest, both
legally and beneficially. Each Limited Partner hereby waives any
and all defenses or other remedies that may be available against
such Person to contest, negate or disaffirm any action of the
General Partner or any such officer in connection with any such
dealing. In no event shall any Person dealing with the General
Partner or any such officer or its representatives be obligated
to ascertain that the terms of the Agreement have been complied
with or to inquire into the necessity or expedience of any act
or action of the General Partner or any such officer or its
representatives. Each and every certificate, document or other
instrument executed on behalf of the Partnership by the General
Partner or any such officer or its representatives shall be
conclusive evidence in favor of any and every Person relying
thereon or claiming thereunder that (i) at the time of the
execution and delivery of such certificate, document or
instrument, this Agreement was in full force and effect,
(ii) the Person executing and delivering such certificate,
document or instrument was duly authorized and empowered to do
so for and on behalf of the Partnership and (iii) such
certificate, document or instrument was duly executed and
delivered in accordance with the terms and provisions of this
Agreement and is binding upon the Partnership.
ARTICLE VIII
Books,
Records, Accounting and Reports
8.1 Records and Accounting. The
General Partner shall keep or cause to be kept at the principal
office of the Partnership appropriate books and records with
respect to the Partnership’s business, including all books
and records necessary to provide to the Limited Partners any
information required to be provided pursuant to
Section 3.4(a). Any books and records maintained by
or on behalf of the Partnership in the regular course of its
business, including the record of the Record Holders of Units or
other Partnership Securities, books of account and records of
Partnership proceedings, may be kept on, or be in the form of,
computer disks, hard drives, punch cards, magnetic tape,
photographs, micrographics or any other information storage
device; provided, that the books and records so
maintained are convertible into clearly legible written form
within a reasonable period of time. The books of the Partnership
shall be maintained, for financial reporting purposes, on an
accrual basis in accordance with U.S. GAAP.
8.2 Fiscal Year. The fiscal year of
the Partnership shall be a fiscal year ending December 31.
8.3 Reports.
(a) As soon as practicable, but in no event later than
120 days after the close of each fiscal year of the
Partnership, the General Partner shall cause to be mailed or
made available to each Record Holder of a Unit as of a date
selected by the General Partner, an annual report containing
consolidated financial statements of the Partnership for such
fiscal year of the Partnership, presented in accordance with
U.S. GAAP, including a balance sheet and statements of
operations and comprehensive income, Partnership equity and cash
flows, such statements to be audited by an independent
registered accounting firm selected by the General Partner.
(b) As soon as practicable, but in no event later than
90 days after the close of each Quarter except the last
Quarter of each fiscal year, the General Partner shall cause to
be mailed or made available to each Record Holder of a Unit, as
of a date selected by the General Partner, such information as
may be required by applicable law, regulation or rule of any
National Securities Exchange on which the Units are listed for
trading, or as the General Partner determines to be necessary or
appropriate.
(c) Such reports shall contain disclosure indicating that
the assets and liabilities of the Partnership Group are separate
from the assets and liabilities of EPCO and the other Affiliates
of the General Partner.
ARTICLE IX
Tax
Matters
9.1 Tax Returns and
Information. The Partnership shall timely file
all returns of the Partnership that are required for federal,
state and local income tax purposes on the basis of the accrual
method and a taxable
year ending on December 31. The tax information reasonably
required by Record Holders for federal and state income tax
reporting purposes with respect to a taxable year shall be
furnished to them within 90 days of the close of the
calendar year in which the Partnership’s taxable year ends.
The classification, realization and recognition of income, gain,
losses and deductions and other items shall be on the accrual
method of accounting for federal income tax purposes.
9.2 Tax Elections.
(a) The Partnership shall make the election under
Section 754 of the Code in accordance with applicable
regulations thereunder, subject to the reservation of the right
to seek to revoke any such election upon the General
Partner’s determination that such revocation is in the best
interests of the Limited Partners. Notwithstanding any other
provision herein contained, for the purposes of computing the
adjustments under Section 743(b) of the Code, the General
Partner shall be authorized (but not required) to adopt a
convention whereby the price paid by a transferee of a Limited
Partner Interest will be deemed to be the lowest quoted closing
price of such Limited Partner Interests on any National
Securities Exchange on which such Limited Partner Interests are
listed or admitted for trading during the calendar month in
which such transfer is deemed to occur pursuant to
Section 6.2(g) without regard to the actual price
paid by such transferee.
(b) Except as otherwise provided herein, the General
Partner shall determine whether the Partnership should make any
other elections permitted by the Code.
9.3 Tax Controversies. Subject to
the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized
and required to represent the Partnership (at the
Partnership’s expense) in connection with all examinations
of the Partnership’s affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend
Partnership funds for professional services and costs associated
therewith. Each Partner agrees to cooperate with the General
Partner and to do or refrain from doing any or all things
reasonably required by the General Partner to conduct such
proceedings.
9.4 Withholding. Notwithstanding
any other provision of this Agreement, the General Partner is
authorized to take any action that may be required to cause the
Partnership to comply with any withholding requirements
established under the Code or any other federal, state or local
law including pursuant to Sections 1441, 1442, 1445 and
1446 of the Code. To the extent that the Partnership is required
or elects to withhold and pay over to any taxing authority any
amount resulting from the allocation or distribution of income
to any Partner (including by reason of Section 1446 of the
Code), the General Partner may treat the amount withheld as a
distribution of cash pursuant to Section 6.3 in the
amount of such withholding from such Partner.
(a) By acceptance of the transfer of any Limited Partner
Interests in accordance with this Section 10.1 or
the issuance of any Limited Partner Interests in a merger or
consolidation pursuant to Article XIV, and except as
provided in Section 4.8, each transferee of a
Limited Partner Interest (including any nominee holder or an
agent or representative acquiring such Limited Partner Interests
for the account of another Person) (i) shall be admitted to
the Partnership as a Limited Partner with respect to the Limited
Partner Interests so transferred to such Person when any such
transfer or admission is reflected in the books and records of
the Partnership, with or without execution of this Agreement,
(ii) shall become bound by the terms of, and shall be
deemed to have executed, this Agreement, (iii) shall become
the Record Holder of the Limited Partner Interests so
transferred, (iv) represents that the transferee has the
capacity, power and authority to enter into this Agreement,
(v) grants the powers of attorney set forth in this
Agreement and (vi) makes the consents and waivers contained
in this Agreement. The transfer of any Limited Partner Interests
and the admission of any new Limited Partner
shall not constitute and amendment to this Agreement. A Person
may become a Record Holder of a Limited Partner Interest without
the consent or approval of any of the Partners. A Person may not
become a Limited Partner without acquiring a Limited Partner
Interest and until such Person is reflected in the books and
records of the Partnership as the Record Holder of such Limited
Partner Interest. The rights and obligations of a Person who is
a Non-citizen Assignee shall be determined in accordance with
Sections 4.8 and 4.9 hereof.
(b) The name and mailing address of each Limited Partner
shall be listed on the books and records of the Partnership
maintained for such purpose by the Partnership or the Transfer
Agent. The General Partner shall update the books and records of
the Partnership from time to time as necessary to reflect
accurately the information therein (or shall cause the Transfer
Agent to do so, as applicable). A Limited Partner Interest may
be represented by a Certificate, as provided in
Section 4.1 hereof.
(c) Any transfer of a Limited Partner Interest shall not
entitle the transferee to share in the profits and losses, to
receive distributions, to receive allocations of income, gain,
loss, deduction or credit or any similar item or to any other
rights to which the transferor was entitled until the transferee
becomes a Limited Partner pursuant to
Section 10.1(a).
10.2 Admission of Successor General
Partner. A successor General Partner approved
pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner’s
Partnership Interest as general partner in the Partnership
pursuant to Section 4.6 who is proposed to be
admitted as a successor General Partner shall be admitted to the
Partnership as the General Partner, effective immediately prior
to the withdrawal or removal of the predecessor or transferring
General Partner pursuant to Section 11.1 or
11.2 or the transfer of the General Partner’s
Partnership Interest as a general partner in the
Partnership pursuant to Section 4.6; provided,
however, that no such successor shall be admitted to the
Partnership until compliance with the terms of
Section 4.6 has occurred and such successor has
executed and delivered such other documents or instruments as
may be required to effect such admission. Any such successor
shall, subject to the terms hereof, carry on the business of the
Partnership without dissolution.
10.3 Amendment of Agreement and Certificate of
Limited Partnership. To effect the admission to
the Partnership of any Partner, the General Partner shall take
all steps necessary and appropriate under the Delaware Act to
amend the records of the Partnership to reflect such admission
and, if necessary, to prepare as soon as practicable an
amendment to this Agreement and, if required by law, the General
Partner shall prepare and file an amendment to the Certificate
of Limited Partnership, and the General Partner may for this
purpose, among others, exercise the power of attorney granted
pursuant to Section 2.6.
ARTICLE XI
Withdrawal
or Removal of Partners
11.1 Withdrawal of the General Partner.
(a) The General Partner shall be deemed to have withdrawn
from the Partnership upon the occurrence of any one of the
following events (each such event herein referred to as an
“Event of Withdrawal”):
(i) the General Partner voluntarily withdraws from the
Partnership by receiving Special Approval and giving notice to
the other Partners;
(ii) the General Partner transfers all of its rights as
General Partner pursuant to Section 4.6, following
the receipt of Special Approval for such transfer;
(iii) the General Partner is removed pursuant to
Section 11.2;
(iv) the General Partner (A) makes a general
assignment for the benefit of creditors; (B) files a
voluntary bankruptcy petition for relief under Chapter 7 of
the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar
relief (but not a reorganization) under any law; (D) files
an answer or other pleading admitting or failing to contest
the material allegations of a petition filed against the General
Partner in a proceeding of the type described in
clauses (A)-(C) of this
Section 11.1(a)(iv); or (E) seeks, consents to
or acquiesces in the appointment of a trustee (but not a
debtor-in-possession),
receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(v) a final and non-appealable order of relief under
Chapter 7 of the United States Bankruptcy Code is entered
by a court with appropriate jurisdiction pursuant to a voluntary
or involuntary petition by or against the General
Partner; or
(vi) (A) in the event the General Partner is a
corporation, a certificate of dissolution or its equivalent is
filed for the General Partner, or 90 days expire after the
date of notice to the General Partner of revocation of its
charter without a reinstatement of its charter, under the laws
of its state of incorporation; (B) in the event the General
Partner is a partnership or a limited liability company, the
dissolution and commencement of winding up of the General
Partner; (C) in the event the General Partner is acting in
such capacity by virtue of being a trustee of a trust, the
termination of the trust; (D) in the event the General
Partner is a natural person, his death or adjudication of
incompetency; and (E) otherwise in the event of the
termination of the General Partner.
If an Event of Withdrawal specified in
Section 11.1(a)(iv), (v) or (vi)(A),
(B), (C) or (E) occurs, the withdrawing
General Partner shall give notice to the Limited Partners within
30 days after such occurrence. The Partners hereby agree
that only the Events of Withdrawal described in this
Section 11.1 shall result in the withdrawal of the
General Partner from the Partnership.
(b) Withdrawal of the General Partner from the Partnership
upon the occurrence of an Event of Withdrawal shall not
constitute a breach of this Agreement under the following
circumstances: (i) at any time during the period beginning
on the Closing Date and ending at 12:00 midnight, Eastern
Standard Time, on December 31, 2016, the General Partner
voluntarily withdraws by giving at least 90 days’
advance notice of its intention to withdraw to the Limited
Partners; provided, that prior to the effective date of
such withdrawal, the withdrawal receives Special Approval and is
approved by holders holding at least a majority of the
Outstanding Units (excluding Common Units held by the General
Partner and its Affiliates) and the General Partner delivers to
the Partnership an Opinion of Counsel (“Withdrawal
Opinion of Counsel”) that such withdrawal (following
the selection of the successor General Partner) would not result
in the loss of the limited liability of any Limited Partner or
cause the Partnership to be treated as an association taxable as
a corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously treated as
such); (ii) at any time after 12:00 midnight, Eastern
Standard Time, on December 31, 2016, the General Partner
voluntarily withdraws by giving at least 90 days’
advance notice to the Unitholders, such withdrawal to take
effect on the date specified in such notice; (iii) at any
time that the General Partner ceases to be the General Partner
pursuant to Section 11.1(a)(ii) or is removed
pursuant to Section 11.2; or
(iv) notwithstanding clause (i) of this sentence, at
any time that the General Partner voluntarily withdraws by
giving at least 90 days’ advance notice of its
intention to withdraw to the Limited Partners, such withdrawal
to take effect on the date specified in the notice, if at the
time such notice is given one Person and its Affiliates (other
than the General Partner and its Affiliates) own beneficially or
of record or control at least 50% of the Outstanding Units. The
withdrawal of the General Partner from the Partnership upon the
occurrence of an Event of Withdrawal shall also constitute the
withdrawal of the General Partner as general partner or managing
member, as the case may be, of any other Group Members. If the
General Partner gives a notice of withdrawal pursuant to
Section 11.1(a)(i), the holders of a majority of
Outstanding Units, may, prior to the effective date of such
withdrawal, elect a successor General Partner. The Person so
elected as successor General Partner shall automatically become
the successor general partner or managing member, as the case
may be, of any other Group Members of which the General Partner
is a general partner or managing member. If, prior to the
effective date of the General Partner’s withdrawal, a
successor is not selected by the Unitholders as provided herein
or the Partnership does not receive a Withdrawal Opinion of
Counsel, the Partnership shall be dissolved in accordance with
Section 12.1. Any successor General Partner elected
in accordance with the terms of this Section 11.1
shall be subject to the provisions of
Section 10.3.
11.2 Removal of the General
Partner. The General Partner may be removed if
such removal receives Special Approval and is approved by
Unitholders holding at least
662/3%
of the Outstanding Units (including Units held by the General
Partner and its Affiliates) voting as a single class. Any such
action by such holders for removal of the General Partner must
also provide for the election of a successor General Partner by
the Unitholders holding a majority of the Outstanding Units
(including Units held by the General Partner and its Affiliates)
voting as a single class. Such removal shall be effective
immediately following the admission of a successor General
Partner pursuant to Section 10.3. The removal of the
General Partner shall also automatically constitute the removal
of the General Partner as general partner or managing member, as
the case may be, of any other Group Members of which the General
Partner is a general partner or managing member. If a Person is
elected as a successor General Partner in accordance with the
terms of this Section 11.2, such Person shall, upon
admission pursuant to Section 10.3, automatically
become a successor general partner or managing member, as the
case may be, of any other Group Members of which the General
Partner is a general partner or managing member. The right of
the holders of Outstanding Units to remove the General Partner
shall not exist or be exercised unless the Partnership has
received an opinion opining as to the matters covered by a
Withdrawal Opinion of Counsel. Any successor General Partner
elected in accordance with the terms of this
Section 11.2 shall be subject to the provisions of
Sections 10.2 and 10.3.
11.3 Interest of Departing General Partner and
Successor General Partner.
(a) In the event of (i) withdrawal of the General
Partner under circumstances where such withdrawal does not
violate this Agreement or (ii) removal of the General
Partner by the holders of Outstanding Units under circumstances
where Cause does not exist and the Units held by the General
Partner and its Affiliates are not voted in favor of such
removal, if a successor General Partner is elected in accordance
with the terms of Sections 11.1 or 11.2, the
Departing General Partner shall have the option exercisable
prior to the effective date of the departure of such Departing
General Partner to require its successor to purchase its
Partnership Interest as a general partner in the
Partnership and any partnership or member interest as the
general partner or managing member of any other Group Member, as
applicable (collectively, the “Purchased
Interest”) in exchange for an amount in cash equal to
the fair market value of such Purchased Interest, such amount to
be determined and payable as of the effective date of its
departure or, if there is not agreement as to the fair market
value of such Purchased Interest, within ten (10) days
after such agreement is reached. If the General Partner is
removed by the Unitholders under circumstances where Cause
exists or if the General Partner withdraws under circumstances
where such withdrawal violates this Agreement, and if a
successor General Partner is elected in accordance with the
terms of Sections 11.1 or 11.2 (or if the
business of the Partnership is continued pursuant to
Section 12.2 and the successor General Partner is
not the former General Partner), such successor shall have the
option, exercisable prior to the effective date of the departure
of such Departing General Partner (or, in the event the business
of the Partnership is continued, prior to the date the business
of the Partnership is continued), to purchase the Purchased
Interest for such fair market value of such Purchased Interest
of the Departing General Partner. In either event, the Departing
General Partner shall be entitled to receive all reimbursements
due such Departing General Partner pursuant to
Section 7.4, including any employee-related
liabilities (including severance liabilities), incurred in
connection with the termination of any employees employed by the
Departing General Partner or its Affiliates (other than the
Partnership) for the benefit of the Partnership or the other
Group Members.
For purposes of this Section 11.3(a), the fair
market value of the Departing General Partner’s Purchased
Interest shall be determined by agreement between the Departing
General Partner and its successor or, failing agreement within
30 days after the effective date of such Departing General
Partner’s departure, by an independent investment banking
firm or other independent expert selected by the Departing
General Partner and its successor, which, in turn, may rely on
other experts, and the determination of which shall be
conclusive as to such matter. If such parties cannot agree upon
one independent investment banking firm or other independent
expert within 45 days after the effective date of such
departure, then the Departing General Partner shall designate an
independent investment banking firm or other independent expert,
the Departing General Partner’s successor shall designate
an independent investment banking firm or other independent
expert, and such firms or experts shall
mutually select a third independent investment banking firm or
independent expert, which third independent investment banking
firm or other independent expert shall determine the fair market
value of the Purchased Interest of the Departing General
Partner. In making its determination, such third independent
investment banking firm or other independent expert may consider
the then current trading price of Units on any National
Securities Exchange on which Units are then listed or admitted
for trading, the value of the Partnership’s assets, the
rights and obligations of the Departing General Partner and
other factors it may deem relevant.
(b) If the Purchased Interest is not purchased in the
manner set forth in Section 11.3(a), the Departing
General Partner (or its transferee) shall become a Limited
Partner and its Purchased Interest shall be converted into
Common Units pursuant to a valuation made by an investment
banking firm or other independent expert selected pursuant to
Section 11.3(a), without reduction in such
Partnership Interest (but subject to proportionate dilution
by reason of the admission of its successor). Any successor
General Partner shall indemnify the Departing General Partner
(or its transferee) as to all debts and liabilities of the
Partnership arising on or after the date on which the Departing
General Partner (or its transferee) becomes a Limited Partner.
For purposes of this Agreement, conversion of the Purchased
Interest of the Departing General Partner to Units will be
characterized as if the General Partner (or its transferee)
contributed its Purchased Interest to the Partnership in
exchange for the newly issued Units.
(c) If a successor General Partner is elected in accordance
with the terms of Sections 11.1 or 11.2 (or
if the business of the Partnership is continued pursuant to
Section 12.2 and the successor General Partner is
not the former General Partner), and the option described in
Section 11.3(a) is not exercised by the party
entitled to do so, the successor General Partner shall, at the
effective date of its admission to the Partnership, contribute
to the Partnership cash in the amount equal to (i) the
quotient obtained by dividing (x) the Percentage Interest
of the Departing Partner by (y) 100% less the Percentage
Interest of the Departing General Partner multiplied by
(ii) the Net Agreed Value of the Partnership’s assets
on such date. In such event, such successor General Partner
shall, subject to the following sentence, be entitled to the
Percentage Interest of all Partnership allocations and
distributions to which the Departing General Partner was
entitled. The successor General Partner shall cause this
Agreement to be amended to reflect that, from and after the date
of such successor General Partner’s admission, the
successor General Partner’s interest in all Partnership
distributions and allocations shall be equal to its Percentage
Interest.
11.4 Withdrawal of Limited
Partners. No Limited Partner shall have any right
to withdraw from the Partnership; provided, however, that
when a transferee of a Limited Partner’s Limited Partner
Interest becomes a Record Holder of the Limited Partner Interest
so transferred, such transferring Limited Partner shall cease to
be a Limited Partner with respect to the Limited Partner
Interest so transferred.
ARTICLE XII
Dissolution
and Liquidation
12.1 Dissolution. The Partnership
shall not be dissolved by the admission of additional Limited
Partners or by the admission of a successor General Partner in
accordance with the terms of this Agreement. Upon the removal or
withdrawal of the General Partner, if a successor General
Partner is elected pursuant to Section 11.1 or
11.2, the Partnership shall not be dissolved and such
successor General Partner shall continue the business of the
Partnership. The Partnership shall dissolve, and (subject to
Section 12.2) its affairs shall be wound up, upon:
(a) an Event of Withdrawal of the General Partner as
provided in Section 11.1(a) (other than
Section 11.1(a)(ii)), unless a successor is elected
and an Opinion of Counsel is received as provided in
Section 11.1(b) or 11.2 and such successor is
admitted to the Partnership pursuant to Section 10.3;
(b) an election to dissolve the Partnership by the General
Partner that receives Special Approval and is approved by the
holders of a majority of Outstanding Units;
(c) the entry of a decree of judicial dissolution of the
Partnership pursuant to the provisions of the Delaware Act; or
(d) at any time there are no Limited Partners, unless the
Partnership is continued without dissolution in accordance with
the Delaware Act.
12.2 Continuation of the Business of the
Partnership After Dissolution. Upon
(a) dissolution of the Partnership following an Event of
Withdrawal caused by the withdrawal or removal of the General
Partner as provided in Section 11.1(a)(i) or
(iii) and the failure of the Partners to select a
successor to such Departing General Partner pursuant to
Sections 11.1 or 11.2, within 90 days
thereafter, or (b) dissolution of the Partnership upon an
event constituting an Event of Withdrawal as defined in
Section 11.1(a)(iv), (v) or (vi), to
the maximum extent permitted by law, within 180 days
thereafter, the holders of a majority of Outstanding Units may
elect to continue the business of the Partnership on the terms
and conditions set forth in this Agreement by appointing as the
successor General Partner a Person approved by the holders of a
majority of Outstanding Units. Unless such an election is made
within the applicable time period as set forth above, the
Partnership shall conduct only activities necessary to wind up
its affairs. If such an election is so made, then:
(i) the Partnership shall continue without dissolution
unless earlier dissolved in accordance with this
Article XII;
(ii) if the successor General Partner is not the former
General Partner, then the interest of the former General Partner
shall be treated in the manner provided in
Section 11.3; and
(iii) the successor General Partner shall be admitted to
the Partnership as General Partner, effective as of the Event of
Withdrawal, by agreeing in writing to be bound by this
Agreement; provided, that the right of the holders of a
majority of Outstanding Units to approve a successor General
Partner and to continue the business of the Partnership shall
not exist and may not be exercised unless the Partnership has
received an Opinion of Counsel that (x) the exercise of the
right would not result in the loss of limited liability of any
Limited Partner and (y) the Partnership would not be
treated as an association taxable as a corporation or otherwise
be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue (to the extent not already so
treated or taxed).
12.3 Liquidator. Upon dissolution
of the Partnership, unless the Partnership is continued pursuant
to Section 12.2, the General Partner shall select
one or more Persons to act as Liquidator. The Liquidator (if
other than the General Partner) shall be entitled to receive
such compensation for its services as may be approved by holders
of at least a majority of the Outstanding Units voting as a
single class. The Liquidator (if other than the General Partner)
shall agree not to resign at any time without 15 days’
prior notice and may be removed at any time, with or without
cause, by notice of removal approved by holders of at least a
majority of the Outstanding Units voting as a single class. Upon
dissolution, removal or resignation of the Liquidator, a
successor and substitute Liquidator (who shall have and succeed
to all rights, powers and duties of the original Liquidator)
shall within 30 days thereafter be approved by holders of
at least a majority of the Outstanding Units voting as a single
class. The right to approve a successor or substitute Liquidator
in the manner provided herein shall be deemed to refer also to
any such successor or substitute Liquidator approved in the
manner herein provided. Except as expressly provided in this
Article XII, the Liquidator approved in the manner
provided herein shall have and may exercise, without further
authorization or consent of any of the parties hereto, all of
the powers conferred upon the General Partner under the terms of
this Agreement (but subject to all of the applicable
limitations, contractual and otherwise, upon the exercise of
such powers, other than the limitation on sale set forth in
Section 7.3, necessary or appropriate to carry out
the duties and functions of the Liquidator hereunder for and
during the period of time required to complete the winding up
and liquidation of the Partnership as provided for herein.
12.4 Liquidation. The Liquidator
shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in
such manner and over such period as determined by the
Liquidator, subject to
Section 17-804
of the Delaware Act and the following:
(a) Disposition of Assets. The assets may
be disposed of by public or private sale on such terms as the
Liquidator may agree, or the Liquidator may distribute the
Partnership’s assets, in whole or in part, in kind if
(i) agreed to by the Partner or Partners or (ii) it
determines that a sale would be impractical or would cause undue
loss to the Partners. Distributions of assets in kind may be
made on a non-Pro Rata basis to the Partners if the Liquidator
determines in good faith that such non-Pro Rata treatment is
fair and reasonable to the Partners as whole; provided,
that any such in-kind distribution shall be deemed fair and
reasonable if approved by Special Approval. If any property is
distributed in kind, the Partner receiving the property shall be
deemed for purposes of Section 12.4(c) to have
received cash equal to its fair market value; and
contemporaneously therewith, appropriate cash distributions must
be made to the other Partners. The Liquidator may defer
liquidation or distribution of the Partnership’s assets for
a reasonable time if it determines that an immediate sale or
distribution of all or some of the Partnership’s assets
would be impractical or would cause undue loss to the Partners.
(b) Discharge of Liabilities. Liabilities
of the Partnership include amounts owed to the Liquidator as
compensation for serving in such capacity (subject to the terms
of Section 12.3) and amounts to Partners otherwise
than in respect of their distribution rights under
Article VI. With respect to any liability that is
contingent, conditional or unmatured or is otherwise not yet due
and payable, the Liquidator shall either settle such claim for
such amount as it thinks appropriate or establish a reserve of
cash or other assets to provide for its payment (or otherwise
make reasonable provision for payment of such claims). When
paid, any unused portion of the reserve shall be distributed as
additional liquidation proceeds.
(c) Liquidation Distributions. All
property and all cash in excess of that required to discharge
liabilities as provided in Section 12.4(b) shall be
distributed to the Partners in accordance with, and to the
extent of, the positive balances in their respective Capital
Accounts, as determined after taking into account all Capital
Account adjustments (other than those made by reason of
distributions pursuant to this Section 12.4(c)) for
the taxable year of the Partnership during which the liquidation
of the Partnership occurs (with such date of occurrence being
determined pursuant to Treasury
Regulation Section 1.704-1(b)(2)(ii)(g)), and such
distribution shall be made by the end of such taxable year (or,
if later, within 90 days after said date of such
occurrence).
12.5 Cancellation of Certificate of Limited
Partnership. Upon the completion of the
distribution of Partnership cash and property as provided in
Section 12.4 in connection with the liquidation of
the Partnership, the Certificate of Limited Partnership and all
qualifications of the Partnership as a foreign limited
partnership in jurisdictions other than the State of Delaware
shall be canceled and such other actions as may be necessary to
terminate the Partnership shall be taken.
12.6 Return of Contributions. The
General Partner shall not be personally liable for, and shall
have no obligation to contribute or loan any monies or property
to the Partnership to enable it to effectuate, the return of the
Capital Contributions of the Limited Partners or Unitholders, or
any portion thereof, it being expressly understood that any such
return shall be made solely from Partnership assets.
12.7 Waiver of Partition. To the
maximum extent permitted by law, each Partner hereby waives any
right to partition of the Partnership property.
12.8 Capital Account
Restoration. No Limited Partner shall have any
obligation to restore any negative balance in its Capital
Account upon liquidation of the Partnership. The General Partner
shall be obligated to restore any negative capital balance in
its Capital Account upon liquidation of its interest in the
Partnership by the end of the taxable year of the Partnership
during which such liquidation occurs, or, if later, within
90 days after the date of such liquidation.
12.9 Certain Prohibited
Acts. Without obtaining Special Approval, the
General Partner shall not take any action to cause the
Partnership to (i) make or consent to a general assignment
for the benefit of the
Partnership’s creditors; (ii) file or consent to the
filing of any bankruptcy, insolvency or reorganization petition
for relief under the United States Bankruptcy Code naming the
Partnership or otherwise seek, with respect to the Partnership,
relief from debts or protection from creditors generally;
(iii) file or consent to the filing of a petition or answer
seeking for the Partnership a liquidation, dissolution,
arrangement, or similar relief under any law; (iv) file an
answer or other pleading admitting or failing to contest the
material allegations of a petition filed against the Partnership
in a proceeding of the type described in clauses
(i) — (iii) of this Section 12.9;
(v) seek, consent to or acquiesce in the appointment of a
receiver, liquidator, conservator, assignee, trustee,
sequestrator, custodian or any similar official for the
Partnership or for all or any substantial portion of its
properties; (vi) sell all or substantially all of its
assets, except in accordance with Section 7.3(b);
(vii) dissolve or liquidate, except in accordance with
Article XII; or (viii) merge or consolidate,
except in accordance with Article XIV.
ARTICLE XIII
Amendment
of Partnership Agreement; Meetings; Record Date
13.1 Amendments to be Adopted Solely by the
General Partner. Each Partner agrees that the
General Partner, without the approval of any Partner, may amend
any provision of this Agreement and execute, swear to,
acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location
of the principal place of business of the Partnership, the
registered agent of the Partnership or the registered office of
the Partnership;
(b) the admission, substitution, withdrawal or removal of
Partners in accordance with this Agreement;
(c) a change that the General Partner determines to be
necessary or appropriate to qualify or continue the
qualification of the Partnership as a limited partnership or a
partnership in which the Limited Partners have limited liability
under the laws of any state or to ensure that no Group Member
will be treated as an association taxable as a corporation or
otherwise taxed as an entity for federal income tax purposes;
(d) a change that the General Partner determines
(i) does not adversely affect the Limited Partners
(including any particular class of Partnership Interests as
compared to other classes of Partnership Interests) in any
material respect, (ii) to be necessary or appropriate to
(A) satisfy any requirements, conditions or guidelines
contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or
contained in any federal or state statute (including the
Delaware Act) or (B) facilitate the trading of the Limited
Partner Interests (including the division of any class or
classes of Outstanding Limited Partner Interests into different
classes to facilitate uniformity of tax consequences within such
classes of Limited Partner Interests) or comply with any rule,
regulation, guideline or requirement of any National Securities
Exchange on which the Common Units are or will be listed or
admitted for trading, (iii) to be necessary or advisable in
connection with action taken by the General Partner pursuant to
Section 5.8 or (iv) to be required to effect
the intent expressed in the Registration Statement or the intent
of the provisions of this Agreement or is otherwise contemplated
by this Agreement;
(e) a change in the fiscal year or taxable year of the
Partnership and any other changes that the General Partner
determines to be necessary or appropriate as a result of a
change in the fiscal year or taxable year of the Partnership
including, if the General Partner shall so determine, a change
in the definition of “Quarter” and the dates on
which distributions are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of
Counsel, to prevent the Partnership, or the General Partner or
its directors, officers, trustees or agents from in any manner
being subjected to the provisions of the Investment Company Act
of 1940, as amended, the Investment Advisers Act of 1940, as
amended, or “plan asset” regulations adopted under the
Employee Retirement Income Security Act of
1974, as amended, regardless of whether such are substantially
similar to plan asset regulations currently applied or proposed
by the United States Department of Labor;
(g) an amendment that the General Partner determines to be
necessary or appropriate in connection with the authorization of
issuance of any class or series of Partnership Securities
pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to
be made by the General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by
a Merger Agreement approved in accordance with
Section 14.3;
(j) an amendment that the General Partner determines to be
necessary or appropriate to reflect, account for the formation
by the Partnership of, or investment by the Partnership in, any
corporation, partnership, joint venture, limited liability
company or other entity other than the Operating Partnership, in
connection with the conduct by the Partnership of activities
permitted by the terms of Section 2.4;
(k) an amendment necessary to require Limited Partners to
provide a statement, certification or other proof to the
Partnership regarding whether such Limited Partner is subject to
United States federal income taxation on the income generated by
the Partnership;
(l) a merger or conveyance pursuant to
Section 14.3(d); or
(m) any other amendments substantially similar to the
foregoing.
13.2 Amendment Procedures. Except
as provided in Sections 13.1 and 13.3, all
amendments to this Agreement shall be made in accordance with
the following requirements. Amendments to this Agreement may be
proposed only by the General Partner; provided, however
that the General Partner shall have no duty or obligation to
propose any amendment to this Agreement and may decline to do so
free of any fiduciary duty or obligation whatsoever to the
Partnership or any Limited Partner and, in declining to propose
an amendment to the fullest extent permitted by law, shall not
be required to act in good faith or pursuant to any other
standard imposed by this Agreement, any other agreement
contemplated hereby or under the Delaware Act or any other law,
rule or regulation or at equity. A proposed amendment shall be
effective upon its approval by the General Partner and the
holders of a majority of Outstanding Units, unless a greater or
different percentage is required under this Agreement or by
Delaware law. Each proposed amendment that requires the approval
of the holders of a specified percentage of Outstanding Units
shall be set forth in a writing that contains the text of the
proposed amendment. If such an amendment is proposed, the
General Partner shall seek the written approval of the requisite
percentage of Outstanding Units or call a meeting of the
Unitholders to consider and vote on such proposed amendment. The
General Partner shall notify all Record Holders upon final
adoption of any such proposed amendments. Notwithstanding the
provisions of Sections 13.1 and 13.2, no
amendment of (i) the definitions of “Audit and
Conflicts Committee” or “Special Approval”,
(ii) Section 2.9,
(iii) Section 4.6,
(iv) Section 7.3,
(v) Section 7.9(a),
(vi) Section 8.3(c),
(vii) Section 10.2,
(viii) Section 12.9;
(ix) Section 14.3 or (x) this
Section 13.2 or any other provision of this
Agreement requiring that Special Approval be obtained as a
condition to any action, shall be effective without first
obtaining Special Approval.
13.3 Amendment Requirements.
(a) Notwithstanding the provisions of
Sections 13.1 and 13.2, no provision of this
Agreement that establishes a percentage of Outstanding Units
(including Units deemed owned by the General Partner) required
to take any action shall be amended, altered, changed, repealed
or rescinded in any respect that would have the effect of
reducing such voting percentage unless such amendment is
approved by the written consent or the affirmative vote of
holders of Outstanding Units whose aggregate Outstanding Units
constitute not less than the voting requirement sought to be
reduced.
(b) Notwithstanding the provisions of
Sections 13.1 and 13.2, no amendment to this
Agreement may (i) enlarge the obligations of any Limited
Partner without its consent, unless such shall be deemed to have
occurred as a result of an amendment approved pursuant to
Section 13.3(c) or (ii) enlarge the obligations
of, restrict in any way any action by or rights of, or reduce in
any way the amounts
distributable, reimbursable or otherwise payable to, the General
Partner or any of its Affiliates without its consent, which
consent may be given or withheld at its option.
(c) Except as provided in Section 14.3, and
without limitation of the General Partner’s authority to
adopt amendments to this Agreement without the approval of any
Partners as contemplated in Section 13.1, any
amendment that would have a material adverse effect on the
rights or preferences of any class of Partnership Interests
in relation to other classes of Partnership Interests must
be approved by the holders of not less than a majority of the
Outstanding Partnership Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement,
except for amendments pursuant to Section 13.1 and
except as otherwise provided by Section 14.3(b), no
amendments shall become effective without the approval of the
holders of at least 90% of the Outstanding Units voting as a
single class unless the Partnership obtains an Opinion of
Counsel to the effect that such amendment will not affect the
limited liability of any Limited Partner under the Delaware Act.
(e) Except as provided in Section 13.1, this
Section 13.3 shall only be amended with the approval
of the holders of at least 90% of the Outstanding Units.
13.4 Special Meetings. All acts of
Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII.
Special meetings of the Limited Partners may be called by the
General Partner or by Limited Partners owning 20% or more of the
Outstanding Units of the class or classes for which a meeting is
proposed. Limited Partners shall call a special meeting by
delivering to the General Partner one or more requests in
writing stating that the signing Limited Partners wish to call a
special meeting and indicating the general or specific purposes
for which the special meeting is to be called. Within
60 days after receipt of such a call from Limited Partners
or within such greater time as may be reasonably necessary for
the Partnership to comply with any statutes, rules, regulations,
listing agreements or similar requirements governing the holding
of a meeting or the solicitation of proxies for use at such a
meeting, the General Partner shall send a notice of the meeting
to the Limited Partners either directly or indirectly through
the Transfer Agent. A meeting shall be held at a time and place
determined by the General Partner on a date not less than
10 days nor more than 60 days after the mailing of
notice of the meeting. Limited Partners shall not vote on
matters that would cause the Limited Partners to be deemed to be
taking part in the management and control of the business and
affairs of the Partnership so as to jeopardize the Limited
Partners’ limited liability under the Delaware Act or the
law of any other state in which the Partnership is qualified to
do business.
13.5 Notice of a Meeting. Notice of
a meeting called pursuant to Section 13.4 shall be
given to the Record Holders of the class or classes of Limited
Partner Interests for which a meeting is proposed in writing by
mail or other means of written communication in accordance with
Section 16.1. The notice shall be deemed to have
been given at the time when deposited in the mail or sent by
other means of written communication.
13.6 Record Date. For purposes of
determining the Limited Partners entitled to notice of or to
vote at a meeting of the Limited Partners or to give approvals
without a meeting as provided in Section 13.11 the
General Partner may set a Record Date, which shall not be less
than 10 nor more than 60 days before (a) the date of
the meeting (unless such requirement conflicts with any rule,
regulation, guideline or requirement of any National Securities
Exchange on which the Limited Partner Interests are listed or
admitted for trading, in which case the rule, regulation,
guideline or requirement of such exchange shall govern) or
(b) in the event that approvals are sought without a
meeting, the date by which Limited Partners are requested in
writing by the General Partner to give such approvals. If the
General Partner does not set a Record Date, then (a) the
Record Date for determining the Limited Partners entitled to
notice of or to vote at a meeting of the Limited Partners shall
be the close of business on the day next preceding the day on
which notice is given, and (b) the Record Date for
determining the Limited Partners entitled to give approvals
without a meeting shall be the date the first written approval
is deposited with the Partnership in care of the General Partner
in accordance with Section 13.11.
13.7 Adjournment. When a meeting is
adjourned to another time or place, notice need not be given of
the adjourned meeting and a new Record Date need not be fixed,
if the time and place thereof are announced at the meeting at
which the adjournment is taken, unless such adjournment shall be
for more than 45 days. At the adjourned meeting, the
Partnership may transact any business which might have been
transacted at the original meeting. If the adjournment is for
more than 45 days or if a new Record Date is fixed for the
adjourned meeting, a notice of the adjourned meeting shall be
given in accordance with this
Article XIII.
13.8 Waiver of Notice. Approval of
Meeting; Approval of Minutes. The transactions of any meeting of
Limited Partners, however called and noticed, and whenever held,
shall be as valid as if it had occurred at a meeting duly held
after regular call and notice, if a quorum is present either in
person or by proxy. Attendance of a Limited Partner at a meeting
shall constitute a waiver of notice of the meeting, except when
the Limited Partner attends the meeting for the express purpose
of objecting at the beginning of the meeting to the transaction
of any business because the meeting is not lawfully called or
convened; and except that attendance at a meeting is not a
waiver of any right to disapprove the consideration of matters
required to be included in the notice of the meeting, but not so
included, if the disapproval is expressly made at the meeting.
13.9 Quorum. The holders of a
majority of the Outstanding Units of the class or classes (or if
such class has not been so designated into Units, a majority of
the Outstanding Limited Partner Interests of such class) for
which a meeting has been called (including Limited Partner
Interests deemed owned by the General Partner) represented in
person or by proxy shall constitute a quorum at a meeting of
Limited Partners of such class or classes unless any such action
by the Limited Partners requires approval by holders of a
greater percentage of such Limited Partner Interests, in which
case the quorum shall be such greater percentage. At any meeting
of the Limited Partners duly called and held in accordance with
this Agreement at which a quorum is present, the act of Limited
Partners holding Outstanding Limited Partner Interests that in
the aggregate represent a majority of the Outstanding Units
entitled to vote and be present in person or by proxy at such
meeting shall be deemed to constitute the act of all Limited
Partners, unless a greater or different percentage is required
with respect to such action under the provisions of this
Agreement, in which case the act of the Limited Partners holding
Outstanding Limited Partner Interests that in the aggregate
represent at least such greater or different percentage shall be
required. The Limited Partners present at a duly called or held
meeting at which a quorum is present may continue to transact
business until adjournment, notwithstanding the withdrawal of
enough Limited Partners to leave less than a quorum, if any
action taken (other than adjournment) is approved by the
required percentage of Outstanding Units or Outstanding Limited
Partner Interests specified in this Agreement (including Limited
Partner Interests deemed owned by the General Partner). In the
absence of a quorum any meeting of Limited Partners may be
adjourned from time to time by the affirmative vote of holders
of at least a majority of the Outstanding Units (or if such
class has not been so designated into Units, a majority of the
Outstanding Limited Partner Interests of such class or classes)
entitled to vote at such meeting (including Limited Partner
Interests deemed owned by the General Partner) represented
either in person or by proxy, but no other business may be
transacted, except as provided in
Section 13.7.
13.10 Conduct of a Meeting. The
General Partner shall have full power and authority concerning
the manner of conducting any meeting of the Limited Partners or
solicitation of approvals in writing, including the
determination of Persons entitled to vote, the existence of a
quorum, the satisfaction of the requirements of
Section 13.4, the conduct of voting, the validity
and effect of any proxies and the determination of any
controversies, votes or challenges arising in connection with or
during the meeting or voting. The General Partner shall
designate a Person to serve as chairman of any meeting and shall
further designate a Person to take the minutes of any meeting.
All minutes shall be kept with the records of the Partnership
maintained by the General Partner. The General Partner may make
such other regulations consistent with applicable law and this
Agreement as it may deem advisable concerning the conduct of any
meeting of the Limited Partners or solicitation of approvals in
writing, including regulations in regard to the appointment of
proxies, the appointment and duties of inspectors of votes and
approvals, the submission and examination of proxies and other
evidence of the right to vote, and the revocation of approvals
in writing.
13.11 Action Without a Meeting. If
authorized by the General Partner, any action that may be taken
at a meeting of the Limited Partners may be taken without a
meeting if an approval in writing setting forth the
action so taken is signed by Limited Partners owning not less
than the minimum percentage of the Outstanding Limited Partner
Interests (including Limited Partner Interests deemed owned by
the General Partner) that would be necessary to authorize or
take such action at a meeting at which all the Limited Partners
were present and voted (unless such provision conflicts with any
rule, regulation, guideline or requirement of any National
Securities Exchange on which the Limited Partner Interests are
listed or admitted for trading, in which case the rule,
regulation, guideline or requirement of such exchange shall
govern). Prompt notice of the taking of action without a meeting
shall be given to the Limited Partners who have not approved in
writing. The General Partner may specify that any written ballot
submitted to Limited Partners for the purpose of taking any
action without a meeting shall be returned to the Partnership
within the time period, which shall be not less than
20 days, specified by the General Partner. If a ballot
returned to the Partnership does not vote all of the Limited
Partner Interests held by the Limited Partners the Partnership
shall be deemed to have failed to receive a ballot for the
Limited Partner Interests that were not voted. If approval of
the taking of any action by the Limited Partners is solicited by
any Person other than by or on behalf of the General Partner,
the written approvals shall have no force and effect unless and
until (a) they are deposited with the Partnership in care
of the General Partner, (b) approvals sufficient to take
the action proposed are dated as of a date not more than
90 days prior to the date sufficient approvals are
deposited with the Partnership and (c) an Opinion of
Counsel is delivered to the General Partner to the effect that
the exercise of such right and the action proposed to be taken
with respect to any particular matter (i) will not cause
the Limited Partners to be deemed to be taking part in the
management and control of the business and affairs of the
Partnership so as to jeopardize the Limited Partners’
limited liability, and (ii) is otherwise permissible under
the state statutes then governing the rights, duties and
liabilities of the Partnership and the Partners.
13.12 Voting and Other Rights.
(a) Only those Record Holders of the applicable Limited
Partner Interests on the Record Date set pursuant to
Section 13.6 (and also subject to the limitations
contained in the definition of “Outstanding”)
shall be entitled to notice of, and to vote at, a meeting of
Limited Partners or to act with respect to matters as to which
the holders of the applicable Outstanding Limited Partner
Interests have the right to vote or to act. All references in
this Agreement to votes of, or other acts that may be taken by,
the Outstanding Limited Partner Interests shall be deemed to be
references to the votes or acts of the Record Holders of such
applicable Outstanding Limited Partner Interests. Except as
otherwise provided herein or pursuant to the designation of the
terms of additional Partnership Securities pursuant to
Section 5.6, references in this Agreement to the
votes, consents or acts of holders of the Outstanding Units
shall be deemed to refer to such holders voting, consenting or
acting as a single class, with each Unit entitled to one vote.
(b) With respect to Limited Partner Interests that are held
for a Person’s account by another Person (such as a broker,
dealer, bank, trust company or clearing corporation, or an agent
of any of the foregoing), in whose name such Limited Partner
Interests are registered, such other Person shall, in exercising
the voting rights in respect of such Limited Partner Interests
on any matter, and unless the arrangement between such Persons
provides otherwise, vote such Limited Partner Interests in favor
of, and at the direction of, the Person who is the beneficial
owner, and the Partnership shall be entitled to assume it is so
acting without further inquiry. The provisions of this
Section 13.12(b) (as well as all other provisions of
this Agreement) are subject to the provisions of
Section 4.3.
ARTICLE XIV
Merger,
Consolidation or Conversion
14.1 Authority. The Partnership may
merge or consolidate with or into one or more corporations,
limited liability companies, statutory trusts or associations,
real estate investment trusts, common law trusts or
unincorporated businesses, including a partnership (whether
general or limited and including a limited liability
partnership), or convert into any such entity, whether such
entity is formed under the laws of the State of Delaware or any
other state of the United States of America, pursuant to a
written agreement of merger or
consolidation (“Merger Agreement”) or a
written plan of conversion (“Plan of
Conversion”)in accordance with this
Article XIV.
14.2 Procedure for Merger, Consolidation or
Conversion. Merger, consolidation or conversion
of the Partnership pursuant to this Article XIV
requires the prior consent of the General Partner and Special
Approval, provided, however, that, to the fullest extent
permitted by law, the General Partner shall have no duty or
obligation to consent to any merger, consolidation or conversion
of the Partnership and may decline to do so free of any
fiduciary duty or obligation whatsoever to the Partnership, or
any Limited Partner and, in declining to consent to a merger,
consolidation or conversion, shall not be required to act in
good faith or pursuant to any other standard imposed by this
Agreement, any other agreement contemplated hereby or under the
Delaware Act or any other law, rule or regulation or at equity.
(a) If the General Partner shall determine to consent to
the merger or consolidation, the General Partner shall approve
the Merger Agreement, which shall set forth:
(i) the names and jurisdictions of formation or
organization of each of the business entities proposing to merge
or consolidate;
(ii) the name and jurisdiction of formation or organization
of the business entity that is to survive the proposed merger or
consolidation (the “Surviving Business Entity”);
(iii) the terms and conditions of the proposed merger or
consolidation;
(iv) the manner and basis of exchanging or converting the
equity securities of each constituent business entity for, or
into, cash, property or general or limited partner interests,
rights, securities or obligations of the Surviving Business
Entity; and (x) if any general or limited partner
interests, securities or rights of any constituent business
entity are not to be exchanged or converted solely for, or into,
cash, property or general or limited partner interests, rights,
securities or obligations of the Surviving Business Entity, the
cash, property or general or limited partner interests, rights,
securities or obligations of any general or limited partnership,
corporation, trust, limited liability company, unincorporated
business or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner
interests, securities or rights are to receive in exchange for,
or upon conversion of their general or limited partner
interests, securities or rights, and (y) in the case of
securities represented by certificates, upon the surrender of
such certificates, which cash, property or general or limited
partner interests, rights, securities or obligations of the
Surviving Business Entity or any general or limited partnership,
corporation, trust, limited liability company, unincorporated
business or other entity (other than the Surviving Business
Entity), or evidences thereof, are to be delivered;
(v) a statement of any changes in the constituent documents
or the adoption of new constituent documents (the articles or
certificate of incorporation, articles of trust, declaration of
trust, certificate or agreement of limited partnership,
operating agreement or other similar charter or governing
document) of the Surviving Business Entity to be effected by
such merger or consolidation;
(vi) the effective time of the merger, which may be the
date of the filing of the certificate of merger pursuant to
Section 14.4 or a later date specified in or
determinable in accordance with the Merger Agreement (provided,
that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective
time shall be fixed at a date or time certain); and
(vii) such other provisions with respect to the proposed
merger or consolidation that the General Partner determines to
be necessary or appropriate.
(c) If the General Partner shall determine to consent to
the conversion, the General Partner shall approve the Plan of
Conversion, which shall set forth:
(i) the name of the converting entity and the converted
entity;
(ii) a statement that the Partnership is continuing its
existence in the organizational form of the converted entity;
(iii) a statement as to the type of entity that the
converted entity is to be and the state or country under the
laws of which the converted entity is to be incorporated, formed
or organized;
(iv) the manner and basis of exchanging or converting the
equity securities of each constituent business entity for, or
into, cash, property or interests, rights, securities or
obligations of the converted entity;
(v) in an attachment or exhibit, the certificate of limited
partnership of the Partnership; and
(vi) in an attachment or exhibit, the certificate of
limited partnership, articles of incorporation, or other
organizational documents of the converted entity;
(vii) the effective time of the conversion, which may be
the date of the filing of the articles of conversion or a later
date specified in or determinable in accordance with the Plan of
Conversion (provided, that if the effective time of the
conversion is to be later than the date of the filing of such
articles of conversion, the effective time shall be fixed at a
date or time certain at or prior to the time of the filing of
such articles of conversion and stated therein); and
(viii) such other provisions with respect to the proposed
conversion that the General Partner determines to be necessary
or appropriate.
14.3 Approval by Limited Partners.
(a) Except as provided in Section 14.3(d) and
Section 14.3(e), the General Partner, upon its
approval of the Merger Agreement or the Plan of Conversion,
shall direct that the Merger Agreement or the Plan of Conversion
be submitted to a vote of Limited Partners, whether at a special
meeting or by written consent, in either case in accordance with
the requirements of Article XIII. A copy or a summary of
the Merger Agreement or the Plan of Conversion, as the case may
be, shall be included in or enclosed with the notice of a
special meeting or the written consent.
(b) Except as provided in Section 14.3(d) and
Section 14.3(e), the Merger Agreement or Plan of
Conversion shall be approved upon receiving the affirmative vote
or consent of the holders of a majority of Outstanding Units.
(c) Except as provided in Section 14.3(d) and
Section 14.3(e), after such approval by vote or
consent of the Limited Partners, and at any time prior to the
filing of the certificate of merger pursuant to
Section 14.4, the merger or consolidation may be
abandoned pursuant to provisions therefor, if any, set forth in
the Merger Agreement or Plan of Conversion, as the case may be.
(d) Notwithstanding anything else contained in this
Agreement, the General Partner is permitted without Limited
Partner approval, to (i) convert the Partnership or any
other Group Member into a new limited liability entity or
(ii) merge the Partnership or any Group Member into, or
convey all of the Partnership’s assets to, another limited
liability entity which shall be newly formed and shall have no
assets, liabilities or operations at the time of such
conversion, merger or conveyance other than those it receives
from the Partnership or other Group Member, provided that in
each such case (A) the General Partner has received an
Opinion of Counsel that the conversion, merger or conveyance, as
the case may be, would not result in the loss of the limited
liability of any Limited Partner or any member of the
Partnership Group or cause the Partnership or the Operating
Partnership to be treated as an association taxable as a
corporation or otherwise to be taxed as an entity for federal
income tax purposes (to the extent not previously treated as
such), (B) the sole purpose of such conversion, merger or
conveyance is to effect a mere change in the legal form of the
Partnership into another limited liability entity, (C) the
governing instruments of the new entity provide the Limited
Partners and the General Partner with rights and obligations
that are, in all material respects, the same rights and
obligations of the Limited Partners and the General Partner
hereunder and (D) the organizational documents of the new
entity and of the new entity’s general partner, manager,
board of directors or other Person exercising management and
decision-making control over the new entity recognize and
provide for, respectively, the establishment of an “Audit
and Conflicts Committee” and the other matters described in
Section 4.6(c)(iv).
(e) Additionally, notwithstanding anything else contained
in this Agreement, the General Partner is permitted, without
Limited Partner approval or Special Approval, to merge or
consolidate the Partnership with or into another entity if
(A) the General Partner has received an Opinion of Counsel
that the merger or consolidation, as the case may be, would not
result in the loss of the limited liability of any Limited
Partner or cause the 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), (B) the merger or consolidation would not
result in an amendment to the Partnership Agreement, other than
any amendments that could be adopted pursuant to
Section 13.1, (C) the Partnership is the
Surviving Business Entity in such merger or consolidation,
(D) each Unit outstanding immediately prior to the
effective date of the merger or consolidation is to be an
identical Unit of the Partnership after the effective date of
the merger or consolidation, (E) the number of Partnership
Securities to be issued by the Partnership in such merger or
consolidation do not exceed 20% of the Partnership Securities
Outstanding immediately prior to the effective date of such
merger or consolidation, and
(F) Section 4.6(c)(iv) is not affected thereby.
14.4 Certificate of Merger. Upon
the required approval by the General Partner and the Limited
Partners of a Merger Agreement, a certificate of merger shall be
executed and filed with the Secretary of State of the State of
Delaware in conformity with the requirements of the Delaware Act.
14.5 Effect of Merger, Consolidation or
Conversion.
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the
business entities that has merged or consolidated, and all
property, real, personal and mixed, and all debts due to any of
those business entities and all other things and causes of
action belonging to each of those business entities, shall be
vested in the Surviving Business Entity and after the merger or
consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business
entity;
(ii) the title to any real property vested by deed or
otherwise in any of those constituent business entities shall
not revert and is not in any way impaired because of the merger
or consolidation;
(iii) all rights of creditors and all liens on or security
interests in property of any of those constituent business
entities shall be preserved unimpaired; and
(iv) all debts, liabilities and duties of those constituent
business entities shall attach to the Surviving Business Entity
and may be enforced against it to the same extent as if the
debts, liabilities and duties had been incurred or contracted by
it.
(b) At the effective time of the articles of conversion:
(i) the Partnership shall continue to exist, without
interruption, but in the organizational form of the converted
entity rather than in its prior organizational form;
(ii) all rights, title, and interests to all real estate
and other property owned by the Partnership shall continue to be
owned by the converted entity in its new organizational form
without reversion or impairment, without further act or deed,
and without any transfer or assignment having occurred, but
subject to any existing liens or other encumbrances thereon;
(iii) all liabilities and obligations of the Partnership
shall continue to be liabilities and obligations of the
converted entity in its new organizational form without
impairment or diminution by reason of the conversion;
(iv) all rights of creditors or other parties with respect
to or against the prior interest holders or other owners of the
Partnership in their capacities as such in existence as of the
effective time of the conversion will continue in existence as
to those liabilities and obligations and may be pursued by such
creditors and obligees as if the conversion did not occur;
(v) a proceeding pending by or against the Partnership or
by or against any of Partners in their capacities as such may be
continued by or against the converted entity in its new
organizational form and by or against the prior partners without
any need for substitution of parties; and
(vi) the Partnership Units that are to be converted into
partnership interests, shares, evidences of ownership, or other
securities in the converted entity as provided in the Plan of
Conversion shall be so converted, and Partners shall be entitled
only to the rights provided in the Plan of Conversion.
(c) A merger, consolidation or conversion effected pursuant
to this Article shall not be deemed to result in a transfer or
assignment of assets or liabilities from one entity to another.
14.6 Amendment of Partnership
Agreement. Pursuant to
Section 17-211(g)
of the Delaware Act and the terms of this Article XIV, an
agreement of merger or consolidation approved in accordance with
Section 17-211(b)
of the Delaware Act may (a) effect any amendment to this
Agreement or (b) effect the adoption of a new partnership
agreement for a limited partnership if it is the Surviving
Business Entity. Any such amendment or adoption made pursuant to
this Section 14.6 shall be effective at the
effective time or date of the merger or consolidation.
ARTICLE XV
Right
to Acquire Limited Partner Interests
15.1 Right to Acquire Limited Partner
Interests.
(a) Notwithstanding any other provision of this Agreement,
if at any time less than 20% of the total Limited Partner
Interests of any class then Outstanding is held by Persons other
than the General Partner and its Affiliates, the General Partner
shall then have the right, which right it may assign and
transfer in whole or in part to the Partnership or any Affiliate
of the General Partner, exercisable at its option, to purchase
all, but not less than all, of such Limited Partner Interests of
such class then Outstanding held by Persons other than the
General Partner and its Affiliates, at the greater of
(x) the Current Market Price as of the date three days
prior to the date that the notice described in
Section 15.1(b) is mailed and (y) the highest
price paid by the General Partner or any of its Affiliates for
any such Limited Partner Interest of such class purchased during
the 90-day
period preceding the date that the notice described in
Section 15.1(b) is mailed. As used in this
Agreement, (i) “Current Market Price” as
of any date of any class of Limited Partner Interests listed or
admitted to trading on any National Securities Exchange means
the average of the daily Closing Prices (as hereinafter defined)
per limited partner interest of such class for the 20
consecutive Trading Days (as hereinafter defined) immediately
prior to such date; (ii) “Closing Price”
for any day means the last sale price on such day, regular way,
or in case no such sale takes place on such day, the average of
the closing bid and asked prices on such day, regular way, in
either case as reported in the principal consolidated
transaction reporting system with respect to securities listed
or admitted for trading on the principal National Securities
Exchange (other than the Nasdaq Stock Market) on which such
Limited Partner Interests of such class are listed or admitted
to trading or, if such Limited Partner Interests of such class
are not listed or admitted to trading on any National Securities
Exchange (other than the Nasdaq Stock Market), the last quoted
price on such day or, if not so quoted, the average of the high
bid and low asked prices on such day in the
over-the-counter
market, as reported by the Nasdaq Stock Market or such other
system then in use, or, if on any such day such Limited Partner
Interests of such class are not quoted by any such organization,
the average of the closing bid and asked prices on such day as
furnished by a professional market maker making a market in such
Limited Partner Interests of such class selected by the General
Partner, or if on any such day no market maker is making a
market in such Limited Partner Interests of such class, the fair
value of such Limited Partner Interests on such day as
determined by the General Partner; and
(iii) “Trading Day” means a day on which
the
principal National Securities Exchange on which such Limited
Partner Interests of any class are listed or admitted to trading
is open for the transaction of business or, if Limited Partner
Interests of a class are not listed or admitted to trading on
any National Securities Exchange, a day on which banking
institutions in New York City generally are open.
(b) If the General Partner elects to exercise the right to
purchase Limited Partner Interests granted pursuant to
Section 15.1(a), the General Partner shall deliver
to the Transfer Agent notice of such election to purchase (the
“Notice of Election to Purchase”) and shall
cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner
Interests of such class (as of a Record Date selected by the
General Partner) at least 10, but not more than 60, days
prior to the Purchase Date. Such Notice of Election to Purchase
shall also be published for a period of at least three
consecutive days in at least two daily newspapers of general
circulation printed in the English language and published in the
Borough of Manhattan, New York. The Notice of Election to
Purchase shall specify the Purchase Date and the price
(determined in accordance with Section 15.1(a)) at
which Limited Partner Interests will be purchased and state that
the General Partner, its Affiliate or the Partnership, as the
case may be, elects to purchase such Limited Partner Interests,
upon surrender of Certificates representing such Limited Partner
Interests in exchange for payment, at such office or offices of
the Transfer Agent as the Transfer Agent may specify, or as may
be required by any National Securities Exchange on which such
Limited Partner Interests are listed or admitted to trading. Any
such Notice of Election to Purchase mailed to a Record Holder of
Limited Partner Interests at his address as reflected in the
records of the Transfer Agent shall be conclusively presumed to
have been given regardless of whether the owner receives such
notice. On or prior to the Purchase Date, the General Partner,
its Affiliate or the Partnership, as the case may be, shall
deposit with the Transfer Agent cash in an amount sufficient to
pay the aggregate purchase price of all of such Limited Partner
Interests to be purchased in accordance with this
Section 15.1. If the Notice of Election to Purchase
shall have been duly given as aforesaid at least 10 days
prior to the Purchase Date, and if on or prior to the Purchase
Date the deposit described in the preceding sentence has been
made for the benefit of the holders of Limited Partner Interests
subject to purchase as provided herein, then from and after the
Purchase Date, notwithstanding that any Certificate shall not
have been surrendered for purchase, all rights of the holders of
such Limited Partner Interests (including any rights pursuant to
Articles IV, V, VI, and XII)
shall thereupon cease, except the right to receive the purchase
price (determined in accordance with
Section 15.1(a)) for Limited Partner Interests
therefor, without interest, upon surrender to the Transfer Agent
of the Certificates representing such Limited Partner Interests,
and such Limited Partner Interests shall thereupon be deemed to
be transferred to the General Partner, its Affiliate or the
Partnership, as the case may be, on the record books of the
Transfer Agent and the Partnership, and the General Partner or
any Affiliate of the General Partner, or the Partnership, as the
case may be, shall be deemed to be the owner of all such Limited
Partner Interests from and after the Purchase Date and shall
have all rights as the owner of such Limited Partner Interests
(including all rights as owner of such Limited Partner Interests
pursuant to Articles IV, V, VI and
XII).
(c) At any time from and after the Purchase Date, a holder
of an Outstanding Limited Partner Interest subject to purchase
as provided in this Section 15.1 may surrender his
Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described
in Section 15.1(a), therefor, without interest
thereon.
ARTICLE XVI
General
Provisions
16.1 Addresses and Notices. Any
notice, demand, request, report or proxy materials required or
permitted to be given or made to a Partner under this Agreement
shall be in writing and shall be deemed given or made when
delivered in person or when sent by first class United
States mail or by other means of written communication to the
Partner at the address described below. Any notice, payment or
report to be given or made to a Partner hereunder shall be
deemed conclusively to have been given or made, and the
obligation to give such notice or report or to make such payment
shall be deemed conclusively to have been fully satisfied, upon
sending of such notice, payment or report to the Record Holder
of such Partnership Securities at his address as shown on the
records of the Transfer Agent or as otherwise shown on the
records of the Partnership, regardless of any claim of any
Person who may have an interest in such Partnership Securities
by reason of any assignment or otherwise. An affidavit or
certificate of making of any notice, payment or report in
accordance with the provisions of this Section 16.1
executed by the General Partner, the Transfer Agent or the
mailing organization shall be prima facie evidence of the giving
or making of such notice, payment or report. If any notice,
payment or report addressed to a Record Holder at the address of
such Record Holder appearing on the books and records of the
Transfer Agent or the Partnership is returned by the United
States Post Office marked to indicate that the United States
Postal Service is unable to deliver it, such notice, payment or
report and any subsequent notices, payments and reports shall be
deemed to have been duly given or made without further mailing
(until such time as such Record Holder or another Person
notifies the Transfer Agent or the Partnership of a change in
his address) if they are available for the Partner at the
principal office of the Partnership for a period of one year
from the date of the giving or making of such notice, payment or
report to the other Partners. Any notice to the Partnership
shall be deemed given if received by the General Partner at the
principal office of the Partnership designated pursuant to
Section 2.3. The General Partner may
rely and shall be protected in relying on any notice or other
document from a Partner or other Person if believed by it to be
genuine.
16.2 Further Action. The parties
shall execute and deliver all documents, provide all information
and take or refrain from taking action as may be necessary or
appropriate to achieve the purposes of this Agreement.
16.3 Binding Effect. This Agreement
shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors,
legal representatives and permitted assigns.
16.4 Integration. This Agreement
constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior
agreements and understandings pertaining thereto.
16.5 Creditors. None of the
provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
16.6 Waiver. No failure by any
party to insist upon the strict performance of any covenant,
duty, agreement or condition of this Agreement or to exercise
any right or remedy consequent upon a breach thereof shall
constitute waiver of any such breach of any other covenant,
duty, agreement or condition.
16.7 Counterparts. This Agreement
may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto,
notwithstanding that all such parties are not signatories to the
original or the same counterpart. Each party shall become bound
by this Agreement immediately upon affixing its signature hereto
or, in the case of a Person acquiring a Limited Partner Interest
pursuant to Section 10.1(a) without execution hereof.
16.8 Applicable Law. This Agreement
shall be construed in accordance with and governed by the laws
of the State of Delaware, without regard to the principles of
conflicts of law.
16.9 Invalidity of Provisions. If
any provision of this Agreement is or becomes invalid, illegal
or unenforceable in any respect, the validity, legality and
enforceability of the remaining provisions contained herein
shall not be affected thereby.
16.10 Consent of Partners. Each
Partner hereby expressly consents and agrees that, whenever in
this Agreement it is specified that an action may be taken upon
the affirmative vote or consent of less than all of the
Partners, such action may be so taken upon the concurrence of
less than all of the Partners and each Partner shall be bound by
the results of such action.
All Limited Partners now and hereafter admitted as Limited
Partners of the Partnership, pursuant to Powers of Attorney now
and hereafter executed in favor of, and granted and delivered to
the General Partner or without execution pursuant to
Section 10.1(a) hereof.
“Adjusted Capital Account” means the Capital
Account maintained for each Partner as of the end of each fiscal
year of the Partnership, (a) increased by any amounts that
such Partner is obligated to restore under the standards set by
Treasury
Regulation Section 1.704-1(b)(2)(ii)(c)
(or is deemed obligated to restore under Treasury
Regulation Sections 1.704-2(g)
and 1.704-2(i)(5)) and (b) decreased by (i) the amount
of all losses and deductions that, as of the end of such fiscal
year, are reasonably expected to be allocated to such Partner in
subsequent years under Sections 704(e)(2) and 706(d) of the
Code and Treasury Regulation
Section 1.751-1(b)(2)(ii),
and (ii) the amount of all distributions that, as of the
end of such fiscal year, are reasonably expected to be made to
such Partner in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting
increases to such Partner’s Capital Account that are
reasonably expected to occur during (or prior to) the year in
which such distributions are reasonably expected to be made
(other than increases as a result of a minimum gain chargeback
pursuant to Section 6.1(c)(i) or 6.1(c)(ii)).
The foregoing definition of Adjusted Capital Account is intended
to comply with the provisions of Treasury
Regulation Section 1.704-1(b)(2)(ii)(d)
and shall be interpreted consistently therewith. The
“Adjusted Capital Account” of a Partner in respect of
a General Partner Interest, a Common Unit or any other specified
interest in the Partnership shall be the amount which such
Adjusted Capital Account would be if such General Partner
Interest, Common Unit or other interest in the Partnership were
the only interest in the Partnership held by a Partner from and
after the date on which such General Partner Interest, Common
Unit or other interest was first issued.
“Adjusted Property” means any property the
Carrying Value of which has been adjusted pursuant to
Section 5.5(d)(i) or 5.5(d)(ii).
Once an Adjusted Property is deemed contributed to a new
partnership in exchange for an interest in the new partnership,
followed by the deemed liquidation of the Partnership for
federal income tax purposes upon a termination of the
Partnership pursuant to Treasury
Regulation Section 1.708-(b)(1)(iv),
such property shall thereafter constitute a Contributed Property
until the Carrying Value of such property is subsequently
adjusted pursuant to Section 5.5(d)(i) or
5.5(d)(ii).
“Administrative Services Agreement” means the
Fourth Amended and Restated Administrative Services Agreement,
dated as
of ,
2007, but effective as
of ,
2007, by and among EPCO, EPE, the EPE GP, the MLP, Enterprise
OLP, the MLP General Partner, Enterprise OLP GP, the
Partnership, the General Partner, the Operating Partnership, the
Operating General Partner, TEPPCO, the TEPPCO General Partner
and certain other parties thereto, as it may be amended,
supplemented or restated from time to time.
“Affiliate” means, with respect to any Person,
any other Person that directly or indirectly through one or more
intermediaries controls, is controlled by or is under common
control with, the Person in question. As used herein, the term
“control” means the possession, direct or indirect, of
the power to direct or cause the direction of the management and
policies of a Person, whether through ownership of voting
securities, by contract or otherwise. Notwithstanding the
foregoing, a Person shall only be considered an
“Affiliate” of the General Partner if (i) such
Person owns, directly or indirectly, 50% or more of the voting
securities of the General Partner or otherwise possesses the
sole power to direct or cause the direction of the management
and policies of the General Partner or (ii) such Person is
under common control with the Person in
clause (i).
“Agreed Allocation” means any allocation, other
than a Required Allocation, of an item of income, gain, loss or
deduction pursuant to the provisions of Section 6.1,
including a Curative Allocation (if appropriate to the context
in which the term “Agreed Allocation” is used).
“Agreed Value” of any Contributed Property
means the fair market value of such property or other
consideration at the time of contribution as determined by the
General Partner. The General Partner shall use such method as it
determines to be appropriate to allocate the aggregate Agreed
Value of Contributed Properties contributed to the Partnership
in a single or integrated transaction among each separate
property on a basis proportional to the fair market value of
each Contributed Property.
“Agreement” means this Amended and Restated
Agreement of Limited Partnership of Duncan Energy Partners L.P.,
as it may be amended, supplemented or restated from time to time.
“Associate” means, when used to indicate a
relationship with any Person, (a) any corporation or
organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more
of any class of voting stock or other voting interest;
(b) any trust or other estate in which such Person has at
least a 20% beneficial interest or as to which such Person
serves as trustee or in a similar fiduciary capacity; and
(c) any relative or spouse of such Person, or any relative
of such spouse, who has the same principal residence as such
Person.
“Audit and Conflicts Committee” means a
committee of the Board of Directors of the General Partner
composed entirely of three or more directors who meet the
independence, qualification and experience requirements
established by the Securities Exchange Act and the rules and
regulations of the Commission thereunder and by the New York
Stock Exchange.
“Available Cash” means, with respect to any
Quarter ending prior to the Liquidation Date:
(a) all cash and cash equivalents of the Partnership Group
on hand on the date of determination of Available Cash with
respect to such Quarter, less
(b) the amount of any cash reserves established by the
General Partner (i) to provide for the proper conduct of
the business of the Partnership Group (including reserves for
future capital expenditures and for anticipated future credit
needs of the Partnership Group) subsequent to such Quarter,
(ii) to comply with applicable law or any loan agreement,
security agreement, mortgage, debt instrument or other agreement
or obligation to which any Group Member is a party of by which
it is bound or its assets are subject or (iii) to provide
funds for distributions under Section 6.3 in respect to any
one or more of the next four Quarters; provided, however,
that disbursements made by a Group Member or cash reserves
established, increased or reduced after the end of such Quarter
but on or before the date of determination of Available Cash
with respect to such Quarter shall be deemed to have been made,
established, increased or reduced, for purposes of determining
Available Cash, within such Quarter if the General Partner so
determines.
Notwithstanding the foregoing, “Available Cash”
with respect to the Quarter in which the Liquidation Date occurs
and any subsequent Quarter shall equal zero.
“Board of Directors” means, with respect to the
Board of Directors of the General Partner, its board of
directors or managers, as applicable, if a corporation or
limited liability company, or if a limited partnership, the
board of directors or board of managers of the general partner
of the General Partner.
“Book-Tax Disparity” means with respect to any
item of Contributed Property or Adjusted Property, as of the
date of any determination, the difference between the Carrying
Value of such Contributed Property or Adjusted Property and the
adjusted basis thereof for federal income tax purposes as of
such date. A Partner’s share of the Partnership’s
Book-Tax Disparities in all of its Contributed Property and
Adjusted Property will be reflected by the difference between
such Partner’s Capital Account balance as maintained
pursuant to Section 5.5 and the hypothetical balance
of such Partner’s Capital Account computed as if it had
been maintained strictly in accordance with federal income tax
accounting principles.
“Business Day” means Monday through Friday of
each week, except that a legal holiday recognized as such by the
government of the United States of America or the states of New
York or Texas shall not be regarded as a Business Day.
“Capital Account” means the capital account
maintained for a Partner pursuant to Section 5.5.
The “Capital Account” of a Partner in respect
of a General Partner Interest, a Common Unit or any other
Partnership Interest shall be the amount which such Capital
Account would be if such General Partner Interest, Common Unit
or other Partnership Interest were the only interest in the
Partnership held by a Partner from and after the date on which
such General Partner Interest, Common Unit or other
Partnership Interest was first issued.
“Capital Contribution” means any cash, cash
equivalents or the Net Agreed Value of Contributed Property that
a Partner contributes to the Partnership.
“Carrying Value” means (a) with respect to
a Contributed Property, the Agreed Value of such property
reduced (but not below zero) by all depreciation, amortization
and cost recovery deductions charged to the Partners’
Capital Accounts in respect of such Contributed Property, and
(b) with respect to any other Partnership property, the
adjusted basis of such property for federal income tax purposes,
all as of the time of determination. The Carrying Value of any
property shall be adjusted from time to time in accordance with
Sections 5.5(d)(i) and 5.5(d)(ii) and to
reflect changes, additions or other adjustments to the Carrying
Value for dispositions and acquisitions of Partnership
properties, as deemed appropriate by the General Partner.
“Cause” means a court of competent jurisdiction
has entered a final, non-appealable judgment finding the General
Partner liable for actual fraud or willful misconduct in its
capacity as general partner of the Partnership.
“Certificate” means (a) a certificate
(i) substantially in the form of Exhibit A to
this Agreement, (ii) issued in global form in accordance
with the rules and regulations of the Depositary or
(iii) in such other form as may be adopted by the General
Partner, issued by the Partnership evidencing ownership of one
or more Common Units, or (b) a certificate, in such form as
may be adopted by the General Partner, issued by the Partnership
evidencing ownership of one or more other Partnership Securities.
“Certificate of Limited Partnership” means the
Certificate of Limited Partnership of the Partnership filed with
the Secretary of State of the State of Delaware as referenced in
Section 2.1, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time
to time.
“Citizenship Certification” means a properly
completed certificate in such form as may be specified by the
General Partner by which a Limited Partner certifies that he
(and if he is a nominee holding for the account of another
Person, that to the best of his knowledge such other Person) is
an Eligible Citizen.
“Claim” has the meaning assigned to such term
in Section 7.12(c).
“Closing Date” means the first date on which
the Common Units are sold by the Partnership to the Underwriters
pursuant to the provisions of the Underwriting Agreement.
“Closing Price” has the meaning assigned to
such term in Section 15.1(a).
“Code” means the Internal Revenue Code of 1986,
as amended and in effect from time to time and as interpreted by
the applicable regulations thereunder. Any reference herein to a
specific section or sections of the Code shall be deemed to
include a reference to any corresponding provision of successor
law.
“Commission” means the United States Securities
and Exchange Commission.
“Common Unit” means a Partnership Security
representing a fractional part of the Partnership Interests
of all Limited Partners and of the General Partner (exclusive of
its interest as a holder of a General Partner Interest) and
having the rights and obligations specified with respect to
Common Units in this Agreement.
“Contributed Property” means each property or
other asset, in such form as may be permitted by the Delaware
Act, but excluding cash, contributed to the Partnership. Once
the Carrying Value of a Contributed Property is adjusted
pursuant to Section 5.5(d), such property shall no
longer constitute a Contributed Property, but shall be deemed an
Adjusted Property.
“Contribution Agreement” means the
Contribution, Conveyance and Assignment Agreement by and among
Enterprise OLP, the Partnership, the General Partner, the OLP
and the Operating General Partner dated as of the date of this
Agreement.
“Curative Allocation” means any allocation of
an item of income, gain, deduction, loss or credit pursuant to
the provisions of Section 6.1(b)(ix).
“Current Market Price” has the meaning assigned
to such term in Section 15.1(a).
“Delaware Act” means the Delaware Revised
Uniform Limited Partnership Act, 6 Del C.
Section 17-101,
et seq., as amended, supplemented or restated from time to time,
and any successor to such statute.
“Departing General Partner” means a former
General Partner from and after the effective date of any
withdrawal or removal of such former General Partner pursuant to
Section 11.1 or 11.2.
“Depositary” means, with respect to any Units
issued in global form, The Depository Trust Company and its
successors and permitted assigns.
“Duncan” means, collectively, individually or in any
combination, Dan L. Duncan, his wife, descendants, heirs
and/or
legatees
and/or
distributees of Dan L. Duncan’s estate,
and/or
trusts established for the benefit of his wife, descendants,
such legatees
and/or
distributees
and/or their
respective descendants, heirs, legatees and distributees.
“Economic Risk of Loss” has the meaning set
forth in Treasury
Regulation Section 1.752-2(a).
“Eligible Citizen” means a Person qualified to
own interests in real property in jurisdictions in which any
Group Member does business or proposes to do business from time
to time, and whose status as a Limited Partner does not or would
not subject such Group Member to a significant risk of
cancellation or forfeiture of any of its properties or any
interest therein, as determined by the General Partner.
“Enterprise OLP” means Enterprise Products
Operating L.P., a Delaware limited partnership, and its
successors and permitted assignees.
“Enterprise OLP GP” means Enterprise Products
OLP GP, Inc., a Delaware corporation and wholly owned subsidiary
of the MLP, and any successors and permitted assigns as the
general partner of the Enterprise OLP.
“EPCO” means EPCO, Inc. (formerly, Enterprise
Products Company), a Texas Subchapter S corporation.
“EPE” means Enterprise GP Holdings L.P., a
Delaware limited partnership, and any successors thereto.
“EPE GP” means EPE Holdings LLC, a Delaware
limited liability company, and its successors and permitted
assigns as general partner of EPE.
“Event of Withdrawal” has the meaning assigned
to such term in Section 11.1(a).
“General Partner” means DEP Holdings, LLC, a
Delaware limited liability company, and its successors and
permitted assigns that are admitted to the Partnership as
general partner of the Partnership, in its capacity as general
partner of the Partnership (except as the context otherwise
requires).
“General Partner Interest” means the management
and ownership interest, if any, of the General Partner in the
Partnership (in its capacity as a general partner without
reference to any Limited Partner Interest held by it) which may
be evidenced by Partnership Securities or a combination thereof
or interest therein, and includes any and all benefits to which
the General Partner is entitled as provided in this Agreement,
together with all obligations of the General Partner to comply
with the terms and provisions of this Agreement.
“General Partner Unit” means a fractional part
of the General Partner Interest having the rights and
obligations specified with respect to the General Partner
Interest, which are used solely as a notional amount for
purposes of making calculations under this Agreement with
respect to determining a Percentage Interest. A General Partner
Unit is not a Unit.
“Group” means a Person that with or through any
of its Affiliates or Associates has any contract, arrangement,
understanding or relationship for the purpose of acquiring,
holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent
solicitation made to 10 or more Persons), exercising investment
power or disposing of any Partnership Securities with any other
Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly,
Partnership Interests.
“Group Member” means a member of the
Partnership Group.
“Group Member Agreement” means the partnership
agreement of any Group Member, other than the Partnership, that
is a limited or general partnership, the limited liability
company agreement of any Group Member that is a limited
liability company, the certificate of incorporation and bylaws
or similar
organizational documents of any Group Member that is a
corporation, the joint venture agreement or similar governing
document of any Group Member that is a joint venture and the
governing or organizational or similar documents of any other
Group Member that is a Person other than a limited or general
partnership, limited liability company, corporation or joint
venture, as such may be amended, supplemented or restated from
time to time.
“Holder” as used in Section 7.12,
has the meaning assigned to such term in
Section 7.12(a).
“Indemnified Persons” has the meaning assigned
to such term in Section 7.12(c).
“Indemnitee” means (a) the General
Partner, any Departing General Partner and any Person who is or
was an Affiliate of the General Partner or any Departing General
Partner, (b) any Person who is or was a member, director,
officer, fiduciary or trustee of a Group Member, (c) any
Person who is or was an officer, member, partner, director or
trustee of the General Partner or any Departing General Partner
or any Affiliate of the General Partner or any Departing General
Partner, or any Affiliate of any such Person and (d) any
Person who is or was serving at the request of the General
Partner or any Departing General Partner or any such Affiliate
as a director, officer, member, partner, fiduciary or trustee of
another Person; provided, that a Person shall not be an
Indemnitee by reason of providing, on a fee-for- services basis,
trustee, fiduciary or custodial services, or (e) any Person
the General Partner designates as an “Indemnitee” for
purposes of this Agreement.
“Initial Common Units” means the Common Units
sold in the Initial Offering.
“Initial Offering” means the initial offering
and sale of Common Units to the public, as described in the
Registration Statement.
“Initial Operating Subsidiaries” means
(1) Mont Belvieu Caverns, LLC, a Delaware limited liability
company and successor of Mont Belvieu Caverns, LP, a Delaware
limited partnership, (2) South Texas NGL Pipelines, LLC, a
Delaware limited liability company, (3) Acadian Gas, LLC, a
Delaware limited liability company, (4) Sabine Propylene
Pipeline, L.P., a Delaware limited partnership, and
(5) Enterprise Lou-Tex Propylene Pipeline, L.P., a Delaware
limited partnership.
“Issue Price” means the price at which a Unit
is purchased from the Partnership, after taking into account any
sales commission or underwriting discount charged to the
Partnership.
“Limited Partner” means, unless the context
otherwise requires, Enterprise OLP as the initial Limited
Partner, each additional Person that becomes a Limited Partner
pursuant to the terms of this Agreement, each additional Limited
Partner and any Departing General Partner upon the change of its
status from General Partner to Limited Partner pursuant to
Section 11.3, in each case, in such Person’s
capacity as a limited partner of the Partnership.
“Limited Partner Interest” means the ownership
interest of a Limited Partner in the Partnership, which may be
evidenced by Common Units or other Partnership Securities or a
combination thereof or interest therein, and includes any and
all benefits to which such Limited Partner is entitled as
provided in this Agreement, together with all obligations of
such Limited Partner to comply with the terms and provisions of
this Agreement.
“Liquidation Date” means (a) in the case
of an event giving rise to the dissolution of the Partnership of
the type described in clauses (a) and (b) of the
first sentence of Section 12.2, the date on which
the applicable time period during which the holders of
Outstanding Units have the right to elect to continue the
business of the Partnership has expired without such an election
being made, and (b) in the case of any other event giving
rise to the dissolution of the Partnership, the date on which
such event occurs.
“Liquidator” means one or more Persons selected
by the General Partner to perform the functions described in
Section 12.3 as liquidating trustee of the
Partnership within the meaning of the Delaware Act.
“Merger Agreement” has the meaning assigned to
such term in Section 14.1.
“MLP” means Enterprise Products Partners L.P.,
a Delaware limited partnership, and any successors thereto.
“MLP General Partner” means Enterprise Products
GP, LLC, a Delaware limited liability company, and its
successors and permitted assigns as general partner of the MLP.
“MLP Partnership Agreement” means the Fifth
Amended and Restated Agreement of Limited Partnership of the
MLP, as it may be amended or restated from time to time.
“National Securities Exchange” means an
exchange registered with the Commission under Section 6(a)
of the Securities Exchange Act or The Nasdaq National Market or
any successor thereto.
“Net Agreed Value” means, (a) in the case
of any Contributed Property, the Agreed Value of such property
reduced by any liabilities either assumed by the Partnership
upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property
distributed to a Partner by the Partnership, the
Partnership’s Carrying Value of such property (as adjusted
pursuant to Section 5.5(d)(ii)) at the time such
property is distributed, reduced by any indebtedness either
assumed by such Partner upon such distribution or to which such
property is subject at the time of distribution, in either case,
as determined under Section 752 of the Code.
“Net Income” means, for any taxable year, the
excess, if any, of the Partnership’s items of income and
gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership’s items of loss and
deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year. The items included in the calculation of Net
Income shall be determined in accordance with
Section 5.5(b) and shall not include any items
specially allocated under Section 6.1(c).
“Net Loss” means, for any taxable year, the
excess, if any, of the Partnership’s items of loss and
deduction (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year over the Partnership’s items of income
and gain (other than those items taken into account in the
computation of Net Termination Gain or Net Termination Loss) for
such taxable year. The items included in the calculation of Net
Loss shall be determined in accordance with
Section 5.5(b) and shall not include any items
specially allocated under Section 6.1(c).
“Net Termination Gain” means, for any taxable
year, the sum, if positive, of all items of income, gain, loss
or deduction recognized by the Partnership after the Liquidation
Date. The items included in the determination of Net Termination
Gain shall be determined in accordance with
Section 5.5(b) and shall not include any items of
income, gain or loss specially allocated under
Section 6.1(c).
“Net Termination Loss” means, for any taxable
year, the sum, if negative, of all items of income, gain, loss
or deduction recognized by the Partnership after the Liquidation
Date. The items included in the determination of Net Termination
Loss shall be determined in accordance with
Section 5.5(b) and shall not include any items of
income, gain or loss specially allocated under
Section 6.1(c).
“Non-citizen Assignee” means a Person whom the
General Partner has determined does not constitute an Eligible
Citizen and as to whose Partnership Interest the General Partner
has become substituted as the limited partner, pursuant to
Section 4.8.
“Nonrecourse Built-in Gain” means with respect
to any Contributed Properties or Adjusted Properties that are
subject to a mortgage or pledge securing a Nonrecourse
Liability, the amount of any taxable gain that would be
allocated to the Partners pursuant to
Sections 6.2(b)(i)(A), 6.2(b)(ii)(A) and
6.2(b)(iii) if such properties were disposed of in a
taxable transaction in full satisfaction of such liabilities and
for no other consideration.
“Nonrecourse Deductions” means any and all
items of loss, deduction or expenditures (described in
Section 705(a)(2)(B) of the Code) that, in accordance with
the principles of Treasury
Regulation Section 1.704-2(b),
are attributable to a Nonrecourse Liability.
“Nonrecourse Liability” has the meaning set
forth in Treasury
Regulation Section 1.752-1(a)(2).
“Notice of Election to Purchase” has the
meaning assigned to such term in Section 15.1(b)
hereof.
“Organizational Limited Partner” means
Enterprise OLP.
“Omnibus Agreement” means the Omnibus Agreement
by and among Enterprise OLP, the General Partner, the
Partnership, the Operating General Partner and the Initial
Operating Subsidiaries dated as of the date of this Agreement.
“Operating General Partner” means DEP OLPGP,
LLC, a Delaware limited liability company and wholly owned
subsidiary of the Partnership, and any successors and permitted
assigns as the general partner of the Operating Partnership.
“Operating Partnership” means Duncan Energy
Operating Partnership, L.P., a Delaware limited partnership, and
any successors thereto.
“Opinion of Counsel” means a written opinion of
counsel (who may be regular counsel to the Partnership or the
General Partner or any of its Affiliates) acceptable to the
General Partner.
“Option Closing Date” has the meaning assigned
to such term in the Underwriting Agreement.
“Outstanding” means, with respect to
Partnership Securities, all Partnership Securities that are
issued by the Partnership and reflected as outstanding on the
Partnership’s books and records as of the date of
determination; provided, however, that, with respect to
Partnership Securities, if at any time any Person or Group
(other than the General Partner or its Affiliates) beneficially
owns 20% or more of any Outstanding Partnership Securities of
any class then Outstanding, all Partnership Securities owned by
such Person or Group shall not be voted on any matter and shall
not be considered to be Outstanding when sending notices of a
meeting of Limited Partners to vote on any matter (unless
otherwise required by law), calculating required votes,
determining the presence of a quorum or for other similar
purposes under this Agreement, except that Common Units so owned
shall be considered to be Outstanding for purposes of
Section 11.1(b)(iv) (such Common Units shall not,
however, be treated as a separate class of Partnership
Securities for purposes of this Agreement); provided,
further, that the foregoing limitation shall not apply to
(i) any Person or Group who acquired 20% or more of any
Outstanding Partnership Securities of any class then Outstanding
directly from the General Partner or its Affiliates,
(ii) to any Person or Group who acquired 20% or more of any
Outstanding Partnership Securities of any class then Outstanding
directly or indirectly from a Person or Group described in
clause (i) provided that the General Partner shall have
notified such Person or Group in writing that such limitation
shall not apply or (iii) to any Person or Group who
acquired 20% or more of any Partnership Securities issued by the
Partnership with the approval of the prior Board of Directors of
the General Partner.
“Over-Allotment Option” means the
over-allotment option granted to the Underwriters by the
Partnership pursuant to the Underwriting Agreement.
“Partner Nonrecourse Debt” has the meaning set
forth in Treasury
Regulation Section 1.704-2(b)(4).
“Partner Nonrecourse Debt Minimum Gain” has the
meaning set forth in Treasury Regulation
Section 1.704-2(i)(2).
“Partner Nonrecourse Deductions” means any and
all items of loss, deduction or expenditure (including any
expenditure described in Section 705(a)(2)(B) of the Code)
that, in accordance with the principles of Treasury
Regulation Section 1.704-2(i),
are attributable to a Partner Nonrecourse Debt.
“Partners” means the General Partner and the
Limited Partners.
“Partnership” means Duncan Energy Partners
L.P., a Delaware limited partnership, and any successors thereto.
“Partnership Group” means the Partnership, the
Operating General Partner, the Operating Partnership and any
Subsidiary of any of these entities, treated as a single
consolidated entity.
“Partnership Interest” means an ownership
interest in the Partnership, which shall include General Partner
Interests and Limited Partner Interests.
“Partnership Minimum Gain” means that amount
determined in accordance with the principles of Treasury
Regulation Section 1.704-2(d).
“Partnership Security” means any class or
series of equity interest in the Partnership (but excluding any
options, rights, warrants and appreciation rights relating to
any equity interest in the Partnership), including Units.
“Percentage Interest” means as of any date of
determination (a) as to the General Partner with respect to
General Partner Units and as to any Unitholder with respect to
Units, the product obtained by multiplying (i) 100% less
the percentage applicable to clause (b) below by
(ii) the quotient obtained by dividing (A) the number
of General Partner Units held by the General Partner or the
number of Units held by such Unitholder, as the case may be, by
(B) the total number of Outstanding Units and all General
Partner Units, and (b) as to holders of other Partnership
Securities issued by the Partnership in accordance with
Section 5.6, the percentage established as part of such
issuance.
“Person” means an individual or a corporation,
limited liability company, partnership, joint venture, trust,
unincorporated organization, association, government agency or
political subdivision thereof or other entity.
“Plan of Conversion” has the meaning ascribed
thereto in Section 14.1.
“Pro Rata” means (a) when modifying Units
or any class thereof, apportioned equally among all designated
Units in accordance with their relative Percentage Interests and
(b) when modifying Partners or Record Holders, apportioned
among all Partners or Record Holders, as the case may be, in
accordance with their respective Percentage Interests.
“Purchase Date” means the date determined by
the General Partner as the date for purchase of all Outstanding
Units (other than Units owned by the General Partner and its
Affiliates) pursuant to Article XV.
“Purchased Interest” has the meaning assigned
to such term in Section 11.3(a).
“Quarter” means, unless the context requires
otherwise, a fiscal quarter of the Partnership, or with respect
to the first fiscal quarter of the Partnership after the Closing
Date, the portion of such fiscal quarter after the Closing Date.
“Recapture Income” means any gain recognized by
the Partnership (computed without regard to any adjustment
required by Sections 734 or 743 of the Code) upon the
disposition of any property or asset of the Partnership, which
gain is characterized as ordinary income because it represents
the recapture of deductions previously taken with respect to
such property or asset.
“Record Date” means the date established by the
General Partner for determining (a) the identity of the
Record Holders entitled to notice of, or to vote at, any meeting
of Limited Partners or entitled to vote by ballot or give
approval of Partnership action in writing without a meeting or
entitled to exercise rights in respect of any lawful action of
Limited Partners or (b) the identity of Record Holders
entitled to receive any report or distribution or to participate
in any offer.
“Record Holder” means the Person in whose name
a Common Unit is registered on the books of the Transfer Agent
as of the opening of business on a particular Business Day, or
with respect to other Partnership Interests, the Person in
whose name any such other Partnership Interest is
registered on the books that the General Partner has caused to
be kept as of the opening of business on such Business Day.
“Redeemable Interests” means any
Partnership Interests for which a redemption notice has
been given, and has not been withdrawn, pursuant to
Section 4.10.
“Registration Statement” means the Registration
Statement on
Form S-1
(Registration
No. 333-138371)
as it has been or as it may be amended or supplemented from time
to time, filed by the Partnership with the Commission under the
Securities Act to register the offering and sale of the Common
Units in the Initial Offering.
“Required Allocations” means (a) any
limitation imposed on any allocation of Net Losses or Net
Termination Losses under Section 6.1(a) or
6.1(b)(ii) and (b) any allocation of an item of
income, gain, loss or deduction pursuant to
Section 6.1(c)(i), 6.1(c)(ii),
6.1(c)(iii), 6.1(c)(vi) or
6.1(c)(viii).
“Residual Gain” or “Residual
Loss” means any item of gain or loss, as the case may
be, of the Partnership recognized for federal income tax
purposes resulting from a sale, exchange or other disposition of
a Contributed Property or Adjusted Property, to the extent such
item of gain or loss is not allocated pursuant to
Section 6.2(b)(i)(A) or 6.2(b)(ii)(A),
respectively, to eliminate Book-Tax Disparities.
“Securities Act” means the Securities Act of
1933, as amended, supplemented or restated from time to time,
and any successor to such statute.
“Securities Exchange Act” means the Securities
Exchange Act of 1934, as amended, supplemented or restated from
time to time, and any successor to such statute.
“Special Approval” means approval by a majority
of the members of the Audit and Conflicts Committee.
“Subsidiary” means, with respect to any Person,
(a) a corporation of which more than 50% of the voting
power of shares entitled (without regard to the occurrence of
any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or
indirectly, at the date of determination, by such Person, by one
or more Subsidiaries of such Person or a combination thereof,
(b) a partnership (whether general or limited) or limited
liability company in which such Person or a Subsidiary of such
Person is, at the date of determination, a general or limited
partner of such partnership or member of such limited liability
company, but only if more than 50% of the partnership interests
of such partnership or membership interests of such limited
liability company (considering all of the partnership interests
or membership interests as a single class) is owned, directly or
indirectly, at the date of determination, by such Person, by one
or more Subsidiaries of such Person, or a combination thereof,
or (c) any other Person (other than a corporation or a
partnership) in which such Person, one or more Subsidiaries of
such Person, or a combination thereof, directly or indirectly,
at the date of determination, has (i) at least a majority
ownership interest or (ii) the power to elect or direct the
election of a majority of the directors or other governing body
of such Person.
“Surviving Business Entity” has the meaning
assigned to such term in Section 14.2(b).
“TEPPCO” means TEPPCO Partners, L.P., a
Delaware limited partnership, and any successors thereto.
“TEPPCO General Partner” means Texas Eastern
Products Pipeline Company, LLC, a Delaware limited liability
company, and any successors thereto.
“Trading Day” has the meaning assigned to such
term in Section 15.1(a).
“transfer” has the meaning assigned to such
term in Section 4.4(a).
“Transfer Agent” means such bank, trust company
or other Person (including the General Partner or one of its
Affiliates) as shall be appointed from time to time by the
Partnership to act as registrar and transfer agent for the Units
and as may be appointed from time to time by the Partnership to
act as registrar and transfer agent for any other Partnership
Securities; provided, that if no Transfer Agent is
specifically designated for any such other Partnership
Securities, the General Partner shall act in such capacity.
“Underwriter” means each Person named as an
underwriter in Schedule 1 to the Underwriting Agreement who
purchases Common Units pursuant thereto.
“Underwriting Agreement” means the Underwriting
Agreement
dated ,
2007, among the Underwriters, the Partnership and certain other
parties, providing for the purchase of Common Units by such
Underwriters.
“Unit” means a Partnership Security that is
designated as a “Unit” and shall include Common Units
but shall not include a General Partner Interest;
provided, that each Common Unit at any time Outstanding
shall represent the same fractional part of the
Partnership Interests of all Limited Partners holding
Common Units as each other Common Unit.
“Unrealized Gain” attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the fair market value of such
property as of such date (as determined under
Section 5.5(d)) over (b) the Carrying Value of
such property as of such date (prior to any adjustment to be
made pursuant to Section 5.5(d) as of such date).
“Unrealized Loss” attributable to any item of
Partnership property means, as of any date of determination, the
excess, if any, of (a) the Carrying Value of such property
as of such date (prior to any adjustment to be made pursuant to
Section 5.5(d) as of such date) over (b) the
fair market value of such property as of such date (as
determined under Section 5.5(d)).
“U.S. GAAP” means United States generally
accepted accounting principles consistently applied.
“Withdrawal Opinion of Counsel” has the meaning
assigned to such term in Section 11.1(b).
DUNCAN
ENERGY PARTNERS L.P. A
LIMITED PARTNERSHIP FORMED UNDER THE LAWS OF DELAWARE
In accordance with Section 4.1 of the Amended and Restated
Agreement of Limited Partnership of Duncan Energy Partners L.P.,
as amended, supplemented or restated from time to time (the
“Partnership Agreement”), Duncan Energy
Partners L.P., a Delaware limited partnership (the
“Partnership”), hereby certifies that
[ ] (the “Holder”)
is the registered owner of Common Units representing Limited
Partner Interests in the Partnership (the “Common
Units”) transferable on the books of the Partnership,
in person or by duly authorized attorney, upon surrender of this
Certificate properly endorsed. The rights, preferences and
limitations of the Common Units are set forth in, and this
Certificate and the Common Units represented hereby are issued
and shall in all respects be subject to the terms and provisions
of, the Partnership Agreement. Copies of the Partnership
Agreement are on file at, and will be furnished without charge
on delivery of written request to the Partnership at, the
principal office of the Partnership located at
1100 Louisiana Street, 10th Floor, Houston, Texas,
77002 or such other address as may be specified by notice under
the Partnership Agreement. Capitalized terms used herein but not
defined shall have the meanings given them in the Partnership
Agreement.
The Holder, by accepting this Certificate, is deemed to have
(i) requested admission as, and agreed to become, a Limited
Partner and to have agreed to comply with and be bound by and to
have executed the Partnership Agreement, (ii) represented
and warranted that the Holder has all right, power and authority
and, if an individual, the capacity necessary to enter into the
Partnership Agreement, (iii) granted the powers of attorney
provided for in the Partnership Agreement, and (iv) made
the waivers and given the consents and approvals contained in
the Partnership Agreement.
This Certificate shall be governed by, and construed in
accordance with, the laws of the State of Delaware, without
regard to principles of conflict of laws thereof.
This Certificate shall not be valid for any purpose unless it
has been countersigned and registered by the Transfer Agent and
Registrar.
The following abbreviations, when used in the inscription on the
face of this Certificate, shall be construed as follows
according to applicable laws or regulations:
TEN COM —
as tenants in common
UNIF GIFT/TRANSFERS MIN ACT
TEN ENT —
as tenants by the entireties
_
_ Custodian _
_
(Cust) (Minor)
JT TEN —
as joint tenants with right of
survivorship and not as tenants in common
under Uniform Gifts/Transfers to
CD Minors Act
_
_(State)
Additional abbreviations, though not in the above list, may also
be used.
ASSIGNMENT
OF COMMON UNITS
IN
DUNCAN ENERGY PARTNERS L.P.
FOR VALUE
RECEIVED,
hereby assigns, conveys, sells and transfers unto
(Please
print or typewrite name and address of Assignee)
(Please
insert Social Security or other identifying number of Assignee)
Common Units representing Limited Partner Interests evidenced by
this Certificate, subject to the Partnership Agreement, and does
hereby irrevocably constitute and
appoint
as its
attorney-in-fact
with full power of substitution to transfer the same on the
books of Duncan Energy Partners L.P.
Date: _
_
NOTE: The signature to any
endorsement hereon must correspond with the name as written upon
the face of this Certificate in every particular, without
alteration, enlargement or change.
SIGNATURE(S) MUST BE GUARANTEED
BY A
MEMBER FIRM OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY SIGNATURE(S)
GUARANTEED
(Signature)
(Signature)
No transfer of the Common Units evidenced hereby will be
registered on the books of the Partnership, unless the
Certificate evidencing the Common Units to be transferred is
surrendered for registration of transfer.
Enterprise GP Holdings: Enterprise GP
Holdings L.P., a publicly traded partnership that owns the
general partner of Enterprise Products Partners.
Enterprise Products
Partners: Enterprise Products Partners L.P.,
a publicly traded partnership that owns our general partner, and
its consolidated subsidiaries.
Enterprise Products OLP: Enterprise
Products Operating L.P., the operating partnership of Enterprise
Products Partners.
Enterprise Products GP: Enterprise
Products GP, LLC, the general partner of Enterprise Products
Partners.
EPE Holdings: EPE Holdings, LLC, the
general partner of Enterprise GP Holdings.
EPCO: EPCO, Inc., an affiliate of our
ultimate parent company.
Evangeline: Our equity method
investment in Evangeline Gas Pipeline Company, L.P. and
Evangeline Gas Corp. For information regarding this
unconsolidated affiliate, please read Note 4 of the Notes
to Combined Financial Statements of Duncan Energy Partners
Predecessor.
feedstock: A raw material required for
an industrial process such as in petrochemical manufacturing.
FERC: Federal Energy Regulatory
Commission.
fractionation: The process of
separating or refining NGLs into their component products by a
process known as fractional distillation.
fractionator: A processing unit that
separates a mixed stream of NGLs into component products by
fractionation.
GAAP: Accounting principles generally
accepted in the United States of America.
MMBtu/d: One million British thermal
units per day.
MMcf: One million cubic feet.
MMcf/d: One million cubic feet per day.
Mont Belvieu Caverns: Mont Belvieu
Caverns, L.P., a Delaware limited partnership, or its successor
Mont Belvieu Caverns, LLC, a Delaware limited liability company.
NGLs: Natural gas liquids which consist
primarily of ethane, propane, isobutane, normal butane and
natural gasoline. NGLs are used by the petrochemical or refining
industries to produce plastics, motor gasoline and other
industrial and consumer products and also are used as
residential, agricultural and industrial fuels.
Operating Partnership: DEP Operating
Partnership, L.P., a Delaware limited partnership.
Operating Partnership Agreement: The
Agreement of Limited Partnership of the Operating Partnership
dated as of September 29, 2006, as amended from time to
time.
propylene: A type of liquid hydrocarbon
derived from oil or natural gas that is used to make
polypropylene. Refinery-grade propylene (a mixture of propane
and propylene) is separated into either polymer-grade propylene
or chemical-grade propylene along with by-products of propane
and mixed butane. Polymer-grade propylene can also be produced
from chemical-grade propylene feedstock.
Sabine Propylene: Sabine Propylene
Pipeline, L.P., a Texas limited partnership.
South Texas NGL: South Texas NGL
Pipelines, LLC, a Delaware limited liability company.
TEPPCO Partners: TEPPCO Partners, L.P.,
a publicly traded partnership, and its subsidiaries.
TEPPCO GP: Texas Eastern Products
Pipeline Company, LLC, the general partner of TEPPCO Partners.
throughput: The volume of natural gas
or NGLs transported or passing through a pipeline, plant,
terminal or other facility in an economically meaningful period
of time.
Set forth below are the expenses (other than underwriting
discounts and commissions) expected to be incurred in connection
with the issuance and distribution of the securities registered
hereby. With the exception of the Securities and Exchange
Commission registration fee, the NASD filing fee and the NYSE
filing fee, the amounts set forth below are estimates.
SEC registration fee
$
33,593
NASD filing fee
31,895
NYSE listing fee
100,000
Printing and engraving expenses
500,000
Fees and expenses of legal counsel
1,000,000
Accounting fees and expenses
1,700,000
Structuring fees
1,000,000
Transfer agent and registrar fees
5,000
Miscellaneous
29,512
Total
$
4,400,000
Item 14.
Indemnification
of Directors and Officers.
The section of the prospectus entitled “Description of
Material Provisions of Our Partnership Agreement —
Indemnification” is incorporated herein by this reference.
Reference is also made to the Underwriting Agreement filed as
Exhibit 1.1 to this registration statement. Subject to any
terms, conditions or restrictions set forth in the partnership
agreement,
Section 17-108
of the Delaware Revised Uniform Limited Partnership Act empowers
a Delaware limited partnership to indemnify and hold harmless
any partner or other person from and against all claims and
demands whatsoever.
Section 18-108
of the Delaware Limited Liability Company Act provides that,
subject to such standards and restrictions, if any, as are set
forth in its limited liability company agreement, a Delaware
limited liability company may, and shall have the power to,
indemnify and hold harmless any member or manager or other
person from and against any and all claims and demands
whatsoever. The First Amended and Restated Limited Liability
Company Agreement of DEP Holdings, LLC provides for the
indemnification of (i) a present or former member of the
Board of Directors of DEP Holdings, LLC or any committee
thereof, (ii) a present or former member, (iii) a
present or former officer of DEP Holdings, LLC or (iv) a
person serving at the request of DEP Holdings, LLC in another
entity in a similar capacity as that referred to in the
immediately preceding clauses (i), (ii) or (iii) (each
person in clauses (i), (ii), (iii) and (iv), a “General
Partner Indemnitee”) to the fullest extent permitted by
law, from and against any and all losses, claims, damages,
liabilities, (joint or several), expenses (including reasonable
legal fees and expenses), judgments, fines, penalties, interest,
settlements and other amounts arising from any and all claims,
demands, actions, suits or proceedings, whether civil, criminal,
administrative or investigative, in which any such person may be
involved, or is threatened to be involved, as a party or
otherwise, by reason of such person’s status as a General
Partner Indemnitee; provided, each case the General Partner
Indemnitee shall not be indemnified if there has been a final
and non-appealable judgment entered by a court of competent
jurisdiction determining that, in respect of the matter for
which the General Partner Indemnitee is seeking indemnification,
the General Partner Indemnitee acted in bad faith or engaged in
fraud, willful misconduct or, in the case of a criminal matter,
acted with knowledge that the General Partner Indemnitee’s
conduct was unlawful. Any indemnification pursuant to these
provisions shall be made only out of the assets of DEP Holdings,
LLC. DEP Holdings, LLC is authorized to purchase and maintain
insurance, on behalf of the members of its Board of Directors,
its officers and such other persons as the Board of Directors
may determine, against any liability that may be asserted
against or expense that may
be incurred by such person in connection with the activities of
DEP Holdings, LLC, regardless of whether DEP Holdings, LLC would
have the power to indemnify such person against such liability
under the provisions of its limited liability company agreement.
Item 15.
Recent
Sales of Unregistered Securities.
On September 29, 2006, in connection with the formation of
the partnership, Duncan Energy Partners L.P. issued (1) to
DEP Holdings, LLC, the 2% general partner interest in the
partnership for $60 and (2) to Enterprise Products
Operating L.P., the 98% limited partner interest in the
partnership for $2,940, in an offering exempt from registration
under Section 4(2) of the Securities Act of 1933. There
have been no other sales of unregistered securities within the
past three years.
Item 16.
Exhibits.
The following documents are filed as exhibits to this
registration statement:
Certificate of Limited Partnership
of Duncan Energy Partners L.P.
3
.2**
—
Form of Amended and Restated
Agreement of Limited Partnership of Duncan Energy Partners L.P.
(included as Appendix A)
3
.3**
—
Certificate of Formation of DEP
Holdings, LLC
3
.4**
—
Form of Amended and Restated
Limited Liability Company Agreement of DEP Holdings, LLC
3
.5**
—
Certificate of Formation of DEP
OLPGP, LLC
3
.6*
—
Amended and Restated Limited
Liability Company Agreement of DEP OLPGP, LLC
3
.7**
—
Certificate of Limited Partnership
of DEP Operating Partnership, L.P.
3
.8**
—
Agreement of Limited Partnership
of DEP Operating Partnership, L.P.
4
.1**
—
Specimen certificate representing
common units
5
.1*
—
Opinion of Andrews Kurth LLP as to
the legality of the securities being registered
8
.1*
—
Opinion of Andrews Kurth LLP
relating to tax matters
10
.1*
—
Form of Contribution, Conveyance
and Assumption Agreement
10
.2†**
—
Form of Storage Lease (Enterprise
Products NGL Marketing), between Enterprise Products Operating
L.P. and Mont Belvieu Caverns, LLC
10
.3†**
—
Form of Storage Lease (North
Propane — Propylene Splitters), between Enterprise
Products Operating L.P. and Mont Belvieu Caverns, LLC
10
.4†**
—
Form of Storage Lease (Belvieu
Environmental Fuels), between Enterprise Products Operating L.P.
and Mont Belvieu Caverns, LLC
10
.5†**
—
Form of Storage Lease (Butane
Isomer), between Enterprise Products Operating L.P. and Mont
Belvieu Caverns, LLC
10
.6†**
—
Form of Storage Lease (Enterprise
Fractionation Plant), between Enterprise Products Operating
L.P., Duke Energy NGL Services L.P., Burlington Resources Inc.
and Mont Belvieu Caverns, LLC
10
.7†**
—
Form of Amended and Restated RGP
Storage Lease, between Enterprise Products Operating L.P. and
Mont Belvieu Caverns, LLC
10
.8*
—
Form of Contribution, Conveyance
and Assumption Agreement, between Enterprise Products Operating
L.P., Enterprise Products OLPGP, Inc., Enterprise Products Texas
Operating, L.P. and Mont Belvieu Caverns, LLC
10
.9*
—
Form of Contribution, Conveyance
and Assumption Agreement, between Enterprise GC, LP, Enterprise
Holding III, L.L.C., Enterprise GTM Holdings L.P., Enterprise
GTMGP, LLC, Enterprise Products GTM, LLC, Enterprise Products
Operating L.P. and South Texas NGL Pipelines, LLC
Ground Lease Agreement, dated as
of January 17, 2002, by and between Enterprise Products
Operating L.P. (successor-in-interest to Diamond-Koch, L.P.) and
Mont Belvieu Caverns, LLC (successor-in-interest to Enterprise
Products Texas Operating L.P.)
10
.11**
—
Form of Pipeline Lease Agreement,
between Enterprise GC, L.P. and TE Products Pipeline Company,
Limited Partnership
10
.12**
Form of NGL Transportation
Agreement, between Enterprise Products Operating L.P. and South
Texas NGL Pipelines, LLC
10
.13*
—
Form of Amended and Restated
Limited Liability Company Agreement of Mont Belvieu Caverns, LLC
10
.14**
—
Form of Amended and Restated
Limited Liability Company Agreement of Acadian Gas, LLC
10
.15*
—
Form of Amended and Restated
Limited Liability Company Agreement of South Texas NGL
Pipelines, LLC
10
.16**
—
Form of Amended and Restated
Agreement of Limited Partnership of Enterprise Lou-Tex Propylene
Pipeline L.P.
10
.17**
—
Form of Amended and Restated
Agreement of Limited Partnership of Sabine Propylene Pipeline
L.P.
10
.18*
—
Form of Fourth Amended and
Restated Administrative Services Agreement
10
.19*
—
Form of Omnibus Agreement
10
.20**
—
Revolving Credit Agreement, dated
as of January 5, 2007, among Duncan Energy Partners L.P.,
as borrower, Wachovia Bank, National Association, as
Administrative Agent, The Bank of Nova Scotia and Citibank,
N.A., as Co-Syndication Agents, JPMorgan Chase Bank, N.A. and
Mizuho Corporate Bank, Ltd., as Co-Documentation Agents, and
Wachovia Capital Markets, LLC, The Bank of Nova Scotia and
Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint
Book Runners
10
.21†**
—
Form of Amended and Restated PGP
Storage Lease, between Enterprise Products Operating L.P. and
Mont Belvieu Caverns, LLC
21
.1*
—
List of Subsidiaries of Duncan
Energy Partners L.P.
23
.1*
—
Consent of Deloitte &
Touche LLP
23
.2*
—
Consent of Andrews Kurth LLP
(contained in Exhibit 5.1)
23
.3*
—
Consent of Andrews Kurth LLP
(contained in Exhibit 8.1)
23
.4**
—
Consent of Director Nominee
(William A. Bruckmann, III)
Portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a
confidential treatment request under Rule 406 of the
Securities Act of 1933, as amended.
Item 17.
Undertakings
The undersigned registrant hereby undertakes to provide to the
underwriters at the closing specified in the underwriting
agreement certificates in such denominations and registered in
such names as required by the underwriters to permit prompt
delivery to each purchaser.
Insofar as indemnification for liabilities arising under the
Securities Act of 1933 may be permitted to directors, officers
and controlling persons of the registrant pursuant to the
foregoing provisions, or otherwise, the registrant has been
advised that in the opinion of the Securities and Exchange
Commission such
indemnification is against public policy as expressed in the
Securities Act of 1933 and is, therefore, unenforceable. In the
event that a claim for indemnification against such liabilities
(other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the
registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the
registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of
appropriate jurisdiction of the question whether such
indemnification by it is against public policy as expressed in
the Securities Act of 1933 and will be governed by the final
adjudication of such issue.
The undersigned registrant hereby undertakes that:
For purposes of determining any liability under the Securities
Act of 1933, the information omitted from the form of prospectus
filed as part of this registration statement in reliance upon
Rule 430A and contained in a form of prospectus filed by
the registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Securities Act of 1933 shall be deemed to be
part of this registration statement as of the time it was
declared effective.
For the purpose of determining any liability under the
Securities Act of 1933, each post-effective amendment that
contains a form of prospectus shall be deemed to be a new
registration statement relating to the securities offered
therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
The registrant undertakes to send to each limited partner at
least on an annual basis a detailed statement of any
transactions with DEP Holdings, LLC or its affiliates, and of
fees, commissions, compensation and other benefits paid, or
accrued to DEP Holdings, LLC or its affiliates for the fiscal
year completed, showing the amount paid or accrued to each
recipient and the services performed.
The registrant undertakes to provide to the limited partners the
financial statements required by
Form 10-K
for the first full fiscal year of operations of the partnership.
Pursuant to the requirements of the Securities Act of 1933, the
registrant has duly caused this Amendment No. 3 to Registration
Statement to be signed on its behalf by the undersigned,
thereunto duly authorized, in the City of Houston, State of
Texas, on January 19, 2007.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following
persons in the capacities indicated on January 19, 2007.
Signature
Title
*
Dan
L. Duncan
Chairman of the Board and Director
/s/ Richard
H. Bachmann
Richard
H. Bachmann
President, Chief Executive Officer
and Director
(Principal Executive Officer)
*
Michael
A. Creel
Executive Vice President, Chief
Financial Officer and Director (Principal Financial Officer)
*
Michael
J. Knesek
Senior Vice President, Controller
and Principal Accounting Officer (Principal Accounting Officer)
*
Gil
H. Radtke
Senior Vice President, Chief
Operating Officer and Director
Certificate of Limited Partnership
of Duncan Energy Partners L.P.
3
.2**
—
Form of Amended and Restated
Agreement of Limited Partnership of Duncan Energy Partners L.P.
(included as Appendix A)
3
.3**
—
Certificate of Formation of DEP
Holdings, LLC
3
.4**
—
Form of Amended and Restated
Limited Liability Company Agreement of DEP Holdings, LLC
3
.5**
—
Certificate of Formation of DEP
OLPGP, LLC
3
.6*
—
Amended and Restated Limited
Liability Company Agreement of DEP OLPGP, LLC
3
.7**
—
Certificate of Limited Partnership
of DEP Operating Partnership, L.P.
3
.8**
—
Agreement of Limited Partnership
of DEP Operating Partnership, L.P.
4
.1**
—
Specimen certificate representing
common units
5
.1*
—
Opinion of Andrews Kurth LLP as to
the legality of the securities being registered
8
.1*
—
Opinion of Andrews Kurth LLP
relating to tax matters
10
.1*
—
Form of Contribution, Conveyance
and Assumption Agreement
10
.2†**
—
Form of Storage Lease (Enterprise
Products NGL Marketing), between Enterprise Products Operating
L.P. and Mont Belvieu Caverns, LLC
10
.3†**
—
Form of Storage Lease (North
Propane — Propylene Splitters), between Enterprise
Products Operating L.P. and Mont Belvieu Caverns, LLC
10
.4†**
—
Form of Storage Lease (Belvieu
Environmental Fuels), between Enterprise Products Operating L.P.
and Mont Belvieu Caverns, LLC
10
.5†**
—
Form of Storage Lease (Butane
Isomer), between Enterprise Products Operating L.P. and Mont
Belvieu Caverns, LLC
10
.6†**
—
Form of Storage Lease (Enterprise
Fractionation Plant), between Enterprise Products Operating
L.P., Duke Energy NGL Services L.P., Burlington Resources Inc.
and Mont Belvieu Caverns, LLC
10
.7†**
—
Form of Amended and Restated RGP
Storage Lease, between Enterprise Products Operating L.P. and
Mont Belvieu Caverns, LLC
10
.8*
—
Form of Contribution, Conveyance
and Assumption Agreement, between Enterprise Products Operating
L.P., Enterprise Products OLPGP, Inc., Enterprise Products Texas
Operating, L.P. and Mont Belvieu Caverns, LLC
10
.9*
—
Form of Contribution, Conveyance
and Assumption Agreement, between Enterprise GC, LP, Enterprise
Holding III, L.L.C., Enterprise GTM Holdings L.P., Enterprise
GTMGP, LLC, Enterprise Products GTM, LLC, Enterprise Products
Operating L.P. and South Texas NGL Pipelines, LLC
10
.10**
—
Ground Lease Agreement, dated as
of January 17, 2002, by and between Enterprise Products
Operating L.P. (successor-in-interest to Diamond-Koch, L.P.) and
Mont Belvieu Caverns, LLC (successor-in-interest to Enterprise
Products Texas Operating L.P.)
10
.11**
—
Form of Pipeline Lease Agreement,
between Enterprise GC, L.P. and TE Products Pipeline Company,
Limited Partnership
10
.12**
Form of NGL Transportation
Agreement, between Enterprise Products Operating L.P. and South
Texas NGL Pipelines, LLC
10
.13*
—
Form of Amended and Restated
Limited Liability Company Agreement of Mont Belvieu Caverns, LLC
10
.14**
—
Form of Amended and Restated
Limited Liability Company Agreement of Acadian Gas, LLC
10
.15*
—
Form of Amended and Restated
Limited Liability Company Agreement of South Texas NGL
Pipelines, LLC
10
.16**
—
Form of Amended and Restated
Agreement of Limited Partnership of Enterprise Lou-Tex Propylene
Pipeline L.P.
10
.17**
—
Form of Amended and Restated
Agreement of Limited Partnership of Sabine Propylene Pipeline
L.P.
Form of Fourth Amended and
Restated Administrative Services Agreement
10
.19*
—
Form of Omnibus Agreement
10
.20**
—
Revolving Credit Agreement, dated
as of January 5, 2007, among Duncan Energy Partners L.P.,
as borrower, Wachovia Bank, National Association, as
Administrative Agent, The Bank of Nova Scotia and Citibank,
N.A., as Co-Syndication Agents, JPMorgan Chase Bank, N.A. and
Mizuho Corporate Bank, Ltd., as Co-Documentation Agents, and
Wachovia Capital Markets, LLC, The Bank of Nova Scotia and
Citigroup Global Markets Inc., as Joint Lead Arrangers and Joint
Book Runners
10
.21†**
—
Form of Amended and Restated PGP
Storage Lease, between Enterprise Products Operating L.P. and
Mont Belvieu Caverns, LLC
21
.1*
—
List of Subsidiaries of Duncan
Energy Partners L.P.
23
.1*
—
Consent of Deloitte &
Touche LLP
23
.2*
—
Consent of Andrews Kurth LLP
(contained in Exhibit 5.1)
23
.3*
—
Consent of Andrews Kurth LLP
(contained in Exhibit 8.1)
23
.4**
—
Consent of Director Nominee
(William A. Bruckmann, III)
Portions of this exhibit have been omitted and filed separately
with the Securities and Exchange Commission pursuant to a
confidential treatment request under Rule 406 of the
Securities Act of 1933, as amended.
Dates Referenced Herein and Documents Incorporated by Reference
