<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 17, 1996
REGISTRATION NO. 333-11545
- -------------------------------------------------------------------------------
- -------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
GENESIS ENERGY, L.P.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
---------------
DELAWARE 5171 76-0513049
(STATE OR OTHER (PRIMARY STANDARD (I.R.S. EMPLOYER
JURISDICTION OF INDUSTRIAL CLASSIFICATION IDENTIFICATION NO.)
INCORPORATION OR CODE NUMBER)
ORGANIZATION)
---------------
ONE ALLEN CENTER
500 DALLAS, SUITE 3200
HOUSTON, TEXAS 77002
(713) 646-1200
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
---------------
JOHN VONBERG
ONE ALLEN CENTER
500 DALLAS, SUITE 3200
HOUSTON, TEXAS 77002
(713) 646-1200
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
OF AGENT FOR SERVICE)
---------------
Copies to:
ANDREWS & KURTH WAYNE KUBICEK ROBERT T. MOFFETT BAKER & BOTTS,
L.L.P. GENERAL COUNSEL VICE PRESIDENT AND L.L.P.
4200 TEXAS COMMERCE BASIS PETROLEUM, GENERAL COUNSEL ONE SHELL PLAZA
TOWER INC. HOWELL CORPORATION 910 LOUISIANA
HOUSTON, TEXAS 77002 500 DALLAS 1111 FANNIN, SUITE HOUSTON, TEXAS
(713) 220-4200 SUITE 3200 1500 77002
ATTN: DAVID J. GRAHAM HOUSTON, TEXAS HOUSTON, TEXAS (713) 229-1234
77002 77002 ATTN: R. JOEL
SWANSON
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, please check the following box. [_]
If this form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [_]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [_]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [_]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
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<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A +
+REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE +
+SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY +
+OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT +
+BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR +
+THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE +
+SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE +
+UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF +
+ANY SUCH STATE. +
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
SUBJECT TO COMPLETION
OCTOBER 17, 1996
PROSPECTUS
8,200,000 COMMON UNITS
GENESIS ENERGY, L.P.
REPRESENTING LIMITED PARTNER INTERESTS
The Common Units offered hereby represent limited partner interests in Genesis
Energy, L.P., a Delaware limited partnership ("Genesis" or the "Partnership").
The Partnership was recently formed to acquire, own and operate the crude oil
gathering, marketing and pipeline related operations (the "Combined
Operations") of Basis Petroleum, Inc. ("Basis"), a wholly owned subsidiary of
Salomon Inc, and Howell Corporation ("Howell"). Genesis Energy, L.L.C., a
recently formed Delaware limited liability company which is owned 54% by Basis
and 46% by Howell, will serve as general partner (the "General Partner") of the
Partnership and its subsidiary operating partnership (the "Operating
Partnership").
The Partnership will distribute to its partners, on a quarterly basis, all of
its Available Cash, which is generally all cash on hand at the end of a
quarter, as adjusted for reserves. The Partnership intends, to the extent there
is sufficient Available Cash, to distribute to each holder of Common Units at
least $0.50 per Common Unit per quarter (the "Minimum Quarterly Distribution")
or $2.00 per Common Unit on an annualized basis. The amount of Available Cash
from Operating Surplus required to pay the Minimum Quarterly Distribution for
four quarters on the Common Units is approximately $16.7 million (approximately
$19.2 million if the Underwriters' over-allotment option is exercised in full).
LIMITED PARTNER INTERESTS ARE INHERENTLY DIFFERENT FROM CAPITAL STOCK OF A
CORPORATION. PROSPECTIVE PURCHASERS OF COMMON UNITS SHOULD CAREFULLY CONSIDER
THE RISK FACTORS SET FORTH BEGINNING ON PAGE 28 UNDER THE CAPTION "RISK
FACTORS" IN EVALUATING AN INVESTMENT IN THE PARTNERSHIP, INCLUDING, BUT NOT
LIMITED TO, THE FOLLOWING:
. THE MINIMUM QUARTERLY DISTRIBUTION IS NOT GUARANTEED. CASH DISTRIBUTIONS
WILL DEPEND ON FUTURE PARTNERSHIP OPERATING PERFORMANCE, WHICH WILL VARY
FROM PERIOD TO PERIOD DUE IN PART TO FACTORS OUTSIDE THE CONTROL OF THE
GENERAL PARTNER, AND WILL BE AFFECTED BY THE FUNDING OF RESERVES,
OPERATING AND CAPITAL EXPENDITURES AND OTHER MATTERS WITHIN THE DISCRETION
OF THE GENERAL PARTNER.
. HOLDERS OF COMMON UNITS WILL HAVE ONLY LIMITED VOTING RIGHTS, AND THE
GENERAL PARTNER WILL MANAGE AND CONTROL THE PARTNERSHIP.
. CONFLICTS OF INTEREST MAY ARISE BETWEEN THE GENERAL PARTNER AND ITS
AFFILIATES, INCLUDING SALOMON INC, ON THE ONE HAND, AND THE PARTNERSHIP
AND THE UNITHOLDERS, ON THE OTHER. THE GENERAL PARTNER'S AFFILIATES ARE
PERMITTED TO COMPETE WITH THE PARTNERSHIP UNDER CERTAIN CIRCUMSTANCES. THE
PARTNERSHIP AGREEMENT LIMITS THE LIABILITY AND REDUCES THE FIDUCIARY
DUTIES OF THE GENERAL PARTNER.
(continued on page 3)
Prior to this offering (the "Offering"), there has been no public market for
the Common Units. It is currently estimated that the initial offering price to
public per Common Unit will be between $ and $ . For a discussion of the
factors to be considered in determining the initial public offering price, see
"Underwriting." The Common Units have been approved for listing on the New York
Stock Exchange, subject to official notice of issuance, under the trading
symbol "GEL."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
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<TABLE>
<CAPTION>
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT PARTNERSHIP(1)
<S> <C> <C> <C>
Per Common Unit...................... $ $ $
Total(2)............................. $ $ $
</TABLE>
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(1)Before deducting offering expenses payable by the Partnership estimated to
be $ .
(2) The Partnership has granted the Underwriters a 30-day option to purchase up
to 1,230,000 additional Common Units at the Price to Public, less the
Underwriting Discount, exercisable solely to cover over-allotments, if any.
To the extent such option is exercised by the Underwriters, the Partnership
will use such net proceeds to redeem subordinated limited partner interests
in the Operating Partnership from Basis and Howell. If the Underwriters
exercise such option in full, the total Price to Public, Underwriting
Discount and Proceeds to Partnership will be $ , $ and $ ,
respectively. See "Underwriting."
The Common Units are offered subject to receipt and acceptance by the
Underwriters, to prior sale and to the Underwriters' right to reject any order
in whole or in part and to withdraw, cancel or modify the offer without notice.
It is expected that delivery of the certificates for the Common Units will be
made at the office of Salomon Brothers Inc, Seven World Trade Center, New York,
New York, or through the facilities of The Depository Trust Company, on or
about , 1996.
SALOMON BROTHERS INC SMITH BARNEY INC.
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
The date of this Prospectus is , 1996.
<PAGE>
[GATEFOLD PAGES OF PROSPECTUS]
[MAP OF SOUTHEASTERN UNITED STATES HIGHLIGHTING THE EIGHT STATES OF GENESIS'
OPERATIONS
AND PHOTOGRAPHS OF GENESIS EMPLOYEES AND EQUIPMENT]
<PAGE>
(Continued from cover page)
. IF AT ANY TIME LESS THAN 20% OF THE ISSUED AND OUTSTANDING COMMON UNITS
ARE HELD BY PERSONS OTHER THAN THE GENERAL PARTNER AND ITS AFFILIATES,
THE GENERAL PARTNER MAY PURCHASE ALL OF THE REMAINING COMMON UNITS AT A
PRICE GENERALLY EQUAL TO THE THEN CURRENT MARKET PRICE OF THE COMMON
UNITS. AS A RESULT, COMMON UNITS MAY BE PURCHASED BY THE GENERAL PARTNER
EVEN WHEN THE HOLDER MAY NOT DESIRE TO SELL THEM OR MAY NOT DESIRE TO
SELL THEM AT THE PRICE PAID BY THE GENERAL PARTNER.
. SALOMON INC'S AGREEMENT TO PROVIDE CREDIT SUPPORT IN CONNECTION WITH THE
PURCHASE, SALE OR EXCHANGE OF CRUDE OIL BY THE PARTNERSHIP WILL END
DECEMBER 31, 1999 AND WILL BE SUBJECT TO PRESCRIBED LIMITS THAT DECLINE
OVER THE THREE-YEAR PERIOD. THE RATE PAID BY THE PARTNERSHIP FOR SUCH
CREDIT SUPPORT WILL INCREASE OVER THE THREE-YEAR PERIOD FROM A BELOW-
MARKET RATE TO A RATE THAT MAY BE HIGHER THAN RATES PAID TO INDEPENDENT
FINANCIAL INSTITUTIONS FOR SIMILAR CREDIT. THERE CAN BE NO ASSURANCE OF
THE SUFFICIENCY OF THE CREDIT SUPPORT DURING THE THREE-YEAR PERIOD OR OF
THE AVAILABILITY OR THE TERMS OF CREDIT FOLLOWING SUCH PERIOD.
. THE OBLIGATION OF SALOMON INC TO CONTRIBUTE ADDITIONAL CASH TO THE
PARTNERSHIP PURSUANT TO THE DISTRIBUTION SUPPORT AGREEMENT DOES NOT
CONSTITUTE A GUARANTEE THAT THE MINIMUM QUARTERLY DISTRIBUTION WILL BE
MADE ON THE COMMON UNITS. SALOMON INC'S OBLIGATION WILL TERMINATE ON
SEPTEMBER 30, 2001. SUCH OBLIGATION IS SUBJECT TO EARLY TERMINATION
AFTER SEPTEMBER 30, 1999, IF THE PARTNERSHIP SATISFIES CERTAIN CASH
DISTRIBUTION AND EARNINGS TESTS, AND IS SUBJECT TO CERTAIN OTHER
LIMITATIONS AND ADJUSTMENTS. THE PARTNERSHIP HAS NO OBLIGATION TO
DISTRIBUTE ANY FUNDS PROVIDED BY SALOMON INC. THE COMMON UNITHOLDERS
HAVE NO RIGHTS, SEPARATE AND APART FROM THE PARTNERSHIP, TO ENFORCE THE
OBLIGATION OF SALOMON INC TO MAKE SUCH CASH CONTRIBUTIONS.
. THE MINIMUM QUARTERLY DISTRIBUTION AND CERTAIN TARGET DISTRIBUTION
LEVELS (ABOVE WHICH THE GENERAL PARTNER IS ENTITLED TO RECEIVE CERTAIN
INCENTIVE COMPENSATION PAYMENTS) ARE SUBJECT TO DOWNWARD ADJUSTMENTS IN
THE EVENT UNITHOLDERS RECEIVE DISTRIBUTIONS OF AVAILABLE CASH FROM
CAPITAL SURPLUS OR LEGISLATION IS ENACTED TO CAUSE THE PARTNERSHIP TO BE
TREATED AS AN ASSOCIATION TAXABLE AS A CORPORATION.
. THE SUBORDINATED LIMITED PARTNER INTERESTS IN THE OPERATING PARTNERSHIP
("SUBORDINATED OLP UNITS") WILL CONVERT INTO COMMON LIMITED PARTNER
INTERESTS IN THE OPERATING PARTNERSHIP ("COMMON OLP UNITS") UPON THE
EXPIRATION OF THE SUBORDINATION PERIOD. IN ADDITION, UP TO ONE HALF OF
THE SUBORDINATED OLP UNITS MAY CONVERT INTO COMMON OLP UNITS PRIOR TO
THE END OF THE SUBORDINATION PERIOD IF THE PARTNERSHIP SATISFIES CERTAIN
CASH DISTRIBUTION AND EARNINGS TESTS. AFTER SUBORDINATED OLP UNITS HAVE
CONVERTED INTO COMMON OLP UNITS, THEY WILL SHARE EQUALLY IN
DISTRIBUTIONS OF AVAILABLE CASH WITH THE COMMON UNITS.
. PURCHASERS OF THE COMMON UNITS OFFERED HEREBY WILL EXPERIENCE IMMEDIATE
AND SUBSTANTIAL DILUTION IN NET TANGIBLE BOOK VALUE OF $11.97 PER COMMON
UNIT FROM THE INITIAL PUBLIC OFFERING PRICE. BASIS AND HOWELL RECEIVED
AN AGGREGATE INTEREST OF 34.40% IN THE PARTNERSHIP IN CONNECTION WITH
THE TRANSFER OF ASSETS, WHICH PRIOR TO THE OFFERING HAD A NEGATIVE NET
TANGIBLE BOOK VALUE.
. SUBJECT TO CERTAIN LIMITATIONS, THE PARTNERSHIP MAY ISSUE ADDITIONAL
COMMON UNITS AND OTHER INTERESTS IN THE PARTNERSHIP FOR SUCH
CONSIDERATION AND ON SUCH TERMS AND CONDITIONS AS ARE ESTABLISHED BY THE
GENERAL PARTNER.
. THE PARTNERSHIP'S MARGINS IN ITS GATHERING AND PIPELINE OPERATIONS WILL
VARY FROM PERIOD TO PERIOD. PROFITABILITY OF THE PARTNERSHIP'S GATHERING
OPERATIONS WILL DEPEND TO A LARGE EXTENT ON THE VOLUMES OF CRUDE OIL IT
PURCHASES, GATHERS AND MARKETS, WHICH WILL BE AFFECTED BY THE
PARTNERSHIP'S ABILITY TO CONTRACT FOR NEW SUPPLIES OF CRUDE OIL TO
OFFSET NATURAL DECLINES IN PRODUCTION. THE PARTNERSHIP'S PIPELINE
OPERATIONS ARE DEPENDENT ON DEMAND FOR CRUDE OIL BY REFINERIES SUPPLIED
BY THE PIPELINES, CRUDE OIL PRODUCTION AND SHIPMENT LEVELS, AND VOLUMES
RECEIVED FROM CONNECTING PIPELINES.
. CERTAIN CRUDE OIL PRICE RISKS (INCLUDING BASIS RISK) AND CERTAIN
IMBALANCES BETWEEN CRUDE OIL PURCHASES, ON THE ONE HAND, AND CRUDE OIL
SALES AND DELIVERY OBLIGATIONS, ON THE OTHER HAND, CANNOT BE HEDGED BY
THE PARTNERSHIP.
During the Subordination Period, which will not end prior to September 30,
2001, each holder of Common Units will be entitled to receive the Minimum
Quarterly Distribution, plus any arrearages in the payment thereof, before any
distributions are made on the Subordinated OLP Units retained by Basis and
Howell, which will represent an aggregate 32.40% interest in the Partnership.
In addition, to further enhance the ability of the Partnership to distribute
the Minimum Quarterly Distribution on the Common Units, Salomon Inc has
agreed, if necessary, and subject to certain limitations and adjustments, to
contribute cash to the Partnership at least through the quarter ending
September 30, 1999 up to a maximum amount outstanding at any one time of
approximately $16.7 million (approximately $19.2 million if the Underwriters'
over-allotment option is exercised in full, in exchange for additional limited
partner interests ("APIs")).
The Partnership will furnish or make available to record holders of Units
(i) within 120 days after the close of each fiscal year of the Partnership, an
annual report containing audited financial statements and a report thereon by
its independent public accountants, and (ii) within 90 days after the close of
each fiscal quarter (other than the fourth quarter), a quarterly report
containing unaudited summary financial information. The Partnership will also
furnish each Unitholder with tax information within 90 days after the close of
each calendar year.
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON UNITS
AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NEW YORK STOCK EXCHANGE, IN THE OVER-THE-
COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
3
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PROSPECTUS SUMMARY.................. 5
<S> <C>
Genesis Energy, L.P. .............. 5
<CAPTION>
Summary Selected Pro Forma
Financial and Operating Data...... 18
<S> <C>
The Offering....................... 19
Summary of Tax Considerations...... 25
RISK FACTORS........................ 28
Risks Inherent in an Investment in
the Partnership................... 28
Conflicts of Interest and Fiduciary
Responsibility.................... 33
Risks Inherent in the Partnership's
Business.......................... 36
Tax Risks.......................... 40
THE TRANSACTIONS.................... 44
CREDIT SUPPORT FACILITIES........... 44
USE OF PROCEEDS..................... 46
CAPITALIZATION...................... 47
DILUTION............................ 48
CASH DISTRIBUTION POLICY............ 49
General............................ 49
Quarterly Distributions of
Available Cash.................... 50
Distributions from Operating
Surplus during Subordination
Period............................ 51
Distributions from Operating
Surplus after Subordination
Period............................ 52
Redemption and Registration Rights
Agreement......................... 52
Incentive Compensation Payments--
Hypothetical Annualized Yield..... 52
Distributions from Capital Surplus. 53
Adjustment of Minimum Quarterly
Distribution and Target
Distribution Levels............... 54
Distributions of Cash Upon
Liquidation....................... 55
Cash Available for Distribution.... 55
Distribution Support............... 56
CERTAIN INFORMATION CONCERNING
SALOMON INC ....................... 59
SELECTED PRO FORMA FINANCIAL AND
OPERATING DATA..................... 61
SELECTED HISTORICAL FINANCIAL AND
OPERATING DATA..................... 62
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS...................... 64
General............................ 64
Genesis............................ 65
Basis Gathering.................... 68
Howell Crude Operations............ 71
BUSINESS............................ 75
General............................ 75
Strategy........................... 76
Business Overview.................. 76
Crude Oil Gathering and Marketing
Operations........................ 77
Common Carrier Crude Oil Pipeline
Operations........................ 81
Growth Opportunities............... 85
Competition........................ 86
Title to Properties................ 87
Employees.......................... 87
Historical Operations of Basis and
Howell............................ 87
Environmental Matters.............. 87
Regulation......................... 89
Litigation......................... 96
MANAGEMENT.......................... 97
Partnership Management............. 97
Incentive Compensation Payments to
General Partner................... 97
Directors and Executive Officers of
the General Partner............... 98
Employment Agreements.............. 100
Executive Compensation............. 101
Restricted Unit Plan............... 101
</TABLE>
<TABLE>
<S> <C>
Incentive Plan..................... 102
Compensation of Directors.......... 102
CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS....................... 102
Salomon Inc and Basis.............. 103
Howell............................. 105
Marketing of Crude Oil............. 105
<CAPTION>
CONFLICTS OF INTEREST AND FIDUCIARY
RESPONSIBILITIES................... 106
<S> <C>
Conflicts of Interest.............. 106
Fiduciary and Other Duties......... 109
DESCRIPTION OF THE COMMON UNITS..... 110
The Common Units................... 111
Transfer Agent and Registrar....... 111
Transfer of Common Units........... 111
THE PARTNERSHIP AGREEMENT........... 113
Purpose............................ 113
Power of Attorney.................. 113
Capital Contributions.............. 113
Indemnification.................... 114
Limited Liability.................. 114
Issuance of Additional Securities.. 115
Amendment of Partnership Agreement. 116
Merger, Sale or Other Disposition
of Assets......................... 117
Termination and Dissolution........ 118
Liquidation and Distribution of
Proceeds.......................... 118
Withdrawal or Removal of the
General Partner................... 118
Transfer of General Partner
Interests and the Incentive
Compensation Payment.............. 119
Limited Call Right................. 120
Meetings; Voting................... 120
Status as Limited Partner or
Assignee.......................... 121
Non-citizen Assignees; Redemption.. 121
Books and Reports.................. 122
Right to Inspect Partnership Books
and Records....................... 122
UNITS ELIGIBLE FOR FUTURE SALE...... 123
TAX CONSIDERATIONS.................. 124
Legal Opinions and Advice.......... 124
Tax Rates and Changes in Federal
Income Tax Laws................... 125
Partnership Status................. 125
<CAPTION>
Limited Partner Status............. 127
<S> <C>
Tax Consequences of Unit Ownership. 128
Tax Treatment of Operations........ 131
Disposition of Common Units........ 136
Uniformity of Units................ 138
Tax-Exempt Organizations and
Certain Other Investors........... 139
Administrative Matters............. 140
State, Local and Other Tax
Considerations.................... 142
INVESTMENT IN THE PARTNERSHIP BY
EMPLOYEE BENEFIT PLANS............. 144
UNDERWRITING........................ 145
VALIDITY OF THE COMMON UNITS........ 147
EXPERTS............................. 147
AVAILABLE INFORMATION............... 148
</TABLE>
<TABLE>
<S> <C>
INDEX TO FINANCIAL STATEMENTS........ F-1
Appendix A--Form of Amended and
Restated Agreement of Limited
Partnership of Genesis Energy,
L.P. .............................. A-1
Appendix B--Form of Amended and
Restated Agreement of Limited
Partnership of Genesis Crude Oil,
L.P. .............................. B-1
Appendix C--Form of Application for
Transfer of Common Units........... C-1
Appendix D--Glossary of Terms....... D-1
Appendix E--Pro Forma Operating
Surplus............................ E-1
</TABLE>
4
<PAGE>
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and historical and pro forma financial data appearing elsewhere in
this Prospectus and should be read only in conjunction with the entire
Prospectus. Unless otherwise specified, the information in this Prospectus
assumes that the Underwriters' over-allotment option is not exercised. Except
as the context otherwise requires, references to, or descriptions of, the
assets, business and operations of Genesis include the crude oil gathering and
marketing assets, business and operations of Basis ("Basis Gathering") and the
crude oil gathering, marketing and pipeline assets, business and operations of
Howell and its subsidiaries ("Howell Crude Operations") as conducted by Basis
and Howell and its subsidiaries, respectively, prior to the closing of the
Offering, and to be conducted by the Partnership and the Operating Partnership
following the closing of the Offering.
The transactions related to the formation of Genesis and Genesis' acquisition
of the Combined Operations are referred to in this Prospectus as the
"Transactions." Unless otherwise specified, references to the Partnership in
this Prospectus include the Operating Partnership and references to percentage
ownership in the Partnership reflect the approximate effective ownership
interest of the Unitholders and the General Partner in the Partnership and the
Operating Partnership on a combined basis. Holders of the Common Units and the
Common OLP Units are collectively referred to herein as "Common Unitholders"
and holders of Subordinated OLP Units are referred to as "Subordinated
Unitholders." The Subordinated Unitholders and the Common Unitholders are
collectively referred to herein as "Unitholders." The Common Units, the Common
OLP Units and the Subordinated OLP Units are collectively referred to herein as
the "Units." Unless otherwise specified, references to Howell in this
Prospectus include Howell Corporation and its subsidiaries. A glossary of
certain terms used in this Prospectus is included as Appendix D to this
Prospectus. Capitalized terms not otherwise defined herein have the meanings
given in the Glossary.
GENESIS ENERGY, L.P.
GENERAL
Genesis is a Delaware limited partnership recently formed to acquire, own and
operate the crude oil gathering and marketing operations of Basis and the crude
oil gathering, marketing and pipeline operations of Howell. Upon completion of
the Transactions, the Partnership will be one of the largest independent
gatherers and marketers of crude oil in North America. Genesis' operations are
concentrated in Texas, Louisiana, Alabama, Florida, Mississippi, New Mexico,
Kansas and Oklahoma. In its gathering and marketing business, Genesis is
principally engaged in the purchase and aggregation of crude oil at the
wellhead and the bulk purchase of crude oil at pipeline and terminal facilities
for resale at various points along the crude oil distribution chain, which
extends from the wellhead to aggregation and terminal stations, refineries and
other end markets (the "Distribution Chain"). The Partnership's gathering and
marketing margins are generated by buying crude oil at competitive prices,
efficiently transporting or exchanging the crude oil along the Distribution
Chain and marketing the crude oil to refineries or other customers at favorable
prices. In addition to its gathering and marketing business, Genesis'
operations include transportation of crude oil for itself and for others at
posted tariffs on its four common carrier pipeline systems. On a pro forma
basis, in 1995 the gathering and marketing operations contributed approximately
67% of the Partnership's total gross margin and the pipeline operations
contributed the remaining 33%.
Genesis currently purchases approximately 118,000 barrels per day ("bpd") of
crude oil at the wellhead from approximately 7,100 leases ("lease gathering").
Genesis utilizes its trucking fleet of approximately 100 tractor-trailers and
its gathering lines to transport crude oil purchased at the
5
<PAGE>
wellhead to pipeline injection points, terminals and refineries for sale to its
customers. It also transports purchased crude oil on trucks, barges and
pipelines owned and operated by third parties. In addition, as part of its
gathering and marketing business, Genesis makes purchases of crude oil in bulk
at pipeline and terminal facilities for resale to refineries or other
customers. When opportunities arise to increase margin or to acquire a grade of
crude oil that more nearly matches the specifications for crude oil the
Partnership is obligated to deliver, Genesis exchanges crude oil with third
parties through exchange or buy/sell agreements.
Genesis' three principal common carrier crude oil pipeline systems and
related gathering lines consist of a 553-mile system in Texas (the "Texas
System"), a 117-mile system extending between Florida and Alabama (the "Jay
System"), and a 281-mile system extending between Mississippi and Louisiana
(the "Mississippi System"). Additionally, the Partnership owns a 5.5-mile
interstate crude oil pipeline in the Gulf of Mexico serving Main Pass Block 64
("Main Pass System"). These pipelines transported an average of approximately
86,000 bpd in the first half of 1996. Additionally, Genesis owns approximately
2.2 million barrels of associated storage capacity, of which approximately 1.0
million barrels will be available at the closing of the Offering.
Experienced management teams installed by both Basis and Howell in 1993
independently developed and implemented new operating programs designed to
enhance the overall profitability of their businesses. These programs included
improving management information systems, reducing operating and administrative
costs, discontinuing activities in nonstrategic areas and increasing volumes of
bulk purchases and resales. Management believes these changes have contributed
to the increase in the Partnership's pro forma earnings (net income) before
interest expense, income taxes, depreciation and amortization and minority
interests ("EBITDA"), which grew 134% from $14.2 million for the year ended
December 31, 1993 to $33.2 million for the year ended December 31, 1995. Pro
forma EBITDA increased 14% from $16.6 million for the six months ended June 30,
1995 to $18.9 million for the six months ended June 30, 1996. Management
believes that the financial results in the first half of 1996 were also
enhanced by unusually favorable market conditions. EBITDA is not intended to
represent cash flow and does not represent the measure of cash available for
distribution. See Note 4 to "Summary Selected Pro Forma Financial and Operating
Data" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations."
Genesis believes that its competitive strengths include (i) its position as
one of the largest independent crude oil gathering and marketing companies in
the United States, (ii) the geographic concentration of its operations in an
eight-state area, (iii) management with significant industry experience, (iv)
advanced management information and risk management systems, (v) its ability to
provide its customers a wide range of customized services, (vi) gross margins
from its common carrier pipeline operations that tend to be countercyclical to
those from its gathering and marketing operations and (vii) a capital structure
with no long-term debt.
STRATEGY
The Partnership's strategy is to increase cash distributions to Unitholders
by maximizing the gross margin realized on its crude oil purchases, sales and
exchanges along the Distribution Chain and by increasing gathering, marketing
and pipeline volumes. The principal elements of this strategy are set forth
below.
. Increase gross margin by using advanced management information systems
to maximize sales prices and reduce operation, transportation and
storage costs.
. Increase utilization of existing assets, systems and related
infrastructure.
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. Increase volumes by attracting new customers and strengthening
relationships with existing customers by offering a wide range of
customized services.
. Enter into strategic alliances with new and existing customers to share
the benefits of additional volumes, incremental margin improvements or
reduction of price and market risks.
. Make selective acquisitions of crude oil gathering systems, pipeline
assets and terminalling and storage facilities to increase overall
volumes of crude oil gathered, transported and marketed.
The General Partner believes that the Transactions will enhance the
Partnership's ability to implement its strategy. The Transactions are expected
to result in higher net revenues due to greater utilization of the
Partnership's combined assets, including its four pipelines, and the expanded
application of its advanced management information systems. The Transactions
are also expected to lower costs and improve efficiencies as operations such as
trucking and sales are consolidated. The two experienced management teams,
brought together by the Transactions, have identified operating programs and
strategies currently used by either Basis Gathering or Howell Crude Operations,
but not currently in use by the other. Management of the Partnership believes
that the implementation of these "best practices" throughout the Combined
Operations of the Partnership will improve customer retention, foster expansion
of its customer base and create efficiencies and cost savings opportunities.
BUSINESS OVERVIEW
In its gathering and marketing business, the Partnership seeks to purchase
and sell crude oil at points along the Distribution Chain where gross margins
can be achieved. Genesis generally purchases crude oil at prevailing prices
from producers at the wellhead under short-term contracts or in bulk from major
oil companies, intermediaries and other third parties. Genesis then transports
the crude oil along the Distribution Chain for sale to or exchange with
customers. The Partnership's margins from its gathering and marketing
operations are generated by the difference between the price of crude oil at
the point of purchase and the price of crude oil at the point of sale, minus
the associated costs of aggregation and transportation. The Partnership
utilizes computerized management information systems to identify the optimal
combination of transportation and exchange transactions expected to result in
the greatest margin for each barrel of crude oil purchased. Genesis generally
enters into an exchange transaction only when the cost of the exchange is less
than the alternative costs that it would otherwise incur in transporting or
storing the crude oil. In addition, Genesis often exchanges one grade of crude
oil for another to maximize margins or meet contract delivery requirements.
Generally, as Genesis purchases crude oil, it simultaneously establishes a
margin by selling crude oil for physical delivery to third party users, such as
independent refiners or major oil companies, or by entering into a future
delivery obligation with respect to futures contracts on the New York
Mercantile Exchange ("NYMEX"). Through these transactions, the Partnership
seeks to maintain a position that is substantially balanced between crude oil
purchases, on the one hand, and sales or future delivery obligations, on the
other hand. It is the Partnership's policy not to acquire and hold crude oil,
futures contracts or other derivative products for the purpose of speculating
on crude oil price changes.
Gross margins from gathering, marketing and pipeline operations vary from
period to period, depending to a significant extent upon changes in the supply
and demand of crude oil and the resulting changes in U.S. crude oil inventory
levels. In general, gathering and marketing gross margin increases when crude
oil inventories decline, resulting in crude oil for prompt (generally the next
month) delivery being priced at an increased premium over crude oil for future
delivery. During periods of low crude oil inventories, however, pipeline
margins in the Partnership's operating areas generally decrease because there
is less crude oil available for shipment and storage in Genesis' pipeline
systems as
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large supplies of crude oil are directed to markets located away from the U.S.
Gulf Coast. Conversely, when crude oil inventories are high, gathering and
marketing margins narrow, but crude oil shipment and storage opportunities
result in increased pipeline margins as crude oil is not directed away from the
U.S. Gulf Coast. Accordingly, the aggregate gross margins from pipeline
operations generally tend to be countercyclical to those from gathering and
marketing. The General Partner believes that the countercyclical nature of the
two businesses will tend to have a stabilizing effect on Genesis' cash flows
from operations. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--General."
Through the pipeline systems it owns and operates, the Partnership transports
crude oil for itself and others pursuant to tariff rates regulated by the
Federal Energy Regulatory Commission ("FERC") or the Texas Railroad Commission.
Accordingly, the Partnership offers transportation services to any shipper of
crude oil, provided that the products tendered for transportation satisfy the
conditions and specifications contained in the applicable tariff. Pipeline
revenues and gross margins are primarily a function of the level of throughput
and storage activity. The margins from the Partnership's pipeline operations
are generated by the difference between the posted tariff and the fixed and
variable costs of operating the pipeline. The pipeline transportation business
has considerable flexibility with respect to sources of crude oil and does not
depend on any specific wellhead source. Genesis believes that the areas served
by its pipeline systems will continue to produce crude oil in volumes that are
sufficient to maintain or increase its pipeline throughput for the foreseeable
future.
The General Partner believes that there are several growth opportunities
available to the Partnership. The trend by major oil companies to dispose of
nonstrategic oil and gas properties in the United States affords increased
opportunities to larger independent gatherers and marketers such as the
Partnership. Independent producers who purchase such properties often do not
have their own gathering and marketing operations and therefore sell their
crude oil to independent gatherers and marketers. In addition, the disposition
of assets by the majors may provide opportunities for independent gatherers
such as the Partnership to purchase pipeline and gathering assets on attractive
terms. The Partnership also believes opportunities are beginning to arise to
provide services to large producers, including major oil companies, who seek to
reduce their overall marketing and supply costs by outsourcing their gathering,
transportation and marketing functions. In addition, competitive pressures are
increasing for gatherers and marketers to realize economies of scale through
efficiencies in the crude oil gathering and aggregation process and through
advanced risk management systems. Such pressures are likely to result in
further consolidation among crude oil gatherers and marketers. The General
Partner believes that the Partnership's competitive strengths, which include
its size, concentration of operations, experienced management, risk management
systems, range of services and capital structure, will enable the Partnership
to benefit from these trends.
RISK FACTORS
Limited partner interests are inherently different from capital stock of a
corporation, although many of the business risks to which the Partnership will
be subject are similar to those that would be faced by a corporation engaged in
a similar business. An investment in the Common Units offered hereby will
involve substantial risks, including risks associated with the nature of the
interests in the Partnership, certain potential conflicts of interest, risks
inherent in the Partnership's business and tax risks. Prospective purchasers of
the Common Units should carefully consider the following risk factors and the
risk factors described beginning on page 28 in evaluating an investment in the
Partnership.
All statements other than statements of historical facts included in this
Prospectus, including, without limitation, statements regarding the
Partnership's business strategy, plans and objectives of
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management of the Partnership for future operations are forward-looking
statements. Although the Partnership believes that the expectations reflected
in such forward-looking statements are reasonable, it can give no assurance
that such expectations will prove to have been correct. Important factors that
could cause actual results to differ materially from the Partnership's
assumptions and expectations ("Cautionary Statements") are disclosed under
"Risk Factors" and elsewhere in this Prospectus. All subsequent written and
oral forward-looking statements attributable to the Partnership or persons
acting on its behalf are expressly qualified in their entirety by the
Cautionary Statements.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
. No Guarantee of Cash Distributions. Cash distributions to the Unitholders are
not guaranteed and may fluctuate based upon the Partnership's performance.
The General Partner may establish and maintain reserves that reduce the
amount of Available Cash.
. Limitations on Voting Rights of Limited Partners; Management by General
Partner. The General Partner will manage and operate the Partnership. Holders
of Common Units will have no right to elect the General Partner on an annual
or other continuing basis and will have only limited voting rights on matters
affecting the Partnership's business. The management exercised by the General
Partner may make it more difficult for others to control or influence the
activities of the Partnership.
. Change of Management Provisions. The General Partner may not be removed
without Cause. The Partnership Agreement contains certain provisions that may
have the effect of discouraging a person or group from attempting to remove
the General Partner of the Partnership or otherwise change the management of
the Partnership. The effect of these provisions may be to diminish the price
at which the Common Units will trade under certain circumstances.
. Limited Call Right for Common Units. If at any time less than 20% of the then
issued and outstanding Common Units are held by persons other than the
General Partner and its affiliates, the General Partner will have the right
to acquire all, but not less than all, of the remaining Common Units held by
such unaffiliated persons at a price generally equal to the then current
market price of the Common Units. As a result, Common Units may be purchased
by the General Partner even when the holder may not desire to sell them or
may not desire to sell them at the price paid by the General Partner.
. Sufficiency of Credit Support. Salomon Inc's agreement pursuant to the Master
Credit Support Agreement to provide credit support in connection with the
purchase, sale or exchange of crude oil by the Partnership will end December
31,1999 and will be subject to prescribed limits that decline over the three-
year period. The rate paid by the Partnership for guarantees issued pursuant
to such agreement will increase over the three-year period from a below-
market rate to a rate that may be higher than rates paid to independent
financial institutions for similar credit. The cost of such credit support by
Salomon Inc (which is included at the applicable rate in the pro forma
financial information included in this Prospectus) is not reflected in the
historical financial information included in this Prospectus. There can be no
assurance of the sufficiency of the credit support during the three-year
period or the availability or the terms of credit for the Partnership
following such period. Salomon Inc's obligation to provide credit support at
any time is dependent on the satisfaction of certain conditions.
. Limitations on Distribution Support. The obligation of Salomon Inc to
contribute additional cash to the Partnership pursuant to the Distribution
Support Agreement does not constitute a guarantee that the Minimum Quarterly
Distribution will be made on the Common Units. Salomon Inc's obligation is
limited to a maximum amount outstanding at any one time of approximately
$16.7 million (approximately $19.2 million if the Underwriters' over-
allotment option is exercised in full) and will terminate on September 30,
2001. Such obligation is subject to early termination after
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September 30, 1999 if the Partnership satisfies certain cash distribution
and earnings tests, and is subject to certain other limitations and
adjustments. The Partnership has no obligation to distribute any funds
provided by Salomon Inc. The Common Unitholders have no rights, separate and
apart from the Partnership, to enforce the obligation of Salomon Inc to make
such cash contributions.
. Minimum Quarterly Distribution is Subject to Downward Adjustment. The
Minimum Quarterly Distribution and certain target distribution levels are
subject to downward adjustments in the event that Unitholders receive
distributions of Available Cash from Capital Surplus (as defined in the
Glossary) or in the event legislation is enacted or existing law is modified
or interpreted by the relevant governmental authority in a manner that
causes the Partnership to be treated as an association taxable as a
corporation. The reduction of Minimum Quarterly Distribution will also
proportionately reduce Salomon Inc's obligation to purchase APIs pursuant to
the Distribution Support Agreement.
. Conversion of Subordinated OLP Units. The Subordinated OLP Units will
convert into Common OLP Units upon the expiration of the Subordination
Period. In addition, up to one half of the Subordinated OLP Units may
convert into Common OLP Units prior to the end of the Subordination Period
if the Partnership satisfies certain cash distribution and earnings tests.
After Subordinated OLP Units have converted into Common OLP Units, they will
share equally in distributions of Available Cash with the Common Units. Upon
the request of Basis or Howell, the Operating Partnership will be obligated
to redeem the Common OLP Units with the net proceeds of an offering of
Common Units by the Partnership.
. Immediate Dilution. Purchasers of the Common Units offered hereby will
experience immediate and substantial dilution in net tangible book value of
$11.97 per Common Unit from the initial public offering price. Basis and
Howell received an aggregate interest of 34.40% in the Partnership in
connection with the transfer of assets, which prior to the Offering had a
negative net tangible book value.
. Possible Future Dilution. Subject to certain limitations, the Partnership
may issue additional Common Units and other interests in the Partnership for
such consideration and on such terms and conditions as are established by
the General Partner. The effect of such issuance may be to dilute the
interests of holders of Common Units in the assets and distributions of the
Partnership and to reduce the protection afforded by the distribution
support obligations of Salomon Inc.
. Loss of Limited Liability under Certain Circumstances. Under certain
circumstances, holders of the Common Units could lose their limited
liability and also could become liable for amounts improperly distributed to
them by the Partnership.
. Payments to the General Partner. Prior to making any distribution on the
Common Units, the Partnership will reimburse the General Partner and its
affiliates for all expenses incurred on behalf of the Partnership. On a pro
forma basis, approximately $ million of expenses (primarily wages and
salaries) would have been reimbursed by the Partnership to the General
Partner and its affiliates in fiscal 1995. In addition, in return for
providing management and other services to the Partnership the General
Partner will receive incentive compensation payments (the "Incentive
Compensation Payments") to the extent certain target levels of cash
distributions (the "Target Distribution Levels") are reached.
. No Prior Market for Common Units. Prior to the Offering, there has been no
public market for the Common Units. The initial public offering price for
the Common Units will be determined through negotiations among the General
Partner and the representatives of the Underwriters. No assurance can be
given as to the market prices at which the Common Units will trade.
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. No Representation by Counsel. The holders of the Common Units have not been
represented by counsel in connection with the Offering or the preparation of
the Partnership Agreement and the other agreements referred to herein.
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
. Conflicts of Interest with General Partner and its Affiliates. The General
Partner and its affiliates, including Salomon Inc, may have conflicts of
interest with the Partnership and holders of Common Units. In resolving
conflicts of interest, including conflicts that may involve Salomon Inc under
the Distribution Support Agreement or the Master Credit Support Agreement,
the Partnership Agreement permits the General Partner to consider the
interests of all parties involved in the conflict, including the interests of
the General Partner and its affiliates.
. Competition and Transactions Permitted with Affiliates of General Partner.
The Partnership Agreement does not restrict the ability of affiliates of the
General Partner to engage or compete in any activities, except for certain
restrictions on crude oil gathering and on transporting of crude oil by
pipeline for third parties along routes shared by the Partnership at the time
of closing of the Offering. The Partnership will have extensive ongoing
relationships and transactions with Salomon Inc, Basis and Howell.
. Control by Affiliates of General Partner. Decisions of the General Partner
with respect to cash expenditures, acquisitions, borrowings, issuances of
additional Units and reserves in any quarter will affect whether or the
extent to which there is sufficient Available Cash from Operating Surplus to
meet the Minimum Quarterly Distribution and target distributions on all Units
in a given quarter. In addition, actions by the General Partner may have the
effect of (i) enabling Basis and Howell to receive distributions on the
Subordinated OLP Units and the General Partner to receive Incentive
Compensation Payments, (ii) reducing the contribution obligations of Salomon
Inc pursuant to the Distribution Support Agreement or (iii) accelerating the
redemption of APIs, the expiration of the Subordination Period or the
conversion of Subordinated OLP Units. The contribution and credit support
obligations of Salomon Inc may affect the criteria used by the General
Partner (which is controlled indirectly by Salomon Inc) in evaluating, and
may reduce the likelihood of Salomon Inc or Basis approving, certain business
opportunities, such as the issuance of debt, the issuance of additional
Common Units and the consummation of possible acquisitions.
. Relationship between General Partner and Lead Underwriter. Salomon Brothers
Inc ("Salomon Brothers"), the lead underwriter of the Offering, and Basis are
each wholly owned subsidiaries of Salomon Inc. After the completion of the
Offering, Basis will hold a 54% member's interest in the General Partner and
a 17.50% subordinated limited partner interest in the Operating Partnership.
. Limitations of General Partner's Fiduciary Duty. The Partnership Agreement
contains certain provisions that limit the liability and reduce the fiduciary
duties of the General Partner to the Unitholders, as well as provisions that
may restrict the remedies available to Unitholders for actions that might,
without such limitations, constitute breaches of fiduciary duty.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
. Dependence on Operating Margins to Support Cash Distributions. The
Partnership's ability to generate cash for distribution depends upon the
margins realized in its gathering, marketing and pipeline operations. The
Partnership's margins vary from period to period and are affected by factors
outside the control of the General Partner. Margins in the first half of 1996
reflect, in part, unusually favorable market conditions.
. Dependence upon Volumes of Crude Oil for Lease Gathering. Partnership
profitability will depend in large part on the volumes of crude oil the
Partnership purchases, gathers and markets. The
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Partnership must continually compete to obtain new supplies of crude oil in
amounts sufficient to offset volumes lost because of natural declines in
crude oil production or volumes lost to competitors.
. Dependence on Crude Oil Supply to Pipelines. The Partnership's pipeline
systems are dependent on demand for crude oil by refineries supplied by the
pipelines, crude oil production and shipment levels and volumes received
from connecting pipelines. These volumes are in part determined by the sale
price that a shipper can receive by utilizing the pipeline to access end
markets. If a decline in the crude oil production in certain geographic
regions does occur or market conditions adversely affect the level of supply
from connecting pipelines, the throughput on the Partnership's pipeline
systems, and therefore the Partnership's profitability, will also decline.
. Inability to Hedge Certain Risks. Certain crude oil price risks (including
basis risk, which is the risk that price differentials between delivery
points, delivery periods or types of crude oil or products will change) and
certain imbalances between crude oil purchases, on the one hand, and crude
oil sales and delivery obligations, on the other, cannot be hedged by the
Partnership.
. Competitive Industry. There is intense competition among all crude oil
gatherers and marketers for volumes of purchased crude oil. The
Partnership's principal competitors have substantial financial resources.
Also, in most areas, the Partnership competes with other pipelines for crude
oil to transport. See "Business--Competition."
. Dependence on Key Management Personnel. The Partnership's management group
includes certain key employees which include John vonBerg, Mark Gorman, John
M. Fetzer and Allyn R. Skelton, II. The failure of the Partnership to retain
key members of its senior management team could adversely affect its
operations.
. Absence of Combined Operating History. The Partnership has conducted no
operations and generated no revenues to date. There can be no assurance that
the Partnership will be able to successfully integrate the Combined
Operations or institute the necessary systems and procedures to successfully
manage the combined enterprise on a profitable basis. The combined
historical financial results of the Combined Operations cover periods when
the Combined Operations were not under common control and management and,
therefore, may not be indicative of the Partnership's future financial and
operating results.
. Exposure to Credit Risks. Credit review and analysis is a major aspect of
the Partnership's overall business. The Partnership may extend credit to
certain customers in large amounts and may be exposed to operator credit
risks. Even if the Partnership's credit review and analysis mechanisms work
properly, there can be no assurance that the Partnership will not experience
losses in dealings with other parties.
. Uncertainty as to Future Acquisitions. Although the Partnership evaluates
acquisition opportunities on a regular basis, there can be no assurance that
any such acquisitions will be consummated or that the Partnership will be
able to identify attractive acquisition candidates in the future, to acquire
assets or businesses on economically acceptable terms or to finance any such
acquisition. There can be no assurance that any debt incurred to finance an
acquisition will not adversely affect the ability of the Partnership to make
distributions to the Unitholders, or that any acquisitions will not be
dilutive of earnings and distributions to the Unitholders.
. Costs of Environmental Regulation. The Partnership's businesses are subject
to governmental regulation with respect to safety, health and environmental
and other regulatory matters. The Partnership could be adversely affected by
environmental costs and liabilities that may be incurred, such as those
arising from pipeline ruptures or oil spills, or increased costs resulting
from the failure to obtain all required or other regulatory consents and
approvals.
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. Government Regulation of Partnership's Businesses. Tariff rates for the
Partnership's interstate common carrier pipeline operations are regulated by
FERC. Proposed new or changed tariff rates may be protested, suspended and
subjected to refunds. Tariff rates that have become effective may also be
challenged and ordered to be reduced for future shipments and reparations
awarded. If FERC were to disallow the corporate income tax allowance in the
cost of service, the Partnership might be required to reduce its tariffs. No
assurance can be given that the Partnership's existing rates will be
maintained. In addition, the Partnership may be required to pay additional
franchise fees to local government jurisdictions. See "Business--Regulation--
Pipeline Regulation."
. Operational Hazards. The Partnership's activities are subject to certain
operational hazards and unforeseen interruptions. The Partnership's
operations could be interrupted by natural disasters, adverse weather or
other events beyond the General Partner's control. Although the Partnership
will carry insurance with respect to certain casualty occurrences, a casualty
occurrence might result in the uninsured loss of equipment or life, as well
as uninsured injury and extensive property or environmental damage.
TAX RISKS
. Dependence on Tax Status; No IRS Ruling. The availability to a Unitholder of
the federal income tax benefits of an investment in the Partnership depends,
in large part, on the classification of the Partnership as a partnership for
federal income tax purposes. There can be no assurance that the law will not
be changed so as to cause the Partnership to be treated as an association
taxable as a corporation for federal income tax purposes or otherwise to be
subject to entity-level taxation. No ruling has been requested from the
Internal Revenue Service ("IRS") with respect to classification of the
Partnership as a partnership for federal income tax purposes or any other
matter affecting the Partnership.
. Allowance of Amortization of Partnership Intangibles. Based upon the advice
of legal counsel, the Partnership intends to amortize certain intangible
assets acquired by the Partnership from Basis and Howell. Due to the absence
of authority, however, the ability to amortize these intangible assets is not
free from doubt and, with respect to the amortization of certain intangibles
contributed by Basis and Howell, legal counsel has not rendered an opinion
thereon. If it were determined that amortization of any such intangibles was
not allowed, the taxable income allocated to a Unitholder would be increased,
and such increase could be substantial.
. Tax Liability Exceeding Cash Distributions. A Unitholder will be required to
pay income taxes on his allocable share of the Partnership's income, whether
or not he receives cash distributions from the Partnership.
. Ownership of Common Units by Tax-Exempt Organizations and Certain Other
Investors. Investment in Common Units by certain tax-exempt entities,
regulated investment companies and foreign persons raises issues unique to
such persons. For example, virtually all of the taxable income derived by
most organizations exempt from federal income tax (including individual
retirement accounts ("IRAs") and other retirement plans) from the ownership
of a Common Unit will be unrelated business taxable income and thus will be
taxable to such a Unitholder.
. Nondeductibility of Losses. In the case of taxpayers subject to the passive
loss rules (generally, individuals and closely held corporations), losses
generated by the Partnership, if any, will generally only be available to
offset future income generated by the Partnership and cannot be used to
offset income from other activities, including passive activities or
investments.
. Nonconforming Depreciation Conventions. The Partnership will adopt certain
depreciation and amortization conventions that do not conform with all
aspects of certain proposed and final Treasury Regulations. A successful
challenge of those conventions by the IRS could adversely
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affect the amount of tax benefits available to a purchaser of Common Units
and could have a negative impact on the value of the Common Units.
. State, Local and Other Tax Considerations. A Unitholder may be required to
file state and local income tax returns and pay state and local income taxes
in some or all of the various jurisdictions in which the Partnership does
business or owns property.
. Tax Shelter Registration; Potential IRS Audit. The Partnership will be
registered with the IRS as a tax shelter. No assurance can be given that the
Partnership will not be audited by the IRS or that tax adjustments will not
be made. Any adjustments in the Partnership's tax returns will lead to
adjustments in the Unitholders' tax returns and may lead to audits of
Unitholders' tax returns and adjustments of items unrelated to the
Partnership.
See "Risk Factors," "Conflicts of Interest and Fiduciary Responsibilities,"
"Description of the Common Units," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other risk
factors and conflicts of interest that should be considered in evaluating an
investment in the Common Units.
CASH AVAILABLE FOR DISTRIBUTION
The Partnership intends, to the extent there is Available Cash, to
distribute at least the Minimum Quarterly Distribution of $0.50 per Common
Unit per quarter or $2.00 on an annualized basis. Based on its assumptions
about operating conditions, the General Partner believes that the Partnership
should generate sufficient Available Cash from Operating Surplus (without the
use of cash contributions or working capital borrowings) to enable the
Partnership to distribute the Minimum Quarterly Distribution on the
outstanding Common Units and Subordinated OLP Units and the related
distribution on the General Partner's 2% general partner interest with respect
to each fiscal quarter at least through the quarter ending December 31, 1997,
although no assurance can be given respecting such distributions or any future
distributions.
The General Partner's belief is based on a number of assumptions, including
the assumption that supply and demand conditions in crude oil markets from the
closing of the Offering through December 31, 1997 will not be as favorable as
conditions experienced during the first six months of 1996 but instead will be
more similar to conditions experienced in 1994 and 1995. The General Partner
has assumed that these less favorable market conditions will result in
somewhat lower gross margins on a per barrel basis than those realized in the
first six months of 1996 but that the impact of the margin reductions will be
offset in part by relatively moderate projected increases in pipeline
utilization and gathering volumes. The General Partner has also assumed the
successful integration of the Combined Operations and the sufficiency of
credit available to the Partnership for its operations. Although the General
Partner believes its assumptions are within a range of reasonableness, whether
the assumptions are realized is not, in a number of cases, within the control
of the Partnership and cannot be predicted with any degree of certainty.
Therefore, certain of the General Partner's assumptions may prove to be
inaccurate. As a result, the actual Available Cash from Operating Surplus
generated by the Partnership could deviate substantially from that currently
expected. See "Risk Factors." Accordingly, no assurance can be given that
distributions of the Minimum Quarterly Distribution or any other amounts will
be made. The Partnership does not intend to update the expression of belief
stated above. See "Cash Distribution Policy--Cash Available for Distribution."
The amount of Available Cash from Operating Surplus needed to pay the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated OLP Units to be outstanding immediately after the Offering and on
the General Partner's 2% general partner interest is approximately $25.0
million, consisting of $16.4 million for the Common Units, $8.1 million for
the
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Subordinated OLP Units and $0.5 million for the General Partner's 2% general
partner interest. Pro forma Available Cash from Operating Surplus generated
during 1995, which was derived from the pro forma consolidated financial
statements of the Partnership in the manner set forth in Appendix E hereto, was
$32.5 million. As more fully explained in Appendix E, pro forma Available Cash
from Operating Surplus for 1995 reflects a level of maintenance capital
expenditures that is significantly less than the amount the Partnership expects
to spend in the future and also does not include any amount that might have
been paid under the Partnership's Incentive Plan.
TRANSACTIONS AT CLOSING
Set forth below is a discussion of the principal transactions in connection
with the formation of the Partnership and the acquisition of the Combined
Operations from Basis and Howell:
. In September 1996, Basis and Howell formed the General Partner and caused
the General Partner to form the Partnership and the Operating Partnership.
Basis and Howell will own interests of 54% and 46%, respectively, in the
General Partner.
. The Partnership will sell 8,200,000 Common Units in the Offering and will
contribute substantially all of the net proceeds thereof, together with
approximately $3 million in cash to be contributed to the Partnership by the
General Partner, to the Operating Partnership.
. The Operating Partnership will use the cash contributed to it by the
Partnership to buy certain of the Combined Operations from Basis and Howell
for approximately $150.6 million.
. Basis and Howell will contribute the remaining portion of the Combined
Operations to the Operating Partnership in exchange for 4,050,000
Subordinated OLP Units and a .66% general partner interest in the Operating
Partnership. Basis and Howell will contribute the .66% general partner
interest in the Operating Partnership to the General Partner.
. Upon completion of the Transactions, the Partnership will own a 66.94%
general partner interest in the Operating Partnership; the Subordinated OLP
Units held by Basis and Howell will represent limited partner interests of
17.5% and 14.9%, respectively, in the Operating Partnership.
. The Partnership will use the net proceeds from any exercise of the
Underwriters' over-allotment option to redeem from Basis and Howell, on a
pro rata basis, a number of Subordinated OLP Units equal to the number of
Common Units issued upon the exercise of such option. If the Underwriters'
over-allotment option is exercised in full, the Partnership will own a
75.44% general partner interest in the Operating Partnership and the
Subordinated OLP Units held by Basis and Howell will represent limited
partner interests of 12.18% and 10.38%, respectively, in the Operating
Partnership.
CREDIT SUPPORT FACILITIES
Concurrently with the Offering, the Operating Partnership will enter into a
credit support agreement with Salomon Inc and Basis ("Master Credit Support
Agreement"), pursuant to which Salomon Inc will provide credit support in the
form of guarantees, up to prescribed limits initially at $500 million (subject
to certain reductions and limitations) and declining each year over a three-
year period ending December 31, 1999. Such guarantees are to be used in
connection with the purchase, sale or exchange of crude oil in the ordinary
course of the Partnership's business. In addition, Basis has agreed to use its
reasonable best efforts to provide the Operating Partnership, for a six-month
period ending May 31, 1997, with a line of credit of up to $35 million for
working capital purposes, including letters of credit and direct cash advances.
Salomon Inc and Basis will receive a security interest in all of the Operating
Partnership's assets to secure obligations under the Master Credit Support
Agreement . See "Credit Support Facilities" and "Conflicts of Interest and
Fiduciary Responsibilities."
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PARTNERSHIP STRUCTURE AND MANAGEMENT
The operations of the Partnership will be conducted through, and the
operating assets of the Partnership will be owned by, the Operating
Partnership. Genesis Energy, L.L.C., a recently formed Delaware limited
liability company, which is owned 54% by Basis and 46% by Howell, will serve as
the general partner of the Partnership and a general partner of the Operating
Partnership. The Partnership will also be a general partner of the Operating
Partnership. See "Conflicts of Interest and Fiduciary Responsibilities."
Following the Offering, the management and employees of Basis and Howell who
currently manage and operate the respective Combined Operations will continue
to manage and operate the Partnership's business as officers and employees of
the General Partner and its affiliates. The General Partner will be reimbursed
for all direct and indirect expenses incurred on behalf of the Partnership and
all other necessary or appropriate expenses allocable to the Partnership or
otherwise reasonably incurred by the General Partner in connection with
operation of the Partnership's business. In addition, the General Partner will
receive Incentive Compensation Payments in connection with its management of
the Partnership if distributions of Available Cash from Operating Surplus
exceed the Target Distribution Levels. Basis and Howell will provide certain
services to the Partnership after the closing of the Offering for which they
will be reimbursed. See "Certain Relationships and Related Transactions."
The principal executive offices of the Partnership and the Operating
Partnership are located at One Allen Center, 500 Dallas, Suite 3200, Houston,
Texas 77002. The telephone number at such offices is (713) 646-1200.
16
<PAGE>
The following chart depicts the organization and ownership of the Partnership
and the Operating Partnership immediately after giving effect to the sale of
the Common Units offered hereby and assumes that the Underwriters' over-
allotment option is not exercised. The percentages reflected in the chart
represent the approximate ownership interest in each of the Partnership and the
Operating Partnership individually and not on a combined basis. Ownership
percentages referred to elsewhere in this Prospectus reflect the approximate
effective ownership interest of the Unitholders and the General Partner in the
Partnership and the Operating Partnership on a combined basis unless otherwise
noted.
EFFECTIVE OWNERSHIP OF
THE OPERATING PARTNERSHIP
<TABLE>
<S> <C>
Unitholders' Common Units............. 65.60%
Basis' Subordinated OLP Units......... 17.50%
Howell's Subordinated OLP Units....... 14.90%
General Partner's Interest............ 2.00%
</TABLE>
[DESCRIPTION OF DIAGRAM]
Diagram depicting organizational structure and percentage interests owned in the
Partnership, the Operating Partnership and the General Partner, setting forth
the following information.
<TABLE>
<CAPTION>
Entity Percentage Interest Held by
------ ------------------- -------
<S> <C> <C>
Basis Petroleum, Inc. 100% Salomon Inc.
Genesis Energy, L.L.C. 54% Basis Petroleum, Inc.
Genesis Energy, L.L.C. 46% Howell Corporation
Genesis Energy, L.P. 98% limited partner interest Public Unitholders
Genesis Energy, L.P. 2% general partner interest Genesis Energy, L.L.C.
Genesis Crude Oil, L.P. 66.94% general partner interest Genesis Energy L.P.
Genesis Crude Oil, L.P. .66% special general partner interest Genesis Energy, L.L.C.
Genesis Crude Oil, L.P. 17.50% subordinated limited partner interest Basis Petroleum, Inc.
Genesis Crude Oil, L.P. 14.90% subordinated limited partner interest Howell Corporation
</TABLE>
- --------
* The General Partner is owned 54% by Basis and 46% by Howell.
17
<PAGE>
SUMMARY SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The following unaudited Summary Selected Pro Forma Financial and Operating
Data reflects the historical operating results of Basis Gathering and of Howell
Crude Operations as adjusted for the Transactions and are derived from the
unaudited Genesis Energy, L.P. Pro Forma Consolidated Financial Statements
included elsewhere in this Prospectus. For a description of the assumptions
used in preparing the Summary Selected Pro Forma Financial and Operating Data,
see "Genesis Energy, L.P. Pro Forma Consolidated Financial Statements." The
following information should not be deemed indicative of future operating
results for the Partnership.
<TABLE>
<CAPTION>
GENESIS ENERGY, L.P. (PRO FORMA UNAUDITED)
-----------------------------------------------
YEAR ENDED SIX MONTHS ENDED JUNE 30,
DECEMBER 31, -------------------------
1995 1995 1996
------------ ------------ ------------
(IN THOUSANDS, EXCEPT PER UNIT AND
BARREL AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gathering and marketing rev-
enues........................ $4,026,873 $ 1,884,158 $ 2,250,438
Pipeline revenues............ 18,577 9,576 8,338
---------- ------------ ------------
Total revenues.............. 4,045,450 1,893,734 2,258,776
Cost of sales:
Crude costs.................. 3,983,735 1,863,124 2,225,123
Field operating costs........ 14,677 7,405 7,566
Pipeline operating costs..... 4,522 2,072 2,488
---------- ------------ ------------
Total cost of sales......... 4,002,934 1,872,601 2,235,177
---------- ------------ ------------
Gross margin.................. 42,516 21,133 23,599
General and administrative
expenses..................... 9,148 4,574 4,658
Depreciation and amortiza-
tion......................... 11,146 6,790 4,081
---------- ------------ ------------
Operating income.............. 22,222 9,769 14,860
Other income (expense)........ (187) 41 (79)
---------- ------------ ------------
Net income before minority
interests.................... 22,035 9,810 14,781
Minority interests(1)......... 7,285 3,243 4,887
---------- ------------ ------------
Net income(2)................. $ 14,750 $ 6,567 $ 9,894
========== ============ ============
Net income per Common Unit.... $ 1.76 $ 0.78 $ 1.18
BALANCE SHEET DATA (AT END OF
PERIOD):
Current assets................ $ 426,908
Total assets.................. 545,455
Current liabilities........... 422,693
Total debt.................... --
Minority interests............ 40,586
Partners' capital............. 82,176
OTHER DATA:
Gross margins(3):
Gathering and marketing...... $ 28,461 $ 13,629 $ 17,749
Pipeline..................... 14,055 7,504 5,850
EBITDA(2)(4).................. 33,181 16,600 18,862
Maintenance capital expendi-
tures(5)..................... 650 363 365
OPERATING DATA:
Volumes (bpd):
Gathering and marketing:
Wellhead(6)................. 118,822 120,712 118,026
Bulk(7)..................... 200,720 145,428 199,239
Exchange(8)................. 295,027 300,325 284,678
---------- ------------ ------------
Total gathering and
marketing................. 614,569 566,465 601,943
Pipeline(9).................. 95,454 102,137 85,961
</TABLE>
- -------
(1) Minority interests in the Operating Partnership represent the 0.66% general
partner interest and the 32.40% subordinated limited partner interest in
the Operating Partnership not owned by the Partnership.
(2) Net income has not been reduced for any amount that might have been paid
under the Incentive Plan, as the determination of the amounts payable
thereunder will be at the discretion of the Compensation Committee. See
"Management--Incentive Plan."
(3) Gross margins net of cost of sales, including operating costs.
(4) EBITDA is defined as earnings (net income) before interest expense, income
taxes, depreciation and amortization and minority interests. EBITDA is not
intended to represent cash flow and does not represent the measure of cash
available for distribution. EBITDA provides additional information for
evaluating the Partnership's ability to make the Minimum Quarterly
Distribution and is presented solely as a supplemental measure. EBITDA
should not be construed as an alternative to net income, operating income,
cash flows from operating activities or any other measure of financial
performance presented in accordance with generally accepted accounting
principles. The Partnership's EBITDA may not be comparable to EBITDA of
other entities as other entities may not calculate EBITDA in the same
manner as the Partnership.
(5) Amounts determined by combining actual amounts for Combined Operations
maintenance capital expenditures. Excludes capital expenditures on the
three principal pipelines prior to their acquisition on March 31, 1995
incurred by the prior owner.
(6) Consists of barrels of crude oil and condensate purchased at the wellhead.
(7) Consists of barrels of crude oil and condensate purchased at collection
points, terminals and pipelines from third parties.
(8) Consists of barrels of crude oil and condensate acquired in simultaneous
buy-sell exchanges of equal volumes.
(9) Includes estimates of volumes transported by the prior owner on the Texas,
Jay and Mississippi Systems during the periods prior to the acquisition of
the systems by Howell on March 31, 1995.
18
<PAGE>
THE OFFERING
Unless otherwise specified herein, the discussion in this Prospectus of
Common Units includes Common OLP Units with respect to cash distributions and
allocations of profits.
Securities Offered...... 8,200,000 Common Units (9,430,000 Common Units if
the Underwriters' over-allotment option is
exercised in full).
Units to be Outstanding
After the Offering..... 8,200,000 Common Units and 4,050,000 Subordinated
OLP Units, representing an effective 65.60% and
32.40% limited partner interest in the Partnership,
respectively. The net proceeds from any exercise of
the Underwriters' over-allotment option will be
used to redeem Subordinated OLP Units from Basis
and Howell. If the Underwriters' over-allotment
option is exercised in full, 9,430,000 Common Units
and 2,820,000 Subordinated OLP Units will be
outstanding, representing an effective 75.44% and
22.56% limited partner interest in the Partnership,
respectively.
Distributions of
Available Cash..... The Partnership will distribute all of its
Available Cash within approximately 45 days after
the end of each quarter to the Unitholders of
record on the applicable record date and to the
General Partner. "Available Cash" for any quarter
will consist generally of all cash on hand at the
end of such quarter, as adjusted for reserves and
as reduced for any Incentive Compensation Payments
required to be made to the General Partner. See
"Cash Distribution Policy--Incentive Compensation
Payments--Hypothetical Annualized Yield" and
"Management--Incentive Compensation Payments to
General Partner." The complete definition of
Available Cash is set forth in the Glossary. The
General Partner has broad discretion in making cash
disbursements and establishing reserves, thereby
affecting the amount of Available Cash that will be
distributed with respect to any quarter.
Distributions to Common
and Subordinated
Unitholders............ The Partnership intends, to the extent there is
sufficient Available Cash from Operating Surplus,
to distribute to each holder of Common Units at
least the Minimum Quarterly Distribution of$0.50
per Common Unit per quarter. The Minimum Quarterly
Distribution is not guaranteed and is subject to
adjustment as described under "Cash Distribution
Policy--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
The first distribution to the Unitholders will be
made within 45 days after the quarter ending
December 31, 1996. Because the period from the
closing of the Offering through December 31, 1996
will not be a full quarter, the Minimum Quarterly
Distribution and the Target Distribution Levels for
such period will be adjusted downward based on the
actual length of such period.
19
<PAGE>
With respect to each quarter during the
Subordination Period, the Common Unitholders will
have the right to receive the Minimum Quarterly
Distribution, plus any arrearages in the payment
thereof ("Common Unit Arrearages"), before any
distribution of Available Cash from Operating
Surplus is made on the Subordinated OLP Units. This
subordination feature will enhance the
Partnership's ability to pay the Minimum Quarterly
Distribution on the Common Units during the
Subordination Period. Subordinated OLP Units will
not accrue distribution arrearages and upon
expiration of the Subordination Period, Common
Units will no longer accrue distribution
arrearages.
The Subordination Period will not end prior to
September 30, 2001 and will only end thereafter if
the Partnership satisfies certain cash distribution
and earnings tests. The complete definition of the
Subordination Period describing the cash
distribution and earnings tests that must be
satisfied is set forth in the Glossary.
Conversion of
Subordinated OLP
Units............. The Subordinated OLP Units will convert into Common
OLP Units upon the expiration of the Subordination
Period. In addition, up to one half of the
Subordinated OLP Units may convert into Common OLP
Units prior to the end of the Subordination Period
(one quarter after September 30, 1999 and an
additional one quarter after September 30, 2000) if
the Partnership satisfies certain cash distribution
and earnings tests. After Subordinated OLP Units
have converted into Common OLP Units they will
share equally in distributions of Available Cash
with the Common Units.
Distribution Support.... To further enhance the Partnership's ability to
distribute the Minimum Quarterly Distribution on
the Common Units with respect to each quarter
through the quarter endingSeptember 30, 2001
(subject to earlier termination commencing
September 30, 1999 if the Partnership satisfies
certain cash distribution and earnings tests),
Salomon Inc has agreed, subject to certain
limitations, to contribute cash, if necessary, to
the Operating Partnership in return for APIs.
Salomon Inc's obligation to purchase APIs is
limited in any one quarter to an amount equal to
the product of the then Minimum Quarterly
Distribution and the number of outstanding Common
Units on the record date for such quarter, plus the
proportionate distribution on the general partner
interest, up to a maximum amount outstanding at any
one time equal to $16.7 million ($19.2 million if
the Underwriters' over-allotment option is
exercised in full), subject to adjustment and
limitation as described under "Cash Distribution
Policy--Distribution Support." Therefore, under
certain circumstances, Salomon Inc's obligation to
purchase APIs may not ensure that there is cash
sufficient to permit the
20
<PAGE>
Partnership to distribute the Minimum Quarterly
Distribution on the Common Units. In addition, the
Partnership is not required to distribute the cash
received from the issuance of APIs and the
Partnership may use such cash for other purposes.
The Common Unitholders have no rights, separate and
apart from the Partnership, to enforce Salomon
Inc's obligation to purchase APIs. Therefore, the
General Partner will be primarily responsible for
enforcing such obligations. The General Partner
will have certain conflicts of interest in this
connection because Salomon Inc will own an indirect
54% interest in the General Partner upon completion
of the Offering. See "Cash Distribution Policy--
Distribution Support" and "Conflicts of Interest
and Fiduciary Responsibilities--Fiduciary and Other
Duties." For information concerning Salomon Inc's
financial condition, see "Certain Information
Concerning Salomon Inc."
APIs are generally not entitled to cash
distributions, allocations of profits or voting
rights, but are subject to quarterly mandatory
redemption to the extent that Available Cash from
Operating Surplus for any quarter exceeds the sum
of the Minimum Quarterly Distribution on all
outstanding Common Units and Subordinated OLP Units
and any Common Unit Arrearages. See "Cash
Distribution Policy--Distributions from Operating
Surplus during Subordination Period" and "--
Distributions from Operating Surplus after
Subordination Period."
The Partnership will retain $5 million of the net
proceeds of the Offering. Such cash will be
available to provide additional support for the
Partnership's ability to distribute the Minimum
Quarterly Distribution on the Common Units,
although the retained cash is not required to be
distributed to holders of Common Units. At any time
following the first anniversary of the closing of
the Offering, the General Partner may cause the
Partnership to distribute such retained cash to
Basis, Howell and the General Partner; provided,
however, such distribution may be made by the
Partnership prior to the second anniversary of the
closing of the Offering only if the General Partner
reasonably believes that the Partnership will
distribute the Minimum Quarterly Distribution on
all Common Units in each of the next four quarters.
Redemption and
Registration Rights....
Pursuant to the Redemption and Registration Rights
Agreement, the Partnership has agreed, at the end
of the Subordination Period or upon earlier
conversion of Subordinated OLP Units into Common
OLP Units, to register for sale in an offering that
number of Common Units equal to the number of
Common OLP Units that Basis or Howell is requesting
be redeemed. The proceeds, net of underwriting
discount, from such offering will be used to redeem
such Common OLP Units.
21
<PAGE>
Adjustment of Minimum
Quarterly Distribution
and Target
Distribution Levels....
The Minimum Quarterly Distribution and the Target
Distribution Levels are subject to downward
adjustments in the event that Unitholders receive
distributions of Available Cash from Capital
Surplus (as defined in the Glossary). Capital
Surplus will generally be generated by borrowings
(other than for working capital purposes), sales of
debt and equity securities (other than APIs or
Common Units sold pursuant to the Redemption and
Registration Rights Agreement) or sales or other
dispositions of assets for cash (other than
inventory, accounts receivable and certain other
assets all as disposed of in the ordinary course of
business). The Minimum Quarterly Distribution and
the Target Distribution Levels are also subject to
downward adjustment in the event legislation is
enacted or existing law is modified or interpreted
by the relevant governmental authority in a manner
that causes the Partnership to be treated as an
association taxable as a corporation or otherwise
taxable as an entity for federal, state or local
income tax purposes. If, as a result of
distributions of Available Cash from Capital
Surplus, the Unitholders receive a full return of
the initial public offering price of the Common
Units offered hereby (the "Initial Unit Price") and
any outstanding Common Unit Arrearages, and any
outstanding APIs are redeemed, the General Partner
will receive the maximum level of Incentive
Compensation Payments. The reduction of the Minimum
Quarterly Distribution will also proportionately
reduce Salomon Inc's obligation to purchase APIs
pursuant to the Distribution Support Agreement. See
"Cash Distribution Policy--General," "--
Distributions from Capital Surplus" and "--
Distribution Support."
Distributions Upon In the event of any liquidation of the Partnership
Liquidation........ during the Subordination Period, the outstanding
Common Units will be entitled to receive a
distribution out of the net assets of the
Partnership in preference to liquidating
distributions on the Subordinated OLP Units to the
extent of their Unrecovered Capital (as defined in
the Glossary) and any outstanding Common Unit
Arrearages. Under certain circumstances there may
be insufficient gain for the holders of Common
Units to fully recover all such amounts, even
though there may be cash available for distribution
to holders of Subordinated OLP Units and APIs.
Following conversion of the Subordinated OLP Units
into Common OLP Units, all Units will be treated
the same upon liquidation of the Partnership. See
"Cash Distribution Policy--Distributions of Cash
Upon Liquidation."
Incentive Compensation
Payments..........
If quarterly distributions of Available Cash from
Operating Surplus exceed the Target Distribution
Levels, the General Partner will receive certain
Incentive Compensation Payments,
22
<PAGE>
which will be paid to the General Partner in
addition to its 2% share of distributions of
Available Cash. After the First Target Distribution
Level ($0.55 per Unit per quarter) has been
reached, (i) the Unitholders and the General
Partner will be entitled to receive distributions
of approximately 86.7% of Available Cash from
Operating Surplus (calculated before any reduction
for the payment of Incentive Compensation
Payments), such distributions to be made 98% to the
Unitholders and 2% to the General Partner, and (ii)
the General Partner will be entitled to receive
Incentive Compensation Payments of approximately
13.3% of Available Cash from Operating Surplus
(calculated before any reduction for such
payments). After the Second Target Distribution
Level ($0.635 per Unit per quarter) and Third
Target Distribution Level ($0.825 per Unit per
quarter) have been reached, the General Partner
will be entitled to receive Incentive Compensation
Payments of approximately 23.5% and 49%,
respectively, of Available Cash from Operating
Surplus (calculated before any reduction for such
payments). The Target Distribution Levels are in
all cases in excess of the amounts required to pay
the Minimum Quarterly Distribution on all Units and
any outstanding Common Unit Arrearages and to
redeem any outstanding APIs. See "Cash Distribution
Policy--Incentive Compensation Payments--
Hypothetical Annualized Yield." In addition,
certain employees of the General Partner may
receive incentive compensation pursuant to the
Incentive Plan. See "Management--Incentive Plan."
Removal and Withdrawal
of the General
Partner................
The General Partner may not be removed without
Cause (as defined in the Glossary). The General
Partner may be removed for Cause upon the approval
of such removal and the election of a successor
general partner by the holders of at least 66-2/3%
of the outstanding Common Units (including Common
Units held by the General Partner and its
affiliates). If the General Partner is removed as
general partner of the Partnership without its
consent, Salomon Inc's and Basis' credit support
obligations will terminate.
The General Partner has agreed not to voluntarily
withdraw as general partner of the Partnership
prior to December 31, 2006, subject to limited
exceptions, without obtaining the approval of the
holders of at least a majority of the Outstanding
Common Units and furnishing an Opinion of Counsel
(as defined in the Glossary). See "The Partnership
Agreement--Withdrawal or Removal of the General
Partner" and "--Meetings; Voting."
If the General Partner is removed or otherwise
withdraws as the general partner prior to having
elected to convert its right to receive Incentive
Compensation Payments into a right to receive
23
<PAGE>
incentive distributions, its right to receive
Incentive Compensation Payments will terminate.
Use of Proceeds.........
The net proceeds from the sale of the Common Units
offered hereby (estimated to be approximately $
million, assuming an initial public offering price
of $ per Common Unit and after deducting the
underwriting discount and expenses of the
Offering), less $5 million to be retained by the
Partnership for at least one year to provide
additional support for the Partnership's ability to
distribute the Minimum Quarterly Distribution on
the Common Units, will be used by the Partnership
to purchase a portion of the Combined Operations
from Basis and Howell. See "Use of Proceeds."
Listing.................
The Common Units have been approved for listing on
the New York Stock Exchange (the "NYSE"), subject
to official notice of issuance.
NYSE Symbol........ "GEL"
24
<PAGE>
SUMMARY OF TAX CONSIDERATIONS
The tax consequences of an investment in the Partnership to a particular
investor will depend in part on the investor's own tax circumstances. Each
prospective investor should consult his own tax advisor about the federal,
state and local tax consequences of an investment in Common Units.
The following is a brief summary of certain expected tax consequences of
owning and disposing of Common Units. The following discussion, insofar as it
relates to federal income tax laws, is based in part upon the opinion of
Counsel described in "Tax Considerations." This summary is qualified by the
discussion in "Tax Considerations," particularly the qualifications on the
opinions of Counsel described therein.
PARTNERSHIP STATUS
In the opinion of Counsel, the Partnership will be classified for federal
income tax purposes as a partnership, and the beneficial owners of Common Units
will generally be considered partners in the Partnership. Accordingly, the
Partnership will pay no federal income taxes, and a Common Unitholder will be
required to report in his federal income tax return his share of the
Partnership's income, gains, losses and deductions. In general, cash
distributions to a Common Unitholder will be taxable only if, and to the extent
that, they exceed such Unitholder's tax basis in his Common Units.
PARTNERSHIP ALLOCATIONS
In general, annual income and loss of the Partnership will be allocated to
the General Partner and the Unitholders for each taxable year in accordance
with their respective percentage interests in the Partnership, as determined
annually and prorated on a monthly basis and subsequently apportioned among the
General Partner and the Unitholders of record as of the opening of the first
business day of the month to which they relate, even though Unitholders may
dispose of their Units during the month in question. A Unitholder will be
required to take into account, in determining his federal income tax liability,
his share of income generated by the Partnership for each taxable year of the
Partnership ending within or with the Unitholder's taxable year whether or not
cash distributions are made to him. As a consequence, a Unitholder's share of
taxable income of the Partnership (and possibly the income tax payable by him
with respect to such income) may exceed the cash, if any, actually distributed
to such Unitholder.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of Common Units in the Offering
who holds such Common Units through December 31, 199 will be allocated, on a
cumulative basis, an amount of federal taxable income for such period that will
be approximately % of the cash distributed with respect to that period. The
Partnership further estimates that after 199 , the taxable income allocable to
the Unitholders will constitute a significantly higher percentage of cash
distributed to the Unitholders. These estimates are based upon the assumption
that gross income from operations will approximate the amount required to make
the Minimum Quarterly Distribution with respect to all Units and other
assumptions with respect to capital expenditures, cash flow and anticipated
cash distributions. These estimates and assumptions are subject to, among other
things, numerous business, economic, regulatory, competitive and political
uncertainties that are beyond the control of the Partnership. Further, the
estimates are based on current tax law and certain tax reporting positions that
the Partnership intends to adopt and with which the IRS could disagree.
Accordingly, no assurance can be given that the estimates will prove to be
correct. The actual percentages could be higher or lower than as described
above and such differences could be material. See "--Amortization of Intangible
Assets" and "Tax Considerations--Tax Consequences of Unit Ownership--Ratio of
Taxable Income to Distributions."
25
<PAGE>
AMORTIZATION OF INTANGIBLE ASSETS
Based upon the advice of Counsel, the Partnership intends to amortize certain
intangible assets purchased by the Partnership from Basis and Howell (the
"Purchased Intangibles") and certain intangible assets contributed to the
Partnership by Basis and Howell (the "Contributed Intangibles"). The ability of
the Partnership to amortize both the Purchased Intangibles and Contributed
Intangibles depends on the inapplicability of certain anti-churning rules under
the Internal Revenue Code of 1986, as amended (the "Code"), and Counsel is of
the opinion that such rules should not apply. No assurance can be given that
the IRS will agree with this conclusion. If the IRS successfully challenged the
ability of the Partnership to amortize the Purchased Intangibles and
Contributed Intangibles as a result of the anti-churning rules, the Partnership
estimates that the ratio of taxable income to distributions through December
31, 199 would increase from approximately to approximately . Furthermore,
there is additional uncertainty about the ability of the Partnership to
amortize the Contributed Intangibles. Due to the absence of authority
interpreting the relevant provisions of the Code, Counsel has not rendered an
opinion with regard to the application of those provisions to the Contributed
Intangibles. If the Partnership were unable to amortize the Contributed
Intangibles, the Partnership estimates that the ratio of taxable income to
distributions through December 31, 199 would increase from approximately to
approximately . See "Tax Considerations--Tax Treatment of Operations--Initial
Tax Basis, Depreciation and Amortization."
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for a Common Unit purchased in the Offering
will be the amount paid for the Common Unit plus his share of Partnership
nonrecourse liabilities, if any. A Unitholder's basis is generally increased by
his share of Partnership income and any increase in his share of Partnership
nonrecourse liabilities and decreased by his share of Partnership losses and
distributions and any decrease in his share of Partnership nonrecourse
liabilities.
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
In the case of taxpayers subject to the passive loss rules (generally,
individuals and closely held corporations), any Partnership losses will only be
available to offset future income generated by the Partnership and cannot be
used to offset income from other activities, including passive activities or
investments. Any losses unused by virtue of the passive loss rules may be
deducted when the Unitholder disposes of all of his Common Units in a fully
taxable transaction with an unrelated party. In addition, a Unitholder may
deduct his share of Partnership losses to the extent that losses do not exceed
his tax basis in his Common Units or, in the case of taxpayers subject to the
"at risk" rules (such as individuals), the amount the Unitholder is at risk
with respect to the Partnership's activities, if less than such tax basis.
SECTION 754 ELECTION
The Partnership intends to make the election provided for by Section 754 of
the Code, which will generally permit a Unitholder to calculate income and
deductions by reference to the portion of his purchase price attributable to
each asset of the Partnership.
DISPOSITION OF COMMON UNITS
A Unitholder who sells Common Units will recognize gain or loss equal to the
difference between the amount realized (including his share of Partnership
nonrecourse liabilities) and his adjusted tax basis in such Common Units. Thus,
prior Partnership distributions in excess of cumulative net taxable income in
respect of a Common Unit which decreased a Unitholder's tax basis in such
Common Unit will, in effect, become taxable income if the Common Unit is sold
at original cost. A portion of the amount realized (whether or not representing
gain) may be ordinary income.
26
<PAGE>
OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders may be subject to other
taxes, such as state and local income taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that are imposed by the various
jurisdictions in which a Unitholder resides or in which the Partnership does
business or owns property. Although an analysis of those various taxes is not
presented here, each prospective Unitholder should consider their potential
impact on his investment in the Partnership. The Partnership will initially own
property and conduct business in the following states which currently impose a
personal income tax: Louisiana, New Mexico, Oklahoma, Alabama, Mississippi and
Kansas. In certain states, tax losses may not produce a tax benefit in the year
incurred (if, for example, the Partnership has no income from sources within
that state) and also may not be available to offset income in subsequent
taxable years. Some of the states may require the Partnership, or the
Partnership may elect, to withhold a percentage of income from amounts to be
distributed to a Unitholder who is not a resident of the state. Withholding,
the amount of which may be more or less than a particular Unitholder's income
tax liability to the state, may not relieve the nonresident Unitholder from the
obligation to file an income tax return. Amounts withheld may be treated as if
distributed to Unitholders for purposes of determining the amounts distributed
by the Partnership. Based on current law and its estimate of future Partnership
operations, the Partnership anticipates that any amounts required to be
withheld will not be material.
It is the responsibility of each prospective Unitholder to investigate the
legal and tax consequences, under the laws of pertinent states and localities,
of his investment in the Partnership. Accordingly, each prospective Unitholder
should consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all federal, state and local tax returns that may be required of such
Unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in the Partnership.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
An investment in Common Units by tax-exempt organizations (including
individual retirement accounts and other retirement plans), regulated
investment companies and foreign persons raises issues unique to such persons.
Virtually all of the Partnership income allocated to a Unitholder which is a
tax-exempt organization will be unrelated business taxable income, and thus
will be taxable to such Unitholder; no significant amount of the Partnership's
gross income will be qualifying income for purposes of determining whether a
Unitholder will qualify as a regulated investment company; and a Unitholder who
is a nonresident alien, foreign corporation or other foreign person will be
regarded as being engaged in a trade or business in the United States as a
result of ownership of a Common Unit and thus will be required to file federal
income tax returns and to pay tax on such Unitholder's share of Partnership
taxable income. See "Tax Considerations--Tax-Exempt Organizations and Certain
Other Investors."
TAX SHELTER REGISTRATION
The Code generally requires that "tax shelters" be registered with the
Secretary of the Treasury. It is arguable that the Partnership will not be
subject to this registration requirement on the basis that it will not
constitute a tax shelter. Nevertheless, the Partnership will be registered as a
tax shelter with the IRS. ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE
THAT AN INVESTMENT IN THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAS BEEN
REVIEWED, EXAMINED OR APPROVED BY THE IRS. See "Tax Considerations--
Administrative Matters--Registration as a Tax Shelter."
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RISK FACTORS
A prospective investor should carefully consider the following risk factors,
as well as the other information set forth in this Prospectus, before
purchasing the Common Units offered hereby.
RISKS INHERENT IN AN INVESTMENT IN THE PARTNERSHIP
CASH DISTRIBUTIONS ARE NOT GUARANTEED AND MAY FLUCTUATE WITH PARTNERSHIP
PERFORMANCE
Although the Partnership will distribute all of its Available Cash, there
can be no assurance regarding the amounts of Available Cash to be generated by
the Partnership. The actual amounts of Available Cash will depend upon
numerous factors, including cash flow generated from operations, ability to
maintain or increase purchases of crude oil from producers, capital
expenditures, costs of acquisitions (including related debt service payments),
issuances of debt and equity securities by the Partnership, fluctuations in
working capital, debt service requirements, adjustments in reserves,
prevailing economic conditions and financial, business and other factors, many
of which will be beyond the control of the Partnership and the General
Partner. In addition, the Partnership Agreement gives the General Partner
broad discretion in establishing reserves for the proper conduct of the
Partnership's business. Additions to reserves established for the Partnership
by the General Partner will reduce the amount of Available Cash. As a result
of these and other factors, there can be no assurance regarding the actual
levels of cash distributions to partners by the Partnership.
The obligation of Salomon Inc to purchase APIs is subject to certain
limitations and does not constitute a guarantee that the Minimum Quarterly
Distribution will be made on the Common Units. The Partnership is not required
to distribute to holders of Common Units the cash received from the issuance
of APIs, and the Partnership may use such cash for other purposes. Therefore,
under certain circumstances, the support obligations may not ensure that there
is cash sufficient to permit the Partnership to distribute the Minimum
Quarterly Distribution on the Common Units.
UNITHOLDERS WILL HAVE CERTAIN LIMITS ON THEIR VOTING RIGHTS; THE GENERAL
PARTNER WILL MANAGE AND OPERATE THE PARTNERSHIP
The General Partner will manage and operate the Partnership. Unlike the
holders of common stock in a corporation, holders of Common Units will have
only limited voting rights on matters affecting the Partnership's business.
Holders of Common Units will have no right to elect the General Partner on an
annual or other continuing basis. As a result, holders of Common Units will
have limited influence on matters affecting the operation of the Partnership,
and third parties may find it difficult to attempt to gain control or
influence the activities of the Partnership. See "The Partnership Agreement."
CHANGE OF MANAGEMENT PROVISIONS
The General Partner may not be removed without Cause. The General Partner
may be removed for Cause upon the approval of such removal and the election of
a successor general partner by the holders of at least 66-2/3% of the
outstanding Common Units (including Common Units held by the General Partner
and its affiliates). In addition, the Partnership Agreement contains certain
provisions that may have the effect of discouraging a person or group from
attempting to remove the General Partner or otherwise change the management of
the Partnership. If the General Partner is removed as general partner of the
Partnership without its consent, Salomon Inc's and Basis' credit support
obligations will terminate, subject to rights of third parties for scheduled
transactions prior to such termination. Further, if any person or group (other
than the General Partner or its affiliates) acquires beneficial ownership of
20% or more of the Common Units then outstanding, such person or group will
lose voting rights with respect to all of its Common Units. In addition, the
Partnership has substantial latitude in issuing equity securities without
Unitholder approval. The Partnership Agreement also
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contains provisions limiting the ability of Unitholders to call meetings of
Unitholders or to acquire information about the Partnership's operations as
well as other provisions limiting the Unitholders' ability to influence the
manner or direction of management. The effect of these provisions may be to
diminish the price at which the Common Units will trade under certain
circumstances. See "The Partnership Agreement--Withdrawal or Removal of the
General Partner."
THE GENERAL PARTNER WILL HAVE A LIMITED CALL RIGHT WITH RESPECT TO THE COMMON
UNITS
If at any time less than 20% of the then issued and outstanding Common Units
are held by persons other than the General Partner and its affiliates, the
General Partner will have the right, which it may assign to any of its
affiliates or the Partnership, to acquire all, but not less than all, of the
remaining Common Units held by such unaffiliated persons at a price generally
equal to the then current market price of the Common Units. As a consequence,
a holder of Common Units may be required to sell his Common Units at a time
when he may not desire to sell them or at a price that is less than the price
he would desire to receive upon such sale. See "The Partnership Agreement--
Limited Call Right."
THE PARTNERSHIP'S CREDIT STANDING AND CAPITAL RESOURCES WILL BE MAJOR ASPECTS
OF ITS BUSINESS
The Partnership will engage in transactions involving large dollar amounts,
and therefore the Partnership's credit standing and capital resources will be
major aspects of its business. The Partnership's financial resources will be a
major consideration for parties that enter into transactions with the
Partnership, and such parties may require letters of credit, other credit
support or evidence of financial responsibility prior to entering into
transactions with the Partnership. The General Partner believes that the
Partnership's ability to obtain letters of credit to support its purchases of
crude oil will be fundamental to the Partnership's basic purchasing, exchange
and marketing activities. Any significant decrease in the Partnership's
financial strength, regardless of the reason for such decrease, may increase
the number of transactions requiring letters of credit or other financial
support or increase the cost of obtaining letters of credit. In such event,
the Partnership's ability to maintain or increase the level of its purchasing
and marketing activities, and its profitability, could be adversely affected.
Pursuant to the Master Credit Support Agreement, Salomon Inc will provide
transitional credit support in the form of guarantees, up to prescribed limits
that will decline over a period ending December 31, 1999. See "Credit Support
Facilities." The cost of such credit support by Salomon Inc
will increase over the three-year period from a below-market rate to a rate
that may be higher than rates paid to independent financial institutions for
similar credit. Pursuant to the Master Credit Support Agreement, Basis will
use its reasonable best efforts to provide, for a period of six months ending
May 31, 1997, a line of credit for working capital purposes of up to $35
million, including direct cash advances not to exceed $25 million outstanding
at any one time and letters of credit that may be required in the ordinary
course of the Partnership's business. The amount available at any time under
the Salomon Inc guarantee support pursuant to the Master Credit Support
Agreement will be reduced by the amount of any advances or lines of credit
utilized under the working capital facility provided by Basis. Salomon Inc and
Basis will receive a security interest in all of the Partnership's assets to
secure obligations under the Master Credit Support Agreement.
The Partnership's pro forma consolidated financial statements include an
applicable rate for the credit support to be provided by Salomon Inc and
Basis, although such rate may differ from the actual cost incurred in the
future. The cost of credit support provided by Salomon Inc in support of the
operations of Basis Gathering is not included in the historical financial
information included for Basis Gathering. Prior to the expiration of the
applicable six-month and three-year periods, respectively, it is expected that
the Partnership will have arranged for a working capital facility through one
or more third party lenders and for third party support to provide letters of
credit to replace the Salomon Inc guarantees. There can be no
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assurance that the Partnership will have sufficient credit during the
respective six-month and three-year periods. Nor can there be any assurance
that the Partnership will be able to obtain replacement credit or credit
support following the expiration of such periods or that the terms of any
replacement facility will not be on terms less favorable to the Partnership
than the credit support provided by Basis or Salomon. In any event, neither
Salomon Inc nor Basis will be under any obligation to provide guarantees or
other credit support after such periods. Salomon Inc's obligation to provide
credit support at any time is dependent on the satisfaction of certain
conditions. In addition, if the General Partner is removed for any reason
without its consent or there is an event of default under the Master Credit
Agreement, Salomon Inc's and Basis' obligations to provide credit support will
terminate, subject to rights of third parties for scheduled transactions prior
to such termination. No assurance can be given that suppliers will sell crude
oil to the Partnership on credit terms as favorable as those made available to
the Combined Operations separately prior to the closing of the Offering.
The credit support limit established in the Master Credit Support Agreement
for the initial year was established by reference to historical requirements
of Basis Gathering. The amount of credit required by Genesis will depend upon
relationships with transaction counterparties, volumes of crude purchases and
the price of crude oil. A significant increase in the price of crude oil could
cause the Partnership to fully utilize its sources of credit, which could
adversely affect the Partnership's ability to maintain or increase its
purchasing, exchange and marketing activities.
Salomon Inc's and Basis' obligations to provide credit support pursuant to
the Master Credit Support Agreement will be subject to certain operating and
financial covenants. Payment or covenant defaults under such agreement, unless
cured within applicable time limitations, would result in the termination of
the credit support obligations of Salomon Inc and Basis. Salomon Inc's
obligations under the Master Credit Support Agreement will be transferable
subject to certain conditions. See "Certain Relationships and Related
Transactions."
For a further discussion of the Master Credit Support Agreement, see "Credit
Support Facilities."
The Partnership does not have established relationships with commercial
banks or other lenders. No assurance can be given that the Partnership will be
able to obtain credit facilities, that such credit facilities will be adequate
to support the Partnership's working capital needs or capital expenditure
requirements or that the General Partner will not limit the Partnership's
business or expansion activities because of concerns regarding limitations on
the Partnership's ability to obtain financing. In addition,
the terms and conditions of any such substitute facilities may include terms
that are not as favorable to Genesis as those contained in the Master Credit
Support Agreement. The Partnership's liquidity and access to capital will be
important factors in its ability to expand its business through acquisitions
or otherwise. The Partnership's working capital needs will depend on a number
of other factors beyond the control of the General Partner. A significant
increase in margin requirements relating to the Partnership's NYMEX hedging
activities (which could result from changes in regulations or a significant
crude oil price increase) could increase the Partnership's needs for working
capital and credit.
LIMITATIONS ON DISTRIBUTION SUPPORT
The obligation of Salomon Inc to contribute additional cash to the
Partnership pursuant to the Distribution Support Agreement does not constitute
a guarantee that the Minimum Quarterly Distribution will be made on the Common
Units. Salomon Inc's obligation is limited to a maximum amount outstanding at
any one time of approximately $16.7 million (approximately $19.2 million if
the Underwriters' over-allotment option is exercised in full) and will
terminate on September 30, 2001. Such obligation is subject to early
termination after September 30, 1999 if the Partnership satisfies certain cash
distribution and earnings tests, and is subject to certain other limitations
and adjustments. The Partnership has no obligation to distribute any funds
provided by Salomon Inc. The Common Unitholders have no rights, separate and
apart from the Partnership, to enforce the obligation of Salomon Inc to make
such cash contributions.
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MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS ARE SUBJECT TO
DOWNWARD ADJUSTMENT
The Minimum Quarterly Distribution and the Target Distribution Levels are
subject to downward adjustment in the event that Unitholders receive
distributions of Available Cash from Capital Surplus. The Minimum Quarterly
Distribution and the Target Distribution Levels are also subject to downward
adjustment in the event legislation is enacted or existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Partnership to be treated as an association taxable as a corporation or
otherwise taxable as an entity for federal, state or local income tax
purposes. If, as a result of distributions of Available Cash from Capital
Surplus, the Unitholders receive a full return of the Initial Unit Price and
any outstanding Common Unit Arrearages, and any outstanding APIs are redeemed,
the General Partner will be entitled to receive the maximum level of Incentive
Compensation Payments. The reduction of the Minimum Quarterly Distribution
will also proportionately reduce Salomon Inc's obligation to purchase APIs
pursuant to the Distribution Support Agreement. See "Cash Distribution
Policy--General," "--Distributions from Capital Surplus" and "--Distribution
Support."
CONVERSION OF SUBORDINATED OLP UNITS
The Subordinated OLP Units will convert into Common OLP Units upon the
expiration of the Subordination Period. In addition, up to one half of the
Subordinated OLP Units may convert into Common OLP Units prior to the end of
the Subordination Period (one quarter after September 30, 1999 and an
additional one quarter after September 30, 2000) if the Partnership satisfies
certain cash distribution and earnings tests. After Subordinated OLP Units
have converted into Common OLP Units, they will share equally in distributions
of Available Cash with the Common Units. Upon the request of Basis or Howell,
the Operating Partnership will be obligated to redeem the Common OLP Units
with the net proceeds of an offering of Common Units by the Partnership.
PURCHASERS OF COMMON UNITS WILL EXPERIENCE IMMEDIATE DILUTION
Purchasers of the Common Units offered hereby will experience immediate and
substantial dilution in net tangible book value of $11.97 per Common Unit from
the initial public offering price. See "Dilution." Basis and Howell received
an aggregate interest of 34.40% in the Partnership in connection with the
transfer of assets, which prior to the Offering had a negative net tangible
book value per Unit of ($11.13) (assuming an initial public offering price of
$20.50 per Unit).
THE PARTNERSHIP MAY ISSUE ADDITIONAL COMMON UNITS, THEREBY DILUTING EXISTING
UNITHOLDERS' INTERESTS
The Partnership may issue additional Common Units and other interests in the
Partnership for such consideration and on such terms and conditions as are
established by the General Partner, in its sole discretion without the
approval of the Unitholders. During the Subordination Period, however, the
Partnership may not issue equity securities of the Partnership ranking prior
or senior to the Common Units or an aggregate of more than 4,100,000
additional Common Units (excluding Common Units issued upon the exercise of
the Underwriters' over-allotment option, in connection with the redemption of
Common OLP Units or in connection with Acquisitions or Capital Improvements
permitted under the Partnership Agreement) or an equivalent number of
securities ranking on a parity with the Common Units without the approval of
the holders of a majority of the outstanding Common Units. After the end of
the Subordination Period, the Partnership may issue an unlimited number of
Partnership securities
of any type without the approval of the Unitholders. The Partnership Agreement
does not impose any restriction on the Partnership's ability to issue
Partnership securities ranking junior to the Common Units at any time. Based
on the circumstances of each case, the issuance of additional Common Units or
securities ranking senior to or on a parity with the Common Units may dilute
the value of the interests of the then existing holders of Common Units in the
net assets of the Partnership.
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Furthermore, the conversion of some or all of the Subordinated OLP Units into
Common OLP Units and the issuance of Common Units upon the exercise of the
Underwriters' over-allotment option (in which case the proceeds of the sale of
additional Common Units will be used to redeem Subordinated OLP Units held by
Basis and Howell) will increase the Partnership's Minimum Quarterly
Distribution obligation with respect to the Common Units while simultaneously
reducing the Partnership's Minimum Quarterly Distribution obligation with
respect to the Subordinated OLP Units. The conversion of Subordinated OLP
Units into Common OLP Units prior to the end of the Subordination Period will
increase the total number of Common Units outstanding, thereby reducing the
maximum amount of Salomon Inc's API contribution obligation available per
Common Unit.
UNITHOLDERS MAY NOT HAVE LIMITED LIABILITY IN CERTAIN CIRCUMSTANCES;
LIABILITY FOR RETURN OF CERTAIN DISTRIBUTIONS
The limitations on the liability of holders of limited partner interests for
the obligations of a limited partnership have not been clearly established in
some states. If it were determined that the Partnership had been conducting
business in any state without compliance with the applicable limited
partnership statute, or that the right or the exercise of the right by the
Unitholders as a group to remove the General Partner with Cause, to make
certain amendments to the Partnership Agreement or to take other action
pursuant to the Partnership Agreement constituted participation in the
"control" of the Partnership's business, then the Unitholders could be held
liable in certain circumstances for the Partnership's obligations to the same
extent as a General Partner. In addition, under certain circumstances a
Unitholder may be liable to the Partnership for the amount of any improper
distribution for a period of three years from the date of the distribution.
See "The Partnership Agreement--Limited Liability" for a discussion of the
limitations on liability and the implications thereof to a Unitholder.
PAYMENTS TO THE GENERAL PARTNER
Prior to making any distribution on the Common Units, the Partnership will
reimburse the General Partner and its affiliates for all expenses incurred on
behalf of the Partnership. On a pro forma basis, approximately $
million of expenses (primarily wages and salaries) would have been reimbursed
by the Partnership to the General Partner and its affiliates in fiscal 1995.
In addition, the General Partner and its affiliates may provide additional
services to the Partnership, for which the Partnership will be charged
reasonable fees as determined by the General Partner. In return for providing
management and other services to the Partnership, the General Partner will
receive Incentive Compensation Payments to the extent the Target Distribution
Levels are reached.
NO PRIOR PUBLIC MARKET FOR COMMON UNITS
Prior to the Offering, there has been no public market for the Common Units.
The initial public offering price for the Common Units will be determined
through negotiations among the General Partner and the representatives of the
several Underwriters. For a description of the factors to be considered in
determining the initial public offering price, see "Underwriting." No
assurance can be given as to the market prices at which the Common Units will
trade. The Common Units have been approved for listing on the NYSE, subject to
official notice of issuance.
HOLDERS OF COMMON UNITS HAVE NOT BEEN REPRESENTED BY COUNSEL
The holders of Common Units have not been represented by counsel in
connection with the Offering or the preparation of the Partnership Agreement
and the other agreements referred to herein.
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PARTNERSHIP ASSUMPTIONS CONCERNING FUTURE OPERATIONS MAY NOT BE REALIZED
In establishing the terms of the Offering, including the number and initial
offering price of the Common Units, the number of Subordinated OLP Units and
the Minimum Quarterly Distribution, the Partnership relied on certain
assumptions concerning its operations, including the assumption that supply
and demand conditions in crude oil markets from the closing of the Offering
through December 31, 1997 will not be as favorable as conditions experienced
during the first six months of 1996 but instead will be more similar to
conditions experienced in 1994 and 1995. The General Partner has assumed that
these less favorable market conditions will result in somewhat lower gross
margins on a per barrel basis than those realized in the first six months of
1996 but that the impact of the margin reductions will be offset in part by
relatively moderate projected increases in pipeline utilization and gathering
volumes. The General Partner has also assumed the successful integration of
the Combined Operations and the sufficiency of credit available to the
Partnership for its operations. Although the General Partner believes its
assumptions are within a range of reasonableness, whether the assumptions are
realized is not, in a number of cases, within the control of the Partnership
and cannot be predicted with any degree of certainty. In the event that the
General Partner's assumptions are not realized, the actual Available Cash from
Operating Surplus generated by the Partnership could deviate substantially
from that currently expected. See "Cash Distribution Policy--Cash Available
for Distribution."
POSSIBLE INABILITY TO OBTAIN CONSENTS AND TITLE DOCUMENTS TO ASSET TRANSFERS
Concurrently with the closing of the Offering, Basis and Howell will convey
the Combined Operations to the Partnership. Most of Basis' and Howell's
leasehold interests in real and personal property and certain of Basis' and
Howell's permits, licenses and other rights are transferable to the
Partnership only with the consent of the lessor or other third party. In
addition, with respect to owned real property of Basis and Howell, searches of
local records may be necessary to obtain documents evidencing chain of title
in order to prepare the documentation to transfer such real property
interests, and certain of such documents may not be available on a timely
basis. The failure by the Partnership to obtain any such consents or title
documents and its resulting inability to obtain any such leasehold rights,
permits, licenses, other rights or property interests could have a material
adverse effect on the Partnership. However, the General Partner believes that
the Partnership will have the licenses, permits, rights and property interests
that will enable the Partnership to conduct its crude oil marketing, gathering
and pipeline business in a manner similar in all material respects to that of
the Combined Operations prior to the closing of the Offering and that any
failure to obtain such licenses, permits, rights or property interests will
not have a material adverse impact on the business of the Partnership as
described in this Prospectus. See "Business--Title to Properties."
CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITY
Conflicts of interest could arise as a result of the relationships between
the Partnership and holders of the Common Units, on the one hand, and the
General Partner and its affiliates, including Salomon Inc, on the other. The
General Partner, which is a limited liability company, will be managed by its
members, Basis and Howell. At the same time, the General Partner has fiduciary
duties to manage the Partnership in a manner beneficial to the Partnership and
the Unitholders. The duties of the General Partner, as general partner, to the
Partnership and the Unitholders, therefore, may come into conflict with the
interests of the members of the General Partner and its affiliates. In
resolving conflicts of interest, including conflicts that may involve Salomon
Inc under the Distribution Support Agreement or the Master Credit Support
Agreement, the Partnership Agreement permits the General Partner to consider
the interests of all parties involved in the conflict, including the interests
of the General Partner and its affiliates.
Such conflicts of interest might arise for the following reasons, among
others:
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(i) The Partnership Agreement does not restrict the ability of affiliates
of the General Partner (including Basis, Phibro Inc., Salomon Inc and
Howell) to engage in any activities other than the business of (a) crude
oil gathering at the wellhead in the states of Alabama, Florida, Kansas,
Louisiana, Mississippi, New Mexico, Oklahoma or Texas, or any states
contiguous to such states, or (b) transporting for third parties crude oil
by pipeline along the routes of the Partnership's crude oil pipelines owned
at the time of completion of the Offering. The restrictions are subject to
certain exceptions, including: (w) affiliates will not be restricted from
any activity incidental to their refinery operations so long as such
activities are not substantially in competition with the lease gathering
operations of the Partnership, (x) if Salomon Inc, Basis or Howell were to
sell or otherwise dispose of its entire interest (direct and indirect) in
the General Partner and the Partnership to an unaffiliated party, such
restrictions would no longer apply to the party making such sale or
disposition or its affiliates, (y) such restrictions will not prevent
affiliates from entering into joint ventures or strategic alliances with
the Partnership and (z) Howell will be permitted to purchase crude oil for
feedstock supply for its research and reference fuels business. Except as
specifically restricted, any affiliates of the General Partner may engage
in any business or activity whether or not such activity may be in
competition with the Partnership, including purchasing crude oil in bulk,
executing crude oil exchanges, executing trades in the crude oil futures
market, providing hedges and risk management services and conducting
pipeline operations not precluded by clause (b) of the first sentence of
this paragraph. Furthermore, the Partnership Agreement provides that the
General Partner and its affiliates have no obligation to present business
opportunities to the Partnership. It shall not constitute a breach of the
Partnership Agreement for the affiliates of the General Partner to engage
in any competitive activities not specifically precluded by the Partnership
Agreement. The Partnership will have extensive ongoing relationships and
transactions with Salomon Inc, Basis and Howell. See "Certain Relationships
and Related Transactions."
(ii) Decisions of the General Partner with respect to the amount and
timing of cash expenditures, participation in capital expansions and
acquisitions, borrowings, issuances of additional Units and reserves in any
quarter will affect whether or the extent to which there is sufficient
Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distribution Levels on all Units in a given
quarter. In addition, actions by the General Partner may have the effect of
(a) enabling Basis and Howell to receive distributions on the Subordinated
OLP Units and the General Partner to receive Incentive Compensation
Payments, (b) reducing the contribution obligations of Salomon Inc pursuant
to the Distribution Support Agreement or (c) accelerating the redemption of
APIs, the expiration of the Subordination Period or the conversion of
Subordinated OLP Units into Common OLP Units. The obligation of Salomon Inc
to provide distribution support and credit support to the Partnership may
affect the criteria used by the General Partner (which is controlled by
Basis and indirectly by Salomon Inc) in evaluating, and may reduce the
likelihood of Salomon Inc or Basis approving, certain business
opportunities, such as the issuance of debt, the issuance of additional
Common Units and the consummation of possible acquisitions.
(iii) Salomon Brothers, the lead underwriter of the Offering, and Basis
are each wholly owned subsidiaries of Salomon Inc. After the completion of
the Offering, Basis will hold a 54% member's interest in the General
Partner and a 17.50% subordinated limited partner interest in the Operating
Partnership.
(iv) The Partnership will not, at least initially, have any employees and
will rely solely on employees of the General Partner and its affiliates.
(v) Under the terms of the Partnership Agreement, the Partnership will
reimburse the General Partner and its affiliates for costs incurred in
managing and operating the Partnership, including costs incurred in
providing corporate staff and support services to the Partnership.
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(vi) Whenever possible, the General Partner intends to limit the
Partnership's liability under contractual arrangements to all or particular
assets of the Partnership, with the other party thereto to have no recourse
against the General Partner or its assets.
(vii) Any agreements between the Partnership and the General Partner and
its affiliates will not grant to the holders of Common Units, separate and
apart from the Partnership, the right to enforce the obligations of the
General Partner and such affiliates in favor of the Partnership. Therefore,
the General Partner, in its capacity as the general partner of the
Partnership, will be primarily responsible for enforcing such obligations.
(viii) Under the terms of the Partnership Agreement, the General Partner
is not restricted from causing the Partnership to pay the General Partner
or its affiliates for any services rendered on terms that are fair and
reasonable to the Partnership or entering into additional contractual
arrangements with any of such entities on behalf of the Partnership.
Neither the Partnership Agreement nor any of the other agreements,
contracts and arrangements between the Partnership, on the one hand, and
the General Partner and its affiliates, on the other, are or will be the
result of arm's-length negotiations.
(ix) The General Partner may exercise its right to call for and purchase
Units as provided in the Partnership Agreement or assign such right to one
of its affiliates or to the Partnership.
Unless provided for otherwise in the partnership agreement, Delaware law
generally requires a general partner of a Delaware limited partnership to
adhere to fiduciary duty standards under which it owes its limited partners
the highest duties of good faith, fairness and loyalty and which generally
prohibit such general partner from taking any action or engaging in any
transaction as to which it has a conflict of interest. The Partnership
Agreement expressly permits the General Partner to resolve conflicts of
interest between itself or its affiliates, on the one hand, and the
Partnership or the Unitholders, on the other, and to consider, in resolving
such conflicts of interest, the interests of other parties in addition to the
interests of the Unitholders. In addition, the Partnership Agreement provides
that a purchaser of Common Units is deemed to have consented to certain
conflicts of interest and actions of the General Partner and its affiliates
that might otherwise be prohibited, including those described in clauses (i)
through (ix) above, and to have agreed that such conflicts of interest and
actions do not constitute a breach by the General Partner of any duty stated
or implied by law or equity. The General Partner will not be in breach of its
obligations under the Partnership Agreement or its duties to the Partnership
or the Unitholders (i) by virtue of any action to which the holders of Common
Units are deemed to have consented by purchasing Common Units or (ii) if the
General Partner's resolution of any conflict of interest is fair and
reasonable to the Partnership. The latitude given in the Partnership Agreement
to the General Partner in resolving conflicts of interest may significantly
limit the ability of a Unitholder to challenge what might otherwise be a
breach of fiduciary duty. The General Partner believes, however, that such
latitude is necessary and appropriate to enable it to serve as the general
partner of the Partnership without undue risk of liability.
The Partnership Agreement expressly limits the liability of the General
Partner by providing that the General Partner, its affiliates and its officers
and directors will not be liable for monetary damages to the Partnership, the
limited partners or assignees for errors of judgment or for any acts or
omissions if the General Partner and such other persons acted in good faith.
In addition, the Partnership is required to indemnify the General Partner, its
affiliates and their respective officers, directors, employees and agents to
the fullest extent permitted by law, against liabilities, costs and expenses
incurred by the General Partner or such other persons, if the General Partner
or such persons acted in good faith and in a manner they reasonably believed
to be in, or not opposed to, the best interests of the Partnership and, with
respect to any criminal proceedings, had no reasonable cause to believe the
conduct was unlawful.
The provisions of Delaware law that allow the common law fiduciary duties of
a general partner to be modified by a partnership agreement have not been
tested in a court of law, and the General
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Partner has not obtained an opinion of counsel covering the provisions set
forth in the Partnership Agreement that purport to waive or restrict the
fiduciary duties of the General Partner that would be in effect under common
law were it not for the Partnership Agreement. See "Conflicts of Interest and
Fiduciary Responsibilities--Conflicts of Interest."
The principal terms of the Partnership Agreement, the Operating Partnership
Agreement, the Master Credit Support Agreement, the Contribution Agreement,
the Distribution Support Agreement and other agreements referred to herein did
not result from arm's-length discussions with unrelated parties. Furthermore,
holders of Common Units have not been represented by separate counsel in
connection with the preparation of the documents referred to herein.
RISKS INHERENT IN THE PARTNERSHIP'S BUSINESS
THE PARTNERSHIP'S CASH FLOWS WILL DEPEND UPON ITS MARGINS
The Partnership's margins from its gathering and marketing operations are
generated by the difference between the price of the crude oil at the point of
purchase and the price of crude oil at the point of sale, minus the associated
costs of aggregation and transportation, and the margins from its pipeline
operations are generated by the difference between the posted tariff and the
fixed and variable costs of operating the pipeline. The Partnership's ability
to generate cash for distribution depends upon the margins realized in its
gathering, marketing and pipeline operations. The Partnership's margins vary
in both its gathering and marketing and its pipeline operations from period to
period and are affected by factors outside the control of the General Partner,
such as changes in U.S. crude oil inventories. Margins in the first half of
1996 reflect, in part, unusually favorable market conditions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations--General--Gross Margin."
PARTNERSHIP PROFITABILITY WILL DEPEND IN LARGE PART ON THE VOLUMES OF CRUDE
OIL IT PURCHASES, GATHERS AND MARKETS
The Partnership's profitability will depend in large part on the volumes of
crude oil it purchases and gathers at the wellhead. To maintain its volumes of
crude oil purchased, the Partnership must continually contract for new
supplies of crude oil in amounts sufficient to offset volumes lost because of
natural declines in crude oil production from depleting wells or volumes lost
to competitors. Replacement of lost volumes of crude oil is particularly
difficult in an environment where production is low and competition to gather
available production is intense. Because producers experience inconveniences
in switching crude oil purchasers (such as delays in receipt of proceeds while
awaiting the preparation of new division orders), producers typically do not
change purchasers on the basis of minor variations in price. Thus, the
Partnership may experience difficulty acquiring crude oil at the wellhead in
areas where there are existing relationships between producers and other
gatherers and purchasers of crude oil.
Sustained low crude oil prices could lead to a decline in drilling activity
and production levels or the shutting-in or abandonment of marginal wells. To
the extent that low crude oil prices result in lower volumes of crude oil
available for purchase at the wellhead, the Partnership may experience lower
margins as competition for available crude oil intensifies. In addition, a
sustained depression in crude oil prices could result in the bankruptcy of
certain producers. Although bankruptcy proceedings are not likely to terminate
production from oil wells, they may disrupt purchasing arrangements and have
other adverse consequences. Alternatively, sustained high crude oil prices can
limit the volumes of crude oil purchases by the Partnership if sufficient
credit support for its activities is unavailable.
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THE PARTNERSHIP IS DEPENDENT ON CRUDE OIL SUPPLY TO ITS PIPELINES
The Partnership's pipeline systems are dependent upon the demand for crude
oil by refineries connected to the Partnership's pipelines as well as the
level of supply of crude oil received from the geographic regions surrounding
the Partnership's pipeline systems and the volumes of crude oil shipped from
connecting pipelines. These volumes are in part determined by the sale price
that a shipper can receive by utilizing the Partnership's pipelines to access
end markets. If a decline in refinery demand for crude oil occurs or a decline
in the crude oil production in those geographic regions occurs or market
conditions adversely affect the level of supply from connecting pipelines, the
throughput on the Partnership's pipeline systems, and therefore the
Partnership's profitability, will also decline.
THE PARTNERSHIP'S PRICE RISK MANAGEMENT STRATEGIES CANNOT ELIMINATE ALL PRICE
RISKS
Generally, as Genesis purchases crude oil, it simultaneously establishes a
margin by selling crude oil for physical delivery to third party users, such
as independent refiners or major oil companies, or by entering into a future
delivery obligation with respect to futures contracts on the NYMEX. Through
these transactions, the Partnership seeks to maintain a position that is
substantially balanced between crude oil purchases, on the one hand, and sales
or future delivery obligations, on the other hand. It is the Partnership's
policy not to acquire and hold crude oil, futures contracts or derivative
products for the purpose of speculating on price changes. These price risk
management strategies cannot, however, eliminate all price risks. Any event
that disrupts the Partnership's anticipated physical supplies of crude oil may
expose it to risk of loss resulting from price changes. For example, if the
General Partner inaccurately forecasts the shut-in of production as the result
of apportionment of pipeline space on common carrier pipelines, the
Partnership might be unable to meet its supply commitments with the barrels
purchased at the wellhead. The Partnership would be forced to make purchases
elsewhere in order to meet its commitments, and in the event prices change
adversely, the Partnership's margins also may be adversely affected. Moreover,
the Partnership will be exposed to some risks that are not hedged, including
certain basis risks (the risk that price differentials between delivery
points, delivery periods or types of crude oil will change) and price risks on
certain portions of its inventory, such as its pipeline fill, which must be
maintained in order to transport crude oil on the pipelines. For accounting
purposes, the Partnership may record losses on a portion of the unhedged
inventory due to market price declines, although such losses would have no
impact on cash flow as long as the Partnership continues to operate its
pipelines.
PARTNERSHIP PROFITABILITY IS AFFECTED BY COMPETITION
There is intense competition among all participants in the business for
purchases of crude oil at the wellhead. The Partnership's largest independent
competitors in the purchase of crude oil at the wellhead are Koch Oil Company,
Scurlock Permian Oil Company, an affiliate of Ashland Inc., Texaco Trading &
Transportation Co., Inc. and EOTT Energy Partners, L.P., an affilate of Enron
Corp., each of which has substantial financial resources. See "Business--
Competition." In most areas, Genesis competes with other pipelines for crude
oil to transport. Competing crude oil pipelines lie near Genesis' principal
pipelines, except for the Jay System and the Main Pass System, which are the
only crude oil pipeline systems serving their respective geographic areas.
THE PARTNERSHIP WILL BE DEPENDENT UPON KEY PERSONNEL
The Partnership's management group includes certain key employees which
include John vonBerg, Mark Gorman, John M. Fetzer and Allyn R. Skelton, II.
The failure of the Partnership to retain key members of its senior management
team could adversely affect its operations.
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PARTNERSHIP PROFITABILITY WILL DEPEND ON SUCCESSFUL INTEGRATION OF THE
COMBINED OPERATIONS
The Partnership has conducted no operations and generated no revenues to
date. Although most of the persons responsible for managing and operating the
respective crude oil gathering, marketing and pipeline operations of Basis and
Howell prior to the formation of the Partnership will continue to be
responsible for managing and operating the Combined Operations after the
Offering, there can be no assurance that the Partnership will be able to
successfully integrate the Combined Operations or institute the necessary
systems and procedures to successfully manage the combined enterprise on a
profitable basis. The combined historical financial results of the Combined
Operations only cover periods when the Combined Operations were not under
common control and management and, therefore, may not be indicative of the
Partnership's future financial and operating results. The inability of the
Partnership to successfully integrate the Combined Operations would have a
material adverse effect on the Partnership's business, financial condition and
results of operations.
CREDIT REVIEW AND ANALYSIS IS A MAJOR ASPECT OF THE PARTNERSHIP'S OVERALL
BUSINESS
Credit review and analysis is a major aspect of the Partnership's overall
business. Because the Partnership may extend credit to certain customers in
large amounts, it is important that its credit review, evaluation and control
mechanisms work properly and also comply with management practices required
pursuant to the Master Credit Support Agreement. In those cases where the
Partnership provides division order services for crude oil purchased at the
wellhead, the Partnership may be responsible for distribution of proceeds to
all parties. In other cases, the Partnership pays a portion of the production
proceeds to an operator who distributes these proceeds to the various interest
owners. This arrangement exposes the Partnership to operator credit risk, and
therefore it must determine that operators have sufficient financial resources
to make such payments and distributions and to indemnify and defend the
Partnership in case of a protest, action or complaint. Even if the
Partnership's credit review and analysis mechanisms work properly, there can
be no assurance that the Partnership will not experience losses in dealings
with other parties.
THE PARTNERSHIP MAY NOT BE SUCCESSFUL IN GROWING THROUGH ACQUISITIONS
The Partnership intends to expand its business in part through selective
acquisitions. Although the Partnership evaluates acquisition opportunities on
a regular basis, there can be no assurance that any such acquisitions will be
consummated or that the Partnership will be able to identify attractive
acquisition candidates in the future, to acquire assets or businesses on
economically acceptable terms or to finance any such acquisition. Furthermore,
there can be no assurance that any debt incurred to finance an acquisition
will not adversely affect the ability of the Partnership to make distributions
to the Unitholders, or that any acquisitions will not be dilutive of earnings
and distributions to the Unitholders.
THE COSTS TO THE PARTNERSHIP OF ENVIRONMENTAL REGULATION
The business of the Partnership is subject to the jurisdiction of
governmental agencies with respect to safety, health and environmental and
other regulatory matters. Although the General Partner believes that the
Partnership is in compliance in all material respects with applicable
environmental laws and regulations, the Partnership could be adversely
affected by environmental costs and liabilities that may be incurred, such as
those arising from pipeline ruptures or oil spills, or increased costs
resulting from failure to obtain all required operating or other regulatory
consents and approvals. Legislation is currently pending before Congress to
require financial assurance for oil spill related costs and damages. Federal
and state agencies also could change the tariffs pipelines may charge or
impose additional safety requirements, any of which could affect the
Partnership's profitability.
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THE PARTNERSHIP'S BUSINESS WILL BE SUBJECT TO GOVERNMENTAL REGULATION
The Partnership's interstate common carrier pipeline systems are subject to
regulation by FERC under the Interstate Commerce Act, which requires, among
other things, that pipeline rates be just and reasonable and not unduly
discriminatory. The Interstate Commerce Act permits challenges by an
economically interested person to proposed new or changed rates by protest,
and to rates that are already effective by complaint. Proposed new or changed
rates may be suspended by FERC for up to seven months and allowed to become
effective subject to investigation and potential refund. Rates that are
already effective may be ordered to be reduced for the future and, upon an
appropriate showing, reparations may be awarded for damages sustained by a
complainant as a result of such rates for up to two years prior to the filing
of a complaint. FERC's regulatory authority extends to such matters as the
Mississippi, Jay and Main Pass Systems' cost of service from tariff, rate of
return on equity, the services that the Partnership is permitted to perform or
abandon on the Mississippi, Jay and Main Pass Systems, the ability of the
Partnership to seek recovery of various categories of costs, the acquisition,
construction and disposition of assets by the Partnership in relation to the
Mississippi, Jay and Main Pass Systems, and the level of competition within
the interstate pipeline industry. See "Business--Regulation--Pipeline
Regulation." No assurance can be given that FERC will continue to permit the
Partnership's Mississippi and Jay Systems to use their respective forms and
levels of tariff. Under FERC regulations, customers will have the opportunity
to contest the Partnership's rates or rate structure and may raise any issues.
While the Partnership is optimistic that existing rates will be maintained, if
the Partnership's rates were successfully challenged, the amount of cash
available for distribution to holders of Units could be materially reduced.
In a proceeding involving Lakehead Pipe Line Company, Limited Partnership
(Opinion No. 397), FERC concluded that for pipelines owned by partnerships
there should not be a corporate income tax allowance built into a pipeline's
rates to reflect income attributable to individual partners since individual
partners, unlike corporate partners, do not pay a corporate income tax.
Opinion No. 397 was affirmed on rehearing in May 1996 and is currently under
judicial review. If a challenge were made to Genesis' rates and FERC were to
disallow the corporate income tax allowance in the cost of service of the Jay
and Mississippi Systems on the basis set forth in the Lakehead order, Genesis
might be required to reduce its tariffs. See "Business--Regulation."
Some local government jurisdictions in Texas have taken or are proposing to
take actions to force pipeline transmission companies to pay franchise fees
for pipelines, including crude oil pipelines, that pass through their
jurisdiction or that cross city streets. Should these proposals be
implemented, the Partnership may be required to pay additional fees.
The Partnership must comply with the Commodity Exchange Act ("CEA") and the
requirements of the NYMEX in connection with its risk management system, and
if additional legislation or regulations are adopted under CEA, costs incurred
by the Partnership in connection with its risk management system could
increase.
THE PARTNERSHIP'S ACTIVITIES WILL BE SUBJECT TO CERTAIN OPERATIONAL HAZARDS
AND UNFORESEEN INTERRUPTIONS
The Partnership's activities are subject to certain operational hazards and
unforeseen interruptions. The Partnership's operations could be interrupted by
natural disasters, adverse weather or other events beyond the General
Partner's control. Although the Partnership will carry insurance with respect
to certain casualty occurrences, a casualty occurrence might result in the
uninsured loss of equipment or life, as well as uninsured injury and extensive
property or environmental damage.
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TAX RISKS
For a general discussion of the expected federal income tax consequences of
owning and disposing of Common Units, see "Tax Considerations."
TAX TREATMENT IS DEPENDENT ON PARTNERSHIP STATUS
The availability to a holder of Common Units of the federal income tax
benefits of an investment in the Partnership depends, in large part, on the
classification of the Partnership as a partnership for federal income tax
purposes. Based on certain representations made by the General Partner and the
Partnership, Counsel is of the opinion that, under current law, the
Partnership will be classified as a partnership for federal income tax
purposes. However, no ruling from the IRS as to such status has been or will
be requested, and the opinion of Counsel is not binding on the IRS. Moreover,
in order for the Partnership to continue to be classified as a partnership for
federal income tax purposes, at least 90% of the Partnership's gross income
for each taxable year must consist of qualifying income. See "Tax
Considerations--Partnership Status."
If the Partnership were classified as an association taxable as a
corporation for federal income tax purposes, the Partnership would pay tax on
its income at corporate rates (currently at a 35% federal rate), distributions
would generally be taxed again to the Unitholders as corporate distributions,
and no income, gains, losses or deductions would flow through to the
Unitholders. Because a tax would be imposed upon the Partnership as an entity,
the cash available for distribution to the holders of Common Units would be
substantially reduced. Treatment of the Partnership as an association taxable
as a corporation or otherwise as a taxable entity would result in a material
reduction in the anticipated cash flow and after-tax return to the holders of
Common Units. See "Tax Considerations--Partnership Status."
There can be no assurance that the law will not be changed so as to cause
the Partnership to be treated as an association taxable as a corporation for
federal income tax purposes or otherwise to be subject to entity-level
taxation. The Partnership Agreement provides that if a law is enacted or
existing law is modified or interpreted in a manner that subjects the
Partnership to taxation as a corporation or otherwise subjects the Partnership
to entity level taxation for federal, state or local income tax purposes,
certain provisions of the Partnership Agreement relating to the subordination
of distributions on Subordinated OLP Units will be subject to change,
including a decrease in the Minimum Quarterly Distribution and the Target
Distribution Levels to reflect the impact of such law on the Partnership. See
"Cash Distribution Policy--Adjustment of Minimum Quarterly Distribution and
Target Distribution Levels."
NO IRS RULING WITH RESPECT TO TAX CONSEQUENCES
No ruling has been requested from the IRS with respect to classification of
the Partnership as a partnership for federal income tax purposes or any other
matter affecting the Partnership. Accordingly, the IRS may adopt positions
that differ from Counsel's conclusions expressed herein. It may be necessary
to resort to administrative or court proceedings in an effort to sustain some
or all of Counsel's conclusions, and some or all of such conclusions
ultimately may not be sustained. The costs of any contest with the IRS will be
borne directly or indirectly by some or all of the Unitholders and the General
Partner.
AMORTIZATION OF PARTNERSHIP INTANGIBLES
Based upon the advice of Counsel, the Partnership intends to amortize the
Purchased Intangibles purchased by the Partnership from Basis and Howell and
the Contributed Intangibles contributed to the Partnership by Basis and
Howell. The ability of the Partnership to amortize both the Purchased
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Intangibles and Contributed Intangibles depends on the inapplicability of
certain anti-churning rules under the Code, and Counsel is of the opinion that
such rules should not apply. No assurance can be given that the IRS will agree
with this conclusion. If the IRS successfully challenged the ability of the
Partnership to amortize the Purchased Intangibles and Contributed Intangibles
as a result of the anti-churning rules, the Partnership estimates that the
ratio of taxable income to distributions through December 31, 199 would
increase from approximately to approximately . Furthermore, there is
additional uncertainty about the ability of the Partnership to amortize the
Contributed Intangibles. Due to the absence of authority interpreting the
relevant provisions of the Code, Counsel has not rendered an opinion with
regard to the application of those provisions to the Contributed Intangibles.
If the Partnership were unable to amortize the Contributed Intangibles only,
the Partnership estimates that the ratio of taxable income to distributions
through December 31, 199 would increase from approximately to
approximately . See "Tax Considerations--Tax Treatment of Operations--
Initial Tax Basis, Depreciation and Amortization."
TAX LIABILITY EXCEEDING CASH DISTRIBUTIONS
A holder of Common Units will be required to pay federal income taxes and,
in certain cases, state and local income taxes on his allocable share of the
Partnership's income, whether or not he receives cash distributions from the
Partnership. No assurance can be given that a Unitholder will receive cash
distributions equal to his allocable share of taxable income from the
Partnership or even the tax liability to him resulting from that income.
Further, a holder of Common Units may incur a tax liability, in excess of the
amount of cash received, upon the sale of his Common Units. See "Tax
Considerations--State, Local and Other Tax Considerations" for a discussion of
certain state and local tax considerations that may be relevant to prospective
Unitholders.
OWNERSHIP OF COMMON UNITS BY TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER
INVESTORS
Investment in Common Units by certain tax-exempt entities, regulated
investment companies and foreign persons raises issues unique to such persons.
See "Tax Considerations--Tax-Exempt Organizations and Certain Other
Investors." For example, virtually all of the taxable income derived by most
organizations exempt from federal income tax (including IRAs and other
retirement plans) from the ownership of a Common Unit will be unrelated
business taxable income and thus will be taxable to such a Unitholder.
NONDEDUCTIBILITY OF LOSSES
In the case of taxpayers subject to the passive loss rules (generally
individuals and closely held corporations), losses generated by the
Partnership, if any, will only be available to offset future income generated
by the Partnership and cannot be used to offset income from other activities,
including passive activities or investments. Passive losses that are not
deductible because they exceed the Unitholder's income generated by the
Partnership may be deducted in full when the Unitholder disposes of all of his
Units in a fully taxable transaction with an unrelated party. Net passive
income from the Partnership may be offset by unused Partnership losses carried
over from prior years, but not by losses from other passive activities,
including losses from other publicly traded partnerships. See "Tax
Considerations--Tax Consequences of Unit Ownership--Limitations on
Deductibility of Partnership Losses."
UNIFORMITY OF COMMON UNITS AND NONCONFORMING DEPRECIATION CONVENTIONS
Because the Partnership cannot match transferors and transferees of Common
Units, uniformity of the economic and tax characteristics of the Common Units
to a purchaser of Common Units must be maintained. To maintain uniformity, the
Partnership will adopt certain depreciation and amortization conventions that
do not conform with all aspects of certain proposed and final Treasury
Regulations.
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The IRS may challenge those conventions and, if such a challenge were
sustained, the uniformity of Common Units could be affected. Non-uniformity
could adversely affect the amount of tax depreciation and amortization
available to a purchaser of Common Units and could have a negative impact on
the value of the Common Units. See "Tax Considerations--Uniformity of Units."
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local taxes, unincorporated business taxes, and
estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property. A
Unitholder may be required to file state and local income tax returns and pay
state and local income taxes in some or all of the various jurisdictions in
which the Partnership does business or owns property and may be subject to
penalties for failure to comply with those requirements. It is the
responsibility of each Unitholder to file all United States federal, state and
local tax returns that may be required of such Unitholder. Counsel has not
rendered an opinion on the state or local tax consequences of an investment in
the Partnership. See "Tax Considerations--State, Local and Other Tax
Considerations."
TAX SHELTER REGISTRATION; POTENTIAL IRS AUDIT
The Partnership will be registered with the IRS as a tax shelter. No
assurance can be given that the Partnership will not be audited by the IRS or
that tax adjustments will not be made. The rights of a Unitholder owning less
than a 1% profits interest in the Partnership to participate in the income tax
audit process are very limited. Further, any adjustments in the Partnership's
returns will lead to adjustments in the Unitholders' returns and may lead to
audits of Unitholders' returns and adjustments of items unrelated to the
Partnership. Each Unitholder would bear the cost of any expenses incurred in
connection with an examination of such Unitholder's personal tax return.
PARTNERSHIP TAX INFORMATION AND AUDITS
The Partnership will furnish each holder of Common Units with a Schedule K-1
that sets forth his allocable share of income, gains, losses and deductions.
In preparing these schedules, the Partnership will use various accounting and
reporting conventions and adopt various depreciation and amortization methods.
There is no assurance that these schedules will yield a result that conforms
to statutory or regulatory requirements or to administrative pronouncements of
the IRS. Further, the Partnership's tax return may be audited, and any such
audit could result in an audit of a partner's individual tax return as well as
increased liabilities for taxes because of adjustments resulting from the
audit.
PROPOSED CHANGES IN FEDERAL INCOME TAX LAWS
Legislation passed by Congress in November 1995 (the "1995 Proposed
Legislation") would have altered the tax reporting procedures and the
deficiency collection procedures applicable to large partnerships such as the
Partnership (generally defined as electing partnerships with more than 100
partners) and would make certain additional changes to the treatment of large
partnerships. That legislation was generally intended to simplify the
administration of the tax reporting and deficiency collection rules governing
large partnerships.
On March 19, 1996, certain tax legislation known as the Revenue
Reconciliation Act of 1996 was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related
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persons enters into one or more positions with respect to the same or
substantially identical property which, for some period, substantially
eliminates both the risk of loss and opportunity for gain on the appreciated
financial position (including selling "short against the box" transactions).
The 1995 Proposed Legislation was vetoed by President Clinton on December 6,
1995. As of the date of this Prospectus, it is not possible to predict whether
any of the changes which were set forth in the 1995 Proposed Legislation, the
Revenue Reconciliation Act of 1996 or any other changes in the
federal income tax laws that would impact the Partnership and the holders of
Common Units will ultimately be enacted, or if enacted, what form they will
take, what the effective dates will be and what, if any, transition rules will
be provided.
See "Description of the Common Units," "The Partnership Agreement" and "Tax
Considerations" for a more detailed description of these and other risk
factors and conflicts of interest that should be considered in evaluating an
investment in the Common Units.
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THE TRANSACTIONS
Set forth below is a discussion of the Transactions in connection with the
formation of the Partnership and the acquisition of the Combined Operations
from Basis and Howell:
. In September 1996, Basis and Howell formed the General Partner and caused
the General Partner to form the Partnership and the Operating Partnership.
Basis and Howell will own interests of 54% and 46%, respectively, in the
General Partner.
. The Partnership will sell 8,200,000 Common Units in the Offering and will
contribute substantially all of the net proceeds thereof, together with
approximately $3 million in cash to be contributed to the Partnership by
the General Partner, to the Operating Partnership.
. The Operating Partnership will use the cash contributed to it by the
Partnership to buy certain of the Combined Operations from Basis and Howell
for approximately $150.6 million.
. Basis and Howell will contribute the remaining portion of the Combined
Operations to the Operating Partnership in exchange for 4,050,000
Subordinated OLP Units and a .66% general partner interest in the Operating
Partnership. Basis and Howell will contribute the .66% general partner
interest in the Operating Partnership to the General Partner.
. Upon completion of the Transactions, the Partnership will own a 66.94%
general partner interest in the Operating Partnership; the Subordinated OLP
Units held by Basis and Howell will represent limited partner interests of
17.5% and 14.9%, respectively, in the Operating Partnership.
. The Partnership will use the net proceeds from any exercise of the
Underwriters' over-allotment option to redeem from Basis and Howell, on a
pro rata basis, a number of Subordinated OLP Units equal to the number of
Common Units issued upon the exercise of such option. If the Underwriters'
over-allotment option is exercised in full, the Partnership will own a
75.44% general partner interest in the Operating Partnership and the
Subordinated OLP Units held by Basis and Howell will represent limited
partner interests of 12.18% and 10.38%, respectively, in the Operating
Partnership.
Pursuant to the Contribution Agreement, with certain exceptions, each of
Basis and Howell has agreed to indemnify the Partnership for liabilities
relating to the conduct of the Combined Operations prior to the closing of the
Offering. For information regarding environmental liabilities, see "Business--
Environmental Matters." The Contribution Agreement provides that all costs and
expenses in connection with this Offering will be borne by the Partnership. In
addition, certain adjustments in connection with the conveyance by Basis and
Howell of the Combined Operations will be made effective as of November ,
1996 (the "Effective Date").
CREDIT SUPPORT FACILITIES
Concurrently with the Offering and pursuant to the Master Credit Support
Agreement, the Operating Partnership will enter into credit facilities with
Salomon Inc and Basis (collectively, the "Credit Facilities"). The following
is a summary of the anticipated material terms of the Credit Facilities as
provided in the Master Credit Support Agreement, a copy of which has been
filed as an exhibit to the Registration Statement of which this Prospectus is
a part. This summary is qualified in its entirety by reference to the Master
Credit Support Agreement. The Operating Partnership's obligations under the
Credit Facilities will rank prior to all other obligations of the Operating
Partnership and will be secured pursuant to a security agreement covering all
of the Operating Partnership's current and future assets. See "Risk Factors"
and "Conflicts of Interest and Fiduciary Responsibilities."
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Guaranty Facility. Salomon Inc has agreed to provide transitional credit
support in the form of guarantees ("Guaranty Facility") over a period of
approximately three years in connection with the purchase, sale and exchange
of crude oil in the ordinary course of the Operating Partnership's business
with third parties. The aggregate amount of the Guaranty Facility will be
limited to $500 million through December 31, 1997, $400 million for the year
ending December 31, 1998 and $300 million for the year ending December 31,
1999 (to be reduced in each case by the amount utilized at any one time
pursuant to the Working Capital Facility as described below). Under the
Guaranty Facility, the Operating Partnership will be required to pay a
guarantee fee to Salomon Inc which will increase over the three-year period,
thereby increasing the cost of the credit support provided to the Operating
Partnership under the Guaranty Facility from a below-market rate to a rate
that may be higher than rates paid to independent financial institutions for
similar credit. In the event the Partnership is required to reimburse Salomon
Inc for disbursements under the Guaranty Facility and the Operating
Partnership fails to reimburse Salomon Inc by the second business day,
interest will be payable under the Guaranty Facility at Prime Rate (as defined
in the Master Credit Support Agreement) plus 2%.
The Guaranty Facility will expire on December 31, 1999, but may terminate
earlier upon the removal of the General Partner or at such time as the
Partnership enters into a substitute credit facility, at which time Salomon
Inc will be released from all its obligations under the Credit Facilities.
Working Capital Facility. Basis has agreed to use its reasonable best
efforts, to the extent it has availability under its uncommitted credit lines,
to provide the Operating Partnership, for a six-month period ending May 31,
1997, a secured line of credit for working capital purposes (the "Working
Capital Facility") of up to $35 million, which amount includes direct cash
advances not to exceed $25 million outstanding at any one time and letters of
credit that may be required in the ordinary course of the Operating
Partnership's business. The total amounts outstanding at any one time under
the Working Capital Facility will correspondingly reduce the amounts available
under the Guaranty Facility. The interest rate for the Working Capital
Facility will equal the cost to Basis of a comparable borrowing as reasonably
determined by Basis.
Summary of Terms. The Master Credit Support Agreement will contain various
restrictive and affirmative covenants including (i) restrictions on
indebtedness other than (a) pre-existing indebtedness, (b) indebtedness
pursuant to Hedging Agreements (as defined in the Master Credit Support
Agreement) entered into in the ordinary course of business and (c)
indebtedness incurred in the ordinary course of business by acquiring and
holding receivables payable in accordance with customary trade terms, (ii)
restrictions on certain liens, investments, guarantees, loans, advances, lines
of business, acquisitions, mergers, consolidations and sales of assets and
(iii) compliance with certain risk management policies, audit and receivable
risk exposure practices and cash management practices in effect for Basis and
as may from time to time be revised or altered by Salomon Inc.
Pursuant to the Master Credit Support Agreement, the Operating Partnership
will be required to maintain (a) at all times Consolidated Tangible Net Worth
(as defined in the Master Credit Support Agreement) of not less than $50
million, (b) Consolidated Working Capital (as defined in the Master Credit
Support Agreement) of not less than $1 million, (c) a ratio of its
Consolidated Current Liabilities to Consolidated Working Capital (as such
terms are defined in the Master Credit Support Agreement) plus net property,
plant and equipment of not more than 7.5 to 1, (d) a ratio of Consolidated
EBITDA to Consolidated Fixed Charges (as such terms are defined in the Master
Credit Support Agreement) of at least 1.75 to 1 as of the last day of each
fiscal quarter prior to December 31, 1999 and (e) a ratio of Consolidated
Total Liabilities to Consolidated Tangible Net Worth (as such terms are
defined in the Master Credit Support Agreement) of not more than 10 to 1.
An Event of Default will result in the termination of the Credit Facilities.
Events of Default include (a) default in the payment of (i) any principal on
any payment obligation under the Credit Facilities when due or (ii) interest
or fees or other amounts within two business days of the due date, (b) the
45
<PAGE>
guaranty exposure amount exceeds the maximum credit support amount for two
consecutive calendar months, (c) failure to perform or otherwise comply with
any covenants contained in the Master Credit Support Agreement if such failure
continues unremedied for a period of 30 days after written notice thereof, (d)
a material misrepresentation in connection with any loan, letter of credit or
guarantee issued under the Credit Facilities, (e) certain cross defaults with
respect to any indebtedness the aggregate principal amount of which exceeds $1
million, (f) various events of bankruptcy or insolvency, (g) the invalidity of
any guarantee, letters of credit or security agreements entered into in
connection with the Master Credit Support Agreement, (h) certain unsatisfied
judgments in excess of $1 million and (i) materially adverse effects as a
result of obligations under ERISA. In addition, removal of the General Partner
will result in the termination of the Credit Facilities and the release of all
of Salomon Inc's obligations thereunder.
Salomon Inc and Basis may assign any of their respective rights or
obligations under the Master Credit Support Agreement provided that the
assignee unconditionally assumes such obligations, is a U.S. entity or agrees
to abide by and submit to the jurisdiction of the United States or the United
Kingdom and is not based in any jurisdiction that is subject to U.S. laws or
regulations prohibiting investments by U.S. entities, and at the time of such
transfer and after giving effect to the transaction meets certain financial
requirements. Such financial requirements would be satisfied if the transferee
either (a) has any long-term unsecured debt obligations that are rated (i) at
least BBB- from Standard & Poor's rating group, (ii) Baa3 from Moody's
Investors Service, Inc. or (iii) a comparable rating from any other rating
agency that is designated by the Securities and Exchange Commission
("Commission") as a nationally recognized statistical rating organization
(collectively, "Qualified Investment Grade") or (b) has, in the reasonable
judgment of Salomon Inc, credit quality comparable to Qualified Investment
Grade in the event the transferee does not have long-term unsecured debt
obligations or such obligations are not rated by such rating agencies or the
transferee is not a U.S. entity.
USE OF PROCEEDS
The net proceeds to the Partnership from the sale of Common Units offered
hereby (assuming an initial public offering price of $ per Common Unit)
are estimated to be approximately $ million, after deducting estimated
underwriting discount and estimated offering expenses of the Offering. The net
proceeds from the sale of Common Units offered hereby, less $5 million to be
retained by the Partnership for at least one year to provide additional
support for the Partnership's ability to distribute the Minimum Quarterly
Distribution on the Common Units, will be used by the Partnership to purchase
a portion of the Combined Operations from Basis and Howell. The Partnership
will use the net proceeds from any exercise of the Underwriters' over-
allotment option to redeem from Basis and Howell, on a pro rata basis, a
number of Subordinated OLP Units equal to the number of Common Units issued
upon the exercise of such option.
46
<PAGE>
CAPITALIZATION
The following table sets forth the unaudited (i) combined historical
capitalization of the Combined Operations as of June 30, 1996, (ii) pro forma
adjustments required to reflect the transactions to be completed at the
closing of the Offering and (iii) pro forma capitalization of the Partnership
as of June 30, 1996 (assuming an initial public offering price of $20.50 per
Common Unit). The table should be read in conjunction with the historical and
pro forma consolidated financial statements and notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1996
-------------------------------------
COMBINED PRO FORMA PARTNERSHIP
HISTORICAL ADJUSTMENTS(1) PRO FORMA
---------- -------------- -----------
(IN THOUSANDS)
<S> <C> <C> <C>
Short-term debt, consisting of the
current portion of long-term debt....... $ 6,346 $ (6,346) $ --
======= ======== ========
Long-term debt........................... $45,286 $(45,286) $ --
------- -------- --------
Minority interests(2).................... -- 40,586 40,586
------- -------- --------
Divisional equity/equity of parent....... 15,738 (15,738) --
------- -------- --------
Partners' capital:
Common Unitholders..................... -- 80,532 80,532
General Partner........................ -- 1,644 1,644
------- -------- --------
Total partners' capital.............. -- 82,176 82,176
------- -------- --------
Total capitalization..................... $61,024 $ 61,738 $122,762
======= ======== ========
</TABLE>
- --------
(1) See Notes to Genesis Energy, L.P. Pro Forma Consolidated Financial
Statements for a discussion of the pro forma adjustments.
(2) Minority interests in the Operating Partnership represent the .66% General
Partner interest and the 32.40% subordinated limited partner interest in
the Operating Partnership not owned by the Partnership.
47
<PAGE>
DILUTION
On a pro forma basis as of June 30, 1996, after giving effect to the
transactions contemplated by this Prospectus, the net tangible book value per
Common Unit was $8.53. Purchasers of Common Units in the 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:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per Common Unit......... $ 20.50
Net negative tangible book value per Unit before the Offering
(1)(2)....................................................... $(11.13)
Increase in book value per Unit attributable to new investors. 19.66
-------
Less: Pro forma net tangible book value per Common Unit after
the Offering (2)(3)......................................... 8.53
-------
Immediate dilution in net tangible book value per Common Unit
to new investors............................................. $11.97
=======
</TABLE>
- --------
(1) Determined by dividing the number of Units (4,050,000 Subordinated OLP
Units and the 2% general partner interest having a dilutive effect
equivalent to 250,000 Units) to be issued to Basis and Howell and to the
General Partner for their contribution of assets and liabilities to the
Partnership into the net tangible book value of the contributed assets and
liabilities. The net negative tangible book value attributable to the
assets and liabilities contributed by Basis is $18.11 per Unit. The net
increase in tangible book value attributable to the acquisition of Howell
is $6.98 per Unit.
(2) The net negative tangible book value does not include intangible assets
contributed to the Partnership with a book value of $16,093,000 ($1.29 per
Unit).
(3) Determined by dividing the total number of Units (8,200,000 Common Units,
4,050,000 Subordinated OLP Units and the 2% general partner interest
having a dilutive effect equivalent to 250,000 Units) to be outstanding
after the Offering made hereby, into the pro forma tangible net book value
of the Partnership, after giving effect to the application of the net
proceeds of the Offering.
The following table sets forth the number of Units that will be issued by
the Partnership and the total consideration to the Partnership contributed by
Basis and Howell in respect of their Subordinated OLP Units, the General
Partner in respect of its 2% general partner interest and by the purchasers of
Common Units in the Offering upon the consummation of the transactions
contemplated by this Prospectus:
<TABLE>
<CAPTION>
UNITS ACQUIRED NET BOOK VALUE
------------------ OF ASSETS
NUMBER PERCENT TRANSFERRED
---------- ------- --------------
(DOLLARS IN
THOUSANDS)
<S> <C> <C> <C>
General Partner(1)(2)......................... 250,000 2.0% $ (1,848)
Basis and Howell(2)........................... 4,050,000 32.4 (29,930)
New investors................................. 8,200,000 65.6 154,540
---------- ----- --------
Total....................................... 12,500,000 100.0% $122,762
========
</TABLE>
- --------
(1) Upon the consummation of the transactions contemplated by this Prospectus,
the General Partner will own an effective 2% general partner interest in
the Partnership having a dilutive effect equivalent to 250,000 Units
issued in the Offering.
(2) The assets and liabilities contributed and sold by Basis to the Operating
Partnership will be recorded at historical cost rather than fair value,
and the assets and liabilities contributed and sold by Howell to the
Operating Partnership will be recorded at fair value by the Operating
Partnership in accordance with generally accepted accounting principles.
Total book value of the consideration provided by Basis, Howell and the
General Partner is as follows (dollars in thousands):
<TABLE>
<S> <C> <C> <C>
Book value of net assets transferred by Howell, Basis
and the General Partner to the Operating Partnership
at June 30, 1996.................................... $122,762
Less: Distribution of net proceeds from the Common
Units............................................... (154,540)
--------
$(31,778)
========
</TABLE>
48
<PAGE>
CASH DISTRIBUTION POLICY
Unless otherwise specified herein, the discussion in this Prospectus of
Common Units includes Common OLP Units with respect to cash distributions and
allocation of profits.
GENERAL
The Operating Partnership will distribute to its partners, including the
Partnership, on a quarterly basis, all of its Available Cash in the manner
described herein. The Partnership will then distribute to its partners, on a
quarterly basis, all of its Available Cash in the manner described herein. The
discussion contained herein concerning the distribution of Available Cash
includes the distribution of Available Cash by both the Partnership and the
Operating Partnership on a combined basis. Available Cash is defined in the
Glossary and generally means, with respect to any fiscal quarter of the
Partnership, all cash on hand at the end of such quarter less (i) the amount
of cash reserves that is necessary or appropriate in the reasonable discretion
of the General Partner to (a) provide for the proper conduct of the
Partnership's business, (b) comply with applicable law or any Partnership debt
instrument or other agreement or (c) provide funds for distributions to
Unitholders and the General Partner in respect of any one or more of the next
four quarters and (ii) any amount necessary to make Incentive Compensation
Payments to the General Partner with respect to such quarter.
Cash distributions will be characterized as distributions from either
Operating Surplus or Capital Surplus. This distinction affects the amounts
distributed to holders of Common Units relative to holders of Subordinated OLP
Units. See "--Quarterly Distributions of Available Cash." Operating Surplus is
defined in the Glossary and refers to (i) the cash balance of the Partnership
on the date the Partnership commences operations, plus $20 million, plus all
cash receipts of the Partnership from its operations (including cash received
from the issuance of APIs), less (ii) all Partnership operating expenses,
Incentive Compensation Payments, debt service payments (including reserves
therefor, but not including payments required in connection with the sale of
assets or any refinancing of indebtedness with the proceeds of new
indebtedness or an equity offering), maintenance capital expenditures and
reserves established for future Partnership operations. See Appendix E for a
calculation of pro forma Available Cash from Operating Surplus generated
during fiscal 1995, which was derived from the pro forma consolidated
financial statements of the Partnership. See "--Cash Available for
Distribution." Capital Surplus is also defined in the Glossary and will
generally be generated only by borrowings (other than for working capital
purposes), sales of debt and equity securities (other than APIs or Common
Units issued in connection with the redemption of Common OLP Units pursuant to
the Redemption and Registration Rights Agreement) and sales or other
dispositions of assets for cash (other than inventory, accounts receivable and
certain other assets all as disposed of in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Partnership is from Operating Surplus or from Capital
Surplus, all Available Cash distributed by the Partnership from any source
will be treated as distributed from Operating Surplus until the sum of all
Available Cash distributed since the commencement of the Partnership equals
the cumulative Operating Surplus through the quarter prior to such
distribution. Any excess Available Cash (irrespective of its source) will be
deemed to be from Capital Surplus and distributed accordingly. If Available
Cash from Capital Surplus is distributed in respect of each Common Unit in an
aggregate amount per Common Unit equal to the Initial Unit Price, plus any
outstanding Common Unit Arrearages, the distinction between Operating Surplus
and Capital Surplus will cease, and all distributions of Available Cash will
be treated as if they were from Operating Surplus. The Partnership does not
anticipate that there will be significant distributions of Available Cash from
Capital Surplus.
The Subordinated OLP Units are a separate class of interests in the
Operating Partnership, and the rights of holders of such interests to
participate in distributions to limited partners differ from the rights of the
holders of Common Units. For any given quarter, any Available Cash will be
distributed to
49
<PAGE>
the General Partner and to the holders of Common Units, and may also be
distributed to the holders of Subordinated OLP Units during the Subordination
Period depending upon the amount of Available Cash for the quarter, the amount
of outstanding Common Unit Arrearages, if any, and other factors discussed
below.
Subject to the limitations described under "The Partnership Agreement--
Issuance of Additional Securities," the Partnership has the authority to issue
additional Common Units or other equity securities of the Partnership for such
consideration and on such terms and conditions as are established by the
General Partner in its sole discretion and without the approval of the
Unitholders. It is possible that the Partnership will fund acquisitions
through the issuance of additional Common Units or other equity securities of
the Partnership. Holders of any additional Common Units issued by the
Partnership will be entitled to share equally with the then-existing holders
of Common Units in distributions of Available Cash by the Partnership. In
addition, the issuance of additional Partnership Interests may dilute the
value of the interests of the then-existing holders of Common Units in the net
assets of the Partnership. The General Partner will be required to make an
additional capital contribution to the Partnership in connection with the
issuance of additional Partnership Interests (other than in connection with
Common Units issued pursuant to the exercise of the Underwriters' over-
allotment option or pursuant to the Redemption and Registration Rights
Agreement).
The discussion below indicates the percentages of cash distributions
required to be made to the General Partner and the holders of Common Units and
the circumstances under which holders of Subordinated OLP Units and holders of
APIs are entitled to cash distributions and the amounts thereof. For a
discussion of Available Cash from Operating Surplus available for
distributions with respect to the Common Units on a pro forma basis, see
"--Cash Available for Distribution."
QUARTERLY DISTRIBUTIONS OF AVAILABLE CASH
The Partnership will make distributions to its partners with respect to each
quarter of the Partnership prior to its liquidation in an amount equal to 100%
of its Available Cash for such quarter. The Partnership expects to make
distributions of Available Cash within approximately 45 days after the end of
each quarter ending March 31, June 30, September 30 and December 31, to
holders of record on the applicable record date. The first distribution to the
Unitholders will be made within 45 days after the quarter ending December 31,
1996. Because the period from the closing of the Offering through December 31,
1996 will not be a full quarter, the Minimum Quarterly Distribution and the
Target Distribution Levels for such period will be adjusted downward based on
the actual length of such period. The Minimum Quarterly Distribution and
Target Distribution Levels are also subject to certain other adjustments as
described below under "--Distributions from Capital Surplus" and "--Adjustment
of Minimum Quarterly Distribution and Target Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distribution, plus any outstanding
Common Unit Arrearages, prior to any distribution of Available Cash to the
holders of Subordinated OLP Units or APIs. This subordination feature will
enhance the Partnership's ability to pay the Minimum Quarterly Distribution on
the Common Units during the Subordination Period. There is no guarantee,
however, that the Minimum Quarterly Distribution will be made on the Common
Units. Upon expiration of the Subordination Period, all Subordinated OLP Units
will convert into Common OLP Units on a one-for-one basis and will thereafter
participate pro rata with the Common Units in future distributions of
Available Cash. Under certain circumstances, up to 2,025,000 Subordinated OLP
Units may convert into Common OLP Units prior to the expiration of the
Subordination Period. Common Units will not accrue distribution arrearages
with respect to any quarter after the Subordination Period, and Subordinated
OLP Units will not accrue distribution arrearages with respect to any quarter.
50
<PAGE>
DISTRIBUTIONS FROM OPERATING SURPLUS DURING SUBORDINATION PERIOD
The Subordination Period will generally extend from the closing of the
Offering until the first day of any quarter beginning after September 30, 2001
in respect of which (i) distributions of Available Cash from Operating Surplus
on the Common Units and the Subordinated OLP Units with respect to each of the
three consecutive, non-overlapping four-quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated OLP Units during such
periods, (ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-quarter periods immediately preceding
such date equaled or exceeded the sum of the Minimum Quarterly Distribution on
all of the outstanding Common Units and Subordinated OLP Units and the related
distribution on the General Partner's 2% general partner interest during such
periods and (iii) there are no outstanding Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the Subordinated
OLP Units will convert into Common OLP Units on a one-for-one basis on the
first day after the record date established for any quarter ending on or after
September 30, 1999 (with respect to 1,012,500 Subordinated OLP Units or
705,000 Subordinated OLP Units if the Underwriters' over-allotment option is
exercised in full) and September 30, 2000 (with respect to an additional
1,012,500 Subordinated OLP Units or 705,000 Subordinated OLP Units if the
Underwriters' over-allotment option is exercised in full) in respect of which
(i) distributions of Available Cash from Operating Surplus on the Common Units
and the Subordinated OLP Units with respect to each of the three consecutive,
non-overlapping four-quarter periods immediately preceding such date equaled
or exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated OLP Units during such periods, (ii)
the Adjusted Operating Surplus generated during each of the two consecutive,
non-overlapping four-quarter periods immediately preceding such date equaled
or exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated OLP Units and the related
distribution on the General Partner's 2% general partner interest during such
periods and (iii) there are no outstanding Common Unit Arrearages; provided,
however, that the early conversion of the second tranche of Subordinated OLP
Units may not occur until at least one year following the early conversion of
the first tranche of Subordinated OLP Units.
Upon expiration of the Subordination Period, all remaining Subordinated OLP
Units will convert into Common OLP Units on a one-for-one basis and will
thereafter participate pro rata with the Common Units in distributions of
Available Cash from Operating Surplus.
"Adjusted Operating Surplus" for any period generally means Operating
Surplus generated during such period, less (i) any net increase in working
capital borrowings during such period, (ii) any net reduction in cash reserves
for Operating Expenditures during such period not relating to an Operating
Expenditure made during such period and (iii) any capital contributed to
purchase APIs pursuant to the Distribution Support Agreement during such
period; and plus (a) any net decrease in working capital borrowings during
such period, (b) any net increase in cash reserves for Operating Expenditures
during such period required by any debt instrument for the repayment of
principal, interest or premium and (c) the amount of any Incentive
Compensation Payments that reduced Operating Surplus for such period.
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter during the Subordination Period will be made in
the following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to the Minimum Quarterly Distribution for such
quarter;
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding
Common Unit an amount equal to any
51
<PAGE>
Common Unit Arrearages accrued and unpaid with respect to any prior
quarters during the Subordination Period;
third, 98% to the Subordinated Unitholders, pro rata, and 2% to the
General Partner, until there has been distributed in respect of each
outstanding Subordinated OLP Unit an amount equal to the Minimum Quarterly
Distribution for such quarter;
fourth, 100% to the holders of APIs, pro rata, to redeem outstanding APIs
until all outstanding APIs have been redeemed at a price of $100 per API;
and
thereafter, 98% to all Unitholders, pro rata, and 2% to the General
Partner.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the General
Partner's percentage interest in distributions from the Partnership and the
Operating Partnership on a combined basis. The General Partner will initially
own a 2% general partner interest in the Partnership and a 0.66% special
general partner interest in the Operating Partnership. Other references in
this Prospectus to the General Partner's 2% interest or to distributions of 2%
of Available Cash are also references to the amount of the General Partner's
combined percentage interest in the Partnership and the Operating Partnership.
With respect to any Common Unit, the term "Common Unit Arrearages" refers to
the amount by which the Minimum Quarterly Distribution in any quarter during
the Subordination Period exceeds the distribution of Available Cash from
Operating Surplus actually made for such quarter on a Common Unit issued in
the Offering, cumulative for such quarter and all prior quarters during the
Subordination Period. Common Unit Arrearages will not accrue interest.
DISTRIBUTIONS FROM OPERATING SURPLUS AFTER SUBORDINATION PERIOD
Distributions by the Partnership of Available Cash from Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been distributed in respect of each Unit an amount equal to
the Minimum Quarterly Distribution for such quarter;
second, 100% to the holders of APIs, pro rata, to redeem outstanding
APIs, until all outstanding APIs have been redeemed at a price of $100 per
API; and
thereafter, 98% to all Unitholders, pro rata, and 2% to the General
Partner.
REDEMPTION AND REGISTRATION RIGHTS AGREEMENT
Pursuant to the Redemption and Registration Rights Agreement, the
Partnership has agreed, at the end of the Subordination Period or upon earlier
conversion of Subordinated OLP Units into Common OLP Units, to register for
sale in an offering that number of Common Units equal to the number of Common
OLP Units that Basis or Howell is requesting be redeemed. The proceeds, net of
underwriting discount, from such offering will be used by the Operating
Partnership to redeem such Common OLP Units. The Partnership is obligated to
pay the expenses incidental to redemption requests, other than the
underwriting discount.
INCENTIVE COMPENSATION PAYMENTS--HYPOTHETICAL ANNUALIZED YIELD
For any quarter for which Available Cash from Operating Surplus is
distributed in respect of both the Common Units and the Subordinated OLP Units
in an amount equal to the Minimum Quarterly Distribution and Available Cash
from Operating Surplus has been distributed on outstanding Common Units in
such amount as may be necessary to eliminate any accrued and unpaid Common
Unit
52
<PAGE>
Arrearages and to the holders of APIs in redemption of any outstanding APIs,
then any additional Available Cash from Operating Surplus in respect of such
quarter will be reduced by certain Incentive Compensation Payments required to
be made to the General Partner with respect to such quarter. (See
"Management-- Incentive Compensation Payments to General Partner.")
After the First Target Distribution Level ($0.55 per Unit per quarter) has
been reached, (i) the Unitholders and the General Partner will be entitled to
receive distributions of approximately 86.7% of Available Cash from Operating
Surplus (calculated before any reduction for the payment of Incentive
Compensation Payments), such distributions to be made 98% to the Unitholders
and 2% to the General Partner, and (ii) the General Partner will be entitled
to receive Incentive Compensation Payments of approximately 13.3% of Available
Cash from Operating Surplus (calculated before any reduction for such
payments). After the Second Target Distribution Level ($0.635 per Unit per
quarter) and Third Target Distribution Level ($0.825 per Unit per quarter)
have been reached, the General Partner will be entitled to receive Incentive
Compensation Payments of approximately 23.5% and 49%, respectively, of
Available Cash from Operating Surplus (calculated before any reduction for
such payments).
The following table illustrates the amounts of cash that would be (1)
distributed to the Unitholders and the General Partner and (2) paid to the
General Partner as Incentive Compensation Payments with respect to a quarter
in which there are no outstanding Common Unit Arrearages, no outstanding APIs
and Available Cash from Operating Surplus (before reduction for Incentive
Compensation Payments) is equal to $12.5 million.
<TABLE>
<CAPTION>
DISTRIBUTIONS HYPOTHETICAL
---------------------------------- ANNUALIZED GENERAL PARTNER
CUMULATIVE YIELD TO INCENTIVE
DISTRIBUTIONS GENERAL COMMON COMPENSATION
UNITHOLDERS PER UNIT PARTNER UNITHOLDERS PAYMENT TOTAL
----------- ------------- -------- ------------ --------------- -----------
<S> <C> <C> <C> <C> <C> <C>
Minimum Quarterly
Distribution........... $ 6,125,000 $0.500 $125,000 9.756% $ 0 $ 6,250,000
First Target
Distribution........... 612,500 $0.550 12,500 10.732% 0 625,000
Second Target
Distribution........... 1,041,250 $0.635 21,250 12.390% 162,500 1,225,000
Third Target
Distribution........... 2,327,500 $0.825 47,500 16.098% 728,333 3,103,333
Thereafter.............. 648,334 13,231 635,102 1,296,667
----------- -------- ---------- -----------
$10,754,584 $219,481 $1,525,935 $12,500,000
=========== ======== ========== ===========
</TABLE>
DISTRIBUTIONS FROM CAPITAL SURPLUS
Distributions by the Partnership of Available Cash from Capital Surplus will
be made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Partnership has distributed, in respect of each outstanding Unit
issued in the Offering, Available Cash from Capital Surplus in an aggregate
amount per Unit equal to the Initial Unit Price;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the Partnership has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any Common Unit Arrearages accrued and unpaid
with respect to any prior quarters during the Subordination Period; and
thereafter, all distributions of Available Cash from Capital Surplus will
be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and each of the Target
Distribution Levels will be adjusted downward by multiplying each such amount
by a fraction, the numerator of which is the Unrecovered Capital of the Common
Units (generally, the Initial Unit Price less any amounts of Available Cash
from Capital Surplus previously distributed with
53
<PAGE>
respect to a Common Unit issued in the Offering, see the Glossary) immediately
after giving effect to such repayment and the denominator of which is the
Unrecovered Capital of the Common Units immediately prior to such repayment.
This adjustment to the Minimum Quarterly Distribution will proportionately
reduce the obligation of Salomon Inc to contribute cash to the Partnership in
exchange for APIs pursuant to the Distribution Support Agreement and may
accelerate the termination of the Subordination Period, thereby increasing the
likelihood of the conversion of Subordinated OLP Units into Common OLP Units.
When "payback" of the Initial Unit Price has occurred through distributions
of Available Cash from Capital Surplus (i.e., when the Unrecovered Capital of
the Common Units is equal to zero), the Minimum Quarterly Distribution and
each of the Target Distribution Levels will have been reduced to zero for
subsequent quarters. Thereafter, following payment of any outstanding Common
Unit Arrearages and redemption of any outstanding APIs, all distributions of
Available Cash from all sources will be treated as if they were from Operating
Surplus. Because the Minimum Quarterly Distribution and the Target
Distribution Levels will have been reduced to zero, the General Partner will
be entitled thereafter to receive the maximum level of Incentive Compensation
Payments.
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or the Target Distribution Levels for the
quarter with respect to which they are distributed.
ADJUSTMENT OF MINIMUM QUARTERLY DISTRIBUTION AND TARGET DISTRIBUTION LEVELS
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution and each of the Target
Distribution Levels, the Unrecovered Capital, the number of additional Common
Units issuable during the Subordination Period without a Unitholder vote and
other amounts calculated on a per Unit basis will be proportionately adjusted
upward or downward, as appropriate, in the event of any combination or
subdivision of Common Units (whether effected by a distribution payable in
Common Units or otherwise), but not by reason of the issuance of additional
Common Units for cash or property. For example, in the event of a two-for-one
split of the Common Units (assuming no prior adjustments), the Minimum
Quarterly Distribution, each of the Target Distribution Levels and the
Unrecovered Capital of the Common Units would each be reduced to 50% of its
initial level.
The Minimum Quarterly Distribution and each of the Target Distribution
Levels may also be adjusted if legislation is enacted or if existing law is
modified or interpreted by the relevant governmental authority in a manner
that causes the Partnership to become taxable as a corporation or otherwise
subjects the Partnership to taxation as an entity for federal, state or local
income tax purposes. In such event, the Minimum Quarterly Distribution and
each of the Target Distribution Levels would be reduced to an amount equal to
the product of (i) the Minimum Quarterly Distribution and each of the Target
Distribution Levels, respectively, multiplied by (ii) one minus the sum of (a)
the maximum effective federal income tax rate to which the Partnership is
subject as an entity plus (b) any increase that results from such legislation
in the effective overall state and local income tax rate to which the
Partnership is subject as an entity for the taxable year in which such event
occurs (after taking into account the benefit of any deduction allowable for
federal income tax purposes with respect to the payment of state and local
income taxes). For example, assuming the Partnership was not previously
subject to state and local income tax, if the Partnership were to become
taxable as an entity for federal income tax purposes and the Partnership
became subject to a maximum marginal federal, and effective state and local,
income tax rate of 38%, then the Minimum Quarterly Distribution and the Target
Distribution Levels would each be reduced to 62% of the amount thereof
immediately prior to such adjustment.
54
<PAGE>
DISTRIBUTIONS OF CASH UPON LIQUIDATION
Following the commencement of the dissolution and liquidation of the
Partnership, assets will be sold or otherwise disposed of from time to time
and the partners' capital account balances will be adjusted to reflect any
resulting gain or loss. The proceeds of such liquidation will, first, be
applied to the payment of creditors of the Partnership in the order of
priority provided in the Partnership Agreement and by law and, thereafter, be
distributed to the Unitholders, the General Partner and the holders of APIs in
accordance with their respective capital account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
Common Units to a preference over the holders of outstanding Subordinated OLP
Units and APIs upon the liquidation of the Partnership, to the extent required
to permit Common Unitholders to receive their Unrecovered Capital plus any
outstanding Common Unit Arrearages. Thus, net losses recognized upon
liquidation of the Partnership will be allocated to the holders of outstanding
Subordinated OLP Units and APIs to the extent of their capital account
balances before any loss is allocated to the holders of outstanding Common
Units, and net gains recognized upon liquidation will be allocated first to
restore negative balances in the capital account of the General Partner and to
reverse losses previously allocated to any Unitholders in reverse priority to
the order in which any such losses were previously allocated and then to the
Common Unitholders until their capital account balances equal their
Unrecovered Capital plus any outstanding Common Unit Arrearages. Any
additional gain will be allocated to the holders of Subordinated OLP Units
until their capital account balances equal their Unrecovered Capital and will
then be allocated 98% to the Unitholders, pro rata, and 2% to the General
Partner. However, no assurance can be given that there will be sufficient gain
recognized upon liquidation of the Partnership to enable the holders of Common
Units to fully receive their Unrecovered Capital plus any outstanding Common
Unit Arrearages even though there may be cash available for distribution to
the holders of Subordinated OLP Units and APIs. The manner of such adjustment
is as provided in the Partnership Agreements, the forms of which are included
as Appendix A and Appendix B to this Prospectus.
CASH AVAILABLE FOR DISTRIBUTION
The Partnership intends, to the extent there is Available Cash, to
distribute at least the Minimum Quarterly Distribution of $0.50 per Common
Unit per quarter or $2.00 on an annualized basis. Based on its assumptions
about operating conditions, the General Partner believes that the Partnership
should generate sufficient Available Cash from Operating Surplus (without the
use of cash contributions or working capital borrowings) to enable the
Partnership to distribute the Minimum Quarterly Distribution on the
outstanding Common Units and Subordinated OLP Units and the related
distribution on the General Partner's 2% general partner interest with respect
to each fiscal quarter at least through the quarter ending December 31, 1997,
although no assurance can be given respecting such distributions or any future
distributions.
The General Partner's belief is based on a number of assumptions, including
the assumption that supply and demand conditions in crude oil markets from the
closing of the Offering through December 31, 1997 will not be as favorable as
conditions experienced during the first six months of 1996 but instead will be
more similar to conditions experienced in 1994 and 1995. The General Partner
has assumed that these less favorable market conditions would lead to somewhat
lower gross margins on a per barrel basis than those realized in the first six
months of 1996 but that the impact of the margin reductions will be offset in
part by relatively moderate projected increases in pipeline utilization and
gathering volumes. The General Partner has also assumed the successful
integration of the Combined Operations and the sufficiency of credit available
to the Partnership for its operations. Although the General Partner believes
its assumptions are within a range of reasonableness, whether the assumptions
are realized is not, in a number of cases, within the control of the
Partnership and cannot be predicted with any degree of certainty. Therefore,
certain of the General Partner's
55
<PAGE>
assumptions may prove to be inaccurate. As a result, the actual Available Cash
from Operating Surplus generated by the Partnership could deviate
substantially from that currently expected. See "Risk Factors." Accordingly,
no assurance can be given that distributions of the Minimum Quarterly
Distribution or any other amounts will be made. The Partnership does not
intend to update the expression of belief stated above.
The amount of Available Cash from Operating Surplus needed to pay the
Minimum Quarterly Distribution for four quarters on the Common Units and
Subordinated OLP Units to be outstanding immediately after the Offering and on
the General Partner's 2% general partner interest is approximately $25.0
million, consisting of $16.4 million for the Common Units, $8.1 million for
the Subordinated OLP Units and $0.5 million for the General Partner's 2%
general partner interest. If the Underwriters' over-allotment option is
exercised in full, such amounts would be $18.9 million for the Common Units,
$5.6 million for the Subordinated OLP Units and $0.5 million for the General
Partner's 2% general partner interest, or an aggregate of $25.0 million. Pro
forma Available Cash from Operating Surplus generated during 1995, which was
derived from the pro forma consolidated financial statements of the
Partnership in the manner set forth in Appendix E hereto, was $32.5 million.
As more fully explained in Appendix E, pro forma Available Cash from Operating
Surplus for 1995 reflects a level of maintenance capital expenditures that is
significantly less than the amount the Partnership expects to spend in the
future and also does not include any amount that might have been paid under
the Partnership's Incentive Plan.
The pro forma adjustments in the pro forma consolidated financial statements
are based upon currently available information and certain estimates and
assumptions. The pro forma financial statements do not purport to present the
results of operations of the Partnership had the Transactions actually been
completed as of the date indicated. Furthermore, the pro forma financial
statements are based on accrual accounting concepts whereas Operating Surplus
is defined in the Partnership Agreement on a cash accounting basis. As a
consequence, the amount of pro forma Available Cash from Operating Surplus
shown above should only be viewed as a general indication of the amounts of
Available Cash from Operating Surplus that may in fact have been generated by
the Partnership had it been formed in earlier periods.
DISTRIBUTION SUPPORT
To further enhance the Partnership's ability to pay the Minimum Quarterly
Distribution on the Common Units, Salomon Inc has agreed, in the Distribution
Support Agreement, that if the amount of Available Cash from Operating Surplus
(before giving effect to the purchase of APIs as described below) with respect
to any quarter through the Support Period Termination Date (as defined below),
is less than the amount necessary to distribute the Minimum Quarterly
Distribution on all Common Units then outstanding for such quarter, plus the
proportionate distribution on the general partner interest, then Salomon Inc
will contribute (or cause to be contributed) to the Partnership (in return for
APIs) cash to support the Partnership's ability to make the Minimum Quarterly
Distribution with respect to such quarter on all Common Units plus the
proportionate distribution on the general partner interest, up to a maximum
amount (i) in any one quarter, equal to the product of the Minimum Quarterly
Distribution as in effect for such quarter times the number of outstanding
Common Units on the record date with respect to such quarter, plus a
proportionate distribution on the general partner interest, and (ii)
outstanding at any one time, equal to $16.7 million (the aggregate of four
times the Minimum Quarterly Distribution on the Common Units issued in the
Offering, plus a proportionate distribution on the general partner interest)
or $19.2 million if the Underwriters' over-allotment option is exercised in
full. The issuance of any other additional Common Units or equity securities
(including the issuance of Common Units in connection with the redemption of
Common OLP Units) will not cause any increase in Salomon Inc's maximum
contribution obligation pursuant to the Distribution Support Agreement. Since
Salomon Inc's maximum contribution obligation at any time is based on the then
current
56
<PAGE>
Minimum Quarterly Distribution any reduction in the Minimum Quarterly
Distribution as a result of a distribution of Available Cash from Capital
Surplus or otherwise will reduce the future contribution obligation in any one
quarter and the maximum contribution obligation outstanding at any one time.
Salomon Inc will contribute cash to the Partnership in exchange for APIs at
the rate of $100 contributed for each API, subject to the maximum amounts
described above. Each API shall be redeemed at a price of $100. Salomon Inc
may satisfy its obligation by causing one or more of its affiliates, including
Basis, to contribute cash to the Partnership in exchange for APIs as and when
required. In the event that such affiliate does not make the contribution when
required, Salomon Inc will be required to make such contribution.
Salomon Inc's obligation to purchase APIs will terminate on the Support
Period Termination Date, which is the earlier to occur of (i) the first day
after the date on which Available Cash is distributed with respect to the
quarter ending September 30, 2001 and (ii) the first day of any quarter
beginning after September 30, 1999 in respect of which (a) distributions of
Available Cash from Operating Surplus on the Common Units and the Subordinated
OLP Units with respect to the four-quarter period immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all
of the outstanding Common Units and Subordinated OLP Units during such period,
(b) the Adjusted Operating Surplus generated during the four-quarter period
immediately preceding such date equaled or exceeded 133% of the sum of the
Minimum Quarterly Distribution on all of the outstanding Common Units and
Subordinated OLP Units during such period and (c) there are no outstanding
Common Unit Arrearages.
Cash received by the Partnership from the purchase of APIs in order to
provide distribution support will constitute Operating Surplus and will be
deemed to be received within the quarter with respect to which such obligation
arises, even if such cash is received after the end of such quarter. Receipt
of such cash will increase Available Cash and Operating Surplus and it is
expected that the Partnership will use the cash from the purchase of APIs to
make a distribution to holders of Common Units and the General Partner.
However, cash received by the Partnership from the purchase of APIs is not
required to be distributed to holders of Common Units and the General Partner
and, in some cases, may be used for other purposes, including debt service and
operating expenditures. As a result of cash requirements, additions to
reserves or the future issuance of additional Common Units or other equity
securities of the Partnership, the purchase of APIs may not ensure that there
is sufficient cash to permit the Partnership to distribute the Minimum
Quarterly Distribution on the Common Units.
As a result of the purchase of APIs, Salomon Inc (or any other purchaser of
APIs) will become a special limited partner of the Partnership with a capital
account in the Partnership and the right to require the Partnership to redeem
such APIs as previously described. See "--Quarterly Distributions of Available
Cash" and "--Distributions of Cash Upon Liquidation." However, the APIs will
not entitle the holder to any voting rights, cash distributions (except in
redemption of APIs), or allocations of any items of Partnership income, gain,
loss, deduction or credit (except in limited circumstances) with respect to
the capital contributions made in connection with the purchase of APIs. APIs
will be mandatorily redeemed by the Partnership consistent with the order of
priority for distributions set forth above, out of Available Cash from
Operating Surplus.
Salomon Inc may at any time transfer its obligations under the Distribution
Support Agreement, provided that certain conditions are satisfied, including
that the transferee (i) unconditionally assumes all of Salomon Inc's
obligations under the Distribution Support Agreement, (ii) is an affiliate of
the General Partner, (iii) is a person organized and existing under the laws
of the United States or any state thereof ("U.S. Person") or who agrees to
abide by and submit to the jurisdiction of the United Kingdom or the United
States and is not organized or based in any jurisdiction that is subject to
U.S. laws or regulations prohibiting U.S. Persons from making investments in
or conducting business with such jurisdiction and (iv) at the time of such
transfer and after giving effect to the transaction meets certain financial
requirements. Such financial requirements would be satisfied if the transferee
either
57
<PAGE>
(a) has any long-term unsecured debt obligations that are rated Qualified
Investment Grade, (b) has, in the reasonable judgment of Salomon Inc, credit
quality comparable to Qualified Investment Grade in the event the transferee
does not have long-term unsecured debt obligations or such obligations are not
rated by such rating agencies or the transferee is not a U.S. Person or (c)
has arranged for a letter of credit to be issued to the Partnership by a bank
whose long-term letter of credit obligations are Qualified Investment Grade,
which letter of credit secures the transferee's obligations under the
Distribution Support Agreement.
To the extent permitted by law, Salomon Inc's obligation under the
Distribution Support Agreement will be enforceable by the Partnership against
Salomon Inc. However, neither the Partnership Agreement, nor the Distribution
Support Agreement, nor any other agreement grants to the Unitholders, separate
and apart from the Partnership, the right to compel Salomon Inc to purchase
APIs or to compel the Partnership to distribute to the Unitholders and the
General Partner the cash received from the purchase of APIs or to enforce any
other obligation of Salomon Inc under the Distribution Support Agreement.
Limited partners may, however, have certain rights under Delaware law to bring
derivative actions on behalf of the Partnership. See "Conflicts of Interest
and Fiduciary Responsibilities."
The Partnership will retain $5 million of the net proceeds of the Offering.
Such cash will be available to provide additional support for the
Partnership's ability to distribute the Minimum Quarterly Distribution on the
Common Units, although the retained cash is not required to be distributed to
holders of Common Units. At any time following the first anniversary of the
Closing of the Offering, the General Partner may cause the Partnership to
distribute such retained cash to Basis, Howell and the General Partner;
provided, however, such distribution may be made by the Partnership prior to
the second anniversary of the Closing of the Offering only if the General
Partner reasonably believes that the Partnership will distribute the Minimum
Quarterly Distribution on all Common Units in each of the next four quarters.
58
<PAGE>
CERTAIN INFORMATION CONCERNING SALOMON INC
Salomon Inc was incorporated in 1960 under the laws of the State of
Delaware. Salomon Inc conducts global investment banking, global securities
and commodities trading, and U.S. crude oil refining and gathering activities.
Investment banking activities are conducted by Salomon Brothers Holdings
Company Inc and its subsidiaries, including Salomon Brothers. Salomon Brothers
provides capital raising, advisory, trading and risk management services to
its customers, and executes proprietary trading strategies on its own behalf.
Salomon Inc's nonfinancial commodities trading activities (including crude oil
trading) are conducted by its wholly owned subsidiary, Phibro Inc., and its
subsidiaries. Crude oil refining and gathering activities are conducted by
Basis.
SELECTED FINANCIAL INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
---------------------------- ENDED
1993 1994 1995 JUNE 30, 1996
-------- -------- -------- -------------
(IN MILLIONS) (UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF INCOME DATA:
Revenues:
Interest and dividends............. $ 6,171 $ 5,902 $ 7,022 $ 3,009
Principal transactions............. 1,482 (560) 1,077 1,235
Investment banking................. 791 486 472 432
Commissions........................ 285 336 332 165
Other.............................. 70 114 30 (11)
-------- -------- -------- --------
Total revenues.................... 8,799 6,278 8,933 4,830
Interest expense................... 4,600 4,892 5,782 2,418
Revenues, net of interest expense.. 4,199 1,386 3,151 2,412
Noninterest expenses:
Compensation and employee-related.. 1,900 1,486 1,737 1,107
Technology......................... 262 255 252 114
Professional services and business
development....................... 142 167 178 95
Occupancy.......................... 231 165 173 87
Clearing and exchange fees......... 62 70 63 35
Other.............................. 137 74 40 29
-------- -------- -------- --------
Total noninterest expenses........ 2,734 2,217 2,443 1,467
Income tax expense................. 601 (432) 251 378
Cumulative effect of change in
accounting principles, net of tax
benefit of $28.................... (37) -- -- --
-------- -------- -------- --------
Net income (loss).................. $ 827 $ (399) $ 457 $ 567
======== ======== ======== ========
BALANCE SHEET DATA (AT END OF
PERIOD):
Total assets........................ $184,835 $172,452 $188,428 $181,445
Total liabilities................... 179,589 167,960 183,725 176,057
Short-term borrowings.............. 97,890 78,579 101,157 81,695
Term debt.......................... 11,692 15,202 13,045 13,509
Total stockholders' equity ......... 4,546 3,792 4,143 4,828
Common stock....................... 156 156 156 156
Redeemable preferred stock......... 700 700 560 560
Perpetual preferred stock.......... 312 312 312 562
</TABLE>
The foregoing table includes the operations of Basis as of and for the
periods indicated.
Salomon Inc is subject to the information requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and in accordance
therewith files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by
Salomon Inc (Commission File No. 1-4346) can be inspected and copied at the
public reference
59
<PAGE>
facilities maintained by the Commission at Room 1024, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the following Regional Offices of the
Commission: CitiCorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621-2511; and 7 World Trade Center, 13th Floor, New York, New York
10048, or may be obtained on the Internet from the Commission's Web site at
http://www.sec.gov. Copies of such material can be obtained at prescribed
rates from the Public Reference Section of the Commission, 450 Fifth Street,
N.W., Washington, D.C. 20549. Such reports, proxy statements and other
information can also be obtained at the office of the NYSE.
Following the closing of the Offering, Salomon Inc will provide the
Partnership with certain credit support for a three-year period and will,
subject to certain limitations, purchase APIs prior to the Support Period
Termination Date if necessary to support the Partnership's ability to
distribute the Minimum Quarterly Distribution on all Common Units.
Distributions on the Common Units are not, however, an obligation of Salomon
Inc, and Salomon Inc will have no obligation to provide additional services or
support to the Partnership other than as described in this Prospectus. See
"Risk Factors" and "Certain Relationships and Related Transactions."
60
<PAGE>
SELECTED PRO FORMA FINANCIAL AND OPERATING DATA
The following unaudited Selected Pro Forma Financial and Operating Data
reflects the historical operating results of Basis Gathering and Howell Crude
Operations as adjusted for the Transactions and are derived from the unaudited
Genesis Energy, L.P. Pro Forma Consolidated Financial Statements included
elsewhere in this Prospectus. For a description of the assumptions used in
preparing the Selected Pro Forma Financial and Operating Data, see the
unaudited Genesis Energy, L.P. Pro Forma Consolidated Financial Statements.
The following information should not be deemed indicative of future operating
results for the Partnership.
<TABLE>
<CAPTION>
GENESIS ENERGY, L.P. (PRO FORMA UNAUDITED)
-------------------------------------------
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, ---------------------
1995 1995 1996
------------ ---------- ----------
(IN THOUSANDS, EXCEPT PER UNIT AND BARREL
AMOUNTS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gathering and marketing revenues.. $4,026,873 $1,884,158 $2,250,438
Pipeline revenues................. 18,577 9,576 8,338
---------- ---------- ----------
Total revenues................... 4,045,450 1,893,734 2,258,776
Cost of sales:
Crude costs....................... 3,983,735 1,863,124 2,225,123
Field operating costs............. 14,677 7,405 7,566
Pipeline operating costs.......... 4,522 2,072 2,488
---------- ---------- ----------
Total cost of sales.............. 4,002,934 1,872,601 2,235,177
---------- ---------- ----------
Gross margin...................... 42,516 21,133 23,599
General and administrative
expenses......................... 9,148 4,574 4,658
Depreciation and amortization..... 11,146 6,790 4,081
---------- ---------- ----------
Operating income.................. 22,222 9,769 14,860
Other income (expense)............ (187) 41 (79)
---------- ---------- ----------
Net income before minority
interests........................ 22,035 9,810 14,781
Minority interests(1)............. 7,285 3,243 4,887
---------- ---------- ----------
Net income(2)..................... $ 14,750 $ 6,567 $ 9,894
========== ========== ==========
Net income per Common Unit........ $ 1.76 $ 0.78 $ 1.18
BALANCE SHEET DATA (AT END OF
PERIOD):
Current assets.................... $ 426,908
Total assets...................... 545,455
Current liabilities............... 422,693
Total debt........................ --
Minority interests................ 40,586
Partners' capital................. 82,176
OTHER DATA:
Gross margins(3):
Gathering and marketing........... $ 28,461 $ 13,629 $ 17,749
Pipeline.......................... 14,055 7,504 5,850
EBITDA(2)(4)...................... 33,181 16,600 18,862
Maintenance capital
expenditures(5).................. 650 363 365
OPERATING DATA:
Volumes (bpd):
Gathering and marketing:
Wellhead(6)...................... 118,822 120,712 118,026
Bulk(7).......................... 200,720 145,428 199,239
Exchange(8)...................... 295,027 300,325 284,678
---------- ---------- ----------
Total gathering and marketing... 614,569 566,465 601,943
Pipeline(9)....................... 95,454 102,137 85,961
</TABLE>
- --------
(1) Minority interests in the Operating Partnership represent the 0.66%
general partner interest and the 32.40% subordinated limited partner
interest in the Operating Partnership not owned by the Partnership.
(2) Net income has not been reduced for any amount that might have been paid
under the Incentive Plan, as the determination of the amounts payable
thereunder will be at the discretion of the Compensation Committee. See
"Management--Incentive Plan."
(3) Gross margins net of cost of sales, including operating costs.
(4) EBITDA is defined as earnings (net income) before interest expense, income
taxes, depreciation and amortization and minority interests. EBITDA is not
intended to represent cash flow and does not represent the measure of cash
available for distribution. EBITDA provides additional information for
evaluating the Partnership's ability to make the Minimum Quarterly
Distribution and is presented solely as a supplemental measure. EBITDA
should not be construed as an alternative to net income, operating income,
cash flows from operating activities or any other measure of financial
performance presented in accordance with generally accepted accounting
principles. The EBITDA of the Partnership may not be comparable to the
EBITDA of other entities as other entities may not calculate EBITDA in the
same manner as the Partnership.
(5) Amounts determined by combining actual amounts for Combined Operations
maintenance capital expenditures. Excludes capital expenditures on the
three principal pipelines prior to their acquisition on March 31, 1995
incurred by the prior owner.
(6) Consists of barrels of crude oil and condensate purchased at the wellhead.
(7) Consists of barrels of crude oil and condensate purchased at collection
points, terminals and pipelines from third parties.
(8) Consists of barrels of crude oil and condensate acquired in simultaneous
buy-sell exchanges of equal volumes.
(9) Includes estimates of volumes transported by the prior owner on the Texas,
Jay and Mississippi Systems during the periods prior to the acquisition of
the systems by Howell on March 31, 1995.
61
<PAGE>
SELECTED HISTORICAL FINANCIAL AND OPERATING DATA
The financial information below as of December 31, 1994 and 1995 and for the
years ended December 31, 1993, 1994 and 1995 is derived from the audited
Financial Statements of Basis Gathering and the audited Combined Financial
Statements of Howell Crude Operations. The financial information below as of
December 31, 1991, 1992 and 1993 and for the years ended December 31, 1991 and
1992 is derived from the accounting records of Basis Gathering and Howell
Crude Operations and is unaudited. The financial information as of June 30,
1995 and 1996 and for the six months ended June 30, 1995 and 1996 is derived
from the Condensed Interim Financial Statements for Basis Gathering and the
Condensed Combined Interim Financial Statements for Howell Crude Operations
and is unaudited. The operating data for all periods presented is derived from
the accounting records of Basis Gathering and Howell Crude Operations and is
unaudited. The Condensed Unaudited Interim Financial Statements and the
Financial Statements for Basis Gathering and the Combined Unaudited Interim
Financial Statements and Combined Financial Statements for Howell Crude
Operations are included elsewhere in this Prospectus. The Selected Historical
Financial and Operating Data below should be read in conjunction with such
financial statements of Basis Gathering and Howell Crude Operations included
elsewhere in this Prospectus and with "Management's Discussion and Analysis of
Financial Condition and Results of Operations."
<TABLE>
<CAPTION>
BASIS GATHERING
--------------------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------------- ----------------------
1991 1992 1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT BARREL AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues............... $973,655 $2,705,077 $2,171,056 $1,830,721 $3,440,065 $1,601,811 $1,957,810
Cost of sales:
Crude costs........... 964,619 2,687,226 2,153,901 1,806,241 3,409,759 1,587,438 1,939,961
Field operating costs. 4,648 9,783 8,046 7,778 7,152 3,767 3,668
-------- ---------- ---------- ---------- ---------- ---------- ----------
Total cost of sales... 969,267 2,697,009 2,161,947 1,814,019 3,416,911 1,591,205 1,943,629
-------- ---------- ---------- ---------- ---------- ---------- ----------
Gross margin........... 4,388 8,068 9,109 16,702 23,154 10,606 14,181
General and
administrative
expenses.............. 3,227 4,960 4,111 3,858 3,658 1,883 1,789
Depreciation and
amortization.......... 3,960 8,611 7,947 7,530 4,815 3,686 950
-------- ---------- ---------- ---------- ---------- ---------- ----------
Operating income
(loss)................ (2,799) (5,503) (2,949) 5,314 14,681 5,037 11,442
Interest income
(expense), net........ (577) (1,691) (1,215) (685) 173 (169) 79
Other income (expense). 44 93 122 82 (197) 38 (80)
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
income taxes and
accounting changes.... (3,332) (7,101) (4,042) 4,711 14,657 4,906 11,441
Income tax expense
(benefit)............. (1,340) (2,690) (1,498) 1,792 5,530 1,851 4,302
-------- ---------- ---------- ---------- ---------- ---------- ----------
Income (loss) before
accounting changes.... (1,992) (4,411) (2,544) 2,919 9,127 3,055 7,139
Change in accounting
principles............ -- -- (248) (136) -- -- --
-------- ---------- ---------- ---------- ---------- ---------- ----------
Net income (loss)...... $ (1,992) $ (4,411) $ (2,792) $ 2,783 $ 9,127 $ 3,055 $ 7,139
======== ========== ========== ========== ========== ========== ==========
BALANCE SHEET DATA (AT
END OF PERIOD):
Current assets......... $401,681 $ 324,111 $ 132,957 $ 184,253 $ 279,285 $ 321,287 $ 365,557
Total assets........... 431,923 349,957 149,430 193,367 283,036 326,237 368,100
Current liabilities.... 418,675 324,206 133,211 188,601 291,459 324,787 369,827
Total debt............. -- -- -- -- -- -- --
Divisional equity...... 13,916 24,824 15,578 4,393 (8,437) 1,234 (1,727)
OTHER DATA:
Cash flows from:
Operating activities.. $ 17,340 $ (13,434) $ 2,288 $ 13,835 $ 21,481 $ 5,723 $ 159
Investing activities.. (319) (2,635) 947 117 476 491 270
Financing activities.. (17,021) 19,304 (6,454) (13,968) (21,957) (6,214) (429)
EBITDA(1).............. 1,205 3,201 5,120 12,926 19,299 8,761 12,312
Maintenance capital
expenditures.......... 319 2,849 122 56 17 -- --
OPERATING DATA:
Volumes (bpd):
Wellhead(2)........... 92,449 93,141 90,974 89,788 83,551 85,230 84,926
Bulk(3)............... -- -- -- 33,595 190,279 133,481 194,022
Exchange(4)........... 149,143 270,946 236,555 180,924 248,781 261,996 241,717
-------- ---------- ---------- ---------- ---------- ---------- ----------
Total................. 241,592 364,087 327,529 304,307 522,611 480,707 520,665
</TABLE>
- -------
(1) EBITDA is defined as earnings (net income) before interest expense, income
taxes, depreciation and amortization. EBITDA is not intended to represent
cash flow and does not represent the measure of cash available for
distribution. EBITDA provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution and is
presented solely as a supplemental measure. EBITDA should not be construed
as an alternative to net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles. The
EBITDA of Basis Gathering may not be comparable to the EBITDA of other
entities as other entities may not calculate EBITDA in the same manner as
Basis Gathering.
(2) Consists of barrels of crude oil and condensate purchased at the wellhead.
(3) Consists of barrels of crude oil and condensate purchased at collection
points, terminals and pipelines from third parties.
(4) Consists of barrels of crude oil and condensate acquired in simultaneous
buy-sell exchanges of equal volumes.
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<TABLE>
<CAPTION>
HOWELL CRUDE OPERATIONS
--------------------------------------------------------------------
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------
1991 1992 1993 1994 1995 1995 1996
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT BARREL AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Gathering and marketing
revenues.............. $431,014 $424,936 $377,052 $411,647 $617,038 $296,281 $315,491
Pipeline revenues...... 294 333 347 392 13,756 4,755 8,338
-------- -------- -------- -------- -------- -------- --------
Total revenues........ 431,308 425,269 377,399 412,039 630,794 301,036 323,829
Cost of sales:
Crude cost............. 424,977 417,679 367,405 399,067 603,406 289,220 307,575
Field operating costs.. 3,470 4,473 5,459 6,327 7,525 3,638 3,898
Pipeline operating
costs................. -- -- -- -- 3,526 1,076 2,488
-------- -------- -------- -------- -------- -------- --------
Total cost of sales... 428,447 422,152 372,864 405,394 614,457 293,934 313,961
-------- -------- -------- -------- -------- -------- --------
Gross margin............ 2,861 3,117 4,535 6,645 16,337 7,102 9,868
General and
administrative
expenses............... 1,499 2,020 2,511 3,090 4,116 1,969 2,173
Depreciation and 270 328 348 593 3,263 1,165 2,001
amortization........... -------- -------- -------- -------- -------- -------- --------
Operating income........ 1,092 769 1,676 2,962 8,958 3,968 5,694
Interest expense........ -- 10 65 17 3,598 1,256 2,062
Other income............ -- -- -- -- (10) (3) (1)
-------- -------- -------- -------- -------- -------- --------
Income before income
taxes.................. 1,092 759 1,611 2,945 5,370 2,715 3,633
Income tax provision.... 384 265 591 1,108 1,995 1,009 1,325
-------- -------- -------- -------- -------- -------- --------
Net income.............. $ 708 $ 494 $ 1,020 $ 1,837 $ 3,375 $ 1,706 $ 2,308
======== ======== ======== ======== ======== ======== ========
BALANCE SHEET DATA (AT
END OF PERIOD):
Current assets......... $ 34,988 $ 46,297 $ 24,814 $ 42,859 $ 59,471 $ 55,460 $ 59,348
Total assets........... 36,219 47,818 26,506 45,853 130,099 124,559 130,514
Current liabilities.... 36,439 46,379 26,600 45,693 67,215 64,897 66,781
Total long-term
obligations........... -- 226 181 133 48,956 51,858 45,286
Total equity of parent. (525) 936 (552) (233) 13,410 7,458 17,465
OTHER DATA:
Cash flows from:
Operating activities.. $ 2,420 $ (615) $ 3,068 $ 3,467 $ 6,045 $ 3,808 $ 3,918
Investing activities.. (147) (616) (519) (1,904) (70,890) (67,270) (2,539)
Financing activities.. (2,273) 1,231 (2,549) (1,563) 64,845 63,462 (1,379)
EBITDA (1)............. 1,362 1,097 2,024 3,555 12,231 5,136 7,696
Maintenance capital
expenditures.......... 156 103 180 372 633 363 365
OPERATING DATA:
Volumes (bpd):
Gathering and
marketing:
Wellhead (2).......... 24,545 25,647 28,715 32,325 35,271 35,482 33,100
Bulk(3)............... -- -- 3,202 6,328 10,441 11,947 5,217
Exchange (4).......... 31,111 32,170 26,341 29,883 50,771 42,415 49,018
-------- -------- -------- -------- -------- -------- --------
Total gathering and
marketing........... 55,656 57,817 58,258 68,536 96,483 89,844 87,335
Pipeline(5)........... 1,551 1,748 1,829 2,066 92,282 99,020 85,961
</TABLE>
- --------
(1) EBITDA is defined as earnings (net income) before interest expense, income
taxes, depreciation and amortization. EBITDA is not intended to represent
cash flow and does not represent the measure of cash available for
distribution. EBITDA provides additional information for evaluating the
Partnership's ability to make the Minimum Quarterly Distribution and is
presented solely as a supplemental measure. EBITDA should not be construed
as an alternative to net income, operating income, cash flows from
operating activities or any other measure of financial performance
presented in accordance with generally accepted accounting principles. The
EBITDA of Howell Crude Operations may not be comparable to the EBITDA of
other entities as other entities may not calculate EBITDA in the same
manner as Howell Crude Operations.
(2) Consists of barrels of crude oil and condensate purchased at the wellhead.
(3) Consists of barrels of crude oil and condensate purchased at collection
points, terminals and pipelines from third parties other than the
producer, based on estimates prepared internally by management.
(4) Consists of barrels of crude oil and condensate acquired in simultaneous
buy-sell exchanges of equal volumes.
(5) Represents the sum of the volume per day transported on each pipeline
calculated for the days in each period that Howell owned the pipeline.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the financial condition and results of
operations for Genesis and its predecessor entities, the gathering and
marketing division of Basis and the gathering, marketing, pipeline and
transportation subsidiaries of Howell, should be read in conjunction with the
historical and pro forma consolidated financial statements and notes thereto
included elsewhere in this Prospectus. For more detailed information regarding
the basis of presentation for the following financial information, see the
notes to the pro forma and historical financial statements.
GENERAL
Genesis is a Delaware limited partnership recently formed to acquire, own
and operate the crude oil gathering and marketing operations of Basis and the
crude oil gathering, marketing and pipeline operations of Howell. Basis
Gathering and Howell Crude Operations conduct crude oil marketing and trading
activities that are separate from the refining, marketing and trading
activities conducted by Basis and Howell in connection with their retained
businesses, including their refinery operations, and the crude oil trading
activities conducted by Basis' affiliate, Phibro Inc.
GROSS MARGIN
The profitability of Genesis and its predecessor entities, Basis Gathering
and Howell Crude Operations, depends to a significant extent upon their
ability to maximize gross margin. The gross margin from gathering and
marketing operations is generated by the difference between the price of crude
oil at the point of purchase and the price of crude oil at the point of sale,
minus the associated costs of aggregation and transportation. In addition to
purchasing crude oil at the wellhead, Genesis purchases crude oil in bulk at
major pipeline terminal points and enters into exchange transactions with
third parties. These bulk and exchange transactions are characterized by large
volumes and narrow profit margins on purchase and sales transactions, and the
absolute price levels for crude oil do not necessarily bear a relationship to
gross margin, although such price levels significantly impact revenues and
cost of sales. Because period-to-period variations in revenues and cost of
sales are not generally meaningful in analyzing the variation in gross margin
for gathering and marketing operations, such changes are not addressed in the
following discussion. Pipeline revenues and gross margins are primarily a
function of the level of throughput and storage activity and are generated by
the difference between the posted tariff and the fixed and variable costs of
operating the pipeline. Changes in revenues, volumes and pipeline operating
costs, therefore, are relevant to the analysis of financial results of
Genesis' pipeline operations and are addressed in the following discussion of
pipeline operations of Genesis and Howell Crude Operations.
Gross margin from gathering, marketing and pipeline operations varies from
period to period, depending to a significant extent upon changes in the supply
and demand of crude oil and the resulting changes in U.S. crude oil inventory
levels. In general, gathering and marketing gross margin increases when crude
oil inventories decline, resulting in crude oil for prompt (generally the next
month) delivery being priced at an increased premium over crude oil for future
delivery. During periods of low crude oil inventories, however, pipeline
margins in the Partnership's operating areas generally decrease because there
is less crude oil available for shipment and storage in Genesis' pipeline
systems as large supplies of crude oil are directed to markets located away
from the U.S. Gulf Coast. Conversely, when crude oil inventories are high,
gathering and marketing margins narrow, but crude oil shipments and storage
opportunities result in increased pipeline margins as crude oil is not
directed away from the U.S. Gulf Coast. Accordingly, the aggregate gross
margins from pipeline operations generally tend to be countercyclical to those
from gathering and marketing. The General Partner believes that the
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countercyclical nature of the two businesses will tend to have a stabilizing
effect on Genesis' cash flows from operations.
RISK MANAGEMENT AND HEDGING ACTIVITIES
In general, as Genesis purchases crude oil in its gathering and marketing
operations, it simultaneously establishes a margin by selling crude oil for
physical delivery to third party users, such as independent refiners or major
oil companies, or by entering into a future delivery obligation with respect
to futures contracts on the NYMEX. Through these transactions, Genesis seeks
to maintain positions that are substantially balanced between crude oil
purchases, on the one hand, and sales or future delivery obligations, on the
other hand. As a result, changes in the absolute price level for crude oil do
not necessarily impact the margin from gathering and marketing. Although
Genesis generally maintains a balanced position in terms of overall volumes,
some risks cannot always be fully hedged, such as a portion of certain basis
risks. Basis risk arises when Genesis acquires crude oil by purchase or
exchange that does not meet the specifications of the crude oil it is
contractually obligated to deliver, whether in terms of geographic location,
grade or delivery schedule. Genesis seeks to limit its price risk and also
manage its margins through a combination of physical sales, NYMEX hedging
activities and exchanges of crude oil with third parties. It is Genesis'
policy not to acquire and hold crude oil, futures contracts or other
derivative products for the purpose of speculating on crude oil price changes.
GENESIS
ANALYSIS OF PRO FORMA CONSOLIDATED RESULTS OF OPERATIONS
The pro forma consolidated financial statements of the Partnership reflect
the historical operating results of Basis Gathering, Howell Crude Operations
and Predecessor Operations of Certain Crude Oil Pipelines Systems of Exxon
Pipeline Company ("Exxon"), as adjusted for the Transactions. The following
analyses compare the pro forma results of the Partnership for the six months
ended June 30, 1996 and the six months ended June 30, 1995. Because the
Partnership will have no long-term debt as of the closing of the Transactions,
the pro forma consolidated results reflect the elimination of interest
expense. Income taxes were also eliminated from the pro forma consolidated
results as the Partnership will not be subject to federal income taxes. The
pro forma consolidated results of operations assume no significant period-to-
period changes in Genesis' general and administrative expenses. The pro forma
general and administrative expenses do not include an amount for the incentive
compensation that might have been paid to Genesis' key employees. The amount
to be paid under the incentive compensation plan will be at the discretion of
the Compensation Committee of the General Partner; therefore, an amount could
not be determined for inclusion in the pro forma consolidated statements of
operations.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Gross Margin. In the first half of 1996, U.S. crude oil inventories were at
their historically low levels and refiner demand for prompt delivery of crude
oil was strong, leading to substantial backwardation in crude oil prices.
Primarily as a result of these unusually favorable market conditions,
gathering and marketing gross margin increased $4.1 million or 30% to $17.7
million for the six months ended June 30, 1996, as compared to $13.6 million
for the six months ended June 30, 1995. Within Genesis' gathering and
marketing operations, wellhead volumes were essentially unchanged but gross
margins per barrel increased significantly from period to period, offset in
part by declining gross margins from bulk reselling activities. Field
operating expenses increased by $0.2 million, primarily due to higher fuel
costs to operate Genesis' fleet of tractor-trailers.
Although increased demand for crude oil resulted in increased gross margin
in the gathering and marketing operations during the first half of 1996
compared with the first half of 1995, pipeline
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<PAGE>
operations experienced a countercyclical decline in gross margin during the
same period. Low U.S. crude oil inventories resulted in reduced pipeline and
storage tank utilization, which resulted in a decline of 16% in Genesis'
pipeline throughput. As a result, Genesis' pipeline gross margin declined $1.6
million or 21% to $5.9 million for the six months ended June 30, 1996, as
compared to $7.5 million for the six months ended June 30, 1995. Pipeline
revenues for both periods included three months of tank rental fees totalling
$0.3 million charged to a third party for use of storage tanks that Genesis
owns in northwest Houston. Genesis has not received any payments under such
lease since March 31, 1996.
Depreciation and Amortization. Depreciation and amortization expense
decreased $2.7 million or 40% to $4.1 million for the six months ended June 30,
1996, as compared to $6.8 million for the six months ended June 30, 1995. Of
the reduction, $2.4 million resulted from the full amortization in 1995 of
costs capitalized from the JM Petroleum Corporation acquisition by Basis in
1991.
LIQUIDITY AND CAPITAL RESOURCES
EBITDA. EBITDA increased $2.3 million or 14% to $18.9 million for the six
months ended June 30, 1996, as compared to $16.6 million for the six months
ended June 30, 1995. The increase in EBITDA reflected the increase in gross
margin, as general and administrative expenses differed by less than $0.1
million.
EBITDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution. See Note 4 to "Selected Pro Forma
Financial and Operating Data--Genesis Energy, L.P."
Capital Expenditures. Genesis anticipates its maintenance capital
expenditures for the second half of 1996 will be approximately $2.3 million.
This amount includes approximately $1.1 million and $1.0 million of deferred
capital expenditures that will be paid for by Basis and Howell, respectively,
for the purchase of new tractor-trailers and for improvements to the pipelines.
The Partnership estimates future maintenance capital expenditures to be
approximately $3.0 million per year. These expenditures are expected to be
primarily for improvements related to the three principal pipeline systems and
for the periodic replacement of tractors and trailers in Genesis' fleet.
Genesis expects to fund its maintenance capital expenditure requirements from
internally generated cash.
Cash Available for Distribution. The amount of Available Cash from Operating
Surplus needed to pay the Minimum Quarterly Distribution for four quarters on
the Common Units and Subordinated OLP Units to be outstanding immediately after
the Offering and on the General Partner's 2% general partner interest is
approximately $25.0 million, consisting of $16.4 million for the Common Units,
$8.1 million for the Subordinated OLP Units and $0.5 million for the General
Partner's 2% general partner interest. If the Underwriters' over-allotment
option is exercised in full, such amounts would be $18.9 million for the Common
Units, $5.6 million for the Subordinated OLP Units and $0.5 million for the
General Partner's 2% general partner interest, or an aggregate of $25.0
million. Pro Forma Operating Surplus generated during fiscal 1995, which was
derived from the pro forma consolidated financial statements of the Partnership
in the manner set forth in Appendix E hereto, was $32.5 million. As more fully
explained in Appendix E, Pro Forma Operating Surplus for 1995 reflects a level
of maintenance capital expenditures that is significantly less than the amount
the Partnership expects to spend in the future and also does not include any
amount that might have been paid under the Partnership's Incentive Plan. The
pro forma adjustments in the pro forma consolidated financial statements are
based upon currently available information and certain estimates and
assumptions. The pro forma financial statements do not purport to present the
results of operations of the Partnership had the Transactions actually been
completed as of the date indicated. Furthermore, the pro forma financial
statements are based on accrual accounting concepts whereas Operating Surplus
is defined in the Partnership
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Agreement on a cash accounting basis. As a consequence, the amount of Pro
Forma Operating Surplus shown above should only be viewed as a general
indication of the amounts of Available Cash from Operating Surplus that may in
fact have been generated by the Partnership had it been formed in earlier
periods.
Master Credit Support Agreement. Pursuant to the Master Credit Support
Agreement, Salomon Inc will provide transitional credit support in the form of
the Guaranty Facility over a period of approximately three years in connection
with the purchase, sale or exchange of crude oil in the ordinary course of the
Operating Partnership's business with third parties. The aggregate amount of
the Guaranty Facility will be limited to $500 million through December 31,
1997, $400 million for the year ending December 31, 1998 and $300 million for
the year ending December 31, 1999 (to be reduced in each case by the amount
utilized pursuant to the Working Capital Facility as described below). The
Operating Partnership will be required to pay a guaranty fee to Salomon Inc
which will increase over the three-year period, thereby increasing the cost of
the credit support provided to the Operating Partnership under the Guaranty
Facility, from a below-market rate to a rate that may be higher than rates
paid to independent financial institutions for similar credit.
In addition, Basis has agreed to use its reasonable best efforts, to the
extent it has availability under its uncommitted credit lines, to provide to
the Operating Partnership, for a six-month period ending May 31, 1997, the
Working Capital Facility of up to $35 million, which amount includes direct
cash advances not to exceed $25 million outstanding at any one time and
letters of credit that may be required in the ordinary course of the Operating
Partnership's business. The total amounts outstanding at any one time under
the Working Capital Facility will correspondingly reduce the amounts available
under the Guaranty Facility. The interest rate for the Working Capital
Facility will equal the cost to Basis of a comparable borrowing as reasonably
determined by Basis. Prior to the expiration of the six-month period of
availability, it is expected that the Partnership will have arranged for a
working capital facility through one or more third party lenders.
As of December 31, 1995, the combined historical aggregate amount of
Genesis' obligations covered by guarantees was $236.4 million, including
$110.6 million in payable obligations and estimated crude oil purchase
obligations for January 1996 of $125.8 million. In addition, letters of credit
of $19.2 million were issued by financial institutions on behalf of Genesis as
of December 31, 1995. The combined historical aggregate amount of obligations
covered by guarantees and letters of credit of $255.6 million represents the
aggregate amount that would have approximated the amount used under the Master
Credit Support Agreement as of December 31, 1995.
The Operating Partnership has agreed to execute for the benefit of Salomon
Inc and Basis a security agreement covering all of the Operating Partnership's
present and future assets.
There can be no assurance of the availability or the terms of credit for the
Partnership. Salomon Inc does not currently foresee any circumstances under
which it would provide guarantees or other credit support after the three-year
credit support period. In addition, if the General Partner is removed without
its consent, Salomon Inc's and Basis' credit support obligations will
terminate. In addition, Salomon Inc's obligations under the Master Credit
Support Agreement may be transferred subject to certain conditions. No
assurance can be given that suppliers will sell crude oil to the Partnership
on credit terms as favorable as those made available to the Combined
Operations separately prior to the closing of the Offering.
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BASIS GATHERING
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS OF BASIS GATHERING
The following analyses compare the results of Basis Gathering for the six
months ended June 30, 1996 with the six months ended June 30, 1995. Full year
comparisons are presented for the years ended December 31, 1995 and 1994 and
the years ended December 31, 1994 and 1993.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Gross Margin. Gathering and marketing gross margin increased $3.6 million or
34% to $14.2 million for the six months ended June 30, 1996, as compared to
$10.6 million for the six months ended June 30, 1995. The increase in gross
margin is attributable in part to decreased U.S. crude oil inventories in the
first half of 1996 as compared with the prior period. Field operating expenses
were generally consistent from period to period.
General and Administrative Expenses. General and administrative expenses
were generally consistent from period to period. General and administrative
expenses consist of general corporate, finance, accounting and administrative
costs to provide support for Basis Gathering's activities.
Depreciation and Amortization. Depreciation and amortization expenses
decreased $2.7 million or 73% to $1.0 million for the six months ended June
30, 1996, as compared to $3.7 million for the six months ended June 30, 1995.
Of this reduction, $2.4 million resulted from the full amortization in 1995 of
costs capitalized from the JM Petroleum Corporation acquisition in 1991.
Interest Expense. All working capital financing requirements were provided
to Basis Gathering by Basis. Net interest expense decreased $0.3 million to
net interest income of $0.1 million for the six months ended June 30, 1996, as
compared to net interest expense of $0.2 million for the six months ended June
30, 1995.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Gross Margin. Gathering and marketing gross margin increased $6.5 million or
39% to $23.2 million for the year ended December 31, 1995, as compared to
$16.7 million for the prior year. The increase in gross margin is attributable
in part to decreased U.S. crude oil inventories and higher levels of bulk
purchases as compared with the prior period. Field operating costs decreased
from year to year, primarily due to the full realization in 1995 of the
discontinuation of unprofitable operations in nonstrategic areas during 1994.
Also, during June 1995 all of Basis Gathering's Oklahoma trucking operation
assets were sold to Associated Transport and Trucking Company, which further
decreased field operating costs in 1995.
General and Administrative Expenses. General and administrative expenses
decreased $0.2 million or 5% to $3.7 million for the year ended December 31,
1995, as compared to $3.9 million for the prior year, primarily reflecting
ongoing efforts to reduce expenses and to consolidate functions.
Depreciation and Amortization. Depreciation and amortization expense
decreased $2.7 million or 36% to $4.8 million for the year ended December 31,
1995, as compared to $7.5 million for the prior year. Of this reduction, $2.4
million resulted from the full amortization in 1995 of costs capitalized from
the JM Petroleum acquisition in 1991. The remainder of the reduction in 1995
is due to the full amortization of some operating assets.
Interest Expense. Net interest expense decreased $0.9 million to net
interest income of $0.2 million for the year ended December 31, 1995, as
compared to net interest expense of $0.7 million for the prior year. This
reduction in interest expense was due primarily to repayment to Basis of cash
advances outstanding.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Gross Margin. Gathering and marketing gross margin increased $7.6 million or
84% to $16.7 million for the year ended December 31, 1994, as compared to $9.1
million for the prior year, due in part to increases in gross margin from the
marketing of bulk oil purchased at major market locations. The increase in
gross margin is attributable in part to decreased U.S. crude oil inventories
as
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compared with the prior period. In addition, gross margin in 1993 was
adversely affected by a noncash charge of $1.3 million to cost of sales
resulting from a write-down of Basis' minimum inventories to market value at
year-end. Field operating expenses decreased from year-to-year, primarily due
to the discontinuation in 1994 of marginal or unprofitable operations in
nonstrategic areas.
General and Administrative Expenses. General and administrative expenses
decreased $0.2 million or 5% to $3.9 million for the year ended December 31,
1994, as compared to $4.1 million for the prior year, primarily reflecting
ongoing efforts to reduce expenses and to consolidate functions.
Depreciation and Amortization. Depreciation and amortization expense
decreased $0.4 million or 5% to $7.5 million for the year ended December 31,
1994, as compared to $7.9 million for the prior year. The reduction in expense
from 1993 to 1994 is due to the full amortization of some operating assets.
Interest Expense. Interest expense decreased $0.5 million or 42% to $0.7
million for the year ended December 31, 1994, as compared to $1.2 million for
the prior year. This reduction in interest expense was due primarily to
repayment to Basis of cash advances outstanding.
HEDGING
Basis Gathering routinely utilizes forward contracts, swaps, options and
futures contracts in an effort to minimize the impact of market fluctuations
on inventories and contractual commitments. Gains and losses on forward
contracts, swaps, options and futures contracts used to hedge future contract
purchases of unpriced domestic crude oil, where firm commitments to sell are
required prior to establishment of the purchase price, are deferred until the
margin from the underlying risk element of the hedged item is recognized.
Basis Gathering recognized net gains of $323,000 and $2,991,000 for the six
months ended June 30, 1995 and 1996, respectively, and net gains (losses) of
$(2,010,000), $2,568,000 and $131,000 for the years ended December 31, 1993,
1994 and 1995, respectively, related to its hedging activity.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities for the years ended December 31,
1993, 1994 and 1995 totaled $2.3 million, $13.8 million and $21.5 million,
respectively. The consistent improvement from year to year is primarily due to
the increases in operating income. Net cash provided by operating activities
for the six months ended June 30, 1995 and 1996 totaled $5.7 million and $0.2
million, respectively. The decrease during 1996 was primarily the result of an
increase in accounts receivable of $46.2 million, only partially offset by an
increase of $42.8 million in accounts payable.
Net cash provided by investing activities was $0.5 million for the year
ended December 31, 1995 as compared to $0.9 million and $0.1 million for the
years ended December 31, 1993 and 1994, respectively. In the six months ended
June 30, 1995 and 1996, net cash provided by investing activities was $0.5
million and $0.3 million, respectively. The positive cash flows for Basis
Gathering in all these periods were provided by proceeds from the sale of
nonstrategic assets, which were $1.1 million, $0.2 million and $0.5 million
for the years ended December 31, 1993, 1994 and 1995, respectively, and $0.5
million and $0.3 million for the six months ended June 30, 1995 and 1996,
respectively.
Net cash used in financing activities was $6.5 million, $14.0 million and
$22.0 million for the years ended December 31, 1993, 1994 and 1995,
respectively, and $6.2 million and $0.4 million for the six months ended June
30, 1995 and 1996, respectively. In each period, the net cash was utilized to
advance funds to Basis.
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EBITDA
EBITDA increased $3.5 million or 40% to $12.3 million for the six months
ended June 30, 1996, as compared to $8.8 million for the six months ended June
30, 1995. This increase is attributable to increases in gross margin, as
general and administrative expenses differed by less than $0.1 million.
EBITDA increased $6.4 million or 50% to $19.3 million for the year ended
December 31, 1995, as compared to $12.9 million for the prior year. EBITDA
increased $7.8 million or 153% to $12.9 million for the year ended December
31, 1994, as compared to $5.1 million for the prior year. The increase in each
year is attributable to increases in gross margin and a decrease in general
and administrative expenses.
EBITDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution. See Note 1 of "Selected Historical
Financial and Operating Data--Basis Gathering."
FINANCING AND SOURCES OF LIQUIDITY
Capital expenditures for the years ended December 31, 1993, 1994 and 1995
were $122,000, $56,000 and $17,000, respectively. All of the capital
expenditures for these periods were maintenance capital expenditures in
support of the ongoing crude oil gathering operations.
Credit Support. Basis and Salomon Inc have historically provided credit
support for all of Basis Gathering's ongoing business transactions in the form
of guarantees of Basis Gathering's contractual obligations. As of December 31,
1995, the aggregate amount of obligations covered by such guarantees was
$186.3 million, including $85.0 million in payable obligations and estimated
crude oil purchase obligations for January 1996 of $101.3 million. In
addition, letters of credit for approximately $19.2 million were issued by
financial institutions on behalf of Basis Gathering as of such date.
Historically, Salomon Inc has not charged a fee for such credit support.
ACCOUNTING PRONOUNCEMENTS
Effective January 1, 1993, Basis Gathering adopted Statement of Financial
Accounting Standards ("SFAS") No. 106, "Employers Accounting for
Postretirement Benefits Other Than Pensions" which requires the accrual of
retiree healthcare and other postretirement benefits costs during the service
periods of eligible employees. Basis Gathering was allocated, as the
cumulative effect of the change in accounting principle, a net charge to
income of $248,000 in 1993, to reflect the present value of expected future
costs attributable to employee services prior to the January 1, 1993 adoption
date.
Effective January 1, 1994, Basis Gathering adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits" which requires the accrual of
postemployment benefits costs during the service periods of eligible
employees. Basis Gathering was allocated, as the cumulative effect of the
change in accounting principle, a net charge to income of $136,000 in 1994 to
reflect the present value of expected future costs for employee benefits
attributable to employees services prior to the January 1, 1994 adoption date.
Effective January 1, 1995, Basis Gathering adopted SFAS No. 121, "Accounting
for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed
of" ("Statement 121"). Statement 121 contains provisions for recording
impairment of long-lived assets that are not expected to produce net cash
flows in the future sufficient to fully recover the remaining cost of the
related assets. Basis Gathering was not required to record impairment of any
of its assets as a result of adopting Statement 121.
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HOWELL CRUDE OPERATIONS
ANALYSIS OF HISTORICAL RESULTS OF OPERATIONS OF HOWELL CRUDE OPERATIONS
The following analyses compare the results of Howell Crude Operations for the
six-month period ending June 30, 1996 with the six months ended June 30, 1995.
Full year comparisons are presented for the years ended December 31, 1995 and
1994 and the years ended December 31, 1994 and 1993. The acquisition of the
Texas, Jay and Mississippi Systems from Exxon in March 1995 resulted in
significant increases in all items discussed below, affecting both the six
month comparison and the 1995 to 1994 comparison.
SIX MONTHS ENDED JUNE 30, 1996 COMPARED TO SIX MONTHS ENDED JUNE 30, 1995
Gross Margin. Gathering and marketing gross margin increased $0.6 million or
18% to $4.0 million for the six months ended June 30, 1996, as compared to $3.4
million for the six months ended June 30, 1995. The increase in gross margin is
attributable in part to decreased U.S. crude oil inventories as compared with
the prior period.
Pipeline revenues for the 1995 period include only three months of revenues
from the three onshore pipelines Howell Crude Operations acquired from Exxon on
March 31, 1995, whereas the 1996 period includes six months of revenues.
Pipeline volumes per day declined from the 1995 period to the 1996 period
partially due to changes in the demand and, therefore, the markets for crude
oil. These changes led to a reduction by crude oil shippers in the use of
Howell Crude Operations' pipelines in the 1996 period. Pipeline revenues for
both periods included three months of tank rental fees totaling $0.3 million
charged to a third party for usage of storage tanks that Howell Crude
Operations owns in northwest Houston. Howell has not received any payments
under such lease since March 31, 1996.
The increase in pipeline operating costs of $1.4 million in the 1996 six-
month period is attributable primarily to the acquisition of the pipelines on
March 31, 1995.
General and Administrative Expenses. General and administrative expenses
increased $0.2 million or 10% to $2.2 million for the six months ended June 30,
1996, as compared to $2.0 million for the six months ended June 30, 1995.
General and administrative costs associated with the pipelines that are
included in these amounts were $0.2 million for the 1995 period and $0.5
million for the 1996 period. The increase is attributable to the difference in
the number of months in each period that Howell Crude Operations owned the
pipelines.
Depreciation and Amortization. Depreciation and amortization expense
increased $0.8 million or 67% to $2.0 million for the six months ended June 30,
1996, as compared to $1.2 million for the six months ended June 30, 1995. The
increase from the 1995 period to the 1996 period in depreciation expense is a
result of depreciation on the pipelines acquired from Exxon. Depreciation
expense is approximately $0.8 million per quarter on the pipeline assets, with
the 1995 period including only one quarter of depreciation expense.
Interest Expense. Interest expense increased $0.8 million or 62% to $2.1
million for the six months ended June 30, 1996, as compared to $1.3 million for
the six months ended June 30, 1995. On March 31, 1995, Howell Crude Operations
obtained a term loan from a group of banks in order to purchase the pipelines
from Exxon. During the 1996 period, the debt related to this term loan was
outstanding for six months, resulting in increased interest expense.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Gross Margin. Gathering and marketing gross margin decreased $0.2 million or
3% to $6.1 million for the year ended December 31, 1995, as compared to $6.3
million for the prior year. Field operating
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costs increased $1.2 million from 1994 to 1995, primarily as a result of labor
costs and certain fixed costs attributable to increased volumes trucked.
In 1995, pipeline revenues increased $13.4 million, which is attributable to
the three onshore crude oil pipelines Howell Crude Operations acquired from
Exxon. These pipeline revenues represent charges to customers for
transportation of crude oil through the pipelines and tank rental fees charged
for usage of storage tanks. Included in the 1995 pipeline revenues is $1.0
million received from a third party, representing nine months of rental income
under the terms of a lease of 1.2 million barrels of tankage. Operating costs
associated with the 1995 pipeline acquisition totaled $3.5 million for the
nine months that Howell Crude Operations owned the pipelines.
General and Administrative Expenses. General and administrative expenses
increased $1.0 million or 32% to $4.1 million for the year ended December 31,
1995, as compared to $3.1 million for the prior year, primarily reflecting an
increase of $0.8 million in these costs resulting from the purchase of the
pipelines from Exxon. The remaining increase is attributable to higher
staffing levels and higher costs.
Depreciation and Amortization. Depreciation and amortization expense
increased $2.7 million or 450% to $3.3 million for the year ended December 31,
1995, as compared to $0.6 million for the prior year, with $2.4 million
attributable to depreciation on the pipelines and related assets purchased
during 1995. Howell Crude Operations also acquired additional transportation
and pipeline injection station assets during 1994 and 1995, contributing to
the increase in depreciation.
Interest Expense. Interest expense increased to $3.6 million for the year
ended December 31, 1995, as compared to $17,000 for the prior year. Almost all
of the interest expense in 1995 was attributable to the term loan Howell Crude
Operations obtained from a group of banks in order to purchase the pipelines
from Exxon.
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Gross Margin. Gross margin increased $2.1 million or 50% to $6.3 million for
the year ended December 31, 1994, as compared to $4.2 million for the prior
year, primarily due to higher lease and bulk volumes partly offset by higher
field operating costs. The increase in gross margin is attributable in part to
decreased U.S. crude oil inventories as compared with the prior period. In
addition, Howell Crude Operations increased its fleet by 14 trailers in 1994,
enabling it to transport additional crude oil. Several pipeline injection
points were also added in areas where Howell Crude Operations had not
previously gathered crude oil. Primarily as a result of these truck and
pipeline injection point additions, Howell Crude Operations increased its
wellhead volumes by 13% from 1993 to 1994. Field operating costs increased
$0.9 million from 1993 to 1994 due to the increase in wellhead volumes. Costs
of operating additional vehicles to transport the crude oil and costs related
to the addition of pipeline injection points led to this increase.
General and Administrative Expenses. General and administrative expenses
increased $0.6 million or 24% to $3.1 million for the year ended December 31,
1994, as compared to $2.5 million for the prior year, primarily as a result of
additions in the number of personnel.
Depreciation and Amortization. Depreciation and amortization expense
increased $0.3 million or 100% to $0.6 million for the year ended December 31,
1994, as compared to $0.3 million for the prior year. The increase was related
to the pipeline injection stations and trailers added during 1994.
Interest Expense. Interest expense in 1994 and 1993 was less than $0.1
million.
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HEDGING
Howell Crude Operations engaged in a limited program of hedging crude oil
inventories and fixed purchase price commitments using crude oil futures
contracts and options as the hedging tools. Changes in the market price of the
futures contracts and options are deferred until the gain or loss is
recognized on the hedged transactions. The effect of these hedging tools for
the six months ended June 30, 1996 and 1995 and the years ended December 31,
1995, 1994 and 1993 was not material to the results of operations of Howell
Crude Operations.
LIQUIDITY AND CAPITAL RESOURCES
CASH FLOWS
Net cash provided by operating activities was $3.1 million, $3.5 million and
$6.0 million for the years ended December 31, 1993, 1994 and 1995,
respectively. For the six months ended June 30, 1995 and 1996, net cash
provided by operating activities was $3.8 million and $3.9 million,
respectively. Improved earnings before depreciation and amortization was the
significant reason for the increase in 1995.
Net cash used in investing activities was $0.5 million, $1.9 million and
$70.9 million for the years ended December 31, 1993, 1994 and 1995,
respectively. In the six months ended June 30, 1995 and 1996, net cash of
$67.3 million and $2.5 million, respectively, was utilized in investing
activities. In each of these periods Howell Crude Operations added assets
consisting primarily of, in 1993 and 1994, vehicles and pipeline injections
points, in 1995, the pipeline assets acquired from Exxon and related
additions, and, in the 1996 six-month period, additional pipeline gathering
capabilities associated with the pipeline systems acquired from Exxon.
Net cash used in financing activities was $2.5 million and $1.6 million in
the years ended December 31, 1993 and 1994, respectively. Net cash provided by
financing activities was $64.8 million in the year ended December 31, 1995. In
the six-month period ended June 30, 1995, net cash provided by financing
activities was $63.5 million and, in the six-month period ended June 30, 1996,
net cash used by financing activities was $1.4 million. In the 1995 periods,
the cash was provided primarily from borrowings from a group of banks and
advances from Howell. In 1993 and 1994, cash was utilized primarily to reduce
advances from Howell. In the six-month period ended June 30, 1996, cash was
utilized to reduce the outstanding balance under the bank debt.
EBITDA
EBITDA increased $2.6 million or 51% to $7.7 million for the six months
ended June 30, 1996, as compared to $5.1 million for the six months ended June
30, 1995. The increase is attributable to the increased gross margins from
gathering and marketing and pipeline operations, offset by an increase in
general and administrative expenses.
EBITDA increased $8.6 million or 239% to $12.2 million for the year ended
December 31, 1995, as compared to $3.6 million for the prior year. The
increase in EBITDA is attributable to the addition in 1995 of the pipeline
operations, offset by a decrease in gathering and marketing gross margin and
an increase in general and administrative expenses.
EBITDA increased $1.6 million or 80% to $3.6 million for the year ended
December 31, 1994, as compared to $2.0 million for the prior year. The
increase is attributable to an increase in gathering and marketing gross
margin, offset by an increase in general and administrative expenses.
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EBITDA is not intended to represent cash flow and does not represent the
measure of cash available for distribution. See Note 1 of "Selected Historical
Financial and Operating Data--Howell Crude Operations."
FINANCING AND SOURCES OF LIQUIDITY
All funds received by Howell Crude Operations were historically transferred
to Howell Corporation, and obligations were then funded by Howell as they were
presented for payment. These transfers of cash with Howell are reflected in
equity on the Howell Crude Operations Combined Balance Sheets. In 1993 and
1994, the net advances to Howell by Howell Crude Operations were $2.5 million
and $1.5 million, respectively. Capital expenditures in those same years were
$0.5 million and $1.8 million, consisting primarily of additions to vehicles
and pipeline injection points. In 1995, in order to purchase the pipelines
from Exxon and to pay for additional acquisition costs, improvements and
related pipeline support systems totaling $69.0 million, Howell Crude
Operations borrowed $57.5 million from a group of banks ("HCO Credit
Facility") and received advances from Howell of $10.3 million. The balance, as
well as capital expenditures for vehicle and pipeline injection points, was
funded from operations. During the six months ended June 30, 1996, Howell
Crude Operations expended $2.7 million on capital expenditures consisting
primarily of costs to complete the computerized pipeline control and
monitoring system and to add a 13-mile gathering line to the Jay System. These
additions were funded from operations.
Credit Support. Howell has historically provided credit support in the form
of guarantees of Howell Crude Operations' contractual obligations. Such
support has reduced the need to issue letters of credit under the HCO Credit
Facility. Howell has not historically charged a fee for such credit support.
As of December 31, 1995, the aggregate amount of obligations covered by such
guarantees was $50.1 million, including $25.6 million in payable obligations
and estimated crude oil purchase obligations for January 1996 of $24.5
million.
ACCOUNTING PRONOUNCEMENTS
In 1995, the Financial Accounting Standards Board issued SFAS No. 121
entitled, "Accounting for the Impairment of Long-Lived Assets and Long-Lived
Assets to be Disposed of." This statement contains provisions for recording
impairment of long-lived assets that are not expected to produce net cash
flows in the future sufficient to fully recover the remaining cost of the
related assets. Howell Crude Operations adopted this statement in 1996 and was
not required to record impairment on any of its assets.
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BUSINESS
The following discussion of the business and operations of Genesis refers to
the businesses and operations conducted by Basis Gathering and Howell Crude
Operations prior to the closing of the Offering and the business and
operations to be conducted by Genesis after the Offering.
GENERAL
Genesis is a Delaware limited partnership recently formed to acquire, own
and operate the crude oil gathering and marketing operations of Basis and the
crude oil gathering, marketing and pipeline operations of Howell. Upon
completion of the Transactions, the Partnership will be one of the largest
independent gatherers and marketers of crude oil in North America. Genesis'
operations are concentrated in Texas, Louisiana, Alabama, Florida,
Mississippi, New Mexico, Kansas and Oklahoma. In its gathering and marketing
business, Genesis is principally engaged in the purchase and aggregation of
crude oil at the wellhead and the bulk purchase of crude oil at pipeline and
terminal facilities for resale at various points along the Distribution Chain.
The Partnership's gathering and marketing margins are generated by buying
crude oil at competitive prices, efficiently transporting or exchanging the
crude oil along the Distribution Chain and marketing the crude oil to
refineries or other customers at favorable prices. In addition to its
gathering and marketing business, Genesis' operations include transportation
of crude oil for itself and for others at posted tariffs on its four common
carrier pipeline systems. On a pro forma basis, in 1995 the gathering and
marketing operations contributed approximately 67% of the Partnership's total
gross margin and the pipeline operations contributed the remaining 33%.
Genesis currently purchases approximately 118,000 bpd of crude oil at the
wellhead from approximately 7,100 leases. Genesis utilizes its trucking fleet
of approximately 100 tractor-trailers and its gathering lines to transport
crude oil purchased at the wellhead to pipeline injection points, terminals
and refineries for sale to its customers. It also transports purchased crude
oil on trucks, barges and pipelines owned and operated by third parties. In
addition, as part of its gathering and marketing business, Genesis makes
purchases of crude oil in bulk at pipeline and terminal facilities for resale
to refineries or other customers. When opportunities arise to increase margin
or to acquire a grade of crude oil that more nearly matches the specifications
for crude oil the Partnership is obligated to deliver, Genesis exchanges crude
oil with third parties through exchange or buy/sell agreements.
Genesis' three principal common carrier crude oil pipeline systems and
related gathering lines consist of the 553-mile Texas System, the 117-mile Jay
System extending between Florida and Alabama and the 281-mile Mississippi
System extending between Mississippi and Louisiana. Additionally, the
Partnership owns the 5.5-mile interstate Main Pass System in the Gulf of
Mexico serving the Main Pass Block 64. These pipelines transported an average
of approximately 86,000 bpd in the first half of 1996. Additionally, Genesis
owns approximately 2.2 million barrels of associated storage capacity of which
approximately 1.0 million barrels will be available at the closing of the
Offering.
Experienced management teams installed by both Basis and Howell in 1993
independently developed and implemented new operating programs designed to
enhance the overall profitability of their businesses. These programs included
improving management information systems, reducing operating and
administrative costs, discontinuing activities in nonstrategic areas and
increasing volumes of bulk purchases and resales. Management believes these
changes have contributed to the increase in the Partnership's pro forma
EBITDA, which grew 134% from $14.2 million for the year ended December 31,
1993 to $33.2 million for the year ended December 31, 1995. Pro forma EBITDA
increased 14% from $16.6 million for the six months ended June 30, 1995 to
$18.9 million for the six months ended June 30, 1996. Management believes that
the financial results in the first half of 1996 were also enhanced by
unusually favorable market conditions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
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Genesis believes that its competitive strengths include (i) its position as
one of the largest independent crude oil gathering and marketing companies in
the United States, (ii) the geographic concentration of its operations in an
eight-state area, (iii) management with significant industry experience, (iv)
advanced management information and risk management systems, (v) its ability
to provide its customers a wide range of customized services, (vi) gross
margins from its common carrier pipeline operations that tend to be
countercyclical to those from its gathering and marketing operations and (vii)
a capital structure with no long-term debt.
STRATEGY
The Partnership's strategy is to increase cash distributions to Unitholders
by maximizing the gross margin realized on its crude oil purchases, sales and
exchanges along the Distribution Chain and by increasing gathering, marketing
and pipeline volumes. The principal elements of this strategy are set forth
below.
. Increase gross margin by using advanced management information systems
to maximize sales prices and reduce operation, transportation and
storage costs.
. Increase utilization of existing assets, systems and related
infrastructure.
. Increase volumes by attracting new customers and strengthening
relationships with existing customers by offering a wide range of
customized services.
. Enter into strategic alliances with new and existing customers to share
the benefits of additional volumes, incremental margin improvements or
reduction of price and market risks.
. Make selective acquisitions of crude oil gathering systems, pipeline
assets and terminalling and storage facilities to increase overall
volumes of crude oil gathered, transported and marketed.
The General Partner believes that the Transactions will enhance the
Partnership's ability to implement its strategy. The Transactions are expected
to result in higher net revenues due to greater utilization of the
Partnership's combined assets, including its four pipelines, and the expanded
application of its advanced management information systems. The Transactions
are also expected to lower costs and improve efficiencies as operations such
as trucking and sales are consolidated. The two experienced management teams,
brought together by the Transactions, have identified operating programs and
strategies currently used by either Basis Gathering or Howell Crude
Operations, but not currently in use by the other. Management of the
Partnership believes that the implementation of these "best practices"
throughout the Combined Operations of the Partnership will improve customer
retention, foster expansion of its customer base and create efficiencies and
cost savings opportunities.
BUSINESS OVERVIEW
In its gathering and marketing business, the Partnership seeks to purchase
and sell crude oil at points along the Distribution Chain where gross margins
can be achieved. Genesis generally purchases crude oil at prevailing prices
from producers at the wellhead under short-term contracts or in bulk from
major oil companies, intermediaries and other third parties. Genesis then
transports the crude oil along the Distribution Chain for sale to or exchange
with customers. The Partnership's margins from its gathering and marketing
operations are generated by the difference between the price of crude oil at
the point of purchase and the price of crude oil at the point of sale, minus
the associated costs of aggregation and transportation. The Partnership
utilizes computerized management information systems to identify the optimal
combination of transportation and exchange transactions expected to result in
the greatest margin for each barrel of crude oil purchased. Genesis generally
enters into an exchange transaction only when the cost of the exchange is less
than the alternative costs that it would otherwise incur in transporting or
storing the crude oil. In addition, Genesis often exchanges one grade of crude
oil for another to maximize margins or meet contract delivery requirements.
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Generally, as Genesis purchases crude oil, it simultaneously establishes a
margin by selling crude oil for physical delivery to third party users, such
as independent refiners or major oil companies, or by entering into a future
delivery obligation with respect to futures contracts on the NYMEX. Through
these transactions, the Partnership seeks to maintain a position that is
substantially balanced between crude oil purchases, on the one hand, and sales
or future delivery obligations, on the other hand. It is the Partnership's
policy not to acquire and hold crude oil, futures contracts or other
derivative products for the purpose of speculating on crude oil price changes.
Gross margin from gathering, marketing and pipeline operations varies from
period to period, depending to a significant extent upon changes in the supply
and demand of crude oil and the resulting changes in U.S. crude oil inventory
levels. In general, gathering and marketing gross margin increases when crude
oil inventories decline, resulting in crude oil for prompt (generally the next
month) delivery being priced at an increased premium over crude oil for future
delivery. During periods of low crude oil inventories, however, pipeline
margins in the Partnership's operating areas generally decrease because there
is less crude oil available for shipment and storage in Genesis' pipeline
systems as large supplies of crude oil are directed to markets located away
from the U.S. Gulf Coast. Conversely, when crude oil inventories are high,
gathering and marketing margins narrow, but crude oil shipment and storage
opportunities result in increased pipeline margins as crude oil is not
directed away from the U.S. Gulf Coast. Accordingly, the aggregate gross
margins from pipeline operations generally tend to be countercyclical to those
from gathering and marketing. The General Partner believes that the
countercyclical nature of the two businesses will tend to have a stabilizing
effect on Genesis' cash flows from operations.
Through the pipeline systems it owns and operates, the Partnership
transports crude oil for itself and others pursuant to tariff rates regulated
by FERC or the Texas Railroad Commission. Accordingly, the Partnership offers
transportation services to any shipper of crude oil, provided that the
products tendered for transportation satisfy the conditions and specifications
contained in the applicable tariff. Pipeline revenues and gross margins are
primarily a function of the level of throughput and storage activity. The
margins from the Partnership's pipeline operations are generated by the
difference between the posted tariff and the fixed and variable costs of
operating the pipeline. The pipeline transportation business has considerable
flexibility with respect to sources of crude oil and does not depend on any
specific wellhead source. Genesis believes that the areas served by its
pipeline systems will continue to produce crude oil in volumes that are
sufficient to maintain or increase its pipeline throughput for the foreseeable
future.
CRUDE OIL GATHERING AND MARKETING OPERATIONS
CRUDE OIL VOLUMES
The following table shows the average daily volume of Genesis' purchases of
crude oil at the wellhead in its gathering operations and its bulk purchases
and exchanges from 1993 through the first six months of 1996.
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
----------------------- ---------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN BARRELS PER DAY)
<S> <C> <C> <C> <C> <C>
Wellhead purchases...................... 119,689 122,113 118,822 120,712 118,026
Bulk purchases.......................... 3,202 39,923 200,720 145,428 199,239
Exchange volumes........................ 262,522 210,304 295,027 300,325 284,678
------- ------- ------- ------- -------
Total volumes......................... 385,413 372,340 614,569 566,465 601,943
======= ======= ======= ======= =======
</TABLE>
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In the first six months of 1996, Genesis purchased approximately 118,000 bpd
of crude oil directly at the wellhead from more than 700 producers. The crude
oil is produced from approximately 7,100 leases, primarily located in the oil-
producing areas of Texas, Louisiana, Alabama, Florida, Mississippi, New
Mexico, Kansas and Oklahoma.
In addition to purchasing crude oil at the wellhead from producers, Genesis
purchases crude oil in bulk at major pipeline terminal points. This production
has been transported from the wellhead to the pipeline by major oil companies,
large independent producers or other gathering and marketing companies.
Genesis only purchases crude oil in bulk at pipeline terminals when it
believes additional opportunities exist to realize new margins further
downstream in the Distribution Chain. The opportunities to earn additional
margins vary over time with changing market conditions. In general,
opportunities for attractive bulk margin transactions increase when there is a
temporary excess of supply over demand for crude oil. As a result, the margins
associated with Genesis' bulk purchases fluctuate from period to period.
Genesis' bulk purchasing activities are concentrated in Texas and Louisiana
and at Cushing, Oklahoma.
When opportunities arise to increase its margin or to acquire a grade of
crude oil that more nearly matches its delivery requirement, Genesis exchanges
physical crude oil with third parties. These exchanges are effected through
contracts called exchange or buy/sell agreements. Through an exchange
agreement, Genesis simultaneously agrees to buy crude oil that differs in
terms of geographic location, grade of crude oil or delivery schedule from
crude oil it has available for sale. Generally, Genesis enters into exchanges
to acquire crude oil at locations that are closer to its end markets, thereby
reducing transportation costs and increasing the margin. Genesis also
exchanges its crude oil for crude oil to be delivered at an earlier or later
date, if the exchange is expected to result in a higher margin net of storage
costs, and enters into exchanges based on grade of crude oil (which includes
such factors as sulfur content and specific gravity) in order to meet the
quality specifications of its delivery contracts.
WELLHEAD CRUDE OIL PURCHASES
Genesis purchases crude oil from many independent producers in the United
States and believes that it has established broad-based relationships with
crude oil producers in its area of operations. The top 16 producers that sell
crude oil to Genesis account for slightly more than half of Genesis'
purchases, and the remaining volumes purchased by Genesis are provided by a
large number of small producers. In the first half of 1996, Genesis purchased
crude oil from more than 700 operators at approximately 7,100 leases. In a
typical producer's operation, the crude oil flows from the wellhead to a
separator where the petroleum gases are removed. After separation, the crude
oil is treated to remove water, sand and other contaminants and is then moved
into the producer's on-site storage tanks. When the tank is full, the producer
contacts Genesis field personnel to purchase and transport the crude oil to
market. Genesis utilizes its truck fleet and gathering pipelines, as well as
trucks, barges and pipelines owned and operated by third parties, to transport
the crude oil to market.
Purchase contracts with producers range from 30 days to two years, but most
agreements are 30-day evergreen contracts, which are automatically renewed on
a month-to-month basis until terminated by either party. In addition, Genesis
is a party to several longer term contracts covering significant volumes. The
vast majority of purchases are based on field posted prices.
On a volume basis, approximately 26,000 bpd or 22% of the crude oil wellhead
lease purchases of the Combined Operations for the first half of 1996 were
from Parker & Parsley Development L.P. ("Parker & Parsley"). The purchases
were made pursuant to a long-term contractual relationship between Basis and
Parker & Parsley that commenced in 1991. In December 1995, Parker & Parsley
and Basis renegotiated the prior crude oil purchase agreement between the
parties and
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provided for adjusted terms effective December 1, 1995. Pursuant to the
current terms of this contract, Parker & Parsley and affiliates must sell to
Genesis substantially all of their crude oil (including condensate) that any
of the Parker & Parsley entities has the right to market. The price to be paid
for crude oil purchased is at market competitive rates and includes a market-
related producer bonus that may vary from month to month based upon spot oil
prices at various commodity trade points. For periods after July 1, 1996,
certain favorable terms to Genesis under the renegotiated contract with Parker
& Parsley expired. The term of the contract extends through June 30, 1998, and
it may continue thereafter subject to termination rights afforded each party.
The security requirement for crude oil purchases under the contracts is
currently met by a $25 million payment guarantee by Salomon Inc, which during
the term of the Master Credit Support Agreement will continue to be provided
by Salomon Inc. No other single producer accounted for more than 10% of crude
oil wellhead lease purchases. See "Certain Relationships and Related
Transactions--Salomon Inc and Basis."
CRUDE OIL TRANSPORTATION
Genesis transports approximately 50% of its wellhead purchases of crude oil
on its fleet of tractor-trailers operating in Texas, Louisiana, Alabama,
Mississippi, New Mexico and Florida. Approximately 5% of Genesis' wellhead
purchases are transported from the lease through Genesis' gathering lines that
are part of the common carrier pipeline systems. The balance of Genesis'
wellhead purchases is transported under contracts with third parties by truck,
barge or pipeline.
Genesis transported approximately 62,000 bpd in 1995 to pipeline injection
stations or end markets using its fleet of 97 tractors and 104 trailers. In
1995, the fleet traveled nearly 9.8 million miles, or an average of 27,000
miles per day. Currently, 45 of Genesis' tractors are leased under operating
leases; the balance of the tractors and all of the trailers are owned. Field
operating costs were approximately $14.7 million in 1995. Genesis' system of
110 pipeline injection stations is an integral part of the trucking operation.
Each station allows Genesis to inject the crude oil into a pipeline which
accesses one or more pipeline terminals or refineries. As sale prices change
at different pipeline terminals and refining centers, Genesis has the
flexibility to direct its trucks to deliver the crude oil into the pipeline
injection stations that will yield the highest margin.
Genesis uses hand-held computer terminals ("HHTs") to communicate with its
drivers and field personnel. As producers call in loads of crude oil to be
transported, Genesis' dispatchers enter information on each load into the
dispatching system, which directs the driver to the wellhead and the
appropriate pipeline injection station. The information is transmitted to the
driver's HHT using modems or satellite communication. At the wellhead, the
driver enters information into the HHT about the volume and quality of the
crude oil loaded on the truck and prints a "ticket" that serves as a bill of
sale for the producer. The driver performs a similar procedure at the pipeline
injection station. All of the information regarding the pick up at the
wellhead and delivery at the pipeline injection station is transmitted from
the HHTs back to the dispatching and accounting systems, again via modem or
satellite communication. A similar system is used in Genesis' common carrier
pipeline operation to capture information about crude oil receipts and
deliveries.
CRUDE OIL SALES AND EXCHANGES
The marketing of crude oil is complex and requires detailed current
knowledge of crude oil sources and end markets and a familiarity with a number
of factors including: grades of crude oil, individual refinery demand for
specific grades of crude oil, area market price structures for the different
grades of crude oil, location of customers, availability of transportation
facilities and timing and costs (including storage) involved in delivering
crude oil to the appropriate customer. Genesis sells its crude oil to major
integrated oil companies and independent refiners in various types of sale and
exchange transactions, generally at market-responsive prices for terms ranging
from one month to one year.
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Genesis pursues exchange opportunities to enhance margins throughout the
gathering and marketing process. These exchanges are effected through
contracts under which Genesis agrees to buy and sell crude oil that differs in
terms of geographic location, grade of crude oil or delivery schedule. Through
such exchanges, which are continuously monitored by Genesis' management
information and risk management system, Genesis seeks to increase its margins
by minimizing its gathering, storage and transportation costs and maximizing
the price received at its end markets for each barrel of crude oil purchased.
MANAGEMENT INFORMATION AND RISK MANAGEMENT SYSTEMS
Genesis' computerized management information and risk management systems are
integral to each stage of the gathering, transportation and marketing
operations. HHTs combined with modems and satellite equipment are used by
field personnel to provide data to Genesis' marketing personnel about crude
oil purchases on a daily basis. Using this information from the field,
management is able to monitor crude oil volumes, grades, locations and timing
of delivery on a daily basis and to transmit instructions to field personnel
regarding crude oil pick-up schedules and truck routing to crude oil injection
stations and end markets. Using information transmitted from field personnel
and representatives to its computers, Genesis has developed a database that
includes volumes of crude oil purchases, volumes and prices under contracts
with producers and customers, accounting balances, transportation costs and
alternatives, and marketing and exchange opportunities. Genesis uses this
database to support its management information and risk management systems.
Risk management strategies, including those involving price hedges using
NYMEX futures contracts, have become increasingly important in creating and
maintaining margins. Such hedging techniques require significant resources
dedicated to managing futures positions, and management believes that its
experienced staff and management information system place Genesis among the
top tier competitors in managing price risks. By analyzing information in its
database through internally developed software programs, Genesis is able to
monitor crude oil volumes, grades, locations and delivery schedules and to
coordinate marketing and exchange opportunities, as well as NYMEX hedging
positions. This coordination enables the Partnership to net positions
internally, thereby reducing NYMEX commissions, and further ensures that
Genesis' NYMEX hedging activities are consistent with its business objectives.
See "Certain Relationships and Related Transactions--Salomon Inc and Basis."
PRODUCER SERVICES
Crude oil purchasers who buy from producers compete on the basis of
competitive prices and highly responsive services. Through its team of crude
oil purchasing representatives, Genesis maintains ongoing relationships with
more than 700 producers. The Partnership believes that its ability to offer
high-quality field and administrative services to producers will be a key
factor in its ability to maintain volumes of purchased crude oil and to obtain
new volumes. High-quality field services include efficient gathering
capabilities, availability of trucks, willingness to construct gathering
pipelines where economically justified, timely pickup of crude oil from tank
batteries at the lease or production point, accurate measurement of crude oil
volumes received, avoidance of spills and effective management of pipeline
deliveries. Accounting and other administrative services include securing
division orders (statements from interest owners affirming the division of
ownership in crude oil purchased by the Partnership), providing statements of
the crude oil purchased each month, disbursing production proceeds to interest
owners and calculation and payment of ad valorem and production taxes on
behalf of interest owners. In order to compete effectively, the Partnership
must maintain records of title and division order interests in an accurate and
timely manner for purposes of making prompt and correct payment of crude oil
production proceeds, together with the correct payment of all severance and
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production taxes associated with such proceeds. In the first half of 1996,
with its staff of division order specialists, Genesis distributed monthly
payments to approximately 29,000 interest owners.
The Partnership intends to focus on providing a broad range of services
adapted to the requirements of a particular producer. With respect to major
oil companies and large, sophisticated independent producers with an in-house
marketing staff, the Partnership will primarily provide transportation and
exchange services. Although the margins associated with these activities are
limited, the large volumes provided by these customers provide the base load
of crude oil that supports a large portion of Genesis' infrastructure. For
small producers without a marketing staff, which generally account for
relatively lower volumes per producer at higher margins, the Partnership will
seek to provide the full range of services that may be required by such
producers. The Partnership has developed several price protection arrangements
for its customers and is likely to offer additional financial and price
protection services in the future and to enter into contracts and strategic
alliances with other industry participants to provide additional services if
appropriate opportunities arise.
CREDIT
Genesis' credit standing is a major consideration for parties with whom
Genesis does business. At times, in connection with its crude oil purchases or
exchanges, Genesis is required to furnish guarantees or letters of credit. In
most purchases from producers and most exchanges, an open line of credit is
provided by the seller up to a dollar limit, with credit support required in
excess of the limit. Since the Partnership is newly formed, it currently does
not have any credit lines of its own, and the Combined Operations have no
credit history upon which to obtain independent lines of credit.
In connection with the purchase, sale or exchange of crude oil, subject to
Genesis' compliance with specified terms and conditions, Salomon Inc will
agree in the Master Credit Support Agreement to provide certain amounts of
credit support until December 31, 1999, in the form of guarantees from time to
time at the Partnership's request. See "Risk Factors," "Credit Support
Facilities," "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Genesis-- Liquidity and Capital Resources--Master
Credit Support Agreement" and "Certain Relationships and Related
Transactions."
When Genesis markets crude oil, it must determine the amount, if any, of the
line of credit to be extended to any given customer. If Genesis determines
that a customer should receive a credit line, it must then decide on the
amount of credit that should be extended. Since typical Genesis sales
transactions can involve tens of thousands of barrels of crude oil, the risk
of nonpayment and nonperformance by customers is a major consideration in
Genesis' business. Management believes that most of Genesis' sales are made to
creditworthy entities or entities with adequate credit support.
Credit review and analysis are also integral to Genesis' leasehold
purchases. Payment for all or substantially all of the monthly leasehold
production is sometimes made to the operator of the lease. The operator, in
turn, is responsible for the correct payment and distribution of such
production proceeds to the proper parties. In these situations, Genesis must
determine whether the operator has sufficient financial resources to make such
payments and distributions and to indemnify and defend Genesis in the event
any third party should bring a protest, action or complaint in connection with
the ultimate distribution of production proceeds by the operator.
COMMON CARRIER CRUDE OIL PIPELINE OPERATIONS
Through the four common carrier crude oil pipeline systems it owns and
operates, the Partnership transports crude oil for itself and others pursuant
to tariff rates regulated by FERC or the Texas Railroad Commission. Genesis'
pipeline systems are located in crude oil producing areas of Texas, Louisiana,
Mississippi, Alabama, Florida and offshore Louisiana and are connected to
other major common carrier pipelines at various points along the systems. The
90-mile northern portion of the
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Texas System, however, is not a common carrier pipeline and is not subject to
tariff regulation. As a common carrier, Genesis offers transportation services
to any shipper of crude oil provided that the crude oil tendered for
transportation satisfies the conditions and specifications contained in the
applicable tariff. Pipeline competitors conduct operations in the areas served
by the Texas and Mississippi Systems, while the Jay System and the Main Pass
System operate in areas not currently served by pipeline competitors. Most of
the crude oil transported on Genesis' pipelines is shipped to refiners for use
as refinery feedstocks. Each of Genesis' pipelines has available capacity to
transport any additional volumes that may be produced in surrounding areas and
sold to connecting refineries or transported on connecting common carrier
pipelines. Howell acquired the Texas, Jay and Mississippi Systems from Exxon
on March 31, 1995, and constructed the Main Pass System in 1983.
Facilities located adjacent to the pipelines provide storage capacity of
approximately 200,000 barrels on each of the Mississippi and Jay Systems and
1.8 million barrels on the Texas System, primarily at the Satsuma terminal in
Houston, Texas. When future crude oil prices (including the all-in cost of
storage) exceed spot prices, the Partnership believes the demand for storage
capacity will increase and it will be able to lease storage capacity to third
parties or to store hedged volumes that it will have sold for future delivery
at higher prices. Of the approximately 2.2 million barrels of storage
capacity, approximately 1.0 million barrels of capacity are available at the
time of closing of the Offering. Of the remaining 1.2 million barrels of
capacity, approximately 700,000 at the Satsuma terminal are not currently
available for lease and require certain tank cleaning operations before they
will become available to the Partnership. Howell has agreed in the
Contribution Agreement to perform these cleaning operations at its sole
expense and expects to complete them by June 30, 1997. If Howell fails to
perform the tank cleanings by June 30, 1997, Howell will be required to make
monthly rental payments of $.10 per barrel of tank capacity to the Partnership
for that portion of tank capacity that has not been cleaned. The Partnership
believes that approximately one-third of the 1.2 million barrels of capacity
expected to become available after the closing are not suitable for service
without capital improvements in excess of the capital expenditures currently
planned by the Partnership. Management believes that the tankage available at
closing will be sufficient to operate the pipeline systems in the manner in
which they have been operated since they were acquired by Howell.
Genesis' pipeline systems are operated from its Pipeline Control Center in
Houston, Texas through a computer based Supervisory Control and Data
Acquisition system ("SCADA"). The SCADA system was developed for Genesis'
pipeline systems and installed in early 1996. The system allows one individual
to control and monitor shipments on the Texas, Jay, and Mississippi Systems on
a real time basis. This not only results in significant manpower savings, but
allows quick identification of and response to operational problems. The SCADA
system was designed to be easily expanded to accommodate the monitoring of
additional pipeline systems.
Information regarding Genesis' pipeline systems is summarized below:
<TABLE>
<CAPTION>
BARRELS
TRANSPORTED
(BPD) STORAGE PERCENT OF
---------------- TANK PIPELINE
JAN.- CAPACITY REVENUES
APRIL- JUNE LENGTH (THOUSAND JAN.-
DEC. 1995 1996 (MILES) BBL) JUNE 1996
--------- ------ ------- --------- ----------
<S> <C> <C> <C> <C> <C>
Texas System(1)................... 49,854 45,202 553 1,781 52%
Jay System........................ 35,833 34,280 117 210 37
Mississippi System................ 4,687 4,758 281 185 9
Main Pass System.................. 1,878 1,721 5 0 2
------ ------ --- ----- ---
Total........................... 92,252 85,961 956 2,176 100%
</TABLE>
- --------
(1) Includes approximately 90 miles of private carrier pipeline.
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TEXAS SYSTEM. The Texas System is Genesis' largest system, in terms of miles
of pipeline and throughput. The system is bi-directional, flowing both north
and south from Hearne, Texas. Crude oil is received at Hearne from two
pipelines owned by other gathering and marketing companies and by truck from
Genesis and other gatherers. Most of the crude oil received at Hearne is
shipped south to Genesis' large storage terminal at Satsuma. As the crude oil
moves to Satsuma, additional volumes are received by truck and pipeline at
Bryan and Navasota. At Satsuma, additional volumes are received from Genesis'
Raccoon Bend and Conroe/Tomball lines, which are part of the Texas System.
From Satsuma, the combined stream is shipped south to Webster where it meets
crude oil received from Texaco's and PanEnergy's pipelines. From Webster, the
crude oil can be shipped to multiple locations including Marathon's Texas City
refinery, Basis Refining's Texas City refinery or Crown Central's or
Lyondell's Houston refineries, or into Amoco's, Exxon's or Texaco's connecting
pipeline systems. These connecting lines afford access to Amoco's Texas City
and Exxon's Baytown refineries. Approximately 5% to 10% of total system
volumes move north from Hearne to Groesbeck where they are delivered into
Genesis' privately owned (non common carrier) line for shipment to Neches. At
Neches, the crude oil is delivered into Exxon's connecting pipeline for
shipment to several refineries in the Longview area.
[Insert Texas System Diagram]
Average throughput on the Texas System was approximately 45,000 bpd in the
first six months of 1996 compared to 50,000 bpd in the first six months of
1995. Management believes that the decline in throughput is attributable to
temporary dislocations in supply associated with historically low crude oil
inventories in the mid-continent area and the limited availability of
comparable foreign crude oils during the first half of 1996. As a result,
higher crude oil prices in other refining areas pulled supply normally
received on the Texas System from connecting carriers into other markets. As
mid-continent inventories began to replenish early in the third quarter of
1996, throughput started to increase above levels prevailing in the first half
of 1996. Although there has been a year-to-year decline in production, average
production from the 19 counties adjacent to the system has exceeded an average
of 120,000 bpd. The General Partner believes that since most of the competing
pipelines adjacent to the Texas System are currently operating at or near
maximum deliverability, opportunities exist to enhance Genesis' throughput if
crude oil production in the area increases. In the first six months of 1996,
the Texas System contributed $4.3 million to Genesis' pipeline revenues of
$8.3 million.
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JAY SYSTEM. The Jay System is an interstate system which runs from Santa
Rosa County, Florida to Mobile County, Alabama, where it connects to Shell's
refinery at Saraland, Alabama and a common carrier pipeline owned and operated
by EOTT. The Shell refinery was designed to process condensates produced in
this area, and over 90% of Jay System shipments are delivered to the Saraland
facility. The remaining volumes are delivered into EOTT's common carrier
system, which affords access to numerous refineries through three connecting
pipelines and its marine terminal.
[Insert Jay System Diagram]
Approximately half of the 117 miles of pipeline comprising the Jay System
represents gathering lines, which reach out from Jay, Florida to collect
production from large fields in the surrounding area. Approximately 26,000 bpd
of the area's production is gathered through these lines to the Jay Station
with the balance delivered by Genesis' and other gatherer's trucks. The Jay
System is the only crude oil pipeline servicing the Florida/Alabama panhandle.
Approximately 34,000 bpd of the 39,000 bpd produced in the counties of
Conecuh, Covington, Escambia and Monroe in Alabama and Escambia and Santa Rosa
in Florida are transported through the Jay System. Much of the balance of the
production does not meet shippers' quality requirements and must be trucked
out of the area. Production from the six counties has been increasing over the
last five years, which has resulted in increasing shipments on the Jay System.
In the first six months of 1996, the Jay System contributed $3.1 million to
Genesis' pipeline revenues of $8.3 million.
MISSISSIPPI SYSTEM. The Mississippi System is an interstate system which
runs southwest from Jones County, Mississippi to Exxon's Maryland Terminal at
East Baton Rouge Parish, Louisiana. A large common carrier line operated by
EOTT connects to the system at Liberty, Mississippi through which Genesis can
receive additional Mississippi production, as well as production delivered
from Genesis' Jay System and foreign crude oil delivered into EOTT's marine
terminal at Mobile, Alabama. Approximately 75% of the volume on the
Mississippi System is received at Liberty from the EOTT system and is produced
in the counties of Clarke, Covington, Jasper, Jones, Smith and Wayne in
Mississippi. Most of the 35,000 bpd of production from these counties is
gathered by EOTT and is sold to several different refiners. In addition to the
crude oil received from the EOTT system, Genesis gathers an average of
approximately 1,300 bpd in the vicinity of the pipeline that is delivered into
the system at Jones County.
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[Insert Mississippi System Diagram]
Throughput on the Mississippi System has varied significantly over the last
several years, averaging 9,700 bpd, 19,600 bpd, 8,100 bpd and 4,800 bpd in
1993, 1994, 1995 and the first half of 1996, respectively. These volume
fluctuations are a function of the level of shipments received from the EOTT
system. As a result of a one-year throughput contract signed in May 1996,
shipments have exceeded an average of approximately 9,000 bpd through August
1996. When crude oil inventories are low and foreign crude oil supply
alternatives limited, demand for the Mississippi production is strong, price
competition between refiners is intense, and volumes may decline if other
refiners are willing to pay more for the supply. In the first six months of
1996, the Mississippi System contributed $0.8 million to Genesis' pipeline
revenues of $8.3 million.
MAIN PASS SYSTEM. Genesis also owns and operates a 5.5-mile interstate
pipeline in the Gulf of Mexico used to transport production from Main Pass
Block 64 to a third party offshore pipeline at the Main Pass Block 66. In the
first six months of 1996, the Main Pass System contributed $0.1 million to
Genesis' pipeline revenues of $8.3 million. See "Certain Relationships and
Related Transactions--Howell."
GROWTH OPPORTUNITIES
The General Partner believes that structural changes in all segments of the
oil and gas industry are creating growth opportunities for Genesis. The trend
by major oil companies to dispose of nonstrategic oil and gas properties in
the United States affords increased opportunities to larger independent
gatherers and marketers such as the Partnership. Independent producers who
purchase these properties often do not have their own gathering and marketing
operations and therefore sell their crude oil to independent gatherers and
marketers. In addition, the disposition of assets by the majors may provide
opportunities to independent gatherers such as the Partnership to purchase
pipeline and gathering assets on attractive terms. The Partnership also
believes opportunities are beginning to arise to provide services to large
producers, including major oil companies, who seek to reduce their overall
marketing and supply costs by outsourcing their gathering, transportation and
marketing functions. In addition, competitive pressures are increasing for
gatherers and marketers to realize economies of scale through efficiencies in
the crude oil gathering and aggregation process and through advanced risk
management systems. Such pressures are likely to result in further
consolidation among crude oil gatherers and marketers. The General Partner
believes that the Partnership's competitive strengths, which include its size,
concentration of operations, experienced management, risk management systems,
range of services and capital structure, will enable the Partnership to
benefit from these trends.
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Many of the Partnership's growth opportunities require only limited capital.
Genesis will seek to expand its current practice of contracting with other
companies to perform gathering services and to increase its lease purchase
volumes without incurring capital costs to extend its trucking operations. The
formation of strategic alliances with large independent producers and refiners
that increase utilization of Genesis' existing infrastructure, and the
construction of new pipeline injection stations and small pipeline gathering
systems to access additional pipeline throughput, can be financed internally.
Larger growth opportunities, such as any acquisitions of stand-alone gathering
and marketing companies or pipeline systems, may require access to new
capital, and there can be no assurance that such capital will be available to
the Partnership on acceptable terms.
COMPETITION
The Partnership will be one of the largest independent gatherers and
marketers of crude oil in North America and considers itself to be in the top
tier of comparable crude oil gathering and marketing companies. The top tier
represents integrated crude oil gatherer-resellers with significant hard
assets and risk management programs. The second tier of the Partnership's
competitors comprises the crude oil gatherer-reseller companies with limited
hard assets and risk management capabilities. The third tier of competitors
includes the crude oil resellers without gathering assets. The Partnership
believes that it is positioned to compete effectively with the largest
independent gatherers and marketers of crude oil. See "Risk Factors--Risks
Inherent in the Partnership's Business."
In the various business activities described above, the Partnership is in
competition with a number of major oil companies and smaller entities. There
is intense competition among all participants in the business for leasehold
purchases of crude oil. The number and location of the Partnership's pipeline
systems and trucking facilities give the Partnership access to a substantial
volume of domestic crude oil production throughout its area of operations. The
Partnership also has considerable flexibility in marketing the volumes of
crude oil which it purchases, without dependence on any single customer or
transportation or storage facility. The Partnership's principal competitors in
the purchase of leasehold crude oil production are Koch Oil Company, Scurlock
Permian Oil Company, Texaco Trading & Transportation Co., Inc., and EOTT
Energy Partners, L.P. Competitive factors include price, range and quality of
services, knowledge of products and markets and capabilities of risk
management systems.
The crude oil gathering and marketing industry continues to be characterized
by a large number of participants, although the number of companies involved
in the gathering of crude oil in the United States has decreased within the
past few years as a result of business failures and consolidations. Consistent
with Genesis' strategy to maximize its margins at various points along the
Distribution Chain, the Partnership will enter into transactions with other
companies, some of which may also be competitors, to increase its lease, bulk
and exchange volumes.
Genesis' most significant competitors in its pipeline operations are
primarily common carrier and proprietary pipelines owned and operated by major
oil companies, large independent pipeline companies and other companies in the
areas where the Mississippi and Texas Systems deliver crude oil. The Jay
System and the Main Pass System operate in areas not currently served by
pipeline competitors. Competition among common carrier pipelines is based
primarily on posted tariffs, quality of customer service and proximity to
refineries and connecting pipelines. The Partnership believes that high
capital costs, tariff regulation and problems in acquiring rights-of-way make
it unlikely that other competing crude oil pipeline systems comparable in size
and scope to Genesis' pipelines will be built in the same geographic areas in
the near future, provided that Genesis' pipelines continue to have available
capacity to satisfy demands of shippers and that its tariffs remain at
reasonable levels.
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TITLE TO PROPERTIES
Basis and Howell will transfer substantially all of the real and personal
property associated with the Combined Operations to the Partnership
simultaneously with the consummation of the Offering. Real property that will
be transferred by Basis and Howell to the Partnership falls into two basic
categories: (i) parcels which Basis or Howell owns in fee, such as terminals,
district offices and maintenance sites, and (ii) parcels where the interest of
Basis or Howell derives from leases, easements, rights-of-way, permits or
licenses from landowners or governmental authorities permitting the use of
such land for operations. Certain portions of the Texas System are located in
easements shared with Exxon. Howell will transfer all such easement sharing
rights associated with the Texas System to the Partnership simultaneously with
the consummation of the Offering. Basis and Howell each believe that it has
satisfactory title to all fee lands, leases, easements, rights-of-way, permits
and licenses that are material to their respective businesses.
The Jay System, the Mississippi System and the Main Pass System will
continue to be operated by the Partnership as interstate common carrier crude
oil pipeline systems, and the Partnership will have the power of eminent
domain in each state in which it operates its interstate pipelines. The Texas
System (excluding the spur extending north from Groesbeck to Neches, which is
a private pipeline) will continue to be operated by the Partnership as an
intrastate common carrier crude oil pipeline system, and the Partnership will
have the power of eminent domain in connection with the common carrier
pipeline under Texas law.
Numerous licenses, permits, registrations and rights will be required for
the operation of the Partnership's business, including licenses, permits,
registrations and rights within the jurisdiction of various state and other
governmental agencies and authorities. In the event that the Partnership has
not obtained all licenses, permits, registrations or rights at the time of
closing of the Offering, Basis or Howell may continue to hold title to and to
conduct the business affected by such licenses, permits, registrations or
rights in its own name, but for the benefit of the Partnership, until such
licenses, permits, registrations or rights have been obtained. If the
Partnership is unable to obtain consents and title documents with respect to
the transfer of such licenses, permits, registrations or rights, the
Partnership's business may be adversely affected.
EMPLOYEES
To carry out various purchasing, gathering, transporting and marketing
activities, the General Partner or its affiliates will employ approximately
200 employees, including management, truck drivers and other operating
personnel, division order analysts, accountants, tax specialists, contract
administrators, schedulers, marketing and credit specialists and employees
involved in Genesis' pipeline operations. Additional services will be
performed on behalf of the Partnership pursuant to the Corporate Services
Agreement. See "Certain Relationships and Related Transactions." None of the
General Partner's employees are represented by labor unions, and the General
Partner believes that its relationships with its employees are good.
HISTORICAL OPERATIONS OF BASIS AND HOWELL
For a description of the historical operations of Basis and Howell and
certain business relationships between the Combined Operations and Basis and
Howell, see "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Certain Relationships and Related Transactions."
ENVIRONMENTAL MATTERS
Pursuant to the Contribution Agreement, Basis and Howell will be responsible
for environmental conditions related to their ownership and operation of their
respective assets contributed to the
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Partnership and for any environmental liabilities which Basis or Howell may
have assumed from prior owners of these assets. The Partnership, however, has
assumed responsibility for the first $25,000 per occurrence as to any
environmental liability, up to an annual aggregate of $200,000 and a total
maximum liability of $600,000. As security for such precontribution
liabilities, Basis and Howell have pledged their respective Subordinated OLP
Units to cover any expenses or reserves arising out of their respective
environmental liabilities during the Subordination Period. The Partnership has
the right to receive distributions on Subordinated OLP Units or to liquidate
Subordinated OLP Units to satisfy the environmental obligations of Basis and
Howell under the Contribution Agreement.
Liabilities arising from conditions determined to have occurred after the
closing date of the Contribution Agreement will be the obligation of the
Partnership and not Basis or Howell. The indemnity provided by Howell to Exxon
relating to the purchase of Exxon's pipeline operations will not be assumed by
the Partnership or the General Partner and will remain the obligation of
Howell.
Basis and Howell have represented in the Contribution Agreement that they
have no knowledge of any outstanding liabilities or claims relating to safety
and environmental matters, individually or in the aggregate, which would have
a material adverse effect on the Partnership's financial condition and that
Partnership assets are in compliance in all material respects with all
applicable environmental laws and regulations. No assurance can be given,
however, as to the amount or timing of future expenditures for environmental
remediation or compliance, and actual future expenditures may be different
from the amounts currently anticipated.
The Partnership is subject to federal and state laws and regulations
relating to the protection of the environment. At the federal level such laws
include, among others, the Clean Air Act, 42 U.S.C. (S) 7401 et seq., as
amended; the Clean Water Act, 33 U.S.C. (S) 1251 et seq., as amended; the
Resource Conservation and Recovery Act, 42 U.S.C. (S) 6901 et seq., as
amended; the Comprehensive Environmental Response, Compensation, and Liability
Act, 42 U.S.C. (S) 9601 et seq., as amended; and the National Environmental
Policy Act, 42 U.S.C. (S) 4321 et seq., as amended. Although compliance with
such laws has not had a significant effect on Genesis' business, such
compliance in the future could prove to be costly, and there can be no
assurance that the Partnership will not incur such costs in material amounts.
The Clean Air Act regulates, among other things, the emission of volatile
organic compounds in order to minimize the creation of ozone. Such emissions
may occur from the handling or storage of crude oil. The required levels of
emission control are established in state air quality control implementation
plans. Both federal and state law impose substantial penalties for violation
of these applicable requirements.
The Clean Water Act controls, among other things, the discharge of oil and
derivatives into certain surface waters. The Clean Water Act provides
penalties for any discharges of crude oil in harmful quantities and imposes
liability for the costs of removing an oil spill. State laws for the control
of water pollution also provide varying civil and criminal penalties and
liabilities in the case of a release of crude oil in surface waters or into
the ground. Federal and state permits for water discharges may be required.
Under the Oil Pollution Act of 1990 ("OPA"), the Minerals Management Service
("MMS") has the authority to promulgate regulations requiring financial
assurance from owners and operators of "offshore facilities" to cover
potential environmental cleanup and restoration costs. Although there has been
uncertainty about the scope and applicability of this requirement, the
Congress recently adopted legislation that would likely exclude most of
Genesis' inland facilities from this financial assurance requirement. The new
legislation would impose a financial assurance requirement of $10 million on
certain inland facilities and $35 million on certain offshore facilities,
subject to upward regulatory adjustment.
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The Resource Conservation and Recovery Act regulates, among other things,
the generation, transportation, treatment, storage and disposal of hazardous
wastes. Transportation of petroleum, petroleum derivatives or other
commodities and maintenance activities may invoke the requirements of the
federal statute, or state counterparts, which impose substantial penalties for
violation of applicable standards.
The Comprehensive Environmental Response, Compensation, and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons that are considered to have contributed to the release of a "hazardous
substance" into the environment. These persons include the owner or operator
of the disposal site or sites where the release occurred and companies that
disposed or arranged for the disposal of the hazardous substances found at the
site. Persons who are or were responsible for releases of hazardous substances
under CERCLA may be subject to joint and several liability for the costs of
cleaning up the hazardous substances that have been released into the
environment and for damages to natural resources, and it is not uncommon for
neighboring landowners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances
released into the environment. In the ordinary course of the Partnership's
operations, substances may be generated or handled which fall within the
definition of "hazardous substances."
Under the National Environmental Policy Act ("NEPA"), a federal agency, in
conjunction with a permittee, may be required to prepare an environmental
assessment or a detailed environmental impact study before issuing a permit
for a pipeline extension or addition that would significantly affect the
quality of the environment. Should an environmental impact study or assessment
be required for any proposed pipeline extensions or additions, the effect of
NEPA may be to delay or prevent construction or to alter the proposed
location, design or method of construction.
The Partnership is subject to similar state and local environmental laws and
regulations that may also address additional environmental considerations of
particular concern to a state.
REGULATION
PIPELINE REGULATION
Interstate Regulation Generally. The interstate common carrier pipeline
operations of the Jay, Mississippi and Main Pass Systems are subject to rate
regulation by FERC under the Interstate Commerce Act ("ICA"). The ICA
requires, among other things, that to be lawful petroleum pipeline rates be
just and reasonable and not unduly discriminatory. The ICA permits challenges
to proposed new or changed rates by protest and to rates that are already
final and in effect by complaint, and provides that upon an appropriate
showing a complainant may obtain reparations for damages sustained for a
period of up to two years prior to the filing of a complaint. Howell will be
responsible for any ICA liabilities with respect to activities or conduct
during periods prior to the closing, and the Partnership will be responsible
for ICA liabilities with respect to activities or conduct thereafter. The
Partnership will adopt all of Howell's tariffs in effect on the date of the
closing of the Offering. These rates have been approved by FERC's staff. None
of the tariffs have been subjected to a protest or complaint by any shipper or
other interested party.
Under the ICA, FERC is authorized to suspend the effectiveness of a new or
changed oil pipeline rate proposed by the carrier for a period of up to seven
months and to investigate such rate. If, upon the completion of an
investigation, FERC finds that the proposed new or changed rate is unlawful,
it is authorized to require the carrier filing the rate to refund to shippers,
with interest, any difference
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between the rates FERC ultimately determines to be lawful and the rates under
investigation and allowed to become effective subject to refund. In addition
FERC, upon complaint or on its own motion and after investigation, may find
the carrier's existing rates unjust, unreasonable or unduly discriminatory and
order the carrier to change its rates prospectively. In addition to rate
regulation, FERC also has regulatory authority over the rules, regulations and
practices of carriers in transporting products for shippers and prescribes a
uniform system of accounts and reporting requirements to be followed by all
regulated petroleum pipelines.
In general, the ICA requires that petroleum pipeline rates be cost based and
permits them to generate operating revenues on the basis of projected volumes
sufficient to cover, among other things, the following: (i) operating
expenses, (ii) depreciation and amortization, (iii) federal and state income
taxes determined on a separate company basis and adjusted or "normalized" to
reflect the impact of timing differences between book and tax accounting for
certain expenses, primarily depreciation and (iv) an overall allowed rate of
return on the pipeline's "rate base." Generally, rate base is a measure of
investment in or value of the common carrier assets which are used and useful
in providing the regulated services.
From the time Congress amended the ICA to authorize the Interstate Commerce
Commission ("ICC") to regulate interstate common carrier oil pipeline rates
and service until 1983, the standard used to determine the appropriate rate
base was the ICC's petroleum pipeline valuation methodology. The ICC valuation
rate base generally reflected a weighted average of the original cost of the
pipeline's common carrier assets and the current cost of reproduction of those
pipeline's assets with certain other adjustments.
Regulatory Reorganization. In 1977, Congress enacted the Department of
Energy Organization Act, which transferred federal regulatory jurisdiction
over oil pipelines from the ICC to the newly created FERC. FERC was required
by that statute to regulate oil pipelines under the provisions of the ICA as
they existed on October 1, 1977. At the time FERC succeeded to such
jurisdiction, there was pending in the United States Court of Appeals for the
District of Columbia the first federal judicial review of an oil pipeline rate
case. In that case the old ICC valuation ratemaking was heavily criticized and
FERC, as one of its first actions, requested the federal court to remand the
case to FERC for corrective action. The appellate court agreed and FERC
thereafter attempted to fashion a ratemaking methodology for oil pipelines
that reconciled the modern day economic and competitive realities affecting
oil pipelines with the ICA's regulatory directive.
The Commission's first attempt, in 1982, was the adoption in Opinion No. 154
of a variation of the old ICC methodology, on the basis that the allowed rate
levels, although likely higher than those achieved through other
methodologies, would rarely, if ever, be achieved in the prevailing
competitive marketplace. However, the federal appellate court reversed and
remanded Opinion No. 154, pointing out a number of deficiencies and
criticizing FERC's almost exclusive reliance on market forces (rather than
regulatory oversight) to restrain rates. Thereafter, in 1985, FERC issued its
Opinion No. 154-B in the Williams case discussed below and adopted a fairly
traditional cost-of-service methodology for determining oil pipeline rates.
The Williams Case. In Williams, FERC adopted the trended original cost
methodology for determining the justness and reasonableness of petroleum
pipeline tariff rates (the "TOC methodology"). In calculating a petroleum
pipeline's rate base, the TOC methodology provides that, after a starting rate
base (as discussed below) has been determined, the carrier's rate base is to
be (i) increased by property additions at cost plus an amount equal to the
equity portion of the rate base multiplied or "trended" by an inflation factor
and (ii) decreased by property retirements and depreciation and amortization
of the rate base write-ups reflecting inflation.
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The Williams opinions also provide for an allowed return for a petroleum
pipeline determined by adding (i) the product of a rate of return equal to the
nominal cost of debt, multiplied by the portion of the rate base that is
deemed to be financed with debt, and (ii) the product of a rate of return
equal to the real (i.e., inflation-free) cost of equity, multiplied by the
portion of the rate base that is deemed to be financed with equity. The
Williams opinions also authorize petroleum pipelines to recover rate base
depreciation and amortization through charges to cost-of-service. The
appropriate rates of return for petroleum pipeline carriers are to be
determined on a case-by-case basis, taking into account a pipeline carrier's
cost of capital, the competition faced by an individual pipeline and other
business and financial risks associated with petroleum pipeline operations.
The starting rate base referred to above must be determined for common
carrier pipelines such as the Jay, Mississippi and Main Pass Systems that were
regulated under the ICC valuation methodology to provide a transition from
that methodology to the TOC methodology. Subject to determination by FERC of
applicability in an individual rate case and subject to challenge by a rate
case participant, a portion of the starting rate base would continue to
reflect reproduction costs in excess of depreciated original cost of petroleum
pipeline assets. The Williams opinions provide that the starting rate base is
to be the sum of the following components determined as of specified dates:
(i) the depreciated original cost of the carrier's property, multiplied by the
ratio of debt to total capitalization, (ii) the net depreciated reproduction
cost from the 1983 FERC valuation completed pursuant to the ICC valuation
methodology, multiplied by the ratio of equity to total capitalization, and
(iii) the original cost of land, the net book value of rights-of-way and
allowed working capital. Property acquired subsequent to the 1983 valuation is
to be included at cost less book depreciation plus a write-up for inflation.
The Williams opinions expressly provide that the use of a starting rate base
in excess of the original cost of the assets is subject to challenge by
showing that the investors in the carrier had not relied on the ICC valuation
rate base methodology in judging their returns.
As previously noted, a petroleum pipeline's capital structure affects its
starting rate base, the proportion of the rate base that is trended to reflect
inflation under the TOC methodology and other factors that bear on the
determination of the justness and reasonableness of its rates. The Williams
opinions stated that as a general policy the actual capital structure of a
carrier should be used unless the carrier has issued no long-term debt, has
issued long-term debt to its parent or has issued long-term debt guaranteed by
its parent to outside investors, in which events the actual capital structure
of the parent will be used. In individual cases FERC may determine that the
actual capital structure of the carrier and its parent are both inappropriate
for the carrier. In that case, FERC will impute a hypothetical capital
structure to the carrier, which will consist of a capital structure deemed by
FERC to be appropriate for that carrier in view of the risks it faces.
Cases Implementing Williams. Although the Williams opinions established a
general framework for pipeline rate regulation subject to implementation in
individual cases, as a practical matter there have been very few adjudicated
proceedings, possibly because of the long, complicated and costly requirements
of the procedure. After adoption of the TOC methodology, another four years
were required to conclude the next rate case using that methodology and many
issues remained to be determined on a case-by-case basis. The issues that were
determined were not subjected to judicial review. As is discussed more fully
below, the extent to which TOC methodology will be applied in the future has
been limited by the Energy Policy Act of 1992 which required FERC to issue a
final rule establishing a simplified and generally applicable ratemaking
methodology for oil and product pipelines. It is impossible to determine at
this time what issues will eventually be developed in these cases.
Light-handed Regulation. In a 1990 proceeding involving Buckeye Pipeline
Company, L.P. ("Buckeye"), FERC authorized a petroleum pipeline carrier able
to demonstrate a lack of market power to charge market-based rates rather than
the cost-of-service based rates imposed by the TOC methodology. In such a case
FERC will, at the request of a pipeline company, bifurcate pipeline
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rate investigations into two phases. In Phase I of such a bifurcated
proceeding, the pipeline company has the opportunity to establish that it
faces sufficient competition to justify relief from the strict application of
cost-based principles. In Phase I of Buckeye, FERC determined, based on the
existing level of market concentration in the pipeline's market areas, that
Buckeye exercised significant market power in only five of its twenty-one
market areas (thus necessitating continued cost-of-service type oversight) but
was entitled to light-handed regulation in the form of market-based rates in
its remaining market areas. FERC indicated that, if significant market power
is found to exist, it will review closely the cost basis for the rates in that
particular market area and more closely exercise its regulatory oversight
authority, compared to the oversight which may be available under a light-
handed methodology. Cases involving other pipelines have been bifurcated and
are pending before FERC.
In the now settled Buckeye proceeding, several issues were raised pertaining
to the appropriate starting rate base to be used for trending and the
calculation of Buckeye's rates under the TOC methodology. Another significant
issue raised in the Buckeye proceeding pertained to Buckeye's limited
partnership status and the proper treatment of federal and state income taxes.
In particular, a question was raised whether Buckeye, which like all publicly-
traded pipeline partnerships does not pay federal income taxes, should be
allowed to recover income tax expense as a cost of service item in its
regulated rates. The Buckeye case was subsequently settled without FERC
deciding the issue. However, in a more recent proceeding involving Lakehead
Pipe Line Company, Limited Partnership (Opinion No. 397), FERC concluded that
there should not be a corporate income tax allowance built into an oil
pipeline's rates to reflect income attributable to noncorporate partners since
noncorporate partners, unlike corporate partners, do not pay a corporate
income tax. This result comports with the principle that, although a regulated
entity is entitled to an allowance to cover its incurred costs, including
income taxes, there should not be an element included in the cost of service
to cover costs not incurred. Opinion No. 397 was affirmed on rehearing in May
1996. Appeals of the Lakehead opinions have been taken and are pending before
the Court of Appeals for the District of Columbia Circuit; however, the
parties to the Lakehead proceeding have agreed to settle the case, with the
result that appellate review of the tax and other issues appears unlikely.
Moreover, in July 1996, hearings concluded in another FERC rate review
proceeding involving SFPP, Inc. ("SFPP") in which the issue of the proper tax
component to be included in a partnership oil pipeline's rates is being
vigorously contested. In that case, SFPP has argued for the pre-Lakehead
treatment of inclusion of a full tax component at the corporate rate; FERC
staff argues for the Lakehead result, i.e., a tax component solely reflecting
corporate ownership in the pipeline partnership; some shippers argue for a
Lakehead approach, but urge special scrutiny of SFPP's ownership structure and
significant adjustments to properly reflect tax costs actually incurred; and
some shippers argue that Lakehead is in error and that no tax component
whatsoever is properly includable in a partnership pipeline's rates. Subject
to the limitations imposed under the Energy Policy Act of 1992 (discussed
below), this issue of the proper tax component, if any, properly includable in
a partnership pipeline's rates could also be raised in any proceeding
involving the Partnership's common carrier rates for the Jay, Mississippi and
Main Pass Systems.
The General Partner is unable to predict what result FERC or the reviewing
courts may ultimately reach on the tax issue or other issues currently in
litigation or yet to be raised. However, an adverse decision respecting the
tax component or other issues which might be contested in any FERC proceeding
pertaining to the Partnership's rates for common carrier service on its Jay,
Mississippi and Main Pass Systems could have a material adverse effect on the
rates the Partnership is allowed to charge and, therefore, the Partnership's
revenues. It is unlikely that the Partnership will incur any liability
associated with the retroactive application of the Lakehead decision for the
years 1995 or 1996 because reduced throughput and utilization in the
Partnership's crude oil pipelines for these periods has caused an overall cost
of service revenue deficiency that is well in excess of any positive revenue
impact for the interstate pipelines that has resulted from allocating a
portion of the pipelines' total tax liability to noncorporate limited partners
for those years.
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Energy Policy Act of 1992 and Subsequent Developments. In October of 1992
Congress passed the Energy Policy Act of 1992 ("Energy Policy Act"). The
Energy Policy Act is significant in that it requires FERC to promulgate
regulations establishing a simplified and generally applicable ratemaking
methodology under the ICA which will streamline FERC procedures to avoid
unnecessary costs and delays. As a fundamental part of this simplification and
streamlining of procedures, the Energy Policy Act deemed pipeline rates in
effect for the 365-day period ending on the date of enactment of the Energy
Policy Act or that were in effect on the 365th day preceding enactment and had
not been subject to complaint, protest or investigation during the 365-day
period to be "just and reasonable" under the ICA. In regard to these so-called
"grandfathered" rates, the Energy Policy Act provides that such grandfathered
rates may only be challenged under the following limited circumstances: (i) a
substantial change has occurred since enactment in either the economic
circumstances of the oil pipeline or the nature of the services which were a
basis for the rate; (ii) the complainant was contractually barred from
challenging the rate prior to enactment (in which event, following the
expiration of the contractual bar, the complainant has a very limited time
period to lodge a complaint); or (iii) the rate is unduly discriminatory or
preferential.
FERC responded to the requirement that it promulgate rules simplifying and
streamlining the ratemaking process in a series of three related rulemaking
proceedings, the principal provisions of which took effect on January 1, 1995.
On October 22, 1993, FERC first responded to this mandate by issuing Order No.
561, which adopts a new indexing rate methodology for petroleum pipelines.
Under the new regulations, which were effective January 1, 1995, petroleum
pipelines are able to change their rates within prescribed ceiling levels that
are tied to the Producer Price Index for Finished Goods, minus one percent.
Rate increases made pursuant to the index will be subject to protest, but such
protests must show that the portion of the rate increase resulting from
application of the index is substantially in excess of the pipeline's increase
in costs. FERC's regulations provide, and a recent FERC order in a contested
pipeline rate proceeding affirms, that shippers may not challenge that portion
of the pipeline's rates which was grandfathered under the Energy Policy Act
whenever the pipeline files for its annual indexed rate increase; such
challenges are limited to the amount of the increase only unless, in a
separate showing, the complainant satisfies the Energy Policy Act's threshold
requirement to show that a "substantial change" has occurred in the economic
circumstances or the nature of the pipeline's services. Rate decreases are
mandated under the new regulations if the index decreases and the carrier has
been collecting rates equal to the rate ceiling. The new indexing methodology
can be applied to any existing rate, including in particular all
"grandfathered" rates, but also applies to rates under investigation. If such
rate is subsequently adjusted, the ceiling level established under the index
must be likewise adjusted.
In Order No. 561, FERC emphasized that the combination of grandfathered
rates plus use of the new indexation methodology is expected to be the
generally prevailing methodology. The new indexation methodology is expected
to cover all normal cost increases. Cost-of-service ratemaking, while still
available to the pipeline for certain rate increases and to establish initial
rates for new service, is generally disfavored except in specified
circumstances. In this regard, the carrier may not use the cost-of-service
methodology to change an existing rate unless the pipeline can demonstrate
that there is a substantial divergence between the actual cost experienced by
the carrier and the rate resulting from the index such that the rate at the
ceiling level would preclude the carrier from being able to charge a just and
reasonable rate. Similarly, any party complaining of any existing indexed rate
or challenging any indexed rate change (other than a grandfathered rate) must
provide a reasonable basis for FERC to conclude that there may be a
substantial divergence between actual costs experienced and the rate resulting
from the index such that the carrier's rates are excessive and, therefore,
unjust and unreasonable, and should be investigated in a cost-of-service
proceeding. FERC regulations also allow rate changes to occur through market-
based rates (for pipeline services which have been found to be eligible for
such rates) and through settlement rates, which are rates unanimously agreed
by the carrier and all shippers as appropriate. In respect of new facilities
and new
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services requiring the establishment of new, initial rates, the carrier may
rely on either cost-of-service ratemaking or may initiate service under rates
which have been contractually agreed with at least one nonaffiliated shipper;
however, other shippers may protest any new rates established in this manner,
in which event a cost-of-service showing is required.
These alternative ratemaking methodologies to FERC's indexing methodology
were finalized on October 28, 1994, when FERC issued Order Nos. 571 and 572.
In Order No. 571, FERC articulated cost-of-service filing and reporting
requirements to be applicable to a pipeline's initial rates and to situations
where indexing is determined to be inappropriate. Order No. 571 also adopted
rules for the establishment of revised depreciation rates, and revised the
information required to be reported by pipelines in their FERC Form No. 6,
"Annual Report for Oil Pipelines." Order No. 572 establishes the filing
requirements and procedures that must be followed when a pipeline seeks to
charge market-based rates.
On May 10, 1996, the Court of Appeals for the District of Columbia Circuit
affirmed Order Nos. 561, 571 and 572. The Court held that by establishing a
general indexing methodology along with limited exceptions to indexed rates,
FERC had fulfilled its responsibilities under the Energy Policy Act and
reasonably balanced its dual responsibilities of ensuring just and reasonable
rates and streamlining ratemaking through generally applicable procedures.
Among other things, the Court affirmed FERC's interpretation of the Energy
Policy Act respecting challenges to grandfathered rates in the context of rate
increase filings using the indexation methodology.
Conclusion Regarding Petroleum Pipeline Regulation. Because of the novelty
and uncertainty surrounding the indexing methodology as well as the numerous
untested issues associated with the TOC methodology and light-handed
regulation, the General Partner is unable to predict with certainty whether,
how or the extent to which FERC may apply these methodologies to the Jay,
Mississippi and Main Pass Systems, which FERC regulates. The General Partner
intends to formally adopt Howell's preexisting tariffs and rates pertaining to
the Jay, Mississippi and Main Pass Systems and to rely on the indexation
procedures available under FERC regulations. Nevertheless, by protest,
complaint or shipper challenge under the Energy Policy Act to the
Partnership's grandfathered or indexed rates, the Partnership could become
involved in a cost-of-service proceeding before FERC and be required to defend
and support its rates based on costs. In any such cost-of-service rate
proceeding involving rates of FERC-regulated Jay, Mississippi and Main Pass
Systems, FERC would be permitted to inquire into and determine all relevant
matters including such issues as (i) the appropriate capital structure to be
utilized in calculating rates, (ii) the appropriate rate of return, (iii) the
rate base, including the proper starting rate base, (iv) the rate design and
(v) the proper allowance for federal and state income taxes. In addition to
the regulatory considerations noted above, it is expected that the interstate
common carrier pipeline tariff rates will continue to be constrained by
competitive and other market factors.
TEXAS INTRASTATE REGULATION
The intrastate common carrier pipeline operations of the Partnership in
Texas are subject to regulation by the Texas Railroad Commission. The
applicable Texas statutes require that pipeline rates be non-discriminatory
and provide a fair return on the aggregate value of the property of a common
carrier used and useful in the services performed after providing reasonable
allowance for depreciation and other factors and for reasonable operating
expenses. There is no case law interpreting these standards as used in the
applicable Texas statutes. This is because historically, as well as currently,
the Texas Railroad Commission has not been aggressive in regulating common
carrier pipelines such as those of the Partnership and has not investigated
the rates or practices of such carriers in the absence of shipper complaints,
which have been few and almost invariably settled informally. Given this
history, although no assurance can be given that the tariffs to be charged by
the Partnership would ultimately be upheld if challenged, the General Partner
believes that the tariffs now in effect can be
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sustained. Howell will be responsible for any liabilities under the applicable
Texas statutes with respect to activities or conduct during periods prior to
the closing, and the Partnership will be responsible for such liabilities with
respect to activities or conduct thereafter. The Partnership will adopt the
tariffs in effect on the date of the closing of the Offering.
PIPELINE SAFETY REGULATION
The Partnership's crude oil pipelines are subject to construction,
installation, operating and safety regulation by the Department of
Transportation ("DOT") and various other federal, state and local agencies.
The Pipeline Safety Act of 1992, among other things, amends the Hazardous
Liquid Pipeline Safety Act of 1979 ("HLPSA") in several important respects. It
requires the Research and Special Programs Administration ("RSPA") of DOT to
consider environmental impacts, as well as its traditional public safety
mandate, when developing pipeline safety regulations. In addition, the
Pipeline Safety Act mandates the establishment by DOT of pipeline operator
qualification rules requiring minimum training requirements for operators, and
requires that pipeline operators provide maps and records to RSPA. It also
authorizes RSPA to require that pipelines be modified to accommodate internal
inspection devices, to mandate the installation of emergency flow restricting
devices for pipelines in populated or sensitive areas, and to order other
changes to the operation and maintenance of petroleum pipelines. The
Partnership has conducted hydrostatic testing of most segments. Significant
expenses could be incurred in the future if additional safety measures are
required or if safety standards are raised and exceed the current pipeline
control system capabilities.
States are largely preempted from regulating pipeline safety by federal law
but may assume responsibility for enforcing federal intrastate pipeline
regulations and inspection of intrastate pipelines. In practice, states vary
considerably in their authority and capacity to address pipeline safety. The
Partnership does not anticipate any significant problems in complying with
applicable state laws and regulations in those states in which it operates.
The Partnership's crude oil pipelines are also subject to the requirements
of the Federal Occupational Safety and Health Act ("OSHA") and comparable
state statutes. The General Partner believes that the Partnership's crude oil
pipelines have been operated in substantial compliance with OSHA requirements,
including general industry standards, record keeping requirements and
monitoring of occupational exposure to regulated substances.
In general, the General Partner expects to increase the Partnership's
expenditures in the future to comply with higher industry and regulatory
safety standards such as those described above. Such expenditures cannot be
accurately estimated at this time, although the General Partner does not
expect that such expenditures will have a material adverse impact on the
Partnership, except to the extent additional testing requirements or safety
measures are imposed.
TRUCKING REGULATION
The Partnership will operate its fleet of trucks as a private carrier.
Although a private carrier that transports property in interstate commerce is
not required to obtain operating authority from the ICC, the carrier is
subject to certain motor carrier safety regulations issued by the DOT. The
trucking regulations cover, among other things, driver operations, keeping of
log books, truck manifest preparations, the placement of safety placards on
the trucks and trailer vehicles, drug testing, safety of operation and
equipment, and many other aspects of truck operations. The Partnership is also
subject to OSHA with respect to its trucking operations.
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TRANSFER OF TARIFFS AND OPERATING PERMITS
The operation of motor carriers and pipelines by the Partnership will
require the transfer of certain tariffs and operating authorities from Basis
and Howell to the Partnership. Such transfer will, in some cases, be subject
to regulatory approval by jurisdictional agencies. It is expected that such
approvals will be obtained without any material change in the present rate
structure or operating authorizations; however, the regulatory approval
process provides an opportunity for competitors or other interested parties to
object to all or part of the transfer. Any objection may or may not be based
on the transfer itself and therefore the likelihood that the objection will
have adverse consequences cannot be predicted. The General Partner expects
that the Partnership will obtain the transfer of all material tariffs and
operating authorities, and the General Partner believes that any delay in
obtaining the transfer of any tariff or operating authority, individually or
in the aggregate, will not have a material adverse effect on the Partnership's
business.
COMMODITIES REGULATION
The Partnership's price risk management operations are subject to
constraints imposed under the CEA and the rules of the NYMEX. The futures and
options contracts that are traded on the NYMEX are subject to strict
regulation by the Commodity Futures Trading Commission. The trading volumes
and pricing bases of futures contracts on some products are such that the
General Partner's ability to use them to hedge the Partnership's price risks
may be limited. As a result of such regulation, the Partnership may incur
additional compliance costs and difficulties, the nature and extent of which
are impossible to predict.
LITIGATION
Various legal actions which have arisen in the ordinary course of business
are pending with respect to the crude oil gathering and transportation
operations of Basis and Howell. Basis and Howell will each retain liability
and responsibility for the defense of existing lawsuits and any future
lawsuits arising out of activities conducted by Basis and Howell prior to the
contribution of assets to the Partnership and have also agreed to cooperate in
the defense of such lawsuits.
During 1995 and 1996, various suits were filed in different jurisdictions
against numerous purchasers of crude oil production alleging price-fixing and
other discriminatory practices in connection with the purchase of crude oil
production at posted prices. The premise of these suits generally is that the
use of posted prices in purchasing crude oil has resulted in the plaintiffs,
and other interest owners, being underpaid for the crude oil purchased and
that purchasers of crude oil have conspired to accomplish this result. Basis
or Howell, as well as major competitors of Genesis, were named in several of
these suits. Class certification either has been denied or not yet granted in
the cases filed against Basis or Howell. No assurance can be given that
Genesis will not be named as a defendant in these cases or that the
prosecution of these claims will not have an impact on industry practices in
the crude oil gathering and marketing business.
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MANAGEMENT
PARTNERSHIP MANAGEMENT
The General Partner will manage and operate the activities of the
Partnership, and the General Partner anticipates that its activities will be
limited to such management and operation. As limited partners, Unitholders
will have no management power over the business and affairs of the Partnership
or actual or apparent authority to enter into contracts on behalf of, or
otherwise to bind, the Partnership. Notwithstanding any limitation on its
obligations or duties, the General Partner will be liable, as the general
partner of the Partnership, for all debts of the Partnership (to the extent
not paid by the Partnership), except to the extent that indebtedness or other
obligations incurred by the Partnership are made specifically non-recourse to
the General Partner.
The General Partner is a limited liability company formed under Delaware law
and is governed by a limited liability company agreement ("LLC Agreement").
Pursuant to the LLC Agreement, the General Partner will be managed by its
members ("Members"), Basis and Howell, who will own 54% and 46% of the General
Partner, respectively. As the owner of a majority of the outstanding interests
in the General Partner, Basis will control decisions concerning the management
and affairs of the General Partner. Pursuant to the LLC Agreement, a Board of
Directors will be elected to provide review and oversight of the General
Partner's business and operations and to provide reports and recommendations
to the Members.
The Board of Directors will include two directors who are neither officers
nor employees of the General Partner or any affiliate of the General Partner
to serve as the Audit Committee of the Partnership. The Audit Committee will
have the authority to review, at the request of the General Partner, specific
matters as to which the General Partner believes there may be a conflict of
interest in order to determine if the resolution of such conflict proposed by
the General Partner is fair and reasonable to the Partnership. The Audit
Committee members are expected to be elected within 90 days from the date of
this Prospectus. The General Partner will have sole discretion to determine
which matters, if any, to submit to the Audit Committee. Any matters approved
by the Audit Committee will be conclusively deemed to be fair and reasonable
to the Partnership, approved by all partners of the Partnership and not a
breach by the General Partner or its Board of Directors of any duties they may
owe the Partnership or the Unitholders. In addition, the Audit Committee will
review external financial reporting of the Partnership, will recommend
engagement of the Partnership's independent accountants and will review the
Partnership's procedures for internal auditing and the adequacy of the
Partnership's internal accounting controls.
The Partnership will not directly employ any of the persons responsible for
managing or operating the Partnership. In addition to persons performing
services pursuant to the Corporate Services Agreement, approximately 200
individuals who will be employed by the General Partner or its affiliates,
consisting principally of the current management and workforce of the Combined
Operations, will manage and operate the Partnership's business as officers and
employees of the General Partner. Such employees are not represented by any
labor unions or covered by any collective bargaining agreements. See "Certain
Relationships and Related Transactions."
INCENTIVE COMPENSATION PAYMENTS TO GENERAL PARTNER
As compensation for providing management and other services to the
Partnership, the General Partner will be entitled to Incentive Compensation
Payments with respect to any quarter for which the Unitholders receive
distributions of Available Cash from Operating Surplus in excess of the first
of the three Target Distribution Levels. Available Cash from Operating Surplus
for any quarter in excess of the amount necessary to distribute the First
Target Distribution to all Unitholders will be distributed 98% to all
Unitholders and 2% to the General Partner. Incentive Compensation Payments to
the General Partner will be based upon the following formula:
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first, an amount equal to approximately 15.3% of all amounts distributed
to the Unitholders and the General Partner that exceed the First Target
Distribution of $0.55 per Unit per quarter, up to and including the Second
Target Distribution;
second, an amount equal to approximately 30.7% of all amounts distributed
to the Unitholders and the General Partner that exceed the Second Target
Distribution of $0.635 per Unit per quarter up to and including the Third
Target Distribution; and
third, an amount equal to 96% of all amounts distributed to the
Unitholders and the General Partner that exceed the Third Target
Distribution of $0.825 per Unit per quarter.
The General Partner will be entitled to receive Incentive Compensation
Payments in accordance with the above described formula regardless of whether
the Partnership has net income for the taxable year in which such Incentive
Compensation Payment is made and regardless of whether the Partnership has
cumulative net income for all taxable years up to and including the taxable
year in which such Incentive Compensation Payment is made. Available Cash will
be reduced by the amount necessary to make the Incentive Compensation Payments
to the General Partner pursuant to the formula set forth above.
At any time following the second anniversary of the Closing Date, the
General Partner may elect to convert (a "Conversion Election") its right to
receive Incentive Compensation Payments into a right to participate with the
Unitholders in distributions of Available Cash from Operating Surplus made in
excess of the First Target Distribution in a ratio which would result in the
General Partner receiving additional cash distributions for any subsequent
quarter in an amount equal to the amount of Incentive Compensation Payments
which would have otherwise been made to the General Partner for such quarter.
If the General Partner makes a Conversion Election, the Partnership Agreement
shall be amended to reflect the following:
(a) the General Partner's right to Incentive Compensation Payments has
been extinguished;
(b) the General Partner's right to participate in distributions in excess
of the First Target Distribution in a ratio that would result in the
General Partner receiving additional cash distributions for any subsequent
quarter pursuant to such provisions in an amount equal to the amount of
Incentive Compensation Payments that would have otherwise been made to the
General Partner for such Quarter;
(c) the special allocation of additional net income to the General
Partner in a manner which matches, to the extent possible, the General
Partner's increased share of subsequent distributions, but only to the
extent that the Partnership has sufficient net income to achieve such
matching in that year or later years;
(d) the General Partner's right to participate in an increased share of
any gains realized (or deemed realized) by the Partnership following the
Conversion Election in connection with (i) an issuance of additional
interests in the Partnership, (ii) distributions of Partnership property or
(iii) the liquidation of the Partnership; and
(e) any special allocations or other matters associated with and
reasonably necessary to the implementation of the foregoing to the extent
such special allocations or other matters do not adversely impact the
interests of the Unitholders.
DIRECTORS AND EXECUTIVE OFFICERS OF THE GENERAL PARTNER
The following table sets forth certain information with respect to the
directors and executive officers of the General Partner. Executive officers
are elected by the General Partner's Board of Directors to serve until their
successors are appointed, and directors are elected for one-year terms. The
Board of Directors of the General Partner is presently composed of six
directors and will be
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expanded to eight directors upon the appointment of the two independent
directors following the closing of the Offering.
<TABLE>
<CAPTION>
NAME AGE POSITION WITH THE PARTNERSHIP
---- --- -----------------------------
<S> <C> <C>
Jeffery R. Serra........ 40 Non-Executive Chairman of the Board of Directors*
Thomas W. Jasper........ 48 Director*
Paul N. Howell.......... 78 Director*
Ronald E. Hall.......... 64 Director*
John P. vonBerg......... 42 President, Chief Executive Officer and Director
Mark J. Gorman.......... 42 Executive Vice President, Marketing and Operations and Director
John M. Fetzer.......... 42 Senior Vice President, Crude Oil
Allyn R. Skelton, II.... 45 Chief Financial Officer
Paul A. Scoff........... 37 General Counsel
Allen R. Stanley........ 53 Vice President, Pipeline Operations
Ben F. Runnels.......... 55 Vice President, Trucking Operations
</TABLE>
- --------
* Mr. Serra and Mr. Jasper will be appointed as Basis' representatives and
Mr. Howell and Mr. Hall will be appointed as Howell's representatives to
the Board of Directors of the General Partner.
JEFFREY R. SERRA is currently Chairman, President and Chief Executive
Officer of Basis Petroleum, Inc., formerly Phibro Energy USA, Inc. ("Phibro
USA"), and has held this post since January 1, 1992. From 1991 to 1992, Mr.
Serra was Vice-Chairman and a Director of Phibro Energy, Inc., a wholly owned
subsidiary of Salomon Inc, responsible for all refining and marketing
activities. From 1987 to 1991, Mr. Serra was Vice-President of Supply and
Trading for Hill Petroleum Company, at the time an 80% owned subsidiary of
Phibro Energy Inc. Prior to 1987, Mr. Serra held the position of Crude Oil
Trader at Phibro Energy Inc. for one year as well as for The Standard Oil
Company of Ohio for the three preceding years. Prior to that, he served four
years in the United States Army Corps of Engineers with the final rank of
Captain.
THOMAS W. JASPER was appointed to the position of Treasurer of Salomon Inc
and Salomon Brothers in April 1996. Mr. Jasper is also a Managing Director of
Salomon Brothers. Prior to this appointment, he was responsible for investment
banking client relationships with European and Japanese multinational
subsidiaries in the United States. In February 1994, Mr. Jasper was named
Chairman of Salomon Brothers Hong Kong Limited and Chief Operating Officer for
the Asia-Pacific region. Mr. Jasper was originally made Regional Head of
Salomon Brothers Hong Kong Limited in July 1992. His previous responsibilities
with Salomon Brothers included managing the firm's Capital Markets Services
Group and its Interest Rate Swap Group. He joined Salomon Brothers in 1982.
Mr. Jasper was with Bankers Trust Company prior to 1982.
PAUL N. HOWELL is currently President and Chief Executive Officer of Howell.
He has held the position of President since 1995 and the post of Chief
Executive Officer since 1955. Mr. Howell served as Chairman of the Board of
Howell from 1978 to 1995.
RONALD E. HALL has been Chairman of the Board of Howell since 1995. From
1985 to 1995, Mr. Hall held the position of President and Chief Executive
Officer of CITGO Petroleum Corporation ("CITGO"), a refining, marketing and
distribution company. Mr. Hall served as a director of CITGO from 1990 to
1995.
JOHN P. VONBERG has been Vice President of Crude Oil Gathering, Domestic
Supply and Trading for Basis and its predecessor, Phibro USA, since January
1994. He managed the Gathering and Domestic Trading and Commercial Support
functions for Phibro USA during 1993. Prior to 1993, Mr. vonBerg worked for
Marathon Oil Company ("Marathon") for 13 years in various capacities including
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Product Trading, Risk Management, Crude Oil Purchases and Sales Finance,
Auditing and Operations.
MARK J. GORMAN has been President of Howell Crude Oil Company, a wholly
owned subsidiary of Howell, since September 1992. Prior to joining Howell, Mr.
Gorman worked for Marathon for fifteen years in various capacities in Crude
Oil Acquisition and Finance and Administration, including Manager of Crude Oil
Purchases and Sales and Manager of Crude Oil Trading and Risk Management.
JOHN M. FETZER has served as Senior Vice President, Crude Oil for Howell
Crude Oil Company since 1994. Previously, he held the positions of Senior Vice
President, Marketing from 1991 to 1993 and Vice President of Crude Oil Trading
from 1986 to 1991 at Enron Oil Trading and Transportation. From 1981 to 1986
Mr. Fetzer served as manager, Crude Oil Trading for UPG Falco and P&O Falco
which later became Enron Oil Trading and Transportation. Prior to joining P&O
Falco he held various financial and commercial positions with Marathon which
he joined in 1976.
ALLYN R. SKELTON, II has served as Chief Financial Officer of Howell since
1989, and Senior Vice President since 1993. Previously, he held the position
of Controller of Howell from 1985 to 1989. Mr. Skelton joined Howell in 1983
as Tax Manager. Prior to joining Howell, he held various tax and financial
positions with other oil companies.
PAUL A. SCOFF has served as Senior Counsel for Basis Petroleum, Inc. and its
predecessor Phibro Energy USA, Inc. since June 1994. Prior to joining Phibro
he was a Senior Attorney for Coastal States Management Corporation from 1989
until June of 1994 where he advised the marine, refining and marketing and
crude gathering subsidiaries of The Coastal Corporation. Mr. Scoff was in
private practice from 1984 until he joined Coastal in 1989.
ALLEN R. STANLEY joined Howell Crude Oil Company as Senior Vice President of
Operations in February 1995 following one year of consulting work related to
the Exxon pipeline acquisition. From 1986 to his retirement from Marathon in
1992, he was Manager, Business Development and Joint Interest for the
downstream component. From 1976 to 1986, he served as Manager/Gulf Coast
Division in Houston, Texas for Marathon Pipe Line Company, Manager/Non-
operated Joint Interests in London for Marathon, Manager/Engineering for Oasis
Oil Company and Manager, Engineering for Marathon Pipe Line Company in
Findlay, Ohio. Mr. Stanley began his career with Marathon in 1965.
BEN F. RUNNELS has held the position of General Manager, Operations with
Basis and its predecessor, Phibro USA, for the past four years. Prior to that,
he was Manager, Operations for JM Petroleum Corporation for four years. From
1974 until 1988, he was employed by Tesoro Petroleum Corp., and held the
positions of Terminal Manager, Regional Manager, Pipeline Manager, and
Division Manager, respectively. From 1962 until 1974, Mr. Runnels held various
managerial positions at Ryder Tank Lines, Coastal Tank Lines, Robertson Tank
Lines and Gulf Oil Corporation.
EMPLOYMENT AGREEMENTS
The General Partner anticipates that on or before the closing of the
Offering it will enter into new employment agreements with the following
executive officers: Mr. vonBerg, Mr. Gorman, Mr. Fetzer, Mr. Skelton, Mr.
Stanley, Mr. Runnels and Mr. Scoff. The new agreements will each have an
initial term expiring December 31, 1999 ("Initial Term") with one optional
extension term of two years and five additional optional extension terms of
one year each ("Extension Terms"), and will include the following additional
provisions: (i) an annual base salary, (ii) eligibility to participate in the
Restricted Unit Plan (including the allocation of Initial Restricted Units)
and Incentive Plan described below, (iii) confidential information and
noncompetition provisions and (iv) an involuntary termination provision
pursuant to which the executive officer will receive a severance payment under
certain circumstances. Severance payments applicable under the employment
agreements for an involuntary
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termination during the Initial Term and Extension Terms (other than a
termination for cause, as defined in the agreements) will equal the greater of
(i) the base salary for the balance of the applicable term, or (ii) one year's
base salary then in effect and, in addition, the Initial Restricted Units
allocated to such employee under the Restricted Unit Plan for a period of six
months after termination or expiration. Upon expiration or termination of the
agreement, the confidential information and noncompetition provisions will
continue until the earlier of one year or six months after the date of
termination or the unexpired term.
EXECUTIVE COMPENSATION
The Partnership and the General Partner were formed in September 1996.
Accordingly, the General Partner paid no compensation with respect to its
directors and officers with respect to the 1995 fiscal year, nor did any
obligations accrue with respect to management incentive or retirement benefits
for the directors and officers with respect to such year. Officers and
employees of the General Partner may participate in employee benefit plans and
arrangements sponsored by Basis, including plans which may be established by
Basis in the future. Under the terms of the Partnership Agreement, the
Partnership is required to reimburse the General Partner for expenses relating
to the operation of the Partnership, including salaries and bonuses of
employees employed on behalf of the Partnership, as well as the costs of
providing benefits to such persons under employee benefit plans and for the
costs of health and life insurance. See "Certain Relationships and Related
Transactions."
RESTRICTED UNIT PLAN
The Partnership will adopt a restricted unit plan (the "Restricted Unit
Plan") for key employees of the Partnership which will be effective upon
consummation of the Transactions. Initially, rights to receive Common Units
with an aggregate value of $6 million will be available under the Restricted
Unit Plan. From these Units, rights to receive Common Units with an aggregate
value of $4 million (the "Initial Restricted Units") will be allocated upon
the consummation of the Transactions, subject to the vesting conditions
described below and subject to other customary terms and conditions.
Approximately 20 individuals are currently eligible to receive an award under
the Restricted Unit Plan.
The Initial Restricted Units will vest upon the conversion of Subordinated
OLP Units to Common OLP Units. In the event of early conversion of a portion
of the Subordinated OLP Units into Common OLP Units, the Initial Restricted
Units will vest in the same proportion as the percentage of Subordinated OLP
Units that convert into Common OLP Units. See "Cash Distribution Policy--
Distributions from Operating Surplus during Subordination Period." The
remaining $2 million of the $6 million aggregate value of rights to receive
Common Units initially available under the Restricted Unit Plan may be
allocated or issued in the future to key employees on such terms and
conditions (including vesting conditions) as the Compensation Committee of the
Members ("Compensation Committee") shall determine. The Compensation Committee
will include the two independent directors.
Upon "vesting" in accordance with the terms and conditions of the Restricted
Unit Plan, Common Units allocated to a plan participant will be issued to such
participant. Units issued to participants may be newly issued Units acquired
by the General Partner from the Partnership at then prevailing market prices
or may be acquired by the General Partner in the open market. In either case,
the associated expense will be borne by the Partnership. Until Common Units
have vested and have been issued to a participant, such participant shall not
be entitled to any distributions or allocations of income or loss and shall
not have any voting or other rights in respect of such Common Units. The
issuance of the Common Units pursuant to the Restricted Unit Plan is intended
to serve as a means of incentive compensation for performance. Accordingly, no
consideration will be payable by the plan participants upon vesting and
issuance of the Common Units.
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INCENTIVE PLAN
Prior to the closing of the Offering, the General Partner will adopt the
Genesis Incentive Plan (the "Incentive Plan"). The Incentive Plan is designed
to enhance the financial performance of the Partnership by rewarding the
executive officers and other specific key employees for achieving annual
financial performance objectives. The Incentive Plan will be administered by
the Compensation Committee. Individual participants and payments, if any, for
each calender year will be determined by and in the discretion of the
Compensation Committee. In no event will incentive payments be made with
respect to any year unless (i) the Minimum Quarterly Distribution in the
Incentive Plan year has been distributed to each holder of Common Units, plus
any arrearage thereon, and to each holder of Subordinated OLP Units, (ii) the
Adjusted Operating Surplus generated during such year has equaled or exceeded
the sum of the Minimum Quarterly Distribution on all of the outstanding Common
Units and Subordinated OLP Units and the related distribution on the General
Partner's 2% general partner interest during such year and (iii) no APIs are
outstanding. Any incentive payments are at the discretion of the Compensation
Committee, and the General Partner may amend or change the Incentive Plan at
any time.
COMPENSATION OF DIRECTORS
Officers of the General Partner will not receive any additional compensation
for serving the General Partner as members of the Board of Directors or any of
its committees. Each director who is not an employee of the General Partner or
an employee or director of Basis, Howell or Salomon Inc will receive an annual
fee of $ for serving as a director. In addition, non-employee directors
will be paid a fee of $ for each directors' meeting attended and $
for each committee meeting attended.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
After the Offering, Basis and Howell will own 2,187,000 and 1,863,000
Subordinated OLP Units, respectively, representing a 17.50% and 14.90% limited
partner interest in the Operating Partnership (approximately 12.18% and
10.38%, respectively, if the Underwriters' over-allotment option is exercised
in full). Basis and Howell will own 54% and 46%, respectively, of the Member
interests in the General Partner. Through its control of the General Partner,
Basis will have the ability to control the management of the Partnership and
the Operating Partnership. See "Conflicts of Interest and Fiduciary
Responsibilities."
In connection with the Transactions, Basis, Howell, the Partnership, the
Operating Partnership and the General Partner will enter into the Contribution
Agreement that will generally govern the Transactions, including the
contribution and sale of the Combined Operations to the Operating Partnership,
and the distribution of the proceeds of the Offering. The Contribution
Agreement was not the result of arm's-length negotiations, and there can be no
assurance that such agreement, or that each of the transactions provided for
therein, was effected on terms at least as favorable to the parties to such
agreement as could have been obtained from unaffiliated third parties. All of
the transaction expenses incurred in connection with the Transactions,
including the expenses associated with transferring assets into the
Partnership, will be paid from the proceeds of the Offering. For
administrative reasons, each of Basis and Howell will employ through December
31, 1996, the persons responsible for managing or operating the Partnership.
All employment costs and expenses related to such employees for the period
between the Effective Date and December 31, 1996 will be borne by the General
Partner and be subject to reimbursement by the Partnership. See "The
Transactions."
Ancillary Agreement. Through the Support Period Termination Date, Howell is
obligated to apply any cash distributions it receives with respect to its
Subordinated OLP Units and Common OLP Units,
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pre-tax on a dollar-for-dollar basis, to purchase up to 46% of the outstanding
APIs. In addition, beginning with the fourth quarter of 1999, Howell is
obligated to apply any cash distributions it receives with respect to its
Subordinated OLP Units and Common OLP Units, pre-tax on a dollar-for-dollar
basis, first, to pay a 12% return on certain APIs then outstanding and,
second, to purchase up to 46% of the outstanding APIs. Any such payments on
and repurchases of APIs are required to be made first from Salomon Inc and
then pro rata from the other holders of APIs, if any. Howell will be required
to pledge its Subordinated OLP Units and any converted Common OLP Units and
related cash distributions to secure such payments in addition to the priority
pledge of such Units to the Partnership to secure their precontribution
environmental liabilities to the Partnership. See "Business--Environmental
Matters."
Redemption and Registration Rights Agreement. Pursuant to the Redemption and
Registration Rights Agreement, the Partnership has agreed, at the end of the
Subordination Period or upon earlier conversion of Subordinated OLP Units into
Common OLP Units, to register for sale in an offering that number of Common
Units equal to the number of Common OLP Units that Basis or Howell is
requesting be redeemed. The proceeds, net of underwriting discount, from such
offering will be used by the Operating Partnership to redeem such Common OLP
Units. The Partnership is obligated to pay the expenses incidental to
redemption requests, other than the underwriting discount and commission. The
General Partner will have a proportionate percentage of its general partner
interest in the Operating Partnership purchased or redeemed when Common OLP
Units are purchased or redeemed or the Subordinated OLP Units are redeemed in
connection with the exercise of the redemption and registration right.
Performance Payment. Upon completion of the Offering, John vonBerg will be
entitled to a payment ("Performance Payment") pursuant to an employment
agreement with Basis. Pursuant to such agreement, Mr. vonBerg may elect to
receive a portion of the Performance Payment in the form of Subordinated OLP
Units in lieu of cash. The maximum number of Subordinated OLP Units that would
be transferred from Basis to Mr. vonBerg under such agreement would be
Units, representing a % interest in the Partnership ( % if the over-
allotment option is exercised by the Underwriters in full). If the maximum
number of Subordinated OLP Units is transferred to Mr. vonBerg, the percentage
interest in the Partnership represented by the Subordinated OLP Units retained
by Basis would be reduced to % ( % if the over-allotment option is
exercised in full). Any Subordinated OLP Units transferred to Mr. vonBerg
pursuant to the payment would be subject to the same encumbrances as the
Subordinated OLP Units retained by Basis as described in this Prospectus. The
obligation to make the Performance Payment described above will remain with
Basis after closing of the Offering and will not be assumed or paid by the
Partnership or the General Partner.
SALOMON INC AND BASIS
The Partnership will have extensive ongoing relationships with Salomon Inc
and Basis, a wholly owned subsidiary of Salomon Inc. These relationships,
described in more detail below, will include (i) the ownership by Basis of 54%
of the Subordinated OLP Units and 54% of the Member interests in the General
Partner, which will give Basis effective control of the General Partner and
the Operating Partnership, (ii) the Distribution Support Agreement, (iii) the
Master Credit Support Agreement, (iv) a one-year evergreen contract to provide
crude oil to the refinery owned by the refining division of Basis ("Basis
Refining") at Krotz Springs, Louisiana, (v) crude oil purchase and sale
transactions with Basis Refining and Phibro Inc. and (vi) a Corporate Services
Agreement.
Distribution Support Agreement. To further enhance the Partnership's ability
to distribute the Minimum Quarterly Distribution on the Common Units with
respect to each quarter through the quarter ending September 30, 2001 (subject
to earlier termination commencing September 30, 1999),
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Salomon Inc has agreed in the Distribution Support Agreement, subject to
certain limitations, to contribute or cause to be contributed cash, if
necessary, to the Partnership in return for APIs. Salomon Inc's obligation to
purchase APIs is limited to a maximum amount outstanding at any one time equal
to $16.7 million ($19.2 million if the Underwriters' over-allotment option is
exercised in full). The Unitholders have no independent right separate and
apart from the Partnership to enforce obligations of Salomon Inc under the
Distribution Support Agreement. See "Cash Distribution Policy--Distribution
Support."
Master Credit Support Agreement. Salomon Inc has agreed to provide
transitional credit support in the form of the Guaranty Facility over a period
of approximately three years ending December 31, 1999 at prescribed limits in
connection with the purchase, sale and exchange of crude oil in the ordinary
course of the Operating Partnership's business with third parties. The
Operating Partnership will be required to pay a guarantee fee to Salomon Inc
which will increase over the three-year period, thereby increasing the cost of
the credit support provided to the Operating Partnership under the Guaranty
Facility from a below-market rate to a rate that may be higher than rates paid
to independent financial institutions for similar credit. Basis has agreed to
use its reasonable best efforts, to the extent it has availability under its
uncommitted credit lines, to provide the Operating Partnership, for a six-
month period ending May 31, 1997, the Working Capital Facility of up to $35
million, which amount includes direct cash advances not to exceed $25 million
outstanding at any one time and letters of credit that may be required in the
ordinary course of the Operating Partnership's business. The total amounts
outstanding at any one time under the Working Capital Facility will
correspondingly reduce the amounts available under the Guaranty Facility. The
interest rate for the Working Capital Facility will equal the cost to Basis of
a comparable borrowing as reasonably determined by Basis. See "Risk Factors,"
"Credit Support Facilities," "Business," and "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Genesis--Liquidity
and Capital Resources."
Crude Oil Sales to Basis Refinery at Krotz Springs, Louisiana. Basis
Gathering supplied approximately 2.8 million barrels of crude oil in the first
six months of 1996, and 5.4 million barrels for the year ended December 31,
1995, to the Basis refinery at Krotz Springs, Louisiana. In each case volumes
were sold at market prices reflecting differentials for grade and location.
The Partnership expects to enter into a one-year evergreen contract with Basis
at market-based prices to supply the Krotz Springs refinery a portion of the
crude oil required to operate the refinery. In the event the Basis refinery at
Krotz Springs is sold or transferred to a party other than an affiliate or is
closed, such contract may be terminated at Basis' option on 60 days' notice to
the Partnership or a buyer may renegotiate the contract on terms less
favorable to the Partnership. The supply contract provides the Partnership
with an initial minimum threshold of business operations in the Krotz Springs
area, and there can be no assurance the Partnership would continue to operate
in this area if the contract to supply the Krotz Springs refinery were
terminated.
Transactions Between Basis, Basis Gathering and Phibro Inc. Transactions
with affiliates accounted for $1,524 million or 38% and $938 million or 42%,
of the total gathering and marketing pro forma revenues of Genesis for the
year ended December 31, 1995 and six months ended June 30, 1996, respectively.
Transactions with affiliates accounted for $672 million or 17% and $195
million or 9%, of the total pro forma crude costs of Genesis for the year
ended December 31, 1995 and six months ended June 30, 1996, respectively.
These transactions were based upon market-related prices determined through
arm's-length negotiations.
Corporate Services Agreement. The Partnership will enter into the Corporate
Services Agreement with Basis pursuant to which Basis, directly or through its
affiliates, will provide certain administrative and support services for the
benefit of the Partnership. Such services may include human resources, tax,
accounting, data processing, trade clearing and other similar administrative
services. Under such agreement, Basis will not receive a fee for such services
but the Partnership will
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reimburse Basis or its affiliates for (i) allocated personnel costs (such as
salaries and employee benefits) of the personnel actually providing such
services, (ii) rent on office space allocated to the General Partner in Basis'
offices in Houston, Texas and (iii) all reasonable out-of-pocket expenses
related to the provision of such services. Either the Partnership or Basis may
terminate or reduce the level of services or office space on 90 days' or 180
days' notice, respectively, to the other party. The Corporate Services
Agreement may be terminated at the Partnership's or Basis' option on 180 days'
notice to the other party. In the event the Corporate Services Agreement is
terminated, the cost to the Partnership of obtaining the services covered
thereby from third parties would likely be higher than the cost of such
services under the Corporate Services Agreement. In addition, the Partnership
has agreed to indemnify and hold harmless Basis and its affiliates from all
claims and damages arising from the provision of services under the Corporate
Services Agreement, unless due to the gross negligence or willful misconduct
of Basis or its affiliates.
A copy of each of the Distribution Support Agreement, the Master Credit
Support Agreement and the Corporate Services Agreement has been filed as an
exhibit to the Registration Statement of which this Prospectus is a part, and
the preceding discussions of the same are qualified by reference to such
exhibits.
HOWELL
Howell owns 46% of the General Partner of the Partnership, and the
Partnership will have ongoing relationships with Howell and its affiliates.
These relationships will include (i) a two-year contract between the
Partnership and a subsidiary of Howell for the purchase of crude oil from
Howell's interest at Main Pass Block 64 averaging approximately 1,000 bpd of
crude oil, (ii) a 30-day evergreen contract negotiated at market prices
providing for the Partnership to purchase crude oil produced by Howell's
exploration and production subsidiary other than Main Pass Block 64 and (iii)
a 30-day evergreen contract between the Partnership and a subsidiary of Howell
providing for the Partnership to supply crude oil feedstocks for Howell's
research and reference fuels business.
MARKETING OF CRUDE OIL
There are certain areas of overlap in the business activities of Genesis,
Basis, Howell and Phibro Inc, in connection with the purchasing, marketing and
trading of crude oil, primarily at marketing centers such as Cushing,
Oklahoma. Basis, Howell and Phibro Inc. have been in competition in the past
to purchase and sell crude oil at the best available price, and Genesis,
Basis, Howell and Phibro Inc. are expected to continue to compete in such
activities following the Offering. In addition, Salomon Inc, Basis, Howell and
Phibro Inc. will be subject to certain noncompetition provisions pursuant to
the Partnership Agreement that allows these trading-oriented activities to
continue but prevents such parties from entering certain other crude oil
businesses. See "Conflicts of Interest and Fiduciary Responsibilities--
Conflicts of Interest--The General Partner's Affiliates May Compete with the
Partnership in Certain Circumstances."
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CONFLICTS OF INTEREST AND FIDUCIARY RESPONSIBILITIES
CONFLICTS OF INTEREST
Certain conflicts of interest exist and may arise in the future as a result
of the General Partner's relationships with its affiliates, Basis, Salomon Inc
and Howell and their affiliates, on the one hand, and the Partnership and the
holders of the Common Units, on the other hand. The Members of the General
Partner have fiduciary duties to manage the General Partner, including its
investments in its subsidiaries and affiliates, in a manner beneficial to the
General Partner and its affiliates. In general, the General Partner has a
fiduciary duty to manage the Partnership in a manner beneficial to the
Partnership and the Unitholders. Therefore, the duty of the Members of the
General Partner may come into conflict with the duties of the General Partner
to the Partnership and the Unitholders. The Audit Committee of the Board of
Directors of the General Partner will, at the request of the General Partner,
review conflicts of interest that may arise between the General Partner and
its officers, on the one hand, and the Partnership, on the other. See
"Management--Partnership Management" and "--Fiduciary and Other Duties."
The fiduciary obligations of general partners is a developing area of law.
The provisions of the Delaware Revised Uniform Limited Partnership Act (the
"Delaware Act") that allow the fiduciary duties of a general partner to be
waived or restricted by a partnership agreement have not been interpreted in a
court of law, and the General Partner has not obtained an opinion of counsel
covering the provisions set forth in the Partnership Agreement that purport to
waive or restrict fiduciary duties of the General Partner. Unitholders should
consult their own legal counsel concerning the fiduciary responsibilities of
the General Partner and its officers and directors and the remedies available
to the Unitholders.
Conflicts of interest could arise with respect to the situations described
below, among others:
COMMON UNITHOLDERS WILL HAVE NO RIGHT TO ENFORCE OBLIGATIONS OF THE GENERAL
PARTNER AND ITS AFFILIATES UNDER AGREEMENTS WITH THE PARTNERSHIP
The agreements between the Partnership, on the one hand, and the General
Partner and its affiliates, on the other hand, do not grant to the
Unitholders, separate and apart from the Partnership, the right to enforce the
obligations of the General Partner and its affiliates in favor of the
Partnership. Therefore, the General Partner will be primarily responsible for
enforcing such obligations.
CONTRACTS BETWEEN THE PARTNERSHIP, ON THE ONE HAND, AND THE GENERAL PARTNER
AND ITS AFFILIATES, ON THE OTHER, WILL NOT BE THE RESULT OF ARM'S-LENGTH
NEGOTIATIONS
Under the terms of the Partnership Agreement, the General Partner is not
restricted from paying the General Partner or its affiliates for any services
rendered (provided such services are rendered on terms fair and reasonable to
the Partnership) or entering into additional contractual arrangements with any
of them on behalf of the Partnership. Neither the Partnership Agreement nor
any of the other agreements, contracts and arrangements between the
Partnership, on the one hand, and the General Partner and its affiliates, on
the other, are or will be the result of arm's-length negotiations. All of such
transactions entered into after the sale of the Common Units offered in the
Offering are to be on terms that are fair and reasonable to the Partnership,
provided that any transaction shall be deemed fair and reasonable if (i) such
transaction is approved by the Audit Committee, (ii) its terms are no less
favorable to the Partnership than those generally being provided to or
available from unrelated third parties or (iii) the transaction is fair to the
Partnership, taking into account the totality of the relationships between the
parties involved (including other transactions that may be particularly
favorable or advantageous to the Partnership). The General Partner and its
affiliates will have no obligation to permit the Partnership to use any
facilities or assets of the General Partner and such affiliates, except as may
be provided in contracts entered into from time to time specifically dealing
with
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such use, nor shall there be any obligation of the General Partner and its
affiliates to enter into any such contracts.
CERTAIN ACTIONS TAKEN BY THE GENERAL PARTNER MAY AFFECT THE AMOUNT OF CASH
AVAILABLE FOR DISTRIBUTION TO UNITHOLDERS OR ACCELERATE THE RIGHT TO
CONVERT SUBORDINATED OLP UNITS
Decisions of the General Partner with respect to the amount and timing of
cash expenditures, participation in capital expansions and acquisitions,
borrowings, issuances of additional partnership interests and reserves in any
quarter may affect whether, or the extent to which, there is sufficient
Available Cash from Operating Surplus to meet the Minimum Quarterly
Distribution and Target Distribution Levels on all Units in such quarter or in
subsequent quarters. The Partnership Agreement provides that any borrowings by
the Partnership or the approval thereof by the General Partner shall not
constitute a breach of any duty owed by the General Partner to the Partnership
or the Unitholders, including borrowings that have the purpose or effect,
directly or indirectly, of (i) enabling Basis and Howell to receive
distributions on the Subordinated OLP Units and the General Partner to receive
Incentive Compensation Payments, (ii) reducing Salomon Inc's contribution
obligations pursuant to the Distribution Support Agreement or (iii)
accelerating the redemption of APIs, the expiration of the Subordination
Period or the conversion of the Subordinated OLP Units into Common OLP Units.
The Partnership Agreement provides that the Partnership and the Operating
Partnership may borrow funds from the General Partner and its affiliates. The
General Partner and its affiliates may not borrow funds from the Partnership
or the Operating Partnership. Furthermore, any actions taken by the General
Partner consistent with the standards of reasonable discretion set forth in
the definitions of Available Cash, Operating Surplus and Capital Surplus will
be deemed not to constitute a breach of any duty of the General Partner to the
Partnership or the Unitholders. The obligation of Salomon Inc to provide
distribution support and the obligations of Salomon Inc and Basis to provide
credit support to the Partnership may affect the criteria used by the General
Partner in evaluating, and the likelihood of Salomon Inc or Basis approving,
certain business opportunities, such as the issuance of debt, the issuance of
additional Common Units and the consummation of possible acquisitions.
THE PARTNERSHIP WILL REIMBURSE THE GENERAL PARTNER AND ITS AFFILIATES FOR
CERTAIN EXPENSES
Under the terms of the Partnership Agreement, the General Partner and its
affiliates will be reimbursed by the Partnership for certain expenses incurred
on behalf of the Partnership, including costs incurred in providing corporate
staff and support services to the Partnership. The Partnership Agreement
provides that the General Partner will determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the
General Partner in its sole discretion.
THE GENERAL PARTNER INTENDS TO LIMIT THE GENERAL PARTNER'S LIABILITY WITH
RESPECT TO THE PARTNERSHIP'S OBLIGATIONS
Whenever possible, the General Partner intends to limit the Partnership's
liability under contractual arrangements to all or particular assets of the
Partnership, with the other party thereto having no recourse against the
General Partner or its assets. The Partnership Agreement provides that any
action by the General Partner in so limiting the liability of the General
Partner or that of the Partnership will not be deemed to be a breach of the
General Partner's fiduciary duties to the Unitholders, even if the Partnership
could have obtained more favorable terms without such limitation on liability.
COMMON UNITS ARE SUBJECT TO THE GENERAL PARTNER'S LIMITED CALL RIGHT
The General Partner may exercise its right to call for and purchase Common
Units as provided in the Partnership Agreement or assign such right to one of
its affiliates or to the Partnership. The General Partner thus may use its own
discretion, free of fiduciary duty restrictions, in determining whether to
exercise such right. As a consequence, a Common Unitholder may have his Common
Units purchased from him even though he may not desire to sell them, and the
price paid may be less than
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the amount the holder would desire to receive upon sale of his Common Units.
For a description of such right, see "The Partnership Agreement--Limited Call
Right."
THE PARTNERSHIP MAY RETAIN SEPARATE COUNSEL FOR ITSELF OR FOR THE HOLDERS
OF COMMON UNITS; ADVISORS RETAINED BY THE PARTNERSHIP FOR THIS OFFERING
HAVE NOT BEEN RETAINED TO ACT FOR HOLDERS OF COMMON UNITS
The principal terms of Partnership Agreement, the Operating Partnership
Agreement, the Master Credit Support Agreement, the Contribution Agreement,
the Distribution Support Agreement and other agreements referred to herein did
not result from arm's-length discussions with unrelated parties. Furthermore,
holders of Common Units have not been represented by separate counsel in
connection with the preparation of the documents referred to herein. The
attorneys, independent public accountants and others who have performed
services for the Partnership in connection with the Offering have been
retained by the General Partner, its affiliates and the Partnership and may
continue to be retained by the General Partner, its affiliates and the
Partnership after the Offering. Attorneys, independent public accountants and
others who will perform services for the Partnership in the future will be
selected by the General Partner or the Audit Committee and may also perform
services for the General Partner and its affiliates. The Partnership may
retain separate counsel for itself or the holders of Common Units in the event
of a conflict of interest arising between the General Partner and its
affiliates, on the one hand, and the Partnership or the holders of Common
Units, on the other, after the sale of the Common Units offered hereby,
depending on the nature of such conflict, but it does not intend to do so in
most cases.
THE GENERAL PARTNER'S AFFILIATES MAY COMPETE WITH THE PARTNERSHIP IN
CERTAIN CIRCUMSTANCES
The Partnership Agreement does not restrict the ability of affiliates of the
General Partner (including Basis, Phibro Inc., Salomon Inc and Howell) to
engage in any activities other than the business of (i) crude oil gathering at
the wellhead in the states of Alabama, Florida, Kansas, Louisiana,
Mississippi, New Mexico, Oklahoma or Texas, or any states contiguous to such
states, or (ii) transporting for third parties crude oil by pipeline along the
routes of the Partnership's crude oil pipelines owned at the time of
completion of the Offering. The restrictions are subject to certain
exceptions, including: (i) affiliates will not be restricted from any activity
incidental to their refinery operations so long as such activities are not
substantially in competition with the lease gathering operations of the
Partnership, (ii) if Salomon Inc, Basis or Howell were to sell or otherwise
dispose of its entire interest (direct and indirect) in the General Partner
and the Partnership to an unaffiliated party, such restrictions would no
longer apply to the party making such sale or disposition or its affiliates,
(iii) such restrictions will not prevent affiliates from entering into joint
ventures or strategic alliances with the Partnership, and (iv) purchases of
crude oil for feedstock supply for Howell's research and reference fuels
business. Except as specifically restricted, any affiliates of the General
Partner may engage in any business or activity whether or not such activity
may be in competition with the Partnership, including purchasing crude oil in
bulk, executing crude oil exchanges, executing trades in the crude oil futures
market, providing hedges and risk management services and conducting pipeline
operations not precluded by clause (ii) of the first sentence of this
paragraph. Furthermore, the Partnership Agreement provides that the General
Partner and its affiliates have no obligation to present business
opportunities to the Partnership. It shall not constitute a breach of the
Partnership Agreement for the affiliates of the General Partner to engage in
any competitive activities not specifically precluded by the Partnership
Agreement.
EMPLOYEES OF THE GENERAL PARTNER'S AFFILIATES WHO PROVIDE SERVICES TO THE
PARTNERSHIP WILL ALSO PROVIDE SERVICES TO OTHER BUSINESSES
The Partnership will not have any employees and will rely on employees of
the General Partner, Basis and Howell. While the General Partner will not
conduct any other business, Basis and Howell
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and other affiliates of the General Partner will conduct business and
activities of their own in which the Partnership will have no economic
interest. There may be competing demands between the Partnership and Basis and
Howell for the time and efforts of employees who provide services to both.
FIDUCIARY AND OTHER DUTIES
The General Partner will be accountable to the Partnership and the
Unitholders as a fiduciary. Consequently, the General Partner must exercise
good faith and integrity in handling the assets and affairs of the
Partnership. In contrast to the relatively well-developed law concerning
fiduciary duties owed by officers and directors to the stockholders of a
corporation, the law concerning the duties owed by general partners to other
partners and to partnerships is relatively undeveloped. Neither the Delaware
Act nor case law defines with particularity the fiduciary duties owed by
general partners to limited partners or a limited partnership, but the
Delaware Act provides that Delaware limited partnerships may, in their
partnership agreements, restrict or expand the fiduciary duties that might
otherwise be applied by a court in analyzing the standard of duty owed by
general partners to limited partners and the partnership.
Fiduciary duties are generally considered to include an obligation to act
with the highest good faith, fairness and loyalty. Such duty of loyalty, in
the absence of a provision in a partnership agreement providing otherwise,
would generally prohibit a general partner of a Delaware limited partnership
from taking any action or engaging in any transaction as to which it has a
conflict of interest. In order to induce the General Partner to manage the
business of the Partnership, the Partnership Agreement, as permitted by the
Delaware Act, contains various provisions intended to have the effect of
restricting the fiduciary duties that might otherwise be owed by the General
Partner to the Partnership and its partners and waiving or consenting to
conduct by the General Partner and its affiliates that might otherwise raise
issues as to compliance with fiduciary duties or applicable law.
The Partnership Agreement provides that in order to become a limited partner
of the Partnership, a holder of Common Units is required to agree to be bound
by the provisions thereof, including the provisions discussed above. This is
in accordance with the policy of the Delaware Act favoring the principle of
freedom of contract and the enforceability of partnership agreements. The
Delaware Act also provides that a partnership agreement is not unenforceable
by reason of its not having been signed by a person being admitted as a
limited partner or becoming an assignee in accordance with the terms thereof.
The Partnership Agreement provides that whenever a conflict arises between
the General Partner or its affiliates, on the one hand, and the Partnership or
any other partner, on the other, the General Partner shall resolve such
conflict. The General Partner shall not be in breach of its obligations under
the Partnership Agreement or its duties to the Partnership or the Unitholders
(i) by virtue of any action to which the Unitholders are deemed to have
consented by purchase of Common Units or (ii) if the General Partner's
resolution of any conflict of interest is fair and reasonable to the
Partnership. Any resolution of a conflict of interest shall conclusively be
deemed to be fair and reasonable to the Partnership if such resolution is (i)
approved by the Audit Committee (although no party is obligated to seek such
approval and the General Partner may adopt a resolution or course of action
that has not received such approval), (ii) on terms no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties or (iii) fair to the Partnership, taking into account the
totality of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership). In resolving such conflict, the General Partner may (unless the
resolution is specifically provided for in the Partnership Agreement) consider
the relative interests of the parties involved in such conflict or affected by
such action, any customary or accepted industry practices or historical
dealings with a particular person or entity and, if applicable, generally
accepted accounting or engineering practices or principles and such other
factors as it deems relevant. Thus, unlike the strict duty of a fiduciary who
must act solely in the best interests of
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his beneficiary, the Partnership Agreement permits the General Partner to
consider the interests of all parties to a conflict of interest, including the
interests of the General Partner. In connection with the resolution of any
conflict that arises, unless the General Partner has acted in bad faith, the
action taken by the General Partner shall not constitute a breach of the
Partnership Agreement, any other agreement or any standard of care or duty
imposed by the Delaware Act or other applicable law. The Partnership also
provides that in certain circumstances the General Partner may act in its sole
discretion, in good faith or pursuant to other appropriate standards.
The Delaware Act provides that a limited partner may institute legal action
on behalf of the partnership (a partnership derivative action) to recover
damages from a third party where the general partner has refused to institute
the action or where an effort to cause the general partner to do so is not
likely to succeed. In addition, the statutory or case law of certain
jurisdictions may permit a limited partner to institute legal action on behalf
of himself or all other similarly situated limited partners (a class action)
to recover damages from a general partner for violations of its fiduciary
duties to the limited partners.
The Partnership Agreement also provides that any standard of care and duty
imposed thereby or under the Delaware Act or any applicable law, rule or
regulation will be modified, waived or limited, to the extent permitted by
law, as required to permit the General Partner and its officers and directors
to act under the Partnership Agreement or any other agreement contemplated
therein and to make any decisions pursuant to the authority prescribed in the
Partnership Agreement so long as such action is reasonably believed by the
General Partner to be in, or not inconsistent with, the best interests of the
Partnership. Further, the Partnership Agreement provides that the General
Partner and its officers and directors will not be liable for monetary damages
to the Partnership, the limited partners or assignees for errors of judgment
or for any acts or omissions if the General Partner and such other persons
acted in good faith.
In addition, under the terms of the Partnership Agreement, the Partnership
is required to indemnify the General Partner, its affiliates and their
respective officers, directors, employees, affiliates, partners, agents and
trustees, to the fullest extent permitted by law, against liabilities, costs
and expenses incurred by the General Partner or such other persons, if the
General Partner or such persons acted in good faith and in a manner they
reasonably believed to be in, or not opposed to, the best interests of the
Partnership and, with respect to any criminal proceedings, had no reasonable
cause to believe the conduct was unlawful. See "The Partnership Agreement--
Indemnification." Thus, the General Partner could be indemnified for its
negligent acts if it meets such requirements concerning good faith and the
best interests of the Partnership.
DESCRIPTION OF THE COMMON UNITS
Upon consummation of the Offering, the Common Units will be registered under
the Exchange Act, and the rules and regulations promulgated thereunder, and
the Partnership will be subject to the reporting and certain other
requirements of the Exchange Act. The Partnership will be required to file
periodic reports containing financial and other information with the
Commission.
Purchasers of Common Units in the Offering and subsequent transferees of
Common Units (or their brokers, agents or nominees on their behalf) who wish
to become Unitholders of record will be required to execute Transfer
Applications, the form of which is included as Appendix C to this Prospectus.
Purchasers in the Offering may hold Common Units in nominee accounts and will
be eligible to receive distributions and federal income tax allocations,
provided that the broker (or other nominee) executes and delivers a Transfer
Application and becomes a limited partner. The Partnership will be entitled to
treat the nominee holder of a Common Unit as the absolute owner thereof, and
the beneficial owner's rights will be limited solely to those that it has
against the nominee holder as a result
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of or by reason of any understanding or agreement between such beneficial
owner and nominee holder.
THE COMMON UNITS
The Common Units represent limited partner interests in the Partnership, and
the Common OLP Units, the Subordinated OLP Units and the APIs represent
limited partner interests in the Operating Partnership. For a description of
the relative rights and preferences of holders of Common Units, Common OLP
Units, Subordinated OLP Units and APIs in and to Partnership distributions,
together with a description of the circumstances under which Subordinated OLP
Units may convert into Common OLP Units, see "Cash Distribution Policy." For a
description of the rights and privileges of limited partners under the
Partnership Agreement, see "The Partnership Agreement."
TRANSFER AGENT AND REGISTRAR
DUTIES
American Stock Transfer & Trust Company will act as a registrar and transfer
agent (the "Transfer Agent") for the Common Units and will receive a fee from
the Partnership for serving in such capacities. All fees charged by the
Transfer Agent for transfers of Common Units will be borne by the Partnership
and not by the holders of Common Units, except that fees similar to those
customarily paid by stockholders for surety bond premiums to replace lost or
stolen certificates, taxes and other governmental charges, special charges for
services requested by a holder of a Common Unit and other similar fees or
charges will be borne by the affected holder. There will be no charge to
holders for disbursements of the Partnership's cash distributions. The
Partnership will indemnify the Transfer Agent, its agents and each of their
respective shareholders, directors, officers and employees against all claims
and losses that may arise out of acts performed or omitted in respect of its
activities as such, except for any liability due to any negligence, gross
negligence, bad faith or intentional misconduct of the indemnified person or
entity.
RESIGNATION OR REMOVAL
The Transfer Agent may at any time resign, by notice to the Partnership, or
be removed by the Partnership, such resignation or removal to become effective
upon the appointment by the Partnership of a successor transfer agent and
registrar and its acceptance of such appointment. If no successor has been
appointed and accepted such appointment within 30 days after notice of such
resignation or removal, the General Partner is authorized to act as the
transfer agent and registrar until a successor is appointed.
TRANSFER OF COMMON UNITS
Until a Common Unit has been transferred on the books of the Partnership,
the Partnership and the Transfer Agent, notwithstanding any notice to the
contrary, may treat the record holder thereof as the absolute owner for all
purposes, except as otherwise required by law or stock exchange regulations.
The transfer of the Common Units to persons that purchase directly from the
Underwriters will be accomplished through the completion, execution and
delivery of a Transfer Application by such investor in connection with such
Common Units. Any subsequent transfers of a Common Unit will not be recorded
by the Transfer Agent or recognized by the Partnership unless the transferee
executes and delivers a Transfer Application. By executing and delivering a
Transfer Application (the form of which is set forth as Appendix C to this
Prospectus and which is also set forth on the reverse side of the certificates
representing the Common Units), the transferee of Common Units (i) becomes the
record holder of such Common Units and shall constitute an assignee until
admitted into the Partnership as a substitute limited partner, (ii)
automatically requests admission as a substituted limited partner in the
Partnership, (iii) agrees to be bound by the terms and conditions of, and
executes, the
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Partnership Agreement, (iv) represents that such transferee has the capacity,
power and authority to enter into the Partnership Agreement, (v) grants powers
of attorney to the Partnership and any liquidator of the Partnership as
specified in the Partnership Agreement and (vi) makes the consents and waivers
contained in the Partnership Agreement. An assignee will become a substituted
limited partner of the Partnership in respect of the transferred Common Units
upon the consent of the Partnership and the recordation of the name of the
assignee on the books and records of the Partnership. Such consent may be
withheld in the sole discretion of the Partnership.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission
as a substituted limited partner in the Partnership in respect of the
transferred Common Units. A purchaser or transferee of Common Units who does
not execute and deliver a Transfer Application obtains only (i) the right to
assign the Common Units to a purchaser or other transferee and (ii) the right
to transfer the right to seek admission as a substituted limited partner in
the Partnership with respect to the transferred Common Units. Thus, a
purchaser or transferee of Common Units who does not execute and deliver a
Transfer Application will not receive cash distributions unless the Common
Units are held in a nominee or "street name" account and the nominee or broker
has executed and delivered a Transfer Application with respect to such Common
Units, and may not receive certain federal income tax information or reports
furnished to record holders of Common Units. The transferor of Common Units
will have a duty to provide such transferee with all information that may be
necessary to obtain registration of the transfer of the Common Units, but a
transferee agrees, by acceptance of the certificate representing Common Units,
that the transferor will not have a duty to insure the execution of the
Transfer Application by the transferee and will have no liability or
responsibility if such transferee neglects or chooses not to execute and
forward the Transfer Application to the Transfer Agent. See "The Partnership
Agreement--Status as Limited Partner or Assignee."
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THE PARTNERSHIP AGREEMENT
The following paragraphs are a summary of the material provisions of the
Partnership Agreements of the Partnership and the Operating Partnership. The
forms of such agreements are included in this Prospectus as Appendix A and
Appendix B. The following discussion is qualified in its entirety by reference
to the Partnership Agreement and to the Operating Partnership Agreement. The
Partnership will be the managing general partner of the Operating Partnership,
which will own and operate the Partnership's business. The General Partner
will serve as the general partner of the Partnership and the general partner
of the Operating Partnership, owning a general partner interest in the
business and properties owned by the Partnership and the Operating Partnership
on a combined basis. Unless specifically described otherwise, references
herein to the "Partnership Agreement" constitute references to the Partnership
Agreement and the Operating Partnership Agreement, collectively.
Certain provisions of the Partnership Agreement are summarized elsewhere in
this Prospectus under various headings. With regard to the transfer of Common
Units, see "Description of the Common Units--Transfer of Common Units." With
regard to distributions of Available Cash, see "Cash Distribution Policy."
With regard to allocations of taxable income and taxable loss, see "Tax
Considerations." Prospective investors are urged to review these sections of
this Prospectus and the Partnership Agreement carefully. Definitions used but
not defined in this section have the meanings set forth in the Partnership
Agreement.
PURPOSE
The purpose of the Partnership under the Partnership Agreement is limited to
serving as the general partner of the Operating Partnership and, under certain
circumstances, engaging in any business activity that may be engaged in by the
Operating Partnership or that is approved by the General Partner. The
Operating Partnership Agreement provides that the Operating Partnership may
engage in any activity engaged in by the Combined Operations immediately prior
to the Offering and any other activity approved by the General Partner.
Although the General Partner has the ability under the Partnership Agreement
to cause the Partnership and the Operating Partnership to engage in activities
that may pose a greater risk to investors than crude oil gathering, marketing
and pipeline-related businesses, the General Partner has no current intention
of doing so. The General Partner is authorized in general to perform all acts
deemed necessary to carry out such purposes and to conduct the business of the
Partnership.
POWER OF ATTORNEY
Each Limited Partner, and each person who acquires a Unit from a Unitholder
and executes and delivers a Transfer Application with respect thereto, grants
to the General Partner and, if a liquidator of the Partnership has been
appointed, such liquidator, a power of attorney to, among other things,
execute and file certain documents required in connection with the
qualification, continuance or dissolution of the Partnership or the amendment
of the Partnership Agreement in accordance with the terms thereof and to make
certain consents and waivers in accordance with the terms of the Partnership
Agreement.
CAPITAL CONTRIBUTIONS
For a description of the initial capital contributions to be made to the
Partnership, see "The Transactions." The Unitholders are not obligated to make
additional capital contributions to the Partnership, except as described below
under "--Limited Liability."
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INDEMNIFICATION
The Partnership Agreement provides that the Partnership will indemnify the
General Partner and any departing general partner ("Departing Partner") and
any person who is or was an affiliate of the General Partner or any Departing
Partner, any person who is or was a director, officer, employee, agent or
trustee of the Partnership or any subsidiary of the Partnership, any person
who is or was an officer, director, employee, agent or trustee of the General
Partner or any Departing Partner or any affiliate of the General Partner or
any Departing Partner, any person who is or was serving at the request of the
General Partner or any Departing Partner or any affiliate of the General
Partner or any Departing Partner as an officer, director, employee, partner,
agent, fiduciary or trustee of another person (collectively, "Indemnitees" and
individually each an "Indemnitee"), to the fullest extent permitted by law,
from and against any and all losses, claims, damages, liabilities (joint or
several), expenses (including, without limitation, legal fees and expenses),
judgments, fines, penalties, interest, settlements and other amounts arising
from any and all claims, demands, actions, suits or proceedings, whether
civil, criminal, administrative or investigative, in which any Indemnitee may
be involved, or is threatened to be involved, as a party or otherwise, by
reason of its status as any of the foregoing; provided that in each case the
Indemnitee acted in good faith and in a manner that such Indemnitee reasonably
believed to be in or not opposed to the best interests of the Partnership and,
with respect to any criminal proceeding, had no reasonable cause to believe
its conduct was unlawful. Any indemnification under these provisions will be
only out of the assets of the Partnership, and the General Partner shall not
be personally liable for, or have any obligation to contribute or loan funds
or assets to the Partnership to enable it to effectuate, such indemnification.
The Partnership is authorized to purchase (or to reimburse the General Partner
or its affiliates for the cost of) insurance against liabilities asserted
against and expenses incurred by such persons in connection with the
Partnership's activities, regardless of whether the Partnership would have the
power to indemnify such person against such liabilities under the provisions
described above.
LIMITED LIABILITY
Assuming that a limited partner does not participate in the control of the
business of the Partnership within the meaning of the Delaware Act and that he
otherwise acts in conformity with the provisions of the Partnership Agreement,
his liability under the Delaware Act will be limited, subject to certain
possible exceptions, to the amount of capital he is obligated to contribute to
the Partnership in respect of his Common Units plus his share of any
undistributed profits and assets of the Partnership. If it were determined,
however, that the right or exercise of the right by the limited partners as a
group to remove or replace the General Partner, to approve certain amendments
to the Partnership Agreement or to take other action pursuant to the
Partnership Agreement constituted "participation in the control" of the
Partnership's business for the purposes of the Delaware Act, then the limited
partners could be held personally liable for the Partnership's obligations
under the laws of the State of Delaware to the same extent as the General
Partner with respect to persons who transact business with the Partnership
reasonably believing, based on the conduct of any of the limited partners,
that such limited partner is a general partner.
Under the Delaware Act, a limited partnership may not make a distribution to
a partner to the extent that at the time of the distribution, after giving
effect to the distribution, all liabilities of the partnership, other than
liabilities to partners on account of their partnership interests and
nonrecourse liabilities, 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 nonrecourse liability shall be included in the assets of the
limited partnership only to the extent that the fair value of that property
exceeds that nonrecourse liability. The Delaware Act provides that a limited
partner who receives such a distribution and knew at the time of the
distribution that the distribution was in violation of the Delaware Act shall
be liable to the limited partnership for the amount of the distribution for
three years from the date of the distribution. Under the Delaware Act,
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an assignee who becomes a substituted limited partner of a limited partnership
is liable for the obligations of his assignor to make contributions to the
partnership, except the assignee is not obligated for liabilities unknown to
him at the time he became a limited partner and which could not be ascertained
from the partnership agreement.
The Partnership expects that the Operating Partnership will initially
conduct business in at least eight states. Maintenance of limited liability
may require compliance with legal requirements in such jurisdictions in which
the Operating Partnership conducts business, including qualifying the
Operating Partnership to do business there. Limitations on the liability of
limited partners for the obligations of a limited partnership have not been
clearly established in many jurisdictions. If it were determined that the
Operating Partnership was conducting business in any state without compliance
with the applicable limited partnership statute, or that the right or exercise
of the right by the limited partners as a group, to remove or replace the
General Partner, to approve certain amendments to the Partnership Agreement,
or to take other action pursuant to the Partnership Agreement constituted
"participation in the control" of the Partnership's business for the purposes
of the statutes of any relevant jurisdiction, then the limited partners could
be held personally liable for the Partnership's obligations under the law of
such jurisdiction to the same extent as the General Partner under certain
circumstances. The Partnership will operate in such manner as the General
Partner deems reasonable and necessary or appropriate to preserve the limited
liability of the Limited Partners.
ISSUANCE OF ADDITIONAL SECURITIES
The Partnership Agreement authorizes the Partnership to issue an unlimited
number of additional limited partner interests and other equity securities of
the Partnership for such consideration and on such terms and conditions as are
established by the General Partner in its sole discretion without the approval
of any limited partners; provided that, during the Subordination Period
(except as provided in the succeeding sentence), the Partnership may not issue
equity securities of the Partnership ranking prior or senior to the Common
Units or an aggregate of more than 4,100,000 additional Common Units
(excluding Common Units issued upon the exercise of the Underwriters' over-
allotment option and in connection with the purchase or redemption of Common
OLP Units and subject to adjustment in the event of a combination or
subdivision of Common Units) or an equivalent number of securities ranking on
a parity with the Common Units, in either case without the prior approval of
holders of a majority of the outstanding Common Units. During the
Subordination Period, the Partnership may also issue an unlimited number of
additional Common Units or parity securities without the approval of the
Unitholders if such issuance occurs (a) in connection with an Acquisition or a
Capital Improvement or (b) within 365 days of, and the net proceeds from such
issuance are used to repay debt incurred in connection with, an Acquisition or
a Capital Improvement, in each case where such Acquisition or Capital
Improvement involves assets that would have, if acquired by the Partnership as
of the date that is one year prior to the first day of the quarter in which
such transaction is to be completed, resulted in an increase in (i) the amount
of Adjusted Operating Surplus generated by the Partnership on a per-Unit basis
for all outstanding Common Units and Subordinated OLP Units with respect to
each of the four most recently completed quarters (on a pro forma basis) over
(ii) the actual amount of Adjusted Operating Surplus generated by the
Partnership on a per-Unit basis for all outstanding Common Units and
Subordinated OLP Units (excluding Adjusted Operating Surplus attributable to
the Acquisition or Capital Improvement) with respect to each of such four
quarters (provided that if the issuance of Units with respect to an
Acquisition or Capital Improvement occurs within the first four full quarters
after the closing of the Offering, then Adjusted Operating Surplus as used in
clauses (i) (determined on a pro forma basis) and (ii) above will be
calculated (x) for each quarter, if any, that commenced after the closing of
the Offering for which actual results of operations are available, based on
the actual Adjusted Operating Surplus of the Partnership generated with
respect to such quarter and (y) for each other quarter, on a pro forma basis
not inconsistent with the procedures, as applicable, set forth in Appendix E
to this Prospectus). In accordance with Delaware law and the provisions of the
Partnership Agreement, the Partnership may also issue additional partnership
interests or other equity securities
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that, in the sole discretion of the General Partner, may have special voting
rights to which the Common Units are not entitled.
Upon issuance of additional Partnership securities, the General Partner will
be required to make additional capital contributions to maintain its 2%
general partner interest in the Partnership. The General Partner will have the
right, which it may from time to time assign in whole or in part to any of its
affiliates, to purchase Common Units or other equity securities of the
Partnership from the Partnership whenever, and on the same terms that, the
Partnership issues such securities or rights to persons other than the General
Partner and its affiliates, to the extent necessary to maintain the percentage
interest of the General Partner and its affiliates in the Partnership that
existed immediately prior to each such issuance. The holders of Common Units
will not have preemptive rights to acquire additional Common Units or other
partnership interests that may be issued by the Partnership.
AMENDMENT OF PARTNERSHIP AGREEMENT
Amendments to the Partnership Agreement may be proposed only by or with the
consent of the General Partner, which consent may be given or withheld in its
sole discretion. In order to adopt a proposed amendment, the Partnership is
required to seek written approval of the holders of the number of Units
required to approve such amendment or call a meeting of the limited partners
to consider and vote upon the proposed amendment, except as described below.
Proposed amendments (unless otherwise specified) must be approved by holders
of at least a majority of the outstanding Common Units, except that no
amendment may be made which would (i) enlarge the obligations of any limited
partner, without its consent, (ii) enlarge the obligations of, restrict in any
way any action by or rights of, or reduce in any way the amounts
distributable, reimbursable or otherwise payable by the Partnership to, the
General Partner or any of its affiliates without the General Partner's
consent, (iii) provide that the Partnership is not dissolved upon the
expiration of its term or upon an election of the General Partner to cause the
dissolution of the Partnership, which election is approved by the holders of a
majority of the outstanding Common Units or (iv) change the term of the
Partnership or give any person other than the General Partner the right to
dissolve the Partnership with the approval of holders of at least a majority
of the outstanding Common Units.
The General Partner may generally make amendments to the Partnership
Agreement without the approval of any limited partner or assignee to reflect
(i) a change in the name of the Partnership, the location of the principal
place of business of the Partnership, the registered agent or the registered
office of the Partnership, (ii) the admission, substitution, withdrawal or
removal of partners in accordance with the Partnership Agreement, (iii) a
change that, in the sole discretion of the General Partner, is necessary or
advisable to qualify or continue the qualification of the Partnership as a
partnership in which the limited partners have limited liability or to ensure
that neither the Partnership nor the Operating Partnership will be treated as
an association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes (except approval of a majority of the Unitholders
will be required if such amendment would result in a delisting or a suspension
of trading of the Common Units), (iv) an amendment that is necessary, in the
opinion of counsel to the Partnership, to prevent the Partnership, the General
Partner or their directors, officers, agents or trustees from in any manner
being subjected to the provisions of the Investment Company Act of 1940, as
amended, the Investment Advisors Act of 1940, as amended, or "plan asset"
regulations adopted under the Employee Retirement Income Security Act of 1974,
as amended ("ERISA"), whether or not substantially similar to plan asset
regulations currently applied or proposed, (v) subject to the limitations on
the issuance of additional Common Units or other limited or general partner
interests described above, an amendment that in the discretion of the General
Partner is necessary or advisable in connection with the authorization or
issuance of any class or series of Partnership Securities, (vi) any amendment
expressly permitted in the Partnership Agreement to be made by the General
Partner acting alone, (vii) an amendment effected, necessitated or
contemplated by a merger agreement that
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has been approved pursuant to the terms of the Partnership Agreement, (viii)
any amendment that, in the discretion of the General Partner, is necessary or
advisable in connection with the formation by the Partnership of, or its
investment in, any corporation, partnership or other entity (other than the
Operating Partnership) as otherwise permitted by the Partnership Agreement,
(ix) a change in the fiscal year and taxable year of the Partnership and
changes related thereto and (x) any other amendments substantially similar to
any of the foregoing.
In addition to the General Partner's right to amend the Partnership
Agreement as described above, the General Partner may make amendments to the
Partnership Agreement without the approval of any limited partner or assignee
if such amendments (i) do not adversely affect the limited partners in any
material respect, (ii) are necessary or advisable (in the discretion of the
General Partner) to satisfy any requirements, conditions or guidelines
contained in any opinion, directive, ruling or regulation of any federal or
state agency or judicial authority or contained in any federal or state
statute, (iii) are necessary or advisable to facilitate the trading of the
Common Units or to comply with any rule, regulation, guideline or requirement
of any securities exchange on which the Common Units are or will be listed for
trading, compliance with any of which the General Partner deems to be in the
best interests of the Partnership and the Unitholders, (iv) are necessary or
advisable in connection with any action taken by the General Partner relating
to splits or combinations of Units pursuant to the provisions of the
Partnership Agreement or (v) are required to effect the intent expressed in
this Prospectus or the intent of the Partnership Agreement or are required or
contemplated by the Partnership Agreement.
The General Partner will not be required to obtain an Opinion of Counsel in
the event of the amendments described in the two immediately preceding
paragraphs. No other amendments to the Partnership Agreement will become
effective without the approval of holders of at least 90% of the Units unless
the Partnership obtains an Opinion of Counsel to the effect that such
amendment will not affect the limited liability under applicable law of any
limited partner in the Partnership or any limited partner of the Operating
Partnership.
Any amendment that materially and adversely affects the rights or
preferences of any type or class of outstanding Units in relation to other
classes of Units will require the approval of at least a majority of the type
or class of Units so affected. Any amendment that reduces the voting
percentage required to take any action is required to be approved by the
affirmative vote of limited partners constituting not less than the voting
requirement sought to be reduced.
MERGER, SALE OR OTHER DISPOSITION OF ASSETS
The General Partner is prohibited, without the prior approval of holders of
at least a majority of the outstanding Common Units, from causing the
Partnership to, among other things, sell, exchange or otherwise dispose of all
or substantially all of its assets in a single transaction or a series of
related transactions (including by way of merger, consolidation or other
combination) or approving, on behalf of the Partnership, the sale, exchange or
other disposition of all or substantially all of the assets of the Operating
Partnership; provided that the General Partner may mortgage, pledge,
hypothecate or grant a security interest in all or substantially all of the
Partnership's assets without such approval. The General Partner may also sell
all or substantially all of the Partnership's assets pursuant to a foreclosure
or other realization upon the foregoing encumbrances without such approval.
The Unitholders are not entitled to dissenters' rights of appraisal under the
Partnership Agreement or applicable Delaware law in the event of a merger or
consolidation of the Partnership, a sale of substantially all of the
Partnership's assets or any other event.
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TERMINATION AND DISSOLUTION
The Partnership will continue until December 31, 2086, unless sooner
terminated pursuant to the Partnership Agreement. The Partnership will be
dissolved upon (i) the election of the General Partner to dissolve the
Partnership, if approved by the holders of a majority of the outstanding
Common Units, (ii) the sale, exchange or other disposition of all or
substantially all of the assets and properties of the Partnership and the
Operating Partnership, (iii) the entry of a decree of judicial dissolution of
the Partnership or (iv) the withdrawal of the General Partner or any other
event that results in its ceasing to be the General Partner (other than by
reason of a transfer of its general partner interest in accordance with the
Partnership Agreement or withdrawal or removal following approval and
admission of a successor). Upon a dissolution pursuant to clause (iv), the
holders of at least a majority of the outstanding Common Units may also elect,
within certain time limitations, to reconstitute the Partnership and continue
its business on the same terms and conditions set forth in the Partnership
Agreement by forming a new limited partnership on terms identical to those set
forth in the Partnership Agreement and having as general partner an entity
approved by the holders of at least a majority of the outstanding Common Units
subject to receipt by the Partnership of an opinion of counsel that such
withdrawal (following the selection of a successor General Partner) will not
result in the loss of the limited liability of any limited partner or cause
the Partnership or the reconstituted limited partnership to be treated as an
association taxable as a corporation or otherwise taxed as an entity for
federal income tax purposes upon the exercise of such right to continue (an
"Opinion of Counsel").
LIQUIDATION AND DISTRIBUTION OF PROCEEDS
Upon dissolution of the Partnership, unless the Partnership is reconstituted
and continued as a new limited partnership, the person authorized to wind up
the affairs of the Partnership (the "Liquidator") will, acting with all of the
powers of the General Partner that such Liquidator deems necessary or
desirable in its good faith judgment in connection therewith, liquidate the
Partnership's assets and apply the proceeds of the liquidation as provided in
"Cash Distribution Policy--Distributions of Cash Upon Liquidation." Under
certain circumstances and subject to certain limitations, the Liquidator may
defer liquidation or distribution of the Partnership's assets for a reasonable
period of time or distribute assets to partners in kind if it determines that
a sale would be impractical or would cause undue loss to the partners.
WITHDRAWAL OR REMOVAL OF THE GENERAL PARTNER
The General Partner has agreed not to withdraw voluntarily as a general
partner of the Partnership prior to December 31, 2006 (with limited exceptions
described below), without obtaining the approval of the holders of a majority
of the outstanding Common Units and furnishing an Opinion of Counsel. On or
after December 31, 2006, the General Partner may withdraw as the General
Partner (without first obtaining approval from the Unitholders) by giving 90
days' written notice, and such withdrawal will not constitute a violation of
the Partnership Agreement. Notwithstanding the foregoing, the General Partner
may withdraw without Unitholder approval upon 90 days' notice to the limited
partners if more than 50% of the outstanding Common Units are held or
controlled by one person and its affiliates (other than the General Partner
and its affiliates). In addition, the Partnership Agreement permits the
General Partner (in certain limited instances) to sell all of its general
partner interests in the Partnership without the approval of the Unitholders.
See "--Transfer of General Partner Interests and the Incentive Compensation
Payments."
Upon the withdrawal of the General Partner under any circumstances (other
than as a result of a transfer by the General Partner of all or a part of its
general partner interest in the Partnership), the holders of a majority of the
outstanding Common Units may select a successor to such withdrawing General
Partner. If such a successor is not elected, or is elected but an Opinion of
Counsel cannot be obtained, the Partnership will be dissolved, wound up and
liquidated, unless within 180 days after such
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withdrawal the holders of a majority of the outstanding Common Units agree in
writing to continue the business of the Partnership and to the appointment of
a successor General Partner. See""--Termination and Dissolution."
The General Partner may not be removed without Cause. The General Partner
may be removed for Cause upon the approval of such removal and the election of
a successor general partner by the holders of record of 66-2/3% of the
outstanding Common Units (including Common Units held by the General Partner
and its affiliates) and upon receipt by the Partnership of an Opinion of
Counsel. Any such removal is also subject to the approval of a successor
general partner by the vote of holders of not less than 66-2/3% of the
outstanding Common Units (including Common Units held by the General Partner
and its affiliates). If the General Partner is removed for any reason without
its consent, Salomon Inc's and Basis' credit support obligations will
terminate subject to rights of third parties for scheduled transactions prior
to such termination.
Withdrawal or removal of the General Partner as the general partner of the
Partnership also constitutes withdrawal or removal, as the case may be, of the
General Partner as general partner of the Operating Partnership.
In the event of withdrawal of the General Partner where such withdrawal
violates the Partnership Agreement, a successor general partner will have the
option to purchase the general partner interest(s) of the Departing Partner in
the Partnership and the Operating Partnership for a cash payment equal to the
fair market value of such interests. Under all other circumstances where the
General Partner withdraws or is removed by the limited partners, the Departing
Partner will have the option to require the successor general partner to
purchase such general partner interest of the Departing Partner for such
amount. In each case, such fair market value will be determined by agreement
between the Departing Partner and the successor general partner, or if no
agreement is reached, by an independent investment banking firm or other
independent experts selected by the Departing Partner and the successor
general partner (or if no expert can be agreed upon, by an expert chosen by
agreement of the experts selected by each of them). In addition, the
Partnership will be required to reimburse the Departing Partner for all
amounts due the Departing Partner, including, without limitation, all
employee-related liabilities, including severance liabilities, incurred in
connection with the termination of the employees employed by the Departing
Partner for the benefit of the Partnership.
If the above-described option is not exercised by either the Departing
Partner or the successor general partner, as applicable, the Departing
Partner's general partner interest in the Partnership and the Operating
Partnership and, if the General Partner has elected to convert its right to
receive Incentive Compensation Payments into a right to receive incentive
distributions, its right to receive incentive distributions will be converted
into Common Units equal to the fair market value of such interest as
determined by an investment banking firm or other independent expert selected
in the manner described in the preceding paragraph. If the General Partner is
removed or otherwise withdraws as a general partner prior to having elected to
convert its right to receive Incentive Compensation Payments into a right to
receive incentive distributions, its right to receive Incentive Compensation
Payments will terminate.
TRANSFER OF GENERAL PARTNER INTERESTS AND THE INCENTIVE COMPENSATION PAYMENTS
Except for a transfer by the General Partner of all, but not less than all,
of its general partner interests in the Partnership and the Operating
Partnership to an affiliate or another person in connection with 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 person or entity, the General Partner may not transfer all or any part
of its general partner interests in the Partnership and the Operating
Partnership to another person or entity prior to December 31, 2006, without
the approval
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of the holders of a majority of the outstanding Common Units; provided that,
in each case, such transferee assumes the rights and duties of the General
Partner to whose interest such transferee has succeeded, agrees to be bound by
the provisions of the Partnership Agreement and the Operating Partnership
Agreement and furnishes an Opinion of Counsel. At any time, the Members of the
General Partner may sell or transfer their interest in the General Partner to
a third party without the approval of the Unitholders. The General Partner or
a subsequent holder may only transfer its right to receive Incentive
Compensation Payments to another person in connection with its merger or
consolidation with or into, or sale of all or substantially all of its assets
to, such person.
LIMITED CALL RIGHT
If at any time less than 20% of the then-issued and outstanding limited
partner interests of any class are held by persons other than the General
Partner and its affiliates, the General Partner will have the right, which it
may assign in whole or in part to any of its affiliates or to the Partnership,
to acquire all, but not less than all, of the remaining limited partner
interests of such class held by such unaffiliated persons as of a record date
to be selected by the General Partner, on at least 10 but not more than 60
days' notice. The purchase price in the event of such a purchase shall be the
greater of (i) the highest price paid by the General Partner or any of its
affiliates for any limited partner interests of such class purchased within
the 90 days preceding the date on which the General Partner first mails notice
of its election to purchase such limited partner interests and (ii) the
Current Market Price as of the date three days prior to the date such notice
is mailed. As a consequence of the General Partner's right to purchase
outstanding limited partner interests, a holder of limited partner interests
may have his limited partner interests purchased even though he may not desire
to sell them, or the price paid may be less than the amount the holder would
desire to receive upon the sale of his limited partner interests. The tax
consequences to a Unitholder of the exercise of this call right are the same
as a sale by such Unitholder of his Common Units in the market. See "Tax
Considerations--Disposition of Common Units."
MEETINGS; VOTING
Except as described below with respect to a person or group owning 20% or
more of all Units, Unitholders or assignees who are record holders of Units on
the record date set pursuant to the Partnership Agreement will be entitled to
notice of, and to vote at, meetings of limited partners of the Partnership and
to act with respect to matters as to which approvals may be solicited. With
respect to voting rights attributable to Common Units that are owned by an
assignee who is a record holder but who has not yet been admitted as a limited
partner, the General Partner shall be deemed to be the limited partner with
respect thereto and shall, in exercising the voting rights in respect of such
Common Units on any matter, vote such Common Units at the written direction of
such record holder. Absent such direction, such Common Units will not be voted
(except that, in the case of Common Units held by the General Partner on
behalf of Non-citizen Assignees, the General Partner shall distribute the
votes in respect of such Common Units in the same ratios as the votes of
limited partners in respect of other Common Units are cast).
The General Partner does not anticipate that any meeting of Unitholders will
be called in the foreseeable future. Any action that is required or permitted
to be taken by the Unitholders may be taken either at a meeting of the
Unitholders or without a meeting if consents in writing setting forth the
action so taken are signed by holders of such number of Units as would be
necessary to authorize or take such action at a meeting of all of the
Unitholders. Meetings of the Unitholders of the Partnership may be called by
the General Partner or by Unitholders owning at least 20% of the outstanding
Units of the class for which a meeting is proposed. Unitholders may vote
either in person or by proxy at meetings. The holders of a majority of the
outstanding Units of the class or classes for which a meeting has been called
represented in person or by proxy shall constitute a quorum at a meeting of
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Unitholders of such class or classes, unless any such action by the
Unitholders requires approval by holders of a greater percentage of such
Units, in which case the quorum shall be such greater percentage (excluding,
in either case, if such are to be excluded from the vote, outstanding Units
owned by the General Partner and its affiliates).
Each record holder of a Unit has a vote according to his percentage interest
in the Partnership, although additional limited partner interests having
special voting rights could be issued by the General Partner. See "--Issuance
of Additional Securities." However, if any person or group (other than the
General Partner and its affiliates) acquires, in the aggregate, beneficial
ownership of 20% or more of the total Common Units, such person or group loses
voting rights with respect to all of its Common Units and such Common Units
may not be voted on any matter and will not be considered to be outstanding
when sending notices of a meeting of Unitholders, calculating required votes,
determining the presence of a quorum or for other similar Partnership
purposes. The Partnership Agreement provides that Common Units held in nominee
or street name account will be voted by the broker (or other nominee) pursuant
to the instruction of the beneficial owner unless the arrangement between the
beneficial owner and his nominee provides otherwise.
Any notice, demand, request, report or proxy material required or permitted
to be given or made to record holders of Common Units (whether or not such
record holder has been admitted as a limited partner) under the terms of the
Partnership Agreement will be delivered to the record holder by the
Partnership or by the Transfer Agent at the request of the Partnership.
STATUS AS LIMITED PARTNER OR ASSIGNEE
Except as described above under "--Limited Liability," the Common Units will
be fully paid, and Unitholders will not be required to make additional
contributions to the Partnership.
An assignee of a Common Unit, subsequent to executing and delivering a
Transfer Application, but pending its admission as a substituted limited
partner in the Partnership, is entitled to an interest in the Partnership
equivalent to that of a limited partner with respect to the right to share in
allocations and distributions from the Partnership, including liquidating
distributions. The General Partner will vote and exercise other powers
attributable to Common Units owned by an assignee who has not become a
substitute limited partner at the written direction of such assignee. See
"--Meetings; Voting." Transferees who do not execute and deliver a Transfer
Application will be treated neither as assignees nor as record holders of
Common Units and will not receive cash distributions, federal income tax
allocations or reports furnished to record holders of Common Units. See
"Description of the Common Units--Transfer of Common Units."
NON-CITIZEN ASSIGNEES; REDEMPTION
If the Partnership is or becomes subject to federal, state or local laws or
regulations that, in the reasonable determination of the Partnership, create a
substantial risk of cancellation or forfeiture of any property in which the
Partnership has an interest because of the nationality, citizenship or other
related status of any limited partner or assignee, the Partnership may redeem
the Common Units held by such limited partner or assignee at their Current
Market Price (as defined in the Glossary). In order to avoid any such
cancellation or forfeiture, the Partnership may require each limited partner
or assignee to furnish information about his nationality, citizenship,
residency or related status. If a limited partner or assignee fails to furnish
information about such nationality, citizenship, residency or other related
status within 30 days after a request for such information, such limited
partner or assignee may be treated as a non-citizen assignee ("Non-citizen
Assignee"). In addition to other limitations on the rights of an assignee who
is not a substituted limited partner, a Non-citizen Assignee does not have the
right to direct the voting of his Common Units and may not receive
distributions in kind upon liquidation of the Partnership.
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BOOKS AND REPORTS
The Partnership is required to keep appropriate books of the business of the
Partnership at the principal offices of the Partnership. The books will be
maintained for both tax and financial reporting purposes on an accrual basis.
For tax and financial reporting purposes, the fiscal year of the Partnership
is the calendar year.
As soon as practicable, but in no event later than 120 days after the close
of each fiscal year, the Partnership will furnish each record holder of Common
Units (as of a date selected by the General Partner) with an annual report
containing audited financial statements of the Partnership for the past fiscal
year, prepared in accordance with generally accepted accounting principles. As
soon as practicable, but in no event later than 90 days after the close of
each quarter (except the last quarter of each fiscal year), the Partnership
will furnish each record holder of Common Units (as of a date selected by the
General Partner) a report containing unaudited financial statements of the
Partnership with respect to such quarter and such other information as may be
required by law.
The Partnership will use all reasonable efforts to furnish each record
holder of a Unit information reasonably required for tax reporting purposes
within 90 days after the close of each calendar year. Such information is
expected to be furnished in summary form so that certain complex calculations
normally required of partners can be avoided. The Partnership's ability to
furnish such summary information to Unitholders will depend on the cooperation
of such Unitholders in supplying certain information to the Partnership. Every
Unitholder (without regard to whether he supplies such information to the
Partnership) will receive information to assist him in determining his federal
and state tax liability and filing his federal and state income tax returns.
RIGHT TO INSPECT PARTNERSHIP BOOKS AND RECORDS
The Partnership Agreement provides that a limited partner can for a purpose
reasonably related to such limited partner's interest as a limited partner,
upon reasonable demand and at his own expense, have furnished to him (i) a
current list of the name and last known address of each partner, (ii) a copy
of the Partnership's tax returns, (iii) information as to the amount of cash,
and a description and statement of the agreed value of any other property or
services, contributed or to be contributed by each partner and the date on
which each became a partner, (iv) copies of the Partnership Agreement, the
certificate of limited partnership of the Partnership, amendments thereto and
powers of attorney pursuant to which the same have been executed, (v)
information regarding the status of the Partnership's business and financial
condition and (vi) such other information regarding the affairs of the
Partnership as is just and reasonable. The Partnership may, and intends to,
keep confidential from the limited partners trade secrets or other information
the disclosure of which the Partnership believes in good faith is not in the
best interests of the Partnership or which the Partnership is required by law
or by agreements with third parties to keep confidential.
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UNITS ELIGIBLE FOR FUTURE SALE
After the sale of the Common Units offered hereby, Basis and Howell will
hold 2,187,000 and 1,863,000 Subordinated OLP Units, respectively (all of
which may convert into Common OLP Units after termination of the Subordination
Period), which could have an adverse effect on the price of the Common Units
or on any trading market that may develop. For a discussion of the
transactions whereby Basis and Howell acquired the Subordinated OLP Units in
connection with the organization of the Partnership, see "The Transactions."
The Common Units sold in the Offering will generally be freely transferable
without restriction or further registration under the Securities Act, except
that any Common Units owned by an "affiliate" of the Partnership (as that term
is defined in the rules and regulations under the Securities Act) may not be
resold publicly except in compliance with the registration requirements of the
Securities Act or pursuant to an exemption therefrom under Rule 144 thereunder
("Rule 144") or otherwise. Rule 144 permits securities acquired by an
affiliate of the issuer in an offering to be sold into the market in an amount
that does not exceed, during any three-month period, the greater of (i) 1% of
the total number of such securities outstanding or (ii) the average weekly
reported trading volume of the Common Units for the four calendar weeks prior
to such sale. Sales under Rule 144 are also subject to certain manner of sale
provisions, notice requirements and the availability of current public
information about the Partnership. A person who is not deemed to have been an
affiliate of the Partnership at any time during the three months preceding a
sale, and who has beneficially owned his Common Units for at least three
years, would be entitled to sell such Common Units under Rule 144 without
regard to the public information requirements, volume limitations, manner of
sale provisions or notice requirements of Rule 144.
Prior to the end of the Subordination Period, the Partnership may issue
without a vote of the Unitholders up to 4,100,000 additional Common Units
(excluding Common Units issued upon the exercise of the Underwriters' over-
allotment option, in connection with the redemption of Common OLP Units and in
connection with certain Acquisitions and Capital Improvements). See "The
Partnership Agreement--Issuance of Additional Securities." Basis and Howell
have certain rights to have their Common OLP Units redeemed from the net
proceeds of an offering of Common Units by the Partnership pursuant to the
Redemption and Registration Rights Agreement. See "Certain Relationships and
Related Transactions--Redemption and Registration Rights Agreement."
The Partnership, the Operating Partnership, the General Partner, Basis and
Howell have agreed not to (i) offer, sell, contract to sell or otherwise
dispose of or announce the offering of any Common Units or Subordinated OLP
Units or any securities that are convertible into, or exercisable or
exchangeable for, Common Units or Subordinated OLP Units or any securities
that are senior to or pari passu with Common Units (other than the issuance of
Common Units in connection with Acquisitions or Capital Improvements permitted
under the Partnership Agreement (provided the holder of such newly issued
Common Units agrees to be bound by this provision), the issuance of Common
Units pursuant to the Restricted Unit Plan or the transfer of Subordinated OLP
Units pursuant to the Performance Payment described herein under "Certain
Relationships and Related Transactions") or (ii) grant any options or warrants
to purchase Common Units or Subordinated OLP Units, in either case for a
period of 180 days after the date of this Prospectus without the prior written
consent of Salomon Inc and Smith Barney Inc.
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TAX CONSIDERATIONS
This section is a description of all material tax considerations that may be
relevant to prospective Unitholders and, to the extent set forth below under
"--Legal Opinions and Advice," expresses the opinion of Andrews & Kurth
L.L.P., counsel to the General Partner and the Partnership ("Counsel"),
insofar as it relates to matters of law and legal conclusions. This section is
based upon current provisions of the Code, existing and, to the extent noted,
proposed regulations thereunder and current administrative rulings and court
decisions, all of which are subject to change with and without retroactive
effect. Subsequent changes in such authorities may cause the tax consequences
to vary substantially from the consequences described below. Unless the
context otherwise requires, references in this section to the Partnership are
references to both the Partnership and the Operating Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting the Partnership or the Unitholders.
Moreover, the discussion focuses on Unitholders who are individual citizens or
residents of the United States and has only limited application to
corporations, estates, trusts, non-resident aliens or other Unitholders
subject to specialized tax treatment (such as tax-exempt institutions,
individual retirement accounts, REITs or mutual funds). Accordingly, each
prospective Unitholder should consult, and should depend on, his own tax
advisor in analyzing the federal, state, local and foreign tax consequences to
him of the ownership or disposition of Common Units.
LEGAL OPINIONS AND ADVICE
Counsel has expressed its opinion that, based on the representations and
subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) the Partnership and the Operating
Partnership will each be treated as a partnership and (ii) owners of Common
Units issued by the Partnership (with certain exceptions, as described in
"--Limited Partner Status" below) will be treated as partners of the Partnership
(but not the Operating Partnership). In addition, all statements as to matters
of law and legal conclusions contained in this section, unless otherwise
noted, reflect the opinion of Counsel.
Although no attempt has been made in the following discussion to comment on
all federal income tax matters affecting the Partnership or prospective
Unitholders, Counsel has advised the Partnership that, based on current law,
the following is a general description of the principal federal income tax
consequences that should arise from the ownership and disposition of Common
Units and, insofar as it relates to matters of law and legal conclusions,
addresses all material tax consequences to Unitholders who are individual
citizens or residents of the United States.
No ruling has been or will be requested from the IRS with respect to the
foregoing issues or any other matter affecting the Partnership or prospective
Unitholders. An opinion of counsel represents only that counsel's best legal
judgment and does not bind the IRS or the courts. Thus, no assurance can be
provided that the opinions and statements set forth herein would be sustained
by a court if contested by the IRS. The costs of any contest with the IRS will
be borne directly or indirectly by the Unitholders and the General Partner.
Furthermore, no assurance can be given that the treatment of the Partnership
or an investment therein will not be significantly modified by future
legislative or administrative changes or court decisions. Any such
modification may or may not be retroactively applied.
For the reasons hereinafter described, counsel has not rendered an opinion
with respect to the following specific federal income tax issues: (i) the
treatment of a Unitholder whose Common Units are loaned to a "short seller" to
cover a short sale of Common Units (see "--Tax Treatment of Operations--
Treatment of Short Sales"), (ii) whether a Unitholder acquiring Common Units
in separate
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transactions must maintain a single aggregate adjusted tax basis in his Common
Units (see "--Disposition of Common Units--Recognition of Gain or Loss"),
(iii) whether the Partnership's monthly convention for allocating taxable
income and losses is permitted by existing Treasury Regulations (see
"--Disposition of Common Units--Allocations between Transferors and
Transferees"), (iv) whether the Partnership's method for depreciating or
amortizing Sections 734 and 743 adjustments, utilized to maintain the
uniformity of the economic and tax characteristics of the Common Units, is
sustainable (see "--Uniformity of Units"), (v) whether distributions to each
Unitholder of amounts contributed by Salomon Inc in exchange for APIs will be
treated as a taxable purchase of a portion of the outstanding Common Units
(see "--Tax Consequences of Unit Ownership--Treatment of Partnership
Distributions"), and (vi) whether certain intangible assets contributed to the
Partnership by Basis and Howell will be amortizable by the Partnership (see
"--Tax Treatment of Operations--Initial Tax Basis, Depreciation and
Amortization").
TAX RATES AND CHANGES IN FEDERAL INCOME TAX LAWS
The top marginal income tax rate for individuals is 36% subject to a 10%
surtax on individuals with taxable income in excess of $256,500 per year. The
surtax is computed by applying a 39.6% rate to taxable income in excess of the
threshold. The net capital gain of an individual is subject to a maximum 28%
tax rate.
The 1995 Proposed Legislation that was passed by Congress on November 17,
1995, as part of the Revenue Reconciliation Act of 1995, would have altered
the tax reporting system and the deficiency collection system applicable to
large partnerships (generally defined as electing partnerships with more than
100 partners) and would have made certain additional changes to the treatment
of large partnerships, such as the Partnership. Certain of the proposed
changes are discussed later in this section. The 1995 Proposed Legislation was
generally intended to simplify the administration of the tax rules governing
large partnerships such as the Partnership. In addition, the 1995 Proposed
Legislation contained provisions which would have reduced the maximum tax rate
applicable to the net capital gains of an individual to 19.8%.
On March 19, 1996, certain tax legislation, known as the Revenue
Reconciliation Act of 1996, was presented to Congress that would impact the
taxation of certain financial products, including partnership interests. One
proposal would treat a taxpayer as having sold an "appreciated" partnership
interest (one in which gain would be recognized if such interest were sold) if
the taxpayer or related persons entered into one or more positions with
respect to the same or substantially identical property which, for some
period, substantially eliminated both the risk of loss and opportunity for
gain on the appreciated financial position (including selling "short against
the box" transactions). Certain of these proposed changes are also discussed
under "--Disposition of Common Units."
The 1995 Proposed Legislation was vetoed by President Clinton on December 6,
1995. As of the date of this Prospectus, it is not possible to predict whether
any of the changes which were set forth in the 1995 Proposed Legislation, the
Revenue Reconciliation Act of 1996 or any other changes in the federal income
tax laws that would impact the Partnership and the holders of Common Units
will ultimately be enacted, or if enacted, what form they will take, what the
effective dates will be and what, if any, transition rules will be provided.
PARTNERSHIP STATUS
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his
allocable share of items of income, gain, loss and deduction of the
partnership in computing his federal income tax liability, regardless of
whether cash distributions are made. Distributions by a partnership to a
partner are generally not taxable unless the amount of any cash distributed is
in excess of the partner's adjusted basis in his partnership interest.
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No ruling has been or will be sought from the IRS as to the status of the
Partnership or the Operating Partnership as a partnership for federal income
tax purposes. Instead the Partnership has relied on the opinion of Counsel
that, based upon the Code, the regulations thereunder, published revenue
rulings and court decisions, the Partnership and the Operating Partnership
will each be classified as a partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on representations and
covenants made by the Partnership and the General Partner as to certain
factual matters. Such factual matters are as follows:
(i) With respect to the Partnership and the Operating Partnership, the
General Partner, at all times while acting as general partner of the
Partnership and the Operating Partnership, will have a net worth, computed on
a fair market value basis, excluding its interests in the Partnership and the
Operating Partnership and any notes or receivables due from the Partnership or
the Operating Partnership, of not less than $7.5 million;
(ii) The Partnership will be operated in accordance with (a) all applicable
partnership statutes, (b) the Partnership Agreement and (c) this Prospectus;
(iii) The Operating Partnership will be operated in accordance with (a) all
applicable partnership statutes, (b) the Operating Partnership Agreement and
(c) this Prospectus;
(iv) The General Partner will, at all times, act independently of the
limited partners;
(v) For each taxable year, other than interest income derived from short-
term investments, the Partnership's sole source of income is its distributive
share of income from the Operating Partnership;
(vi) For each taxable year, less than 10% of the gross income of the
Operating Partnership will be derived from sources other than (a) the
exploration, development, production, processing, refining, transportation or
marketing of any mineral or natural resource, including oil, gas and products
thereof or (b) other items of "qualifying income" within the meaning of
Section 7704(d) of the Code;
(vii) Each futures contract entered into by the Operating Partnership for
the purchase or sale of crude oil will be identified as a hedging transaction
pursuant to Treasury Regulation Section 1.1221-2(e)(1); and
(viii) Gain or loss resulting from futures transactions entered into by the
Operating Partnership will be treated as an adjustment in the computation of
cost of goods sold with respect to sales of crude oil for federal income tax
purposes.
Counsel's opinion as to the partnership classification of the Partnership in
the event of a change in the general partner is based upon the assumption that
the new general partner will satisfy the foregoing representations and
covenants.
The Partnership (but not the Operating Partnership) constitutes a "publicly
traded partnership" within the meaning of Section 7704(b) of the Code. Section
7704(a) provides that publicly traded partnerships will, as a general rule, be
taxed as corporations. However, an exception (the "Qualifying Income
Exception") exists with respect to publicly traded partnerships of which 90%
or more of the gross income for every taxable year consists of "qualifying
income." Qualifying income includes income and gains from the transportation
and marketing of crude oil and income and gains derived from futures
transactions which are entered into primarily as a means to reduce the risk of
price fluctuations with respect to purchases or sales of crude oil
inventories. The Partnership has represented that, other than interest income
derived from short-term investments, the Partnership's only source of income
is its distributive share of the Operating Partnership's income. The Operating
Partnership has represented that in excess of 90% of the Operating
Partnership's gross income will
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be derived from transportation and marketing of crude oil and from futures
transactions which are entered into primarily as a means to reduce the risk of
price fluctuations with respect to purchases and sales of crude oil
inventories. Based upon these representations and a review of the applicable
legal authorities, at least 90% of the Partnership's gross income will
constitute "qualifying income." The Operating Partnership estimates that
substantially less than 10% of the Operating Partnership's gross income for
each taxable year will not constitute qualifying income.
If the Partnership fails to meet the Qualifying Income Exception (other than
a failure which is determined by the IRS to be inadvertent and which is cured
within a reasonable time after discovery), the Partnership will be treated as
if it had transferred all of its assets (subject to liabilities) to a newly
formed corporation (on the first day of the year in which it fails to meet the
Qualifying Income Exception) in return for stock in that corporation, and then
distributed that stock to the partners in liquidation of their interests in
the Partnership. This contribution and liquidation should be tax-free to
Unitholders and the Partnership, so long as the Partnership, at that time,
does not have liabilities in excess of the basis of its assets. Thereafter,
the Partnership would be treated as a corporation for federal income tax
purposes.
If the Partnership were treated as an association taxable as a corporation
in any taxable year, either as a result of a failure to meet the Qualifying
Income Exception or otherwise, its items of income, gain, loss and deduction
would be reflected only on its tax return rather than being passed through to
the Unitholders, and its net income would be taxed to the Partnership at
corporate rates. In addition, any distribution made by the Partnership to a
Unitholder would be treated as either taxable dividend income (to the extent
of the Partnership's current or accumulated earnings and profits) or (in the
absence of earnings and profits) as a nontaxable return of capital (to the
extent of the Unitholder's tax basis in his Common Units) or taxable capital
gain (after the Unitholder's tax basis in the Common Units is reduced to
zero). Accordingly, treatment of the Partnership as an association taxable as
a corporation would result in a material reduction in a Unitholder's cash flow
and after-tax return.
The discussion below is based on the assumption that the Partnership will be
classified as a partnership for federal income tax purposes.
LIMITED PARTNER STATUS
Unitholders who have become limited partners of the Partnership will be
treated as partners of the Partnership for federal income tax purposes.
Moreover, the IRS has ruled that assignees of partnership interests who have
not been admitted to a partnership as partners, but who have the capacity to
exercise substantial dominion and control over the assigned partnership
interests, will be treated as partners for federal income tax purposes. On the
basis of this ruling, except as otherwise described herein, Counsel is of the
opinion that (i) assignees who have executed and delivered Transfer
Applications, and are awaiting admission as limited partners and (ii)
Unitholders whose Common Units are held in street name or by another nominee
and who have the right to direct the nominee in the exercise of all
substantive rights attendant to the ownership of their Common Units will be
treated as partners of the Partnership for federal income tax purposes. As
this ruling does not extend, on its facts, to assignees of Common Units who
are entitled to execute and deliver Transfer Applications and thereby become
entitled to direct the exercise of attendant rights, but who fail to execute
and deliver Transfer Applications, Counsel's opinion does not extend to these
persons. Income, gain, deductions or losses would not appear to be reportable
by a Unitholder who is not a partner for federal income tax purposes, and any
cash distributions received by such a Unitholder would therefore be fully
taxable as ordinary income. These holders should consult their own tax
advisors with respect to their status as partners in the Partnership for
federal income tax purposes. A purchaser or other transferee of Common Units
who does not execute and deliver a Transfer Application may not receive
certain federal income tax information or reports furnished to record holders
of Common Units unless the
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Common Units are held in a nominee or street name account and the nominee or
broker has executed and delivered a Transfer Application with respect to such
Common Units.
A beneficial owner of Common Units whose Common Units have been transferred
to a short seller to complete a short sale would appear to lose his status as
a partner with respect to such Common Units for federal income tax purposes.
See "--Tax Treatment of Operations--Treatment of Short Sales."
TAX CONSEQUENCES OF UNIT OWNERSHIP
FLOW-THROUGH OF TAXABLE INCOME
No federal income tax will be paid by the Partnership. Instead, each
Unitholder will be required to report on his income tax return his allocable
share of the income, gains, losses and deductions of the Partnership without
regard to whether corresponding cash distributions are received by such
Unitholder. Consequently, a Unitholder may be allocated income from the
Partnership even if he has not received a cash distribution. Each Unitholder
will be required to include in income his allocable share of Partnership
income, gain, loss and deduction for the taxable year of the Partnership
ending with or within the taxable year of the Unitholder.
TREATMENT OF PARTNERSHIP DISTRIBUTIONS
Distributions by the Partnership to a Unitholder generally will not be
taxable to the Unitholder for federal income tax purposes to the extent of his
basis in his Common Units immediately before the distribution. Cash
distributions in excess of a Unitholder's basis will result in the recognition
of gain from the sale or exchange of the Common Units, generally taxable as
capital gain (either long-term or short-term depending upon the Unitholder's
holding period in the Units). Any reduction in a Unitholder's share of the
Partnership's liabilities for which no partner, including the General Partner,
bears the economic risk of loss ("nonrecourse liabilities"), or any reduction
in the Partnership's share of the Operating Partnership's nonrecourse
liabilities resulting in a corresponding reduction in a Unitholder's share of
such nonrecourse liabilities, will be treated as a distribution of cash to
that Unitholder. To the extent that Partnership 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. See
"--Limitations on Deductibility of Partnership Losses."
A decrease in a Unitholder's Percentage Interest in the Partnership because
of the issuance by the Partnership of additional Common Units may decrease
such Unitholder's share of nonrecourse liabilities of the Partnership, and
thus may 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 basis in his Common Units, if such distribution
reduces the Unitholder's share of the Partnership's "unrealized receivables"
(including depreciation recapture) and/or substantially appreciated "inventory
items" (both as defined in Section 751 of the Code) (collectively, "Section
751 Assets"). To that extent, the Unitholder will be treated as having been
distributed his proportionate share of the Section 751 Assets and having
exchanged such assets with the Partnership in return for the non-pro rata
portion of the actual distribution made to him. This latter deemed exchange
will generally result in the Unitholder's realization of ordinary income under
Section 751(b) of the Code. Such income will equal the excess of (1) the non-
pro rata portion of such distribution over (2) the Unitholder's basis for the
share of such Section 751 Assets deemed relinquished in the exchange.
There is a risk that the IRS will treat an acquisition of APIs by Salomon
Inc as a taxable purchase of a portion of an interest in Common Units, taxable
in accordance with Section 707(a)(2)(B) of the Code. Under this
characterization, the portion of the cash distributed to the Unitholders
attributable to the cash contributed by Salomon Inc would be treated as having
been received in exchange for a
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portion of each Common Unit. The Unitholders would be required to recognize
gain to the extent the cash distribution attributable to such contribution
exceeded the basis allocable to the portion of the Common Units deemed sold.
No authority exists specifically addressing the issue. No assurance can be
given that the distribution of cash to Unitholders that has been contributed
by Salomon Inc in exchange for APIs, will not result in the deemed sale
treatment of a portion of each Common Unit and in the recognition of gain by
the recipient Unitholder.
RATIO OF TAXABLE INCOME TO DISTRIBUTIONS
The Partnership estimates that a purchaser of Common Units in the Offering
who holds such Common Units from the date of the closing of the Offering
through will be allocated, on a cumulative basis, an amount of federal
taxable income for such period that will be approximately % of the cash
distributed with respect to that period. The Partnership further estimates
that after 199 , the taxable income allocable to the Unitholders will
constitute a significantly higher percentage of cash distributed to the
Unitholders. These estimates are based upon the assumption that gross income
from operations will approximate the amount required to make the Minimum
Quarterly Distribution with respect to all Units and other assumptions with
respect to capital expenditures, cash flow and anticipated cash distributions.
These estimates and assumptions are subject to, among other things, numerous
business, economic, regulatory, competitive and political uncertainties beyond
the control of the Partnership. Further, the estimates are based on current
tax law and certain tax reporting positions that the Partnership intends to
adopt and with which the IRS could disagree. Accordingly, no assurance can be
given that the estimates will prove to be correct. The actual percentage could
be higher or lower and any such differences could be material. See "--Tax
Consequences of Unit Ownership--Allocation of Partnership Income, Gain, Loss
and Deduction" and "--Tax Treatment of Operations--Initial Tax Basis,
Depreciation and Amortization."
BASIS OF COMMON UNITS
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of the Partnership's nonrecourse
liabilities. That basis will be increased by his share of Partnership income
and by any increases in his share of Partnership nonrecourse liabilities. That
basis will be decreased (but not below zero) by distributions from the
Partnership, by the Unitholder's share of Partnership losses, by any decrease
in his share of Partnership nonrecourse liabilities and by his share of
expenditures of the Partnership that are not deductible in computing its
taxable income and are not required to be capitalized. A limited partner will
have no share of Partnership debt which is recourse to the General Partner,
but will have a share, generally based on his share of profits, of Partnership
nonrecourse liabilities. See "--Disposition of Common Units--Recognition of
Gain or Loss."
LIMITATIONS ON DEDUCTIBILITY OF PARTNERSHIP LOSSES
The passive loss limitations generally provide that individuals, estates,
trusts and certain closely held corporations and personal service corporations
can deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) only to the extent of the taxpayer's
income from those passive activities. The passive loss limitations are applied
separately with respect to each publicly traded partnership. Consequently, any
passive losses generated by the Partnership will only be available to offset
future income generated by the Partnership other than certain portfolio income
and will not be available to offset income from other passive activities or
investments (including other publicly traded partnerships) or salary or active
business income. Passive losses which are not deductible because they exceed a
Common Unitholder's income (other than certain portfolio income) generated by
the Partnership may be deducted in full when he disposes of his entire
investment in the Partnership in a fully taxable transaction to an unrelated
party. The passive activity loss rules are applied after other applicable
limitations on deductions such as the at risk rules and the basis limitation,
described below.
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In addition to the passive loss limitations, the deduction by a Common
Unitholder of his share of Partnership losses will be limited to the tax basis
in his Common Units and, in the case of an individual Unitholder or a
corporate Common Unitholder (if more than 50% of the value of its stock is
owned directly or indirectly by five or fewer individuals or certain tax-
exempt organizations), to the amount which the Common Unitholder is considered
to be "at risk" with respect to the Partnership's activities. A Common
Unitholder must recapture losses deducted in previous years to the extent that
Partnership distributions cause the Common Unitholder's at risk amount to be
less than zero at the end of any taxable year. Losses disallowed to a Common
Unitholder or recaptured as a result of these limitations will carry forward
and will be allowable to the extent that the Common Unitholder's basis or at
risk amount (whichever is the limiting factor) is subsequently increased. Upon
the taxable disposition of a Common Unit, any gain recognized by a Common
Unitholder can be offset by losses that were previously suspended by the at
risk limitation but may not be offset by losses suspended by the basis
limitation. Any excess loss (above such gain) previously suspended by the at
risk or basis limitations is no longer utilizable.
LIMITATIONS ON INTEREST DEDUCTIONS
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of such taxpayer's "net investment
income." Under Treasury Regulations which the IRS has announced it will issue,
a Unitholder's net passive income from the Partnership will be treated as
investment income for this purpose. In addition, the Unitholder's share of the
Partnership's portfolio income will be treated as investment income.
Investment interest expense includes (i) interest on indebtedness properly
allocable to property held for investment, (ii) a Partnership's interest
expense attributed to portfolio income and (iii) 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 to the
extent attributable to portfolio income of the Partnership. Net investment
income includes gross income from property held for investment and amounts
treated as portfolio income pursuant to 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.
ALLOCATION OF PARTNERSHIP INCOME, GAIN, LOSS AND DEDUCTION
(i) Operating Partnership.
In general, if the Operating Partnership has a net profit in any year, such
net profit will be allocated among the General Partner, Basis, Howell and the
Partnership in accordance with their respective percentage interests in the
Operating Partnership. To the extent any partner in the Operating Partnership
is distributed more cash than its percentage interest share of total cash
distributed by the Operating Partnership with respect to a year, such partner
will be allocated additional gross income equal to the excess cash
distribution. Disproportionate distributions of cash can result from a number
of events, including subordination. If the Operating Partnership has a net
loss in any year, such net loss will generally be allocated in a manner that
reflects both (i) the subordination of any outstanding subordinated limited
partner interests and APIs and (ii) the obligation of the General Partner to
bear, as an economic matter, all losses in excess of the equity capitalization
of the Operating Partnership.
As required by Section 704(c) of the Code, certain items of Partnership
income, deduction, gain and loss will be allocated to account for the
difference between the tax basis and fair market value of property contributed
to the Operating Partnership by Basis and Howell ("Contributed Property").
These allocations, which will be made in accordance with Treasury Regulation
Section 1.704-3(d), will generally have the effect of causing Basis and Howell
to recognize the tax burden associated with any
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difference between the fair market value and the tax basis of Contributed
Property, and will also generally have the effect of providing the Partnership
(and, accordingly, the holders of Common Units) with a tax basis in the
Contributed Property equal to their share of the fair market value of such
Contributed Property.
In addition, certain items of recapture income will be allocated, to the
extent possible, to the partner allocated the deduction giving rise to the
treatment of such gain as recapture income in order to minimize the
recognition of ordinary income by the Partnership (and, accordingly, the
Common Unitholders), but these allocations may not be respected. If these
allocations of recapture income are not respected, the amount of the income or
gain allocated to the Partnership (and, thus, a Common Unitholder) will not
change, but a change in the character of the income allocated to the
Partnership (and, thus, a Common Unitholder) would result.
(ii) Partnership.
In general, if the Partnership has a net profit, such net profit will be
allocated among the General Partner and the Unitholders in accordance with
their respective percentage interests in the Partnership. If the Partnership
has a net loss, such net loss will generally be allocated (a) first, to the
General Partner and the Unitholders in accordance with their percentage
interests to the extent of their positive capital accounts (as maintained
under the Partnership Agreement), and (b) second, 100% to the General Partner.
(iii) Opinion as to the Partnership's and the Operating Partnership's
Allocations.
Counsel is of the opinion that, with the exception of the allocation of
recapture income discussed above, allocations under both the Operating
Partnership Agreement and the Partnership Agreement will be given effect for
federal income tax purposes in determining a partner's distributive share of
an item of income, gain, loss or deduction. There are, however, uncertainties
in the Treasury Regulations relating to allocations of the Operating
Partnership's income, and investors should be aware that the allocations of
recapture income in the Operating Partnership Agreement may be successfully
challenged by the IRS.
TAX TREATMENT OF OPERATIONS
ACCOUNTING METHOD AND TAXABLE YEAR
The Partnership will use the fiscal year ending December 31 as its taxable
year and will adopt the accrual method of accounting for federal income tax
purposes. Each Unitholder will be required to include in income his allocable
share of Partnership income, gain, loss and deduction for the fiscal year of
the Partnership ending within or with the taxable year of the Unitholder. In
addition, a Unitholder who has a taxable year ending on a date other than
December 31 and who disposes of all of his Units following the close of the
Partnership's taxable year but before the close of his taxable year must
include his allocable share of Partnership income, gain, loss and deduction in
income for his taxable year with the result that he will be required to report
in income for his taxable year his distributive share of more than one year of
Partnership income, gain, loss and deduction. See "--Disposition of Common
Units--Allocations Between Transferors and Transferees."
INITIAL TAX BASIS, DEPRECIATION AND AMORTIZATION
The tax basis of the assets of the Operating Partnership will be used for
purposes of computing depreciation and cost recovery deductions and,
ultimately, gain or loss on the disposition of such assets. The assets
purchased by the Operating Partnership from Basis and Howell will have a tax
basis equal to their purchase price. The assets contributed to the Operating
Partnership by Basis and
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Howell will initially have an aggregate tax basis equal to the tax basis of
such assets in the hands of Basis and Howell immediately prior to the
formation of the Operating Partnership.The federal income tax burden
associated with the difference between the fair market value of the
Contributed Property and the tax basis established for such property will be
borne by Basis and Howell. See "--Tax Consequences of Unit Ownership--
Allocation of Partnership Income, Gain, Loss and Deduction."
The assets sold to the Operating Partnership by Basis will consist primarily
of intangible assets in the nature of know-how and going concern value (the
"Purchased Intangibles"). Similarly, the assets contributed to the Operating
Partnership by Basis and Howell will consist almost entirely of intangible
assets in the nature of know-how and going concern value (the "Contributed
Intangibles").
The Operating Partnership will have a tax basis in the Purchased Intangibles
equal to the amount paid therefor. Subject to application of certain anti-
churning rules discussed below, the Operating Partnership should be allowed to
amortize its tax basis in the Purchased Intangibles over fifteen years on a
straight-line basis under Section 197 of the Code. Each Unitholder will be
allocated a share of such amortization deductions which will reduce the
Unitholder's share of the taxable income of the Partnership. In addition, the
Partnership expects that Unitholders will receive similar tax benefits with
respect to the Contributed Intangibles. Under Section 704(b) of the Code, when
appreciated property, like the Contributed Intangibles, is contributed to a
partnership, the partnership acquires a new "book" basis in the contributed
property that reflects its agreed fair market value. If the contributed
property is depreciable or amortizable, the partnership will depreciate or
amortize this book basis and Sections 704(b) and 704(c) will work together to
ensure that partners contributing cash to the partnership are allocated tax
deductions with respect to the contributed property that match the "book"
depreciation or amortization deductions that are allocated to them with
respect to such property. Accordingly, the Contributed Intangibles will have a
book basis equal to their agreed value at the time of contribution and the
Operating Partnership should be able to amortize that book basis ratably over
a 15-year period as long as the Contributed Intangibles are treated as
amortizable Section 197 intangibles. As a result, the taxable income otherwise
allocable to each Common Unit for any taxable year will be reduced by the book
amortization deductions attributable to the Contributed Intangibles that are
allocable to such Common Unit, while the taxable income otherwise allocable to
Basis and Howell will be increased by the same amount. This reallocation of
taxable income that is required by Section 704(c) of the Code to account for
the difference between the agreed value and tax basis of the Contributed
Intangibles will be made solely for tax purposes and will not affect the
partners' economic interests in the Partnership.
The amortization of the tax basis of the Purchased Intangibles and the book
basis of the Contributed Intangibles depends upon whether such intangibles
qualify as amortizable Section 197 intangibles. Those intangibles will not,
however, qualify as amortizable Section 197 intangibles if the anti-churning
rules of Section 197(f)(9) apply. The anti-churning rules will not apply to
either the Purchased Intangibles or the Contributed Intangibles as long as
neither Basis nor Howell is treated as a person that is related to the
Operating Partnership for purposes of those rules. Counsel to the Partnership
is of the opinion that neither Basis nor Howell should be considered related
to the Operating Partnership for purposes of the anti-churning rules. No
assurance can be given, however, that the Internal Revenue Service will agree
with this conclusion. If the anti-churning rules were to apply to the
Purchased Intangibles and the Contributed Intangibles, the Partnership
estimates that the ratio of taxable income to distributions described above
would increase to % (see "--Tax Consequences of Unit Ownership--Ratio of
Taxable Income to Distributions").
As long as the anti-churning rules are inapplicable to the Purchased
Intangibles, it is clear that the Operating Partnership will be entitled to
amortize the tax basis of those intangibles ratably over a 15-year period. It
is not as clear, however, that the book basis of the Contributed Intangibles
will be so amortizable (thereby making similar tax benefits available to
Unitholders with respect to the Contributed Intangibles as described above)
even if the anti-churning rules are inapplicable. Where
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intangible assets are contributed to a partnership in a nonrecognition
transaction in which the transferor's tax basis in such assets carries over to
the partnership, Section 197(f)(2) provides that the partnership cannot
amortize the carryover tax basis to the extent that the transferor could not
amortize that tax basis. Section 197(f)(2), in limiting a partnership's
ability to amortize the carryover tax basis of a contributed intangible, does
not characterize the entire intangible as a nonamortizable intangible, but
merely provides that the contributed intangible is not an amortizable Section
197 intangible to the extent of its carryover tax basis. There is no authority
or other guidance as to what impact Section 197(f)(2) has on a partnership's
ability to amortize the "book" basis of an intangible asset that has a zero
tax basis and is contributed to a partnership when such asset was not
amortizable in the hands of the contributing partner. The Internal Revenue
Service may argue that this book basis is not amortizable. Based upon the
advice of its Counsel, the General Partner intends to treat the Contributed
Intangibles as amortizable Section 197 intangibles and to amortize the book
basis of those intangibles. Due to the absence of any authority, however, the
issue is not free from doubt and Counsel has not rendered an opinion thereon.
If it were determined that the book basis attributable to the Contributed
Intangibles was not amortizable, the Partnership estimates that the ratio of
taxable income to distributions described above would increase to %. (See
"--Tax Consequences of Unit Ownership--Ratio of Taxable Income to
Distributions.")
To the extent allowable, the Partnership may elect to use the depreciation
and cost recovery methods that will result in the largest depreciation
deductions in the early years of the Operating Partnership. Property
subsequently acquired or constructed by the Operating Partnership may be
depreciated using accelerated methods permitted by the Code.
If the Operating Partnership disposes of depreciable property by sale,
foreclosure, or otherwise, all or a portion of any gain (determined by
reference to the amount of depreciation previously deducted and the nature of
the property) may be subject to the recapture rules and taxed as ordinary
income rather than capital gain. Similarly, a partner who has taken cost
recovery or depreciation deductions with respect to property owned by the
Operating Partnership may be required to recapture such deductions as ordinary
income upon a sale of his interest in the Partnership. See "--Tax Consequences
of Unit Ownership--Allocation of Partnership Income, Gain, Loss and Deduction"
and "--Disposition of Common Units--Recognition of Gain or Loss."
Costs incurred in organizing the Partnership may be amortized over any
period selected by the Partnership not shorter than 60 months. The costs
incurred in promoting the issuance of Units must be capitalized and cannot be
deducted currently, ratably or upon termination of the Partnership. There are
uncertainties regarding the classification of costs as organization expenses,
which may be amortized, and as syndication expenses, which may not be
amortized. Under recently issued regulations, the Underwriter's spread would
be treated as a syndication cost.
SECTION 754 ELECTION
The Partnership and the Operating Partnership will each make the election
permitted by Section 754 of the Code. That election is irrevocable without the
consent of the IRS. The election will generally permit the Operating
Partnership to adjust the Operating Partnership's basis in the Partnership's
assets ("inside basis") pursuant to Section 734(b) of the Code to reflect the
Operating Partnership's price of redeeming Basis' or Howell's Subordinated OLP
Units or Common OLP Units, whichever the case may be. The Section 734 basis
adjustment adjusts the Common Basis (as hereafter defined) of the Operating
Partnership's assets. The Section 754 election also permits the Partnership to
adjust a Common Unit purchaser's inside basis in the Partnership's interest in
the Operating Partnership and, in turn, permits the Operating Partnership to
adjust the Common Unit purchaser's inside basis in the Operating Partnership's
assets. The Section 743(b) adjustment belongs to the purchaser and not to
other partners. (For purposes of this discussion, a partner's inside basis in
the Partnership's and Operating Partnership's assets will be considered to
have two components: (1) his share of the
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Partnership's basis in such assets ("Common Basis") and (2) his Section 743(b)
adjustment to that basis.
Proposed Treasury Regulation Section 1.168-2(n) generally requires the Section
743(b) adjustment attributable to recovery property to be depreciated as if the
total amount of such adjustment were attributable to newly-acquired recovery
property placed in service when the purchaser acquires the Unit. Similarly, the
legislative history of Section 197 indicates that the Section 743(b) adjustment
attributable to an amortizable Section 197 intangible must be treated as a newly
acquired asset placed in service in the month when the purchaser acquires the
Unit. Under Treasury Regulation Section 1.167(c)-1(a)(6), a Section 743(b)
adjustment attributable to property subject to depreciation under Section 167 of
the Code rather than cost recovery deductions under Section 168 is generally
required to be depreciated using either the straight-line method or the 150%
declining balance method. The depreciation and amortization methods and useful
lives associated with the Section 743(b) adjustment, therefore, may differ from
the methods and useful lives generally used to depreciate the Common Basis in
such properties. Pursuant to the Operating Partnership Agreement, the Operating
Partnership is authorized to adopt a convention to preserve the uniformity of
Units even if such convention is not consistent with Treasury Regulation
Sections 1.167(c)-1(a)(6), Proposed Treasury Regulation Section 1.168-2(n) or
the legislative history of Section 197 of the Code. See "--Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
the Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property (to the extent of any unamortized book-tax disparity) using a rate of
depreciation or amortization derived from the depreciation or amortization
method and useful life applied to the Common Basis of such property, despite
its inconsistency with Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197 of the Code.
These conventions will not have any operative effect until such time as the
Partnership issues additional Common Units to the public. While these
conventions are designed to maintain the uniformity of the federal income tax
characteristics of all Common Units, the use of such conventions may result in
certain unfavorable tax consequences to the holders of Common Units. The
conventions may result in the purchaser of a Common Unit in a subsequent
offering (or which was originally purchased in the Offering but sold
subsequent to an additional offering of Common Units by the Partnership)
receiving depreciation deductions more rapidly than would be permitted under
Proposed Treasury Regulation Section 1.168-2(n) or Treasury Regulation Section
1.167(c)-1(a)(b). Because the Partnership cannot match the transferors and
transferees of Common Units, the IRS could assert that the depreciation
deductions claimed by all transferees of Common Units have been overstated,
thus increasing the taxable income allocable to the Unitholders for prior
periods.
If the Partnership determines that these conventions cannot reasonably be
applied, the Partnership may adopt a depreciation or amortization convention
under which all purchasers acquiring Units in the same month would receive
depreciation or amortization, whether attributable to Common Basis or Section
743(b) adjustment, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's assets. Such an aggregate
approach may result in lower annual depreciation or amortization deductions
than would otherwise be allowable to certain Unitholders. See "--Uniformity of
Units."
The allocation of the Sections 734(b) and 743(b) adjustments must be made in
accordance with the Code. The IRS may seek to reallocate some or all of any of
these adjustments not so allocated by the Partnership to goodwill which, as an
intangible asset, would be amortizable over a longer period of time than the
Partnership's tangible assets.
A Section 754 election is advantageous if the transferee's basis in his
Units is higher than such Units' share of the aggregate basis to the
Partnership of the Partnership's assets immediately prior to
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the transfer. In such a case, as a result of the election, the transferee
would have a higher basis in his share of the Partnership's assets for
purposes of calculating, among other items, his depreciation and depletion
deductions and his share of any gain or loss on a sale of the Partnership's
assets. Conversely, a Section 754 election is disadvantageous if the
transferee's basis in such Units is lower than such Unit's share of the
aggregate basis of the Partnership's assets immediately prior to the transfer.
Thus, the fair market value of the Units may be affected either favorably or
adversely by the election.
The calculations involved in the Section 754 election are complex and will
be made by the Partnership on the basis of certain assumptions as to the value
of Partnership assets and other matters. There is no assurance that the
determinations made by the Partnership will not be successfully challenged by
the IRS and that the deductions resulting from them will not be reduced or
disallowed altogether. Should the IRS require a different basis adjustment to
be made, and should, in the Partnership's opinion, the expense of compliance
exceed the benefit of the election, the Partnership may seek permission from
the IRS to revoke the Section 754 election for the Partnership. If such
permission is granted, a subsequent purchaser of Units may be allocated more
income than he would have been allocated had the election not been revoked.
ALTERNATIVE MINIMUM TAX
Each Unitholder will be required to take into account his distributive share
of any items of Partnership income, gain, deduction, or loss for purposes of
the alternative minimum tax.
A Unitholder's alternative minimum taxable income derived from the
Partnership may be higher than his share of Partnership net income because the
Partnership may use accelerated methods of depreciation for purposes of
computing federal taxable income or loss. The minimum tax rate for
noncorporate taxpayers is 26% on the first $175,000 of alternative minimum
taxable income in excess of the exemption amount and to 28% on any additional
alternative minimum taxable income. Prospective Unitholders should consult
with their tax advisors as to the impact of an investment in Units on their
liability for the alternative minimum tax.
VALUATION OF PARTNERSHIP PROPERTY AND BASIS OF PROPERTIES
The federal income tax consequences of the ownership and disposition of
Units will depend in part on estimates by the Partnership of the relative fair
market values, and determinations of the initial tax bases, of the assets of
the Partnership. Although the Partnership may from time to time consult with
professional appraisers with respect to valuation matters, many of the
relative fair market value estimates will be made by the Partnership. These
estimates and determinations of basis are subject to challenge and will not be
binding on the IRS or the courts. If the estimates of fair market value or
determinations of basis are subsequently found to be incorrect, the character
and amount of items of income, gain, loss or deductions previously reported by
Unitholders might change, and Unitholders might be required to adjust their
tax liability for prior years.
TREATMENT OF SHORT SALES
A Unitholder whose Units are loaned to a "short seller" to cover a short
sale of Units may be considered as having disposed of ownership of those
Units. If so, he would no longer be a partner with respect to those Units
during the period of the loan and may recognize gain or loss from the
disposition. As a result, during this period, any Partnership income, gain,
deduction or loss with respect to those Units would not be reportable by the
Unitholder, any cash distributions received by the Unitholder with respect to
those Units would be fully taxable and all of such distributions would appear
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to be treated as ordinary income. Unitholders desiring to assure their status
as partners and avoid the risk of gain recognition should modify any
applicable brokerage account agreements to prohibit their brokers from
borrowing their Units. The IRS has announced that it is actively studying
issues relating to the tax treatment of short sales of Partnership interests.
DISPOSITION OF COMMON UNITS
RECOGNITION OF GAIN OR LOSS
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold.
A Unitholder's amount realized will be measured by the sum of the cash or the
fair market value of other property received plus his share of Partnership
nonrecourse liabilities. Because the amount realized includes a Unitholder's
share of Partnership nonrecourse liabilities, the gain recognized on the sale
of Units could result in a tax liability in excess of any cash received from
such sale. However, the General Partner does not anticipate that the
Partnership will incur a material amount of nonrecourse liabilities. As a
result of certain conventions which the Partnership will apply in order to
maintain the fungibility of Common Units, the IRS may assert that a
Unitholder's tax basis is also reduced by the amount of certain amortization
deductions which could have been but were not claimed.
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 long-term capital gain or loss. A portion of this gain or loss
(which could be substantial), however, will be separately computed and taxed
as ordinary income or loss under Section 751 of the Code to the extent
attributable to assets giving rise to depreciation recapture or other
"unrealized receivables" or to "substantially appreciated inventory" owned by
the Partnership. The term "unrealized receivables" includes potential
recapture items, including depreciation recapture. Inventory is considered to
be "substantially appreciated" if its value exceeds 120% of its adjusted basis
to the Partnership. Ordinary income attributable to unrealized receivables,
substantially appreciated inventory and depreciation recapture may exceed net
taxable gain realized upon the sale of the Unit and may be recognized even if
there is a net taxable loss realized on the sale of the Unit. Thus, a
Unitholder may recognize both ordinary income and a capital loss upon a
disposition of Units. Net capital loss may offset no more than $3,000 of
ordinary income in the case of individuals and may only be used to offset
capital gain in the case of corporations.
The IRS has ruled that a partner who acquires interests in a Partnership in
separate transactions must combine those interests and maintain a single
adjusted tax basis. Upon a sale or other disposition of less than all of such
interests, a portion of that tax basis must be allocated to the interests sold
using an "equitable apportionment" method. The ruling is unclear as to how the
holding period of these interests is determined once they are combined. If
this ruling is applicable to the holders of Common Units, a Common Unitholder
will be unable to select high or low basis Common Units to sell as would be
the case with corporate stock. It is not clear whether the ruling applies to
the Partnership, because interests in the Partnership, like shares of
corporate stock, are evidenced by separate certificates. Accordingly Counsel
is unable to opine as to the effect such ruling will have on the Unitholders.
A Unitholder considering the purchase of additional Common Units or a sale of
Common Units purchased in separate transactions should consult his tax advisor
as to the possible consequences of such ruling.
ALLOCATIONS BETWEEN TRANSFERORS AND TRANSFEREES
In general, the Partnership's taxable income and losses will be determined
annually, will be prorated on a monthly basis and subsequently apportioned
among the Unitholders in proportion to the number of Units owned by each of
them as of the close of business on the last day of the preceding month.
However, gain or loss realized on a sale or other disposition of Partnership
assets other than
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in the ordinary course of business will be allocated among the Unitholders of
record as of the opening of the NYSE on the first business day of the month in
which that gain or loss is recognized. As a result, a Unitholder transferring
Common Units in the open market may be allocated income, gain, loss and
deduction accrued after the date of transfer.
The use of this method may not be permitted under existing Treasury
Regulations. Accordingly, Counsel is unable to opine on the validity of this
method of allocating income and deductions between the transferors and the
transferees of Units. If this method is not allowed under the Treasury
Regulations (or only applies to transfers of less than all of the Unitholder's
interest), taxable income or losses of the Partnership might be reallocated
among the Unitholders. The Partnership is authorized to revise its method of
allocation between transferors and transferees (as well as among partners
whose interests otherwise vary during a taxable period) to conform to a method
permitted under future Treasury Regulations.
A Unitholder who owns Units at any time during a quarter and who disposes of
such Units prior to the record date set for a cash distribution with respect
to such quarter will be allocated items of Partnership income, gain, loss and
deductions attributable to such quarter but will not be entitled to receive
that cash distribution.
NOTIFICATION REQUIREMENTS
A Unitholder who sells or exchanges Units is required to notify the
Partnership in writing of that sale or exchange within 30 days after the sale
or exchange and in any event by no later than January 15 of the year following
the calendar year in which the sale or exchange occurred. The Partnership is
required to notify the IRS of that transaction and to furnish certain
information to the transferor and transferee. However, these reporting
requirements do not apply with respect to a sale by an individual who is a
citizen of the United States and who effects the sale or exchange through a
broker. Additionally, a transferor and a transferee of a Unit will be required
to furnish statements to the IRS, filed with their income tax returns for the
taxable year in that the sale or exchange occurred, that set forth the amount
of the consideration received for the Unit that is allocated to goodwill or
going concern value of the Partnership. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
CONSTRUCTIVE TERMINATION
The Partnership and the Operating Partnership will be considered to have
been terminated if there is a sale or exchange of 50% or more of the total
interests in Partnership capital and profits within a 12-month period. A
termination results in the closing of a Partnership's taxable year for all
partners and the Partnership's assets are regarded as having been distributed
to the partners and reconveyed to the Partnership, which is then treated as a
new partnership. However, under proposed regulations which are not yet
effective, the Partnership will be deemed to have conveyed all its assets to a
newly formed partnership in exchange for all the interests in such partnership
and then the Partnership will be deemed to have liquidated and to have
distributed to its partners the interests in this newly formed partnership. A
termination of the Partnership will cause a termination of the Operating
Partnership and any subsidiary Partnership. Such a termination could also
result in penalties or loss of basis adjustments under Section 754 of the Code
if the Partnership were unable to determine that the termination had occurred.
(Under the 1995 Act, termination of a large partnership, such as the
Partnership would not occur by reason of the sale or exchange of interests in
the partnership.)
In the case of a Unitholder reporting on a taxable year other than a fiscal
year ending December 31, the closing of the tax year of the Partnership may
result in more than 12 months' taxable income or loss of the Partnership being
includable in his taxable income for the year of termination. In addition,
each Unitholder will realize taxable gain to the extent that any money deemed
as a result of the termination to have been distributed to him exceeds the
adjusted basis of his Units. New tax elections required to be
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made by the Partnership, including a new election under Section 754 of the
Code, must be made subsequent to a constructive termination. A termination
could also result in a deferral of Partnership deductions for depreciation.
Finally, a termination might either accelerate the application of or subject
the Partnership to any tax legislation enacted prior to the termination.
ENTITY-LEVEL COLLECTIONS
If the Partnership is required or elects under applicable law to pay any
federal, state or local income tax on behalf of any Unitholder or any General
Partner or any former Unitholder, the Partnership is authorized to pay those
taxes from Partnership funds. Such payment, if made, will be treated as a
distribution of cash to the partner on whose behalf the payment was made. If
the payment is made on behalf of a person whose identity cannot be determined,
the Partnership is authorized to treat the payment as a distribution to
current Unitholders. Alternatively, the Partnership may elect to treat an
amount paid on behalf of the General Partner and Unitholders as an expenditure
of the Partnership if the amount paid on behalf of the General Partner is not
substantially greater than 2% of the total amount paid. The Partnership is
authorized to amend the Partnership Agreement in the manner necessary to
maintain uniformity of intrinsic tax characteristics of Units and to adjust
subsequent distributions, so that after giving effect to such distributions,
the priority and characterization of distributions otherwise applicable under
the Partnership Agreement is maintained as nearly as is practicable. Payments
by the Partnership as described above could give rise to an overpayment of tax
on behalf of an individual partner in which event the partner could file a
claim for credit or refund.
UNIFORMITY OF UNITS
Because the Partnership cannot match transferors and transferees of Units,
uniformity of the economic and tax characteristics of the Units to a purchaser
of such Units must be maintained. In the absence of uniformity, compliance
with a number of federal income tax requirements, both statutory and
regulatory, could be substantially diminished. A lack of uniformity can result
from a literal application of Proposed Treasury Regulation Section 1.168-2(n)
and Treasury Regulation Section 1.167(c)-1(a)(6) or the legislative history of
Section 197 and from the application of the "ceiling limitation" on the
Partnership's ability to make allocations to eliminate book-tax disparities
attributable to Contributed Properties and Partnership property that has been
revalued and reflected in the partners' capital accounts ("Adjusted
Properties"). Any non-uniformity could have a negative impact on the value of
the Units. See "Tax Treatment of Operations--Section 754 Election."
The Partnership intends to depreciate the portion of a Section 743(b)
adjustment attributable to unrealized appreciation in the value of Contributed
Property or Adjusted Property (to the extent of any unamortized Book-Tax
Disparity) using a rate of depreciation or amortization derived from the
depreciation or amortization method and useful life applied to the Common
Basis of such property, despite its inconsistency with Proposed Treasury
Regulation Section 1.168-2(n) and Treasury Regulation Section 1.167(c)-1(a)(6)
or the legislative history of Section 197. See "--Tax Treatment of
Operations--Section 754 Election."
These conventions will not have any operative effect until such time as the
Partnership issues additional Common Units to the public. While these
conventions are designed to maintain the uniformity of the federal income tax
characteristics of all Common Units, the use of such conventions may result in
certain unfavorable tax consequences to the holders of Common Units. The
conventions may result in the purchaser of a Common Unit issued in a
subsequent offering (or which was originally purchased in the Offering but
sold subsequent to an additional offering of Common Units by the Partnership)
receiving depreciation deductions more rapidly than would be permitted under
Proposed Treasury Regulation Section 1.168-2(n) or Treasury Regulation Section
1.167(c)-1(a)(b). Because the
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Partnership cannot match the transferors and transferees of Common Units, the
IRS could assert that the depreciation deductions claimed by all transferees
of Common Units have been overstated, thus increasing the taxable income
allocable to the Unitholders for prior periods.
If the Partnership determines that these conventions cannot reasonably be
applied, the Partnership may adopt a depreciation and amortization convention
under which all purchasers acquiring Units in the same month would receive
depreciation and amortization deductions, whether attributable to Common Basis
or Section 743(b) basis, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's property. If such an
aggregate approach is adopted, it may result in lower annual depreciation and
amortization deductions than would otherwise be allowable to certain
Unitholders and risk the loss of depreciation and amortization deductions not
taken in the year that such deductions are otherwise allowable. This
convention will not be adopted if the Partnership determines that the loss of
depreciation and amortization deductions will have a material adverse effect
on the Unitholders. If the Partnership chooses not to utilize this aggregate
method, the Partnership may use any other reasonable depreciation and
amortization convention to preserve the uniformity of the intrinsic tax
characteristics of any Units that would not have a material adverse effect on
the Unitholders. The IRS may challenge any method of depreciating the Section
743(b) adjustment described in this paragraph. If such a challenge were
sustained, the uniformity of Units might be affected.
TAX-EXEMPT ORGANIZATIONS AND CERTAIN OTHER INVESTORS
Ownership of Units by employee benefit plans, other tax-exempt
organizations, nonresident aliens, foreign corporations, other foreign persons
and regulated investment companies raises issues unique to such persons and,
as described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including individual retirement accounts (IRAs) and other
retirement plans) are subject to federal income tax on unrelated business
taxable income. Virtually all of the taxable income derived by such an
organization from the ownership of a Unit will be unrelated business taxable
income and thus will be taxable to such a Unitholder.
A regulated investment company or "mutual fund" is required to derive 90% or
more of its gross income from interest, dividends, gains from the sale of
stocks or securities or foreign currency or certain related sources. It is not
anticipated that any significant amount of the Partnership's gross income will
include that type of income.
Non-resident aliens and foreign corporations, trusts or estates which hold
Units will be considered to be engaged in business in the United States on
account of ownership of Units. As a consequence they will be required to file
federal tax returns in respect of their share of Partnership income, gain,
loss or deduction and pay federal income tax at regular rates on any net
income or gain. Generally, a Partnership is required to pay a withholding tax
on the portion of the Partnership's income which is effectively connected with
the conduct of a United States trade or business and which is allocable to the
foreign partners, regardless of whether any actual distributions have been
made to such partners. However, under rules applicable to publicly-traded
partnerships, the Partnership will withhold (currently at the rate of 39.6%)
on actual cash distributions made quarterly to foreign Unitholders. Each
foreign Unitholder must obtain a taxpayer identification number from the IRS
and submit that number to the Transfer Agent of the Partnership on a Form W-8
in order to obtain credit for the taxes withheld. A change in applicable law
may require the Partnership to change these procedures.
Because a foreign corporation which owns Units will be treated as engaged in
a United States trade or business, such a corporation may be subject to United
States branch profits tax at a rate of 30%, in addition to regular federal
income tax, on its allocable share of the Partnership's income and gain (as
adjusted for changes in the foreign corporation's "U.S. net equity") which are
effectively
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connected with the conduct of a United States trade or business. That tax may
be reduced or eliminated by an income tax treaty between the United States and
the country with respect to which the foreign corporate Unitholder is a
"qualified resident." In addition, such a Unitholder is subject to special
information reporting requirements under Section 6038C of the Code.
Under a ruling of the IRS, a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are regularly traded on an established securities
market at the time of the disposition.
ADMINISTRATIVE MATTERS
PARTNERSHIP INFORMATION RETURNS AND AUDIT PROCEDURES
The Partnership intends to furnish to each Unitholder, within 90 days after
the close of each calendar year, certain tax information, including a Schedule
K-1, which sets forth each Unitholder's allocable share of the Partnership's
income, gain, loss and deduction for the preceding Partnership taxable year.
In preparing this information, which will generally not be reviewed by
counsel, the Partnership will use various accounting and reporting
conventions, some of which have been mentioned in the previous discussion, to
determine the Unitholder's allocable share of income, gain, loss and
deduction. There is no assurance that any of those conventions will yield a
result which conforms to the requirements of the Code, regulations or
administrative interpretations of the IRS. The Partnership cannot assure
prospective Unitholders that the IRS will not successfully contend in court
that such accounting and reporting conventions are impermissible.
The federal income tax information returns filed by the Partnership may be
audited by the IRS. Adjustments resulting from any such audit may require each
Unitholder to adjust a prior year's tax liability, and possibly may result in
an audit of the Unitholder's own return. Any audit of a Unitholder's return
could result in adjustments of non-Partnership as well as Partnership items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss and deduction are determined in a partnership proceeding
rather than in separate proceedings with the partners. The Code provides for
one partner to be designated as the "Tax Matters Partner" for these purposes.
The Partnership Agreement appoints the General Partner as the Tax Matters
Partner of the Partnership.
The Tax Matters Partner will make certain elections on behalf of the
Partnership and Unitholders and can extend the statute of limitations for
assessment of tax deficiencies against Unitholders with respect to Partnership
items. The Tax Matters Partner may bind a Unitholder with less than a 1%
profits interest in the Partnership to a settlement with the IRS unless that
Unitholder elects, by filing a statement with the IRS, not to give such
authority to the Tax Matters Partner. The Tax Matters Partner may seek
judicial review (by which all the Unitholders are bound) of a final
partnership administrative adjustment and, if the Tax Matters Partner fails to
seek judicial review, such review may be sought by any Unitholder having at
least a 1% interest in the profits of the Partnership and by the Unitholders
having in the aggregate at least a 5% profits interest. However, only one
action for judicial review will go forward, and each Unitholder with an
interest in the outcome may participate.
A Unitholder must file a statement with the IRS identifying the treatment of
any item on his federal income tax return that is not consistent with the
treatment of the item on the Partnership's return. Intentional or negligent
disregard of the consistency requirement may subject a Unitholder to
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substantial penalties. Under the 1995 Proposed Legislation, partners in large
partnerships, such as the Partnership, would be required to treat all
Partnership items in a manner consistent with the Partnership return.
Under the reporting provisions of the 1995 Proposed Legislation, each
partner of a large partnership, such as the Partnership, would take into
account separately his share of the following items, determined at the
partnership level: (i) taxable income or loss from passive loss limitation
activities; (ii) taxable income or loss from other activities (such as
portfolio income or loss); (iii) net capital gains to the extent allocable to
passive loss limitation activities and other activities; (iv) tax exempt
interest; (v) a net alternative minimum tax adjustment separately computed for
passive loss limitation activities and other activities; (vi) general credits;
(vii) low-income housing credit; (viii) rehabilitation credit; (ix) foreign
income taxes; (x) credit for producing fuel from a nonconventional source; and
(xi) any other items the Secretary of Treasury deems appropriate.
The House version of the 1995 Proposed Legislation would also make a number
of changes to the tax compliance and administrative rules relating to
partnerships. One provision would require that each partner in a large
partnership, such as the Partnership, take into account his share of any
adjustments to partnership items in the year such adjustments are made. Under
current law, adjustments relating to partnership items for a previous taxable
year are taken into account by those persons who were partners in the previous
taxable year. Alternatively, under the 1995 Proposed Legislation, a
partnership could elect to or, in some circumstances, could be required to,
directly pay the tax resulting from any such adjustments. In either case,
therefore, Unitholders could bear significant economic burdens associated with
tax adjustments relating to periods predating their acquisition of Units.
President Clinton vetoed the 1995 Proposed Legislation on December 6, 1995.
As of the date of this Prospectus, it is not possible to predict whether any
of the changes set forth in the 1995 Proposed Legislation, the Revenue
Reconciliation Act of 1996 or any other changes in the federal income tax laws
that would impact the Partnership and the Unitholders will ultimately be
enacted or, if enacted, what form they will take, what the effective dates
will be, and what, if any, transition rules will be provided.
NOMINEE REPORTING
Persons who hold an interest in the Partnership as a nominee for another
person are required to furnish to the Partnership (i) the name, address and
taxpayer identification number of the beneficial owner and the nominee; (ii)
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; (iii) the amount and description of Units held, acquired or
transferred for the beneficial owner; and (iv) certain information including
the dates of acquisitions and transfers, means of acquisitions and transfers,
and acquisition cost for purchases, as well as the amount of net proceeds from
sales. Brokers and financial institutions are required to furnish additional
information, including whether they are United States persons and certain
information on Units they acquire, hold or transfer for their own account. A
penalty of $50 per failure (up to a maximum of $100,000 per calendar year) is
imposed by the Code for failure to report such information to the Partnership.
The nominee is required to supply the beneficial owner of the Units with the
information furnished to the Partnership.
REGISTRATION AS A TAX SHELTER
The Code requires that "tax shelters" be registered with the Secretary of
the Treasury. The temporary Treasury Regulations interpreting the tax shelter
registration provisions of the Code are extremely broad. It is arguable that
the Partnership will not be subject to the registration requirement on the
basis that it will not constitute a tax shelter. However, the General Partner,
as a principal
141
<PAGE>
organizer of the Partnership, has registered the Partnership as a tax shelter
with the IRS in the absence of assurance that the Partnership will not be
subject to tax shelter registration and in light of the substantial penalties
which might be imposed if registration is required and not undertaken. The
Partnership has applied for a tax shelter registration number with the IRS.
ISSUANCE OF THE REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN
THE PARTNERSHIP OR THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR
APPROVED BY THE IRS. The Partnership must furnish the registration number to
the Unitholders, and a Unitholder who sells or otherwise transfers a Unit in a
subsequent transaction must furnish the registration number to the transferee.
The penalty for failure of the transferor of a Unit to furnish the
registration number to the transferee is $100 for each such failure. The
Unitholders must disclose the tax shelter registration number of the
Partnership on Form 8271 to be attached to the tax return on which any
deduction, loss or other benefit generated by the Partnership is claimed or
income of the Partnership is included. A Unitholder who fails to disclose the
tax shelter registration number on his return, without reasonable cause for
that failure, will be subject to a $250 penalty for each failure. Any
penalties discussed herein are not deductible for federal income tax purposes.
ACCURACY-RELATED PENALTIES
An additional tax equal to 20% of the amount of any portion of an
underpayment of tax which is attributable to one or more of certain listed
causes, including negligence or disregard of rules or regulations, substantial
understatements of income tax and substantial valuation misstatements, is
imposed by the Code. No penalty will be imposed, however, with respect to any
portion of an underpayment if it is shown that there was a reasonable cause
for that portion and that the taxpayer acted in good faith with respect to
that portion.
A substantial understatement of income tax in any taxable year exists if the
amount of the understatement exceeds the greater of 10% of the tax required to
be shown on the return for the taxable year or $5,000 ($10,000 for most
corporations). The amount of any understatement subject to penalty generally
is reduced if any portion is attributable to a position adopted on the return
(i) with respect to which there is, or was, "substantial authority" or (ii) as
to which there is a reasonable basis and the pertinent facts of such position
are disclosed on the return. Certain more stringent rules apply to "tax
shelters," a term that in this context, does not appear to include the
Partnership. If any Partnership item of income, gain, loss or deduction
included in the distributive shares of Unitholders might result in such an
"understatement" of income for which no "substantial authority" exists, the
Partnership must disclose the pertinent facts on its return. In addition, the
Partnership will make a reasonable effort to furnish sufficient information
for Unitholders to make adequate disclosure on their returns to avoid
liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of such valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
STATE, LOCAL AND OTHER TAX CONSIDERATIONS
In addition to federal income taxes, Unitholders will be subject to other
taxes, such as state and local income taxes, unincorporated business taxes,
and estate, inheritance or intangible taxes that may be imposed by the various
jurisdictions in which the Partnership does business or owns property.
Although an analysis of those various taxes is not presented here, each
prospective Unitholder should consider their potential impact on his
investment in the Partnership. The Partnership will initially own property and
conduct business in Alabama, Florida, Kansas, Louisiana, Mississippi, New
Mexico,
142
<PAGE>
Oklahoma and Texas. A Unitholder may be required to file state income tax
returns and to pay state income taxes in some or all of these states and may
be subject to penalties for failure to comply with those requirements. In
certain states, tax losses may not produce a tax benefit in the year incurred
(if, for example, the Partnership has no income from sources within that
state) and also may not be available to offset income in subsequent taxable
years. Some of the states may require the Partnership, or the Partnership may
elect, to withhold a percentage of income from amounts to be distributed to a
Unitholder who is not a resident of the state. Withholding, the amount of
which may be greater or less than a particular Unitholder's income tax
liability to the state, generally does not relieve the non-resident Unitholder
from the obligation to file an income tax return. Amounts withheld may be
treated as if distributed to Unitholders for purposes of determining the
amounts distributed by the Partnership. See "--Disposition of Common Units--
Entity-Level Collections." Based on current law and its estimate of future
Partnership operations, the General Partner anticipates that any amounts
required to be withheld will not be material.
It is the responsibility of each Unitholder to investigate the legal and tax
consequences, under the laws of pertinent states and localities, of his
investment in the Partnership. Accordingly, each prospective Unitholder should
consult, and must depend upon, his own tax counsel or other advisor with
regard to those matters. Further, it is the responsibility of each Unitholder
to file all state and local, as well as federal, tax returns that may be
required of such Unitholder. Counsel has not rendered an opinion on the state
or local tax consequences of an investment in the Partnership.
143
<PAGE>
INVESTMENT IN THE PARTNERSHIP BY EMPLOYEE BENEFIT PLANS
An investment in the Partnership by an employee benefit plan is subject to
certain additional considerations because the investments of such plans are
subject to the fiduciary responsibility and prohibited transaction provisions
of ERISA, and restrictions imposed by Section 4975 of the Code. As used
herein, the term "employee benefit plan" includes, but is not limited to,
qualified pension, profit-sharing and stock bonus plans, Keogh plans,
simplified employee pension plans and tax deferred annuities or Individual
Retirement Accounts established or maintained by an employer or employee
organization. Among other things, consideration should be given to (a) whether
such investment is prudent under Section 404(a)(1)(B) of ERISA; (b) whether in
making such investment, such plan will satisfy the diversification requirement
of Section 404(a)(1)(C) of ERISA; and (c) whether such investment will result
in recognition of unrelated business taxable income by such plan and, if so,
the potential after-tax investment return. See "Tax Considerations--Tax-Exempt
Organizations and Certain Other Investors." The person with investment
discretion with respect to the assets of an employee benefit plan (a
"fiduciary") should determine whether an investment in the Partnership is
authorized by the appropriate governing instrument and is a proper investment
for such plan.
Section 406 of ERISA and Section 4975 of the Code (which also applies to
Individual Retirement Accounts that are not considered part of an employee
benefit plan) prohibit an employee benefit plan from engaging in certain
transactions involving "plan assets" with parties that are "parties in
interest" under ERISA or "disqualified persons" under the Code with respect to
the plan.
In addition to considering whether the purchase of Common Units is a
prohibited transaction, a fiduciary of an employee benefit plan should
consider whether such plan will, by investing in the Partnership, be deemed to
own an undivided interest in the assets of the Partnership, with the result
that the General Partner also would be a fiduciary of such plan and the
operations of the Partnership would be subject to the regulatory restrictions
of ERISA, including its prohibited transaction rules, as well as the
prohibited transaction rules of the Code.
The Department of Labor regulations provide guidance with respect to whether
the assets of an entity in which employee benefit plans acquire equity
interests would be deemed "plan assets" under certain circumstances. Pursuant
to these regulations, an entity's assets would not be considered to be "plan
assets" if, among other things, (a) the equity interest acquired by employee
benefit plans are publicly offered securities--i.e., the equity interests are
widely held by 100 or more investors independent of the issuer and each other,
freely transferable and registered pursuant to certain provisions of the
federal securities laws, (b) the entity is an "operating company"--i.e., it is
primarily engaged in the production or sale of a product or service other than
the investment of capital either directly or through a majority owned
subsidiary or subsidiaries or (c) there is no significant investment by
benefit plan investors, which is defined to mean that less than 25% of the
value of each class of equity interest (disregarding certain interests held by
the General Partner, its affiliates, and certain other persons) is held by the
employee benefit plans referred to above, Individual Retirement Accounts and
other employee benefit plans not subject to ERISA (such as governmental
plans). The Partnership's assets should not be considered "plan assets" under
these regulations because it is expected that the investment will satisfy the
requirements in (a) and (b) above and may also satisfy the requirements in
(c).
Plan fiduciaries contemplating a purchase of Common Units should consult
with their own counsel regarding the consequences under ERISA and the Code in
light of the serious penalties imposed on persons who engage in prohibited
transactions or other violations.
144
<PAGE>
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement,
the Partnership has agreed to sell to each of the Underwriters named below
(the "Underwriters") for whom Salomon Brothers Inc, Smith Barney Inc., Dean
Witter Reynolds Inc., PaineWebber Incorporated and Prudential Securities
Incorporated are acting as representatives (the "Representatives"), and each
of the Underwriters has severally agreed to purchase from the Partnership, the
respective number of Common Units set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER COMMON UNITS
- ----------- ------------
<S> <C>
Salomon Brothers Inc ..............................................
Smith Barney Inc. .................................................
Dean Witter Reynolds Inc. .........................................
PaineWebber Incorporated...........................................
Prudential Securities Incorporated.................................
---------
Total............................................................. 8,200,000
=========
</TABLE>
In the Underwriting Agreement, the several Underwriters have agreed, subject
to the terms and conditions set forth therein, to purchase all 8,200,000
Common Units offered hereby (other than those subject to the over-allotment
option described below), if any Common Units are purchased. In the event of a
default by any Underwriter, the Underwriting Agreement provides that, in
certain circumstances, the purchase commitments of the non-defaulting
Underwriters may be increased or the Underwriting Agreement may be terminated.
The Partnership has been advised by the Representatives that the several
Underwriters propose initially to offer Common Units to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such offering price less a concession not in excess of $
per Common Unit. The Underwriters may allow, and such dealers may reallow, a
concession not in excess of $ per Common Unit to other dealers. After the
initial offering, the public offering price and such concessions may be
changed.
The Partnership has granted to the Underwriters an option, exercisable
during the 30-day period after the date of this Prospectus, to purchase up to
1,230,000 additional Common Units at the public offering price less the
underwriting discount set forth on the cover page of this Prospectus. The
Underwriters may exercise such option only to cover over-allotments in
connection with the sale of the Common Units that the Underwriters have agreed
to purchase. To the extent that the Underwriters exercise such option, each
Underwriter will have a firm commitment, subject to certain conditions, to
purchase a number of option Common Units proportionate to such Underwriter's
initial commitment.
The Partnership, the Operating Partnership, the General Partner, Basis and
Howell have agreed not to (i) offer, sell, contract to sell or otherwise
dispose of or announce the offering of any Common Units or Subordinated OLP
Units or any securities that are convertible into, or exercisable or
exchangeable for, Common Units or Subordinated OLP Units or any securities
that are senior to or pari passu with Common Units (other than the issuance of
Common Units in connection with Acquisitions or Capital Improvements permitted
under the Partnership Agreement (provided the holder of such newly issued
Common Units agrees to be bound by this provision), the issuance of Common
Units pursuant to the Restricted Unit Plan or the transfer of Subordinated OLP
Units pursuant to the Performance Payment described herein under "Certain
Relationships and Related Transactions") or (ii) grant any options or warrants
to purchase Common Units or Subordinated OLP Units, in either case for a
period of 180 days after the date of this Prospectus without the prior written
consent of Salomon Brothers Inc and Smith Barney Inc.
145
<PAGE>
Because the National Association of Securities Dealers, Inc. ("NASD") views
the Common Units offered hereby as interests in a direct participation
program, the Offering is being made in compliance with Rule 2810 of the NASD's
Conduct Rules. Investor suitability of the Common Units should be judged
similarly to the suitability of other securities that are listed for trading
on a national securities exchange. The Underwriters do not intend to confirm
sales to any accounts over which they exercise discretionary authority without
the prior written approval of the transaction by the customer.
Prior to the Offering, there has not been any public market for the Common
Units of the Partnership. Consequently, the initial public offering price of
the Common Units included in the Offering will be determined by negotiations
between the Partnership and the Representatives. Among the factors to be
considered in determining such price are the history of and prospects for the
Partnership's business and the industry in which it competes, an assessment of
the Partnership's management and the present state of the Partnership's
development, the past and present revenues and earnings of the Partnership,
the prospects for growth of the Partnership's revenues and earnings, the
current state of the economy in the United States and the current level of
economic activity in the industry in which the Partnership competes and in
related or comparable industries, and currently prevailing conditions in the
securities markets, including current market valuations of publicly traded
entities which are comparable to the Partnership.
Salomon Brothers and Basis are wholly owned subsidiaries of Salomon Inc.
The Common Units have been approved for listing on the NYSE, subject to
official notice of issuance, under the symbol "GEL."
The Partnership, the Operating Partnership, the General Partner, Basis,
Howell and Salomon Inc have agreed to indemnify the several Underwriters
against certain civil liabilities, including liabilities under the Securities
Act, or contribute to payments the Underwriters may be required to make in
respect thereof.
146
<PAGE>
VALIDITY OF THE COMMON UNITS
The validity of the Common Units will be passed upon for the Partnership by
Andrews & Kurth L.L.P., Houston, Texas. Certain legal matters in connection
with the Common Units will be passed upon for the Underwriters by Baker &
Botts, L.L.P., Houston, Texas. Baker & Botts, L.L.P. performs legal work for
Basis and its affiliates from time to time.
EXPERTS
The audited historical financial statements of Basis, Genesis Energy, L.P.
and Genesis Energy, L.L.C. included in this Prospectus and elsewhere in the
registration statement, to the extent and for the periods indicated in their
reports, have been audited by Arthur Andersen LLP, independent public
accountants, and are included herein in reliance upon the authority of said
firm as experts in giving said reports.
The financial statements of Howell Crude Operations as of December 31, 1995
and 1994, and for each of the three years in the period ended December 31,
1995 included in this Prospectus have been audited by Deloitte & Touche LLP,
independent auditors, as stated in their report appearing herein and elsewhere
in the registration statement, and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing.
The statement of revenues and direct operating expenses of the Pipeline
Systems (commonly referred to as the Texas System, the Mississippi System and
the Jay System) for each year in the three-year period ended December 31, 1994
included in this Prospectus have been so included in reliance on the report of
Price Waterhouse LLP, independent accountants, given on the authority of said
firm as experts in auditing and accounting.
147
<PAGE>
AVAILABLE INFORMATION
The Partnership has filed with the Commission, 450 Fifth Street, N.W.,
Washington, D.C. 20549, a Form S-1 Registration Statement under the Securities
Act, for the registration of the securities to be offered by this Prospectus.
Certain of the information contained in the Registration Statement is omitted
from this Prospectus, and reference is hereby made to the Registration
Statement and exhibits relating thereto for further information concerning the
Partnership and the General Partner and the securities to which this
Prospectus relates. As to statements contained herein concerning the
provisions of any document, reference is made to the copy of the document
filed as an exhibit to the Registration Statement. Each such statement is
qualified in its entirety by this reference.
The Registration Statement and the exhibits thereto are available for
inspection in the principal office of the Commission in Washington, D.C., or
on the Internet at http://www.sec.gov, and photostatic copies of such material
may be obtained from the Commission upon payment of the fees prescribed by the
Commission.
148
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
GENESIS ENERGY, L.P. PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS:
Introduction............................................................ F-2
Pro Forma Consolidated Balance Sheet as of June 30, 1996................ F-3
Pro Forma Consolidated Statement of Operations for the six months ended
June 30, 1996.......................................................... F-4
Pro Forma Consolidated Statement of Operations for the six months ended
June 30, 1995.......................................................... F-5
Pro Forma Consolidated Statement of Operations for the year ended
December 31, 1995...................................................... F-6
Notes to Pro Forma Consolidated Financial Statements.................... F-7
BASIS PETROLEUM, INC. CRUDE GATHERING DIVISION CONDENSED UNAUDITED INTERIM
FINANCIAL STATEMENTS:
Condensed Balance Sheets as of December 31, 1995 and June 30, 1996...... F-11
Condensed Statements of Operations for the six months ended June 30,
1995 and 1996.......................................................... F-12
Condensed Statement of Divisional Equity for the six months ended June
30, 1996............................................................... F-13
Condensed Statements of Cash Flows for the six months ended June 30,
1995 and 1996.......................................................... F-14
Notes to Condensed Financial Statements................................. F-15
HOWELL CRUDE OPERATIONS CONDENSED COMBINED UNAUDITED INTERIM FINANCIAL
STATEMENTS:
Condensed Combined Balance Sheets as of December 31, 1995 and June 30,
1996................................................................... F-18
Condensed Combined Statements of Operations for the six months ended
June 30, 1995 and 1996................................................. F-19
Condensed Combined Statement of Equity of Parent for the six months
ended June 30, 1996.................................................... F-20
Condensed Combined Statements of Cash Flows for the six months ended
June 30, 1995 and 1996................................................. F-21
Notes to Condensed Combined Financial Statements........................ F-22
BASIS PETROLEUM, INC. CRUDE GATHERING DIVISION FINANCIAL STATEMENTS:
Report of Independent Public Accountants................................ F-25
Balance Sheets as of December 31, 1994 and 1995......................... F-26
Statements of Income for the years ended December 31, 1993, 1994, and
1995................................................................... F-27
Statements of Divisional Equity for the years ended December 31, 1993,
1994, and 1995......................................................... F-28
Statements of Cash Flows for the years ended December 31, 1993, 1994,
and 1995............................................................... F-29
Notes to Financial Statements........................................... F-30
HOWELL CRUDE OPERATIONS COMBINED FINANCIAL STATEMENTS:
Independent Auditors' Report............................................ F-38
Combined Balance Sheets as of December 31, 1994 and 1995................ F-39
Combined Statements of Operations for the years ended December 31, 1993,
1994, and 1995......................................................... F-40
Combined Statements of Equity of Parent for the years ended December 31,
1993, 1994, and 1995................................................... F-41
Combined Statements of Cash Flows for the years ended December 31, 1993,
1994, and 1995......................................................... F-42
Notes to Combined Financial Statements.................................. F-43
HOWELL CORPORATION--PREDECESSOR OPERATIONS OF CERTAIN CRUDE OIL PIPELINE
SYSTEMS OF EXXON PIPELINE COMPANY:
Report of Independent Accountants....................................... F-52
Statement of Revenues and Direct Operating Expenses for the years ended
December 31, 1992, 1993, and 1994 and the three months ended March 31,
1994 and 1995.......................................................... F-53
Notes to the Statement of Revenues and Direct Operating Expenses........ F-54
GENESIS ENERGY, L.P.
Report of Independent Public Accountants................................ F-55
Balance Sheet as of September 5, 1996................................... F-56
Note to Balance Sheet................................................... F-57
GENESIS ENERGY, L.L.C.
Report of Independent Public Accountants................................ F-58
Balance Sheet as of September 5, 1996................................... F-59
Note to Balance Sheet................................................... F-60
</TABLE>
F-1
<PAGE>
PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS OF
GENESIS ENERGY, L.P.
The pro forma consolidated financial statements are based upon the
historical financial statements of Basis Petroleum, Inc. Crude Gathering
Division ("Basis") and Howell Crude Operations ("Howell") and the revenues and
direct operating expenses of the Pipeline Systems of Exxon Pipeline Company
("Exxon"), appearing elsewhere herein. The pro forma consolidated financial
statements were prepared to reflect the formation of a limited partnership
(the "Partnership") and an operating limited partnership (the "Operating
Partnership") to own and operate the crude oil gathering and marketing
operations of Basis and the crude oil gathering, marketing and pipeline
operations of Howell. Genesis Energy, L.L.C. will serve as the General Partner
of the Partnership. The formation of the Partnership is described in the Notes
to Pro Forma Consolidated Financial Statements.
As Basis will own 54% of the general partner interest in the Partnership and
an effective 17.50% limited partner interest in the Operating Partnership,
Basis will have the largest ownership interest in Genesis. Therefore, for
purposes of the preparation of these pro forma financial statements, Basis has
been treated as the acquirer of Howell and the acquisition of Howell has been
treated as a purchase for accounting purposes.
The pro forma consolidated financial statements do not purport to present
the financial position or results of operations of the Partnership had the
transactions to be effected at the closing of this offering actually been
completed as of the dates indicated. In addition, the pro forma consolidated
financial statements are not necessarily indicative of the results of future
operations of the Partnership and should be read in conjunction with the
historical financial statements of Basis and the historical combined financial
statements of Howell and the historical statement of revenues and direct
operating expenses of Exxon and the notes thereto appearing elsewhere in this
Prospectus. Management believes the results of operations in the first half of
1996 were enhanced by unusually favorable market conditions. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations."
F-2
<PAGE>
GENESIS ENERGY, L.P.
PRO FORMA CONSOLIDATED BALANCE SHEET
AT JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PURCHASE
BASIS HOWELL ACCOUNTING PRO FORMA PARTNERSHIP
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash
equivalents........... $ -- $ -- $ -- $ 5,463 (A) $ 5,463
154,540 (B)
(154,540)(C)
Trade receivables...... 206,798 56,955 (2,640)(D) 261,113
Related party
receivables........... 156,170 338 156,508
Inventories............ 2,007 1,660 3,667
Current deferred income
tax assets............ 582 238 (820)(E) --
Other.................. -- 157 157
-------- -------- ------- -------- --------
Total current assets... 365,557 59,348 -- 2,003 426,908
PROPERTY AND EQUIPMENT,
net.................... 2,449 70,925 29,075(F) 102,449
DEFERRED INCOME TAX
ASSETS................. 94 -- (94)(E) --
GOODWILL................ -- -- 16,093(F) 16,093
OTHER ASSETS, net....... -- 241 (236)(G) 5
-------- -------- ------- -------- --------
$368,100 $130,514 $45,168 $ 1,673 $545,455
======== ======== ======= ======== ========
LIABILITIES AND
PARTNERS' CAPITAL
CURRENT LIABILITIES:
Current portion of
long-term debt........ $ -- $ 6,346 $ $ (6,346)(G) $ --
Trade accounts payable. 323,857 55,777 (2,640)(D) 376,994
Related party accounts
payable............... 38,868 1,319 40,187
Accrued liabilities.... 2,565 3,242 (295)(G) 5,512
Accrued income taxes... 4,537 97 (4,634)(E) --
-------- -------- ------- -------- --------
Total current
liabilities........... 369,827 66,781 -- (13,915) 422,693
LONG-TERM DEBT.......... -- 45,286 (45,286)(G) --
DEFERRED INCOME TAX
LIABILITIES............ -- 982 (982)(E) --
MINORITY INTERESTS IN
OLP.................... -- -- 40,586 (H) 40,586
DIVISIONAL EQUITY/EQUITY
OF PARENT.............. (1,727) 17,465 45,168(F) 5,463 (A) --
(122,762)(H)
4,702 (E)
51,691 (G)
PARTNERS' CAPITAL:
Common Unitholders..... -- -- 80,532 (H) 80,532
154,540 (B)
(154,540)(C)
General Partner........ -- -- 1,644 (H) 1,644
-------- -------- ------- -------- --------
PARTNERS' CAPITAL....... -- -- -- 82,176 82,176
-------- -------- ------- -------- --------
$368,100 $130,514 $45,168 $ 1,673 $545,455
======== ======== ======= ======== ========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-3
<PAGE>
GENESIS ENERGY, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
PURCHASE
BASIS HOWELL ACCOUNTING PRO FORMA PARTNERSHIP
HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
REVENUES:
Gathering and marketing
revenues.............. $1,957,810 $315,491 $(22,863)(I) $2,250,438
Pipeline revenues...... -- 8,338 8,338
---------- -------- ------- -------- ----------
Total revenues......... 1,957,810 323,829 -- (22,863) 2,258,776
COST OF SALES:
Crude costs............ 1,939,961 307,575 (22,863)(I) 2,225,123
450 (J)
Field operating costs.. 3,668 3,898 7,566
Pipeline operating
costs................. -- 2,488 2,488
---------- -------- ------- -------- ----------
Total cost of sales.... 1,943,629 313,961 -- (22,413) 2,235,177
---------- -------- ------- -------- ----------
GROSS MARGIN............ 14,181 9,868 -- (450) 23,599
EXPENSES:
General and
administrative........ 1,789 2,173 696 (K) 4,658
Depreciation and
amortization.......... 950 2,001 1,130(M) 4,081
---------- -------- ------- -------- ----------
OPERATING INCOME........ 11,442 5,694 (1,130) (1,146) 14,860
OTHER INCOME (EXPENSE):
Interest, net.......... 79 (2,062) 2,062 (G) --
(79)(O)
Other, net............. (80) 1 (79)
---------- -------- ------- -------- ----------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTERESTS.............. 11,441 3,633 (1,130) 837 14,781
Income tax provision .. 4,302 1,325 (5,627)(E) --
---------- -------- ------- -------- ----------
NET INCOME BEFORE
MINORITY INTERESTS..... 7,139 2,308 (1,130) 6,464 14,781
MINORITY INTERESTS IN
OLP.................... -- -- 4,887 (P) 4,887
---------- -------- ------- -------- ----------
NET INCOME.............. $ 7,139 $ 2,308 $(1,130) $ 1,577 $ 9,894
========== ======== ======= ======== ==========
NET INCOME PER COMMON
UNIT................... $ 1.18 (Q)
==========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-4
<PAGE>
GENESIS ENERGY, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
PURCHASE
BASIS HOWELL EXXON ACCOUNTING PRO FORMA PARTNERSHIP
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Gathering and marketing
revenues.............. $1,601,811 $296,281 $ -- $ $(13,934)(I) $1,884,158
Pipeline revenues...... -- 4,755 4,821 9,576
---------- -------- ------ ------- -------- ----------
Total revenues......... 1,601,811 301,036 4,821 -- (13,934) 1,893,734
COST OF SALES:
Crude costs............ 1,587,438 289,220 -- (13,934)(I) 1,863,124
400 (J)
Field operating costs.. 3,767 3,638 -- 7,405
Pipeline operating
costs................. -- 1,076 878 118 (L) 2,072
---------- -------- ------ ------- -------- ----------
Total cost of sales.... 1,591,205 293,934 878 -- (13,416) 1,872,601
---------- -------- ------ ------- -------- ----------
GROSS MARGIN............ 10,606 7,102 3,943 (518) 21,133
EXPENSES:
General and
administrative........ 1,883 1,969 -- 271 (L) 4,574
451 (K)
Depreciation and
amortization.......... 3,686 1,165 -- 1,130 (M) 809 (N) 6,790
---------- -------- ------ ------- -------- ----------
OPERATING INCOME........ 5,037 3,968 3,943 (1,130) (2,049) 9,769
OTHER INCOME (EXPENSE):
Interest, net.......... (169) (1,256) -- 1,256 (G) --
169 (O)
Other, net............. 38 3 -- 41
---------- -------- ------ ------- -------- ----------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTERESTS.............. 4,906 2,715 3,943 (1,130) (624) 9,810
Income tax provision... 1,851 1,009 -- (2,860)(E) --
---------- -------- ------ ------- -------- ----------
NET INCOME BEFORE
MINORITY INTERESTS..... 3,055 1,706 3,943 (1,130) 2,236 9,810
MINORITY INTERESTS IN
OLP.................... -- -- -- 3,243 (P) 3,243
---------- -------- ------ ------- -------- ----------
NET INCOME.............. $ 3,055 $ 1,706 $3,943 $(1,130) $ (1,007) $ 6,567
========== ======== ====== ======= ======== ==========
NET INCOME PER COMMON
UNIT................... $ 0.78 (Q)
==========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-5
<PAGE>
GENESIS ENERGY, L.P.
PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1995
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER UNIT DATA)
<TABLE>
<CAPTION>
PURCHASE
BASIS HOWELL EXXON ACCOUNTING PRO FORMA PARTNERSHIP
HISTORICAL HISTORICAL HISTORICAL ADJUSTMENTS ADJUSTMENTS PRO FORMA
---------- ---------- ---------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
REVENUES:
Gathering and marketing
revenues.............. $3,440,065 $617,038 $ -- $ $(30,230)(I) $4,026,873
Pipeline revenues...... -- 13,756 4,821 18,577
---------- -------- ------ ------- -------- ----------
Total revenues......... 3,440,065 630,794 4,821 -- (30,230) 4,045,450
COST OF SALES:
Crude costs............ 3,409,759 603,406 -- (30,230)(I) 3,983,735
800 (J)
Field operating costs.. 7,152 7,525 -- 14,677
Pipeline operating
costs................. -- 3,526 878 118 (L) 4,522
---------- -------- ------ ------- -------- ----------
Total cost of sales.... 3,416,911 614,457 878 -- (29,312) 4,002,934
---------- -------- ------ ------- -------- ----------
GROSS MARGIN............ 23,154 16,337 3,943 (918) 42,516
EXPENSES:
General and
administrative........ 3,658 4,116 -- 271 (L) 9,148
1,103 (K)
Depreciation and
amortization.......... 4,815 3,263 -- 2,259 (M) 809 (N) 11,146
---------- -------- ------ ------- -------- ----------
OPERATING INCOME........ 14,681 8,958 3,943 (2,259) (3,101) 22,222
OTHER INCOME (EXPENSE):
Interest, net.......... 173 (3,598) -- 3,598 (G) --
(173)(O)
Other, net............. (197) 10 -- (187)
---------- -------- ------ ------- -------- ----------
INCOME BEFORE INCOME
TAXES AND MINORITY
INTERESTS.............. 14,657 5,370 3,943 (2,259) 324 22,035
Income tax provision... 5,530 1,995 -- (7,525)(E) --
---------- -------- ------ ------- -------- ----------
NET INCOME BEFORE
MINORITY INTERESTS..... 9,127 3,375 3,943 (2,259) 7,849 22,035
MINORITY INTERESTS IN
OLP.................... -- -- -- 7,285 (P) 7,285
---------- -------- ------ ------- -------- ----------
NET INCOME.............. $ 9,127 $ 3,375 $3,943 $(2,259) $ 564 $ 14,750
========== ======== ====== ======= ======== ==========
NET INCOME PER COMMON
UNIT................... $ 1.76 (Q)
==========
</TABLE>
The accompanying notes are an integral part of these pro forma consolidated
financial statements.
F-6
<PAGE>
GENESIS ENERGY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN THOUSANDS)
(UNAUDITED)
BASIS OF PRESENTATION
The following pro forma adjustments have been prepared as if the
transactions to be effected at the closing of the Offering had taken place on
June 30, 1996, in the case of the pro forma consolidated balance sheet or as
of January 1, 1995, in the case of the pro forma consolidated statements of
operations for the year ended December 31, 1995 and the six months ended June
30, 1996 and 1995. The adjustments are based upon currently available
information and certain estimates and assumptions, and therefore the actual
adjustments made to effect the transactions may 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
these assumptions and are properly applied in the pro forma financial
information.
THE TRANSACTIONS
Simultaneously with the closing of the Offering, pursuant to the terms of
the Purchase & Sale and Contribution & Conveyance Agreement among the
Partnership, the Operating Partnership, Basis, Howell, certain subsidiaries of
Howell and Genesis Energy, L.L.C. (the "Contribution Agreement"), the
Partnership will contribute the net proceeds of the Offering to the Operating
Partnership in exchange for a 66.94% general partner interest in the Operating
Partnership. The Operating Partnership will use such net proceeds to acquire a
portion of the crude oil gathering and marketing operations of Basis and the
crude oil gathering, marketing and pipeline operations of Howell and will
issue an aggregate of 4,050,000 Subordinated OLP Units to Basis and Howell to
acquire the remaining operations. Pursuant to the Contribution Agreement, with
certain exceptions, each of Basis and Howell has agreed to indemnify the
Partnership for liabilities relating to the conduct of the Combined Operations
prior to the closing of the Offering. The General Partner will receive an
effective 2% general partner interest in the Partnership (and the right to
receive incentive compensation payments) in exchange for a contribution
primarily of cash equal to 2% of the value of the Partnership's assets.
Upon consummation of the Offering, Basis and Howell will hold 54% and 46%,
respectively, of the Subordinated OLP Units (2,187,000 and 1,863,000
Subordinated OLP Units, respectively), representing an effective 17.50% and
14.90% limited partner interest in the Operating Partnership.
Pursuant to a credit support agreement ("Master Credit Support Agreement"),
Salomon Inc will provide credit support in the form of guarantees, up to
prescribed limits that will decline over a period of three years, in
connection with the purchase, sale or exchange of crude oil in transactions
with third parties in the ordinary course of the Partnership's business. The
cost of such credit support by Salomon Inc will increase over the three-year
period from a below-market rate to a rate that may be higher than rates paid
to independent financial institutions for similar credit. In addition,
pursuant to the Master Credit Support Agreement, Basis will use its reasonable
best efforts to provide, for a period of six months ending May 31, 1997, a
line of credit of up to $35,000 for working capital purposes, including
letters of credit and direct cash advances. Salomon Inc and Basis will receive
a security interest in all of the Partnership's assets to secure obligations
under the Master Credit Support Agreement.
F-7
<PAGE>
GENESIS ENERGY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
PRO FORMA ADJUSTMENTS
A. Reflects cash to be contributed by Basis and Howell to enable Genesis to
bring inventories to an agreed upon level and to eliminate any net
working capital position, exclusive of inventories. The agreed upon
level of inventories is approximately 260,000 barrels. This is an
inventory level that management believes is necessary to conduct
operations. In order to bring the June 30, 1996 inventory levels to this
agreed upon level, Basis and Howell would contribute $431 and $117,
respectively, in cash to Genesis. These amounts were computed using
approximate market values of the inventories at June 30, 1996. In
addition, after consideration of the pro forma adjustments described
below, Basis and Howell will contribute an additional $2,322 and $2,593,
respectively, in cash to Genesis in order to eliminate the net working
capital position, exclusive of inventories.
B. Reflects the receipt of proceeds from the Offering (assumed to be
$168,100), net of offering costs of $13,560.
C. Reflects the purchase of a portion of the combined operations from Basis
and Howell with the net proceeds of the Offering.
D. Reflects the elimination of accounts receivable and accounts payable
that exist between Basis and Howell.
E. Reflects the elimination of the income tax provision or benefit and
related accrued income taxes payable and deferred income tax assets and
liabilities as income taxes will be borne by the partners and not the
Partnership.
F. Reflects the increase in property and intangibles due to the purchase by
the Operating Partnership of the assets of Howell. The purchase price of
the Howell assets was calculated as follows:
<TABLE>
<S> <C>
Howell share of gross proceeds of the Offering
(46% of $168,100).............................................. $ 77,326
Subordinated OLP Units to be issued to Howell
(1,863,000 units valued at $20.50)............................. 38,192
General Partner Interests to be issued to Howell
(46% of 250,000 equivalent units at $20.50).................... 2,357
--------
Purchase price of Howell assets................................. $117,875
========
</TABLE>
Under the purchase method of accounting, the purchase price was
allocated to the Howell assets based on their relative fair values as
estimated by management. The total purchase price in excess of the
historical cost of Howell's assets was calculated as follows:
<TABLE>
<S> <C>
Purchase price of Howell assets............................... $117,875
Less: Historical book value of Howell property, inventory and
other assets to be transferred to the Partnership............ (72,590)
Less: Cash to be contributed by Howell to increase inventory
to agreed upon level......................................... (117)
--------
Purchase price in excess of historical cost of Howell assets.. $ 45,168
========
</TABLE>
The allocation of the purchase price of the Howell assets based on
their relative fair values resulted in an increase in property and
equipment of $29,075 to reflect those assets at their estimated fair
values with the remaining $16,093 of value allocated to goodwill. This
allocation
F-8
<PAGE>
GENESIS ENERGY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
is preliminary and may change based on final terms of the transactions.
The Howell pipeline assets are subject to a mortgage that will be
released simultaneously with the closing of the Offering. The Basis
assets will be recorded at their historical carrying amounts.
G. Reflects the elimination of the bank debt and capital lease obligations,
related unamortized assets and related interest expense of Howell that,
pursuant to the Contribution Agreement, will not be assumed by the
Partnership.
H. Reflects the issuance of Partnership interests upon the closing of the
Offering, using the following relative partnership interests:
(i) General Partner interests representing an approximate 2% interest in
the Partnership and (ii) 8,200 Common Units representing an approximate
98% limited partner interest in the Partnership. The Partnership will
have an approximate 66.94% general partner interest in the Operating
Partnership. The 0.66% general partner interest in the Operating
Partnership is held by Genesis Energy, L.L.C. and 2,187,000 and
1,863,000 subordinated limited partner units in the Operating
Partnership are held by Basis and Howell, respectively. These
subordinated limited partner units represent a total of 32.40% of the
limited partner interests in the Operating Partnership. The interests
held by Basis, Howell and Genesis Energy, L.L.C. in the Operating
Partnership are included in minority interests.
I. Reflects the elimination of revenues and crude costs on transactions
between Basis and Howell.
J. Reflects estimated fees associated with the Master Credit Support
Agreement. The fees for each year were estimated based on pro forma
levels of crude costs for the year. The Master Credit Support Agreement
provides for a decreasing amount of credit support over a three year
period, with increasing fees for that support each year. Management
believes that the rates in the second year of the Agreement are most
representative of the rates the Operating Partnership could obtain from
third parties and has, therefore, used those rates to calculate the pro
forma adjustment. The calculation also considered that the Operating
Partnership should be able to obtain levels of open credit from
counterparties consistent with those levels obtained by Basis and Howell
historically. This adjustment is subject to revision based upon possible
changes to the Credit Support Agreement.
K. Reflects estimated general and administrative expenses (e.g., costs of
tax return preparation, annual and quarterly reports to Unitholders,
investor relations, and registrar and transfer agent fees) and
compensation costs, above those incurred on a historical basis, for the
operation of the Partnership as a separate public entity.
The estimated incremental general and administrative expenses were
determined by obtaining estimates from vendors and totaled
approximately $450 on an annual basis. The estimated incremental
compensation costs were determined by analyzing new positions within
the new organization and totaled approximately $425 on an annual basis.
The pro forma adjustment for general and administrative expenses does
not include any amount for the incentive compensation that might be
paid to key employees. The amounts payable under the Incentive Plan are
at the discretion of the Compensation Committee; therefore an amount
could not be determined for inclusion in these pro forma consolidated
statements of operations.
L. Reflects estimated additional operating and general and administrative
costs that Howell would have incurred had it owned the crude oil
pipelines during the period. The estimated amounts of additional
operating and general and administrative expenses were determined based
on amounts Howell has incurred since it acquired the crude oil
pipelines.
F-9
<PAGE>
GENESIS ENERGY, L.P.
NOTES TO PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
M. Reflects the additional depreciation and amortization expense due to the
increase in property and intangibles that resulted from applying the
purchase method of accounting to the Howell assets. Property, which
consists primarily of pipelines, and intangibles will be amortized over
20 years.
N. Reflects the estimated additional depreciation expense that Howell would
have recorded had it owned the crude oil pipelines during the period.
O. Reflects the elimination of net interest charged between Basis and its
parent company, as Genesis Energy, L.P., will have no long-term debt as
of the closing.
P. Minority interests in the Operating Partnership represents the 0.66%
general partner interest and the 32.40% subordinated limited partner
interests in the Operating Partnership not owned by the Partnership.
Q. Net income per Common Unit is determined by dividing the net income that
would be allocated to the Common Unitholders, which is 98% of net
income, by the number of common units outstanding. The number of common
units outstanding, 8,200,000, were assumed to have been outstanding the
entire period.
F-10
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
CONDENSED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ -- $ --
Accounts receivable--
Trade.............................................. 117,361 206,798
Related party...................................... 155,427 156,170
Inventories.......................................... 6,041 2,007
Current deferred income tax assets................... 456 582
-------- --------
Total current assets............................. 279,285 365,557
PROPERTY AND EQUIPMENT, net............................ 3,751 2,449
DEFERRED INCOME TAX ASSETS............................. -- 94
OTHER ASSETS, net...................................... -- --
-------- --------
Total assets..................................... $283,036 $368,100
======== ========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable--
Trade.............................................. $212,035 $323,857
Related party...................................... 70,316 38,868
Accrued liabilities.................................. 3,078 2,565
Accrued income taxes................................. 6,030 4,537
-------- --------
Total current liabilities........................ 291,459 369,827
DEFERRED INCOME TAX LIABILITIES........................ 14 --
-------- --------
Total liabilities................................ 291,473 369,827
DIVISIONAL EQUITY...................................... (8,437) (1,727)
-------- --------
Total liabilities and divisional equity.......... $283,036 $368,100
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-11
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
CONDENSED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
REVENUES:
Unrelated parties................................. $ 905,911 $ 1,020,105
Related party..................................... 695,900 937,705
------------ ------------
1,601,811 1,957,810
COST OF SALES:
Crude costs, unrelated parties.................... 1,286,069 1,744,640
Crude costs, related party........................ 301,369 195,321
Field operating costs............................. 3,767 3,668
------------ ------------
Total cost of sales............................. 1,591,205 1,943,629
------------ ------------
Gross margin.................................. 10,606 14,181
EXPENSES:
General and administrative........................ 1,883 1,789
Depreciation and amortization..................... 3,686 950
------------ ------------
Operating income.............................. 5,037 11,442
OTHER INCOME (EXPENSE):
Interest, net..................................... (169) 79
Other, net........................................ 38 (80)
------------ ------------
INCOME BEFORE INCOME TAXES.......................... 4,906 11,441
INCOME TAX PROVISION................................ 1,851 4,302
------------ ------------
NET INCOME.......................................... $ 3,055 $ 7,139
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-12
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
CONDENSED STATEMENT OF DIVISIONAL EQUITY
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, January 1, 1996............................................... $(8,437)
Net income........................................................... 7,139
Net advances to parent............................................... (429)
-------
BALANCE, June 30, 1996................................................. $(1,727)
=======
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-13
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
CONDENSED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1995 1996
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................................... $ 3,055 $ 7,139
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization................. 3,686 950
Deferred income taxes......................... (193) (234)
(Gain) loss on sale of fixed assets........... (33) 82
Other noncash charges......................... 21 --
Changes in components of working capital--
Accounts receivable........................... (142,087) (90,180)
Inventories................................... 5,088 4,034
Accounts payable.............................. 136,513 80,374
Accrued liabilities........................... (200) (513)
Accrued income taxes.......................... (127) (1,493)
------------- ------------
Net cash provided by operating activities... 5,723 159
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets.............. 491 270
------------- ------------
Net cash provided by investing activities... 491 270
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances to parent.......................... (6,214) (429)
------------- ------------
Net cash used in financing activities....... (6,214) (429)
------------- ------------
NET DECREASE IN CASH AND CASH EQUIVALENTS......... -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.... -- --
------------- ------------
CASH AND CASH EQUIVALENTS, END OF PERIOD.......... $ -- $ --
============= ============
</TABLE>
The accompanying notes are an integral part of these condensed financial
statements.
F-14
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO CONDENSED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. BASIS OF FINANCIAL STATEMENT PREPARATION
The condensed financial statements included herein are unaudited and have
been prepared by Basis Petroleum, Inc. Crude Gathering Division (Basis
Gathering), in accordance with the rules and regulations of the Securities and
Exchange Commission. In the opinion of management, all adjustments have been
made which are necessary for a fair statement of the results of operations and
financial position for the interim periods presented. Such adjustments
consisted only of normal recurring items unless otherwise disclosed. These
condensed financial statements should be read in conjunction with the
financial statements and notes thereto of Basis Petroleum, Inc. Crude
Gathering Division included elsewhere in this Prospectus. The results of
operations for the first six months of 1996 are, in management's opinion, due
to unusually favorable market conditions and are not necessarily indicative of
the results to be expected for a full year.
The preparation of these condensed financial statements required the use of
certain estimates and assumptions by management in determining Basis
Gathering's assets, liabilities, revenues and expenses. Actual results could
differ from these estimates.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In 1995, Basis Gathering adopted Statement of Financial Accounting Standards
No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-
Lived Assets to be Disposed of" ("Statement 121"). Statement 121 contains
provisions for recording impairment of long-lived assets that are not expected
to produce net cash flows in the future to fully recover the remaining cost of
the related assets. Basis Gathering was not required to record impairment of
any of its assets as a result of adopting Statement 121.
3. INVENTORIES
At December 31, 1995 and June 30, 1996, inventories consisted of the
following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Marketing crude oil inventories, at market............ $3,134 $ --
Minimum marketing crude oil inventories, at lower of
cost or market....................................... 2,551 1,638
Store warehouse inventories, at lower of cost or
market............................................... 356 369
------ ------
Total inventories................................... $6,041 $2,007
====== ======
</TABLE>
As of December 31, 1995 and June 30, 1996, the number of barrels included in
minimum crude oil marketing inventories was 185,000, and 139,000,
respectively, with approximate market values of $3,573,000 and $2,853,000,
respectively. Total minimum marketing crude oil inventories were lower at June
30, 1996 to take advantage of a backwardated market.
4. PROPERTY AND EQUIPMENT
At December 31, 1995 and June 30, 1996, property and equipment consisted of
the following (in thousands):
F-15
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ --------
<S> <C> <C>
Land and buildings..................................... $1,032 $ 761
Machinery and equipment................................ 5,698 5,136
Vehicles............................................... 3,377 3,377
Data processing equipment.............................. 3,307 3,307
Furniture and fixtures................................. 103 103
------ -------
13,517 12,684
Less--Accumulated depreciation......................... 9,766 10,235
------ -------
Property and equipment, net.......................... $3,751 $ 2,449
====== =======
</TABLE>
Depreciation expense was $1,142,000 and $950,000 for the six months ended
June 30, 1995 and 1996, respectively.
5. SUPPLEMENTAL CASH FLOW INFORMATION
Payment of imputed interest was $169,000 for the six months ended June 30,
1995. Receipt of imputed interest was $79,000 for the six months ended June
30, 1996.
Cash paid for state income taxes and the imputed cash payments made by Basis
Gathering for federal income taxes totaled $2,172,000 and $6,030,000 for the
six months ended June 30, 1995 and 1996, respectively.
6. INCOME TAXES
The effective tax rate for the six months ended June 30, 1995 and 1996 was
38%.
7. FINANCIAL INSTRUMENTS
Basis Gathering routinely utilizes forward contracts, swaps, options and
futures contracts in an effort to minimize the impact of market fluctuations
on inventories and contractual commitments. Gains and losses on forward
contracts, swaps, options and futures contracts used to hedge future contract
purchases of unpriced domestic crude oil, where firm commitments to sell are
required prior to establishment of the purchase price, are deferred until the
margin from the underlying risk element of the hedged item is recognized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 80,
"Accounting for Futures Contracts." Unrecognized income of $1,614,000 and
$928,000 was deferred on these contracts at December 31, 1995 and June 30,
1996, respectively.
At June 30, 1996, Basis Gathering had written options on 2,150,000 barrels
of crude oil with terms extending through December 1996. These options
obligate Basis Gathering to sell the committed barrels at market-based prices.
8. FORMATION OF MASTER LIMITED PARTNERSHIP
On July 18, 1996, Basis Petroleum, Inc. announced that it had signed a
Letter of Intent with Howell Corporation covering the contributions by each
entity of their respective crude oil gathering, marketing and transportation
activities to form a master limited partnership.
F-16
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO CONDENSED FINANCIAL STATEMENTS--(CONTINUED)
9. COMMITMENTS AND CONTINGENCIES
Basis Gathering has contractual commitments (primarily forward contracts)
arising in the ordinary course of business. At June 30, 1996, the Company had
commitments to purchase 31,669,000 barrels of crude oil at fixed prices
ranging from $17.05 to $22.14 per barrel extending to December 1996, and
commitments to sell 35,017,000 barrels of crude oil at fixed prices ranging
from $17.12 to $22.10 per barrel extending to December 1996. Additionally,
Basis Gathering had commitments to purchase 27,732,000 barrels of crude oil
extending to June 1998, and commitments to sell 6,178,000 barrels of crude oil
extending to December 1996, associated with market-related contracts.
Basis Gathering is subject to various environmental laws and regulations.
Policies and procedures are in place to monitor compliance. Basis Gathering's
management has made an assessment of its potential environmental exposure and
determined that such exposure is not material to its financial position,
results of operations or cash flows.
Basis Gathering is subject to lawsuits in the normal course of business and
examination by tax and other regulatory authorities. Such matters presently
pending are not expected to have a material adverse effect on Basis
Gathering's financial position, results of operations or cash flows.
F-17
<PAGE>
HOWELL CRUDE OPERATIONS
CONDENSED COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents............................ $ -- $ --
Accounts receivable--
Trade.............................................. 56,283 56,955
Related party...................................... 842 338
Inventories.......................................... 1,991 1,660
Current deferred income tax assets................... 177 238
Other................................................ 178 157
-------- --------
Total current assets............................. 59,471 59,348
PROPERTY AND EQUIPMENT, net............................ 70,356 70,925
OTHER ASSETS, net...................................... 272 241
-------- --------
TOTAL ASSETS........................................... $130,099 $130,514
======== ========
LIABILITIES AND EQUITY OF PARENT
CURRENT LIABILITIES:
Current portion of long-term debt.................... $ 5,802 $ 6,346
Accounts payable--
Trade.............................................. 56,287 55,777
Related party.................................... 1,441 1,319
Accrued liabilities.................................. 3,456 3,242
Accrued income taxes................................. 229 97
-------- --------
Total current liabilities........................ 67,215 66,781
LONG-TERM DEBT......................................... 48,956 45,286
DEFERRED INCOME TAX LIABILITIES........................ 518 982
COMMITMENTS AND CONTINGENCIES..........................
EQUITY OF PARENT....................................... 13,410 17,465
-------- --------
TOTAL LIABILITIES AND EQUITY OF PARENT................. $130,099 $130,514
======== ========
</TABLE>
The accompanying notes are an integral part of these condensed combined
financial statements.
F-18
<PAGE>
HOWELL CRUDE OPERATIONS
CONDENSED COMBINED STATEMENTS OF OPERATIONS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
--------------------------
1995 1996
------------ ------------
<S> <C> <C>
REVENUES:
Gathering and marketing revenues.................. $ 296,281 $ 315,491
Pipeline revenues................................. 4,755 8,338
------------ ------------
Total revenues.................................. 301,036 323,829
COSTS OF SALES:
Crude costs....................................... 289,220 307,575
Field operating costs............................. 3,638 3,898
Pipeline operating costs.......................... 1,076 2,488
------------ ------------
Total cost of sales............................. 293,934 313,961
------------ ------------
GROSS MARGIN........................................ 7,102 9,868
EXPENSES:
General and administrative........................ 1,969 2,173
Depreciation and amortization..................... 1,165 2,001
------------ ------------
OPERATING INCOME.................................... 3,968 5,694
OTHER INCOME (EXPENSE):
Interest expense.................................. (1,256) (2,062)
Other, net........................................ 3 1
------------ ------------
INCOME BEFORE INCOME TAXES.......................... 2,715 3,633
INCOME TAX PROVISION................................ 1,009 1,325
------------ ------------
NET INCOME.......................................... $ 1,706 $ 2,308
============ ============
</TABLE>
The accompanying notes are an integral part of these condensed combined
financial statements.
F-19
<PAGE>
HOWELL CRUDE OPERATIONS
CONDENSED COMBINED STATEMENT OF EQUITY OF PARENT
FOR THE SIX MONTHS ENDED JUNE 30, 1996
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, January 1, 1996............................................... $13,410
Net income........................................................... 2,308
Net advances from parent............................................. 1,747
-------
BALANCE, June 30, 1996................................................. $17,465
=======
</TABLE>
The accompanying notes are an integral part of these condensed combined
financial statements.
F-20
<PAGE>
HOWELL CRUDE OPERATIONS
CONDENSED COMBINED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-----------------
1995 1996
-------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income................................................ $ 1,706 $ 2,308
Adjustments to reconcile net income to net cash provided
by operating activities--
Depreciation and amortization........................... 1,165 2,001
Deferred income taxes................................... 52 402
Changes in components of working capital--
Accounts receivable.................................... (12,416) (168)
Inventories............................................ (195) 331
Other current assets................................... 44 21
Accounts payable....................................... 11,263 (632)
Accrued liabilities.................................... 2,220 (213)
Accrued income taxes................................... (31) (132)
-------- -------
Net cash provided by operating activities............. 3,808 3,918
-------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equipment...... 5 100
Additions to property, plant and equipment................ (67,075) (2,662)
Other, net................................................ (200) 23
-------- -------
Net cash used in investing activities................. (67,270) (2,539)
-------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances from parent.................................. 5,985 1,747
Borrowings under term loan agreement...................... 57,500 --
Principal payments under term loan agreement.............. -- (3,101)
Principal payments under capital lease obligations........ (23) (25)
-------- -------
Net cash provided by (used in) financing activities... 63,462 (1,379)
-------- -------
INCREASE IN CASH AND CASH EQUIVALENTS....................... -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD.............. -- --
-------- -------
CASH AND CASH EQUIVALENTS, END OF PERIOD.................... $ -- $ --
======== =======
</TABLE>
The accompanying notes are an integral part of these condensed combined
financial statements.
F-21
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1996
1. BASIS OF FINANCIAL STATEMENT PREPARATION
The condensed combined financial statements included herein have been
prepared by Howell Crude Operations (the Company) without audit, in accordance
with the rules and regulations of the Securities and Exchange Commission. In
the opinion of management, all adjustments (all of which are normal and
recurring) have been made which are necessary for a fair statement of the
results of operations and financial position for the interim periods
presented. These condensed combined financial statements should be read in
conjunction with the combined financial statements and notes thereto of Howell
Crude Operations included elsewhere in this Prospectus.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
2. ADOPTION OF NEW ACCOUNTING STANDARD
In 1996, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets
to be Disposed of" ("Statement 121") was issued. Statement 121 contains
provisions for recording impairment of long-lived assets that are not expected
to produce net cash flows in the future to fully recover the remaining cost of
the related assets. The Company was not required to record impairment of any
of its assets as a result of adopting Statement 121.
3. INVENTORIES
The components of inventories at the balance sheet dates are as follows (in
thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Crude oil.................................... $1,963 $1,638
Supplies..................................... 28 22
------ ------
Total...................................... $1,991 $1,660
====== ======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Land and buildings........................... $ 3,958 $ 3,991
Pipelines and related assets................. 66,591 68,971
Vehicles..................................... 3,203 3,096
Office equipment............................. 777 793
Other equipment.............................. 1,364 1,456
------- -------
75,893 78,307
Less-Accumulated depreciation................ 5,537 7,382
------- -------
Net property and equipment................... $70,356 $70,925
======= =======
</TABLE>
Depreciation expense was $1,137,000 and $1,992,000 for the six months ended
June 30, 1995 and 1996, respectively.
F-22
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. OTHER ASSETS
Other assets consist primarily of the fee paid to obtain the Company's term
loan agreement. Other assets are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31, 1995 JUNE 30, 1996
----------------- -------------
<S> <C> <C>
Noncompete agreement......................... $113 $--
Term loan agreement facility fee............. 288 288
Utility deposits............................. 6 5
---- ----
407 293
Less-Accumulated amortization................ 135 52
---- ----
Unamortized other assets..................... $272 $241
==== ====
</TABLE>
Amortization expense was $28,000 and $9,000 for the six months ended June
30, 1995 and 1996, respectively. Amortization of the facility fee, which is
included in interest expense, for the six months ended June 30, 1995 and 1996
was $11,000 and $21,000, respectively.
6. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $462,000 and $2,061,000 for the six
months ended June 30, 1995 and 1996, respectively.
Cash paid for state income taxes and the imputed cash payments made by the
Company for federal income taxes totaled $850,000 and $872,000 for the six
months ended June 30, 1995 and 1996, respectively.
7. INCOME TAXES
The effective tax rate for the six months ended June 30, 1995 and 1996 was
37% and 36%, respectively.
8. DERIVATIVES
Crude oil future contracts and options are being used as hedging tools in a
limited program of hedging crude oil inventories and fixed purchase price
commitments. Changes in the market value of the financial instruments are
deferred until the gain or loss is recognized on the hedged transactions.
Unrecognized gain of $3,000 and $67,000 was deferred on these contracts at
December 31, 1995 and June 30, 1996, respectively.
9. COMMITMENTS AND CONTINGENCIES
Donna Refinery Partners, Ltd. v. Howell Crude Oil Company and Howell
Corporation; District Court of Harris County, Texas; No. 89-033634. The suit
alleged the Company is in breach of a crude oil supply contract. In December
1993, a jury verdict of $1.9 million was rendered against the Company which
was subsequently reduced by the judge to approximately $675,000. The Company
believes the judgment is in error. The Company filed a motion for a new trial
that was denied, so the Company appealed the decision. The plaintiff has filed
an appeal to increase the recovery by $1.25 million. On June 6, 1996, the
Fourteenth Court of Appeals affirmed the judgment of the lower court. The
Company is currently perfecting its rights to appeal this case to the Texas
Supreme Court. The Company does not believe that the ultimate resolution of
this matter will have a material adverse effect on the financial position,
results of operations or cash flows of the Company.
F-23
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO CONDENSED COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Several working interest owners and royalty owners have filed lawsuits
against the Company in Alabama concerning pricing in the North Frisco City
Field. The lawsuits allege the Company violated its contracts with the
plaintiffs by not paying the plaintiffs ". . . the highest available price for
oil". Damages claimed by the plaintiffs include approximately $3.8 million and
are based on numerous damage theories including, but not limited to,
allegations of breach of contract and fraud. The complaint also seeks
unspecified punitive damages. The Company filed an answer denying all charges.
On June 28, 1996, the Court entered an order denying class certification.
Related to this matter, the Company, on July 11, 1995, received a demand
letter from the working interest owners in the North Frisco City Field and in
the North Rome Field indicating the Company had not paid according to the
terms of a "call on production".
The Company was granted a call on a portion of this production but has never
exercised the call. Accordingly, the Company has filed petitions for
declaratory judgment to that effect in cases styled Howell Petroleum
Corporation, et al, vs. Shore Oil Company, et al, District Court of Harris
County, Texas; No. 95-037180 and Howell Petroleum Corporation, et al, vs.
Tenexco, Inc., et al, District Court of Harris County, Texas; No. 95-037970.
The defendants in this action have counterclaimed against the Company. These
claims are similar in nature to the Alabama litigation. One of the defendants,
John Faulkinberry, has filed a counterclaim against the Company seeking actual
damages of $75,000 and punitive damages of $100,000,000. The Company does not
believe that the ultimate resolution of these matters will have a material
adverse effect on the financial position, results of operations or cash flows
of the Company.
The Company is subject to various environmental regulations and laws.
Procedures exist within the Company to monitor compliance and assess the
potential environmental exposure of the Company. The Company believes that
such exposure is not material to its financial position, results of operations
or cash flows.
The Company has indemnified Exxon for certain environmental claims that may
be made in the future attributable to the time when Exxon owned the crude oil
pipelines that the Company acquired from Exxon. Management does not believe
the indemnification of Exxon for these environmental liabilities will have a
material financial impact on the financial position, results of operations or
cash flows of the Company.
The Company is subject to lawsuits in the ordinary course of business and
examination by tax and other regulatory authorities. Such matters presently
pending are not expected to have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
The Company has contractual commitments (primarily forward contracts)
arising in the ordinary course of business. At June 30, 1996, the Company had
commitments to purchase 780,000 barrels of crude oil for July delivery at
fixed prices ranging from $19.30 to $22.37 per barrel and commitments to sell
900,000 barrels of crude oil for July delivery at fixed prices ranging from
$19.65 to $22.25 per barrel. Additionally, the Company had commitments to
purchase approximately 2,300,000 barrels and to sell approximately 2,200,000
barrels of crude oil under 30-day evergreen contracts at market-based prices.
F-24
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Board of Directors of
Basis Petroleum, Inc.:
We have audited the accompanying balance sheets of Basis Petroleum, Inc.'s
(formerly Phibro Energy USA, Inc.) Crude Gathering Division as of December 31,
1994 and 1995, and the related statements of income, divisional equity and
cash flows for each of the three years in the period ended December 31, 1995.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Basis Petroleum, Inc.'s
Crude Gathering Division as of December 31, 1994 and 1995, and the results of
its operations and its cash flows for each of the three years in the period
ended December 31, 1995, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
June 20, 1996
F-25
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
BALANCE SHEETS--DECEMBER 31, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995
-------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ -- $ --
Accounts receivable--
Trade.................................................... 127,616 117,361
Related party............................................ 47,032 155,427
Inventories................................................ 9,290 6,041
Deferred income tax assets................................. 315 456
-------- --------
Total current assets................................... 184,253 279,285
PROPERTY AND EQUIPMENT, net.................................. 6,394 3,751
OTHER ASSETS, net............................................ 2,720 --
-------- --------
Total assets........................................... $193,367 $283,036
======== ========
LIABILITIES AND DIVISIONAL EQUITY
CURRENT LIABILITIES:
Accounts payable--
Trade.................................................... $140,371 $212,035
Related party............................................ 43,064 70,316
Accrued liabilities........................................ 2,995 3,078
Accrued income taxes....................................... 2,171 6,030
-------- --------
Total current liabilities.............................. 188,601 291,459
DEFERRED INCOME TAX LIABILITIES.............................. 373 14
-------- --------
Total liabilities...................................... 188,974 291,473
DIVISIONAL EQUITY............................................ 4,393 (8,437)
-------- --------
Total liabilities and divisional equity................ $193,367 $283,036
======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-26
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
STATEMENTS OF INCOME
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
REVENUES:
Unrelated parties........................ $1,400,228 $1,160,151 $1,916,231
Related party............................ 770,828 670,570 1,523,834
---------- ---------- ----------
2,171,056 1,830,721 3,440,065
COST OF SALES:
Crude costs, unrelated parties........... 1,877,724 1,455,275 2,729,145
Crude costs, related party............... 276,177 350,966 680,614
Field operating costs.................... 8,046 7,778 7,152
---------- ---------- ----------
Total cost of sales.................... 2,161,947 1,814,019 3,416,911
---------- ---------- ----------
Gross margin......................... 9,109 16,702 23,154
EXPENSES:
General and administrative............... 4,111 3,858 3,658
Depreciation and amortization............ 7,947 7,530 4,815
---------- ---------- ----------
Operating income (loss).............. (2,949) 5,314 14,681
OTHER INCOME (EXPENSE):
Interest, net............................ (1,215) (685) 173
Other, net............................... 122 82 (197)
---------- ---------- ----------
INCOME (LOSS) BEFORE INCOME TAXES AND
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES................................ (4,042) 4,711 14,657
INCOME TAX PROVISION (BENEFIT)............. (1,498) 1,792 5,530
---------- ---------- ----------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF
CHANGES IN ACCOUNTING PRINCIPLES.......... (2,544) 2,919 9,127
CUMULATIVE EFFECT OF CHANGES IN ACCOUNTING
PRINCIPLES (Net of income tax benefit of
$134 in 1993 and $73 in 1994)............. (248) (136) --
---------- ---------- ----------
NET INCOME (LOSS).......................... $ (2,792) $ 2,783 $ 9,127
========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-27
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
STATEMENTS OF DIVISIONAL EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, January 1, 1993............................................. $ 24,824
Net loss........................................................... (2,792)
Net advances to parent............................................. (6,454)
--------
BALANCE, December 31, 1993........................................... 15,578
Net income......................................................... 2,783
Net advances to parent............................................. (13,968)
--------
BALANCE, December 31, 1994........................................... 4,393
Net income......................................................... 9,127
Net advances to parent............................................. (21,957)
--------
BALANCE, December 31, 1995........................................... $ (8,437)
========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-28
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
1993 1994 1995
--------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............................. $ (2,792) $ 2,783 $ 9,127
Adjustments to reconcile net income (loss) to
net cash provided by operating activities--
Depreciation and amortization............... 7,947 7,530 4,815
Deferred income taxes....................... (390) (453) (500)
Gain on sale of fixed assets................ (76) (85) (33)
Base stock inventory write-down............. 1,294 -- --
Other noncash charges....................... 787 (195) 124
Changes in components of working capital--
Accounts receivable......................... 178,829 (51,951) (98,158)
Inventories................................. 3,995 (426) 3,249
Accounts payable............................ (190,797) 52,459 98,916
Accrued liabilities......................... (198) 760 83
Accrued income taxes........................ 3,689 3,413 3,858
--------- -------- --------
Net cash provided by operating activities. 2,288 13,835 21,481
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of fixed assets............ 1,069 173 493
Additions to property and equipment........... (122) (56) (17)
--------- -------- --------
Net cash provided by investing activities. 947 117 476
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances to parent........................ (6,454) (13,968) (21,957)
--------- -------- --------
Net cash used in financing activities..... (6,454) (13,968) (21,957)
--------- -------- --------
NET DECREASE IN CASH AND CASH EQUIVALENTS....... (3,219) (16) --
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR.. 3,235 16 --
--------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF YEAR........ $ 16 $ -- $ --
========= ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-29
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS:
Basis Gathering is a division of Basis Petroleum, Inc. (the Company), a
Texas corporation, formerly Phibro Energy USA, Inc., a wholly owned subsidiary
of Salomon Inc (Salomon). Basis Gathering gathers approximately 85,000 barrels
a day in eight states, principally in the southern and southwestern United
States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Presentation
The accompanying financial statements include the accounts of Basis
Gathering, representing the assets, liabilities, revenues and expenses related
to operation of the crude gathering business.
Use of Estimates
The preparation of these financial statements required the use of certain
estimates and assumptions by management in determining Basis Gathering's
assets, liabilities, revenues and expenses. Actual results could differ from
these estimates.
Cash and Cash Equivalents
Basis Gathering considers investments purchased with a maturity of three
months or less to be cash equivalents. Basis Gathering has no requirement for
compensating balances or restrictions on cash.
Inventories
Crude oil inventories held for sale are valued at market. Due to the nature
of Basis Gathering's marketing activities, a minimum level of physical
inventories is required, as determined by management, to ensure efficient and
uninterrupted operation of the gathering business. These minimum marketing
inventories are not marked-to-market as inventories held for sale but are
carried at the lower of cost or market, using the weighted-average cost
method.
Store warehouse inventories, including parts and fuel, are carried at the
lower of cost or market.
Financial Instruments
Basis Gathering routinely utilizes forward contracts, swaps, options and
futures contracts in an effort to minimize the impact of market fluctuations
on inventories and contractual commitments. Gains and losses on forward
contracts, swaps, options and futures contracts used to hedge future contract
purchases of unpriced domestic crude oil, where firm commitments to sell are
required prior to establishment of the purchase price, are deferred until the
margin from the underlying risk element of the hedged item is recognized in
accordance with Statement of Financial Accounting Standards (SFAS) No. 80,
"Accounting for Futures Contracts." Unrecognized income (loss) of $(806,000),
$137,000 and $1,614,000 was deferred on these contracts at December 31, 1993,
1994 and 1995, respectively.
Based on the historical correlations between the New York Mercantile
Exchange (NYMEX) price for West Texas intermediate crude at Cushing, Oklahoma,
and the various trading hubs at which Basis
F-30
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Gathering trades, Basis Gathering's management believes the hedging program
has been effective in minimizing the overall price risk. Basis Gathering
continuously monitors the basis differentials between its various trading hubs
and Cushing, Oklahoma, to further manage its basis exposure.
Basis Gathering accounts for all other transactions which are not designated
as hedges under the marked-to-market method of accounting. Under this
methodology, forward contracts, swaps, options and futures contracts are
reflected at market value and the resulting unrealized gains and losses are
recognized currently in the statements of income. The net gains and losses are
determined on a counterparty-by-counterparty basis, netted when a contractual
right of offset exists and reflected as either an asset or liability on the
balance sheets. Activities for trading purposes were not material to Basis
Gathering's financial position or results of operations for all years
presented. See Note 11 for further discussion of Basis Gathering's financial
instruments.
Field Operating Expenses
Field operating expenses consist primarily of labor costs for drivers and
field office personnel, truck maintenance, utilities and insurance.
Amortization of Acquisition Costs
In the course of purchasing the assets of Basis Gathering, the Company
acquired various lease volume purchase contracts and noncompete agreements.
These costs were capitalized and amortized using the straight-line method over
four years which approximated the lives of the respective contracts. These
costs were fully amortized during 1995.
Property and Equipment
Property and equipment are carried at cost. Depreciation of property and
equipment is provided using the straight-line method over the respective
estimated useful lives, which range from five to 15 years. Maintenance and
repair costs are charged against current operations. Expenditures which
materially increase value, change capacities or extend useful lives are
capitalized.
In 1995, the Company adopted Statement of Financial Accounting Standards No.
121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to Be Disposed Of." Statement 121 contains provisions for recording
impairment of long-lived assets that are not expected to produce net cash
flows in the future sufficient to fully recover the remaining cost of the
related assets. The Company was not required to record impairment of any of
its assets as a result of adopting Statement 121.
Income Taxes
Basis Gathering is included through the Company in the consolidated federal
income tax returns of Salomon. Basis Gathering is included in the state income
tax returns of the Company.
Basis Gathering's federal and state income taxes are provided as if Basis
Gathering filed its income tax return separately from the Company. If there is
taxable income, taxes are provided at the statutory rate reduced by allowable
tax credits. If there is a taxable loss, a tax benefit is provided at the
statutory rate without limitation of any loss deduction. The tax benefit is
increased by tax credits to the extent the credits may be utilized by the
Company.
F-31
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company adopted SFAS No. 109, "Accounting for Income Taxes," effective
January 1, 1993. SFAS No. 109 requires recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in the financial statements or tax returns. Under this method,
deferred tax assets and liabilities are determined based on differences
between the tax bases of assets and liabilities and their reported amounts in
the financial statements using enacted tax rates.
Revenue Recognition
Basis Gathering recognizes revenue on the accrual method based on the
obligation of the purchaser to make future payments for goods received. The
purchase obligation becomes legally binding when title passes.
Postretirement Benefits
Effective January 1, 1993, the Company adopted SFAS No. 106, "Employers'
Accounting for Postretirement Benefits Other Than Pensions." SFAS No. 106
requires employers to accrue the cost of retiree health care and other
postretirement benefits during the service periods of eligible employees.
Basis Gathering was allocated, as the cumulative effect of a change in
accounting principle, a net charge to income of $248,000 ($382,000 before tax)
in 1993, to reflect the present value of expected future benefits attributed
to employees' services prior to the January 1, 1993, adoption date.
Postemployment Benefits
Effective January 1, 1994, the Company adopted SFAS No. 112, "Employers'
Accounting for Postemployment Benefits." SFAS No. 112 requires employers to
accrue the cost of postemployment benefits during the service periods of
eligible employees. Basis Gathering was allocated, as the cumulative effect of
a change in accounting principle, a net charge to income of $136,000 ($209,000
before tax) in 1994 to reflect the present value at January 1, 1994, of
expected future benefits to be provided for by the Company to former or
inactive employees of Basis Gathering after employment but before retirement
attributed to employees' services prior to the January 1, 1994, adoption date.
Divisional Equity
The Company's net investment in Basis Gathering has been classified in the
accompanying balance sheet as divisional equity, representing Basis
Gathering's accumulated income or loss and the net advances to or from the
Company. Basis Gathering has arrangements with the Company whereby excess
funds are remitted to the Company, which may result at any given period-end in
a divisional deficit.
F-32
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
3. PROPERTY AND EQUIPMENT:
At December 31, 1994 and 1995, property and equipment consisted of the
following (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Land and buildings........................................... $1,032 $1,032
Machinery and equipment...................................... 6,646 5,698
Vehicles..................................................... 3,737 3,377
Data processing equipment.................................... 3,307 3,307
Furniture and fixtures....................................... 111 103
------ ------
14,833 13,517
Less-Accumulated depreciation................................ (8,439) (9,766)
------ ------
Property and equipment, net................................ $6,394 $3,751
====== ======
</TABLE>
Depreciation expense was $2,894,000, $2,472,000 and $2,178,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
4. OTHER ASSETS:
Other assets consist primarily of gathering acquisition costs, net of
related amortization. Gathering acquisition costs at December 31, 1994 and
1995, consisted of the following amounts (in thousands):
<TABLE>
<CAPTION>
1994 1995
------- -------
<S> <C> <C>
Producer contracts......................................... $15,150 $15,150
Noncompete agreements...................................... 4,910 4,910
Start-up cost.............................................. 604 604
------- -------
20,664 20,664
Less--Accumulated amortization............................. (18,027) (20,664)
------- -------
Unamortized gathering acquisition costs.................. $ 2,637 $ --
======= =======
</TABLE>
Amortization expense was $5,053,000, $5,058,000 and $2,637,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
5. INVENTORIES:
At December 31, 1994 and 1995, inventories consisted of the following (in
thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
Marketing crude inventories, at market........................ $6,166 $3,134
Minimum marketing crude inventories, at lower of cost or
market....................................................... 2,551 2,551
Store warehouse inventories, at lower of cost or market....... 573 356
------ ------
Total inventories........................................... $9,290 $6,041
====== ======
</TABLE>
During the fourth quarter of 1993, Basis Gathering incurred a pretax noncash
charge to cost of sales of $1,294,000 to write down its minimum marketing
inventories to market value at year-end. As a result, Basis Gathering's
carrying value of its minimum marketing inventories approximated replacement
value at December 31, 1993.
F-33
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
As of December 31,1994 and 1995, the number of barrels included in minimum
crude marketing inventories was 185,000 and 185,000, respectively, with
approximate market values of $3,242,000 and $3,573,000, respectively.
6. WORKING CAPITAL:
The Company and Salomon have a treasury agreement whereby Salomon provides a
working capital facility on an unsecured basis. This agreement expires on the
earlier of August 31, 1997, or when the Company ceases to be a wholly owned
subsidiary of Salomon.
Basis Gathering has an arrangement with the Company whereby the Company
provides a working capital facility on an unsecured basis. To the extent Basis
Gathering has available excess funds, these amounts are remitted to the
Company against this balance. Outstanding working capital borrowings totaled
$10,806,000 at December 31, 1994. At December 31, 1995, Basis Gathering had a
balance due from the Company of $11,151,000 under the arrangement.
Under the terms of the working capital facility, the Company provides
guarantees or letters of credit to support Basis Gathering's contractual
obligations in its purchase of crude oil. In instances where letters of credit
were provided, such letter-of-credit costs, which were not material, have been
allocated to Basis Gathering.
The working capital balance is a variable interest rate obligation. The
imputed interest rates were based on the blended Salomon short-term borrowing
rate which tracked the daily federal funds rate. Basis Gathering earned net
interest income from the Company of $173,000 for 1995. Basis Gathering
incurred interest expense on borrowings from the Company of $1,215,000 and
$685,000 for 1993 and 1994.
7. STATEMENTS OF CASH FLOWS:
Payments of imputed interest were $1,215,000, $685,000 and $169,000 during
1993, 1994 and 1995, respectively. The Company received payments on behalf of
Basis Gathering of $4,433,000 and $1,109,000 in 1993 and 1994, respectively,
for the utilization of federal income tax net operating losses from prior
periods. The Company paid, on behalf of Basis Gathering, $1,959,000 in federal
income taxes in the fourth quarter of 1995 related to 1994.
8. EMPLOYEE BENEFIT PLANS:
In order to encourage long-term savings and to provide additional funds for
retirement to its employees, the Company sponsors a profit-sharing and
retirement savings plan. Under this plan, the Company's matching contribution
is calculated as the lesser of 50 percent of each employee's annual pretax
contribution or 3 percent of each employee's total compensation. The Company
also makes a profit-sharing contribution of at least 3 percent of each
eligible employee's total compensation. Basis Gathering's costs relating to
this plan were $219,000, $289,000 and $292,000 in 1993, 1994 and 1995,
respectively.
The Company also provides certain health care and survivor benefits for its
active and retired employees. The Company self-insures these benefit programs.
Both active and retired employees contribute to such programs with retired
employees assuming a larger portion of the cost attributable to their
benefits. Expenses allocated to Basis Gathering for these benefits were
$732,000, $625,000 and $391,000 in 1993, 1994 and 1995, respectively. Basis
Gathering has accrued, pursuant to SFAS No. 106 and SFAS No. 112,
approximately $600,000 at December 31, 1994 and 1995 for these benefits.
F-34
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
9. INCOME TAXES:
The components of the provision (benefit) for income taxes for the years
ended December 31, 1993, 1994 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------ ------
<S> <C> <C> <C>
Current--
Federal........................................... $(1,109) $1,959 $5,416
State............................................. (133) 212 614
------- ------ ------
Total current................................... (1,242) 2,171 6,030
------- ------ ------
Deferred--
Federal, continuing operations.................... (256) (379) (500)
Federal, effect of accounting changes............. (134) (73) --
------- ------ ------
Total deferred.................................. (390) (452) (500)
------- ------ ------
Total provision (benefit)....................... $(1,632) $1,719 $5,530
======= ====== ======
</TABLE>
The components of deferred tax assets and liabilities at December 31, 1993,
1994 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
----- ----- ----
<S> <C> <C> <C>
Current deferred tax assets (liabilities)--
Inventories............................................ $ (3) $ 108 $249
Accrued liabilities.................................... 134 207 207
----- ----- ----
Net current deferred tax assets...................... 131 315 456
----- ----- ----
Noncurrent deferred tax liabilities--
Property and equipment................................. (642) (373) (14)
----- ----- ----
Net deferred tax assets (liabilities)................ $(511) $ (58) $442
===== ===== ====
</TABLE>
A reconciliation of income taxes computed at the federal statutory rate to
income taxes computed at Basis Gathering's effective tax rate is as follows
(in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------ ------
<S> <C> <C> <C>
Provision (benefit) for income taxes at the
statutory rate..................................... $(1,415) $1,649 $5,130
State taxes, net of federal tax benefit............. (86) 138 399
Other............................................... 3 5 1
------- ------ ------
Provision (benefit) for income taxes................ (1,498) 1,792 5,530
Tax effect of accounting changes.................... (134) (73) --
------- ------ ------
Provision (benefit) for income taxes after tax
effect of accounting changes....................... $(1,632) $1,719 $5,530
======= ====== ======
</TABLE>
Net operating loss carryforwards have not been utilized as a reduction
against Basis Gathering's future tax liability. Rather, as the losses were
utilized on the consolidated tax return, the benefit has been reflected as a
contribution from the Company in Basis Gathering's equity in the year of
benefit.
F-35
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
10. RELATED-PARTY TRANSACTIONS:
Basis Gathering has related-party sales and purchases of crude with the
Company and Phibro Inc., a wholly owned subsidiary of Salomon. These sales
amounted to $770,828,000, $670,570,000 and $1,523,834,000 respectively, for
the years ended December 31, 1993, 1994 and 1995. Purchases totaled
$276,177,000, $350,966,000 and $680,614,000 for the years ended December
31,1993,1994 and 1995.
Basis Gathering cleared its commodity futures transactions on the New York
Mercantile Exchange through Basis Clearing, Inc., a wholly owned subsidiary of
the Company, and Phibro Energy Clearing, Inc., a wholly owned subsidiary of
Phibro Inc. Basis Gathering paid commissions to Basis Clearing, Inc., of
$142,000 in 1995 and to Phibro Energy Clearing, Inc., of $479,000, $263,000
and $234,000 in 1993, 1994 and 1995, respectively.
The Company allocates certain general and administrative costs to Basis
Gathering for ancillary services, insurance, and office space. These costs
amount to approximately $1,200,000 for each calendar year and are allocated
based upon the percentage of employment resources applied to Division
operations. Management believes the costs allocated to Basis Gathering were
reasonable.
11. FINANCIAL INSTRUMENTS:
Market Risk
In order to hedge its exposure to market fluctuations, Basis Gathering
enters into various financial instruments with off-balance-sheet risk,
including option contracts and swap agreements. Basis Gathering does not
consider its commodity futures and forward contracts to be financial
instruments since these contracts either require or permit settlement by the
delivery of the underlying commodities. Normally, any contracts used to hedge
market risk are generally less than one year in duration.
At December 31, 1995, Basis Gathering had written options on 4,880,000
barrels of crude oil with terms extending through December 1996. These options
obligate Basis Gathering to sell the committed barrels at market-based prices.
Fair Value and Net Gains and Losses
Estimated fair values of financial instruments and the net gains and losses,
both recognized and deferred, arising from hedging activities at December 31,
1993, 1994 and 1995, are as follows (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995
----------------------- ------------------------ -----------------------
NET NET NET
CARRYING FAIR GAINS CARRYING FAIR GAINS CARRYING FAIR GAINS
AMOUNT VALUE (LOSSES) AMOUNT VALUE (LOSSES) AMOUNT VALUE (LOSSES)
-------- ----- -------- -------- ------ -------- -------- ----- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Option contracts
written................ $47 $47 $-- $1,880 $2,339 $(459) $537 $324 $213
</TABLE>
Quoted market prices are used in determining the fair value of financial
instruments. If quoted prices are not available, fair values are estimated on
the basis of pricing models or quoted prices for financial instruments with
similar characteristics.
F-36
<PAGE>
BASIS PETROLEUM, INC.
CRUDE GATHERING DIVISION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
Credit Risk
Credit risk represents the accounting loss that Basis Gathering would record
if counterparties of its financial transactions failed to perform pursuant to
contractual terms. Management of credit risk involves a number of
considerations, such as the financial profile of the counterparty, the value
of collateral held, if any, specific terms and duration of the contractual
agreement, and the counterparty's sensitivity to political and macroeconomic
developments.
Basis Gathering has established various procedures to manage credit
exposure, including initial credit approvals, credit limits, collateral
requirements and rights of offset. Letters of credit, prepayments and
guarantees are also utilized to limit credit risk to ensure that management's
established credit criteria are met.
12. COMMITMENTS AND CONTINGENCIES:
Basis Gathering uses surface, vehicle and office leases in the course of its
business operations. The future minimum rental payments under all
noncancelable operating leases as of December 31, 1995, were as follows (in
thousands):
<TABLE>
<S> <C>
1996................................................................... $449
1997................................................................... 9
1998................................................................... 4
1999................................................................... 2
2000................................................................... --
Thereafter............................................................. --
----
Total minimum lease obligations........................................ $464
====
</TABLE>
Total operating lease expense for the years ended December 31, 1993, 1994
and 1995, was $530,000, $472,000 and $538,000, respectively.
Basis Gathering has contractual commitments (primarily forward contracts)
arising in the ordinary course of business. At December 31, 1995, Basis
Gathering had commitments to purchase 33,774,000 barrels of crude oil at fixed
prices ranging from $17.04 to $20.20 per barrel extending to December 1996,
and commitments to sell 38,339,000 barrels of crude oil at fixed prices
ranging from $16.75 to $20.25 per barrel extending to December 1996.
Additionally, Basis Gathering had commitments to purchase 30,842,000 barrels
of crude oil extending to June 1998, and commitments to sell 4,195,000 barrels
of crude oil extending to December 1996, associated with market-related
contracts.
Basis Gathering is subject to various environmental laws and regulations.
Policies and procedures are in place to monitor compliance. Basis Gathering's
management has made an assessment of its potential environmental exposure and
determined that such exposure is not material to its financial position,
results of operations or cash flows.
Basis Gathering is subject to lawsuits in the normal course of business and
examination by tax and other regulatory authorities. Such matters presently
pending are not expected to have a material adverse effect on Basis
Gathering's financial position, results of operations or cash flows.
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of Howell Corporation:
We have audited the accompanying combined balance sheets of Howell Crude
Operations (see Note 2) as of December 31, 1994 and 1995, and the related
combined statements of operations, equity of parent and cash flows for each of
the three years in the period ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, such combined financial statements present fairly, in all
material respects, the combined financial position of Howell Crude Operations
as of December 31, 1994 and 1995, and the combined results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE llp
Houston, Texas
August 9, 1996
F-38
<PAGE>
HOWELL CRUDE OPERATIONS
COMBINED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AT DECEMBER 31,
-----------------
1994 1995
------- --------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents.................................. $ -- $ --
Accounts receivable--
Trade.................................................... 41,389 56,283
Related party............................................ 689 842
Inventories................................................ 424 1,991
Current deferred income tax assets......................... 143 177
Other...................................................... 214 178
------- --------
Total current assets..................................... 42,859 59,471
PROPERTY AND EQUIPMENT, net.................................. 2,928 70,356
OTHER ASSETS, net ........................................... 66 272
------- --------
TOTAL ASSETS................................................. $45,853 $130,099
======= ========
LIABILITIES AND EQUITY OF PARENT
CURRENT LIABILITIES:
Current portion of long-term debt.......................... $ 48 $ 5,802
Accounts payable--
Trade.................................................... 42,530 56,287
Related party............................................ 1,177 1,441
Accrued liabilities........................................ 1,819 3,456
Accrued income taxes....................................... 119 229
------- --------
Total current liabilities................................ 45,693 67,215
LONG-TERM DEBT............................................... 133 48,956
DEFERRED INCOME TAX LIABILITIES.............................. 260 518
COMMITMENTS & CONTINGENCIES.................................. -- --
EQUITY OF PARENT............................................. (233) 13,410
------- --------
TOTAL LIABILITIES AND EQUITY OF PARENT....................... $45,853 $130,099
======= ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-39
<PAGE>
HOWELL CRUDE OPERATIONS
COMBINED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES:
Gathering and marketing revenues................ $377,052 $411,647 $617,038
Pipeline revenues............................... 347 392 13,756
-------- -------- --------
Total revenues................................ 377,399 412,039 630,794
COSTS OF SALES:
Crude costs..................................... 367,405 399,067 603,406
Field operating costs........................... 5,459 6,327 7,525
Pipeline operating costs........................ -- -- 3,526
-------- -------- --------
Total cost of sales........................... 372,864 405,394 614,457
-------- -------- --------
GROSS MARGIN...................................... 4,535 6,645 16,337
EXPENSES:
General and administrative...................... 2,511 3,090 4,116
Depreciation and amortization................... 348 593 3,263
-------- -------- --------
OPERATING INCOME.................................. 1,676 2,962 8,958
OTHER INCOME (EXPENSE):
Interest expense................................ (65) (17) (3,598)
Other, net...................................... -- -- 10
-------- -------- --------
INCOME BEFORE INCOME TAXES........................ 1,611 2,945 5,370
INCOME TAX PROVISION.............................. 591 1,108 1,995
-------- -------- --------
NET INCOME........................................ $ 1,020 $ 1,837 $ 3,375
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-40
<PAGE>
HOWELL CRUDE OPERATIONS
COMBINED STATEMENTS OF EQUITY OF PARENT
(IN THOUSANDS)
<TABLE>
<S> <C>
BALANCE, January 1, 1993............................................... $ 936
Net income........................................................... 1,020
Net advances to parent............................................... (2,508)
-------
BALANCE, December 31, 1993............................................. (552)
Net income........................................................... 1,837
Net advances to parent............................................... (1,518)
-------
BALANCE, December 31, 1994............................................. (233)
Net income........................................................... 3,375
Net advances from parent............................................. 10,268
-------
BALANCE, December 31, 1995............................................. $13,410
=======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-41
<PAGE>
HOWELL CRUDE OPERATIONS
COMBINED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................................... $ 1,020 $ 1,837 $ 3,375
Adjustments to reconcile net income to net cash
provided by operating activities--
Depreciation and amortization..................... 348 593 3,263
Deferred income taxes............................. (19) (86) 224
Losses (gains) on disposal of assets.............. -- 9 (7)
Changes in components of working capital--
Accounts receivable.............................. 21,720 (18,167) (15,047)
Inventories...................................... (195) 377 (1,567)
Other current assets............................. (24) (186) 36
Accounts payable................................. (19,856) 18,631 14,021
Accrued liabilities.............................. 41 401 1,637
Accrued income taxes............................. 33 58 110
------- ------- -------
Net cash provided by operating activities...... 3,068 3,467 6,045
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales of property, plant and equip-
ment............................................ 8 38 145
Additions to property, plant and equipment....... (527) (1,829) (70,772)
Other, net....................................... -- (113) (263)
------- ------- -------
Net cash used in investing activities.......... (519) (1,904) (70,890)
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net advances (to) from parent.................... (2,508) (1,518) 10,268
Borrowings under term loan agreement............. -- -- 57,500
Principal payments under term loan agreement..... -- -- (2,875)
Principal payments under capital lease obliga-
tion............................................ (41) (45) (48)
------- ------- -------
Net cash (used in) provided by financing
activities.................................... (2,549) (1,563) 64,845
------- ------- -------
INCREASE IN CASH AND CASH EQUIVALENTS.............. -- -- --
CASH AND CASH EQUIVALENTS, BEGINNING OF YEAR....... -- -- --
------- ------- -------
CASH AND CASH EQUIVALENTS, END OF YEAR............. $ -- $ -- $ --
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these combined financial
statements.
F-42
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
The principal business activities of Howell Crude Operations (the "Company")
are the purchasing, gathering, transporting and marketing of crude oil in the
United States. The Company gathers approximately 35,000 barrels per day at the
wellhead in Texas, Louisiana, Mississippi, Alabama and offshore in the Gulf of
Mexico. The Company also owns and operates three crude oil pipelines onshore
as well as one offshore pipeline. The onshore pipelines are in Texas,
Mississippi/Louisiana and Florida/Alabama. The offshore pipeline is a 5.5 mile
pipeline in the Gulf of Mexico that transports oil from Main Pass Block 64 to
a connection with another party's pipeline. The Company also has approximately
2.2 million barrels of crude oil storage capacity in tanks connected to the
pipelines.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying combined financial statements and related notes present the
combined financial position, results of operations, cash flows and equity of
parent of Howell Crude Oil Company and its wholly-owned subsidiaries and the
crude oil transportation operations of Howell Transportation Services, Inc.
(collectively referred to as "Howell Crude Operations" or the "Company") in
conformity with generally accepted accounting principles. Howell Crude Oil
Company and Howell Transportation Services, Inc., are wholly-owned
subsidiaries of Howell Corporation. These combined financial statements are
prepared in connection with the proposed public offering of limited partner
interests in a master limited partnership to be formed which will acquire
substantially all of the assets and continue the business of Howell Crude
Operations. As used herein, the combined financial statements are referred to
as the financial statements of Howell Crude Operations. All material
intercompany accounts and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Inventories
Inventories of crude oil are stated at the lower of market value or monthly
weighted average cost. Other inventories are stated at the lower of average
cost or market value.
Derivatives
Crude oil future contracts and options are being used as hedging tools in a
limited program of hedging crude oil inventories and fixed purchase price
commitments. Changes in the market value of the financial instruments are
deferred until the gain or loss is recognized on the hedged transactions.
Costs of sales were reduced by $100,000 in both 1994 and 1995 from the effects
of futures and options. Unrecognized gain of $3,000 was deferred on these
contracts at December 31, 1995. There was no deferred gain or loss at December
31, 1994.
Property and Equipment
Property and equipment are carried at cost. Depreciation and amortization is
provided by applying the straight-line method to the cost basis of property
and equipment over the estimated useful lives of
F-43
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
the assets. Asset lives are 20 years for pipelines and related assets, 5 to 10
years for transportation equipment, and 3 to 20 years for other facilities and
equipment.
Maintenance and repairs are charged to expense as incurred, while renewals
and betterments are capitalized.
In 1996, Statement of Financial Accounting Standards No. 121, "Accounting
for the Impairment of Long-Lived Assets and for Long-Lived Assets to be
Disposed of" (Statement 121). Statement 121 contains provisions for recording
impairment of long-lived assets that are not expected to produce net cash
flows in the future sufficient to fully recover the remaining cost of the
related assets. The Company was not required to record impairment on any of
its assets as a result of adopting Statement 121.
Environmental Liabilities
The Company provides for the estimated costs of environmental contingencies
when liabilities are likely to occur and reasonable estimates can be made.
Ongoing environmental compliance costs, including maintenance and monitoring
costs, are charged to expense as incurred.
Income Taxes
The Company is included in the consolidated federal income tax returns of
Howell Corporation. The Company's federal income taxes are provided in these
combined financial statements as if the Company filed an income tax return
separately from Howell Corporation. State income tax returns are filed
separately for Howell Crude Oil Company, each of its subsidiaries and Howell
Transportation Services, Inc. Deferred federal and state income taxes are
established at enacted rates for the temporary differences between the
financial reporting bases and the tax bases of the Company's assets and
liabilities.
In 1991, the Company adopted the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" (Statement 109)
which governs the accounting recognition of income taxes in its financial
statements. Statement 109 defines a balance sheet (liability) approach in the
calculation of the deferred tax balance at each financial statement date by
applying the provisions of enacted tax laws to measure the deferred tax
consequences of the differences in the tax and financial (book) bases of
assets and liabilities as they result in net taxable or deductible amounts in
future years. The net taxable or deductible amounts in future years are
adjusted for the effect of utilizing the carryback/carryforward attributes of
any net losses generated and available tax credits.
Revenue Recognition
Gathering and marketing revenues are recognized when title to the crude oil
is transferred to the customer. Pipeline revenues are recognized upon delivery
of the barrels to the location designated by the shipper.
Cost of Sales
Cost of sales consists of the cost of crude oil and field and pipeline
operating expenses. Field and pipeline operating expenses consist primarily of
labor costs for drivers and pipeline field personnel, truck rental costs and
maintenance, utilities, insurance and property taxes.
F-44
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Interest Expense
Interest expense includes interest related to the Company's long-term debt
and capital lease obligations. Howell Corporation does not have formal note
agreements for intercompany balances; therefore, no interest has been charged
by Howell Corporation to the Company.
Equity of Parent
Howell Corporation's net investment in the Company has been classified in
the accompanying balance sheets as equity of parent, representing the
Company's accumulated income and the net advances to or from Howell
Corporation.
Significant Customer
Marathon Oil Company accounted for approximately 12%, 19% and 14% of
combined revenues in 1993, 1994 and 1995, respectively.
Disclosure About Fair Value of Financial Instruments
Information on the fair value of the Company's long-term debt and capital
lease obligation can be found in Note 8. Information regarding the fair value
of crude oil options contracts written can be found in Note 11.
3. INVENTORIES
Inventories are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
-------------
<S> <C> <C>
Crude oil...................................................... $385 $1,963
Supplies....................................................... 39 28
----- -------
Total.......................................................... $424 $1,991
===== =======
</TABLE>
4. PROPERTY AND EQUIPMENT
Property and equipment are summarized as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ -------
<S> <C> <C>
Land and buildings........................................... $ 16 $ 3,958
Pipelines and related assets................................. 1,348 66,591
Vehicles..................................................... 2,459 3,203
Office equipment............................................. 401 777
Other equipment.............................................. 1,210 1,364
------ -------
5,434 75,893
Less-Accumulated depreciation................................ 2,506 5,537
------ -------
Net property and equipment................................... $2,928 $70,356
====== =======
</TABLE>
Depreciation expense was $348,000, $546,000 and $3,206,000 for the years
ended December 31, 1993, 1994 and 1995, respectively.
F-45
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
5. ACQUISITION OF PIPELINE ASSETS
On March 31, 1995, the Company acquired from Exxon Pipeline Company
("Exxon") two interstate crude oil pipeline systems and one intrastate crude
oil pipeline system. The interstate pipeline systems are located in
Florida/Alabama and Mississippi/Louisiana. The intrastate system is located in
Texas. Collectively, the purchase of these pipelines and related assets
comprise the "Exxon Transaction". The Exxon Transaction was financed through
borrowings from banks. See Note 8 below.
The following unaudited pro forma information represents the combined pro
forma amounts, assuming the Exxon Transaction had occurred at the beginning of
each period presented (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1994 1995
----------- -----------
<S> <C> <C>
Revenues............................................. $ 430,703 $ 635,615
Net income........................................... $ 3,734 $ 4,271
</TABLE>
The above amounts are based upon certain assumptions and estimates which the
Company believes are reasonable. The pro forma amounts above are based upon
actual 1995 results and, therefore, differ from pro forma results previously
reported by Howell Corporation which were based on management estimates. The
pro forma results do not necessarily represent results which would have
occurred if the acquisition had taken place on the basis assumed above, nor
are they indicative of the results of future combined operations.
6. OTHER ASSETS
Other assets consist primarily of a noncompete agreement and the fee paid to
obtain the term loan agreement discussed in Note 8. These assets are being
amortized over the life of the related agreements. Other assets are summarized
as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------
1994 1995
------ ------
<S> <C> <C>
Noncompete agreement........................................... $113 $113
Term loan agreement facility fee............................... -- 288
Utility deposits............................................... -- 6
------ ------
113 407
Less--Accumulated amortization................................. 47 135
------ ------
Unamortized other assets....................................... $ 66 $272
====== ======
</TABLE>
Amortization expense of the noncompete agreement was $47,000 and $57,000 for
the years ended December 31, 1994 and 1995, respectively. Amortization of the
facility fee for the year ended December 31, 1995 was $31,000 and is included
in interest expense in the Combined Statements of Operations.
7. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest expense was $19,000, $15,000 and $3,146,000 for the
years ended December 31, 1993, 1994 and 1995, respectively.
Cash paid for state income taxes and the imputed cash payments made by the
Company for federal income taxes totaled $600,000, $1,129,000 and $2,088,000
for the three years ended December 31, 1993, 1994 and 1995, respectively.
F-46
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
8. CREDIT FACILITIES AND LONG-TERM DEBT
Long-term debt and the capital lease obligation of the Company were as
follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
1994 1995
---- -------
<S> <C> <C>
Note payable under term loan agreement......................... $-- $54,625
Capital lease obligation for vehicles.......................... 181 133
---- -------
181 54,758
Less: Current maturities....................................... 48 5,802
---- -------
$133 $48,956
==== =======
</TABLE>
Maturities of the term loan agreement for the five years subsequent to
December 31, 1995 are $5,750,000 each year and $25,875,000 thereafter.
The future minimum lease payments for the capital lease obligation, together
with the present value of the net minimum lease payments as of December 31,
1995, were as follows (in thousands):
<TABLE>
<S> <C>
1996................................................................... $ 60
1997................................................................... 83
----
Total minimum lease payments......................................... 143
Less: Amount representing interest..................................... 10
----
Present value of net minimum lease payments............................ $133
====
</TABLE>
Term Loan Agreement
The credit facility among Howell Crude Oil Company, Bank One, Texas, N.A.,
Bank of Montreal, Compass Bank--Houston and Den norske Bank AS (the "HCO
Credit Facility") provides for a term loan in an amount of $57.5 million and
for the issuance of letters of credit in the aggregate not to exceed the
lesser of the commitment of $15 million or the Borrowing Base, as defined in
the HCO Credit Facility.
Repayment of the term loan will occur over a period not to exceed seven
years. In July 1995, the Company began making principal payments in quarterly
installments of $1.4 million. In addition, the Company is required to make
additional repayments of the term loan, beginning in the second quarter of
1996, equal to 60% of Excess Cash Flow, as defined in the HCO Credit Facility.
Interest is paid at the rate selected by the Company of either (1) a Floating
Base Rate (as defined in the HCO Credit Facility) that is generally the
prevailing prime rate or (2) a rate based on LIBOR. A LIBOR-based rate of
7.9375% was applicable to the outstanding balance under the HCO Credit
Facility at December 31, 1995.
The HCO Credit Facility carries a commitment fee of 1/4% on the available
portion of the commitment for letters of credit. There is no compensating
balance requirement. The HCO Credit Facility is collateralized by the
inventory and accounts receivable of Howell Crude Oil Company, the pipeline
properties acquired from Exxon, the common stock of Howell Crude Oil Company
and its subsidiaries, the common stock of another subsidiary of Howell
Corporation, and the guarantee of Howell Corporation. Material covenants and
restrictions for Howell Crude Oil Company and its subsidiaries include
requirements to maintain tangible net worth, as defined in the HCO Credit
Facility,
F-47
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
of $6.4 million at December 31, 1995 and to maintain cash flow coverage, as
defined in the HCO Credit Facility, of 1.25 to 1.0. In addition, certain
restrictions and covenants also apply to Howell Corporation.
The common stock of Howell Crude Oil Company also collateralizes a loan
agreement of another subsidiary of Howell Corporation.
Capital Lease Obligation
In July 1992, the Company entered into a capital lease for vehicles. The
obligation is payable in monthly installments with interest at 7.4%. The
obligation is secured by the equipment and the guarantee of Howell
Corporation. Included in property at December 31, 1995, is the cost of the
vehicles under capital lease of $0.3 million and accumulated depreciation of
$0.1 million on the vehicles.
Fair Value of Long-term Debt
The fair value of the Company's long-term debt and its capital lease
obligation at December 31, 1995, was estimated to be the same as its carrying
value in the balance sheet, as the significant debt obligation bears interest
at a floating market rate.
9. INCOME TAXES
A summary of the provision for income taxes included in the combined
statements of operations is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
1993 1994 1995
------- -------- --------
<S> <C> <C> <C>
Current:
Federal......................................... $ 568 $ 1,086 $ 1,612
State........................................... 50 108 156
------ -------- --------
Total current................................. 618 1,194 1,768
Deferred:
Federal......................................... (24) (80) 200
State........................................... (3) (6) 27
------ -------- --------
Total deferred................................ (27) (86) 227
------ -------- --------
Total Provision................................... $ 591 $ 1,108 $ 1,995
====== ======== ========
</TABLE>
Deferred income taxes are provided on all temporary differences between
financial and taxable income. The approximate tax effects of each significant
type of temporary difference and carryforward were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------
1994 1995
------ ------
<S> <C> <C>
Current deferred tax assets--Accrual of costs not yet
deductible for tax........................................ $ 143 $ 177
Noncurrent deferred tax liabilities--Property and
equipment................................................. (260) (518)
------ ------
Net deferred tax assets (liabilities)...................... $ (117) $ (341)
====== ======
</TABLE>
F-48
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The following table accounts for the difference between the actual tax
provision and the amounts obtained by applying the applicable statutory U.S.
Federal income tax rate of 34% to the income before income taxes (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------
1993 1994 1995
--------------- --------
<S> <C> <C> <C>
Provision for income taxes at the statutory rate... $ 548 $ 1,001 $ 1,826
State income taxes, net of federal tax benefit..... 32 67 121
Other.............................................. 11 40 48
------ -------- --------
$ 591 $ 1,108 $ 1,995
====== ======== ========
</TABLE>
10. TRANSACTIONS WITH HOWELL CORPORATION AND RELATED PARTIES
Sales and Purchases of Crude Oil
A summary of sales to and purchases from Howell Corporation and its
subsidiaries of crude oil is as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1993 1994 1995
------- ------- -------
<S> <C> <C> <C>
Sales to affiliates................................. $ 8,345 $ 9,184 $ 8,137
Purchases from affiliates........................... $14,146 $14,258 $16,399
</TABLE>
Management believes that the terms of these purchase and sale arrangements
represented terms that could be obtained from third parties at the time they
were established.
General and Administrative
Howell Corporation allocates certain general and administrative costs to the
Company for ancillary services and office space. These costs amounted to
approximately $350,000 for each year and were allocated based upon the
percentage of employment resources applicable to the Company. Management
believes the costs allocated to the Company are reasonable.
Guarantees
Howell Corporation provides guarantees to support the Company's contractual
obligations in its purchases of crude oil. As discussed in Note 8, Howell
Corporation also provides guarantees of the HCO Credit Facility and capital
lease obligation of the Company.
Cash Management
Howell Corporation provides cash management services for the Company. All
funds received by the Company are transferred to Howell Corporation and
obligations are funded as they are presented for payment.
Employee Benefit Plans
Howell Corporation maintains group life, medical, dental, long-term
disability and accidental death and dismemberment insurance plans for its
employees. In addition, Howell Corporation provides its employees with a stock
purchase plan, a thrift plan and a Simplified Employee Pension Plan. The
F-49
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
Company is allocated the cost of these plans that can be directly associated
with its employees. In 1993, 1994 and 1995, the Company's allocations were
$269,000, $321,000 and $424,000, respectively.
11. MARKET RISK, FINANCIAL INSTRUMENTS AND CREDIT RISK
The Company uses crude oil futures and options contracts as the tools in a
limited program of hedging crude oil inventories and fixed purchase price
commitments from market fluctuations. The Company does not consider crude oil
futures contracts to be financial instruments since these contracts either
permit or require settlement by the delivery of the underlying commodity.
Estimated fair values of the crude oil option contracts, which are considered
to be financial instruments, and the net gains and losses, both recognized and
deferred, arising from the use of these contracts in hedging activities at
December 31, 1994 and 1995 are as follows (in thousands):
<TABLE>
<CAPTION>
NET
CARRYING FAIR GAINS
AMOUNT VALUE (LOSSES)
-------- ----- --------
<S> <C> <C> <C>
1994--Option contracts written....................... $10 $40 $10
1995--Option contracts written....................... $ 8 $20 $45
</TABLE>
In 1993, the Company did not write any option contracts.
The Company has exposure to credit risk in the form of the accounting loss
the Company would recognize if a counterparty to its financial transactions
failed to perform pursuant to contractual terms. In order to manage this
credit risk, the Company considers the financial profile of the counterparty,
the value of any collateral held and the terms and conditions of the
contractual arrangement. Procedures used to manage credit exposure include
credit approvals, credit limits, rights of offset and collateral requirements
such as letters of credit or prepayments.
12. COMMITMENTS AND CONTINGENCIES
Donna Refinery Partners, Ltd. v. Howell Crude Oil Company and Howell
Corporation; District Court of Harris County, Texas; No. 89-033634. In
December 1993, a jury verdict of $1.9 million was rendered against the Company
which was subsequently reduced by the judge to approximately $675,000. The
Company believes the judgment is in error. The Company filed a motion for a
new trial that was denied, so the Company appealed the decision. The plaintiff
has filed an appeal to increase the recovery by $1.25 million. On June 6,
1996, the Fourteenth Court of Appeals affirmed the judgment of the lower
court. The Company is currently perfecting its rights to appeal this case to
the Texas Supreme Court. The Company does not believe that the ultimate
resolution of this matter will have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
Several working interest owners and royalty owners have filed lawsuits
against the Company in Alabama concerning pricing in the North Frisco City
Field. The lawsuits allege the Company violated its contracts with the
plaintiffs by not paying the plaintiffs ". . . the highest available price for
oil". Damages claimed by the plaintiffs include approximately $3.8 million and
are based on numerous damage theories including, but not limited to,
allegations of breach of contract and fraud. The complaint also seeks
unspecified punitive damages. The Company filed an answer denying all charges.
On June 28, 1996, the Court entered an order denying class certification.
Related to this matter, the Company, on July 11, 1995, received a demand
letter from the working interest owners in the North Frisco City Field and in
the North Rome Field indicating the Company had not paid according to the
terms of a "call on production".
F-50
<PAGE>
HOWELL CRUDE OPERATIONS
NOTES TO COMBINED FINANCIAL STATEMENTS--(CONTINUED)
The Company was granted a call on a portion of this production but has never
exercised the call. Accordingly, the Company has filed petitions for
declaratory judgment to that effect in cases styled Howell Petroleum
Corporation, et al, vs. Shore Oil Company, et al, District Court of Harris
County, Texas; No. 95-037180 and Howell Petroleum Corporation, et al, vs.
Tenexco, Inc., et al, District Court of Harris County, Texas; No. 95-037970.
The defendants in this action have counterclaimed against the Company. These
claims are similar in nature to the Alabama litigation. One of the defendants,
John Faulkinberry, has filed a counterclaim against the Company seeking actual
damages of $75,000 and punitive damages of $100,000,000. The Company does not
believe that the ultimate resolution of these matters will have a material
adverse effect on the financial position, results of operations or cash flows
of the Company.
The Company is subject to various environmental regulations and laws.
Procedures exist within the Company to monitor compliance and assess the
potential environmental exposure of the Company. The Company believes that
such exposure is not material to its financial position, results of operations
or cash flows.
The Company has indemnified Exxon for certain environmental claims that may
be made in the future attributable to the time when Exxon owned the crude oil
pipelines that the Company acquired from Exxon. Management does not believe
the indemnification of Exxon for these environmental liabilities will have a
material financial impact on the financial position, results of operations or
cash flows of the Company.
The Company is subject to lawsuits in the ordinary course of business and
examination by tax and other regulatory authorities. Such matters presently
pending are not expected to have a material adverse effect on the financial
position, results of operations or cash flows of the Company.
The Company has contractual commitments (primarily forward contracts)
arising in the ordinary course of business. At December 31, 1995, the Company
had commitments to purchase 610,000 barrels of crude oil for January delivery
at fixed prices ranging from $18.00 to $19.50 per barrel and commitments to
sell 710,000 barrels of crude oil for January delivery at fixed prices ranging
from $16.80 to $19.91 per barrel. Additionally, the Company had commitments to
purchase approximately 2,440,000 barrels and to sell approximately 2,260,000
barrels of crude oil under 30-day evergreen contracts at market-based prices.
The Company uses transportation equipment under operating lease
arrangements. The Company also leases three tanks for use in its pipeline
activities. The costs of these arrangements amounted to $741,000 in 1993,
$792,000 in 1994 and $1,015,000 in 1995. At December 31, 1995, long-term
commitments for lease of facilities and equipment totaled approximately
$3,226,000, consisting of $1,348,000, $770,000, $607,000 and $500,000 for the
years 1996 through 1999, respectively.
13. SUBSEQUENT EVENTS
On July 18, 1996, Howell Corporation announced that it had signed a Letter
of Intent with Basis Petroleum, Inc. ("Basis"), a wholly-owned subsidiary of
Salomon Inc, covering the contributions by Howell Corporation and Basis of
their respective crude oil gathering, marketing and transportation activities
to form a master limited partnership.
F-51
<PAGE>
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Stockholders of Exxon Pipeline Company and
Howell Crude Oil Company:
We have audited the accompanying statement of revenues and direct operating
expenses of the Pipeline Systems (as described in Note 1 of this statement)
for each year in the three-year period ended December 31, 1994. This statement
is the responsibility of management. Our responsibility is to express an
opinion on this statement based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the statement is free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the statement. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall presentation of the
statement. We believe that our audits provide a reasonable basis for our
opinion.
The accompanying statement reflects the revenues and direct operating
expenses of the Pipeline Systems and was prepared as described in Note 2 and
is not intended to be a complete presentation of the revenues and expenses of
the Pipeline Systems.
In our opinion, the statement audited by us presents fairly, in all material
respects, the revenues and direct operating expenses of the Pipeline Systems
(and was prepared as described in Note 2 to the statement) for each year in
the three-year period ended December 31, 1994 in conformity with generally
accepted accounting principles.
PRICE WATERHOUSE LLP
Houston, Texas
May 25, 1995
F-52
<PAGE>
THE PIPELINE SYSTEMS
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------- -------------------
1992 1993 1994 1994 1995
------- ------- ------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Trunk............................ $16,350 $13,103 $15,889 $ 3,248 $ 4,195
Gathering........................ 2,630 2,338 2,775 597 626
------- ------- ------- --------- ---------
Total.......................... 18,980 15,441 18,664 3,845 4,821
------- ------- ------- --------- ---------
Direct operating expenses:
Pipeline salaries and wages...... 1,508 1,511 1,391 339 336
Other pipeline expenses.......... 3,091 3,062 3,202 517 525
Major maintenance projects....... 883 897 1,911 78 17
------- ------- ------- --------- ---------
Total.......................... 5,482 5,470 6,504 934 878
------- ------- ------- --------- ---------
Excess of revenues over direct
operating expenses................ $13,498 $ 9,971 $12,160 $ 2,911 $ 3,943
======= ======= ======= ========= =========
</TABLE>
The accompanying notes are an integral part of this statement.
F-53
<PAGE>
THE PIPELINE SYSTEMS
NOTES TO THE STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
NOTE 1--THE PIPELINE SYSTEMS
Effective March 31, 1995, Howell Crude Oil Company purchased certain
domestic oil pipeline systems from Exxon Pipeline Company (EPC) which are
commonly referred to as the Texas System, the Mississippi System and the Jay
System (collectively, the Pipeline Systems) for approximately $64 million. The
Pipeline Systems cover territory in Central Texas and the Texas Gulf Coast,
Mississippi, Louisiana, Alabama and Florida. EPC is subject to regulation by
the Federal Energy Regulatory Commission (FERC) and conducts its business in
accordance with the relevant FERC requirements.
NOTE 2--BASIS OF PRESENTATION
During the periods presented, the Pipeline Systems were not accounted for as
a separate entity. Certain costs, such as depreciation and amortization,
general and administrative expenses, interest expense and corporate taxes,
were not allocated to the Pipeline Systems. Accordingly, full separate
financial statements prepared in accordance with generally accepted accounting
principles do not exist and are not practicable to obtain in these
circumstances.
The statement of revenues and direct operating expenses (the Statement) was
derived from the historical accounting records of the seller. Such information
is presented on the accrual basis of accounting. Revenue is recognized upon
delivery. Trunk revenues include net inventory gains and losses. Depreciation
and amortization, allocated general and administrative expenses, interest
expense and corporate income taxes are not components of direct operating
expenses and are therefore not included in the Statement. Accordingly, the
Statement is not intended to present financial position and results of
operations in accordance with generally accepted accounting principles.
The revenues and direct operating expenses for the periods ended March 31,
1995 and 1994 presented in the Statement have not been audited by independent
accountants; however, in the opinion of management, the amounts present fairly
EPC's revenues and direct operating expenses for the three-month periods ended
March 31, 1995 and 1994.
NOTE 3--RELATED PARTY
EPC is a wholly-owned subsidiary of Exxon Corporation (Exxon). As a result,
numerous transactions routinely occur in the normal course of business between
EPC and its parent. Salaries and wages in the Statement include certain
retirement, health and welfare, life and other such benefits. EPC participates
in Exxon benefit plans and pays the costs associated with benefits provided to
EPC employees and annuitants. Exxon is also a major customer of the Pipeline
Systems. See Note 4.
NOTE 4--MAJOR CUSTOMERS
During 1994, revenue from Exxon accounted for 38% of total revenue while two
other individual customers accounted for 37% and 18% of total revenue. During
1993, revenue from Exxon accounted for 28% of total revenue while two other
individual customers accounted for 39% and 20% of total revenue. During 1992,
revenue from Exxon accounted for 31% of total revenue while two other
individual customers accounted for 32% and 14% of the revenue.
F-54
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genesis Energy, L.P.
We have audited the accompanying balance sheet of Genesis Energy, L.P. (a
Delaware limited partnership) as of September 5, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Genesis Energy, L.P. as of
September 5, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 5, 1996
F-55
<PAGE>
GENESIS ENERGY, L.P.
BALANCE SHEET
SEPTEMBER 5, 1996
<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $1,000
------
Total Assets........................................................ $1,000
======
PARTNERS' EQUITY
General Partner....................................................... $ 10
Organizational Limited Partner........................................ 990
------
Total Partners' Equity.............................................. $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-56
<PAGE>
GENESIS ENERGY, L.P.
NOTE TO BALANCE SHEET
SEPTEMBER 5, 1996
Genesis Energy, L.P. (the "Partnership") is a Delaware limited partnership
recently formed to acquire, own and operate an interest in the crude oil
gathering, marketing and related pipeline operations of Basis Petroleum, Inc.
and Howell Corporation through a limited partnership. The Partnership has not
commenced operations. The Partnership intends to offer Common Units,
representing limited partnership interests in the Partnership, to third
parties.
On September 5, 1996, Genesis Energy, L.L.C., a recently formed Delaware
limited liability company, and an organizational limited partner contributed
$1,000 in cash to the Partnership.
F-57
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Genesis Energy, L.L.C.
We have audited the accompanying balance sheet of Genesis Energy, L.L.C. (a
Delaware limited liability company) as of September 5, 1996. This financial
statement is the responsibility of the Company's management. Our
responsibility is to express an opinion on this financial statement based on
our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the balance sheet is free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the balance sheet. An audit also
includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the balance sheet referred to above presents fairly, in all
material respects, the financial position of Genesis Energy, L.L.C., as of
September 5, 1996, in conformity with generally accepted accounting
principles.
ARTHUR ANDERSEN LLP
Houston, Texas
September 5, 1996
F-58
<PAGE>
GENESIS ENERGY, L.L.C.
BALANCE SHEET
SEPTEMBER 5, 1996
<TABLE>
<S> <C>
ASSETS
Cash.................................................................. $ 990
Investment in Genesis Energy, L.P. ................................... $ 10
------
Total Assets........................................................ $1,000
======
SHAREHOLDER'S EQUITY
Shareholder's Equity.................................................. $1,000
------
Total Shareholder's Equity.......................................... $1,000
======
</TABLE>
The accompanying note is an integral part of this balance sheet.
F-59
<PAGE>
GENESIS ENERGY, L.L.C.
NOTE TO BALANCE SHEET
SEPTEMBER 5, 1996
Genesis Energy, L.L.C. (the "Company") is a recently formed Delaware limited
liability company, which is owned 54% by Basis Petroleum, Inc. and 46% by
Howell Corporation. The Company was formed to acquire an aggregate 2% general
partner interest in Genesis Energy, L.P. and the subsidiary operating
partnership.
On September 5, 1996, Basis Petroleum, Inc. and Howell Corporation
contributed $1,000 in cash to the Company. Additionally, on September 5, 1996,
Genesis Energy, L.L.C. contributed $10 in cash to Genesis Energy, L.P. for a
general partner interest.
F-60
<PAGE>
APPENDIX A
AMENDED AND RESTATED
AGREEMENT OF LIMITED PARTNERSHIP
OF
GENESIS ENERGY, L.P.
<PAGE>
TABLE OF CONTENTS
ARTICLE I
Definitions
<TABLE>
<C> <S> <C>
1.1 Definitions........................................................ A-1
1.2 Construction....................................................... A-11
ARTICLE II
Organization
2.1 Formation.......................................................... A-11
2.2 Name............................................................... A-11
2.3 Registered Office; Registered Agent; Principal Office; Other
Offices............................................................ A-12
2.4 Purpose and Business............................................... A-12
2.5 Powers............................................................. A-12
2.6 Power of Attorney.................................................. A-12
2.7 Term............................................................... A-14
2.8 Title to Partnership Assets........................................ A-14
ARTICLE III
Rights of Limited Partners
3.1 Limitation of Liability............................................ A-14
3.2 Management of Business............................................. A-14
3.3 Outside Activities of the Limited Partners......................... A-15
3.4 Rights of Limited Partners......................................... A-15
ARTICLE IV
Certificates; Record Holders; Transfer of
Partnership Interests; Redemption of Partnership Interests
4.1 Certificates....................................................... A-16
4.2 Mutilated, Destroyed, Lost or Stolen Certificates.................. A-16
4.3 Record Holders..................................................... A-17
4.4 Transfer Generally................................................. A-17
4.5 Registration and Transfer of Limited Partner Interests............. A-17
4.6 Transfer of a General Partner's General Partner Interest........... A-18
4.7 Restrictions on Transfers.......................................... A-18
4.8 Citizenship Certificates; Non-citizen Assignees.................... A-19
4.9 Redemption of Partnership Interests of Non-citizen Assignees....... A-20
ARTICLE V
Capital Contributions and Issuance of Partnership Interests
5.1 Organizational Contributions....................................... A-21
5.2 Contributions by General Partner................................... A-21
5.3 Contributions by Initial Limited Partners.......................... A-21
5.4 Interest and Withdrawal............................................ A-22
5.5 Capital Accounts................................................... A-22
5.6 Issuances of Additional Partnership Securities..................... A-25
5.7 Limitations on Issuance of Additional Partnership Securities....... A-25
5.8 Limited Preemptive Right........................................... A-26
5.9 Splits and Combination............................................. A-27
5.10 Fully Paid and Non-Assessable Nature of Limited Partner Interests.. A-27
</TABLE>
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<PAGE>
ARTICLE VI
Allocations and Distributions
<TABLE>
<C> <S> <C>
6.1 Allocations for Capital Account Purposes........................... A-27
6.2 Allocations for Tax Purposes....................................... A-30
6.3 Distributions to Record Holders.................................... A-32
ARTICLE VII
Management and Operation of Business
7.1 Management......................................................... A-32
7.2 Certificate of Limited Partnership................................. A-34
7.3 Restrictions on General Partner's Authority........................ A-34
7.4 Reimbursement of the General Partner............................... A-35
7.5 Outside Activities................................................. A-36
7.6 Loans from the General Partner; Loans or Contributions from the
Partnership; Contracts with Affiliates; Certain Restrictions on the
General Partner.................................................... A-37
7.7 Indemnification.................................................... A-38
7.8 Liability of Indemnitees........................................... A-40
7.9 Resolution of Conflicts of Interest................................ A-40
7.10 Other Matters Concerning the General Partner....................... A-41
7.11 Purchase or Sale of Partnership Securities......................... A-42
7.12 Registration Rights of the General Partner and its Affiliates...... A-42
7.13 Reliance by Third Parties.......................................... A-44
ARTICLE VIII
Books, Records, Accounting and Reports
8.1 Records and Accounting............................................. A-44
8.2 Fiscal Year........................................................ A-44
8.3 Reports............................................................ A-45
ARTICLE IX
Tax Matters
9.1 Tax Returns and Information........................................ A-45
9.2 Tax Elections...................................................... A-45
9.3 Tax Controversies.................................................. A-46
9.4 Withholding........................................................ A-46
ARTICLE X
Admission of Partners
10.1 Admission of Initial Limited Partners.............................. A-46
10.2 Admission of Substituted Limited Partner........................... A-46
10.3 Admission of Successor General Partner............................. A-47
10.4 Admission of Additional Limited Partners........................... A-47
10.5 Amendment of Agreement and Certificate of Limited Partnership...... A-47
</TABLE>
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<PAGE>
ARTICLE XI
Withdrawal or Removal of Partners
<TABLE>
<C> <S> <C>
11.1 Withdrawal of the General Partner................................. A-47
11.2 Removal of the General Partner.................................... A-49
11.3 Interest of Departing Partner and Successor General Partner...... A-49
11.4 Withdrawal of Limited Partners.................................... A-50
ARTICLE XII
Dissolution and Liquidation
12.1 Dissolution........................................................ A-51
12.2 Continuation of the Business of the Partnership After Dissolution.. A-51
12.3 Liquidator......................................................... A-52
12.4 Liquidation........................................................ A-52
12.5 Cancellation of Certificate of Limited Partnership................. A-53
12.6 Return of Contributions............................................ A-53
12.7 Waiver of Partition................................................ A-53
12.8 Capital Account Restoration........................................ A-53
ARTICLE XIII
Amendment of Partnership Agreement; Meetings; Record Date
13.1 Amendment to be Adopted Solely by the General Partner.............. A-53
13.2 Amendment Procedure................................................ A-54
13.3 Amendment Requirements............................................. A-55
13.4 Special Meetings................................................... A-55
13.5 Notice of a Meeting................................................ A-56
13.6 Record Date........................................................ A-56
13.7 Adjournment........................................................ A-56
13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes......... A-56
13.9 Quorum............................................................. A-56
13.10 Conduct of a Meeting............................................... A-57
13.11 Action Without a Meeting........................................... A-57
13.12 Voting and Other Rights............................................ A-58
ARTICLE XIV
Merger
14.1 Authority........................................................... A-58
14.2 Procedure for Merger or Consolidation............................... A-58
14.3 Approval by Unitholders of Merger or Consolidation.................. A-59
14.4 Certificate of Merger............................................... A-60
14.5 Effect of Merger.................................................... A-60
ARTICLE XV
Right to Acquire Units
15.1 Right to Acquire Limited Partner Interests.......................... A-60
</TABLE>
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<PAGE>
ARTICLE XVI
General Provisions
<TABLE>
<C> <S> <C>
16.1 Addresses and Notices.............................................. A-62
16.2 Further Action..................................................... A-62
16.3 Binding Effect..................................................... A-63
16.4 Integration........................................................ A-63
16.5 Creditors.......................................................... A-63
16.6 Waiver............................................................. A-63
16.7 Counterparts....................................................... A-63
16.8 Applicable Law..................................................... A-63
16.9 Invalidity of Provisions........................................... A-63
16.10 Consent of Partners................................................ A-63
</TABLE>
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<PAGE>
AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP
OF
GENESIS ENERGY, L.P.
THIS AMENDED AND RESTATED AGREEMENT OF LIMITED PARTNERSHIP of Genesis
Energy, L.P. dated as of , 1996, is entered into by and among Genesis
Energy, L.L.C., a Delaware limited liability company, as the General Partner,
and Wayne Kubicek, as the Organizational Limited Partner, together with any
other Persons who become Partners in the Partnership or parties hereto as
provided herein. In consideration of the covenants, conditions and agreements
contained herein, the parties hereto hereby agree as follows:
ARTICLE I
Definitions
1.1 Definitions
The following definitions shall be for all purposes, unless otherwise
clearly indicated to the contrary, applied to the terms used in this
Agreement.
"Acquisition" means any transaction in which any Group Member acquires
(through an asset acquisition, merger, stock acquisition or other form of
investment) control over all or a portion of the assets, properties or
business of another Person for the purpose of increasing the operating
capacity or revenues of the Partnership Group from the operating capacity or
revenues of the Partnership Group existing immediately prior to such
transaction.
"Additional Limited Partner" means a Person admitted to the Partnership as a
Limited Partner pursuant to Section 10.4 and who is shown as such on the books
and records of the Partnership.
"Adjusted Capital Account" means the Capital Account maintained for each
Partner as of the end of each fiscal year of the Partnership, (a) increased by
any amounts that such Partner is obligated to restore under the standards set
by Treasury Regulation Section 1.704-1(b)(2)(ii)(c) (or is deemed obligated to
restore under Treasury Regulation Sections 1.704-2(g) and 1.704-2(i)(5)) and
(b) decreased by (i) the amount of all losses and deductions that, as of the
end of such fiscal year, are reasonably expected to be allocated to such
Partner in subsequent years under Sections 704(e)(2) and 706(d) of the Code
and Treasury Regulation Section 1.751-1(b)(2)(ii), and (ii) the amount of all
distributions that, as of the end of such fiscal year, are reasonably expected
to be made to such Partner in subsequent years in accordance with the terms of
this Agreement or otherwise to the extent they exceed offsetting increases to
such Partner's Capital Account that are reasonably expected to occur during
(or prior to) the year in which such distributions are reasonably expected to
be made (other than increases as a result of a minimum gain chargeback
pursuant to Section 6.1(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.
"Adjusted Operating Surplus" has the meaning assigned to such term in the
Genesis OLP Partnership Agreement.
"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 distributed by, and recontributed to, the Partnership for
federal income tax purposes upon a termination of the Partnership pursuant to
Treasury Regulation Section 1.708-1(b)(1)(iv), such property shall thereafter
constitute a Contributed Property until the Carrying Value of such property is
subsequently adjusted pursuant to Section
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<PAGE>
5.5(d)(i) or 5.5(d)(ii). Upon a termination of the Partnership following the
publication of Proposed Treasury Regulation 1.708-1(b)(1)(iv) as a final
regulation, an Adjusted Property deemed contributed to a new partnership in
exchange for an interest in the new partnership, followed by the deemed
liquidation of the Partnership, shall thereafter constitute a Contributed
Property until the Carrying Value of such property is subsequently adjusted
pursuant to Section 5.5(d)(i) or 5.5(d)(ii).
"Affiliate" means, with respect to any Person, any other Person that (i)
directly or indirectly through one or more intermediaries controls, is
controlled by or is under common control with, the Person in question or (ii)
owns, beneficially, directly or indirectly, 20% or more of the outstanding
capital stock, shares or other equity interests of 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.
"Agreed Allocation" means any allocation, other than a Required Allocation,
of an item of income, gain, loss or deduction pursuant to the provisions of
Section 6.1, including, without limitation, a Curative Allocation (if
appropriate to the context in which the term "Agreed Allocation" is used).
"Agreed Value" of any Contributed Property means the fair market value of
such property or other consideration at the time of contribution as determined
by the General Partner using such reasonable method of valuation as it may
adopt; provided, however, that the Agreed Value of any property deemed
contributed to the Partnership for federal income tax purposes upon
termination and reconstitution thereof pursuant to Section 708 of the Code
(whether before or after finalization of Proposed Treasury Regulation Section
1.708-1(b)(1)(iv)) shall be determined in accordance with Section 5.5(c)(i).
Subject to Section 5.5(c)(i), the General Partner shall, in its discretion,
use such method as it deems reasonable and appropriate to allocate the
aggregate Agreed Value of Contributed Properties contributed to the
Partnership in a single or integrated transaction among each separate property
on a basis proportional to the fair market value of each Contributed Property.
"Agreement" means this Amended and Restated Agreement of Limited Partnership
of Genesis Energy, L.P., as it may be amended, supplemented or restated from
time to time.
"APIs" has the meaning assigned to such term in the Genesis OLP Partnership
Agreement.
"Assignee" means a Non-citizen Assignee or a Person to whom one or more
Limited Partner Interests have been transferred in a manner permitted under
this Agreement and who has executed and delivered a Transfer Application as
required by this Agreement, but who has not been admitted as a Substituted
Limited Partner.
"Associate" means, when used to indicate a relationship with any Person, (a)
any corporation or organization of which such Person is a director, officer or
partner or is, directly or indirectly, the owner of 20% or more of any class
of voting stock or other voting interest; (b) any trust or other estate in
which such Person has at least a 20% beneficial interest or as to which such
Person serves as trustee or in a similar fiduciary capacity; and (c) any
relative or spouse of such Person, or any relative of such spouse, who has the
same principal residence as such Person.
"Audit Committee" means a committee of the Board of Directors of the General
Partner composed entirely of two or more directors who are neither officers
nor employees of the General Partner or officers, directors or employees of
any Affiliate of the General Partner.
"Available Cash" means, with respect to any Quarter ending prior to the
Liquidation Date,
(a) the sum of (i) all cash and cash equivalents of the Partnership on
hand at the end of such Quarter, and (ii) all additional cash and cash
equivalents of the Partnership on hand on the date of determination of
Available Cash with respect to such Quarter resulting from borrowings for
working capital purposes made subsequent to the end of such Quarter, less
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<PAGE>
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership (including reserves for
future capital expenditures) subsequent to such Quarter and, (ii) comply
with applicable law or any loan agreement, security agreement, mortgage,
debt instrument or other agreement or obligation to which any member of the
Partnership is a party or by which it is bound or its assets are subject;
provided, however, that disbursements made by the Partnership 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, less
(c) any Redemption Proceeds on hand that have not yet been contributed to
Genesis OLP.
Notwithstanding the foregoing, "Available Cash" with respect to the Quarter
in which the Liquidation Date occurs and any subsequent Quarter shall equal
zero.
"Basis" means Basis Petroleum, Inc., a Texas corporation.
"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.
"Capital Contribution" means any cash, cash equivalents or the Net Agreed
Value of Contributed Property that a Partner contributes to the Partnership
pursuant to this Agreement.
"Capital Improvements" means (a) additions or improvements to the capital
assets owned by any Group Member or (b) the acquisition of existing or the
construction of new capital assets (including pipeline systems, storage
facilities and related assets), made to increase the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
"Carrying Value" means (a) with respect to a Contributed Property, the
Agreed Value of such property reduced (but not below zero) by all
depreciation, amortization and cost recovery deductions charged to the
Partners' and Assignees' Capital Accounts in respect of such Contributed
Property, and (b) with respect to any other Partnership property, the adjusted
basis of such property for federal income tax purposes, all as of the time of
determination. The Carrying Value of any property shall be adjusted from time
to time in accordance with Sections 5.5(d)(i) and 5.5(d)(ii) and to reflect
changes, additions or other adjustments to the Carrying Value for dispositions
and acquisitions of Partnership properties, as deemed appropriate by the
General Partner.
"Cause" means a court of competent jurisdiction has entered a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as general partner
of the Partnership.
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<PAGE>
"Certificate" means a certificate, substantially in the form of Exhibit A to
this Agreement or in such other form as may be adopted by the General Partner
in its discretion, issued by the Partnership evidencing ownership of one or
more Common Units or a certificate, in such form as may be adopted by the
General Partner in its discretion, issued by the Partnership evidencing
ownership of one or more other Partnership Securities.
"Certificate of Limited Partnership" means the Certificate of Limited
Partnership of the Partnership filed with the Secretary of State of the State
of Delaware as referenced in Section 7.2, as such Certificate of Limited
Partnership may be amended, supplemented or restated from time to time.
"Citizenship Certification" means a properly completed certificate in such
form as may be specified by the General Partner by which an Assignee or a
Limited Partner certifies that he (and if he is a nominee holding for the
account of another Person, that to the best of his knowledge such other
Person) is an Eligible Citizen.
"claim" has the meaning assigned to such term in Section 7.12(c).
"Closing Date" means the first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
"Closing Price" has the meaning assigned to such term in Section 15.1(a).
"Code" means the Internal Revenue Code of 1986, as amended and in effect
from time to time. Any reference herein to a specific section or sections of
the Code shall be deemed to include a reference to any corresponding provision
of future law.
"Combined Interest" has the meaning assigned to such term in Section
11.3(a).
"Commission" means the United States Securities and Exchange Commission.
"Common Unit" means a Partnership Security representing a fractional part of
the Partnership Interests of all Limited Partners and Assignees and having the
rights and obligations specified with respect to a Common Unit 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 (or deemed contributed to the Partnership on termination and
reconstitution thereof pursuant to Section 708 of the Code, whether before or
after finalization of Proposed Treasury Regulation Section 1.708-1(b)(1)(iv)).
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.
"Conversion Election" has the meaning assigned to such term in the Genesis
OLP Partnership Agreement.
"Conveyance Agreement" means that certain Purchase and Sale and Contribution
and Conveyance Agreement, dated as of , among the Partnership, Genesis
OLP, Genesis Energy, L.L.C., Basis, Howell and the Howell Subsidiaries,
together with the additional conveyance documents and instruments contemplated
or referenced thereunder.
"Curative Allocation" means any allocation of an item of income, gain,
deduction, loss or credit pursuant to the provisions of Section 6.1(c)(ix).
"Current Market Price" has the meaning assigned to such term in Section
15.1(a).
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<PAGE>
"Delaware Act" means the Delaware Revised Uniform Limited Partnership Act, 6
Del C. 17-101, et seq., as amended, supplemented or restated from time to
time, and any successor to such statute.
"Departing Partner" means a former General Partner from and after the
effective date of any withdrawal or removal of such former General Partner
pursuant to Section 11.1 or 11.2.
"Distribution Support Agreement" means the Distribution Support Agreement,
dated as of , among Basis, Salomon and Genesis OLP, which sets forth the
agreement of Basis, Salomon and Genesis OLP relating to the purchase of APIs.
"Economic Risk of Loss" has the meaning set forth in Treasury Regulation
Section 1.752-2(a).
"Eligible Citizen" means a Person qualified to own interests in real
property in jurisdictions in which any Group Member does business or proposes
to do business from time to time, and whose status as a Limited Partner or
Assignee does not or would not subject such Group Member to a significant risk
of cancellation or forfeiture of any of its properties or any interest
therein.
"Event of Withdrawal" has the meaning assigned to such term in Section
11.1(a).
"GP Unit" means a Partnership Security representing a fractional part of the
Partnership Interest of the General Partner and having the rights and
obligations specified with respect to GP Units in this Agreement.
"General Partner" means Genesis Energy, L.L.C. and its successors and
permitted assigns as general partner of the Partnership.
"General Partner Interest" means the ownership interest of a 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 GP Units
or other 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.
"Genesis Energy, L.L.C." means Genesis Energy, L.L.C., a Delaware limited
liability company, which is currently the General Partner of the Partnership,
and its successors.
"Genesis OLP" means Genesis Crude Oil, L.P., a Delaware limited partnership,
and any successors thereto.
"Genesis OLP Partnership Agreement" means the Amended and Restated Agreement
of Limited Partnership of Genesis Crude Oil, L.P., as it may be amended,
supplemented or restated from time to time.
"Group" means a Person that with or through any of its Affiliates or
Associates has any agreement, arrangement or understanding for the purpose of
acquiring, holding, voting (except voting pursuant to a revocable proxy or
consent given to such Person in response to a proxy or consent solicitation
made to 10 or more Persons) or disposing of any Partnership Securities with
any other Person that beneficially owns, or whose Affiliates or Associates
beneficially own, directly or indirectly, Partnership Securities.
"Group Member" means a member of the Partnership Group.
"Guaranteed Payment" has the meaning assigned to such term in the Genesis
OLP Partnership Agreement.
"Holder" as used in Section 7.12, has the meaning assigned to such term in
Section 7.12(a).
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<PAGE>
"Howell" means Howell Corporation, a Delaware corporation.
"Howell Subsidiaries" means Howell Crude Oil Company, a Delaware
corporation, Howell Pipeline Texas, Inc., a Delaware corporation, Howell
Pipeline U.S.A., Inc., a Delaware corporation, Howell Transportation Services,
Inc., a Delaware corporation, and Howell [Newco], a corporation.
"Indemnified Persons" has the meaning assigned to such term in Section
7.12(c).
"Indemnitee" means (a) the General Partner, any Departing Partner and any
Person who is or was an Affiliate of the General Partner or any Departing
Partner, (b) any Person who is or was a director, officer, employee, agent or
trustee of the Partnership, Genesis OLP or any other Subsidiary of the
Partnership, (c) any Person who is or was an officer, director, employee,
agent or trustee of the General Partner or any Departing Partner or any such
Affiliate, and (d) any Person who is or was serving at the request of the
General Partner or any Departing Partner or any such Affiliate as a director,
officer, employee, member, partner, agent, fiduciary or trustee of another
Person; provided, that a Person shall not be an Indemnitee by reason of
providing, on a fee-for-services basis, trustee, fiduciary or custodial
services.
"Initial Common Unit" means a Common Unit sold in the Initial Offering.
"Initial Limited Partners" means the Underwriters upon being admitted to the
Partnership in accordance with Section 10.1.
"Initial Offering" means the initial offering and sale of Common Units to
the public, as described in the Registration Statement.
"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.
"LLC Contribution Amount" has the meaning assigned to such term in the
Conveyance Agreement.
"LLC Overallotment Contribution" has the meaning assigned to such term in
the Conveyance Agreement.
"Limited Partner" means, unless the context otherwise requires, (a) the
Organizational Limited Partner, each Initial Limited Partner, each Substituted
Limited Partner, each Additional Limited Partner, and any Partner upon the
change of its status from General Partner to Limited Partner pursuant to
Section 11.3 and (b) solely for purposes of Articles V, VI, VII and IX and
Section 12.4, each Assignee.
"Limited Partner Interest" means the ownership interest of a Limited Partner
or Assignee in the Partnership, which may be evidenced by Common Units or
other Partnership Securities or a combination thereof or interest therein, and
includes any and all benefits to which such Limited Partner or Assignee is
entitled as provided in this Agreement, together with all obligations of such
Limited Partner or Assignee to comply with the terms and provisions of this
Agreement.
"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 Partners have the right to elect to reconstitute the
Partnership and continue its business has expired without such an election
being made, and (b) in the case of any other event giving rise to the
dissolution of the Partnership, the date on which such event occurs.
"Liquidator" means one or more Persons selected by the General Partner to
perform the functions described in Section 12.3.
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<PAGE>
"Majority Interest" means at least a majority in Voting Power of the
Outstanding Limited Partner Interests.
"Merger Agreement" has the meaning assigned to such term in Section 14.1.
"National Securities Exchange" means an exchange registered with the
Commission under Section 6(a) of the Securities Exchange Act of 1934, as
amended, supplemented or restated from time to time, and any successor to such
statute, or the Nasdaq Stock Market or any successor thereto.
"Net Agreed Value" means, (a) in the case of any Contributed Property, the
Agreed Value of such property reduced by any liabilities either assumed by the
Partnership upon such contribution or to which such property is subject when
contributed, and (b) in the case of any property distributed to a Partner or
Assignee by the Partnership, the Partnership's Carrying Value of such property
(as adjusted pursuant to Section 5.5(d)(ii)) at the time such property is
distributed, reduced by any indebtedness either assumed by such Partner or
Assignee upon such distribution or to which such property is subject at the
time of distribution, in either case, as determined under Section 752 of the
Code.
"Net Income" means, for any taxable year, the excess, if any, of the
Partnership's items of income and gain for such taxable year over the
Partnership's items of loss and deduction 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 for such taxable year over the
Partnership's items of income and gain 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).
"Ninety-Percent Interest" means at least 90% in Voting Power of the
Outstanding Limited Partner Interests.
"Non-citizen Assignee" means a Person whom the General Partner has
determined in its discretion does not constitute an Eligible Citizen and as to
whose Limited Partner Interest the General Partner has become the Substituted
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.
"OLP Common Unit" has the meaning assigned to the term "Common Unit" in the
Genesis OLP Partnership Agreement.
"OLP Parity Unit" has the meaning assigned to the term "Parity Unit" in the
Genesis OLP Partnership Agreement.
"OLP Subordinated Unit" has the meaning assigned to the term "Subordinated
Unit" in the Genesis OLP Partnership Agreement.
"OLP Unit" has the meaning assigned to the term "Unit" in the Genesis OLP
Partnership Agreement.
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"Opinion of Counsel" means a written opinion of counsel (who may be regular
counsel to the Partnership or the General Partner or any of their Affiliates)
acceptable to the General Partner in its reasonable discretion.
"Option Closing Date" has the meaning assigned to such term in the
Underwriting Agreement.
"Organizational Limited Partner" means Wayne Kubicek in his capacity as the
organizational limited partner of the Partnership pursuant to this Agreement.
"Outstanding" means, with respect to Partnership Securities, all Partnership
Securities that are issued by the Partnership and reflected as outstanding on
the Partnership's books and records as of the date of determination; provided,
however, that if at any time any Person or Group (other than the General
Partner or its Affiliates) beneficially owns 20% or more of any Outstanding
Partnership Securities of any class then Outstanding, all Partnership
Securities owned by such Person or Group shall not be voted on any matter and
shall not be considered to be Outstanding when sending notices of a meeting of
Limited Partners to vote on any matter (unless otherwise required by law),
calculating required votes, determining the presence of a quorum or for other
similar purposes under this Agreement, except that such Partnership Securities
shall be considered to be Outstanding for purposes of Section 11.1(b)(iv)
(such Partnership Securities shall not, however, be treated as a separate
class of Partnership Securities for purposes of this Agreement).
"Over-allotment Option" means the over-allotment option granted to the
Underwriters by the Partnership pursuant to the Underwriting Agreement.
"Parity Units" means Common Units and all other Limited Partner Interests
having rights to distributions or in liquidation ranking on a parity with the
Common Units.
"Partner Nonrecourse Debt" has the meaning set forth in Treasury Regulation
Section 1.704-2(b)(4).
"Partner Nonrecourse Debt Minimum Gain" has the meaning set forth in
Treasury Regulation Section 1.704-2(i)(2).
"Partner Nonrecourse Deductions" means any and all items of loss, deduction
or expenditure (including, without limitation, any expenditure described in
Section 705(a)(2)(B) of the Code) that, in accordance with the principles of
Treasury Regulation Section 1.704-2(i), are attributable to a Partner
Nonrecourse Debt.
"Partners" means the General Partner and the Limited Partners.
"Partnership" means Genesis Energy, L.P., a Delaware limited partnership,
and any successors thereto.
"Partnership Group" means the Partnership, Genesis OLP and any other
Subsidiary of the Partnership, 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 interests of the
Partnership and shall include, without limitation, Common Units and GP Units.
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"Percentage Interest" means as of the date of such determination (a) as to
any Partner or Assignee holding Units, the product of (i) 100% less the
percentage applicable to paragraph (b) multiplied by (ii) the quotient of the
number of Units held by such Partner or Assignee divided by the total number
of all Outstanding Units, and (b) as to the holders of additional Partnership
Securities issued by the Partnership in accordance with Section 5.6, the
percentage established as a part of such issuance.
"Person" means an individual or a corporation, limited liability company,
partnership, joint venture, trust, unincorporated organization, association,
government agency or political subdivision thereof or other entity.
"Pro Rata" means (a) when modifying Units or any class thereof, apportioned
among all designated Units in accordance with their relative Percentage
Interests and (b) when modifying Partners and Assignees, apportioned among all
Partners and Assignees in accordance with their respective Percentage
Interests.
"Purchase Date" means the date determined by the General Partner as the date
for purchase of all Outstanding Units (other than Units owned by the General
Partner and its Affiliates) pursuant to Article XV.
"Quarter" means, unless the context requires otherwise, a calendar quarter.
"Recapture Income" means any gain recognized by the Partnership (computed
without regard to any adjustment required by Section 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 participate in any offer.
"Record Holder" means the Person in whose name a Common Unit is registered
on the books of the Transfer Agent as of the opening of business on a
particular Business Day, or with respect to other Partnership Securities, the
Person in whose name any such other Partnership Security is registered on the
books which the General Partner has caused to be kept as of the opening of
business on such Business Day.
"Redeemable Interests" means any Limited Partner Interests for which a
redemption notice has been given, and has not been withdrawn, pursuant to
Section 4.9.
"Redemption and Registration Rights Agreement" means the Redemption and
Registration Rights Agreement, dated as of , among Basis, Howell, the
Partnership and Genesis OLP which sets forth the agreement regarding the
redemption of OLP Common Units by Genesis OLP.
"Redemption Proceeds" means any cash received by the Partnership from the
issuance of Partnership Securities which cash is to be contributed to Genesis
OLP and used by Genesis OLP to redeem OLP Common Units pursuant to the
Redemption and Registration Rights Agreement.
"Registration Statement" means the Registration Statement on Form S-1
(Registration No. 333-11545) 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.
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"Required Allocations" means (a) any limitation imposed on any allocation of
Net Losses under Section 6.1(b) 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.
"Salomon" means Salomon Inc, a Delaware corporation.
"Securities Act" means the Securities Act of 1933, as amended, supplemented
or restated from time to time and any successor to such statute.
"Special Approval" means approval by a majority of the members of the Audit
Committee.
"Subordination Period" has the meaning assigned to such term in the Genesis
OLP Partnership Agreement.
"Subsidiary" means, with respect to any Person, (a) a corporation of which
more than 50% of the voting power of shares entitled (without regard to the
occurrence of any contingency) to vote in the election of directors or other
governing body of such corporation is owned, directly or indirectly, at the
date of determination, by such Person, by one or more Subsidiaries of such
Person or a combination thereof, (b) a partnership (whether general or
limited) in which such Person or a Subsidiary of such Person is, at the date
of determination, a general or limited partner of such partnership, but only
if more than 50% of the partnership interests of such partnership (considering
all of the partnership interests of such partnership as a single class) is
owned, directly or indirectly, at the date of determination, by such Person,
by one or more Subsidiaries of such Person, or a combination thereof, or (c)
any other Person (other than a corporation or a partnership) in which such
Person, one or more Subsidiaries of such Person, or a combination thereof,
directly or indirectly, at the date of determination, has (i) at least a
majority ownership interest or (ii) the power to elect or direct the election
of a majority of the directors or other governing body of such Person.
"Substituted Limited Partner" means a Person who is admitted as a Limited
Partner to the Partnership pursuant to Section 10.2 in place of and with all
the rights of a Limited Partner and who is shown as a Limited Partner on the
books and records of the Partnership.
"Surviving Business Entity" has the meaning assigned to such term in Section
14.2(b).
"Trading Day" has the meaning assigned to such term in Section 15.1(a).
"transfer" has the meaning assigned to such term in Section 4.4(a).
"Transfer Agent" means such bank, trust company or other Person (including
the General Partner or one of its Affiliates) as shall be appointed from time
to time by the Partnership to act as registrar and transfer agent for the
Common Units.
"Transfer Application" means an application and agreement for transfer of
Partnership Securities in the form set forth on the back of a Certificate or
in a form substantially to the same effect in a separate instrument.
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"Two-Thirds Interest" means at least 66-2/3% in Voting Power of the
Outstanding Limited Partner Interests.
"Underwriter" means each Person named as an underwriter in Schedule I to the
Underwriting Agreement who purchases Common Units pursuant thereto.
"Underwriting Agreement" means the Underwriting Agreement dated , 1996,
among the Underwriters, the Partnership, Genesis OLP, the General Partner and
certain other parties, providing for the purchase of Common Units by such
Underwriters.
"Unit" means a Common Unit or a GP Unit or any other Partnership Security
that is designated as a "Unit."
"Unitholder" means the holder of a Unit other than a GP 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.
"Voting Power" means the right, if any, of the holder of a Partnership
Security to vote on Partnership matters. Each Common Unit shall entitle the
holder thereof to one vote. Each additional Partnership Security shall entitle
the holder thereof to such vote, if any, as shall be established at the time
of issuance of such Partnership Security.
"Withdrawal Opinion of Counsel" has the meaning assigned to such term in
Section 11.1(b).
1.2 Construction
Unless the context requires otherwise: (a) any pronoun used in this
Agreement shall include the corresponding masculine, feminine or neuter forms,
and the singular form of nouns, pronouns and verbs shall include the plural
and vice versa; (b) references to Articles and Sections refer to Articles and
Sections of this Agreement; and (c) "include" or "includes" means includes,
without limitation, and "including" means including, without limitation.
ARTICLE II
Organization
2.1 Formation
The General Partner and the Organizational Limited Partner have previously
formed the Partnership as a limited partnership pursuant to the provisions of
the Delaware Act and hereby amend and restate the original Agreement of
Limited Partnership of Genesis Energy, L.P. in its entirety. 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 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 "Genesis Energy, L.P." The
Partnership's business may be conducted under any other name or names deemed
necessary or appropriate by the General Partner
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in its sole discretion, including the name of the General Partner. The words
"Limited Partnership," "L.P.," "Ltd." or similar words or letters shall be
included in the Partnership's name where necessary for the purpose of
complying with the laws of any jurisdiction that so requires. The General
Partner in its discretion may change the name of the Partnership at any time
and from time to time and shall notify the Limited Partners of such change in
the next regular communication to the Limited Partners.
2.3 Registered Office; Registered Agent; Principal Office; Other Offices
Unless and until changed by the General Partner, the registered office of
the Partnership in the State of Delaware shall be located at 1209 Orange
Street, New Castle County, Wilmington, Delaware 19801, and the registered
agent for service of process on the Partnership in the State of Delaware at
such registered office shall be CT Corporation System. The principal office of
the Partnership shall be located at 500 Dallas, Suite 3200, Houston, Texas
77002 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 500 Dallas, Suite 3200, Houston, Texas 77002 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 to (a) serve as a general partner in Genesis OLP and, in connection
therewith, to exercise all the rights and powers conferred upon the
Partnership as a general partner in Genesis OLP pursuant to the Genesis OLP
Partnership Agreement or otherwise, (b) engage directly in, or enter into or
form any corporation, partnership, joint venture, limited liability company or
other arrangement to engage indirectly in, any business activity that Genesis
OLP is permitted to engage in by the Genesis OLP Partnership Agreement and, in
connection therewith, to exercise all of the rights and powers conferred upon
the Partnership pursuant to the agreements relating to such business activity,
(c) engage directly in, or to enter into or form any corporation, partnership,
joint venture, limited liability company or other arrangement to engage
indirectly in, any business activity that is approved by the General Partner
and which lawfully may be conducted by a limited partnership organized
pursuant to the Delaware Act and, in connection therewith, to exercise all of
the rights and powers conferred upon the Partnership pursuant to the
agreements relating to such business activity, and (d) do anything necessary
or appropriate to the foregoing, including the making of capital contributions
or loans to a Group Member; provided, however, that, notwithstanding the
foregoing, the Partnership shall not engage in the activities described in (b)
and (c) above if (x) there are any outstanding OLP Units that are not held by
the Partnership, which OLP Units give the holders thereof the right to cause
Genesis OLP to redeem such OLP Units based on a value that is tied to the
value of Partnership Securities and, as a result of engaging in such
activities, the relative values of such OLP Units and Partnership Securities
will be materially affected or (y) there are any outstanding OLP Subordinated
Units. The General Partner has no obligation or duty to the Partnership, the
Limited Partners, or the Assignees to propose or approve, and in its
discretion may decline to propose or approve, the conduct by the Partnership
of any business.
2.5 Powers
The Partnership shall be empowered to do any and all acts and things
necessary, appropriate, proper, advisable, incidental to or convenient for the
furtherance and accomplishment of the purposes and business described in
Section 2.4 and for the protection and benefit of the Partnership.
2.6 Power of Attorney
(a) Each Limited Partner and each Assignee hereby constitutes and appoints
the General Partner and, if a Liquidator shall have been selected pursuant to
Section 12.3, the Liquidator, severally (and
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any successor to the Liquidator by merger, transfer, assignment, election or
otherwise) and each of their authorized officers and attorneys-in-fact, as the
case may be, with full power of substitution, as his true and lawful agent and
attorney-in-fact, with full power and authority in his name, place and stead,
to:
(i) execute, swear to, acknowledge, deliver, file and record in the
appropriate public offices (A) all certificates, documents and other
instruments (including this Agreement and the Certificate of Limited
Partnership and all amendments or restatements hereof or thereof) that the
General Partner or the Liquidator deems necessary or appropriate to form,
qualify or continue the existence or qualification of the Partnership as a
limited partnership (or a partnership in which the limited partners have
limited liability) in the State of Delaware and in all other jurisdictions
in which the Partnership may conduct business or own property; (B) all
certificates, documents and other instruments that the General Partner or
the Liquidator deems necessary or appropriate to reflect, in accordance
with its terms, any amendment, change, modification or restatement of this
Agreement; (C) all certificates, documents and other instruments (including
conveyances and a certificate of cancellation) that the General Partner or
the Liquidator deems necessary or appropriate to reflect the dissolution
and liquidation of the Partnership pursuant to the terms of this Agreement;
(D) all certificates, documents and other instruments relating to the
admission, withdrawal, removal or substitution of any Partner pursuant to,
or other events described in, Article IV, X, XI or XII; (E) all
certificates, documents and other instruments relating to the determination
of the rights, preferences and privileges of any class or series of
Partnership Securities issued pursuant to Section 5.6; and (F) all
certificates, documents and other instruments (including agreements and a
certificate of merger) relating to a merger or consolidation of the
Partnership pursuant to Article XIV; and
(ii) execute, swear to, acknowledge, deliver, file and record all
ballots, consents, approvals, waivers, certificates, documents and other
instruments necessary or appropriate, in the discretion of the General
Partner or the Liquidator, to make, evidence, give, confirm or ratify any
vote, consent, approval, agreement or other action that is made or given by
the Partners hereunder or is consistent with the terms of this Agreement or
is necessary or appropriate, in the discretion of the General Partner or
the Liquidator, to effectuate the terms or intent of this Agreement;
provided, that when required by Section 13.3 or any other provision of this
Agreement that establishes a percentage of the Limited Partners or of the
Limited Partners of any class or series required to take any action, the
General Partner and the Liquidator may exercise the power of attorney made
in this Section 2.6(a)(ii) only after the necessary vote, consent or
approval of the Limited Partners or of the Limited Partners of such class
or series, as applicable.
Nothing contained in this Section 2.6(a) shall be construed as authorizing
the General Partner to amend this Agreement except in accordance with Article
XIII or as may be otherwise expressly provided for in this Agreement.
(b) The foregoing power of attorney is hereby declared to be irrevocable and
a power coupled with an interest, and it shall survive and, to the maximum
extent permitted by law, not be affected by the subsequent death,
incompetency, disability, incapacity, dissolution, bankruptcy or termination
of any Limited Partner or Assignee and the transfer of all or any portion of
such Limited Partner's or Assignee's Partnership Interest and shall extend to
such Limited Partner's or Assignee's heirs, successors, assigns and personal
representatives. Each such Limited Partner or Assignee hereby agrees to be
bound by any representation made by the General Partner or the Liquidator
acting in good faith pursuant to such power of attorney; and each such Limited
Partner or Assignee, to the maximum extent permitted by law, hereby waives any
and all defenses that may be available to contest, negate or disaffirm the
action of the General Partner or the Liquidator taken in good faith under such
power of attorney. Each Limited Partner or Assignee shall execute and deliver
to the General Partner or the Liquidator, within 15 days after receipt of the
request therefor, such further
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designation, powers of attorney and other instruments as the General Partner
or the Liquidator deems necessary to effectuate this Agreement and the
purposes of the Partnership.
2.7 Term
The Partnership commenced upon the filing of the Certificate of Limited
Partnership in accordance with the Delaware Act and shall continue in
existence until the close of Partnership business on December 31, 2086 or
until the earlier termination of the Partnership in accordance with the
provisions of Article XII.
2.8 Title to Partnership Assets
Title to Partnership assets, whether real, personal or mixed and whether
tangible or intangible, shall be deemed to be owned by the Partnership as an
entity, and no Partner or Assignee, individually or collectively, shall have
any ownership interest in such Partnership assets or any portion thereof.
Title to any or all of the Partnership assets may be held in the name of the
Partnership, the General Partner, one or more of its Affiliates or one or more
nominees, as the General Partner may determine. The General Partner hereby
declares and warrants that any Partnership assets for which record title is
held in the name of the General Partner or one or more of its Affiliates or
one or more nominees shall be held by the General Partner or such Affiliate or
nominee for the use and benefit of the Partnership in accordance with the
provisions of this Agreement; provided, however, that the General Partner
shall use reasonable efforts to cause record title to such assets (other than
those assets in respect of which the General Partner determines that the
expense and difficulty of conveyancing makes transfer of record title to the
Partnership impracticable) to be vested in the Partnership as soon as
reasonably practicable; provided, further, that, prior to the withdrawal or
removal of the General Partner or as soon thereafter as practicable, the
General Partner shall use reasonable efforts to effect the transfer of record
title to the Partnership and, prior to any such transfer, will provide for the
use of such assets in a manner satisfactory to the General Partner. All
Partnership assets shall be recorded as the property of the Partnership in its
books and records, irrespective of the name in which record title to such
Partnership assets is held.
ARTICLE III
Rights of Limited Partners
3.1 Limitation of Liability
The Limited Partners and the Assignees shall have no liability under this
Agreement except as expressly provided in this Agreement or the Delaware Act.
3.2 Management of Business
No Limited Partner or Assignee (other than the General Partner or any of its
Affiliates or any officer, director, employee, member, general partner, agent
or trustee of the General Partner or any of its Affiliates, or any officer,
director, employee, member, general partner, agent or trustee of a Group
Member, in its capacity as such, if such Person shall also be a Limited
Partner or Assignee) 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,
general partner, agent or trustee of the General Partner or any of its
Affiliates, or any officer, director, employee, member, general partner, agent
or trustee of a Group Member, in its capacity as such, shall not be deemed to
be participation in the control of the business of the Partnership by a
limited partner of the Partnership (within the meaning
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of Section 17-303(a) of the Delaware Act) and shall not affect, impair or
eliminate the limitations on the liability of the Limited Partners or
Assignees under this Agreement.
3.3 Outside Activities of the Limited Partners
Subject to the provisions of Section 7.5, which shall continue to be
applicable to the Persons referred to therein, regardless of whether such
Persons shall also be Limited Partners or Assignees, any Limited Partner or
Assignee shall be entitled to and may have business interests and engage in
business activities in addition to those relating to the Partnership,
including business interests and activities in direct competition with the
Partnership Group. Neither the Partnership nor any of the other Partners or
Assignees shall have any rights by virtue of this Agreement in any business
ventures of any Limited Partner or Assignee.
3.4 Rights of Limited Partners
(a) In addition to other rights provided by this Agreement or by applicable
law, and except as limited by Section 3.4(b), each Limited Partner shall have
the right, for a purpose reasonably related to such Limited Partner's interest
as a limited partner in the Partnership, upon reasonable written demand and at
such Limited Partner's own expense:
(i) to obtain true and full information regarding the status of the
business and financial condition of the Partnership;
(ii) promptly after becoming available, to obtain a copy of the
Partnership's federal, state and local tax returns for each year;
(iii) to have furnished to him a current list of the name and last known
business, residence or mailing address of each Partner;
(iv) to have furnished to him a copy of this Agreement and the
Certificate of Limited Partnership and all amendments thereto, together
with a copy of the executed copies of all powers of attorney pursuant to
which this Agreement, the Certificate of Limited Partnership and all
amendments thereto have been executed;
(v) to obtain true and full information regarding the amount of cash and
a description and statement of the Net Agreed Value of any other Capital
Contribution by each Partner and which each Partner has agreed to
contribute in the future, and the date on which each became a Partner; and
(vi) to obtain such other information regarding the affairs of the
Partnership as is just and reasonable.
(b) The General Partner may keep confidential from the Limited Partners and
Assignees, for such period of time as the General Partner deems reasonable,
(i) any information that the General Partner reasonably believes to be in the
nature of trade secrets or (ii) other information the disclosure of which the
General Partner in good faith believes (A) is not in the best interests of the
Partnership Group, (B) could damage the Partnership Group or (C) that any
Group Member is required by law or by agreement with any third party to keep
confidential (other than agreements with Affiliates of the Partnership the
primary purpose of which is to circumvent the obligations set forth in this
Section 3.4).
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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 one or more Certificates in the name of such Person
evidencing the number of such Common Units being so issued. In addition, the
General Partner may cause the Partnership to issue Certificates evidencing
ownership of one or more other classes or series of Partnership Securities.
Certificates shall be executed on behalf of the Partnership by the Chairman of
the Board, President or any Vice President and the Secretary or any Assistant
Secretary of the General Partner. No Common Unit Certificate shall be valid
for any purpose until it has been countersigned by the Transfer Agent.
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 deliver and, in the case of a Common Unit Certificate, the
Transfer Agent shall countersign, 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, in the case of a Common Unit
Certificate, the Transfer Agent shall countersign, a new Certificate in place
of any Certificate previously issued if the Record Holder of the Certificate:
(i) makes proof by affidavit, in form and substance satisfactory to the
Partnership, that a previously issued Certificate has been lost, destroyed
or stolen;
(ii) requests the issuance of a new Certificate before the Partnership
has notice that the Certificate has been acquired by a purchaser for value
in good faith and without notice of an adverse claim;
(iii) if requested by the Partnership, delivers to the Partnership a
bond, in form and substance satisfactory to the Partnership, with surety or
sureties and with fixed or open penalty as the Partnership may reasonably
direct, in its sole discretion, to indemnify the Partnership, the General
Partner and the Transfer Agent against any claim that may be made on
account of the alleged loss, destruction or theft of the Certificate; and
(iv) satisfies any other reasonable requirements imposed by the
Partnership.
If a Limited Partner or Assignee fails to notify the Partnership within a
reasonable time after he has notice of the loss, destruction or theft of a
Certificate, and a transfer of the Limited Partner Interests represented by
the Certificate is registered before the Partnership, the General Partner or
the Transfer Agent receives such notification, the Limited Partner or Assignee
shall be precluded from making any claim against the Partnership, the General
Partner and the Transfer Agent for such transfer or for a new Certificate.
(c) As a condition to the issuance of any new Certificate under this Section
4.2, the Partnership may require the payment of a sum sufficient to cover any
tax or other governmental charge that may be imposed in relation thereto and
any other expenses (including the fees and expenses of the Transfer Agent)
reasonably connected therewith.
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4.3 Record Holders
The Partnership shall be entitled to recognize the Record Holder as the
Partner or Assignee with respect to any Partnership Interest and, accordingly,
shall not be bound to recognize any equitable or other claim to or interest in
such Partnership Interest on the part of any other Person, regardless of
whether the Partnership shall have actual or other notice thereof, except as
otherwise provided by law or any applicable rule, regulation, guideline or
requirement of any National Securities Exchange on which Limited Partner
Interests are listed for trading. Without limiting the foregoing, when a
Person (such as a broker, dealer, bank, trust company or clearing corporation
or an agent of any of the foregoing) is acting as nominee, agent or in some
other representative capacity for another Person in acquiring and/or holding
Limited Partner Interests, as between the Partnership on the one hand, and
such other Persons on the other, such representative Person (a) shall be the
Partner or Assignee (as the case may be) of record and beneficially, (b) must
execute and deliver a Transfer Application and (c) shall be bound by this
Agreement and shall have the rights and obligations of a Partner or Assignee
(as the case may be) hereunder and as, and to the extent, provided for herein.
4.4 Transfer Generally
(a) The term "transfer," when used in this Agreement with respect to a
Partnership Interest, shall be deemed to refer to a transaction by which the
General Partner assigns its General Partner Interest to another Person who
becomes the General Partner, or by which the holder of a Limited Partner
Interest assigns such Limited Partner Interest to another Person who is or
becomes a Limited Partner or an Assignee, and includes a sale, assignment,
gift, pledge, encumbrance, hypothecation, mortgage, exchange or any other
disposition by law or otherwise.
(b) No Partnership Interest shall be transferred, in whole or in part,
except in accordance with the terms and conditions set forth in this Article
IV. Any transfer or purported transfer of a Partnership Interest not made in
accordance with this Article IV shall be null and void.
(c) Nothing contained in this Agreement shall be construed to prevent a
disposition by any interest holder in the General Partner of any or all of the
issued and outstanding interests in the General Partner.
4.5 Registration and Transfer of Limited Partner Interests
(a) The Partnership shall keep or cause to be kept on behalf of the
Partnership a register in which, subject to such reasonable regulations as it
may prescribe and subject to the provisions of Section 4.5(b), the Partnership
will provide for the registration and transfer of Limited Partner Interests.
The Transfer Agent is hereby appointed registrar and transfer agent for the
purpose of registering Common Units and transfers of such Common Units as
herein provided. The Partnership shall not recognize transfers of Certificates
representing Limited Partner Interests unless such transfers are effected in
the manner described in this Section 4.5. Upon surrender for registration of
transfer of any Limited Partner Interest, 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, 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 4.8, the Partnership shall not
recognize any transfer of Limited Partner Interests until the Certificates
evidencing such Limited Partner Interests are surrendered for registration of
transfer and are accompanied by a Transfer Application duly executed by the
transferee (or the transferee's attorney-in-fact duly authorized in writing).
No charge shall be
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imposed by the Partnership for such transfer; provided, that as a condition to
the issuance of any new Certificate under this Section 4.5, the Partnership
may require the payment of a sum sufficient to cover any tax or other
governmental charge that may be imposed with respect thereto.
(c) Limited Partner Interests may be transferred only in the manner
described in this Section 4.5. The transfer of any Limited Partner Interests
and the admission of any new Limited Partner shall not constitute an amendment
to this Agreement.
(d) Until admitted as a Substituted Limited Partner pursuant to Section
10.2, the Record Holder of a Limited Partner Interest shall be an Assignee in
respect of such Limited Partner Interest. Limited Partners may include
custodians, nominees or any other individual or entity in its own or any
representative capacity.
(e) A transferee of a Limited Partner Interest who has completed and
delivered a Transfer Application shall be deemed to have (i) requested
admission as a Substituted Limited Partner, (ii) agreed to comply with and be
bound by and to have executed this Agreement, (iii) represented and warranted
that such transferee has the right, power and authority and, if an individual,
the capacity to enter into this Agreement, (iv) granted the powers of attorney
set forth in this Agreement and (v) given the consents and approvals and made
the waivers contained in this Agreement.
4.6 Transfer of a General Partner's General Partner Interest
Prior to September 30, 2006, the General Partner shall not transfer all or
any part of its General Partner Interest to a Person unless such transfer (a)
has been approved by the prior written consent or vote of the holders of a
Majority Interest or (b) is of all, but not less than all, of its General
Partner Interest to (i) an Affiliate of the General Partner or (ii) another
Person in connection with the merger or consolidation of the General Partner
with or into another Person or the transfer by the General Partner of all or
substantially all of its assets to another Person. Notwithstanding anything
herein to the contrary, no transfer by the General Partner of all or any part
of its General Partner Interest to another Person shall be permitted unless
(x) the transferee agrees to assume the rights and duties of the General
Partner under this Agreement and the Genesis OLP Partnership Agreement and to
be bound by the provisions of this Agreement and the Genesis OLP Partnership
Agreement, (y) the Partnership receives an Opinion of Counsel that such
transfer would not result in the loss of limited liability of any Limited
Partner or of any limited partner of Genesis OLP or cause the Partnership or
Genesis OLP 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 (z) such transferee also agrees to
purchase all (or the appropriate portion thereof, if applicable) of the
partnership interest of the General Partner as the general partner of each
other Group Member. In the case of a transfer pursuant to and in compliance
with this Section 4.6, the transferee or successor (as the case may be) shall,
subject to compliance with the terms of Section 10.3, be admitted to the
Partnership as a General Partner immediately prior to the transfer of the
General Partner Interest, and the business of the Partnership shall continue
without dissolution.
4.7 Restrictions on Transfers
(a) Notwithstanding the other provisions of this Article IV, no transfer of
any Partnership Interest shall be made if such transfer would (i) violate the
then applicable federal or state securities laws or rules and regulations of
the Commission, any state securities commission or any other governmental
authority with jurisdiction over such transfer, (ii) terminate the existence
or qualification of the Partnership or Genesis OLP under the laws of the
jurisdiction of its formation or (iii) cause the Partnership or Genesis OLP 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).
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(b) The General Partner may impose restrictions on the transfer of
Partnership Interests if a subsequent Opinion of Counsel determines that such
restrictions are necessary to avoid a significant risk of the Partnership or
Genesis OLP becoming taxable as a corporation or otherwise to be taxed as an
entity for federal income tax purposes. The restrictions may be imposed by
making such amendments to this Agreement as the General Partner may determine
to be necessary or appropriate to impose such restrictions; provided, however,
that any amendment that the General Partner believes, in the exercise of its
reasonable discretion, could result in the delisting or suspension of trading
of any class of Limited Partner Interests on the principal National Securities
Exchange on which such class of Limited Partner Interests is then traded must
be approved, prior to such amendment being effected, by the holders of at
least a majority of the Outstanding Limited Partner Interests of such class.
(c) Nothing contained in this Article IV, or elsewhere in this Agreement,
shall preclude the settlement of any transactions involving Partnership
Interests entered into through the facilities of any National Securities
Exchange on which such Partnership Interests are listed for trading.
4.8 Citizenship Certificates; Non-citizen Assignees
(a) If any Group Member is or becomes subject to any federal, state or local
law or regulation that, in the reasonable determination of the General
Partner, creates a substantial risk of cancellation or forfeiture of any
property in which the Group Member has an interest based on the nationality,
citizenship or other related status of a Limited Partner or Assignee, the
General Partner may request any Limited Partner or Assignee to furnish to the
General Partner, within 30 days after receipt of such request, an executed
Citizenship Certification or such other information concerning his
nationality, citizenship or other related status (or, if the Limited Partner
or Assignee is a nominee holding for the account of another Person, the
nationality, citizenship or other related status of such Person) as the
General Partner may request. If a Limited Partner or Assignee fails to furnish
to the General Partner within the aforementioned 30-day period such
Citizenship Certification or other requested information or if upon receipt of
such Citizenship Certification or other requested information the General
Partner determines, with the advice of counsel, that a Limited Partner or
Assignee is not an Eligible Citizen, the Limited Partner Interests owned by
such Limited Partner or Assignee shall be subject to redemption in accordance
with the provisions of Section 4.9. In addition, the General Partner may
require that the status of any such Limited Partner or Assignee be changed to
that of a Non-citizen Assignee and, thereupon, the General Partner shall be
substituted for such Non-citizen Assignee as the Limited Partner in respect of
his Limited Partner Interests.
(b) The General Partner shall, in exercising voting rights in respect of
Limited Partner Interests held by it on behalf of Non-citizen Assignees,
distribute the votes in the same ratios as the votes of Limited Partners
(including without limitation the General Partner) in respect of Limited
Partner Interests other than those of Non-citizen Assignees are cast, either
for, against or abstaining as to the matter.
(c) Upon dissolution of the Partnership, a Non-citizen Assignee shall have
no right to receive a distribution in kind pursuant to Section 12.4 but shall
be entitled to the cash equivalent thereof, and the Partnership shall provide
cash in exchange for an assignment of the Non-citizen Assignee's share of the
distribution in kind. Such payment and assignment shall be treated for
Partnership purposes as a purchase by the Partnership from the Non-citizen
Assignee of his Limited Partner Interest (representing his right to receive
his share of such distribution in kind).
(d) At any time after he can and does certify that he has become an Eligible
Citizen, a Non-citizen Assignee may, upon application to the General Partner,
request admission as a Substituted Limited Partner with respect to any Limited
Partner Interests of such Non-citizen Assignee not redeemed pursuant to
Section 4.9, and upon his admission pursuant to Section 10.2, the General
Partner shall
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cease to be deemed to be the Limited Partner in respect of the Non-citizen
Assignee's Limited Partner Interests.
4.9 Redemption of Partnership Interests of Non-citizen Assignees
(a) If at any time a Limited Partner or Assignee fails to furnish a
Citizenship Certification or other information requested within the 30-day
period specified in Section 4.8(a), or if upon receipt of such Citizenship
Certification or other information the General Partner determines, with the
advice of counsel, that a Limited Partner or Assignee is not an Eligible
Citizen, the Partnership may, unless the Limited Partner or Assignee
establishes to the satisfaction of the General Partner that such Limited
Partner or Assignee is an Eligible Citizen or has transferred his Limited
Partner 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 or Assignee as follows:
(i) The General Partner shall, not later than the 30th day before the
date fixed for redemption, give notice of redemption to the Limited Partner
or Assignee, at his last address designated on the records of the
Partnership or the Transfer Agent, by registered or certified mail, postage
prepaid. The notice shall be deemed to have been given when so mailed. The
notice shall specify the Redeemable Interests, the date fixed for
redemption, the place of payment, that payment of the redemption price will
be made upon surrender of the Certificate evidencing the Redeemable
Interests and that on and after the date fixed for redemption no further
allocations or distributions to which the Limited Partner or Assignee would
otherwise be entitled in respect of the Redeemable Interests will accrue or
be made.
(ii) The aggregate redemption price for Redeemable Interests shall be an
amount equal to the Current Market Price (the date of determination of
which shall be the date fixed for redemption) of Limited Partner Interests
of the class to be so redeemed multiplied by the number of Limited Partner
Interests of each such class included among the Redeemable Interests. The
redemption price shall be paid, in the discretion of the General Partner,
in cash or by delivery of a promissory note of the Partnership in the
principal amount of the redemption price, bearing interest at the rate of
10% annually and payable in three equal annual installments of principal
together with accrued interest, commencing one year after the redemption
date.
(iii) Upon surrender by or on behalf of the Limited Partner or Assignee,
at the place specified in the notice of redemption, of the Certificate
evidencing the Redeemable Interests, duly endorsed in blank or accompanied
by an assignment duly executed in blank, the Limited Partner or Assignee or
his duly authorized representative shall be entitled to receive the payment
therefor.
(iv) After the redemption date, Redeemable Interests shall no longer
constitute issued and Outstanding Limited Partner Interests.
(b) The provisions of this Section 4.9 shall also be applicable to Limited
Partner Interests held by a Limited Partner or Assignee as nominee of a Person
determined to be other than an Eligible Citizen.
(c) Nothing in this Section 4.9 shall prevent the recipient of a notice of
redemption from transferring his Limited Partner Interests 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 Limited Partner
Interests certifies to the satisfaction of the General Partner in a
Citizenship Certification delivered in connection with the Transfer
Application that he is an Eligible Citizen. If the transferee fails to make
such certification, such redemption shall be effected from the transferee on
the original redemption date.
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ARTICLE V
Capital Contributions and Issuance of
Partnership Interests
5.1 Organizational Contributions
In connection with the formation of the Partnership under the Delaware Act,
the General Partner made an initial Capital Contribution to the Partnership in
the amount of $10.00 for an interest in the Partnership and has been admitted
as the General Partner of the Partnership, and the Organizational Limited
Partner made an initial Capital Contribution to the Partnership in the amount
of $990.00 for an interest in the Partnership and has been 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
Conveyance Agreement; the initial Capital Contributions of each Partner shall
thereupon be refunded; and the Organizational Limited Partner shall cease to
be a Limited Partner of the Partnership. Ninety-nine 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 General Partner
(a) On the Closing Date and pursuant to the Conveyance Agreement, the
General Partner shall contribute to the Partnership, as a Capital
Contribution, cash in an amount equal to the LLC Contribution Amount in
exchange for 167,347 GP Units and the continuation of its General Partner
Interest in the Partnership, subject to all of the rights, privileges and
duties of the General Partner under this Agreement.
(b) Upon the issuance of any Common Units pursuant to the exercise of the
Over-allotment Option, the General Partner shall be required to make an
additional Capital Contribution equal to the LLC Overallotment Contribution in
exchange for a number of additional GP Units equal to 2/98ths of the number of
Common Units issued to the Underwriters pursuant to Section 5.3(b). All cash
contributed to the Partnership in exchange for the GP Units issued to the
General Partner pursuant to this Section 5.2(b) shall be contributed to
Genesis OLP.
(c) If the Partnership issues Partnership Securities, other than Common
Units issued pursuant to Sections 5.3(a) and (b), then: (i) to the extent the
proceeds of such issuance of Partnership Securities will be used to redeem OLP
Units pursuant to the terms of the Redemption and Registration Rights
Agreement, then the General Partner shall not make an additional Capital
Contribution to the Partnership in conjunction with the issuance of such
Partnership Securities and (ii) to the extent the proceeds of such issuance of
Partnership Securities will be used for purposes other than to redeem OLP
Units pursuant to the terms of the Redemption and Registration Rights
Agreement, then the General Partner shall make an additional Capital
Contribution to the Partnership in conjunction with the issuance of such
Partnership Securities in exchange for a number of GP Units sufficient to
maintain the Percentage Interest of the General Partner's General Partner
Interest existing prior to the issuance of such Partnership Securities.
(d) Except as set forth in Sections 5.2(a), (b) and (c) and Article XII, the
General Partner shall not be obligated to make any Capital Contributions to
the Partnership.
5.3 Contributions by Initial Limited Partners
(a) On the Closing Date, simultaneous with the Capital Contribution referred
to in Section 5.2(a), 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
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Agreement to be purchased by such Underwriter at the Closing Date. In exchange
for such Capital Contributions by the Underwriters, the Partnership shall
issue Common Units to each Underwriter on whose behalf such Capital
Contribution is made in an amount equal to the quotient obtained by dividing
(i) the cash contribution to the Partnership by or on behalf of such
Underwriter by (ii) the Issue Price per Initial Common Unit. All cash
contributed to the Partnership in exchange for the Common Units issued to the
Underwriters on the Closing Date pursuant to this Section 5.3(a) remaining
after the payment or reservation of amounts for payment of all expenses
associated with the Initial Offering shall be contributed to Genesis OLP.
(b) Upon the exercise of the Over-allotment Option, each Underwriter shall
contribute to the Partnership cash in an amount equal to the Issue Price per
Initial Common Unit, multiplied by the number of Common Units specified in the
Underwriting Agreement to be purchased by such Underwriter at the Option
Closing Date. In exchange for such Capital Contributions by the Underwriters,
the Partnership shall issue Common Units to each Underwriter on whose behalf
such Capital Contribution is made in an amount equal to the quotient obtained
by dividing (i) the cash contributions to the Partnership by or on behalf of
such Underwriter by (ii) the Issue Price per Common Unit. All cash contributed
to the Partnership in exchange for the Common Units issued to the Underwriters
pursuant to this Section 5.3(b) shall be contributed to Genesis OLP.
(c) No Limited Partner Interests will be issued or issuable as of or at the
Closing Date other than (i) the Common Units issuable pursuant to Section
5.3(a) in aggregate number equal to and (ii) the "Option Units" as
such term is defined in the Underwriting Agreement in aggregate number up to
issuable upon exercise of the Over-allotment Option pursuant to
Section 5.3(b).
5.4 Interest and Withdrawal
No interest shall be paid by the Partnership on Capital Contributions. No
Partner or Assignee shall be entitled to the withdrawal or return of its
Capital Contribution, except to the extent, if any, that distributions made
pursuant to this Agreement or upon termination of the Partnership may be
considered as such by law and then only to the extent provided for in this
Agreement. Except to the extent expressly provided in this Agreement, no
Partner or Assignee shall have priority over any other Partner or Assignee
either as to the return of Capital Contributions or as to profits, losses or
distributions. Any such return shall be a compromise to which all Partners and
Assignees agree within the meaning of 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 in its sole discretion) owning a Partnership Interest a separate
Capital Account with respect to such Partnership Interest in accordance with
the rules of Treasury Regulation Section 1.704-1(b)(2)(iv). Such Capital
Account shall be increased by (i) the amount of all Capital Contributions made
to the Partnership with respect to such Partnership Interest pursuant to this
Agreement and (ii) all items of Partnership income and gain (including,
without limitation, income and gain exempt from tax) computed in accordance
with Section 5.5(b) and allocated with respect to such Partnership Interest
pursuant to Section 6.1, and decreased by (x) 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 (y) 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
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determination, recognition and classification of any such item shall be the
same as its determination, recognition and classification for federal income
tax purposes (including, without limitation, any method of depreciation, cost
recovery or amortization used for that purpose), provided, that:
(i) Solely for purposes of this Section 5.5, the Partnership shall be
treated as owning directly its proportionate share (as determined by the
General Partner based upon the provisions of the Genesis OLP Partnership
Agreement) of all property owned by Genesis OLP.
(ii) All underwriting discounts and commissions incurred by the
Partnership in connection with the issuance of Partnership Securities that
can neither be deducted nor amortized under Section 709 of the Code shall,
for purposes of Capital Account maintenance, be treated as an item of
deduction at the time such costs are incurred and shall be allocated 100%
to the holders of such Partnership Securities in accordance with their
relative Percentage Interests. All other fees and other expenses incurred
by the Partnership to promote the sale of (or to sell) Partnership
Securities that can neither be deducted nor amortized under Section 709 of
the Code, if any, shall, for purposes of Capital Account maintenance, be
treated as an item of deduction at the time such fees and other expenses
are incurred and shall be allocated among the Partners pursuant to Section
6.1.
(iii) Except as otherwise provided in Treasury Regulation Section 1.704-
1(b)(2)(iv)(m), the computation of all items of income, gain, loss and
deduction shall be made without regard to any election under Section 754 of
the Code which may be made by the Partnership and, as to those items
described in Section 705(a)(1)(B) or 705(a)(2)(B) of the Code, without
regard to the fact that such items are not includable in gross income or
are neither currently deductible nor capitalized for federal income tax
purposes. To the extent an adjustment to the adjusted tax basis of any
Partnership asset pursuant to Section 734(b) or 743(b) of the Code is
required, pursuant to Treasury Regulation Section 1.704-1(b)(2)(iv)(m) to
be taken into account in determining Capital Accounts, the amount of such
adjustment in the Capital Accounts shall be treated as an item of gain or
loss.
(iv) Any income, gain or loss attributable to the taxable disposition of
any Partnership property shall be determined as if the adjusted basis of
such property as of such date of disposition were equal in amount to the
Partnership's Carrying Value with respect to such property as of such date.
(v) In accordance with the requirements of Section 704(b) of the Code,
any deductions for depreciation, cost recovery or amortization attributable
to any Contributed Property shall be determined as if the adjusted basis of
such property on the date it was acquired by the Partnership were equal to
the Agreed Value of such property. Upon an adjustment pursuant to Section
5.5(d) to the Carrying Value of any Partnership property subject to
depreciation, cost recovery or amortization, any further deductions for
such depreciation, cost recovery or amortization attributable to such
property shall be determined (A) as if the adjusted basis of such property
were equal to the Carrying Value of such property immediately following
such adjustment and (B) using a rate of depreciation, cost recovery or
amortization derived from the same method and useful life (or, if
applicable, the remaining useful life) as is applied for federal income tax
purposes; provided, however, that, if the asset has a zero adjusted basis
for federal income tax purposes, depreciation, cost recovery or
amortization deductions shall be determined using any reasonable method
that the General Partner may adopt.
(vi) If the Partnership's adjusted basis in a depreciable or cost
recovery property is reduced for federal income tax purposes pursuant to
Section 48(q)(1) or 48(q)(3) of the Code, the amount of such reduction
shall, solely for purposes hereof, be deemed to be an additional
depreciation or cost recovery deduction in the year such property is placed
in service and shall be allocated among the Partners pursuant to Section
6.1. Any restoration of such basis pursuant to Section 48(q)(2) of the Code
shall, to the extent possible, be allocated in the same manner to the
Partners to whom such deemed deduction was allocated.
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(c) (i) A transferee of a Partnership Interest shall succeed to a pro rata
portion of the Capital Account of the transferor relating to the Partnership
Interest so transferred; provided, however, that, if the transfer causes a
termination of the Partnership under Section 708(b)(1)(B) of the Code, the
Partnership's properties and liabilities shall be deemed (i) to have been
distributed in liquidation of the Partnership to the Partners (including any
transferee of a Partnership Interest that is a party to the transfer causing
such termination) pursuant to Section 12.4 (after adjusting the balance of the
Capital Accounts of the Partners as provided in Section 5.5(d)(ii)) and
recontributed by such Partners in reconstitution of the Partnership or (ii) in
the event of a termination of the Partnership that occurs after the
finalization of Proposed Treasury Regulation Section 1.704-1(b)(1)(iv), to
have been contributed to a new partnership which will be deemed to be a
continuation of, and successor to, the Partnership and the Partnership will be
deemed to make liquidating distributions of the interests in this new
partnership to the Partners (including any transferee of a Partnership
Interest that is a party to the transfer causing such termination) pursuant to
Section 12.4 (after adjusting the balance of the Capital Accounts of the
Partners as provided in Section 5.5(d)(ii)). Any such deemed distribution and
contribution, in the case of a characterization under clause (i) of the
preceding sentence, or any such deemed contribution and distribution, in the
case of a characterization under clause (ii) of the preceding sentence, shall
be treated as an actual contribution and distribution for purposes of this
Section 5.5. In such event, the Carrying Values of the Partnership properties
shall be adjusted immediately prior to such deemed distribution and
contribution, or deemed contribution and distribution, pursuant to Treasury
Regulation Section 1.704-1(b)(2)(iv) and Section 5.5 hereof and such Carrying
Values shall then constitute the Agreed Values of such properties upon such
deemed contribution to the new partnership. In either case, the Capital
Accounts of the new partnership that results under the applicable
characterization shall be maintained in accordance with the principles of this
Section 5.5.
(d) (i) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
on an issuance of additional Partnership Securities for cash or Contributed
Property or the conversion of the General Partner's Combined 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, without limitation, cash or cash equivalents) immediately prior to
the issuance of additional Partnership Securities shall be determined by the
General Partner using such reasonable method of valuation as it may adopt;
provided, however, that the General Partner, in arriving at such valuation,
must take fully into account the fair market value of the Partnership
Interests of all Partners at such time. The General Partner shall allocate
such aggregate value among the assets of the Partnership (in such manner as it
determines in its discretion to be reasonable) to arrive at a fair market
value for individual properties.
(ii) In accordance with Treasury Regulation Section 1.704-1(b)(2)(iv)(f),
immediately prior to any actual or deemed distribution to a Partner of any
Partnership property (other than a distribution of cash that is not in
redemption or retirement of a Partnership Interest), the Capital Accounts of
all Partners and the Carrying Value of all Partnership property shall be
adjusted upward or downward to reflect any Unrealized Gain or Unrealized Loss
attributable to such Partnership property, as if such Unrealized Gain or
Unrealized Loss had been recognized in a sale of such property immediately
prior to such distribution for an amount equal to its fair market value, and
had been allocated to the Partners, at such time, pursuant to Section 6.1 in
the same manner as any item of gain or loss actually recognized during such
period would have been allocated. In determining such Unrealized Gain or
Unrealized Loss the aggregate cash amount and fair market value of all
Partnership assets (including, without limitation, cash or cash equivalents)
immediately prior to a distribution shall (A) in the case of an actual
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distribution which is not made pursuant to Section 12.4 or in the case of a
deemed contribution and/or distribution occurring as a result of a termination
of the Partnership pursuant to Section 708 of the Code, be determined and
allocated in the same manner as that provided in Section 5.5(d)(i) or (B) in
the case of a liquidating distribution pursuant to Section 12.4, be determined
and allocated by the Liquidator using such reasonable method of valuation as
it may adopt.
5.6 Issuances of Additional Partnership Securities
(a) Subject to Section 5.7, the Partnership may issue additional Partnership
Securities and options, rights, warrants and appreciation rights relating to
Partnership Securities for any Partnership purpose at any time and from time
to time to such Persons for such consideration and on such terms and
conditions as shall be established by the General Partner in its sole
discretion, all without the approval of any Limited Partners.
(b) Each additional Partnership Security authorized to be issued by the
Partnership pursuant to Section 5.6(a) may be issued in one or more classes,
or one or more series of any such classes, with such designations,
preferences, rights, powers and duties (which may be senior to existing
classes and series of Partnership Securities), as shall be fixed by the
General Partner in the exercise of its sole discretion, including (i) the
right to share Partnership profits and losses or items thereof; (ii) the right
to share in Partnership distributions; (iii) the rights upon dissolution and
liquidation of the Partnership; (iv) whether, and the terms and conditions
upon which, the Partnership may redeem such Partnership Security; (v) whether
such Partnership Security is issued with the privilege of conversion or
exchange and, if so, the terms and conditions of such conversion or exchange;
(vi) the terms and conditions upon which such Partnership Security will be
issued, evidenced by certificates and assigned or transferred; and (vii) the
right, if any, of such Partnership Security to vote on Partnership matters,
including matters relating to the relative rights, preferences and privileges
of such Partnership Security.
(c) The General Partner is hereby authorized and directed to take all
actions that it deems necessary or appropriate in connection with (i) each
issuance of Partnership Securities pursuant to this Section 5.6, (ii) the
conversion of a General Partner Interest into Common Units pursuant to the
terms of this Agreement, (iii) the admission of Additional Limited Partners
and (iv) all additional issuances of Partnership Securities. The General
Partner is further authorized and directed to specify the relative rights,
powers and duties of the holders of Partnership Securities being so issued.
The General Partner shall do all things necessary to comply with the Delaware
Act and is authorized and directed to do all things it deems to be necessary
or advisable in connection with any future issuance of Partnership Securities
or in connection with the conversion of a General Partner Interest into Common
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 Common
Units or other Partnership Securities are listed for trading.
(d) If the Partnership shall issue any Partnership Securities at a time when
there are any outstanding OLP Units that are not held by the Partnership,
which OLP Units give the holders thereof the right to cause Genesis OLP to
redeem such OLP Units based on a value that is tied to the value of
Partnership Securities, the Partnership shall contribute the net proceeds
raised in connection with all such issuances of Partnership Securities
(including Partnership Securities issued to the General Partner) as a Capital
Contribution to Genesis OLP if the contribution of such net proceeds to
Genesis OLP is required to maintain the relative values of the OLP Units and
the Partnership Securities.
5.7 Limitations on Issuance of Additional Partnership Securities
The issuance of Partnership Securities pursuant to Section 5.6 shall be
subject to the following restrictions and limitations:
(a) During the Subordination Period, the Partnership shall not issue an
aggregate of more than 4,100,000 additional Parity Units without the prior
approval of the holders of a majority of the Outstanding Common Units;
provided, however that the number of additional Parity Units that may
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be issued without the prior approval of the holders of a majority of the
Outstanding Common Units shall be reduced by the number of OLP Parity Units
issued by Genesis OLP. In applying this limitation, there shall be excluded
Common Units issued (i) in connection with the exercise of the Over-
allotment Option, (ii) in accordance with Section 5.7(b), (iii) in
connection with the purchase or redemption of OLP Common Units pursuant to
the Redemption and Registration Rights Agreement, (iv) pursuant to the
employee benefit plans of the Partnership or any other Group Member and (v)
in the event of a combination or subdivision of Common Units.
(b) The Partnership may also issue an unlimited number of Parity Units,
prior to the end of the Subordination Period and without the prior approval
of the Unitholders if such issuance occurs (i) in connection with an
Acquisition or a Capital Improvement or (ii) within 365 days of, and the
net proceeds from such issuance are used to repay debt incurred in
connection with, an Acquisition or a Capital Improvement, in each case
where such Acquisition or Capital Improvement involves assets that, if
acquired by the Partnership as of the date that is one year prior to the
first day of the Quarter in which such Acquisition is to be consummated or
such Capital Improvement is to be completed, would have resulted in an
increase in:
(A) the amount of Adjusted Operating Surplus generated by Genesis OLP
on a per-unit basis (for all Outstanding OLP Units) with respect to
each of the four most recently completed Quarters (on a pro forma basis
as described below) as compared to
(B) the actual amount of Adjusted Operating Surplus generated by
Genesis OLP on a per-unit basis (for all Outstanding OLP Units)
(excluding Adjusted Operating Surplus attributable to the Acquisition
or Capital Improvement) with respect to each of such four most recently
completed Quarters.
If the issuance of Units with respect to an Acquisition or Capital
Improvement occurs within the first four full Quarters after the Closing
Date, then Adjusted Operating Surplus as used in clauses (A) (subject to
the succeeding sentence) and (B) above shall be calculated (i) for each
Quarter, if any, that commenced after the Closing Date for which actual
results of operations are available, based on the actual Adjusted Operating
Surplus of Genesis OLP generated with respect to such Quarter, and (ii) for
each other Quarter, on a pro forma basis not inconsistent with the
procedure, as applicable, set forth in Appendix E to the Registration
Statement. Furthermore, the amount in clause (A) shall be determined on a
pro forma basis assuming that (1) all of the Parity Units or Partnership
Securities to be issued in connection with or within 365 days of such
Acquisition or Capital Improvement had been issued and outstanding, (2) all
indebtedness for borrowed money to be incurred or assumed in connection
with such Acquisition or Capital Improvement (other than any such
indebtedness that is to be repaid with the proceeds of such issuance) had
been incurred or assumed, in each case as of the commencement of such four-
Quarter period, (3) the personnel expenses that would have been incurred by
the Partnership in the operation of the acquired assets are the personnel
expenses for employees to be retained by the Partnership in the operation
of the acquired assets, and (4) the non-personnel costs and expenses are
computed on the same basis as those incurred by the Partnership in the
operation of the Partnership's business at similarly situated Partnership
facilities.
(c) During the Subordination Period, the Partnership shall not issue
additional Partnership Securities having rights to distributions or in
liquidation ranking prior or senior to the Common Units, without the prior
approval of the holders of a majority of the Outstanding Common Units.
(d) No fractional Units shall be issued by the Partnership.
5.8 Limited Preemptive Right
Except as provided in this Section 5.8 and in Section 5.2, no Person shall
have any preemptive, preferential or other similar right with respect to the
issuance of any Partnership Security, whether
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unissued, held in the treasury or hereafter created. The General Partner shall
have the right, which it may from time to time assign in whole or in part to
any of its Affiliates, to purchase Partnership Securities from the Partnership
whenever, and on the same terms that, the Partnership issues Partnership
Securities to Persons other than the General Partner and its Affiliates, to
the extent necessary to maintain the Percentage Interests of the General
Partner and its Affiliates equal to that which existed immediately prior to
the issuance of such Partnership Securities.
5.9 Splits and Combination
(a) Subject to Section 5.9(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 (including the number of additional
Parity Units that may be issued pursuant to Section 5.7 without a vote of the
Limited Partners) are proportionately adjusted retroactive to the beginning of
the Partnership.
(b) Whenever such a distribution, subdivision or combination of Partnership
Securities is declared, the General Partner shall select a Record Date as of
which the distribution, subdivision or combination shall be effective and
shall send notice thereof at least 20 days prior to such Record Date to each
Record Holder as of a date not less than 10 days prior to the date of such
notice. The General Partner also may cause a firm of independent public
accountants selected by it to calculate the number of Partnership Securities
to be held by each Record Holder after giving effect to such distribution,
subdivision or combination. The General Partner shall be entitled to rely on
any certificate provided by such firm as conclusive evidence of the accuracy
of such calculation.
(c) Promptly following any such distribution, subdivision or combination,
the Partnership may issue Certificates to the Record Holders of Partnership
Securities as of the applicable Record Date representing the new number of
Partnership Securities held by such Record Holders, or the General Partner may
adopt such other procedures as it may deem appropriate to reflect such
changes. If any such combination results in a smaller total number of
Partnership Securities Outstanding, the Partnership shall require, as a
condition to the delivery to a Record Holder of such new Certificate, the
surrender of any Certificate held by such Record Holder immediately prior to
such Record Date.
(d) The Partnership shall not issue fractional Units upon any distribution,
subdivision or combination of Units. If a distribution, subdivision or
combination of Units would result in the issuance of fractional Units but for
the provisions of Section 5.7(d) and this Section 5.9(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).
5.10 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
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accordance with Section 5.5(b)) shall be allocated among the Partners in each
taxable year (or portion thereof) as provided hereinbelow.
(a) 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 as follows:
(i) First, 100% to the General Partner until the aggregate Net Income
allocated to the General Partner pursuant to this Section 6.1(a)(i) for the
current taxable year and all previous taxable years is equal to the
aggregate Net Losses allocated to the General Partner pursuant to Section
6.1(b)(ii) for all previous taxable years; and
(ii) Second, the balance, if any, 100% to the Partners in accordance with
their respective Percentage Interests.
(b) 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 as follows:
(i) First, 100% to the Partners in accordance with their respective
Percentage Interests; provided, that Net Losses shall not be allocated
pursuant to this Section 6.1(b)(i) to the extent that such allocation would
cause any Limited 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); and
(ii) 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)(iv) and 6.1(c)(v), 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.
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(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 in its good faith
discretion that the Partnership's Nonrecourse Deductions must be allocated
in a different ratio to satisfy the safe harbor requirements of the
Treasury Regulations promulgated under Section 704(b) of the Code, the
General Partner is authorized, upon notice to the other Partners, to revise
the prescribed ratio to the numerically closest ratio that does satisfy
such requirements.
(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(c) 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
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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 reasonably 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 reasonably
determines that such allocations are likely to be offset by subsequent
Required Allocations.
(B) The General Partner shall have reasonable discretion, with
respect to each taxable period, to (1) apply the provisions of Section
6.1(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 (ii), and (2) second, in the event such
property was originally a Contributed Property, be allocated among the
Partners in a manner consistent with Section 6.2(b)(i)(A); and (B) any item
of Residual Gain or Residual Loss attributable to an Adjusted Property
shall be allocated among the Partners in the same manner as its correlative
item of "book" gain or loss is allocated pursuant to Section 6.1.
(iii) The General Partner shall apply the principles of Treasury
Regulation Section 1.704-3(d) to eliminate Book-Tax Disparities.
(c) For the proper administration of the Partnership and for the
preservation of uniformity of the Limited Partner Interests (or any class or
classes thereof), the General Partner shall have sole discretion to (i) adopt
such conventions as it deems appropriate in determining the amount of
depreciation, amortization and cost recovery deductions; (ii) make special
allocations for federal income tax purposes of income (including, without
limitation, gross income) or deductions; and (iii)
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amend the provisions of this Agreement as appropriate (x) to reflect the
proposal or promulgation of Treasury Regulations under Section 704(b) or
Section 704(c) of the Code or (y) otherwise to preserve or achieve uniformity
of the Limited Partner Interests (or any class or classes thereof). The
General Partner may adopt such conventions, make such allocations and make
such amendments to this Agreement as provided in this Section 6.2(c) only if
such conventions, allocations or amendments would not have a material adverse
effect on the Partners, the holders of any class or classes of Limited Partner
Interests issued and Outstanding or the Partnership, and if such allocations
are consistent with the principles of Section 704 of the Code.
(d) The General Partner in its discretion may determine to depreciate or
amortize the portion of an adjustment under Section 743(b) of the Code
attributable to unrealized appreciation in any Adjusted Property (to the
extent of the unamortized Book-Tax Disparity) using a predetermined rate
derived from the depreciation or amortization method and useful life applied
to the Partnership's common basis of such property, despite any inconsistency
of such approach with Proposed Treasury Regulation Section 1.168-2(n),
Treasury Regulation Section 1.167(c)-l(a)(6) or the legislative history of
Section 197 of the Code. If the General Partner determines that such reporting
position cannot reasonably be taken, the General Partner may adopt
depreciation and amortization conventions under which all purchasers acquiring
Limited Partner Interests in the same month would receive depreciation and
amortization deductions, based upon the same applicable rate as if they had
purchased a direct interest in the Partnership's property. If the General
Partner chooses not to utilize such aggregate method, the General Partner may
use any other reasonable depreciation and amortization conventions to preserve
the uniformity of the intrinsic tax characteristics of any Limited Partner
Interests that would not have 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 as necessary or appropriate to take into account those adjustments
permitted or required by Sections 734 and 743 of the Code.
(g) Each item of Partnership income, gain, loss and deduction attributable
to a transferred Partnership Interest, shall for federal income tax purposes,
be determined on an annual basis and prorated on a monthly basis and shall be
allocated to the Partners as of the opening of the New York Stock Exchange on
the first Business Day of each month; provided, however, that (i) if the Over-
allotment Option is not exercised, such items for the period beginning on the
Closing Date and ending on the last day of the month in which the Closing Date
occurs shall be allocated to Partners as of the opening of the New York Stock
Exchange on the first Business Day of the next succeeding month or (ii) if the
Over-allotment Option is exercised, 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 occurs shall be allocated to the Partners as of the opening of
the New York Stock Exchange 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 New York Stock
Exchange 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
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otherwise modify such methods of allocation as it determines necessary, to the
extent permitted or required by Section 706 of the Code and the regulations or
rulings promulgated thereunder.
(h) Allocations that would otherwise be made to a Limited Partner under the
provisions of this Article VI shall instead be made to the beneficial owner of
Limited Partner Interests held by a nominee in any case in which the nominee
has furnished the identity of such owner to the Partnership in accordance with
Section 6031(c) of the Code or any other method acceptable to the General
Partner in its sole discretion.
6.3 Distributions to Record Holders
(a) Within 45 days following the end of each Quarter commencing with the
Quarter ending on December 31, 1996, an amount equal to 100% of Available Cash
with respect to such Quarter shall, subject to Section 17-607 of the Delaware
Act, be distributed in accordance with this Article VI by the Partnership to
the Partners as of the Record Date selected by the General Partner in its
reasonable discretion in accordance with their respective Percentage
Interests. The immediately preceding sentence shall not require any
distribution of cash if and to the extent such distribution would be
prohibited by applicable law or by any loan agreement, security agreement,
mortgage, debt instrument or other agreement or obligation to which the
Partnership is a party or by which it is bound or its assets are subject. All
distributions required to be made under this Agreement shall be made subject
to Section 17-607 of the Delaware Act.
(b) In the event of the dissolution and liquidation of the Partnership, all
receipts received during or after the Quarter in which the Liquidation Date
occurs, other than from borrowings described in (a)(ii) of the definition of
Available Cash, shall be applied and distributed solely in accordance with,
and subject to the terms and conditions of, Section 12.4.
(c) The General Partner shall have the discretion to treat taxes paid by the
Partnership on behalf of, or amounts withheld with respect to, all or less
than all of the Partners, as a distribution of Available Cash to such
Partners.
(d) Each distribution in respect of a Partnership Interest shall be paid by
the Partnership, directly or through the Transfer Agent or through any other
Person or agent, only to the Record Holder of such Partnership Interest as of
the Record Date set for such distribution. Such payment shall constitute full
payment and satisfaction of the Partnership's liability in respect of such
payment, regardless of any claim of any Person who may have an interest in
such payment by reason of an assignment or otherwise.
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 which are granted to the General Partner
under any other provision of this Agreement, the General Partner, subject to
Section 7.3, shall have full power and authority to do all things and on such
terms as it, in its sole discretion, may deem necessary or appropriate to
conduct the business of the
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Partnership, to exercise all powers set forth in Section 2.5 and to effectuate
the purposes set forth in Section 2.4, including the following:
(i) the making of any expenditures, the lending or borrowing of money,
the assumption or guarantee of, or other contracting for, indebtedness and
other liabilities, the issuance of evidences of indebtedness, including
indebtedness that is convertible into Partnership Securities, and the
incurring of any other obligations;
(ii) the making of tax, regulatory and other filings, or rendering of
periodic or other reports to governmental or other agencies having
jurisdiction over the business or assets of the Partnership;
(iii) the acquisition, disposition, mortgage, pledge, encumbrance,
hypothecation or exchange of any or all of the assets of the Partnership or
the merger or other combination of the Partnership with or into another
Person (the matters described in this clause (iii) being subject, however,
to any prior approval that may be required by Section 7.3);
(iv) the use of the assets of the Partnership (including cash on hand)
for any purpose consistent with the terms of this Agreement, including the
financing of the conduct of the operations of the Partnership Group, the
lending of funds to other Persons, the repayment of obligations of the
Partnership Group and the making of capital contributions to any member of
the Partnership Group;
(v) the negotiation, execution and performance of any contracts,
conveyances or other instruments (including instruments that limit the
liability of the Partnership under contractual arrangements to all or
particular assets of the Partnership, with the other party to the contract
to have no recourse against the General Partner or its assets other than
its interest in the Partnership, even if same results in the terms of the
transaction being less favorable to the Partnership than would otherwise be
the case);
(vi) the distribution of Partnership cash;
(vii) the selection and dismissal of employees (including employees
having titles such as "president," "vice president," "secretary" and
"treasurer") and agents, outside attorneys, accountants, consultants and
contractors and the determination of their compensation and other terms of
employment or hiring;
(viii) the maintenance of such insurance for the benefit of the
Partnership Group and the Partners as it deems necessary or appropriate;
(ix) the formation of, or acquisition of an interest in, and the
contribution of property and the making of loans to, any further limited or
general partnerships, joint ventures, corporations or other relationships
(including the acquisition of interests in, and the contributions of
property to, Genesis OLP from time to time), subject, however, to the
restrictions set forth in Section 2.4;
(x) the control of any matters affecting the rights and obligations of
the Partnership, including the bringing and defending of actions at law or
in equity and otherwise engaging in the conduct of litigation and the
incurring of legal expense and the settlement of claims and litigation;
(xi) the indemnification of any Person against liabilities and
contingencies to the extent permitted by law;
(xii) the entering into of listing agreements with any National
Securities Exchange and the delisting of some or all of the Limited Partner
Interests from, or requesting that trading be suspended on, any such
exchange (subject to any prior approval that may be required under Section
4.7);
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(xiii) the purchase, sale or other acquisition or disposition of
Partnership Securities, and, unless restricted or prohibited by Section
5.7, the issuance of additional Partnership Securities and options, rights,
warrants and appreciation rights relating to Partnership Securities; and
(xiv) the undertaking of any action in connection with the Partnership's
participation as a general partner of Genesis OLP including, without
limitation, exercising the authority granted to the Partnership in Section
7.3(d) of the Genesis OLP Partnership Agreement to make certain decisions
relating to the operation and conduct of the business of Genesis OLP.
(b) Notwithstanding any other provision of this Agreement, the Genesis OLP
Partnership 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 the Genesis
OLP Partnership Agreement, the agreements and other documents filed as
exhibits to the Registration Statement, and the other agreements described in
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 as may be determined by the General Partner in
its sole discretion to be reasonable and necessary or appropriate for the
formation, continuation, qualification and operation of a limited partnership
(or a partnership in which the limited partners have limited liability) in the
State of Delaware or any other state in which the Partnership may elect to do
business or own property. To the extent that such action is determined by the
General Partner in its sole discretion to be reasonable and necessary or
appropriate, the General Partner shall file amendments to and restatements of
the Certificate of Limited Partnership and do all things to maintain the
Partnership as a limited partnership (or a partnership or other entity in
which the limited partners have limited liability) under the laws of the State
of Delaware or of any other state in which the Partnership may elect to do
business or own property. Subject to the terms of Section 3.4(a), the General
Partner shall not be required, before or after filing, to deliver or mail a
copy of the Certificate of Limited Partnership, any qualification document or
any amendment thereto to any Limited Partner.
7.3 Restrictions on General Partner's Authority
(a) The General Partner may not, without written approval of the specific
act by holders of all of the Outstanding Limited Partner Interests or by other
written instrument executed and delivered by holders of all of the Outstanding
Limited Partner Interests subsequent to the date of this Agreement, take any
action in contravention of this Agreement, including, except as otherwise
provided in this Agreement, (i) committing any act that would make it
impossible to carry on the ordinary business of
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the Partnership; (ii) possessing Partnership property, or assigning any rights
in specific Partnership property, for other than a Partnership purpose; (iii)
admitting a Person as a Partner; (iv) amending this Agreement in any manner;
or (v) transferring its General Partner Interest.
(b) Except as provided in Articles XII and XIV, the General Partner may not
sell, exchange or otherwise dispose of all or substantially all of the assets
of the Partnership Group in a single transaction or a series of related
transactions, without the approval of holders of a Majority Interest;
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.
(c) Without the approval of holders of a Majority Interest, the General
Partner shall not, on behalf of the Partnership, (i) consent to any amendment
to the Genesis OLP Partnership Agreement or, except as expressly permitted by
Section 7.9(d), take any action permitted to be taken by a partner of Genesis
OLP, in either case, that would have a material adverse effect on the
Partnership as a partner of Genesis OLP or (ii) except as permitted under
Sections 4.6, 11.1 and 11.2, elect or cause the Partnership to elect a
successor general partner of Genesis OLP. If a vote of the holders of OLP
Common Units is required by Section 4.6 of the Distribution Support Agreement
to approve an amendment to the Distribution Support Agreement, the General
Partner will call a special meeting of the Limited Partners. At such special
meeting the Limited Partners will be asked to vote on the proposed amendment
to the Distribution Support Agreement and following such vote the Partnership
will vote its OLP Common Units on the proposed amendment to the Distribution
Support Agreement in the same ratios as the votes of the Limited Partner
Interests were cast, either for, against or abstaining as to the proposed
amendment to the Distribution Support Agreement.
(d) At all times while serving as the general partner of the Partnership,
the General Partner shall not make any dividend or distribution on, or
repurchase any shares of, its stock or take any other action within its
control if the effect of such action would cause its net worth, independent of
its interest in the Partnership Group, to be less than $7.5 million or such
lower amount, which based on an Opinion of Counsel that states, (i) based on a
change in the position of the Internal Revenue Service with respect to
partnership status pursuant to Code Section 7701, such lower amount would not
cause the Partnership or Genesis OLP to be treated as an association taxable
as a corporation or otherwise to be taxed as an entity for federal income tax
purposes and (ii) would not result in the loss of the limited liability of any
Limited Partner or of any limited partner of Genesis OLP.
7.4 Reimbursement of the General Partner
(a) Except as provided in this Section 7.4 and elsewhere in this Agreement
or in the Genesis OLP Partnership Agreement, the General Partner shall not be
compensated for its services as general partner of any Group Member.
(b) The General Partner shall be reimbursed on a monthly basis, or such
other reasonable basis as the General Partner may determine in its sole
discretion, for (i) all direct and indirect expenses it incurs or payments it
makes on behalf of the Partnership (including salary, bonus, incentive
compensation and other amounts paid to any Person, including Affiliates of the
General Partner, to perform services for the Partnership or for the General
Partner in the discharge of its duties to the Partnership), and (ii) all other
necessary or appropriate expenses allocable to the Partnership or otherwise
reasonably incurred by the General Partner in connection with operating the
Partnership's business (including expenses allocated to the General Partner by
its Affiliates). The General Partner shall determine the expenses that are
allocable to the Partnership in any reasonable manner determined by the
General Partner in its sole discretion. Reimbursements pursuant to this
Section 7.4
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shall be in addition to any reimbursement to the General Partner as a result
of indemnification pursuant to Section 7.7.
(c) Subject to Section 5.7, the General Partner, in its sole discretion and
without the approval of the Limited Partners (who shall have no right to vote
in respect thereof), may propose and adopt on behalf of the Partnership
employee benefit plans, employee programs and employee practices (including
plans, programs and practices involving the issuance of Partnership Securities
or options to purchase Partnership Securities), or cause the Partnership to
issue Partnership Securities pursuant to any employee benefit plan, employee
program or employee practice maintained or sponsored by the General Partner or
any of its Affiliates, in each case for the benefit of employees of the
General Partner, any Group Member or any Affiliate, or any of them, in respect
of services performed, directly or indirectly, for the benefit of the
Partnership Group. The Partnership agrees to issue and sell to the General
Partner or any of its Affiliates any Partnership Securities that the General
Partner or such Affiliate is obligated to provide to any employees pursuant to
any such employee benefit plans, employee programs or employee practices.
Expenses incurred by the General Partner in connection with any such plans,
programs and practices (including the net cost to the General Partner or such
Affiliate of Partnership Securities purchased by the General Partner or such
Affiliate from the Partnership to fulfill options or awards under such plans,
programs and practices) shall be reimbursed in accordance with Section 7.4(b).
Any and all obligations of the General Partner under any employee benefit
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 General Partner Interest 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 a general partner of the Partnership, Genesis OLP and any other
partnership of which the Partnership or Genesis OLP is, directly or
indirectly, a partner and to undertake activities that are ancillary or
related thereto (including being a limited partner in the Partnership or any
such other partnership), (ii) shall not engage in any business or activity or
incur any debts or liabilities except in connection with or incidental to (A)
its performance as general partner 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 of any Group
Member and (iii) shall not, and shall cause its Affiliates (other than a Group
Member) not to, and each such Affiliate is deemed to have agreed not to (it
being understood that the failure of an Affiliate of the General Partner to
comply with this Section 7.5 shall be deemed to be a breach of this Section
7.5 by the General Partner), engage in the business of (A) crude oil gathering
at the wellhead in the states of Alabama, Florida, Kansas, Louisiana,
Mississippi, New Mexico, Oklahoma or Texas, or any states contiguous to such
states, or (B) transporting for third parties crude oil by pipeline along the
routes of the Partnership's crude oil pipelines owned as of the Closing Date.
Notwithstanding the above restrictions: (i) Affiliates of the General Partner
will not be restricted from any activity incidental to their refinery
operations so long as such activities are not substantially in competition
with the lease gathering operations of the Partnership, (ii) such restrictions
will not prevent Affiliates of the General Partner from entering into joint
ventures or strategic alliances with the Partnership, and (iii) such
restrictions will not apply to purchases of crude oil for feedstock supply for
Howell's research and reference fuels business.
(b) Except as restricted by Section 7.5(a), each Indemnitee shall have the
right to engage in businesses of every type and description and other
activities for profit and to engage in and possess
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an interest in other business ventures of any and every type or description,
whether in businesses engaged in or anticipated to be engaged in by any Group
Member, independently or with others, including business interests and
activities in direct competition with the business and activities of any Group
Member, and none of the same shall constitute a breach of this Agreement or
any duty express or implied by law to any Group Member or any Partner. Neither
any Group Member, any Limited Partner nor any other Person shall have any
rights by virtue of this Agreement, the Genesis OLP Partnership Agreement or
the partnership relationship established hereby or thereby in any business
ventures of any Indemnitee.
(c) Subject to the terms of Sections 7.5(a) and (b), 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 and (ii) it shall be deemed not to be a
breach of the General Partner's fiduciary duty or any other obligation of any
type whatsoever of the General Partner for the Indemnitees (other than the
General Partner) to engage in such business interests and activities in
preference to or to the exclusion of the Partnership and the General Partner
and the Indemnitees shall have no obligation to present business opportunities
to the Partnership.
(d) The General Partner and any of its Affiliates may acquire Partnership
Securities in addition to those acquired on the Closing Date and, except as
otherwise provided in this Agreement, shall be entitled to exercise all rights
of a General Partner or Limited Partner, as applicable, relating to such
Partnership Securities.
(e) The term "Affiliates" when used in Section 7.5 with respect to the
General Partner shall not include any Group Member or any Subsidiary of the
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 Affiliate thereof may lend to any Group
Member, and any Group Member may borrow from the General Partner or any of its
Affiliates, funds needed or desired by the Group Member for such periods of
time and in such amounts as the General Partner may determine; provided,
however, that in any such case the lending party may not charge the borrowing
party interest at a rate greater than the rate that would be charged the
borrowing party or impose terms less favorable to the borrowing party than
would be charged or imposed on the borrowing party by unrelated lenders on
comparable loans made on an arm's-length basis (without reference to the
lending party's financial abilities or guarantees). The borrowing party shall
reimburse the lending party for any costs (other than any additional interest
costs) incurred by the lending party in connection with the borrowing of such
funds. For purposes of this Section 7.6(a) and Section 7.6(b), the term "Group
Member" shall include any Affiliate of a Group Member that is controlled by
the Group Member. No Group Member may lend funds to the General Partner or any
of its Affiliates (other than another Group Member).
(b) The Partnership may lend or contribute to any Group Member, and any
Group Member may borrow from the Partnership, funds on terms and conditions
established in the sole discretion of the General Partner; provided, however,
that the Partnership may not charge the Group Member interest at a rate less
than the rate that would be charged to the Group Member (without reference to
the General Partner's financial abilities or guarantees) by unrelated lenders
on comparable loans. The foregoing authority shall be exercised by the General
Partner in its sole discretion and shall not create any right or benefit in
favor of any Group Member or any other Person.
(c) The General Partner may itself, or may enter into an agreement 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
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partner of the Partnership. Any services rendered to a Group Member by the
General Partner or any of its Affiliates shall be on terms that are fair and
reasonable to the Partnership; provided, however, that the requirements of
this Section 7.6(c) shall be deemed satisfied as to (i) any transaction
approved by Special Approval, (ii) any transaction, the terms of which are no
less favorable to the Partnership Group than those generally being provided to
or available from unrelated third parties or (iii) any transaction that,
taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Partnership Group), is equitable to the Partnership Group.
The provisions of Section 7.4 shall apply to the rendering of services
described in this Section 7.6(c).
(d) The Partnership Group may transfer assets to joint ventures, other
partnerships, corporations, limited liability companies or other business
entities in which it is or thereby becomes a participant upon such terms and
subject to such conditions as are consistent with this Agreement and
applicable law.
(e) Neither the General Partner nor any of its Affiliates shall sell,
transfer or convey any property to, or purchase any property from the
Partnership, directly or indirectly, except pursuant to transactions that are
fair and reasonable to the Partnership; provided, however, that the
requirements of this Section 7.6(e) shall be deemed to be satisfied as to (i)
the transactions effected pursuant to Sections 5.2 and 5.3, the Conveyance
Agreement and any other transactions described in or contemplated by the
Registration Statement, (ii) any transaction approved by Special Approval,
(iii) any transaction, the terms of which are no less favorable to the
Partnership than those generally being provided to or available from unrelated
third parties, or (iv) any transaction that, taking into account the totality
of the relationships between the parties involved (including other
transactions that may be particularly favorable or advantageous to the
Partnership), is equitable to the Partnership. With respect to any
contribution of assets to the Partnership in exchange for Partnership
Securities, the Audit Committee, in determining whether the appropriate number
of Partnership Securities are being issued, may take into account, among other
things, the fair market value of the assets, the liquidated and contingent
liabilities assumed, the tax basis in the assets, the extent to which tax-only
allocations to the transferor will protect the existing partners of the
Partnership against a low tax basis, and such other factors as the Audit
Committee deems 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 in each
case the Indemnitee acted in good faith and in a manner that such Indemnitee
reasonably believed to be in, or not opposed to, the best interests of the
Partnership and, with respect to any criminal proceeding, had no reasonable
cause to believe its conduct was unlawful. The termination of any action, suit
or proceeding by
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judgment, order, settlement, conviction or upon a plea of nolo contendere, or
its equivalent, shall not create a presumption that the Indemnitee acted in a
manner contrary to that specified above. Any indemnification pursuant to this
Section 7.7 shall be made only out of the assets of the Partnership, it being
agreed that the General Partner shall not be personally liable for such
indemnification and shall have no obligation to contribute or loan any monies
or property to the Partnership to enable it to effectuate such
indemnification.
(b) To the fullest extent permitted by law, expenses (including legal fees
and expenses) incurred by an Indemnitee who is indemnified pursuant to Section
7.7(a) in defending any claim, demand, action, suit or proceeding shall, from
time to time, be advanced by the Partnership prior to the final disposition of
such claim, demand, action, suit or proceeding upon receipt by the Partnership
of any undertaking by or on behalf of the Indemnitee to repay such amount if
it shall be determined that the Indemnitee is not entitled to be indemnified
as authorized in this Section 7.7.
(c) The indemnification provided by this Section 7.7 shall be in addition to
any other rights to which an Indemnitee may be entitled under any agreement,
pursuant to any vote of the holders of Outstanding Limited Partner Interests,
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 it with respect to any employee benefit plan in the performance of
its duties for a purpose reasonably believed by it to be in the interest of
the participants and beneficiaries of the plan shall be deemed to be for a
purpose which is in, or not opposed to, the best interests of the Partnership.
(f) In no event may an Indemnitee subject the Limited Partners to personal
liability by reason of the indemnification provisions set forth in this
Agreement.
(g) An Indemnitee shall not be denied indemnification in whole or in part
under this Section 7.7 because the Indemnitee had an interest in the
transaction with respect to which the indemnification applies if the
transaction was otherwise permitted by the terms of this Agreement.
(h) The provisions of this Section 7.7 are for the benefit of the
Indemnitees, their heirs, successors, assigns and administrators and shall not
be deemed to create any rights for the benefit of any other Persons.
(i) No amendment, modification or repeal of this Section 7.7 or any
provision hereof shall in any manner terminate, reduce or impair the right of
any past, present or future Indemnitee to be indemnified by the Partnership,
nor the obligations of the Partnership to indemnify any such Indemnitee
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under and in accordance with the provisions of this Section 7.7 as in effect
immediately prior to such amendment, modification or repeal with respect to
claims arising from or relating to matters occurring, in whole or in part,
prior to such amendment, modification or repeal, regardless of when such
claims may arise or be asserted.
7.8 Liability of Indemnitees
(a) Notwithstanding anything to the contrary set forth in this Agreement, no
Indemnitee shall be liable for monetary damages to the Partnership, the
Limited Partners 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 if such Indemnitee acted in good faith.
(b) Subject to its obligations and duties as General Partner set forth in
Section 7.1(a), the General Partner may exercise any of the powers granted to
it by this Agreement and perform any of the duties imposed upon it hereunder
either directly or by or through its agents, and the General Partner shall not
be responsible for any misconduct or negligence on the part of any such agent
appointed by the General Partner in good faith.
(c) Any amendment, modification or repeal of this Section 7.8 or any
provision hereof shall be prospective only and shall not in any way affect the
limitations on the liability to the Partnership, the Limited Partners, the
General Partner, and the Partnership's and General Partner's directors,
officers and employees under this Section 7.8 as in effect immediately prior
to such amendment, modification or repeal with respect to claims arising from
or relating to matters occurring, in whole or in part, prior to such
amendment, modification or repeal, regardless of when such claims may arise or
be asserted.
7.9 Resolution of Conflicts of Interest
(a) Unless otherwise expressly provided in this Agreement or the Genesis OLP
Partnership Agreement, whenever a potential conflict of interest exists or
arises between the General Partner or any of its Affiliates, on the one hand,
and the Partnership, Genesis OLP or any Partner, on the other, any resolution
or course of action by the General Partner or its Affiliates in respect of
such conflict of interest shall be permitted and deemed approved by all
Partners, and shall not constitute a breach of this Agreement, of the Genesis
OLP Partnership Agreement, of any agreement contemplated herein, or of any
duty stated or implied by law or equity, if the resolution or course of action
is, or by operation of this Agreement is deemed to be, fair and reasonable to
the Partnership. The General Partner shall be authorized but not required in
connection with its resolution of such conflict of interest to seek Special
Approval of such resolution. Any conflict of interest and any resolution of
such conflict of interest shall be conclusively deemed fair and reasonable to
the Partnership if such conflict of interest or resolution is (i) approved by
Special Approval (as long as the material facts known to the General Partner
or any of its Affiliates regarding any proposed transaction were disclosed to
the Audit Committee at the time it gave its approval), (ii) on terms no less
favorable to the Partnership than those generally being provided to or
available from unrelated third parties or (iii) fair to the Partnership,
taking into account the totality of the relationships between the parties
involved (including other transactions that may be particularly favorable or
advantageous to the Partnership). The General Partner may also adopt a
resolution or course of action that has not received Special Approval. The
General Partner (including the Audit Committee in connection with Special
Approval) shall be authorized in connection with its determination of what is
"fair and reasonable" to the Partnership and in connection with its resolution
of any conflict of interest to consider (A) the relative interests of any
party to such conflict, agreement, transaction or situation and the benefits
and burdens relating to such interest; (B) any customary or accepted industry
practices and any customary or historical dealings with a particular Person;
(C) any applicable generally accepted accounting practices or principles; and
(D) such additional factors as the General Partner (including the Audit
Committee) determines in its sole discretion to be relevant, reasonable or
appropriate under the circumstances. Nothing contained in this
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Agreement, however, is intended to nor shall it be construed to require the
General Partner (including the Audit Committee) to consider the interests of
any Person other than the Partnership. In the absence of bad faith by the
General Partner, the resolution, action or terms so made, taken or provided by
the General Partner with respect to such matter shall not constitute a breach
of this Agreement or any other agreement contemplated herein or a breach of
any standard of care or duty imposed herein or therein or, to the extent
permitted by law, under the Delaware Act or any other law, rule or regulation.
(b) Whenever this Agreement or any other agreement contemplated hereby
provides that the General Partner or any of its Affiliates is permitted or
required to make a decision (i) in its "sole discretion" or "discretion," that
it deems "necessary or appropriate" or "necessary or advisable" or under a
grant of similar authority or latitude, except as otherwise provided herein,
the General Partner or such Affiliate shall be entitled to consider only such
interests and factors as it desires and shall have no duty or obligation to
give any consideration to any interest of, or factors affecting, the
Partnership, Genesis OLP 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 shall not
be subject to any other or different standards imposed by this Agreement, the
Genesis OLP Partnership Agreement, any other agreement contemplated hereby or
under the Delaware Act or any other law, rule or regulation. In addition, any
actions taken by the General Partner or such Affiliate consistent with the
standards of "reasonable discretion" set forth in the definition of Available
Cash shall not constitute a breach of any duty of the General Partner to the
Partnership or the Limited Partners. The General Partner shall have no duty,
express or implied, to sell or otherwise dispose of any asset of the
Partnership Group other than in the ordinary course of business. No borrowing
by any Group Member or the approval thereof by the General Partner shall be
deemed to constitute a breach of any duty of the General Partner to the
Partnership or the Limited Partners by reason of the fact that the purpose or
effect of such borrowing is directly or indirectly to (A) enable Genesis OLP
to make Guaranteed Payments or (B) hasten the expiration of the Subordination
Period or the conversion of any OLP Subordinated Units into OLP Common Units.
(c) Whenever a particular transaction, arrangement or resolution of a
conflict of interest is required under this Agreement to be "fair and
reasonable" to any Person, the fair and reasonable nature of such transaction,
arrangement or resolution shall be considered in the context of all similar or
related transactions.
(d) The Unitholders hereby authorize the General Partner, on behalf of the
Partnership as a partner of a Group Member, to approve of actions by the
general partner of such Group Member similar to those actions permitted to be
taken by the General Partner pursuant to this Section 7.9.
7.10 Other Matters Concerning the General Partner
(a) The General Partner may rely and shall be protected in acting or
refraining from acting upon any resolution, certificate, statement,
instrument, opinion, report, notice, request, consent, order, bond, debenture
or other paper or document believed by it to be genuine and to have been
signed or presented by the proper party or parties.
(b) The General Partner may consult with legal counsel, accountants,
appraisers, management consultants, investment bankers and other consultants
and advisers selected by it, and any act taken or omitted to be taken in
reliance upon the opinion (including an Opinion of Counsel) of such Persons as
to matters that the General Partner reasonably believes to be within such
Person's professional or expert competence shall be conclusively presumed to
have been done or omitted in good faith and in accordance with such opinion.
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(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.
(d) Any standard of care and duty imposed by this Agreement or under the
Delaware Act or any applicable law, rule or regulation shall be modified,
waived or limited, to the extent permitted by law, as required to permit the
General Partner to act under this Agreement or any other agreement
contemplated by this Agreement and to make any decision pursuant to the
authority prescribed in this Agreement, so long as such action is reasonably
believed by the General Partner to be in, or not inconsistent with, the best
interests of the Partnership.
7.11 Purchase or Sale of Partnership Securities
The General Partner may cause the Partnership to purchase or otherwise
acquire Partnership Securities; provided that the General Partner may not
cause the Partnership or any other Group Member to purchase OLP Subordinated
Units during the Subordination Period. As long as Partnership Securities are
held by any Group Member, such Partnership Securities shall not be considered
Outstanding for any purpose, except as otherwise provided herein. The General
Partner and any Affiliate of the General Partner may also purchase or
otherwise acquire and sell or otherwise dispose of Partnership Securities for
its own account, subject to the provisions of Articles IV and X.
7.12 Registration Rights of the General Partner and its Affiliates
(a) If (i) the General Partner or any Affiliate of the General Partner
(including for purposes of this Section 7.12, any Person that is an Affiliate
of the General Partner at the date hereof notwithstanding that it may later
cease to be an Affiliate of the General Partner) holds Partnership Securities
that it desires to sell and (ii) Rule 144 of the Securities Act (or any
successor rule or regulation to Rule 144) or another exemption from
registration is not available to enable such holder of Partnership Securities
(the "Holder") to dispose of the number of Partnership Securities it desires
to sell at the time it desires to do so without registration under the
Securities Act, then upon the request of the General Partner or any of its
Affiliates, the Partnership shall file with the Commission as promptly as
practicable after receiving such request, and use all reasonable efforts to
cause to become effective and remain effective for a period of not less than
six months following its effective date or such shorter period as shall
terminate when all Partnership Securities covered by such registration
statement have been sold, a registration statement under the Securities Act
registering the offering and sale of the number of Partnership Securities
specified by the Holder; provided, however, that the Partnership shall not be
required to effect more than three registrations pursuant to this Section
7.12(a); and provided further, however, that if the Audit Committee determines
in its good faith judgment that a postponement of the requested registration
for up to six months would be in the best interests of the Partnership and its
Partners due to a pending transaction, investigation or other event, the
filing of such registration statement or the effectiveness thereof may be
deferred for up to six months, but not thereafter. In connection with any
registration pursuant to the immediately preceding sentence, the Partnership
shall promptly prepare and file (x) such documents as may be necessary to
register or qualify the Partnership Securities subject to such registration
under the securities laws of such states as the Holder shall reasonably
request; provided, however, that no such qualification shall be required in
any jurisdiction where, as a result thereof, the Partnership would become
subject to general service of process or to taxation or qualification to do
business as a foreign corporation or partnership doing business in such
jurisdiction solely as a result of such registration and (y) such documents as
may be necessary to apply for listing or to list the Partnership Securities
subject to such registration on such National Securities Exchange as the
Holder shall reasonably request, and do any and all other acts and things that
may reasonably be necessary or advisable to enable the Holder to consummate a
public sale of such Partnership Securities in such states. Except as set forth
in Section 7.11(c), all
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costs and expenses of any such registration and offering (other than the
underwriting discounts and commissions) shall be paid by the Partnership,
without reimbursement by the Holder.
(b) If the Partnership shall at any time propose to file a registration
statement under the Securities Act for an offering of Partnership Securities
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 Partnership Securities held by the Holder in such registration
statement as the Holder shall request. If the proposed offering pursuant to
this Section 7.12(b) shall be an underwritten offering, then, in the event
that the managing underwriter or managing underwriters of such offering advise
the Partnership and the Holder in writing that in their opinion the inclusion
of all or some of the Holder's Partnership Securities would adversely and
materially affect the success of the offering, the Partnership shall include
in such offering only that number or amount, if any, of Partnership Securities
held by the Holder which, in the opinion of the managing underwriter or
managing underwriters, will not so adversely and materially affect the
offering. Except as set forth in Section 7.12(c), all costs and expenses of
any such registration and offering (other than the underwriting discounts and
commissions) shall be paid by the Partnership, without reimbursement by the
Holder.
(c) If underwriters are engaged in connection with any registration referred
to in this Section 7.12, the Partnership shall provide indemnification,
representations, covenants, opinions and other assurance to the underwriters
in form and substance reasonably satisfactory to such underwriters. Further,
in addition to and not in limitation of the Partnership's obligation under
Section 7.7, the Partnership shall, to the fullest extent permitted by law,
indemnify and hold harmless the Holder, its officers, directors and each
Person who controls the Holder (within the meaning of the Securities Act) and
any agent thereof (collectively, "Indemnified Persons") against any losses,
claims, demands, actions, causes of action, assessments, damages, liabilities
(joint or several), costs and expenses (including interest, penalties and
reasonable attorneys' fees and disbursements), resulting to, imposed upon, or
incurred by the Indemnified Persons, directly or indirectly, under the
Securities Act or otherwise (hereinafter referred to in this Section 7.12(c)
as a "claim" and in the plural as "claims") based upon, arising out of or
resulting from any untrue statement or alleged untrue statement of any
material fact contained in any registration statement under which any
Partnership Securities were registered under the Securities Act or any state
securities or Blue Sky laws, in any preliminary prospectus (if used prior to
the effective date of such registration statement), or in any summary or final
prospectus or in any amendment or supplement thereto (if used during the
period the Partnership is required to keep the registration statement
current), or arising out of, based upon or resulting from the omission or
alleged omission to state therein a material fact required to be stated
therein or necessary to make the statements made therein not misleading;
provided, however, that the Partnership shall not be liable to any Indemnified
Person to the extent that any such claim arises out of, is based upon or
results from an untrue statement or alleged untrue statement or omission or
alleged omission made in such registration statement, such preliminary,
summary or final prospectus or such amendment or supplement, in reliance upon
and in conformity with written information furnished to the Partnership by or
on behalf of such Indemnified Person specifically for use in the preparation
thereof.
(d) The provisions of Section 7.12(a) and 7.12(b) shall continue to be
applicable with respect to the General Partner (and any of the General
Partner's Affiliates) after it ceases to be a General Partner of the
Partnership, during a period of two years subsequent to the effective date of
such cessation and for so long thereafter as is required for the Holder to
sell all of the Partnership Securities with respect to which it has requested
during such two-year period inclusion in a registration statement otherwise
filed or that a registration statement be filed; provided, however, that the
Partnership shall not be required to file successive registration statements
covering the same Partnership Securities for which registration was demanded
during such two-year period. The provisions of Section 7.12(c) shall continue
in effect thereafter.
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(e) Any request to register Partnership Securities pursuant to this Section
7.12 shall (i) specify the Partnership Securities intended to be offered and
sold by the Person making the request, (ii) express such Person's present
intent to offer such shares for distribution, (iii) describe the nature or
method of the proposed offer and sale of Partnership Securities, and (iv)
contain the undertaking of such Person to provide all such information and
materials and take all action as may be required in order to permit the
Partnership to comply with all applicable requirements in connection with the
registration of such Partnership Securities.
7.13 Reliance by Third Parties
Notwithstanding anything to the contrary in this Agreement, any Person
dealing with the Partnership shall be entitled to assume that the General
Partner and any officer of the General Partner authorized by the General
Partner to act on behalf of and in the name of 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 its representatives shall be
conclusive evidence in favor of any and every Person relying thereon or
claiming thereunder that (a) at the time of the execution and delivery of such
certificate, document or instrument, this Agreement was in full force and
effect, (b) 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 (c) such certificate, document or instrument was duly executed
and delivered in accordance with the terms and provisions of this Agreement
and is binding upon the Partnership.
ARTICLE VIII
Books, Records, Accounting and Reports
8.1 Records and Accounting
The General Partner shall keep or cause to be kept at the principal office
of the Partnership appropriate books and records with respect to the
Partnership's business, including all books and records necessary to provide
to the Limited Partners any information required to be provided pursuant to
Section 3.4(a). Any books and records maintained by or on behalf of the
Partnership in the regular course of its business, including the record of the
Record Holders and Assignees of Units or other Partnership Securities, books
of account and records of Partnership proceedings, may be kept on, or be in
the form of, computer disks, hard drives, punch cards, magnetic tape,
photographs, micrographics or any other information storage device; provided,
that the books and records so maintained are convertible into clearly legible
written form within a reasonable period of time. The books of the Partnership
shall be maintained, for financial reporting purposes, on an accrual basis in
accordance with U.S. GAAP.
8.2 Fiscal Year
The fiscal year of the Partnership shall be the calendar year.
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8.3 Reports
(a) As soon as practicable, but in no event later than 120 days after the
close of each fiscal year of the Partnership, the General Partner shall cause
to be mailed or furnished to each Record Holder of a Limited Partner Interest
as of a date selected by the General Partner in its discretion, an annual
report containing financial statements of the Partnership for such fiscal year
of the Partnership, presented in accordance with U.S. GAAP, including a
balance sheet and statements of operations, Partnership equity and cash flows,
such statements to be audited by a firm of independent public accountants
selected by the General Partner.
(b) As soon as practicable, but in no event later than 90 days after the
close of each Quarter except the last Quarter of each year, the General
Partner shall cause to be mailed or furnished to each Record Holder of a
Limited Partner Interest, as of a date selected by the General Partner in its
discretion, a report containing unaudited financial statements of the
Partnership and such other information as may be required by applicable law,
regulation or rule of any National Securities Exchange on which Limited
Partner Interests are listed for trading, or as the General Partner determines
to be necessary or appropriate.
ARTICLE IX
Tax Matters
9.1 Tax Returns and Information
The General Partner shall arrange for the preparation and timely filing of
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
Unitholders. 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 traded during the calendar month in which such transfer is deemed to occur
pursuant to Section 6.2(g) without regard to the actual price paid by such
transferee.
(b) The Partnership shall elect to deduct expenses incurred in organizing
the Partnership ratably over a sixty-month period as provided in Section 709
of the Code.
(c) Except as otherwise provided herein, the General Partner shall determine
whether the Partnership should make any other elections permitted by the Code.
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9.3 Tax Controversies
Subject to the provisions hereof, the General Partner is designated as the
Tax Matters Partner (as defined in the Code) and is authorized and required to
represent the Partnership (at the Partnership's expense) in connection with
all examinations of the Partnership's affairs by tax authorities, including
resulting administrative and judicial proceedings, and to expend Partnership
funds for professional services and costs associated therewith. Each Partner
agrees to cooperate with the General Partner and to do or refrain from doing
any or all things reasonably required by the General Partner to conduct such
proceedings.
9.4 Withholding
Notwithstanding any other provision of this Agreement, the General Partner
is authorized to take any action that it determines in its discretion to be
necessary or appropriate to cause the Partnership to comply with any
withholding requirements established under the Code or any other federal,
state or local law including, without limitation, pursuant to Sections 1441,
1442, 1445 and 1446 of the Code. To the extent that the Partnership is
required or elects to withhold and pay over to any taxing authority any amount
resulting from the allocation or distribution of income to any Partner or
Assignee (including, without limitation, by reason of Section 1446 of the
Code), the amount withheld may be treated as a distribution of cash pursuant
to Section 6.3 in the amount of such withholding from such Partner.
ARTICLE X
Admission of Partners
10.1 Admission of Initial Limited Partners
Upon the issuance by the Partnership of Common Units to the Underwriters as
described in Section 5.3 in connection with the Initial Offering and the
execution by each Underwriter of a Transfer Application, the General Partner
shall admit the Underwriters to the Partnership as Initial Limited Partners in
respect of the Common Units purchased by them.
10.2 Admission of Substituted Limited Partner
By transfer of a Limited Partner Interest in accordance with Article IV, the
transferor shall be deemed to have given the transferee the right to seek
admission as a Substituted Limited Partner subject to the conditions of, and
in the manner permitted under, this Agreement. A transferor of a Certificate
representing a Limited Partner Interest shall, however, only have the
authority to convey to a purchaser or other transferee who does not execute
and deliver a Transfer Application (a) the right to negotiate such Certificate
to a purchaser or other transferee and (b) the right to transfer the right to
request admission as a Substituted Limited Partner to such purchaser or other
transferee in respect of the transferred Limited Partner Interests. Each
transferee of a Limited Partner Interest (including any nominee holder or an
agent acquiring such Limited Partner Interest for the account of another
Person) who executes and delivers a Transfer Application shall, by virtue of
such execution and delivery, be an Assignee and be deemed to have applied to
become a Substituted Limited Partner with respect to the Limited Partner
Interest so transferred to such Person. Such Assignee shall become a
Substituted Limited Partner (x) at such time as the General Partner consents
thereto, which consent may be given or withheld in the General Partner's
discretion, and (y) when any such admission is shown on the books and records
of the Partnership. If such consent is withheld, such transferee shall be an
Assignee. An Assignee shall have an interest in the Partnership equivalent to
that of a Limited Partner with respect to allocations and distributions,
including liquidating distributions, of the Partnership. With respect to
voting rights attributable to Limited Partner Interests that are held by
Assignees, the General Partner shall be deemed to be the Limited Partner with
respect thereto and shall, in exercising the
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voting rights in respect of such Limited Partner Interests on any matter, vote
such Limited Partner Interests at the written direction of the Assignee who is
the Record Holder of such Limited Partner Interests. If no such written
direction is received, such Limited Partner Interests will not be voted. An
Assignee shall have no other rights of a Limited Partner.
10.3 Admission of Successor General Partner
A successor General Partner approved pursuant to Section 11.1 or 11.2 or the
transferee of or successor to all of the General Partner's General Partner
Interest 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 General
Partner pursuant to Section 11.1 or 11.2 or the transfer of the General
Partner's General Partner Interest 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 and Genesis OLP without dissolution.
10.4 Admission of Additional Limited Partners
(a) A Person (other than the General Partner, an Initial Limited Partner or
a Substituted Limited Partner) who makes a Capital Contribution to the
Partnership in accordance with this Agreement in exchange for Limited Partner
Interests shall be admitted to the Partnership as an Additional Limited
Partner only upon furnishing to the General Partner (i) evidence of acceptance
in form satisfactory to the General Partner of all of the terms and conditions
of this Agreement, including the power of attorney granted in Section 2.6, and
(ii) such other documents or instruments as may be required in the discretion
of the General Partner to effect such Person's admission as an Additional
Limited Partner.
(b) Notwithstanding anything to the contrary in this Section 10.4, no Person
shall be admitted as an Additional Limited Partner without the consent of the
General Partner, which consent may be given or withheld in the General
Partner's discretion. The admission of any Person as an Additional Limited
Partner shall become effective on the date upon which the name of such Person
is recorded as such in the books and records of the Partnership, following the
consent of the General Partner to such admission.
10.5 Amendment of Agreement and Certificate of Limited Partnership
To effect the admission to the Partnership of any Partner, the General
Partner shall take all steps necessary and appropriate under the Delaware Act
to amend the records of the Partnership to reflect such admission and, if
necessary, to prepare as soon as practicable an amendment to this Agreement
and, if required by law, the General Partner shall prepare and file an
amendment to the Certificate of Limited Partnership, and the General Partner
may for this purpose, among others, exercise the power of attorney granted
pursuant to Section 2.6.
ARTICLE XI
Withdrawal or Removal of Partners
11.1 Withdrawal of the General Partner
(a) The General Partner shall be deemed to have withdrawn from the
Partnership upon the occurrence of any one of the following events (each such
event herein referred to as an "Event of Withdrawal");
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(i) the General Partner voluntarily withdraws from the Partnership by
giving written notice to the Limited Partners (and it shall be deemed that
the General Partner has withdrawn pursuant to this Section 11.1(a)(i) if
the General Partner voluntarily withdraws as a general partner of the
Operating Partnership);
(ii) the General Partner transfers all of its General Partner Interest
pursuant to Section 4.6;
(iii) the General Partner is removed pursuant to Section 11.2;
(iv) the General Partner (A) makes a general assignment for the benefit
of creditors; (B) files a voluntary bankruptcy petition for relief under
Chapter 7 of the United States Bankruptcy Code; (C) files a petition or
answer seeking for itself a liquidation, dissolution or similar relief (but
not a reorganization) under any law; (D) files an answer or other pleading
admitting or failing to contest the material allegations of a petition
filed against the General Partner in a proceeding of the type described in
clauses (A)-(C) of this Section 11.1(a)(iv); or (E) seeks, consents to or
acquiesces in the appointment of a trustee (but not a debtor in
possession), receiver or liquidator of the General Partner or of all or any
substantial part of its properties;
(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, 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 September 30, 2006, the General Partner voluntarily withdraws by
giving at least 90 days' advance notice of its intention to withdraw to the
Limited Partners; provided that prior to the effective date of such
withdrawal, the withdrawal is approved by the holders of a Majority Interest
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 any limited partner of Genesis
OLP or cause the Partnership or Genesis OLP 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 September 30, 2006,
the General Partner voluntarily withdraws by giving at least 90 days' advance
notice to the Limited Partners, 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
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Affiliates) own beneficially or of record or control at least 50% of the
Outstanding Limited Partner Interests. 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 of the
other Group Members. If the General Partner gives a notice of withdrawal
pursuant to Section 11.1(a)(i), the holders of a Majority Interest, 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 of the other Group Members of which the General
Partner is a general partner. If, prior to the effective date of the General
Partner's withdrawal, a successor is not selected by the Limited Partners 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 not be removed without Cause. If Cause exists the
General Partner may be removed if such removal is approved by the holders of a
Two-Thirds Interest (including Limited Partner Interests held by the General
Partner and its Affiliates). Any such action by such holders for removal of
the General Partner must also provide for the election of a successor General
Partner by the holders of a Two-Thirds Interest (including Limited Partner
Interests held by the General Partner and its Affiliates). 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 of the other Group Members of which the General Partner is a general
partner. 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 the successor general partner
of the other Group Members of which the General Partner is a general partner.
The right of the Limited Partners to remove the General Partner pursuant to
this Section 11.2 shall not exist or be exercised unless the Partnership has
received an opinion opining as to the matters covered by a Withdrawal Opinion
of Counsel. Any successor General Partner elected in accordance with the terms
of this Section 11.2 shall be subject to the provisions of Section 10.3.
11.3 Interest of Departing Partner and Successor General Partner
(a) In the event of the withdrawal of the General Partner under
circumstances where such withdrawal does not violate this Agreement, if a
successor General Partner is elected in accordance with the terms of Section
11.1 or 11.2, the Departing Partner shall have the option exercisable prior to
the effective date of the departure of such Departing Partner to require its
successor to purchase its General Partner Interest and its partnership
interest as a general partner in the other Group Members and if the General
Partner has delivered a Conversion Election as provided in Section 7.13 of the
Genesis OLP Partnership Agreement, its right to participate in distributions
as provided in Section 7.13 of the Genesis OLP Partnership Agreement
(collectively, the "Combined Interest") in exchange for an amount in cash
equal to the fair market value of such Combined Interest, such amount to be
determined and payable as of the effective date of its departure. If the
General Partner is removed by the Partners under circumstances where Cause
exists or if the General Partner withdraws under circumstances where such
withdrawal violates this Agreement or the Genesis OLP Partnership Agreement,
and if a successor General Partner is elected in accordance with the terms of
Section 11.1 or 11.2, such successor shall have the option, exercisable prior
to the effective date of the departure of such Departing Partner, to purchase
the Combined Interest of the Departing Partner for such fair market value of
such Combined Interest. In either event, the Departing Partner shall be
entitled to receive all reimbursements due such Departing Partner pursuant to
Section 7.4, including any employee-related liabilities (including severance
liabilities), incurred in connection with the termination
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of any employees employed by the General Partner 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
Partner's Combined Interest shall be determined by agreement between the
Departing Partner and its successor or, failing agreement within 30 days after
the effective date of such Departing Partner's departure, by an independent
investment banking firm or other independent expert selected by the Departing
Partner and its successor, which, in turn, may rely on other experts, and the
determination of which shall be conclusive as to such matter. If such parties
cannot agree upon one independent investment banking firm or other independent
expert within 45 days after the effective date of such departure, then the
Departing Partner shall designate an independent investment banking firm or
other independent expert, the Departing Partner's successor shall designate an
independent investment banking firm or other independent expert, and such
firms or experts shall mutually select a third independent investment banking
firm or independent expert, which third independent investment banking firm or
other independent expert shall determine the fair market value of the Combined
Interest. In making its determination, such third independent investment
banking firm or other independent expert may consider the then current trading
price of Common Units on any National Securities Exchange on which Common
Units are then listed, the value of the Partnership's assets, the rights and
obligations of the General Partner and other factors it may deem relevant.
(b) If the Combined Interest is not purchased in the manner set forth in
Section 11.3(a), the Departing Partner will have the right to convert the
Combined Interest into Common Units or to receive cash from the Partnership in
exchange for such Combined Interest. The Departing Partner's Combined Interest
shall be converted into Common Units pursuant to a valuation made by an
investment banking firm or other independent expert selected pursuant to
Section 11.3(a), without reduction in such Combined Interest (but subject to
proportionate dilution by reason of the admission of its successor). Any
successor General Partner shall indemnify the Departing Partner as to all
debts and liabilities of the Partnership arising on or after the date on which
the Departing Partner becomes a Limited Partner. For purposes of this
Agreement, conversion of the General Partner's Combined Interest to Common
Units will be characterized as if the General Partner contributed its Combined
Interest to the Partnership in exchange for the newly issued Common Units.
(c) If a successor General Partner is elected in accordance with the terms
of Section 11.1 or 11.2 and the option described in Section 11.3(a) is not
exercised by the party entitled to do so, the successor General Partner shall,
at the effective date of its admission to the Partnership, contribute to the
Partnership cash in the amount necessary to acquire a General Partner Interest
equal to the General Partner Interest of the Departing Partner. In such event,
such successor General Partner shall be entitled to such Percentage Interest
of all Partnership allocations and distributions and any other allocations and
distributions to which the Departing Partner was entitled.
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.
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ARTICLE XII
Dissolution and Liquidation
12.1 Dissolution
The Partnership shall not be dissolved by the admission of Substituted
Limited Partners or Additional Limited Partners or by the admission of a
successor General Partner in accordance with the terms of this Agreement. Upon
the removal or withdrawal of the General Partner, if a successor General
Partner is elected pursuant to Section 11.1 or 11.2, the Partnership shall not
be dissolved and such successor General Partner shall continue the business of
the Partnership. The Partnership shall dissolve, and (subject to Section 12.2)
its affairs shall be wound up, upon:
(a) the expiration of its term as provided in Section 2.7;
(b) an Event of Withdrawal of the General Partner as provided in Section
11.1(a) (other than Section 11.1(a)(ii)), unless a successor is elected and
an Opinion of Counsel is received as provided in Section 11.1(b) or 11.2
and such successor is admitted to the Partnership pursuant to Section 10.3;
(c) an election to dissolve the Partnership by the General Partner that
is approved by the holders of a Majority Interest;
(d) the entry of a decree of judicial dissolution of the Partnership
pursuant to the provisions of the Delaware Act; or
(e) the sale of all or substantially all of the assets and properties of
the Partnership Group.
12.2 Continuation of the Business of the Partnership After Dissolution
Upon (a) dissolution of the Partnership following an Event of Withdrawal
caused by the withdrawal or removal of the General Partner as provided in
Section 11.1(a)(i) or (iii) and the failure of the Partners to select a
successor to such Departing Partner pursuant to Section 11.1 or 11.2, then
within 90 days thereafter, or (b) dissolution of the Partnership upon an event
constituting an Event of Withdrawal as defined in Section 11.1(a)(iv), (v) or
(vi), then, to the maximum extent permitted by law, within 180 days
thereafter, the holders of a Majority Interest may elect to reconstitute the
Partnership and continue its business on the same terms and conditions set
forth in this Agreement by forming a new limited partnership on terms
identical to those set forth in this Agreement and having as the successor
general partner a Person approved by the holders of a Majority Interest.
Unless such an election is made within the applicable time period as set forth
above, the Partnership shall conduct only activities necessary to wind up its
affairs. If such an election is so made, then:
(i) the reconstituted Partnership shall continue until the end of the
term set forth in Section 2.7 unless earlier dissolved in accordance with
this Article XII;
(ii) if the successor General Partner is not the former General Partner,
then the interest of the former General Partner shall be treated in the
manner provided in Section 11.3; and
(iii) all necessary steps shall be taken to cancel this Agreement and the
Certificate of Limited Partnership and to enter into and, as necessary, to
file a new partnership agreement and certificate of limited partnership,
and the successor general partner may for this purpose exercise the powers
of attorney granted the General Partner pursuant to Section 2.6; provided,
that the right of the holders of a Majority Interest to approve a successor
General Partner and to reconstitute and to continue the business of the
Partnership shall not exist and may not be exercised unless the Partnership
has received an Opinion of Counsel that (x) the exercise of the right would
not result in the loss of limited liability of any Limited Partner and (y)
neither the Partnership, the reconstituted limited partnership, nor Genesis
OLP would be treated as an association taxable as a corporation or
otherwise be taxable as an entity for federal income tax purposes upon the
exercise of such right to continue.
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12.3 Liquidator
Upon dissolution of the Partnership, unless the Partnership is continued
under an election to reconstitute and continue the Partnership pursuant to
Section 12.2, the General Partner shall select one or more Persons to act as
Liquidator. The Liquidator (if other than the General Partner) shall be
entitled to receive such compensation for its services as may be approved by
holders of a Majority Interest. 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 a Majority Interest. 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 a
Majority Interest. The right to approve a successor or substitute Liquidator
in the manner provided herein shall be deemed to refer also to any such
successor or substitute Liquidator approved in the manner herein provided.
Except as expressly provided in this Article XII, the Liquidator approved in
the manner provided herein shall have and may exercise, without further
authorization or consent of any of the parties hereto, all of the powers
conferred upon the General Partner under the terms of this Agreement (but
subject to all of the applicable limitations, contractual and otherwise, upon
the exercise of such powers, other than the limitation on sale set forth in
Section 7.3(b)) to the extent necessary or desirable in the good faith
judgment of the Liquidator to carry out the duties and functions of the
Liquidator hereunder for and during such period of time as shall be reasonably
required in the good faith judgment of the Liquidator to complete the winding
up and liquidation of the Partnership as provided for herein.
12.4 Liquidation
The Liquidator shall proceed to dispose of the assets of the Partnership,
discharge its liabilities, and otherwise wind up its affairs in such manner
and over such period as the Liquidator determines to be in the best interest
of the Partners, subject to Section 17-804 of the Delaware Act and the
following:
(a) Disposition of Assets. The assets may be disposed of by public or
private sale or by distribution in kind to one or more Partners on such
terms as the Liquidator and such Partner or Partners may agree. If any
property is distributed in kind, the Partner receiving the property shall
be deemed for purposes of Section 12.4(c) to have received cash equal to
its fair market value; and contemporaneously therewith, appropriate cash
distributions must be made to the other Partners. The Liquidator may, in
its absolute discretion, defer liquidation or distribution of the
Partnership's assets for a reasonable time if it determines that an
immediate sale of all or some of the Partnership's assets would be
impractical or would cause undue loss to the partners. The Liquidator may,
in its absolute discretion, distribute the Partnership's assets, in whole
or in part, in kind if it determines that a sale would be impractical or
would cause undue loss to the partners.
(b) Discharge of Liabilities. Liabilities of the Partnership include
amounts owed to Partners otherwise than in respect of their distribution
rights under Article VI. With respect to any liability that is contingent
or is otherwise not yet due and payable, the Liquidator shall either settle
such claim for such amount as it thinks appropriate or establish a reserve
of cash or other assets to provide for its payment. When paid, any unused
portion of the reserve shall be distributed as additional liquidation
proceeds.
(c) Liquidation Distributions. All property and all cash in excess of
that required to discharge liabilities as provided in Section 12.4(b) shall
be distributed to the Partners in accordance with, and to the extent of,
the positive balances in their respective Capital Accounts, as determined
after taking into account all Capital Account adjustments (other than those
made by reason of distributions pursuant to this Section 12.4(c)) for the
taxable year of the Partnership during which the liquidation of the
Partnership occurs (with such date of occurrence being determined pursuant
to Treasury Regulation Section 1.704-1(b)(2)(ii)(g)), and such distribution
shall be made by the end of such taxable year (or, if later, within 90 days
after said date of such occurrence).
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12.5 Cancellation of Certificate of Limited Partnership
Upon the completion of the distribution of Partnership cash and property as
provided in Section 12.4 in connection with the liquidation of the
Partnership, the Partnership shall be terminated and the Certificate of
Limited Partnership and all qualifications of the Partnership as a foreign
limited partnership in jurisdictions other than the State of Delaware shall be
canceled and such other actions as may be necessary to terminate the
Partnership shall be taken.
12.6 Return of Contributions
The General Partner shall not be personally liable for, and shall have no
obligation to contribute or loan any monies or property to the Partnership to
enable it to effectuate, the return of the Capital Contributions of the
Limited Partners, or 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 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.
ARTICLE XIII
Amendment of Partnership Agreement; Meetings; Record Date
13.1 Amendment to be Adopted Solely by the General Partner
Each Partner agrees that the General Partner, without the approval of any
Partner or Assignee, may amend any provision of this Agreement and execute,
swear to, acknowledge, deliver, file and record whatever documents may be
required in connection therewith, to reflect:
(a) a change in the name of the Partnership, the location of the
principal place of business of the Partnership, the registered agent of the
Partnership or the registered office of the Partnership;
(b) admission, substitution, withdrawal or removal of Partners in
accordance with this Agreement;
(c) a change that, in the sole discretion of the General Partner, is
necessary or advisable to qualify or continue the qualification of the
Partnership as a limited partnership or a partnership in which the Limited
Partners have limited liability under the laws of any state or to ensure
that the Partnership and Genesis OLP will not be treated as an association
taxable as a corporation or otherwise taxed as an entity for federal income
tax purposes;
(d) a change that, in the discretion of the General Partner, (i) does not
adversely affect the Limited Partners in any material respect, (ii) is
necessary or advisable to (A) satisfy any requirements, conditions or
guidelines contained in any opinion, directive, order, ruling or regulation
of any federal or state agency or judicial authority or contained in any
federal or state statute (including the Delaware Act) or (B) facilitate the
trading of Limited Partner Interests
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(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 Limited Partner Interests are or will be
listed for trading, compliance with any of which the General Partner
determines in its discretion to be in the best interests of the Partnership
and the Limited Partners, (iii) is necessary or advisable in connection
with action taken by the General Partner pursuant to Section 5.9, or (iv)
is required to effect the intent expressed in the Registration Statement or
the intent of the provisions of this Agreement or is otherwise contemplated
by this Agreement;
(e) a change in the fiscal year or taxable year of the Partnership and
any changes that, in the discretion of the General Partner, are necessary
or advisable as a result of a change in the fiscal year or taxable year of
the Partnership including, if the General Partner shall so determine, a
change in the definition of "Quarter" and the dates on which distributions
are to be made by the Partnership;
(f) an amendment that is necessary, in the Opinion of Counsel, to prevent
the Partnership or the General Partner or its directors, officers, trustees
or agents from in any manner being subjected to the provisions of the
Investment Company Act of 1940, as amended, the Investment Advisers Act of
1940, as amended, or "plan asset" regulations adopted under the Employee
Retirement Income Security Act of 1974, as amended, regardless of whether
such are substantially similar to plan asset regulations currently applied
or proposed by the United States Department of Labor;
(g) subject to the terms of Section 5.7, an amendment that, in the
discretion of the General Partner, is necessary or advisable in connection
with the authorization of issuance of any class or series of Partnership
Securities pursuant to Section 5.6;
(h) any amendment expressly permitted in this Agreement to be made by the
General Partner acting alone;
(i) an amendment effected, necessitated or contemplated by a Merger
Agreement approved in accordance with Section 14.3;
(j) an amendment that, in the discretion of the General Partner, is
necessary or advisable to reflect, account for and deal with appropriately
the formation by the Partnership of, or investment by the Partnership in,
any corporation, partnership, joint venture, limited liability company or
other entity, in connection with the conduct by the Partnership of
activities permitted by the terms of Section 2.4;
(k) a merger or conveyance pursuant to Section 14.3(d); or
(l) any other amendments substantially similar to the foregoing.
13.2 Amendment Procedures
Except as provided in Sections 13.1 and 13.3, all amendments to this
Agreement shall be made in accordance with the following requirements.
Amendments to this Agreement may be proposed only by or with the consent of
the General Partner, which consent may be given or withheld in its sole
discretion. A proposed amendment shall be effective upon its approval by the
holders of a Majority Interest, 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
Limited Partner Interests 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 Limited Partner Interests or call a meeting of the
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Limited Partners to consider and vote on such proposed amendment. The General
Partner shall notify all Record Holders upon final adoption of any such
proposed amendments.
13.3 Amendment Requirements
(a) Notwithstanding the provisions of Sections 13.1 and 13.2, no provision
of this Agreement that establishes a percentage of Outstanding Limited Partner
Interests (including Limited Partner Interests 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 Limited Partner
Interests (including Limited Partner Interests deemed owned by the General
Partner) whose aggregate Outstanding Limited Partner Interests 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), (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 may be
given or withheld in its sole discretion, (iii) change Section 12.1(a) or (c),
or (iv) change the term of the Partnership or, except as set forth in Section
12.1(c), give any Person the right to dissolve the Partnership.
(c) Except as provided in Section 14.3, and except as otherwise provided,
and without limitation of the General Partner's authority to adopt amendments
to this Agreement as contemplated in Section 13.1, any amendment that would
have a material adverse effect on the rights or preferences of any class of
Partnership Interests in relation to other classes of Partnership Interests
must be approved by the holders of not less than a majority of the Outstanding
Partnership Interests of the class affected.
(d) Notwithstanding any other provision of this Agreement, except for
amendments pursuant to Section 7.3 or 13.1 and except as otherwise provided by
Section 14.3(b), no amendments shall become effective without the approval of
the holders of a Ninety Percent Interest unless the Partnership obtains an
Opinion of Counsel to the effect that such amendment will not affect the
limited liability of any Limited Partner under applicable law.
(e) Except as provided in Section 13.1, this Section 13.3 shall only be
amended with the approval of the holders of a Ninety Percent Interest.
13.4 Special Meetings
All acts of Limited Partners to be taken pursuant to this Agreement shall be
taken in the manner provided in this Article XIII. Special meetings of the
Limited Partners may be called by the General Partner or by Limited Partners
owning 20% or more of the Outstanding Limited Partner Interests of the class
or classes for which a meeting is proposed and which are entitled to vote
thereat. 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
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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 Limited Partner Interests are listed for trading, in which case the
rule, regulation, guideline or requirement of such exchange shall govern) or
(b) in the event that approvals are sought without a meeting, the date by
which Limited Partners are requested in writing by the General Partner to give
such approvals.
13.7 Adjournment
When a meeting is adjourned to another time or place, notice need not be
given of the adjourned meeting and a new Record Date need not be fixed, if the
time and place thereof are announced at the meeting at which the adjournment
is taken, unless such adjournment shall be for more than 45 days. At the
adjourned meeting, the Partnership may transact any business which might have
been transacted at the original meeting. If the adjournment is for more than
45 days or if a new Record Date is fixed for the adjourned meeting, a notice
of the adjourned meeting shall be given in accordance with this Article XIII.
13.8 Waiver of Notice; Approval of Meeting; Approval of Minutes
The transactions of any meeting of Limited Partners, however called and
noticed, and whenever held, shall be as valid as if occurred at a meeting duly
held after regular call and notice, if a quorum is present either in person or
by proxy, and if, either before or after the meeting, Limited Partners
representing such quorum who were present in person or by proxy and entitled
to vote, sign a written waiver of notice or an approval of the holding of the
meeting or an approval of the minutes thereof. All waivers and approvals shall
be filed with the Partnership records or made a part of the minutes of the
meeting. Attendance of a Limited Partner at a meeting shall constitute a
waiver of notice of the meeting, except when the Limited Partner does not
approve, at the beginning of the meeting, of the transaction of any business
because the meeting is not lawfully called or convened; and except that
attendance at a meeting is not a waiver of any right to disapprove the
consideration of matters required to be included in the notice of the meeting,
but not so included, if the disapproval is expressly made at the meeting.
13.9 Quorum
The holders of a majority of the Outstanding Limited Partner Interests
(including Limited Partner Interests deemed owned by the General Partner) of
the class or classes for which a meeting has been called and which are
entitled to vote represented in person or by proxy shall constitute a quorum
at a
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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 (including
Limited Partner Interests deemed owned by the General Partner) that in the
aggregate represent a majority of the Outstanding Limited Partner Interests
(including Limited Partner Interests deemed owned by the General Partner)
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 (including Limited Partner
Interests deemed owned by the General Partner) that in the aggregate represent
at least such greater or different percentage shall be required. The Limited
Partners present at a duly called or held meeting at which a quorum is present
may continue to transact business until adjournment, notwithstanding the
withdrawal of enough Limited Partners to leave less than a quorum, if any
action taken (other than adjournment) is approved by the required percentage
of Outstanding Limited Partner Interests (including Limited Partner Interests
deemed owned by the General Partner) specified in this Agreement. In the
absence of a quorum any meeting of Limited Partners may be adjourned from time
to time by the affirmative vote of holders of at least a majority of the
Outstanding Limited Partner Interests (including Limited Partner Interests
deemed owned by the General Partner) entitled to vote at such meeting
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 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 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 Limited Partner Interests are listed for
trading, in which case the rule, regulation, guideline or requirement of such
exchange shall govern). Prompt notice of the taking of action without a
meeting shall be given to the Limited Partners who have not approved in
writing. The General Partner may specify that any written ballot submitted to
Limited Partners for the purpose of taking any action without a meeting shall
be returned to the Partnership within the time period, which shall be not less
than 20 days, specified by the General Partner. If a ballot
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returned to the Partnership does not vote all of the Limited Partner Interests
held by a Limited Partner the Partnership shall be deemed to have failed to
receive a ballot for the Limited Partner Interests that were not voted. If
approval of the taking of any action by the Limited Partners is solicited by
any Person other than by or on behalf of the General Partner, the written
approvals shall have no force and effect unless and until (a) they are
deposited with the Partnership in care of the General Partner, (b) approvals
sufficient to take the action proposed are dated as of a date not more than 90
days prior to the date sufficient approvals are deposited with the Partnership
and (c) an Opinion of Counsel is delivered to the General Partner to the
effect that the exercise of such right and the action proposed to be taken
with respect to any particular matter (i) will not cause the Limited Partners
to be deemed to be taking part in the management and control of the business
and affairs of the Partnership so as to jeopardize the Limited Partners'
limited liability, and (ii) is otherwise permissible under the state statutes
then governing the rights, duties and liabilities of the Partnership and the
Partners.
13.12 Voting and Other Rights
(a) Only those Record Holders of the Limited Partner Interests on the Record
Date set pursuant to Section 13.6 (and also subject to the limitations
contained in the definition of "Outstanding") shall be entitled to notice of,
and to vote at, a meeting of Limited Partners or to act with respect to
matters as to which the holders of the Outstanding Limited Partner Interests
have the right to vote or to act. All references in this Agreement to votes
of, or other acts that may be taken by, the Outstanding Limited Partner
Interests shall be deemed to be references to the votes or acts of the Record
Holders of such Outstanding Limited Partner Interests.
(b) With respect to Limited Partner Interests that are held for a Person's
account by another Person (such as a broker, dealer, bank, trust company or
clearing corporation, or an agent of any of the foregoing), in whose name such
Limited Partner Interests are registered, such other Person shall, in
exercising the voting rights in respect of such Limited Partner Interests on
any matter, and unless the arrangement between such Persons provides
otherwise, vote such Limited Partner Interests in favor of, and at the
direction of, the Person who is the beneficial owner, and the Partnership
shall be entitled to assume it is so acting without further inquiry. The
provisions of this Section 13.12(b) (as well as all other provisions of this
Agreement) are subject to the provisions of Section 4.3.
ARTICLE XIV
Merger
14.1 Authority
The Partnership may merge or consolidate with one or more corporations,
limited liability companies, business trusts or associations, real estate
investment trusts, common law trusts or unincorporated businesses, including a
general partnership or limited partnership, formed under the laws of the State
of Delaware or any other state of the United States of America, pursuant to a
written agreement of merger or consolidation ("Merger Agreement") in
accordance with this Article XIV.
14.2 Procedure for Merger or Consolidation
Merger or consolidation of the Partnership pursuant to this Article XIV
requires the prior approval of the General Partner. If the General Partner
shall determine, in the exercise of its discretion, to consent to the merger
or consolidation, the General Partner shall approve the Merger Agreement,
which shall set forth:
(a) The names and jurisdictions of formation or organization of each of
the business entities proposing to merge or consolidate;
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(b) The name and jurisdiction of formation or organization of the
business entity that is to survive the proposed merger or consolidation
(the "Surviving Business Entity");
(c) The terms and conditions of the proposed merger or consolidation;
(d) The manner and basis of exchanging or converting the equity
securities of each constituent business entity for, or into, cash, property
or general or limited partner interests, rights, securities or obligations
of the Surviving Business Entity; and (i) if any general or limited partner
interests, securities or rights of any constituent business entity are not
to be exchanged or converted solely for, or into, cash, property or general
or limited partner interests, rights, securities or obligations of the
Surviving Business Entity, the cash, property or general or limited partner
interests, rights, securities or obligations of any limited partnership,
corporation, trust or other entity (other than the Surviving Business
Entity) which the holders of such general or limited partner interests,
securities or rights are to receive in exchange for, or upon conversion of
their general or limited partner interests, securities or rights, and (ii)
in the case of securities represented by certificates, upon the surrender
of such certificates, which cash, property or general or limited partner
interests, rights, securities or obligations of the Surviving Business
Entity or any general or limited partnership, corporation, trust or other
entity (other than the Surviving Business Entity), or evidences thereof,
are to be delivered;
(e) A statement of any changes in the constituent documents or the
adoption of new constituent documents (the articles or certificate of
incorporation, articles of trust, declaration of trust, certificate or
agreement of limited partnership or other similar charter or governing
document) of the Surviving Business Entity to be effected by such merger or
consolidation;
(f) The effective time of the merger, which may be the date of the filing
of the certificate of merger pursuant to Section 14.4 or a later date
specified in or determinable in accordance with the Merger Agreement
(provided, that if the effective time of the merger is to be later than the
date of the filing of the certificate of merger, the effective time shall
be fixed no later than the time of the filing of the certificate of merger
and stated therein); and
(g) Such other provisions with respect to the proposed merger or
consolidation as are deemed necessary or appropriate by the General
Partner.
14.3 Approval by Unitholders of Merger or Consolidation
(a) Except as provided in Section 14.3(d), the General Partner, upon its
approval of the Merger Agreement, shall direct that the Merger Agreement be
submitted to a vote of the Limited Partners, whether at a special meeting or
by written consent, in either case in accordance with the requirements of
Article XIII. A copy or a summary of the Merger Agreement shall be included in
or enclosed with the notice of a special meeting or the written consent.
(b) Except as provided in Section 14.3(d), the Merger Agreement shall be
approved upon receiving the affirmative vote or consent of the holders of a
Majority Interest unless the Merger Agreement contains any provision that, if
contained in an amendment to this Agreement, the provisions of this Agreement
or the Delaware Act would require the vote or consent of a greater percentage
of the Outstanding Limited Partner Interests or of any class of Limited
Partners, in which case such greater percentage vote or consent shall be
required for approval of the Merger Agreement.
(c) Except as provided in Section 14.3(d), after such approval by vote or
consent of the Limited Partners, and at any time prior to the filing of the
certificate of merger pursuant to Section 14.4, the merger or consolidation
may be abandoned pursuant to provisions therefor, if any, set forth in the
Merger Agreement.
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(d) Notwithstanding anything else contained in this Article XIV or in this
Agreement, the General Partner is permitted, in its discretion, without
Limited Partner approval, to merge the Partnership or any Group Member into,
or convey all of the Partnership's assets to, another limited liability entity
which shall be newly formed and shall have no assets, liabilities or
operations at the time of such Merger other than those it receives from the
Partnership or other Group Member if (i) the General Partner has received an
Opinion of Counsel that the merger or conveyance, as the case may be, would
not result in the loss of the limited liability of any Limited Partner or any
limited partner in Genesis OLP or cause the Partnership or Genesis OLP to be
treated as an association taxable as a corporation or otherwise to be taxed as
an entity for federal income tax purposes (to the extent not previously
treated as such), (ii) the sole purpose of such merger or conveyance is to
effect a mere change in the legal form of the Partnership into another limited
liability entity and (iii) the governing instruments of the new entity provide
the Limited Partners and the General Partner with the same rights and
obligations as are herein contained.
14.4 Certificate of Merger
Upon the required approval by the General Partner and the Limited Partners
of a Merger Agreement, a certificate of merger shall be executed and filed
with the Secretary of State of the State of Delaware in conformity with the
requirements of the Delaware Act.
14.5 Effect of Merger
(a) At the effective time of the certificate of merger:
(i) all of the rights, privileges and powers of each of the business
entities that has merged or consolidated, and all property, real, personal
and mixed, and all debts due to any of those business entities and all
other things and causes of action belonging to each of those business
entities shall be vested in the Surviving Business Entity and after the
merger or consolidation shall be the property of the Surviving Business
Entity to the extent they were of each constituent business entity;
(ii) the title to any real property vested by deed or otherwise in any of
those constituent business entities shall not revert and is not in any way
impaired because of the merger or consolidation;
(iii) all rights of creditors and all liens on or security interests in
property of any of those constituent business entities shall be preserved
unimpaired; and
(iv) all debts, liabilities and duties of those constituent business
entities shall attach to the Surviving Business Entity, and may be enforced
against it to the same extent as if the debts, liabilities and duties had
been incurred or contracted by it.
(b) A merger or consolidation effected pursuant to this Article XIV shall
not be deemed to result in a transfer or assignment of assets or liabilities
from one entity to another.
ARTICLE XV
Right to Acquire Limited Partner Interests
15.1 Right to Acquire Limited Partner Interests
(a) Notwithstanding any other provision of this Agreement, if at any time
not more than 20% of the total Limited Partner Interests of any class then
Outstanding are 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,
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exercisable in its sole discretion, to purchase all, but not less than all, of
such Limited Partner Interests of such class then Outstanding held by Persons
other than the General Partner and its Affiliates, at the greater of (x) the
Current Market Price as of the date three days prior to the date that the
notice described in Section 15.1(b) is mailed and (y) the highest price paid
by the General Partner or any of its Affiliates for any such Limited Partner
Interest of such class purchased during the 90-day period preceding the date
that the notice described in Section 15.1(b) is mailed. As used in this
Agreement, (i) "Current Market Price" as of any date of any class of Limited
Partner Interests listed or admitted to trading on any National Securities
Exchange means the average of the daily Closing Prices (as hereinafter
defined) per Limited Partner Interest of such class for the 20 consecutive
Trading Days (as hereinafter defined) immediately prior to such date; (ii)
"Closing Price" for any day means the last sale price on such day, regular
way, or in case no such sale takes place on such day, the average of the
closing bid and asked prices on such day, regular way, in either case as
reported in the principal consolidated transaction reporting system with
respect to securities listed or admitted for trading on the principal National
Securities Exchange (other than the Nasdaq Stock Market) on which such Limited
Partner Interests of such class are listed or admitted to trading or, if such
Limited Partner Interests of such class are not listed or admitted to trading
on any National Securities Exchange (other than the Nasdaq Stock Market), the
last quoted price on such day or, if not so quoted, the average of the high
bid and low asked prices on such day in the over-the-counter market, as
reported by the Nasdaq Stock Market or such other system then in use, or, if
on any such day such Limited Partner Interests of such class are not quoted by
any such organization, the average of the closing bid and asked prices on such
day as furnished by a professional market maker making a market in such
Limited Partner Interests of such class selected by the General Partner, or if
on any such day no market maker is making a market in such Limited Partner
Interests of such class, the fair value of such Limited Partner Interests on
such day as determined reasonably and in good faith by the General Partner;
and (iii) "Trading Day" means a day on which the principal National Securities
Exchange on which such Limited Partner Interests of any class are listed or
admitted to trading is open for the transaction of business or, if Limited
Partner Interests of a class are not listed or admitted to trading on any
National Securities Exchange, a day on which banking institutions in New York
City generally are open.
(b) If the General Partner, any Affiliate of the General Partner or the
Partnership elects to exercise the right to purchase Limited Partner Interests
granted pursuant to Section 15.1(a), the General Partner shall deliver to the
Transfer Agent notice of such election to purchase (the "Notice of Election to
Purchase") and shall cause the Transfer Agent to mail a copy of such Notice of
Election to Purchase to the Record Holders of Limited Partner Interests of
such class (as of a Record Date selected by the General Partner) at least 10,
but not more than 60, days prior to the Purchase Date. Such Notice of Election
to Purchase shall also be published for a period of at least three consecutive
days in at least two daily newspapers of general circulation printed in the
English language and published in the Borough of Manhattan, New York. The
Notice of Election to Purchase shall specify the Purchase Date and the price
(determined in accordance with Section 15.1(a)) at which Limited Partner
Interests will be purchased and state that the General Partner, its Affiliate
or the Partnership, as the case may be, elects to purchase such Limited
Partner Interests, upon surrender of Certificates representing such Limited
Partner Interests in exchange for payment, at such office or offices of the
Transfer Agent as the Transfer Agent may specify, or as may be required by any
National Securities Exchange on which such Limited Partner Interests are
listed or admitted to trading. Any such Notice of Election to Purchase mailed
to a Record Holder of Limited Partner Interests at his address as reflected in
the records of the Transfer Agent shall be conclusively presumed to have been
given regardless of whether the owner receives such notice. On or prior to the
Purchase Date, the General Partner, its Affiliate or the Partnership, as the
case may be, shall deposit with the Transfer Agent cash in an amount
sufficient to pay the aggregate purchase price of all of such Limited Partner
Interests to be purchased in accordance with this Section 15.1. If the Notice
of Election to Purchase shall have been duly given as aforesaid at least 10
days prior to the Purchase Date, and if on or prior to the Purchase Date the
deposit described in the preceding sentence has been made for the benefit of
the holders of
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Limited Partner Interests subject to purchase as provided herein, then from
and after the Purchase Date, notwithstanding that any Certificate shall not
have been surrendered for purchase, all rights of the holders of such Limited
Partner Interests (including any rights pursuant to Articles IV, V, VI, and
XII) shall thereupon cease, except the right to receive the purchase price
(determined in accordance with Section 15.1(a)) for Limited Partner Interests
therefor, without interest, upon surrender to the Transfer Agent of the
Certificates representing such Limited Partner Interests, and such Limited
Partner Interests shall thereupon be deemed to be transferred to the General
Partner, its Affiliate or the Partnership, as the case may be, on the record
books of the Transfer Agent and the Partnership, and the General Partner or
any Affiliate of the General Partner, or the Partnership, as the case may be,
shall be deemed to be the owner of all such Limited Partner Interests from and
after the Purchase Date and shall have all rights as the owner of such Limited
Partner Interests (including all rights as owner of such Limited Partner
Interests pursuant to Articles IV, V, VI and XII).
(c) At any time from and after the Purchase Date, a holder of an Outstanding
Limited Partner Interest subject to purchase as provided in this Section 15.1
may surrender his Certificate evidencing such Limited Partner Interest to the
Transfer Agent in exchange for payment of the amount described in Section
15.1(a), therefor, without interest thereon.
ARTICLE XVI
General Provisions
16.1 Addresses and Notices
Any notice, demand, request, report or proxy materials required or permitted
to be given or made to a Partner or Assignee under this Agreement shall be in
writing and shall be deemed given or made when delivered in person or when
sent by first class United States mail or by other means of written
communication to the Partner or Assignee at the address described below. Any
notice, payment or report to be given or made to a Partner or Assignee
hereunder shall be deemed conclusively to have been given or made, and the
obligation to give such notice or report or to make such payment shall be
deemed conclusively to have been fully satisfied, upon sending of such notice,
payment or report to the Record Holder of such Partnership Securities at his
address as shown on the records of the Transfer Agent or as otherwise shown on
the records of the Partnership, regardless of any claim of any Person who may
have an interest in such Partnership Securities by reason of any assignment or
otherwise. An affidavit or certificate of making of any notice, payment or
report in accordance with the provisions of this Section 16.1 executed by the
General Partner, the Transfer Agent or the mailing organization shall be prima
facie evidence of the giving or making of such notice, payment or report. If
any notice, payment or report addressed to a Record Holder at the address of
such Record Holder appearing on the books and records of the Transfer Agent or
the Partnership is returned by the United States Post Office marked to
indicate that the United States Postal Service is unable to deliver it, such
notice, payment or report and any subsequent notices, payments and reports
shall be deemed to have been duly given or made without further mailing (until
such time as such Record Holder or another Person notifies the Transfer Agent
or the Partnership of a change in his address) if they are available for the
Partner or Assignee at the principal office of the Partnership for a period of
one year from the date of the giving or making of such notice, payment or
report to the other Partners and Assignees. Any notice to the Partnership
shall be deemed given if received by the General Partner at the principal
office of the Partnership designated pursuant to Section 2.3. The General
Partner may rely and shall be protected in relying on any notice or other
document from a Partner, Assignee or other Person if believed by it to be
genuine.
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.
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16.3 Binding Effect
This Agreement shall be binding upon and inure to the benefit of the parties
hereto and their heirs, executors, administrators, successors, legal
representatives and permitted assigns.
16.4 Integration
This Agreement constitutes the entire agreement among the parties hereto
pertaining to the subject matter hereof and supersedes all prior agreements
and understandings pertaining thereto.
16.5 Creditors
None of the provisions of this Agreement shall be for the benefit of, or
shall be enforceable by, any creditor of the Partnership.
16.6 Waiver
No failure by any party to insist upon the strict performance of any
covenant, duty, agreement or condition of this Agreement or to exercise any
right or remedy consequent upon a breach thereof shall constitute waiver of
any such breach of any other covenant, duty, agreement or condition.
16.7 Counterparts
This Agreement may be executed in counterparts, all of which together shall
constitute an agreement binding on all the parties hereto, notwithstanding
that all such parties are not signatories to the original or the same
counterpart. Each party shall become bound by this Agreement immediately upon
affixing its signature hereto or, in the case of a Person acquiring a Unit,
upon accepting the certificate evidencing such Unit or executing and
delivering a Transfer Application as herein described, independently of the
signature of any other party.
16.8 Applicable Law
This Agreement shall be construed in accordance with and governed by the
laws of the State of Delaware, without regard to the principles of conflicts
of law.
16.9 Invalidity of Provisions
If any provision of this Agreement is or becomes invalid, illegal or
unenforceable in any respect, the validity, legality and enforceability of the
remaining provisions contained herein shall not be affected thereby.
16.10 Consent of Partners
Each Partner hereby expressly consents and agrees that, whenever in this
Agreement it is specified that an action may be taken upon the affirmative
vote or consent of less than all of the Partners, such action may be so taken
upon the concurrence of less than all of the Partners and each Partner shall
be bound by the results of such action.
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IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of
the date first written above.
GENESIS ENERGY, L.L.C.,
As General Partner
By:Basis Petroleum, Inc.
As Member
By: _________________________________
Name:
Title:
_____________________________________
Wayne Kubicek,
As Organizational Limited Partner
LIMITED PARTNERS
All Limited Partners now and
hereafter admitted as Limited
Partners of the Partnership,
pursuant to powers of attorney now
and hereafter executed in favor of,
and granted and delivered to the
General Partner.
By: _________________________________
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EXHIBIT A TO THE AMENDED AND
RESTATED AGREEMENT OF LIMITED
PARTNERSHIP OF GENESIS ENERGY, L.P.
CERTIFICATE EVIDENCING COMMON UNITS
REPRESENTING LIMITED PARTNER INTERESTS
GENESIS ENERGY, L.P.
No. Common Units
In accordance with Section 4.1 of the Amended and Restated Agreement of
Limited Partnership of Genesis Energy, L.P., as amended, supplemented or
restated from time to time (the "Partnership Agreement"), Genesis Energy,
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 and accompanied
by a properly executed application for transfer of the Common Units
represented by this Certificate. 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 500 Dallas, Suite 3200, Houston, Texas 77002. Capitalized terms
used herein but not defined shall have the meaning 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 not be valid for any purpose unless it has been
countersigned and registered by the Transfer Agent and Registrar.
Dated: _______________________________ Genesis Energy, L.P.
By: Genesis Energy, L.L.C., its
General Partner
By: Basis Petroleum, Inc.,
As Member
Countersigned and Registered by: By: ________________________________
Chairman and Chief Executive
Officer
______________________________________
as Transfer Agent and Registrar
By: _________________________________ By: ________________________________
<TABLE>
<S> <C>
Authorized Signature Secretary
</TABLE>
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<PAGE>
[REVERSE OF CERTIFICATE]
ABBREVIATIONS
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 MIN ACT--
TEN ENT--as tenants by the Custodian
entireties
JT TEN--as joint tenants with right (Cust) (Minor)
of survivorship and not as tenants under Uniform Gifts to Minors
in common
Act _________________________________
State
Additional abbreviations, though not in the above list, may also be used.
ASSIGNMENT OF COMMON UNITS
IN
GENESIS ENERGY, L.P.
IMPORTANT NOTICE REGARDING INVESTOR RESPONSIBILITIES
DUE TO TAX SHELTER STATUS OF GENESIS ENERGY, L.P.
You have acquired an interest in Genesis Energy, L.P., 500 Dallas, Suite
3200, Houston, Texas 77002 whose taxpayer identification number is .
The Internal Revenue Service has issued Genesis Energy, L.P. the following tax
shelter registration number: .
YOU MUST REPORT THIS REGISTRATION NUMBER TO THE INTERNAL REVENUE SERVICE IF
YOU CLAIM ANY DEDUCTION, LOSS, CREDIT, OR OTHER TAX BENEFIT OR REPORT ANY
INCOME BY REASON OF YOUR INVESTMENT IN GENESIS ENERGY, L.P.
You must report the registration number as well as the name and taxpayer
identification number of Genesis Energy, L.P. on Form 8271. FORM 8271 MUST BE
ATTACHED TO THE RETURN ON WHICH YOU CLAIM THE DEDUCTION, LOSS, CREDIT, OR
OTHER TAX BENEFIT OR REPORT ANY INCOME BY REASON OF YOUR INVESTMENT IN GENESIS
ENERGY, L.P.
If you transfer your interest in Genesis Energy, L.P. to another person, you
are required by the Internal Revenue Service to keep a list containing (a)
that person's name, address and taxpayer identification number, (b) the date
on which you transferred the interest and (c) the name, address and tax
shelter registration number of Genesis Energy, L.P. If you do not want to keep
such a list, you must (1) send the information specified above to the
Partnership, which will keep the list for this tax shelter, and (2) give a
copy of this notice to the person to whom you transfer your interest. Your
failure to comply with any of the above-described responsibilities could
result in the imposition of a penalty under Section 6707(b) or 6708(a) of the
Internal Revenue Code of 1986, as amended, unless such failure is shown to be
due to reasonable cause.
ISSUANCE OF A REGISTRATION NUMBER DOES NOT INDICATE THAT THIS INVESTMENT OR
THE CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED, OR APPROVED BY THE
INTERNAL REVENUE SERVICE.
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<PAGE>
FOR VALUE RECEIVED, hereby assigns, conveys, sells and transfers
unto .
_____________________________________ _____________________________________
(Please print or typewrite name and (Please insert Social Security or
address of Assignee) 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 Genesis Energy,
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 (Signature)
ASSOCIATION OF SECURITIES DEALERS,
INC. OR BY A COMMERCIAL BANK OR
TRUST COMPANY
_____________________________________
(Signature)
SIGNATURE(S) GUARANTEED
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 or transfer and an
Application for Transfer of Common Units has been executed by a transferee
either (a) on the form set forth below or (b) on a separate application that
the Partnership will furnish on request without charge. A transferor of the
Common Units shall have no duty to the transferee with respect to execution of
the transfer application in order for such transferee to obtain registration
of the transfer of the Common Units.
----------------
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APPENDIX C
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 or transfer and an
Application for Transfer of Common Units has been executed by a transferee
either (a) on the form set forth below or (b) on a separate application that
the Partnership will furnish on request without charge. A transferor of the
Common Units shall have no duty to the transferee with respect to execution of
the transfer application in order for such transferee to obtain registration
of the transfer of the Common Units.
APPLICATION FOR TRANSFER OF COMMON UNITS
The undersigned ("Assignee") hereby applies for transfer to the name of the
Assignee of the Common Units evidenced hereby.
The Assignee (a) requests admission as a Substituted Limited Partner and
agrees to comply with and be bound by, and hereby executes, the Agreement of
Limited Partnership of Genesis Energy, L.P. (the "Partnership"), as amended,
supplemented or restated to the date hereof (the "Partnership Agreement"), (b)
represents and warrants that the Assignee has all right, power and authority
and, if an individual, the capacity necessary to enter into the Partnership
Agreement, (c) appoints the General Partner and, if a Liquidator shall be
appointed, the Liquidator of the Partnership as the Assignee's attorney-in-
fact to execute, swear to, acknowledge and file any document, including,
without limitation, the Partnership Agreement and any amendment thereto and
the Certificate of Limited Partnership of the Partnership and any amendment
thereto, necessary or appropriate for the Assignee's admission as a
Substituted Limited Partner and as a party to the Partnership Agreement, (d)
gives the powers of attorney provided for in the Partnership Agreement and (e)
makes the waivers and gives the consents and approvals contained in the
Partnership Agreement. Capitalized terms not defined herein have the meanings
assigned to such terms in the Partnership Agreement.
Date:
---------------------------------------------------------------------------
- ---------------------------------------
Signature of Assignee
- ---------------------------------------
Social Security or other identifying
number of Assignee
- ---------------------------------------
Name and Address of Assignee
- ---------------------------------------
Purchase Price including commissions,
if any
Type of Entity (check one):
[_] Individual [_] Partnership [_] Corporation
[_] Trust [_] Other (specify)
Nationality (check one):
[_] U.S. Citizen, Resident or Domestic Entity
[_] Foreign Corporation [_] Non-resident Alien
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<PAGE>
If the U.S. Citizen, Resident or Domestic Entity box is checked, the
following certification must be completed.
Under Section 1445(e) of the Internal Revenue Code of 1986, as amended (the
"Code"), the Partnership must withhold tax with respect to certain transfers
of property if a holder of an interest in the Partnership is a foreign person.
To inform the Partnership that no withholding is required with respect to the
undersigned interestholder's interest in it, the undersigned hereby certifies
the following (or, if applicable, certifies the following on behalf of the
interestholder).
Complete Either A or B:
A. Individual Interestholder
1.I am not a non-resident alien for purposes of U.S. income taxation.
2.I am a calendar-year taxpayer.
3.My U.S. taxpayer identification number (Social Security Number) is
------------------------------------------------------------------------
4.My home address is
B. Partnership, Corporation or Other Interestholder
1. is not a foreign
(Name of Interestholder)
corporation, foreign partnership, foreign trust or foreign estate (as
those terms are defined in the Code and Treasury Regulations).
2.Interestholder is a calendar-year taxpayer.
3.The interestholder's U.S. employer identification number is
------------------------------------------------------------------------
4.The interestholder's office address and place of incorporation (if
applicable) is
------------------------------------------------------------------------
The interestholder agrees to notify the Partnership within sixty (60) days
of the date the interestholder becomes a foreign person.
The interestholder understands that this certificate may be disclosed to the
Internal Revenue Service by the Partnership and that any false statement
contained herein could be punishable by fine, imprisonment or both.
Under penalties of perjury, I declare that I have examined this
certification and to the best of my knowledge and belief it is true, correct
and complete and, if applicable, I further declare that I have authority to
sign this document on behalf of
---------------------------------
(Name of Interestholder)
---------------------------------
Signature and Date
---------------------------------
Title (if applicable)
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<PAGE>
Note: If the Assignee is a broker, dealer, bank, trust company, clearing
corporation, other nominee holder or an agent of any of the foregoing, and is
holding for the account of any other person, this application should be
completed by an officer thereof or, in the case of a broker or dealer, by a
registered national securities exchange or a member of the National
Association of Securities Dealers, Inc., or, in the case of any other nominee
holder, a person performing a similar function. If the Assignee is a broker,
dealer, bank, trust company, clearing corporation, other nominee owner or an
agent of any of the foregoing, the above certification as to any person for
whom the Assignee will hold the Common Units shall be made to the best of the
Assignee's knowledge.
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<PAGE>
APPENDIX D
GLOSSARY OF TERMS
ACQUISITION: Any transaction in which any member of the Partnership Group
acquires (through an asset acquisition, merger, stock acquisition or other
form of investment) control over all or a portion of the assets, properties or
business of another Person for the purpose of increasing the operating
capacity or revenues of the Partnership Group over the operating capacity or
revenues of the Partnership Group existing immediately prior to such
transaction.
ADJUSTED OPERATING SURPLUS: Generally, for any period, Operating Surplus
generated during such period less (i) any net increase in working capital
borrowings during such period, (ii) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period and (iii) any capital contributed to
purchase APIs pursuant to the Distribution Support Agreement during such
period; and plus (a) any net decrease in working capital borrowings during
such period, (b) any net increase in cash reserves for Operating Expenditures
during such period required by any debt instrument for the repayment of
principal, interest or premium and (c) the amount of any Incentive
Compensation Payments that reduced Operating Surplus for such period. Adjusted
Operating Surplus does not include that portion of Operating Surplus included
in clause (a)(i) of the definition of Operating Surplus.
APIS: Non-voting, limited partner interests in the Operating Partnership
issued (at a rate of $100 per API) pursuant to the Operating Partnership
Agreement and in accordance with the Distribution Support Agreement, which
non-voting, limited partner interests shall confer upon the holder thereof
only the rights and obligations specifically provided in the Operating
Partnership Agreement with respect to APIs (and no other rights otherwise
available to holders of limited partner interests in the Operating
Partnership).
AUDIT COMMITTEE: A committee of the board of directors of the General
Partner composed entirely of two or more directors who are neither officers
nor employees of the General Partner nor officers, directors or employees of
any affiliate of the General Partner.
AVAILABLE CASH: With respect to any quarter ending prior to liquidation:
(a) the sum of (i) all cash and cash equivalents of the Partnership on
hand at the end of such quarter and (ii) all additional cash and cash
equivalents of the Partnership on hand on the date of determination of
Available Cash with respect to such quarter resulting from borrowings for
working capital purposes subsequent to the end of such quarter, less
(b) the amount of any cash reserves that is necessary or appropriate in
the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the business of the Partnership (including reserves for
future capital expenditures) subsequent to such quarter and (ii) comply
with applicable law or any loan agreement, security agreement, mortgage,
debt instrument or other agreement or obligation to which any member of the
Partnership Group is a party or by which it is bound or its assets are
subject; provided, however, that disbursements made by the Partnership 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, less
(c) any Redemption Proceeds on hand that have not yet been contributed to
the Operating Partnership.
BACKWARDATION: A market condition that occurs when future prices are lower
than current prices.
BASIS GATHERING: The crude oil marketing and gathering operations of Basis
historically conducted through its gathering division.
BPD: Barrels per day.
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<PAGE>
CAPITAL ACCOUNT: The capital account maintained for a partner pursuant to
the Partnership Agreement. The Capital Account of a partner in respect of a
general partner interest, a Common Unit 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 IMPROVEMENTS: Additions or improvements to the capital assets owned
by any member of the Partnership Group or the acquisition of existing or the
construction of new capital assets (including pipeline systems, storage
facilities and related assets), made to increase the operating capacity or
revenues of the Partnership Group from the operating capacity or revenues of
the Partnership Group existing immediately prior to such addition,
improvement, acquisition or construction.
CAPITAL SURPLUS: All Available Cash distributed by the Partnership from any
source will be treated as distributed from Operating Surplus until the sum of
all Available Cash distributed since the commencement of the Partnership
equals the Operating Surplus as of the end of the quarter prior to such
distribution. Any excess Available Cash will be deemed to be Capital Surplus.
CAUSE: The entry by a court of competent jurisdiction of a final, non-
appealable judgment finding the General Partner liable for actual fraud, gross
negligence or willful or wanton misconduct in its capacity as general partner
of the Partnership.
CLOSING DATE: The first date on which Common Units are sold by the
Partnership to the Underwriters pursuant to the provisions of the Underwriting
Agreement.
CODE: The Internal Revenue Code of 1986, as amended and in effect from time
to time. Any reference herein to a specific section or sections of the Code
shall be deemed to include a reference to any corresponding provision of
future law.
COMMON OLP UNIT: A Unit representing a fractional part of the partnership
interests of all limited partners in the Operating Partnership and their
assignees and having the rights and obligations specified with respect to
Common OLP Units in the Operating Partnership Agreement.
COMMON UNIT ARREARAGE: As to any quarter within the Subordination Period
commencing prior to liquidation, the excess, if any, of (a) the Minimum
Quarterly Distribution in respect of such quarter over (b) the sum of all
Available Cash distributed with respect to a Common Unit in respect of such
quarter.
COMMON UNIT: A Unit representing a fractional part of the partnership
interests of all limited partners in the Partnership and their assignees and
having the rights and obligations specified with respect to a Common Unit in
the Partnership Agreement.
CONTRIBUTION AGREEMENT: The Purchase & Sale and Contribution & Conveyance
Agreement dated as of among the Partnership, the Operating Partnership,
the General Partner, Basis, Howell and certain subsidiaries of Howell,
together with the additional conveyance documents and instruments contemplated
or referenced thereunder.
CURRENT MARKET PRICE: A 20-day average of the closing prices on the NYSE
immediately prior to the call date.
DELAWARE ACT: The Delaware Revised Uniform Limited Partnership Act, 6 Del C.
17-101, et seq., as amended, supplemented or restated from time to time, and
any successor to such statute.
D-2
<PAGE>
EBITDA: Net income before interest expense, income taxes, depreciation and
amortization and minority interests (if applicable). As used in this
Prospectus, EBITDA is not intended to be construed as an alternative to net
income as an indicator of operating performance or as an alternative to cash
flow as a measure of liquidity or ability to service debt obligations.
EFFECTIVE DATE: November , 1996.
GENERAL PARTNER: Genesis Energy, L.L.C., a Delaware limited liability
company, and its successors and permitted assigns as general partner of the
Partnership.
GROSS MARGIN: For gathering and marketing operations, the difference between
the price of crude oil where it is purchased and the sales price of crude oil
where it is sold, minus the associated costs of aggregation and
transportation; for pipeline operations, pipeline revenues minus pipeline
costs.
HOWELL CRUDE OPERATIONS: The crude oil marketing, gathering and
transportation operations of Howell historically conducted through wholly
owned subsidiaries.
INCENTIVE COMPENSATION PAYMENTS: Incentive compensation payments paid to the
General Partner as compensation for providing management and other services to
the Partnership in the event the Target Distribution Levels have been reached.
INITIAL COMMON UNITS: The Common Units sold in the Offering.
INITIAL UNIT PRICE: The initial public offering price per Common Unit at
which the Underwriters offered the Common Units to the public for sale as set
forth on the outside front cover page of this Prospectus.
INTERIM CAPITAL TRANSACTIONS: The following transactions if they occur prior
to liquidation: (a) borrowings, refinancings or refundings of indebtedness and
sales of debt securities (other than for working capital purposes and other
than for items purchased on open account in the ordinary course of business)
by any member of the Partnership Group; (b) sales of equity interests by any
member of the Partnership Group (other than (i) Units issued by the
Partnership (A) in connection with the exercise by the Underwriters of their
over-allotment option or (B) in connection with the redemption of Common OLP
Units pursuant to the Redemption and Registration Rights Agreement and (ii)
APIs); and (c) sales or other voluntary or involuntary dispositions of any
assets of any member of the Partnership Group other than (i) sales or other
dispositions of inventory in the ordinary course of business, (ii) sales or
other dispositions of other current assets, including, without limitation,
receivables and accounts, in the ordinary course of business and (iii) sales
or other dispositions of assets as a part of normal retirements or
replacements.
MANAGING GENERAL PARTNER: Genesis Energy, L.P., a Delaware limited
partnership, and its successors and permitted assigns as managing general
partner of the Operating Partnership.
MINIMUM QUARTERLY DISTRIBUTION: $0.50 per Unit per quarter (or with respect
to the period commencing on the Closing Date and ending on December 31, 1996,
the product of $0.50 multiplied by a fraction of which the numerator is the
number of days in such period and of which the denominator is 92), subject to
adjustment in accordance with the Partnership Agreement as described in "Cash
Distribution Policy--Distributions from Capital Surplus" and "Cash
Distribution Policy--Adjustment of Minimum Quarterly Distribution and Target
Distribution Levels."
OLP UNIT: A Common GP Unit, a Subordinated GP Unit, a Common OLP Unit or a
Subordinated OLP Unit.
D-3
<PAGE>
OPERATING EXPENDITURES: All Partnership Group expenditures, including, but
not limited to, taxes, reimbursements of the General Partners, Incentive
Compensation Payments, debt service payments and capital expenditures, subject
to the following:
(a) Payments (including prepayments) of principal of and premium on
indebtedness shall not be an Operating Expenditure if the payment is (i)
required in connection with the sale or other disposition of assets or (ii)
made in connection with the refinancing or refunding of indebtedness with
the proceeds from new indebtedness or from the sale of equity interests.
For purposes of the foregoing, at the election and in the reasonable
discretion of the Operating General Partner, any payment of principal or
premium shall be deemed to be refunded or refinanced by any indebtedness
incurred or to be incurred by the Partnership Group within 180 days before
or after such payment to the extent of the principal amount of such
indebtedness.
(b) Operating Expenditures shall not include (i) capital expenditures
made for Acquisitions or for Capital Improvements, (ii) payment of
transaction expenses relating to Interim Capital Transactions or (iii)
distributions to partners. Where capital expenditures are made in part for
Acquisitions or for Capital Improvements and in part for other purposes,
the Operating General Partner's good faith allocation between the amounts
paid for each shall be conclusive.
OPERATING PARTNERSHIP: Genesis Crude Oil, L.P., a Delaware limited
partnership, and any successors thereto.
OPERATING PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of
Limited Partnership of the Operating Partnership, as it may be amended,
supplemented or restated from time to time (the form of which has been filed
as an exhibit to the registration statement of which this Prospectus is a
part).
OPERATING SURPLUS: With respect to any period ending prior to liquidation,
on a cumulative basis and without duplication:
(a) the sum of (i) $20 million plus all cash and cash equivalents of the
Partnership Group on hand as of the close of business on the Closing Date,
(ii) all cash receipts of the Partnership Group for the period beginning on
the Closing Date and ending with the last day of such period, other than
cash receipts (A) from Interim Capital Transactions (except to the extent
specified in Section 6.5 of the Operating Partnership Agreement) or (B)
from the sale of Units in connection with the redemption of Common OLP
Units pursuant to the Redemption and Registration Rights Agreement and
(iii) all cash receipts of the Partnership Group after the end of such
period but on or before the date of determination of Operating Surplus with
respect to such period resulting from borrowings for working capital
purposes, less
(b) the sum of (i) Operating Expenditures for the period beginning on the
Closing Date and ending with the last day of such period and (ii) the
amount of cash reserves that is necessary or advisable in the reasonable
discretion of the General Partner to provide funds for future Operating
Expenditures, provided, however, that disbursements made (including
contributions to a member of the Partnership Group or disbursements on
behalf of a member of the Partnership Group) or cash reserves established,
increased or reduced after the end of such period but on or before the date
of determination of Available Cash with respect to such period shall be
deemed to have been made, established, increased or reduced for purposes of
determining Operating Surplus, within such period if the General Partner so
determines.
Notwithstanding the foregoing, "Operating Surplus" with respect to the
quarter in which liquidation occurs and any subsequent quarter shall equal
zero.
OPINION OF COUNSEL: A written opinion of counsel (who may be regular counsel
to the Partnership or the General Partner or any of their affiliates)
acceptable to the General Partner in its reasonable discretion.
D-4
<PAGE>
PARTNERSHIP: Genesis Energy, L.P., a Delaware limited partnership, and any
successors thereto.
PARTNERSHIP AGREEMENT: The Amended and Restated Agreement of Limited
Partnership of the Partnership (the form of which has been filed is included
in this prospectus at Appendix A), as it may be amended, restated or
supplemented from time to time. Unless the context requires otherwise,
references to the Partnership Agreement constitute references to the
Partnership Agreements of the Partnership and of the Operating Partnership,
collectively.
PARTNERSHIP INTEREST: An ownership interest in the Partnership, which shall
include general partner interests, Common Units or other equity securities of
the Partnership, or combination thereof or interest therein, as the case may
be.
PARTNERSHIP GROUP: The Partnership, the Operating Partnership and any other
subsidiary of the Partnership, treated as a single consolidated entity.
SUBORDINATED OLP UNIT: A Unit representing a fractional part of the
partnership interests of all limited partners of the Operating Partnership and
assignees of any such limited partner interest (other than of holders of the
APIs) and having the rights and obligations specified with respect to
Subordinated OLP Units in the Operating Partnership Agreement.
SUBORDINATION PERIOD: The period commencing on the Closing Date and ending
on the first day of any quarter beginning after September 30, 2001 in respect
of which (i) distributions of Available Cash from Operating Surplus on each of
the outstanding Common Units and Subordinated Units with respect to each of
the three consecutive, non-overlapping four-quarter periods immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all outstanding Common Units and Subordinated Units during
such periods, (ii) the Adjusted Operating Surplus generated during each of the
three consecutive, non-overlapping four-quarter periods immediately preceding
such date equaled or exceeded the sum of Minimum Quarterly Distribution on all
of the outstanding Common Units and Subordinated Units during such periods,
and (iii) there are no outstanding Common Unit Arrearages.
SUPPORT PERIOD TERMINATION DATE: The earlier to occur of (a) the first day
after the date on which Available Cash is distributed with respect to the
quarter ending September 30, 2001 and (b) the first day of any quarter
beginning after September 30, 1999 in respect of which (i) distributions of
Available Cash from Operating Surplus on each of the Common Units and
Subordinated OLP Units with respect to the four-quarter period immediately
preceding such date equaled or exceeded the sum of the Minimum Quarterly
Distribution on all of the outstanding Common Units and Subordinated OLP Units
during such period, (ii) the Adjusted Operating Surplus generated during the
four-quarter period immediately preceding such date equaled or exceeded 133%
of the sum of the Minimum Quarterly Distribution on all of the outstanding
Common Units and Subordinated OLP Units during such period and (iii) there are
no outstanding Cumulative Common Unit Arrearages.
TARGET DISTRIBUTION LEVELS: The distribution levels at which the General
Partner's Incentive Compensation Payments are determined as set forth in
"Management--Incentive Compensation Payments to the General Partner."
D-5
<PAGE>
TRANSFER AGENT: American Stock Transfer & Trust Company or such bank, trust
company or other person (including the General Partner or one of its
affiliates) as shall be appointed from time to time by the Partnership to act
as registrar and transfer agent for the Common Units.
TRANSFER APPLICATION: The application which all purchasers of Common Units
in this offering and purchasers of Common Units in the open market who wish to
become Common Unitholders of record must deliver before the transfer of such
Common Units will be registered and before cash distributions and federal
income tax allocations will be made to the transferee. A form of Transfer
Application is included in this Prospectus as Appendix C.
UNITHOLDERS: Holders of Units.
UNITS: The Common Units, the Common OLP Units and the Subordinated OLP
Units, collectively.
UNRECOVERED CAPITAL: At any time, with respect to (a) a Common Unit, the
Initial Unit Price, less the sum of all distributions constituting Capital
Surplus theretofore made in respect of an Initial Common Unit and any
distributions of cash (or the net agreed value of any distributions in kind)
in connection with the dissolution and liquidation of the Partnership
theretofore made in respect of an Initial Common Unit, adjusted as the
Operating General Partner determines to be appropriate to give effect to any
distribution, subdivision or combination of such Units and (b) an API, the
excess of (i) the cash amount contributed to the Operating Partnership in
exchange for such API over (ii) any amounts previously distributed toward the
redemption of such API pursuant to the Operating Partnership Agreement.
D-6
<PAGE>
APPENDIX E
PRO FORMA OPERATING SURPLUS
(UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1995
------------
<S> <C>
Pro forma net income(a)............................................ $14,750
Add:Pro forma depreciation and amortization........................ 11,146
Pro forma minority interest in the Operating Partnership........ 7,285
-------
Pro forma EBITDA(b)............................................. 33,181
Less:Pro forma interest expense.................................... --
Pro forma capital expenditures--maintenance (c)(d).............. 650
-------
Pro forma Operating Surplus (e).................................... $32,531
=======
</TABLE>
- --------
(a) Net income has not been reduced for any amount that might have been paid
under the Incentive Plan, as the determination of the amounts payable
thereunder will be at the discretion of the Compensation Committee.
(b) EBITDA is defined as earnings (net income) before interest expense, income
taxes, depreciation and amortization and minority interests.
(c) Amounts determined by combining actual amounts for Combined Operations
maintenance capital expenditures. Excludes capital expenditures on the
three principal pipelines prior to their acquisition on March 31, 1995
incurred by the prior owner.
(d) The Partnership estimates future maintenance capital expenditures to be
approximately $3.0 million per year. See "Management's Discussion and
Analysis of Results of Operations and Financial Condition."
(e) The pro forma adjustments in the pro forma consolidated financial
statements are based upon currently available information and certain
estimates and assumptions. The pro forma financial statements do not
purport to present the results of operations of the Partnership had the
Transactions actually been completed as of the date indicated.
Furthermore, the pro forma financial statements are based on accrual
accounting concepts whereas Operating Surplus is defined in the
Partnership Agreement on a cash accounting basis. As a consequence, the
amount of pro forma Operating Surplus shown above should only be viewed as
a general indication of the amounts of Available Cash from Operating
Surplus that may in fact have been generated by the Partnership had it
been formed in earlier periods.
E-1
<PAGE>
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY IN-
FORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR IN-
CORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE PARTNERSHIP OR ANY OF
THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE
HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT THE IN-
FORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN
OFFER TO BUY THE COMMON UNITS BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OF-
FER OR SOLICITATION IS NOT AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER
OR SOLICITATION IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM IT IS UN-
LAWFUL TO MAKE SUCH SOLICITATION.
---------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary........................................................ 5
Risk Factors.............................................................. 28
The Transactions.......................................................... 44
Credit Support Facilities................................................. 44
Use of Proceeds........................................................... 46
Capitalization............................................................ 47
Dilution.................................................................. 48
Cash Distribution Policy.................................................. 49
Certain Information Concerning Salomon Inc................................ 59
Selected Pro Forma Financial and Operating Data........................... 61
Selected Historical Financial and Operating Data.......................... 62
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 64
Business.................................................................. 75
Management................................................................ 97
Certain Relationships and Related Transactions............................ 102
Conflicts of Interest and Fiduciary Responsibilities...................... 106
Description of the Common Units........................................... 110
The Partnership Agreement................................................. 113
Units Eligible for Future Sale............................................ 123
Tax Considerations........................................................ 124
Investment in the Partnership by Employee Benefit Plans................... 144
Underwriting.............................................................. 145
Validity of the Common Units.............................................. 147
Experts................................................................... 147
Available Information..................................................... 148
Index to Financial Statements............................................. F-1
Partnership Agreement..................................................... A-1
Operating Partnership Agreement........................................... B-1
Transfer Application...................................................... C-1
Glossary.................................................................. D-1
Pro Forma Operating Surplus............................................... E-1
</TABLE>
UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS EF-
FECTING TRANSACTIONS IN THE REGISTERED SECURITIES, WHETHER OR NOT PARTICIPAT-
ING IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN
ADDITION TO THE OBLIGATIONS OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
8,200,000 COMMON UNITS
GENESIS ENERGY, L.P.
REPRESENTING LIMITED
PARTNER INTERESTS
SALOMON BROTHERS INC
SMITH BARNEY INC.
DEAN WITTER REYNOLDS INC.
PAINEWEBBER INCORPORATED
PRUDENTIAL SECURITIES INCORPORATED
PROSPECTUS
DATED , 1996
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13 OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
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 and the NASD filing fee,
the amounts set forth below are estimates.
<TABLE>
<S> <C>
Securities and Exchange Commission registration fee.............. $68,287
NASD filing fee.................................................. 20,303
NYSE listing fee................................................. *
Printing and engraving expenses.................................. *
Legal fees and expenses.......................................... *
Accounting fees and expenses..................................... *
Blue Sky fees and expenses....................................... *
Transfer agent fees and expenses................................. *
Miscellaneous expenses........................................... *
-------
Total.......................................................... $ *
=======
</TABLE>
- --------
* To be furnished by amendment.
ITEM 14 INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Section of the Prospectus entitled "The Partnership Agreement--
Indemnification" is incorporated herein by this reference.
Reference is made to Section 8 of the Underwriting Agreement filed as
Exhibit 1.1 to this Registration Statement.
Subject to any terms, conditions or restrictions set forth in the
Partnership Agreements, 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.
ITEM 15 RECENT SALES OF UNREGISTERED SECURITIES
There has been no sale of securities of the Partnership within the past
three years.
ITEM 16 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
a. Exhibits:
<TABLE>
<C> <S>
1.1 --Form of Underwriting Agreement
**3.1 --Form of Agreement of Limited Partnership of Genesis Energy, L.P.
("Genesis") (included as Appendix A to the Prospectus)
3.2 --Form of Agreement of Limited Partnership of Genesis Crude Oil, L.P.
(the "Operating Partnership") (included as Appendix B to this
Prospectus)
5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality of the securities
being registered
**8.1 --Opinion of Andrews & Kurth L.L.P. relating to tax matters
10.1 --Form of Purchase & Sale and Contribution & Conveyance Agreement dated
as of , 1996 among Basis Petroleum, Inc. ("Basis"), Howell
Corporation ("Howell"), certain subsidiaries of Howell, Genesis, the
Operating Partnership and Genesis Energy, L.L.C.
</TABLE>
II-1
<PAGE>
<TABLE>
<C> <S>
10.2 --Form of Distribution Support Agreement among Salomon Inc and Genesis
10.3 --Form of Master Credit Support Agreement among Salomon Inc, Basis and
the Operating Partnership
10.4 --Form of Redemption and Registration Rights Agreement among Basis,
Howell and Genesis
10.5 --Form of Corporate Services Agreement between Basis and Genesis
10.6 --Restricted Unit Plan
10.7 --Incentive Plan
10.8 --Form of Employment Agreement between Genesis Energy, L.L.C. and
certain executive officers
21.1 --List of Subsidiaries
**23.1 --Consent of Arthur Andersen LLP
**23.2 --Consent of Deloitte & Touche llp
**23.3 --Consent of Price Waterhouse LLP
**23.4 --Consent of Andrews & Kurth L.L.P. (included in Exhibit 5.1 and
Exhibit 8.1)
*24.1 --Powers of Attorney (included on signature page)
27.1 --Financial Data Schedule
</TABLE>
- --------
* Previously filed.
** Filed herewith.
b. Financial Statement Schedules
All financial statement schedules are omitted because the information is not
required, is not material or is otherwise included in the financial statements
or related notes thereto.
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, as amended (the "Securities Act") 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 and is, therefor,
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 the question whether such indemnification by it is
against public policy as expressed in the Securities Act 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, 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 shall be deemed to be a part of this
Registration Statement as of the time it was declared effective.
For the purpose of determining any liability under the Securities Act,
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.
II-2
<PAGE>
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS AMENDMENT TO THE REGISTRATION STATEMENT TO BE
SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE
CITY OF HOUSTON, STATE OF TEXAS, ON OCTOBER 17, 1996.
GENESIS ENERGY, L.P.
By: Genesis Energy, L.L.C.
as General Partner
/s/ Allyn R. Skelton, II
By:__________________________________
Allyn R. Skelton, II
Chief Financial Officer
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THIS
AMENDMENT TO THE REGISTRATION STATEMENT HAS BEEN SIGNED BY THE FOLLOWING
PERSONS IN THE CAPACITIES INDICATED AS OF OCTOBER 17, 1996.
<TABLE>
<CAPTION>
SIGNATURE TITLE
--------- -----
<S> <C> <C>
Jeffrey R. Serra* Chairman of the Board of
____________________________________ Directors
Jeffrey R. Serra
John P. vonBerg* President and Director
____________________________________ (Principal Executive
John P. vonBerg Officer)
Mark J. Gorman* Executive Vice President and
____________________________________ Director
Mark J. Gorman
/s/ Allyn R. Skelton, II Chief Financial Officer
____________________________________ (Principal Financial and
Allyn R. Skelton, II Accounting Officer)
Ronald E. Hall* Director
____________________________________
Ronald E. Hall
Paul N. Howell* Director
____________________________________
Paul N. Howell
Thomas W. Jasper* Director
____________________________________
Thomas W. Jasper
</TABLE>
*By: /s/ Allyn R. Skelton,
I_________________________I
Allyn R. Skelton, II
Attorney-in-fact
II-3
<PAGE>
EXHIBIT INDEX
<TABLE>
<CAPTION>
SEQUENTIALLY
EXHIBIT NUMBERED
NO. DESCRIPTION PAGES
------- ----------- ------------
<C> <S> <C>
1.1 --Form of Underwriting Agreement
**3.1 --Form of Agreement of Limited Partnership of Genesis
Energy, L.P. ("Genesis") (included as Appendix A to
the Prospectus)
3.2 --Form of Agreement of Limited Partnership of Genesis
Crude Oil, L.P. (the "Operating Partnership")
(included as Appendix B to this Prospectus)
5.1 --Opinion of Andrews & Kurth L.L.P. as to the legality
of the securities being registered
**8.1 --Opinion of Andrews & Kurth L.L.P. relating to tax
matters
10.1 --Form of Purchase & Sale and Contribution & Conveyance
Agreement dated as of , 1996 among Basis
Petroleum, Inc. ("Basis"), Howell Corporation
("Howell"), certain subsidiaries of Howell, Genesis,
the Operating Partnership and Genesis Energy, L.L.C.
10.2 --Form of Distribution Support Agreement among Salomon
Inc and Genesis
10.3 --Form of Master Credit Support Agreement among Salomon
Inc, Basis and the Operating Partnership
10.4 --Form of Redemption and Registration Rights Agreement
among Basis, Howell and Genesis
10.5 --Form of Corporate Services Agreement between Basis
and Genesis
10.6 --Restricted Unit Plan
10.7 --Incentive Plan
10.8 --Form of Employment Agreement between Genesis Energy,
L.L.C. and certain executive officers
21.1 --List of Subsidiaries
**23.1 --Consent of Arthur Andersen LLP
**23.2 --Consent of Deloitte & Touche llp
**23.3 --Consent of Price Waterhouse LLP
**23.4 --Consent of Andrews & Kurth L.L.P. (included in
Exhibit 5.1 and Exhibit 8.1)
*24.1 --Powers of Attorney (included on signature page)
27.1 --Financial Data Schedule
</TABLE>
- --------
* Previously filed.
** Filed herewith.
<PAGE>
[LETTERHEAD OF ANDREWS & KURTH APPEARS HERE]
Exhibit 8.1
OCTOBER 17, 1996
Genesis Energy L.P.
One Allen Center
500 Dallas, Suite 3200
Houston, Texas 77002
TAX OPINION
Gentlemen:
We have acted as counsel to Genesis Energy, L.P. (the "Partnership") in
connection with the offering of up to 9,430,000 common units representing
limited partner interests ("Common Units") in the Partnership pursuant to the
Registration Statement on Form S-1 of the Partnership (Registration No. 333-
11545) relating to the Common Units (the "Registration Statement").
All statements of legal conclusions contained in the discussion under the
caption "Tax Considerations" in the prospectus included in the Registration
Statement, unless otherwise noted, reflect our opinion with respect to the
matters set forth therein.
In addition, based on the foregoing, we are of the opinion that the federal
income tax discussion in the prospectus included in the Registration Statement
with respect to those matters as to which no legal conclusions are provided is
an accurate discussion of such federal income tax matters (except for the
representations and statements of fact of the Partnership and its general
partner, included in such discussion, as to which we express no opinion).
We hereby consent to the references to our firm and this opinion contained
in the prospectus included in the Registration Statement.
Very truly yours,
Andrews & Kurth L.L.P.
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
As independent public accountants, we hereby consent to the use in this
registration statement of our reports dated June 20, 1996 and September 5,
1996 included herein and to all references to our Firm included in or made
part of this registration statement.
ARTHUR ANDERSEN LLP
Houston, Texas
October 16, 1996
<PAGE>
EXHIBIT 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Amendment No. 1 to Registration Statement No.
333-11545 of Genesis Energy, L.P. of our report dated August 9, 1996 appearing
in the Prospectus, which is part of such Registration Statement, and to the
reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Houston, Texas
October 16, 1996
<PAGE>
EXHIBIT 23.3
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Amendment No. 1 to Form S-1 of our report dated May
25, 1995, relating to the statement of revenues and direct operating expenses
of the Pipeline Systems for each year in the three-year period ended December
31, 1994 (commonly referred to as the Texas System, the Mississippi System and
the Jay System) which appears in such Prospectus. We also consent to the
reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
Houston, Texas
October 16, 1996
