<PAGE>
Filed Pursuant to Rule 424(b)(2)
Registration No. 333-93239
333-93239-01
Prospectus Supplement to Prospectus dated January 14, 2000
$350,000,000
Enterprise Products Operating L.P.
Unconditionally Guaranteed by
Enterprise Products Partners L.P. [Enterprise Logo]
8.25% Senior Notes Due 2005
Maturity
. The notes will mature on March 15, 2005.
Interest
. Interest on the notes is payable on March 15 and September 15 of each year,
beginning September 15, 2000.
. Interest will accrue from March 15, 2000.
Redemption
. We may redeem some or all of the notes at any time at a redemption price
described beginning on page S-14.
. There is no sinking fund.
Ranking
. The notes are unsecured.
. The notes rank equally with all of our existing and future unsecured and
unsubordinated indebtedness and senior to any future subordinated
indebtedness.
Guarantee
. If we fail to make payments on the notes, our parent company guarantor,
Enterprise Products Partners L.P., must make them instead. This guarantee
will be an unsecured and unsubordinated obligation of our parent company.
Listing
. We do not intend to list the notes on any securities exchange.
-----------------------------------------------------
Investing in the notes involves risks. See "Risk Factors" beginning on page 5
of the accompanying Prospectus.
-----------------------------------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined if
this prospectus supplement or the accompanying prospectus is accurate or
complete. Any representation to the contrary is a criminal offense.
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Per Note Total
- ---------------------------------------------------------------------
<S> <C> <C>
Initial Price to Public 99.948% $349,818,000
Underwriting Discount 0.600% $ 2,100,000
Proceeds to Us (Before Expenses) 99.348% $347,718,000
</TABLE>
Your purchase price will also include any interest that has accrued on the
notes from March 15, 2000.
-----------------------------------------------------
. The notes will be delivered to you . The underwriters listed below will
in global form through the book- purchase the notes from us on a
entry delivery system of The firm commitment basis and offer
Depository Trust Company on or them to you, subject to certain
about March 15, 2000. conditions.
Chase Securities Inc. Lehman Brothers
Banc One Capital Markets, Inc.
FleetBoston Robertson Stephens
First Union Securities, Inc.
Scotia Capital (USA) Inc.
SG Cowen
-----------------------------------------------------
The date of this prospectus supplement is March 10, 2000.
<PAGE>
[MONT BELVIEU FACILITY]
[Gulf Coast Assets Map]
<PAGE>
In making your investment decision, you should rely only on the information
contained in this prospectus supplement and the accompanying prospectus and
those items incorporated by reference herein. We have not authorized anyone to
provide you with any other information. If you receive any unauthorized
information, you must not rely on it.
We are offering to sell the notes only in places where sales are permitted.
You should not assume that the information contained or incorporated by
reference in this prospectus supplement or the attached prospectus is accurate
as of any date other than their respective dates.
----------------
TABLE OF CONTENTS
Prospectus Supplement
<TABLE>
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Page
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<S> <C>
Summary.................................................................... S-1
Use of Proceeds............................................................ S-6
Capitalization............................................................. S-6
Selected Financial Data.................................................... S-7
Business................................................................... S-10
</TABLE>
<TABLE>
<CAPTION>
Page
----
<S> <C>
Description of Notes....................................................... S-12
Underwriting............................................................... S-16
Legal Matters.............................................................. S-17
Experts.................................................................... S-17
</TABLE>
Prospectus
<TABLE>
<CAPTION>
Page
----
<S> <C>
Forward-Looking Statements................................................. 2
Where You Can Find More Information........................................ 3
Incorporation of Certain Documents by Reference............................ 3
The Company................................................................ 4
Risk Factors............................................................... 5
Use of Proceeds............................................................ 9
Ratio of Earnings to Fixed Charges......................................... 9
</TABLE>
<TABLE>
<CAPTION>
Page
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<S> <C>
Description of Debt Securities............................................. 10
Description of Common Units................................................ 23
Federal Income Tax Considerations.......................................... 32
Selling Unitholders........................................................ 46
Plan of Distribution....................................................... 46
Legal Matters.............................................................. 48
Experts.................................................................... 48
</TABLE>
i
<PAGE>
SUMMARY
This summary highlights selected information from this prospectus supplement
and the accompanying prospectus but does not contain all of the information
that is important to you or that you should consider in making an investment
decision. To understand all of the terms of the offering of the notes and to
attain a more complete understanding of our business and financial situation,
you should read carefully this entire prospectus supplement and the
accompanying prospectus. In this prospectus supplement, the terms "Issuer,"
"we," "our," "ours," and "us" refer to Enterprise Products Operating L.P. and
its subsidiaries, and the terms "Guarantor" and "our parent" refer to our
parent, Enterprise Products Partners L.P.
Enterprise Products Operating L.P. is a leading integrated North American
provider of processing and transportation services to domestic and foreign
producers of natural gas liquids ("NGLs") and other liquid hydrocarbons and
domestic and foreign consumers of NGL and liquid hydrocarbon products. We
manage a fully integrated and diversified portfolio of midstream energy assets
and are engaged in NGL processing and transportation through direct and
indirect ownership and operation of NGL fractionators. We also operate and/or
manage NGL processing facilities, storage facilities, pipelines, rail
transportation facilities, a methyl tertiary butyl ether ("MTBE") facility, a
propylene production complex and other transportation facilities in which we
have direct and indirect ownership interests. As a result of the recent
acquisition of Tejas Natural Gas Liquids LLC ("TNGL") described below, we are
also now engaged in natural gas processing.
We and our subsidiaries and joint ventures conduct substantially all the
business of our parent, Enterprise Products Partners L.P., a publicly traded
master limited partnership (NYSE, symbol "EPD"). We and our parent were formed
in April 1998 to acquire, own, and operate all of the NGL processing and
distribution assets of Enterprise Products Company ("EPCO"). EPCO manages our
business and affairs and employs the operating personnel involved in our
business for which EPCO is paid a monthly administrative services fee
(currently $1.55 million plus accrued employee incentive plan costs) plus
reimbursement for all expenses other than selling, general and administrative
expenses.
Our parent completed a public offering of 12,000,000 common units on July
27, 1998, of which 1,458,313 common units were acquired, as of December 31,
1999, by EPCO's affiliates. The remaining 10,541,687 common units currently
represent a 12.8% equity interest in our parent. The net proceeds of the
offering were approximately $243.3 million. In connection with the acquisition
of TNGL, effective as of August 1, 1999, our parent issued 14,500,000 non-
distribution bearing, convertible special units, representing a 17.6% equity
interest, to Tejas Energy LLC, now Coral Energy LLC, an affiliate of Shell Oil
Company, on September 17, 1999. All references herein to "Shell", unless the
context indicates otherwise, shall refer collectively to Shell Oil Company, its
subsidiaries and affiliates. Shell also has the right to receive up to
6,000,000 additional non-distribution bearing, convertible special units, as
described under "--Recent Acquisitions," and if all such units are issued,
Shell would own an approximate 24% equity interest in our parent. As of
December 31, 1999, EPCO and its affiliates held 35,011,228 common units and
21,409,870 subordinated units, representing an aggregate 68.6% equity interest
in our parent. Our general partner, Enterprise Products GP, LLC (the "General
Partner"), a majority-owned subsidiary of EPCO, holds a 1.0% general partner
interest in our parent and a 1.0101% general partner interest in our company.
Our parent holds a 98.9899% limited partner interest in our company.
We own, operate and manage:
. natural gas processing plants;
. NGL fractionation facilities;
S-1
<PAGE>
. propylene production facilities;
. isobutane production facilities;
. MTBE production facilities;
. storage facilities;
. rail transportation facilities;
. pipelines; and
. import/export assets.
Certain of these facilities are owned jointly by us and other industry
partners, either through co-ownership arrangements or joint ventures. Some of
these jointly owned facilities are operated by other owners.
The following chart shows our organizational structure:
COMPANY ORGANIZATION CHART FOR
ENTERPRISE PRODUCTS COMPANY (EPCO) AND SUBSIDIARIES
AS OF DECEMBER 31, 1999
[Chart]
Our Business Strategy
Our business strategy is to grow our core assets and maximize the returns to
our unitholders. We intend to pursue this strategy principally by:
Capitalizing on Expected Increases in NGL Production. We believe production
of both oil and natural gas in the Gulf of Mexico will continue to increase
over the next several years. We intend to capitalize on our existing
infrastructure, market position, strategic relationships and financial
flexibility to expand our operations to meet the anticipated increased demand
for NGL processing
S-2
<PAGE>
services. Of particular significance will be production associated with the
development of natural gas fields in Mobile Bay and the Gulf of Mexico offshore
Louisiana, which are expected to produce natural gas with significantly higher
NGL content than typical domestic production. We believe the Gulf Coast is the
only major marketplace that has sufficient storage facilities, pipeline
distribution systems and petrochemical and refining demand to absorb this new
NGL production. In connection with the TNGL acquisition, Shell entered into a
20 year natural gas processing agreement with us, covering substantially all of
the Shell entities' Gulf of Mexico natural gas production ("Shell Processing
Agreement").
Expanding Through Construction of Identified New Projects. We are currently
participating in the construction of:
. a new propylene concentrator adjacent to the Baton Rouge NGL
fractionation facility (scheduled for completion in the third quarter of
2000), in which our ownership interest will be 30%; and
. a wholly-owned, 206-mile, 12" NGL pipeline (the "Lou-Tex NGL" pipeline)
from Breaux Bridge, Louisiana to Mont Belvieu, Texas, with a capacity of
50,000 barrels per day, in batch mode, for the transportation of mixed
NGLs and NGL products. The pipeline is being designed to allow for
efficient expansion to approximately 80,000 barrels per day.
Construction of the Lou-Tex NGL pipeline is expected to be completed
during the fourth quarter of 2000.
Investing with Strategic Partners. We will continue to pursue joint
investments with oil and natural gas producers that can commit feedstock
volumes to new facilities or with petrochemical companies that agree to
purchase a significant portion of the production from new facilities. We
believe commitments from producers to bring NGL volumes to new fractionation
facilities and pipelines are central to establishing the viability of new
investments in the NGL processing and transportation industry.
Expanding Through Acquisitions. We will continue to analyze potential
acquisitions, joint ventures or similar transactions with businesses that
operate in complementary markets and geographic regions. In recent years, major
oil and natural gas companies have sold non-strategic assets including assets
in the midstream natural gas industry, such as those we acquired from Shell in
the TNGL acquisition. We believe this trend will continue, and we expect
independent oil and natural gas companies to consider similar options.
Managing Commodity Price Exposure. A substantial portion of our operations
are conducted pursuant to tolling contracts or involve NGL transportation where
we process, transport and store a raw feedstock or product for a fee and do not
take title to the product. When we do take title to the products we process,
the following scenarios apply:
. In our isomerization merchant activities, and to a certain extent our
propylene fractionation business, we generally attempt to match the
timing and price of our feedstock purchases with those of the sales of
end products so as to reduce exposure to fluctuations in commodity
prices.
. In our natural gas processing business, to the extent we take title to
the NGLs removed from the natural gas stream and reimburse the producer
for the reduction in the Btu content and/or the natural gas used as
fuel, our margins are affected by the prices of NGLs and natural gas.
From time to time we use financial instruments to reduce our exposure to
fluctuations in the prices of NGLs and natural gas.
S-3
<PAGE>
Recent Acquisitions and Developments
TNGL Acquisition. As noted above, effective August 1, 1999 we acquired TNGL
from Shell, in exchange for 14.5 million non-distribution bearing, convertible
special partner units ("Special Units") of our parent and a cash payment of
$166 million (the "TNGL acquisition"). Our parent also agreed to issue up to
6.0 million non-distribution bearing, convertible special units ("Contingency
Units") to Shell in the future if the volumes of natural gas that we process
for Shell reach certain agreed upon levels in 2000 and 2001. The businesses
acquired from Shell include natural gas processing and NGL fractionation,
transportation and storage in Louisiana and Mississippi and its NGL supply and
merchant business. The assets acquired include varying interests in 11 natural
gas processing plants, four NGL fractionation facilities, and four NGL storage
facilities and operator and non-operator ownership interests in approximately
1,500 miles of NGL pipelines.
Our major customer related to the TNGL assets is Shell. Under the terms of
the Shell Processing Agreement, we have the right to process substantially all
of Shell's current and future natural gas production from the Gulf of Mexico.
This includes natural gas production from the developments currently referred
to as deepwater. Generally, the Shell Processing Agreement grants us the
following rights and obligations:
. the exclusive right to process any and all of Shell's Gulf of Mexico
natural gas production from existing and future dedicated leases; plus
. the right to all title, interest, and ownership in the raw make
extracted by our gas processing facilities from Shell's natural gas
production from such leases; with
. the obligation to deliver to Shell the natural gas stream after the raw
make is extracted.
Mont Belvieu NGL Fractionation Facility. Effective July 1, 1999, we acquired
an additional 25% interest in the Mont Belvieu NGL fractionation facility from
Kinder Morgan Operating LP "A" ("Kinder Morgan") for a purchase price of
approximately $41.2 million in cash and the assumption of $4 million in debt.
We also purchased an additional 0.5% interest in the same facility from EPCO
for a cash price of $0.9 million. These acquisitions (referred to as the "MBA
acquisition") increased our effective economic interest in the Mont Belvieu NGL
fractionation facility from 37.0% to 62.5%. As a result of these acquisitions,
the results of operations of this facility after July 1, 1999 were consolidated
rather than included in equity in earnings of unconsolidated affiliates.
Lou-Tex Propylene Pipeline. Effective March 1, 2000, we acquired certain
Louisiana and Texas pipeline assets from Shell, for approximately $100 million
in cash. The principal asset acquired was the Lou-Tex Propylene Pipeline which
is 263 miles of 10" pipeline from Sorrento, Louisiana to Mont Belvieu, Texas.
The Lou-Tex Propylene Pipeline is currently dedicated to the transportation of
chemical grade propylene from Sorrento to the Mont Belvieu area. Also acquired
in this transaction was 27.5 miles of 6" ethane pipeline between Sorrento and
Norco, Louisiana, and a 0.5 million barrel storage cavern at Sorrento,
Louisiana. The acquisition of the Lou-Tex Propylene Pipeline is our first step
in the development of an approximately $180 million, 160,000 barrel per day
Louisiana-to-Texas NGL Pipeline system from Sorrento, Louisiana to Mont
Belvieu, Texas, scheduled for completion in the third quarter of 2000. This
larger system will link growing supplies of NGLs produced in Louisiana and
Mississippi with the principal NGL markets on the United States Gulf Coast.
Expiration of Offer to Dixie Pipeline Company. On March 8, 2000, the offer
we made on February 23, 2000 to buy the remaining 88.5% ownership interests in
Dixie Pipeline Company from the other seven owners expired, with no interests
being purchased.
S-4
<PAGE>
The Offering
Securities Offered.......... $350 million principal amount of 8.25% notes due
2005.
Maturity Date............... March 15, 2005.
Interest Payment Dates...... March 15 and September 15 of each year,
commencing September 15, 2000.
Optional Redemption......... At any time, we may redeem any or all of the
notes in principal amounts of $1,000 or any
integral multiple thereof. We will pay a
redemption price equal to the greater of (i) 100%
of the principal amount of the notes to be
redeemed or (ii) the sum of the present values of
the remaining scheduled payments of principal and
interest (at the rate in effect on the date of
calculation of the redemption price) thereon
(exclusive of interest accrued to the date of
redemption) discounted to the date of redemption
on a semiannual basis (assuming a 360-day year
consisting of twelve 30-day months) at the
applicable Treasury Yield (as defined) plus 25
basis points, plus, in either case, accrued
interest to the date of redemption. See
"Description of Notes-- Optional Redemption"
beginning on page S-14.
Ranking..................... The notes:
. are unsecured; and
. rank equally with all of our existing and
future senior unsecured and unsubordinated
indebtedness and are senior to any future
subordinated indebtedness.
Covenants................... We will issue the notes under an indenture
containing certain covenants for your benefit.
These covenants restrict the ability of our
parent and us, with certain exceptions, to:
. incur debt secured by liens; and
. engage in sale/leaseback transactions.
Guarantee................... The notes will be unconditionally guaranteed by
our parent, Enterprise Products Partners L.P. The
guarantee will be an unsecured and unsubordinated
obligation of our parent.
Use of Proceeds............. We intend to use the net proceeds of
approximately $347.5 million to retire all
outstanding indebtedness under our $200 million
bank credit facility and to repay indebtedness
outstanding under our $350 million bank credit
facility. Any amount remaining after such
repayment will be used for general company
purposes.
S-5
<PAGE>
USE OF PROCEEDS
The net proceeds of the offering are expected to be approximately $347.5
million, after deducting discounts to the underwriters and other estimated
offering expenses. We expect to use such net proceeds to retire all
indebtedness outstanding ($169 million at March 1, 2000) under our $200 million
bank credit facility and to repay to the extent funds are available
indebtedness outstanding ($226 million at March 1, 2000) under our $350 million
bank credit facility. Any amount remaining after such repayment will be used
for general company purposes. At December 31, 1999, the weighted average
interest rates on the $200 million and $350 million bank credit facilities were
6.74% and 7.10%, respectively. The indebtedness outstanding under the bank
credit facilities was incurred for the following purposes:
. To finance $166 million in connection with the TNGL acquisition;
. To finance $42 million in connection with the MBA acquisition;
. To finance $100 million for the purchase of the Lou-Tex Propylene
Pipeline; and
. To finance our portion of the cost of certain other projects and for
working capital.
We intend to maintain our $350 million bank credit facility for the
remainder of its term (which expires in July 2001). We plan to borrow $54
million in March 2000 from the Mississippi Business Finance Corporation to
finance our portion of construction cost of the Pascagoula gas processing
plant, repay additional indebtedness outstanding under the $350 million bank
credit facility and for other company purposes. Our parent will also guarantee
that indebtedness.
CAPITALIZATION
The following table sets forth the capitalization of the Guarantor as of
December 31, 1999 and as adjusted to give effect to this offering and the
application of the net proceeds therefrom. The table should be read together
with the historical financial statements and notes thereto incorporated by
reference in this prospectus supplement and the accompanying prospectus.
<TABLE>
<CAPTION>
As of December 31,
1999
-----------------------
Actual As Adjusted
---------- -----------
(in thousands of
dollars)
<S> <C> <C>
Long-term debt (including current portion):
Senior notes (including original issue discount)..... $ -- $ 350,000
Revolving credit facilities.......................... 295,000 --
---------- ----------
Total indebtedness................................. $ 295,000 $ 350,000
========== ==========
Partners' equity:
Common Units......................................... 428,707 428,707
Subordinated Units................................... 131,688 131,688
Special Units........................................ 225,855 225,855
Treasury Units....................................... (4,727) (4,727)
General partner interests............................ 7,942 7,942
---------- ----------
Total partners' and combined equity................ 789,465 789,465
---------- ----------
Total capitalization............................. $1,084,465 $1,139,465
========== ==========
</TABLE>
S-6
<PAGE>
SELECTED FINANCIAL DATA
The following tables set forth for the periods and at the dates indicated,
selected historical financial and operating data for the Guarantor and pro
forma financial and operating data for the Guarantor. Since the Guarantor owns
no material assets other than its 98.9899% limited partnership interest in the
Issuer, the Issuer's financial and operating data is substantially the same as
that of the Guarantor. The selected historical operating statement data for the
five years ended December 31, 1999, and the balance sheet data as of December
31 in each of the five years ended December 31, 1999, are derived from the
historical audited financial statements of the Guarantor. The data included
below should be read in conjunction with the financial statements included or
incorporated by reference in this prospectus supplement and the accompanying
prospectus. The selected pro forma financial and operating data of the
Guarantor gives effect to the TNGL acquisition and the acquisition of the
additional 25.5% interest in the Mont Belvieu NGL fractionation facility as if
they had occurred on January 1, 1999. The selected pro forma and operating data
do not purport to be indicative of the results of operations that would have
occurred or that may be obtained in the future if the transactions described
had occurred on January 1, 1999. For a more detailed discussion of the
financial data, see also "Management's Discussion and Analysis of Financial
Condition and Results of Operations" in the Guarantor's Annual Report on Form
10-K for the year ended December 31, 1999 (the "1999 Annual Report")
incorporated by reference herein.
<TABLE>
<CAPTION>
Guarantor--Historical Pro Forma
------------------------------------------------------ ------------
For Year Ended December 31 Year Ended
------------------------------------------------------ December 31,
1995 1996 1997(1) 1998(1) 1999(1)(7) 1999(9)
-------- ---------- ---------- -------- ---------- ------------
(in thousands, except per Unit data)
<S> <C> <C> <C> <C> <C> <C>
Income Statement Data
Revenues from
consolidated
operations............ $790,080 $ 999,506 $1,020,281 $738,902 $1,332,979 $1,714,222
Equity in income of
unconsolidated
affiliates............ 12,274 15,756 15,682 15,671 13,477 12,294
-------- ---------- ---------- -------- ---------- ----------
Total revenues......... $802,354 $1,015,262 $1,035,963 $754,573 1,346,456 1,726,516
Operating costs and
expenses (2).......... 719,389 907,524 938,392 685,884 1,201,605 1,557,442
-------- ---------- ---------- -------- ---------- ----------
Operating margin....... 82,965 107,738 97,571 68,689 144,851 169,074
Selling, general and
administrative
expenses (2,3)........ 21,120 23,070 21,891 18,216 12,500 12,500
-------- ---------- ---------- -------- ---------- ----------
Operating income....... 61,845 84,668 75,680 50,473 132,351 156,574
Interest expense....... (27,567) (26,310) (25,717) (15,057) (16,439) (30,160)
Interest income........ 554 2,705 1,934 772 886 946
Interest income from
unconsolidated
affiliates............ -- -- -- 809 1,667 1,387
Dividend income from
unconsolidated
affiliates............ -- -- -- -- 3,435 4,849
Other income (expense),
net................... 305 364 793 358 (379) (244)
-------- ---------- ---------- -------- ---------- ----------
Income before
extraordinary charge
and minority
interest.............. 35,137 61,427 52,690 37,355 121,521 133,352
Extraordinary charge on
early extinguishment
of debt............... -- -- -- (27,176) -- --
-------- ---------- ---------- -------- ---------- ----------
Income before minority
interest.............. 35,137 61,427 52,690 10,179 121,521 133,352
Minority interest...... (351) (614) (527) (102) (1,226) (1,347)
-------- ---------- ---------- -------- ---------- ----------
Net income............. $ 34,786 $ 60,813 $ 52,163 $ 10,077 $ 120,295 $ 132,005
======== ========== ========== ======== ========== ==========
Net income per Unit,
basic (4)............. $ 0.63 $ 1.10 $ 0.94 $ 0.17 $ 1.79 $ 1.96
Number of Units used
for basic EPU (in
000s)................. 54,962.8 54,962.8 54,962.8 60,124.4 66,710.4 66,710.4
Net income per Unit,
diluted (4)........... -- -- -- -- 1.64 1.61
Number of Units used
for diluted EPU (in
000s)................. -- -- -- -- 72,788.5 81,210.4
Dividends declared per
Common Unit........... -- -- -- 0.77 1.85
Balance Sheet Data (at
year end):
Total assets........... $610,931 $ 711,151 $ 697,713 $741,037 $1,494,952
Long-term debt......... 281,656 255,617 230,237 90,000 295,000
Combined equity /
Partners' equity...... 198,815 266,021 311,885 562,536 789,465
Other Financial Data:
Cash flows from
operating activities.. $ 12,212 $ 91,431 $ 57,795 $(20,294) $ 168,810
Cash flows from
investing activities.. (9,233) (57,725) (30,982) (50,695) (265,221)
Cash flows from
financing activities.. 11,995 (24,930) (26,551) 61,238 77,538
EBITDA (5)............. 65,406 87,109 79,882 55,472 147,050
EBITDA of
unconsolidated
affiliates (6)........ 18,520 25,012 24,372 23,912 23,425
Ratio of Earnings to
fixed charges (8)..... 1.73 2.38 2.11 1.16 5.84 4.34
</TABLE>
S-7
<PAGE>
- --------
Notes
(1) Differences between the consolidated financial statements of the Issuer and
the Guarantor are not significant. See note 18 to the Guarantor's
consolidated financial statements included in Guarantor's Annual Report on
Form 10-K for condensed financial information of the Issuer and
reconciliation of net income of Guarantor and Issuer.
(2) Certain 1995 through 1998 amounts have been reclassified to conform to the
1999 presentation.
(3) 1998 and 1999 expenses are lower than previous years amounts due to the
adoption of an agreement dated July 27, 1998 between EPCO and the Guarantor
(the "EPCO Agreement") pursuant to which, among other things, all
management, administrative and operating functions are performed by
employees of EPCO. Operating costs and expenses include charges for EPCO's
employees who operate our various facilities. Such charges are based upon
EPCO's actual salary costs and related fringe benefits.
(4) Basic net income per Unit is computed by dividing the limited partners' 99%
interest in net income by the weighted average of the number of Common and
Subordinated Units outstanding. Diluted net income per Unit is computed by
dividing the limited partners' 99% interest in net income by the weighted
average of the number of Common, Subordinated and Special Units
Outstanding.
(5) EBITDA is defined as net income plus depreciation and amortization and
interest expense less equity in income of unconsolidated affiliates.
Interest expense (excluding amortization of loan costs) was $14.7 million
and $14.9 million in 1998 and 1999, respectively. EBITDA should not be
considered as an alternative to net income, operating income, cash flow
from operations or any other measure of financial performance presented in
accordance with generally accepted accounting principles. EBITDA is not
intended to represent cash flow and does not represent the measure of cash
available for distribution, but provides additional information for
evaluating the Guarantor's ability to make the minimum quarterly
distribution. Management uses EBITDA to assess the viability of projects
and to determine overall rate of returns on alternative investment
opportunities. Because EBITDA excludes some, but not all, items that affect
net income and this measure may vary among companies, the EBITDA data
presented above may not be comparable to similarly titled measures of other
companies. EBITDA for 1998 excludes the extraordinary charge of $27.2
million related to the early extinguishment of debt.
(6) Represents the Guarantor's pro rata share of net income plus depreciation
and amortization and interest expense of the unconsolidated affiliates.
(7) 1999 amounts reflect the impact of the TNGL and MBA acquisitions. The TNGL
acquisition was effective August 1, 1999 and the MBA acquisition was
effective July 1, 1999.
(8) The ratio of earnings to fixed charges and the pro forma ratios of earnings
to fixed charges have been calculated as provided in the accompanying
prospectus.
(9) The pro forma net income for 1999 includes $3,064 in interest expense and
$31 in minority interest that are not applicable to the pro forma 1999
results in the Guarantor's 1999 Annual Report on Form 10-K.
S-8
<PAGE>
Results of Operations--1999 vs. 1998
Revenues, Costs and Expenses and Operating Income. Revenues increased by
78.4% to $1,346.5 million in 1999 compared to $754.6 million in 1998. Costs and
expenses increased by 75.2% to $1,201.6 million in 1999 versus $685.9 million
in 1998. Operating income before selling, general and administrative expenses
("SG&A") increased 110.9% to $144.9 million in 1999 from $68.7 million in 1998.
The principal factor behind the $76.2 million increase in operating income
before SG&A was the TNGL acquisition. Earnings attributable to these assets
from the date of acquisition, August 1, 1999, through December 31, 1999 added
approximately $48.4 million in gross operating margin to our financial
performance. The other primary source of the increase was an overall
improvement in NGL product prices in 1999 over 1998 levels.
Fractionation. Gross operating margin for the Fractionation segment
increased to $106.3 million in 1999 from $66.6 million in 1998. The increase is
associated with a number of factors including:
. an overall improvement in the isomerization business due to an increase
in production volumes and higher pricing in the first half of 1999;
. the addition of the Norco NGL fractionation facility operating results
(acquired in the TNGL acquisition);
. higher earnings in the propylene production business stemming from a
rebound in propylene prices and an increase in propylene production; and
. the acquisition of the additional 25.5% interest in of the Mont Belvieu
NGL fractionation facility.
Pipeline. Gross operating margin for the Pipeline segment was $27.0 million
in 1999 as compared to $27.3 million in 1998. Earnings generated from the
Louisiana Pipeline Distribution System increased $3.2 million on an increase in
pipeline volumes. Throughput volumes increased from 40 thousand barrels per day
("MBPD") in 1998 to 48 MBPD in 1999 on the pre-TNGL acquisition system. With
the post-TNGL acquisition volumes added, the throughput (on a pro rata basis
from August 1, 1999) increased to 104 MBPD. The increase in earnings from the
Louisiana System was offset by declines in our Houston Ship Channel
Distribution system of $0.5 million and at our import terminal of $1.5 million.
The decrease for both the Houston Ship Channel Distribution System on our
import terminal are generally attributable to lower butane import volumes.
Processing. Gross operating margin for Processing was $36.8 million in 1999
compared to a loss of $0.7 million in 1998. Of the increase, $36.4 million is
due to the gas processing operations acquired in the TNGL acquisition effective
August 1, 1999. The gas processing operations benefited from a favorable NGL
pricing environment where the ratio of crude oil to natural gas prices averaged
10 to 1 during the fourth quarter of 1999.
Octane Enhancement. Gross operating margin for Octane Enhancement decreased
to $8.2 million in 1999 from $9.8 million in 1998. This segment consists
entirely of equity earnings and investment in a joint venture facility that
currently produces MTBE. The decrease in equity earnings from this joint
venture can be attributed a $4.5 million non-cash write-off in January 1999 of
the unamortized balance of deferred start-up costs. Our share of this non-cash
charge was $1.5 million.
Other. Gross operating margin for the Other segment was $0.9 million in 1999
compared to a loss of $3.5 million in 1998. Beginning in 1999, this segment
includes fee-based marketing services, which were acquired as part of the TNGL
acquisition. For the period August 1, 1999 through December 31, 1999, this
business earned $0.6 million. Apart from this portion of the segment's
operations, the gross margin contribution of the other aspects of this segment
were insignificant in both 1999 and 1998.
S-9
<PAGE>
Selling, general and administrative expenses. SG&A expenses decreased to
$12.5 million in 1999 from $18.2 million in 1998. SG&A expenses are covered by
the administrative services fee found in EPCO Agreement. On July 7, 1999, the
Audit and Conflicts Committee of the General Partner authorized an increase in
the administrative services fee to $1.1 million per month from the initial $1.0
million per month. The increased fees were effective August 1, 1999. Beginning
in January 2000, the administrative services fee will increase to $1.55 million
per month plus accrued employee incentive plan costs to compensate EPCO for the
additional SG&A charges related to the additional administrative employees
acquired in the TNGL acquisition.
Interest expense. Interest expense increased to $16.4 million in 1999
compared to $15.1 million in 1998. While average debt levels remained generally
consistent in 1999 compared to 1998, interest expense increased due to the
amortization of loan origination costs. Debt service costs will increase in the
future as a result of additional borrowings for possible acquisitions and
working capital needs.
Dividend income from unconsolidated affiliates. Investments in two
unconsolidated affiliates are recorded using the cost method as prescribed by
generally accepted accounting principles. In accordance with these guidelines,
the cash distributions from these investments is recorded as dividend income as
opposed to showing equity earnings. Both of these investments were acquired as
part of the TNGL acquisition. For 1999, dividend income was recorded from these
investments in the amounts of $0.8 million and $2.6 million, respectively.
BUSINESS
General
We (i) process natural gas; (ii) fractionate for a processing fee mixed NGLs
produced as by-products of oil and natural gas production into their component
products: ethane, propane, isobutane, normal butane and natural gasoline; (iii)
convert normal butane to isobutane through the process of isomerization; (iv)
produce MTBE from isobutane and methanol; and (v) transport NGL products to end
users by pipeline and railcar. We also separate high purity propylene from
refinery-sourced propane/propylene mix and transport high purity propylene to
plastics manufacturers by pipeline. Products we process generally are used as
feedstocks in petrochemical manufacturing, in the production of motor gasoline
and as fuel for residential and commercial heating.
Our NGL processing operations are concentrated in the Texas, Louisiana, and
Mississippi Gulf Coast area. A large portion is concentrated in Mont Belvieu,
Texas, which is the hub of the domestic NGL industry and is adjacent to the
largest concentration of refineries and petrochemical plants in the United
States. The facilities we operate at Mont Belvieu include: (i) one of the
largest NGL fractionation facilities in the United States with an average
production capacity of 210,000 barrels per day; (ii) the largest butane
isomerization complex in the United States with an average isobutane production
capacity of 116,000 barrels per day; (iii) a MTBE production facility in the
United States with an average production capacity of 14,800 barrels per day;
and (iv) two propylene fractionation units with an average combined production
capacity of 31,000 barrels per day. We own all of the assets at our Mont
Belvieu facility except for the NGL fractionation facility, in which we own an
effective 62.5% economic interest (see Summary-Recent Acquisitions); one of the
propylene fractionation units, in which we own a 54.6% interest and control the
remaining interest through a long-term lease; the MTBE production facility, in
which we own a 33.33% interest; and one of our three isomerization units and
one deisobutanizer which are held under long-term leases with purchase options.
We also own and operate approximately 35 million barrels of storage capacity at
Mont Belvieu, Texas, Breaux Bridge, Louisiana and Petal, Mississippi, which are
an integral part of our processing operations. In addition, we own and operate
a NGL fractionation facility in Petal, Mississippi with an average production
capacity of 7,000 barrels per day. We also lease and operate one of only two
commercial NGL import/export terminals on the Gulf Coast.
S-10
<PAGE>
As a result of the TNGL acquisition, we acquired, effective August 1, 1999:
. the Shell Processing Agreement;
. varying interests in 11 natural gas processing plants (including one
under construction) with a combined gross capacity of 11.0 billion cubic
feet per day ("Bcfd") and net capacity of 3.1 Bcfd;
. four NGL fractionation facilities with a combined gross capacity of
281,000 BPD and net capacity of 131,500 BPD;
. four NGL storage facilities with approximately 28.8 million barrels of
gross capacity and 8.8 million barrels of net capacity; and
. operator and non-operator interest in approximately 1,500 miles of
pipelines.
We also own operating and non-operating ownership interests in an additional
900 miles of NGL pipelines along the Gulf Coast.
Industry Environment
Because certain NGL products compete with other refined petroleum products
in the fuel and petrochemical feedstock markets, NGL product prices are set by
or in competition with refined petroleum products. Increased production and
importation of NGLs and NGL products in the United States may decrease NGL
product prices in relation to refined petroleum alternatives and thereby
increase consumption of NGL products as NGL products are substituted for other
more expensive refined petroleum products. Conversely, a decrease in the
production and importation of NGLs and NGL products could increase NGL product
prices in relation to refined petroleum product prices and thereby decrease
consumption of NGLs. However, because of the relationship of crude oil and
natural gas production to NGL production, we believe any imbalance in the
prices of NGLs and NGL products and alternative products would be temporary.
When the price of crude oil is a multiple of ten or more to the price of
natural gas (i.e., crude oil $20 per barrel and natural gas $2 per thousand
cubic feet ("MCF")), NGL pricing has been strong due to increased use in
manufacturing petrochemicals. In 1999, the industry experienced an annualized
multiple of approximately nine (i.e., crude oil $19.29 per barrel (based on an
average of published Cushing Oklahoma prices) and natural gas $2.27 per MCF
(based on an average of published Henry Hub prices)), which caused
petrochemical manufacturing demand to change from a preference for crude oil
derivatives to a reliance on NGLs. In 1998, when the annualized multiple was
approximately seven, petrochemical manufacturing demand relied on crude oil
derivatives which depressed NGL prices. This change resulted in the increasing
of both the production and pricing of NGLs. In the NGL industry, revenues and
cost of goods sold can fluctuate significantly up or down based on current NGL
prices. However, except in our gas processing business, operating margins will
generally remain constant except for the effect of inventory price adjustments
or increased operating expenses. In our gas processing business, a decrease in
the difference between natural gas and NGL prices generally results in lower
margins on volumes processed.
Business Segments
Historically, we have had only one reportable business segment: NGL
Operations. Due to the broadened scope of our operations with the acquisition
of TNGL in the third quarter of 1999, our operations are being managed using
the following five reportable business segments to better reflect the earnings
and activities in each of our major lines of business:
. Fractionation
. Pipeline
S-11
<PAGE>
. Processing
. Octane Enhancement
. Other
Fractionation includes NGL fractionation, polymer grade propylene
fractionation and butane isomerization (converting normal butane into high
purity isobutane) services. Pipeline consists of pipeline, storage and
import/export terminal services. Processing includes the natural gas processing
business and its related NGL merchant activities. Octane Enhancement is
conducted through our 33.33% ownership interest in a facility that produces
motor gasoline additives to enhance octane (currently producing MTBE). The
Other operating segment consists of fee-based marketing services and other
plant support functions.
Our management evaluates segment performance on the basis of gross operating
margin. Gross operating margin reported for each segment represents earnings
before depreciation, lease expense obligations retained by our largest
Unitholder, EPCO, and general and administrative expenses. In addition, segment
gross operating margin is exclusive of interest expense, interest income (from
unconsolidated affiliates or others), dividend income from unconsolidated
affiliates, minority interest, extraordinary charges and other income and
expense transactions. Our equity earnings from unconsolidated affiliates are
included in segment gross operating margin. Segment gross operating margin is
inclusive of intersegment revenues. Such revenues, which have been eliminated
from the consolidated totals, are recorded at arms-length prices which are
intended to approximate the prices charged to external customers. Segment
assets consists of property, plant and equipment and the amount of investments
in and advances to equity and cost method investees.
Our gross operating margins by segment (in thousands) along with a
reconciliation to consolidated operating income over the past three years were
as follows:
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------
1997 1998 1999
-------- ------- --------
<S> <C> <C> <C>
Gross Operating Margin by segment:
Fractionation..................................... $100,770 $66,627 $106,267
Pipeline.......................................... 23,909 27,334 27,038
Processing........................................ (3,778) (652) 36,799
Octane enhancement................................ 9,305 9,801 8,183
Other............................................. (1,496) (3,483) 908
-------- ------- --------
Gross Operating margin total........................ 128,710 99,627 179,195
Depreciation and amortization..................... 17,684 18,579 23,664
Retained lease expense, net....................... 13,300 12,635 10,557
Loss (gain) on sale of assets..................... 155 (276) 123
Selling, general, and administrative expenses..... 21,891 18,216 12,500
-------- ------- --------
Consolidated operating income....................... $ 75,680 $50,473 $132,351
======== ======= ========
</TABLE>
DESCRIPTION OF NOTES
The notes are a series of debt securities described in the accompanying
prospectus that will be issued under an Indenture dated as of March 15, 2000
(the "Indenture"), among Enterprise Products Operating L.P., Enterprise
Products Partners L.P., as guarantor, and First Union National Bank, as trustee
(the "Trustee").
This Description of Notes is intended to be a useful overview of the
material provisions of the notes and is intended to supplement, and to the
extent of any inconsistency replace, the description
S-12
<PAGE>
of the general terms and provisions of the debt securities set forth in the
accompanying prospectus. Since this Description of Notes is only a summary, you
should refer to the Indenture for a complete description of our obligations and
your rights.
References in this Description of Notes to the "Issuer," "we" or "us" mean
only Enterprise Products Operating L.P. and not its subsidiaries.
General
The Notes. The notes:
. are general unsecured, senior obligations of the Issuer;
. constitute a series of debt securities issued under the Indenture and
will be limited to an aggregate principal amount of $350 million;
. mature on March 15, 2005;
. will be issued in denominations of $1,000 and integral multiples of
$1,000;
. will be represented by one or more registered notes in global form, but
in certain circumstances may be represented by notes in definitive form.
See "Description of Debt Securities--Book-Entry, Delivery and Form" in
the accompanying Prospectus; and
. will be unconditionally guaranteed on a senior unsecured basis by our
parent, Enterprise Products Partners L.P., and references in this
Description of Notes to the Guarantor mean only such entity and not its
subsidiaries. See "--Guarantee".
Interest. Interest on the notes will:
. accrue at the rate of 8.25% per annum;
. accrue from the date of issuance or the most recent interest payment
date;
. be payable in cash semi-annually in arrears on March 15 and September 15
of each year, commencing on September 15, 2000;
. be payable to the holders of record on the March 1 and September 1
immediately preceding the related interest payment dates; and
. be computed on the basis of a 360-day year comprised of twelve 30-day
months.
Payment and Transfer.
Principal of, premium, if any, and interest on the notes will be payable,
and the notes may be exchanged or transferred, at the office or agency
maintained by us for such purpose (which initially will be the corporate trust
office of the Trustee located at 50 Broad Street, 5th Floor, Suite 550, New
York, New York 10004). Payment of principal of, premium, if any, and interest
on notes in global form registered in the name of or held by the Depositary or
its nominee will be made in immediately available funds to the Depositary or
its nominee, as the case may be, as the registered holder of such global note.
If any of the notes are no longer represented by global notes, payment of
interest on the notes in definitive form may, at our option, be made by check
mailed directly to holders at their registered addresses.
A holder may transfer or exchange notes in definitive form at the same
location given in the preceding paragraph. No service charge will be made for
any registration of transfer or exchange of notes, but we may require payment
of a sum sufficient to cover any transfer tax or other similar governmental
charge payable in connection therewith. We are not required to transfer or
exchange any note selected for redemption or for a period of 15 days before a
selection of notes to be redeemed.
The registered holder of a note will be treated as the owner of it for all
purposes.
S-13
<PAGE>
Optional Redemption
The notes will be redeemable, at our option, at any time in whole, or from
time to time in part, upon not less than 30 and not more than 60 days' notice
mailed to each holder of notes to be redeemed at the holder's address appearing
in the note register, at a price equal to the greater of (i) 100% of the
principal amount of the notes to be redeemed or (ii) the sum of the present
values of the remaining scheduled payments of principal and interest (at the
rate in effect on the date of calculation of the redemption price) thereon
(exclusive of interest accrued to the date of redemption) discounted to the
date of redemption on a semiannual basis (assuming a 360-day year consisting of
twelve 30-day months) at the applicable Treasury Yield plus 25 basis points,
plus, in either case, accrued interest to the date of redemption.
Notes called for redemption become due on the date fixed for redemption (the
"Redemption Date"). Notices of redemption will be mailed by first-class mail at
least 30 but not more than 60 days before the Redemption Date to each holder of
record of the notes to be redeemed at its registered address. The notice of
redemption for the notes will state the amount to be redeemed. On and after the
Redemption Date, if monies for the redemption of the notes to be redeemed have
been made available with the Trustee, interest will cease to accrue on any
notes that have been called for redemption. If less than all the notes are
redeemed at any time, the Trustee will select notes on a pro rata basis or by
any other method the Trustee deems fair and appropriate.
For purposes of determining the optional redemption price, the following
definitions are applicable:
"Treasury Yield" means, with respect to any Redemption Date applicable to
the notes, the rate per annum equal to the semi-annual equivalent yield to
maturity (computed as of the third business day immediately preceding such
Redemption Date) of the Comparable Treasury Issue, assuming a price for the
Comparable Treasury Issue (expressed as a percentage of its principal amount)
equal to the applicable Comparable Treasury Price for such Redemption Date.
"Comparable Treasury Issue" means the United States Treasury security
selected by an Independent Investment Banker as having a maturity comparable to
the remaining term of the notes that would be utilized, at the time of
selection and in accordance with customary financial practice, in pricing new
issues of corporate debt securities of comparable maturity to the remaining
terms of the notes.
"Independent Investment Banker" means Chase Securities Inc. (and its
successors), or, if such firm is unwilling or unable to select the applicable
Comparable Treasury Issue, an independent investment banking institution of
national standing appointed by the Trustee and reasonably acceptable to the
Issuer.
"Comparable Treasury Price" means, with respect to any Redemption Date, (a)
the bid price for the Comparable Treasury Issue (expressed as a percentage of
its principal amount) at 4:00 P.M. on the third business day preceding such
Redemption Date, as set forth on "Telerate Page 500" (or such other page as may
replace Telerate Page 500), or (b) if such page (or any successor page) is not
displayed or does not contain such bid prices at such time (i) the average of
the Reference Treasury Dealer Quotations obtained by the Trustee for such
Redemption Date, after excluding the highest and lowest of four such Reference
Treasury Dealer Quotations, or (ii) if the Trustee is unable to obtain at least
four such Reference Treasury Dealer Quotations, the average of all Reference
Treasury Dealer Quotations obtained by the Trustee.
"Reference Treasury Dealer" means Chase Securities Inc. (and its successors)
and three other primary U.S. government securities dealers in New York City
selected by the Independent Investment Banker (each, a "Primary Treasury
Dealer"); provided, however, that if any of the foregoing shall cease to be a
Primary Treasury Dealer, the Issuer shall substitute therefor another Primary
Treasury Dealer.
S-14
<PAGE>
"Reference Treasury Dealer Quotations" means, with respect to each Reference
Treasury Dealer and any Redemption Date for the notes, an average, as
determined by the Trustee, of the bid and asked prices for the Comparable
Treasury issue for the notes (expressed in each case as a percentage of its
principal amount) quoted in writing to the Trustee by such Reference Treasury
Dealer at 5:00 p.m., New York City time, on the third business day preceding
such Redemption Date.
Except as set forth above, the notes will not be redeemable by the Issuer
prior to maturity and will not be entitled to the benefit of any sinking fund.
Ranking
The notes will be unsecured and unsubordinated obligations of the Issuer and
will rank equally with all other existing and future unsecured and
unsubordinated indebtedness of the Issuer. The Guarantee will be an unsecured
and unsubordinated obligation of the Guarantor and will rank equally with all
other existing and future unsecured and unsubordinated indebtedness of the
Guarantor. The notes and the Guarantee will effectively rank junior to any
future secured indebtedness of the Issuer and the Guarantor to the extent of
the assets securing such indebtedness and to all indebtedness and other
liabilities of their respective subsidiaries.
Guarantee
The Guarantor will unconditionally guarantee to each holder and the Trustee,
on an unsecured and unsubordinated basis, the full and prompt payment of
principal of, premium, if any, and interest on the notes, when and as the same
become due and payable, whether at maturity, upon redemption, by declaration of
acceleration or otherwise.
No Personal Liability of General Partner
The General Partner and its directors, officers, employees, incorporators
and stockholders, as such, shall have no liability for any obligations of the
Guarantor or the Issuer under the notes, the Indenture or the Guarantee or for
any claim based on, in respect of, or by reason of, such obligations or their
creation. Each holder by accepting a note waives and releases all such
liability. The waiver and release are part of the consideration for issuance of
the notes. Such waiver may not be effective to waive liabilities under the
federal securities laws and it is the view of the Commission that such a waiver
is against public policy.
Concerning the Trustee
First Union National Bank is the Trustee under the Indenture and has been
appointed by the Issuer as Registrar and Paying Agent with regard to the notes.
First Union National Bank is a lender under the Issuer's credit facilities and
will receive a portion of the amounts repaid with the net proceeds of the
offering. First Union National Bank is also an affiliate of First Union
Securities, Inc., an Underwriter of the notes.
Governing Law
The Indenture provides that it and the notes will be governed by, and
construed in accordance with, the laws of the State of New York.
S-15
<PAGE>
UNDERWRITING
We, the Guarantor and the underwriters named below (the "Underwriters") have
entered into an Underwriting Agreement relating to the offering and sale of the
notes (the "Underwriting Agreement"). In the Underwriting Agreement, we have
agreed to sell to each Underwriter, and each Underwriter has agreed to purchase
from us, the principal amount of the notes set forth opposite the name of that
Underwriter below:
<TABLE>
<CAPTION>
Principal
Underwriter Amount
----------- ------------
<S> <C>
Chase Securities Inc........................................ $210,000,000
Lehman Brothers Inc......................................... 87,500,000
Banc One Capital Markets, Inc............................... 10,500,000
FleetBoston Robertson Stephens Inc.......................... 10,500,000
First Union Securities, Inc................................. 10,500,000
Scotia Capital (USA) Inc.................................... 10,500,000
SG Cowen Securities Corp.................................... 10,500,000
------------
Total..................................................... $350,000,000
============
</TABLE>
The obligations of the Underwriters under the Underwriting Agreement,
including their agreement to purchase the notes from us, are several and not
joint. Those obligations are also subject to the satisfaction of certain
conditions in the Underwriting Agreement. The Underwriters have agreed to
purchase all of the notes if any of them are purchased.
The Underwriters have advised us that they propose to offer the notes to the
public at the public offering price that appears on the cover of this
prospectus supplement. The Underwriters may offer the notes to selected dealers
at the public offering price minus a selling concession of up to .35% of the
principal amount. In addition, the Underwriters may allow, and those selected
dealers may reallow, a selling concession of up to .25 % of the principal
amount to certain other dealers. After the initial public offering, the
Underwriters may change the public offering price and any other selling terms.
In the Underwriting Agreement, we have agreed that:
. we will not offer or sell any of our debt securities (other than the
notes and the $54 million that we are planning to borrow from the
Mississippi Business Finance Corporation) for a period of 30 days after
the date of this prospectus supplement without the prior consent of
Chase Securities Inc.;
. we will pay our expenses related to this offering, which we estimate
will be $250,000; and
. we will indemnify the Underwriters against certain liabilities,
including liabilities under the Securities Act of 1933.
The notes are a new issue of securities, and there is currently no
established trading market for the notes. We do not intend to apply for the
notes to be listed on any securities exchange or to arrange for the notes to be
quoted on any quotation system. The Underwriters have advised us that they
intend to make a market in the notes. However, they are not obligated to do so
and may discontinue any market making in the notes at any time in their sole
discretion. Therefore, we cannot assure you that a liquid trading market will
develop for the notes, that you will be able to sell your notes at a particular
time or that the prices that you receive when you sell will be favorable.
In connection with this offering of the notes, the Underwriters may engage
in overallotment, stabilizing transactions and syndicate covering transactions
in accordance with Regulation M under the Securities Exchange Act of 1934.
Overallotment involves sales in excess of the offering size,
S-16
<PAGE>
which creates a short position for the Underwriters. Stabilizing transactions
involve bids to purchase the notes in the open market for the purpose of
pegging, fixing or maintaining the price of the notes. Syndicate covering
transactions involve purchases of the notes in the open market after the
distribution has been completed in order to cover short positions. Stabilizing
transactions and syndicate covering transactions may cause the price of the
notes to be higher than it would otherwise be in the absence of those
transactions. If the Underwriters engage in stabilizing or syndicate covering
transactions, they may discontinue them at any time.
We will deliver the notes to the Underwriters at the closing of this
offering when the Underwriters pay us the purchase price for the notes.
Certain of the Underwriters and their affiliates engage in various general
financing and banking transactions with us and our affiliates. In particular,
The Chase Manhattan Bank, BankBoston, N.A., Bank One, NA, The Bank of Nova
Scotia and First Union National Bank (who are affiliates of Chase Securities
Inc., FleetBoston Robertson Stephens Inc., Banc One Capital Markets, Inc.,
Scotia Capital (USA) Inc. and First Union Securities, Inc., respectively) are
lenders under our bank credit facilities and will receive a portion of the
amounts repaid under those facilities with the net proceeds of the offering.
Because more than 10% of the net proceeds of the offering will be paid to
affiliates of the Underwriters, the offering is being made in accordance with
Rule 2710(c)(8) of the Conduct Rules of the National Association of Securities
Dealers, Inc. First Union National Bank is the Trustee under the Indenture.
LEGAL MATTERS
Certain legal matters with respect to the notes will be passed upon for the
Issuer and the Guarantor by Vinson & Elkins L.L.P., Houston, Texas. Certain
legal matters with respect to the notes will be passed upon for the
underwriters by Simpson Thacher & Bartlett, New York, New York.
EXPERTS
The consolidated financial statements and the related financial statement
schedule of Enterprise Products Partners L.P. (guarantor parent company of
Enterprise Products Operating L.P.) as of December 31, 1999 and 1998 and for
each of the three years in the period ended December 31, 1999 incorporated in
this prospectus by reference from the Guarantor's Annual Report on Form 10-K
have been audited by Deloitte & Touche LLP, independent auditors, as stated in
their report, which is incorporated by reference herein, and has been so
incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
S-17
<PAGE>
PROSPECTUS
[Enterprise Logo]
$800,000,000
ENTERPRISE PRODUCTS PARTNERS L.P.
ENTERPRISE PRODUCTS OPERATING L.P.
COMMON UNITS
DEBT SECURITIES
We may offer the following securities under this Prospectus:
. Common Units representing limited partner interests in Enterprise
Products Partners L.P., and
. Debt Securities of Enterprise Products Operating L.P., which will be
guaranteed by its parent company, Enterprise Products Partners L.P.
This Prospectus provides you with a general description of the securities we
may offer. Each time we sell securities we will provide a Prospectus Supplement
that will contain specific information about the terms of that offering. The
Prospectus Supplement may also add, update or change information contained in
this prospectus. You should read this Prospectus and any Prospectus Supplement
carefully before you invest.
In addition, Common Units may be offered from time to time by other holders
thereof. Any selling unitholders will be identified, and the number of Common
Units to be offered by them will be specified, in a Prospectus Supplement to
this Prospectus. We will not receive proceeds of any sale of shares by any such
selling unitholders.
The Common Units are listed on the New York Stock Exchange under the trading
symbol "EPD." Any Common Units sold pursuant to a Prospectus Supplement will be
listed on that exchange, subject to official notice of issuance. On December
20, 1999, the closing price of a Common Unit on that exchange was $19.50.
Unless otherwise specified in a Prospectus Supplement, the senior debt
securities, when issued, will be unsecured and will rank equally with our other
unsecured and unsubordinated indebtedness. The subordinated debt securities,
when issued, will be subordinated in right of payment to our senior debt.
YOU SHOULD CAREFULLY REVIEW "RISK FACTORS" BEGINNING ON PAGE 5 FOR A
DISCUSSION OF THINGS YOU SHOULD CONSIDER WHEN INVESTING IN OUR SECURITIES.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED UPON THE
ADEQUACY OR ACCURACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS
A CRIMINAL OFFENSE.
This Prospectus may not be used to consummate sales of securities unless
accompanied by a Prospectus Supplement.
The date of this Prospectus is January 14, 2000.
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
FORWARD-LOOKING STATEMENTS................................................. 2
WHERE YOU CAN FIND MORE INFORMATION........................................ 3
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE............................ 3
THE COMPANY................................................................ 4
RISK FACTORS............................................................... 5
USE OF PROCEEDS............................................................ 9
RATIO OF EARNINGS TO FIXED CHARGES......................................... 9
DESCRIPTION OF DEBT SECURITIES............................................. 10
DESCRIPTION OF COMMON UNITS................................................ 23
FEDERAL INCOME TAX CONSIDERATIONS.......................................... 32
SELLING UNITHOLDERS........................................................ 46
PLAN OF DISTRIBUTION....................................................... 46
LEGAL MATTERS.............................................................. 48
EXPERTS.................................................................... 48
</TABLE>
FORWARD-LOOKING STATEMENTS
The statements in this Prospectus and the documents incorporated by
reference that are not historical facts are forward-looking statements. We have
based these forward-looking statements on our current expectations and
projections about future events based upon our knowledge of facts as of the
date of this Prospectus and our assumptions about future events. Although we
believe that the expectations reflected in these forward-looking statements are
reasonable, we can give no assurance that these expectations will prove to be
correct. These statements are subject to certain risks, uncertainties, and
assumptions. If one or more of these risks or uncertainties materialize, or if
underlying assumptions provide incorrect, actual results may vary materially
from those anticipated, estimated, projected, or expected. Among the key risk
factors that may have a direct bearing on our results of operations and
financial condition are:
. competitive practices in the industries in which we compete,
. fluctuations in oil, natural gas, and NGL product prices and production,
. operational and systems risks,
. environmental liabilities that are not covered by indemnity or
insurance,
. the impact of current and future laws and governmental regulations
(including environmental regulations) affecting the NGL industry in
general, and our operations in particular,
. loss of a significant customer, and
. failure to complete one or more new projects on time or within budget.
We use words like "anticipate," "estimate," "project," "expect," "plan,"
"forecast," "intend," "could," and "may," and similar expressions and
statements regarding our business strategy, plans and objectives for future
operations to help identify forward-looking statements. We have no obligation
to publicly update or revise any forward-looking statement, whether as a result
of new information, future events or otherwise.
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WHERE YOU CAN FIND MORE INFORMATION
Enterprise Products Partners L.P. files annual, quarterly and current
reports, proxy statements and other information with the Securities and
Exchange Commission. Under the rules and policies of the Commission, it is not
expected that Enterprise Products Operating L.P. will file separate periodic
reports with the Commission. You may read and copy any document we file at the
Commission's public reference rooms in Washington, D.C., New York, New York and
Chicago, Illinois. Please call the Commission at (800) SEC-0330 for further
information on the public reference rooms. Our filings are also available to
the public at the Commission's web site at http://www.sec.gov. In addition,
documents filed by us can be inspected at the offices of the New York Stock
Exchange, Inc., 20 Broad Street, New York, New York 10002.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The Commission allows us to "incorporate by reference" into this Prospectus
the information we file with it, which means that we can disclose important
information to you by referring you to those documents. The information
incorporated by reference is considered to be part of this Prospectus, and
later information that we file with the Commission will automatically update
and supersede this information. We incorporate by reference the documents
listed below and any future filings made with the Commission under section
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934 until our
offering is completed:
(1) Annual Report on Form 10-K for the fiscal year ended December 31,
1998 (the "1998 Form 10-K");
(2) Current Reports on Form 8-K filed with the Commission on April 21,
1999, September 20, 1999 and October 4, 1999, and Amended Current Reports
on Form 8-K/A filed with the Commission on October 27, 1999 and November
29, 1999.
(3) Quarterly Reports on Form 10-Q for the fiscal quarters ended March
31, 1999, June 30, 1999 and September 30, 1999; and
(4) The description of the Common Units contained in the Registration
Statement on Form S-1 (Registration No. 333-52537), initially filed with
the Commission on May 13, 1998, and any subsequent amendment thereto filed
for the purposes of updating such description.
We will provide without charge to each person, including any beneficial
owner, to whom this Prospectus is delivered, upon written or oral request, a
copy of any document incorporated by reference in this Prospectus, other than
exhibits to any such document not specifically described above. Requests for
such documents should be directed to Investor Relations, Enterprise Products
Partners L.P., 2727 North Loop West, Suite 700, Houston, Texas 77008-1038;
telephone number: (713) 880-6694.
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THE COMPANY
Enterprise Products Partners L.P. (the "Company") is a publicly traded
master limited partnership that was formed in April 1998 to acquire, own, and
operate all of the NGL processing and distribution assets of Enterprise
Products Company. We conduct all of our business through our 98.9899% owned
subsidiary, Enterprise Products Operating L.P. (the "Operating Partnership")
and its subsidiaries and joint ventures. Enterprise Products GP, LLC (the
"General Partner") is the general partner of the Company and the Operating
Partnership, owning 1.0% and 1.0101% equity interests, respectively, in those
partnerships.
We are a leading integrated North American provider of processing and
transportation services to domestic producers of natural gas, domestic and
foreign producers of natural gas liquids ("NGLs") and other liquid hydrocarbons
and domestic and foreign consumers of NGL and liquid hydrocarbon products. We
manage a fully integrated and diversified portfolio of midstream energy assets.
We own and operate:
. natural gas processing plants;
. NGL fractionation facilities;
. storage facilities;
. pipelines;
. rail transportation facilities;
. rail cars; and
. methyl tertiary butyl ether ("MTBE") production and propylene production
and transportation facilities.
Certain of these facilities are owned jointly by us and other industry
partners, either through co-ownership arrangements or joint ventures. Some of
these jointly owned facilities are operated by other owners.
Our principal executive office is located at 2727 North Loop West, Houston,
Texas 77008-1038, and our telephone number is (713) 880-6500.
Recent Acquisitions
Effective August 1, 1999, we acquired Tejas Natural Gas Liquids, LLC from an
affiliate of Shell Oil Company, in exchange for 14,500,000 of our convertible
special limited partner units and a cash payment of $166.0 million. We have
also agreed to issue up to 6,000,000 additional convertible special units to
the Shell affiliate in the future if the volumes of natural gas that we process
for Shell Oil Company and its affiliates reach certain agreed upon levels in
2000 and 2001. The businesses we acquired include natural gas processing and
NGL fractionation, transportation and storage in Louisiana and Mississippi and
its NGL supply and marketing business. The assets acquired include varying
interests in:
. eleven natural gas processing plants (including Neptune gas plant which
is under construction) with a combined gross capacity of 11.0 billion
cubic feet per day (Bcfd) and net capacity of 3.1 Bcfd;
. four NGL fractionation facilities with a combined gross capacity of
281,000 barrels per day (BPD) and net capacity of 131,500 BPD;
. four NGL storage facilities with approximately 28.8 million barrels of
gross capacity and 8.8 million barrels of net capacity; and
. over 1,500 miles of NGL pipelines (including an 11.5% interest in Dixie
Pipeline Company).
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Effective July 1, 1999, we acquired an additional 25% interest in our Mont
Belvieu NGL fractionation facility from Kinder Morgan Energy Partners L.P. for
a purchase price of approximately $41 million in cash and assumption of $4
million in debt, and we acquired an additional 0.5% interest in the facility
from Enterprise Products Company for a cash purchase price of $0.9 million.
These acquisitions increased our effective economic interest in the Mont
Belvieu facility from 37.0% to 62.5%.
RISK FACTORS
An investment in the securities involves a significant degree of risk,
including the risks described below. You should carefully consider the
following risk factors and the other information in this Prospectus before
deciding to invest in the securities. The risks described below are not the
only ones facing us. This Prospectus also contains forward-looking statements
that involve risks and uncertainties. See "Forward-Looking Statements." Our
actual results could differ materially from those anticipated in the forward-
looking statements as a result of certain factors, including the risks
described below and elsewhere in this Prospectus.
Risks Inherent in Our Business
The Profitability of Our Operations Depends Upon the Spread Between Natural
Gas Prices and NGL.
Prices for natural gas and NGLs are subject to fluctuations in response to
changes in supply, market uncertainty and a variety of additional factors that
are beyond our control. These factors include:
. the level of domestic production;
. the availability of imported oil and gas;
. actions taken by foreign oil and gas producing nations,;
. the availability of transportation systems with adequate capacity;
. the availability of competitive fuels;
. fluctuating and seasonal demand for oil, gas and NGLs;
. conservation and the extent of governmental regulation of production and
the overall economic environment.
A decrease in the difference between natural gas and NGL prices results in
lower margins on volumes processed.
The Profitability of Our Operations Depends Upon the Demand and Prices for
Our Products and Services.
The products that we process are principally used as feedstocks in
petrochemical manufacturing and in the production of motor gasoline and as fuel
for residential and commercial heating. A reduction in demand for our products
by the petrochemical, refining or heating industries, whether because of
general economic conditions, reduced demand by consumers for the end products
made with NGL products, increased competition from petroleum-based products due
to pricing differences, adverse weather conditions, government regulations
affecting prices and production levels of natural gas or the content of motor
gasoline or other reasons, could have a material adverse effect on our results
of operations.
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Ethane. Ethane is primarily used in the petrochemical industry as feedstock
for ethylene, one of the basic building blocks for a wide range of plastics and
other chemical products. Although ethane is typically separated from the
natural gas stream at gas processing plants, if natural gas prices increase
significantly in relation to NGL product prices or if the demand for ethylene
falls, it may be more profitable for natural gas producers to leave the ethane
in the natural gas stream to be burned as fuel than to extract the ethane from
the mixed NGL stream for sale as an ethylene feedstock thereby reducing the
volume of NGLs for fractionation.
Propane. Propane is used both as a petrochemical feedstock in the production
of ethylene and propylene and as a heating, engine and industrial fuel. The
demand for propane as a heating fuel is significantly affected by weather
conditions. The volume of propane sold is at its highest during the six-month
peak heating season of October through March.
Isobutane. Isobutane is predominantly used in refineries to produce
alkylates to enhance octane levels and in the production of MTBE, which is used
in motor gasoline. Accordingly, any action that reduces demand for motor
gasoline in general or MTBE in particular would similarly reduce demand for
isobutane. Further, we purchase almost all of the normal butane feedstock that
we convert into isobutane for our non-tolling customers in the spot and import
markets. It is generally profitable for us to convert normal butane into
isobutane when the prevailing price of isobutane exceeds the prevailing price
of normal butane by approximately 2.0 cents per gallon. On those occasions
where the spread between isobutane and normal butane is narrow, we may find it
more economical to purchase isobutane on the spot market for delivery to
customers than to process the normal butane in our inventory. We frequently
retain the normal butane in our inventory until pricing differentials improve
or until product prices increase. However, if the price of normal butane
declines, our inventory may decline in value. During periods in which isobutane
spreads are narrow or inventory values are high relative to current prices for
normal butane or isobutane, our operating margin from selling isobutane will be
reduced.
MTBE. The production of MTBE is driven by oxygenated fuels programs enacted
under the federal Clean Air Amendments of 1990 and other legislation. Any
changes to these programs that enable localities to opt out of these programs,
lessen the requirements for oxygenates or favor the use of non-isobutane based
oxygenated fuels would reduce the demand for MTBE and could have a material
adverse effect on our results of operations. On March 25, 1999, the Governor of
California ordered the phase-out of MTBE in California by the end of 2002 due
to allegations by several public advocacy and protest groups that MTBE
contaminates water supplies, causes health problems and has not been as
beneficial in reducing air pollution as originally contemplated. In addition,
legislation to amend the federal Clean Air Act has been introduced in the House
of Representatives to ban the use of MTBE as a fuel additive within three
years. Legislation introduced in the Senate would eliminate the Clean Air Act's
oxygenate requirement in order to foster the elimination of MTBE in fuel. No
assurance can be given as to whether this or similar legislation ultimately
will be adopted or whether Congress or the EPA might take steps to override the
MTBE ban in California.
In November 1998, the EPA formed a panel to investigate the air quality
benefits and water quality concerns associated with oxygenates in gasoline and
to provide independent advice and recommendations on ways to maintain air
quality while protecting water quality. The panel issued a report on their
findings and recommendations in July 1999. The panel urged widespread reduction
in the use of MTBE due to the growing threat to drinking water sources despite
the fact that use of reformulated gasolines have contributed to significant air
quality improvements. The panel credited reformulated gasoline with
"substantial reductions" in toxic emissions from vehicles and recommended that
those reductions be maintained by the use of cleaner-burning fuels that rely on
additives other than MTBE and improvements in refining processes. The panel
stated that the
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problems associated with MTBE can be characterized as a low-level, widespread
problem that had not reached the state of a being a public health threat. The
panel's recommendations are geared towards confronting the problems associated
with MTBE now rather than letting the issue grow into a larger problem. The
panel did not call for an outright ban on MTBE but stated that its use should
be curtailed significantly. The panel also encouraged a public educational
campaign on the potential harm posed by gasoline when it leaks into ground
water from storage tanks or while in use. Based on the panel's
recommendations, the EPA will ask Congress to revise the Clean Air Act in a
manner that maintains air quality gains and allows for the removal of
oxygenates from gasoline.
Propylene. Propylene is sold to petrochemical companies for a variety of
uses, principally for the production of polypropylene. Propylene is subject to
rapid and material price fluctuations. Any downturn in the domestic or
international economy could cause reduced demand for, and result in an
oversupply of, propylene, which could cause a reduction in the volumes of
propylene that we produce and expose our investment in inventories of
propane/propylene mix to pricing risk due to requirements for short-term price
discounts in the spot or short-term propylene markets.
The Profitability of Our Operations Depends upon the Availability of a
Supply of NGL Feedstock.
Our profitability is materially impacted by the volume of NGLs processed at
our facilities. A material decrease in natural gas production or crude oil
refining, as a result of depressed commodity prices or otherwise, or a
decrease in imports of mixed butanes, could result in a decline in the volume
of NGLs delivered to our facilities for processing, thereby reducing revenue
and operating income.
We Depend on Certain Key Customers and Contracts.
We currently derive a significant portion of our revenues from contracts
with certain key customers. The loss of these or other significant customers
could materially adversely affect our results of operations. Lyondell
Worldwide accounted for approximately 38.9% of our isomerization volumes in
1998. Our current contract with Lyondell has a ten-year term which expires in
December 2009. Our unconsolidated affiliate, BEF, has an agreement with Sunoco
pursuant to which Sunoco is required to purchase all of BEF's MTBE production
through May 2005. Our contract for sales of high purity propylene to Montell
accounted for approximately 42.5% of 1998 production. We are a party to a
natural gas processing contract with Shell and certain of its affiliates which
provides us with the right to process substantially all natural gas produced
from the Shell entities' Gulf of Mexico properties for the next 20 years.
We Experience Significant Competition.
We face competition from oil, natural gas, natural gas processing and
petrochemical companies. The principal areas of competition include obtaining
gas supplies for processing operations, obtaining supplies of raw product for
fractionation and the marketing and transportation of natural gas liquids.
Competition typically arises as a result of the location and operating
efficiency of facilities, the reliability of services and price and delivery
capabilities. Our NGL fractionation facilities at Mont Belvieu compete for
volumes of mixed NGLs with three other fractionators at Mont Belvieu. In
addition, certain major producers fractionate NGLs for their own account in
captive facilities. The Mont Belvieu fractionation facilities also compete on
a more limited basis with two fractionators in Conway, Kansas. We also compete
with large, integrated energy and petrochemical companies in our
isomerization, MTBE, propylene and natural gas processing businesses. Our
customers who are significant producers or consumers of NGLs or natural gas
may develop their own processing facilities in lieu of using our services or
co-investing with us in new projects. In addition, certain of our competitors
may have advantages in competing for acquisitions or other new business
opportunities because of their financial resources and access to NGL supplies.
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We Are Subject to Operating and Litigation Risks Which May Not Be Covered by
Insurance.
Our operations are subject to all operating hazards and risks normally
incidental to processing, storing and transporting, and otherwise providing for
use by third parties, natural gas, NGLs, propane/propylene mix and MTBE. As a
result, we may be a defendant in various legal proceedings and litigation
arising in the ordinary course of business. We cannot assure you that the
insurance we maintain will be adequate to protect us from all material expenses
related to potential future claims for personal and property damage.
Our Businesses are Subject to Governmental Regulation With Respect to
Environmental, Safety and Other Regulatory Matters.
Our business is subject to the jurisdiction of governmental agencies with
respect to a wide range of environmental, safety and other regulatory matters.
We could be adversely affected by increased costs due to more strict pollution
control requirements or liabilities resulting from non-compliance with required
operating or other regulatory permits. New environmental regulations might
adversely impact our products and activities, including processing, storage and
transportation. Federal and state agencies also could impose additional safety
requirements, any of which could affect profitability. In addition, there are
risks of accidental releases or spills associated with our operations, and we
cannot assure you that material costs and liabilities will not be incurred,
including those relating to claims for damages to property and persons.
We Depend Upon Our Key Personnel.
We believe that our success has been dependent to a significant extent upon
the efforts and abilities of our senior management team and in particular Dan
Duncan, Chairman of the Board (age 66) and O. S. Andras, President and Chief
Executive Officer (age 64). The failure to retain the key members of our senior
management team, or to implement a succession plan to prepare qualified
individuals to join the senior management team upon the retirement of Mr.
Duncan and Mr. Andras, could materially adversely affect our financial
condition or results. We do not maintain any life insurance for these persons.
Risks Inherent in an Investment in the Securities.
The Prospectus Supplement accompanying this Prospectus will describe any
additional risk factors inherent in an investment in the particular securities
being offering.
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USE OF PROCEEDS
Except as may be set forth in a Prospectus Supplement, we will use the net
proceeds from any sale of securities described in this Prospectus for future
business acquisitions and other general corporate purposes, such as working
capital, investments in subsidiaries, the retirement of existing debt and/or
the repurchase of common units or other securities. The exact amounts to be
used and when the net proceeds will be applied to corporate purposes will
depend on a number of factors, including our funding requirements and the
availability of alternative funding sources. We routinely review acquisition
opportunities. A Prospectus Supplement will disclose any future proposal to use
net proceeds from an offering of our securities to finance any specific
acquisition, if applicable.
We will not receive any proceeds from any sale of common units by any
selling unitholders.
RATIO OF EARNINGS TO FIXED CHARGES
The ratio of earnings to fixed charges for each of the periods indicated is
as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended December 31, Ended
--------------------------------------------------------------------- September 30,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C>
1.65 1.73 2.38 2.11 1.16 5.99
</TABLE>
The pro forma ratio of earnings to fixed charges assuming we acquired Tejas
Natural Gas Liquids LLC and the additional 25.5% interest in the Mont Belvieu
NGL fractionation facility on January 1, 1998 for each of the periods indicated
is as follows:
<TABLE>
<CAPTION>
Nine Months
Year Ended Ended
December 31, September 30,
1998 1999
------------ -------------
<S> <C>
1.34 4.37
</TABLE>
These computations include us and our subsidiaries, and 50% or less equity
companies. For these ratios, "earnings" is the amount resulting from adding and
subtracting the following items.
Add the following:
. pre-tax income from continuing operations before adjustment for minority
interests in consolidated subsidiaries or income or loss from equity
investees;
. fixed charges;
. amortization of capitalized interest;
. distributed income of equity investees; and
. our share of pre-tax losses of equity investees for which charges
arising from guarantees are included in fixed charges.
From the total of the added items, subtract the following:
. interest capitalized;
. preference security dividend requirements of consolidated subsidiaries;
and
. minority interest in pre-tax income of subsidiaries that have not
incurred fixed charges.
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The term "fixed charges" means the sum of the following:
. interest expensed and capitalized;
. amortized premiums, discounts and capitalized expenses related to
indebtedness;
. an estimate of the interest within rental expenses; and
. preference security dividend requirements of consolidated subsidiaries.
We calculated the pro forma ratio of earnings to fixed charges using the pro
forma financial statements incorporated by reference in this prospectus.
DESCRIPTION OF DEBT SECURITIES
The debt securities will be issued under an Indenture (the "Indenture")
among the Operating Partnership, as issuer, the Company, as guarantor, and a
commercial bank to be selected, as trustee (the "Trustee"). The terms of the
debt securities will include those expressly set forth in the Indenture and
those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). Capitalized terms used in this
Description of Debt Securities have the meanings specified in the Indenture.
This Description of Debt Securities is intended to be a useful overview of
the material provisions of the debt securities and the Indenture. Since this
Description of Debt Securities is only a summary, you should refer to the
Indenture for a complete description of our obligations and your rights.
References to the "Issuer" mean only Enterprise Products Operating L.P. and
not its subsidiaries. References to the "Guarantor" mean only Enterprise
Products Partners L.P. and not its subsidiaries. References to "we" and "us"
mean the Issuer and the Guarantor collectively.
General
The Indenture does not limit the amount of debt securities that may be
issued thereunder. Debt securities may be issued under the Indenture from time
to time in separate series, each up to the aggregate amount authorized for such
series. The debt securities will be general obligations of the Issuer and the
Guarantor and may be subordinated to Senior Indebtedness of the Issuer and the
Guarantor. See "Description of Debt Securities--Subordination."
A prospectus supplement and a supplemental indenture relating to any series
of debt securities being offered will include specific terms relating to the
offering. These terms will include some or all of the following:
. the form and title of the debt securities;
. the total principal amount of the debt securities;
. the portion of the principal amount which will be payable if the
maturity of the debt securities is accelerated;
. the currency or currency unit in which the debt securities will be paid,
if not U.S. dollars;
. any right we may have to defer payments of interest by extending the
dates payments are due whether interest on those deferred amounts will
be payable as well;
. the dates on which the principal of the debt securities will be payable;
. the interest rate which the debt securities will bear and the interest
payment dates for the debt securities;
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. any optional redemption provisions;
. any sinking fund or other provisions that would obligate us to
repurchase or otherwise redeem the debt securities;
. any changes to or additional Events of Default or covenants;
. whether the debt securities are to be issued as Registered Securities or
Bearer Securities or both; and any special provisions for Bearer
Securities;
. the subordination, if any, of the debt securities and any changes to the
subordination provisions of the Indenture; and
. any other terms of the debt securities.
The Prospectus Supplement will also describe any material United States
federal income tax consequences or other special considerations applicable to
the applicable series of debt securities, including those applicable to:
. Bearer Securities,
. debt securities with respect to which payments of principal, premium or
interest are determined with reference to an index or formula, including
changes in prices of particular securities, currencies or commodities,
. debt securities with respect to which principal, premium or interest is
payable in a foreign or composite currency,
. debt securities that are issued at a discount below their stated
principal amount, bearing no interest or interest at a rate that at the
time of issuance is below market rates, and
. variable rate debt securities that are exchangeable for fixed rate debt
securities.
At our option, we may make interest payments, by check mailed to the
registered holders thereof or, if so stated in the applicable Prospectus
Supplement, at the option of a holder by wire transfer to an account designated
by the holder. Except as otherwise provided in the applicable Prospectus
Supplement, no payment on a Bearer Security will be made by mail to an address
in the United States or by wire transfer to an account in the United States.
Unless otherwise provided in the applicable Prospectus Supplement,
Registered Securities may be transferred or exchanged at the office of the
Trustee at which its corporate trust business is principally administered in
the United States or at the office of the Trustee or the Trustee's agent in New
York City, subject to the limitations provided in the Indenture, without the
payment of any service charge, other than any applicable tax or governmental
charge. Bearer Securities will be transferable only by delivery. Provisions
with respect to the exchange of Bearer Securities will be described in the
applicable Prospectus Supplement.
Any funds we pay to a paying agent for the payment of amounts due on any
debt securities that remain unclaimed for two years will be returned to us, and
the holders of the debt securities must thereafter look only to us for payment
thereof.
Guarantee
The Guarantor will unconditionally guarantee to each holder and the Trustee
the full and prompt payment of principal of, premium, if any, and interest on
the debt securities, when and as the same become due and payable, whether at
maturity, upon redemption or repurchase, by declaration of acceleration or
otherwise.
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Certain Covenants
Except as set forth below or as may be provided in a Prospectus Supplement
and Supplemental Indenture, neither the Issuer nor the Guarantor will be
restricted by the Indenture from incurring any type of indebtedness or other
obligation, from paying dividends or making distributions on its partnership
interests or capital stock or purchasing or redeeming its partnership interests
or capital stock. The Indenture will not require the maintenance of any
financial ratios or specified levels of net worth or liquidity. In addition,
the Indenture will not contain any provisions that would require the Issuer to
repurchase or redeem or otherwise modify the terms of any of the debt
securities upon a change in control or other events involving the Issuer which
may adversely affect the creditworthiness of the debt securities.
Limitations on Liens. The Indenture will provide that the Guarantor will
not, nor will it permit any Subsidiary to, create, assume, incur or suffer to
exist any mortgage, lien, security interest, pledge, charge or other
encumbrance ("liens") other than Permitted Liens (as defined below) upon any
Principal Property (as defined below) or upon any shares of capital stock of
any Subsidiary owning or leasing any Principal Property, whether owned or
leased on the date of the Indenture or thereafter acquired, to secure any
indebtedness for borrowed money ("debt") of the Guarantor or the Issuer or any
other person (other than the debt securities), without in any such case making
effective provision whereby all of the debt securities outstanding shall be
secured equally and ratably with, or prior to, such debt so long as such debt
shall be so secured. "Principal Property" means, whether owned or leased on the
date of the Indenture or thereafter acquired:
(1) any pipeline assets of the Guarantor or any Subsidiary, including any
related facilities employed in the transportation, distribution,
storage or marketing of refined petroleum products, natural gas
liquids, and petrochemicals, that are located in the United States of
America or any territory or political subdivision thereof; and
(2) any processing or manufacturing plant or terminal owned or leased by
the Guarantor or any Subsidiary that is located in the United States or
any territory or political subdivision thereof,
except, in the case of either of the foregoing clauses (1) or (2):
(a) any such assets consisting of inventories, furniture, office
fixtures and equipment (including data processing equipment),
vehicles and equipment used on, or useful with, vehicles; and
(b) any such assets, plant or terminal which, in the opinion of the
board of directors of the General Partner, is not material in
relation to the activities of the Issuer or of the Guarantor and
its Subsidiaries taken as a whole.
Notwithstanding the foregoing, under the Indenture, the Guarantor may, and
may permit any Subsidiary to, create, assume, incur, or suffer to exist any
lien upon any Principal Property to secure debt of the Guarantor or any other
person (other than the debt securities) other than a Permitted Lien without
securing the debt securities, provided that the aggregate principal amount of
all debt then outstanding secured by such lien and all similar liens, together
with all Attributable Indebtedness from Sale-Leaseback Transactions (excluding
Sale-Leaseback Transactions permitted by clauses (1) through (4), inclusive, of
the first paragraph of the restriction on sale-leasebacks covenant described
below) does not exceed 10% of Consolidated Net Tangible Assets.
"Permitted Liens" means:
(1) liens upon rights-of-way for pipeline purposes;
(2) any statutory or governmental lien or lien arising by operation of law,
or any mechanics', repairmen's, materialmen's, suppliers', carriers',
landlords', warehousemen's or similar lien
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incurred in the ordinary course of business which is not yet due or
which is being contested in good faith by appropriate proceedings and
any undetermined lien which is incidental to construction, development,
improvement or repair; or any right reserved to, or vested in, any
municipality or public authority by the terms of any right, power,
franchise, grant, license, permit or by any provision of law, to
purchase or recapture or to designate a purchaser of, any property;
(3) liens for taxes and assessments which are (a) for the then current
year, (b) not at the time delinquent, or (c) delinquent but the
validity or amount of which is being contested at the time by the
Guarantor or any Subsidiary in good faith by appropriate proceedings;
(4) liens of, or to secure performance of, leases, other than capital
leases; or any lien securing industrial development, pollution control
or similar revenue bonds;
(5) any lien upon property or assets acquired or sold by the Guarantor or
any Subsidiary resulting from the exercise of any rights arising out of
defaults on receivables;
(6) any lien in favor of the Guarantor or any Subsidiary; or any lien upon
any property or assets of the Guarantor or any Subsidiary in existence
on the date of the execution and delivery of the Indenture;
(7) any lien in favor of the United States of America or any state thereof,
or any department, agency or instrumentality or political subdivision
of the United States of America or any state thereof, to secure
partial, progress, advance, or other payments pursuant to any contract
or statute, or any debt incurred by the Guarantor or any Subsidiary for
the purpose of financing all or any part of the purchase price of, or
the cost of constructing, developing, repairing or improving, the
property or assets subject to such lien;
(8) any lien incurred in the ordinary course of business in connection with
workmen's compensation, unemployment insurance, temporary disability,
social security, retiree health or similar laws or regulations or to
secure obligations imposed by statute or governmental regulations;
(9) liens in favor of any person to secure obligations under provisions of
any letters of credit, bank guarantees, bonds or surety obligations
required or requested by any governmental authority in connection with
any contract or statute; or any lien upon or deposits of any assets to
secure performance of bids, trade contracts, leases or statutory
obligations;
(10) any lien upon any property or assets created at the time of acquisition
of such property or assets by the Guarantor or any Subsidiary or within
one year after such time to secure all or a portion of the purchase
price for such property or assets or debt incurred to finance such
purchase price, whether such debt was incurred prior to, at the time of
or within one year after the date of such acquisition; or any lien upon
any property or assets to secure all or part of the cost of
construction, development, repair or improvements thereon or to secure
debt incurred prior to, at the time of, or within one year after
completion of such construction, development, repair or improvements or
the commencement of full operations thereof (whichever is later), to
provide funds for any such purpose;
(11) any lien upon any property or assets existing thereon at the time of
the acquisition thereof by the Guarantor or any Subsidiary and any lien
upon any property or assets of a person existing thereon at the time
such person becomes a Subsidiary by acquisition, merger or otherwise;
provided that, in each case, such lien only encumbers the property or
assets so acquired or owned by such person at the time such person
becomes a Subsidiary;
(12) liens imposed by law or order as a result of any proceeding before any
court or regulatory body that is being contested in good faith, and
liens which secure a judgment or other court-ordered award or
settlement as to which the Guarantor or the applicable Subsidiary has
not exhausted its appellate rights;
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(13) any extension, renewal, refinancing, refunding or replacement (or
successive extensions, renewals, refinancing, refunding or
replacements) of liens, in whole or in part, referred to in clauses (1)
through (12) above; provided, however, that any such extension,
renewal, refinancing, refunding or replacement lien shall be limited to
the property or assets covered by the lien extended, renewed,
refinanced, refunded or replaced and that the obligations secured by
any such extension, renewal, refinancing, refunding or replacement lien
shall be in an amount not greater than the amount of the obligations
secured by the lien extended, renewed, refinanced, refunded or replaced
and any expenses of the Guarantor and its Subsidiaries (including any
premium) incurred in connection with such extension, renewal,
refinancing, refunding or replacement; or
(14) any lien resulting from the deposit of moneys or evidence of
indebtedness in trust for the purpose of defeasing debt of the
Guarantor or any Subsidiary.
"Consolidated Net Tangible Assets" means, at any date of determination, the
total amount of assets of the Guarantor and its consolidated subsidiaries after
deducting therefrom:
(1) all current liabilities (excluding (A) any current liabilities that by
their terms are extendable or renewable at the option of the obligor
thereon to a time more than 12 months after the time as of which the
amount thereof is being computed, and (B) current maturities of long-
term debt); and
(2) the value (net of any applicable reserves) of all goodwill, trade
names, trademarks, patents and other like intangible assets, all as set
forth, or on a pro forma basis would be set forth, on the consolidated
balance sheet of the Guarantor and its consolidated subsidiaries for
the Guarantor's most recently completed fiscal quarter, prepared in
accordance with generally accepted accounting principles.
Restriction on Sale-Leasebacks. The Indenture will provide that the
Guarantor will not, and will not permit any Subsidiary to, engage in the sale
or transfer by the Guarantor or any Subsidiary of any Principal Property to a
person (other than the Issuer or a Subsidiary) and the taking back by the
Guarantor or any Subsidiary, as the case may be, of a lease of such Principal
Property (a "Sale-Leaseback Transaction"), unless:
(1) such Sale-Leaseback Transaction occurs within one year from the date of
completion of the acquisition of the Principal Property subject thereto
or the date of the completion of construction, development or
substantial repair or improvement, or commencement of full operations
on such Principal Property, whichever is later;
(2) the Sale-Leaseback Transaction involves a lease for a period, including
renewals, of not more than three years;
(3) the Guarantor or such Subsidiary would be entitled to incur debt
secured by a lien on the Principal Property subject thereto in a
principal amount equal to or exceeding the Attributable Indebtedness
from such Sale-Leaseback Transaction without equally and ratably
securing the debt securities; or
(4) the Guarantor or such Subsidiary, within a one-year period after such
Sale-Leaseback Transaction, applies or causes to be applied an amount
not less than the Attributable Indebtedness from such Sale-Leaseback
Transaction to (a) the prepayment, repayment, redemption, reduction or
retirement of any debt of the Guarantor or any Subsidiary that is not
subordinated to the debt securities, or (b) the expenditure or
expenditures for Principal Property used or to be used in the ordinary
course of business of the Guarantor or its Subsidiaries. "Attributable
Indebtedness," when used with respect to any Sale-Leaseback
Transaction, means, as at the time of determination, the present value
(discounted at the rate set forth or implicit in the terms of the lease
included in such transaction) of the total
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obligations of the lessee for rental payments (other than amounts
required to be paid on account of property taxes, maintenance, repairs,
insurance, assessments, utilities, operating and labor costs and other
items that do not constitute payments for property rights) during the
remaining term of the lease included in such Sale-Leaseback Transaction
(including any period for which such lease has been extended). In the
case of any lease that is terminable by the lessee upon the payment of a
penalty or other termination payment, such amount shall be the lesser of
the amount determined assuming termination upon the first date such
lease may be terminated (in which case the amount shall also include the
amount of the penalty or termination payment, but no rent shall be
considered as required to be paid under such lease subsequent to the
first date upon which it may be so terminated) or the amount determined
assuming no such termination.
Notwithstanding the foregoing, under the Indenture the Guarantor may, and
may permit any Subsidiary to, effect any Sale-Leaseback Transaction that is
not excepted by clauses (1) through (4), inclusive, of the first paragraph
under "--Restrictions On Sale-Leasebacks," provided that the Attributable
Indebtedness from such Sale-Leaseback Transaction, together with the aggregate
principal amount of outstanding debt (other than the debt securities) secured
by liens other than Permitted Liens upon Principal Property, do not exceed 10%
of Consolidated Net Tangible Assets.
In the Indenture, the term "Subsidiary" means:
(1) the Issuer; or
(2) any corporation, association or other business entity of which more
than 50% of the total voting power of the equity interests entitled
(without regard to the occurrence of any contingency) to vote in the
election of directors, managers or trustees thereof or any partnership
of which more than 50% of the partners' equity interests (considering
all partners' equity interests as a single class) is, in each case, at
the time owned or controlled, directly or indirectly, by the Guarantor,
the Issuer or one or more of the other Subsidiaries of the Guarantor or
the Issuer or combination thereof.
Merger, Consolidation or Sale of Assets. The Indenture will provide that
each of the Guarantor and the Issuer may, without the consent of the holders
of any of the debt securities, consolidate with or sell, lease, convey all or
substantially all of its assets to, or merge with or into, any partnership,
limited liability company or corporation if:
(1) the partnership, limited liability company or corporation formed by or
resulting from any such consolidation or merger or to which such assets
shall have been transferred (the "successor") is either the Guarantor
or the Issuer, as applicable, or assumes all the Guarantor's or the
Issuer's, as the case may be, obligations and liabilities under the
Indenture and the debt securities (in the case of the Issuer) and the
Guarantee (in the case of the Guarantor).
(2) the successor is organized under the laws of the United States, any
state or the District of Columbia; and
(3) immediately after giving effect to the transaction no Default or Event
of Default shall have occurred and be continuing.
The successor will be substituted for the Guarantor or the Issuer, as the
case may be, in the Indenture with the same effect as if it had been an
original party to the Indenture. Thereafter, the successor may exercise the
rights and powers of the Guarantor or the Issuer, as the case may be, under
the Indenture, in its name or in its own name. If the Guarantor or the Issuer
sells or transfers all or substantially all of its assets, it will be released
from all liabilities and obligations under the Indenture and under the debt
securities (in the case of the Issuer) and the Guarantee (in the case of
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the Guarantor) except that no such release will occur in the case of a lease of
all or substantially all of its assets.
Events of Default
Each of the following will be an Event of Default under the Indenture with
respect to a series of debt securities:
(1) default in any payment of interest on any debt securities of that
series when due, continued for 30 days;
(2) default in the payment of principal of or premium, if any, on any debt
securities of that series when due at its stated maturity, upon
optional redemption, upon declaration or otherwise;
(3) failure by the Guarantor or the Issuer to comply for 60 days after
notice with its other agreements contained in the Indenture;
(4) certain events of bankruptcy, insolvency or reorganization of the
Issuer or the Guarantor (the "bankruptcy provisions"); or
(5) the Guarantee ceases to be in full force and effect or is declared null
and void in a judicial proceeding or the Guarantor denies or disaffirms
its obligations under the Indenture or the Guarantee.
However, a default under clause (3) of this paragraph will not constitute an
Event of Default until the Trustee or the holders of 25% in principal amount of
the outstanding debt securities of that series notify the Issuer and the
Guarantor of the default and such default is not cured within the time
specified in clause (3) of this paragraph after receipt of such notice.
If an Event of Default (other than an Event of Default described in clause
(4) above) occurs and is continuing, the Trustee by notice to the Issuer, or
the holders of at least 25% in principal amount of the outstanding debt
securities of that series by notice to the Issuer and the Trustee, may, and the
Trustee at the request of such holders shall, declare the principal of,
premium, if any, and accrued and unpaid interest, if any, on all the debt
securities of that series to be due and payable. Upon such a declaration, such
principal, premium and accrued and unpaid interest will be due and payable
immediately. If an Event of Default described in clause (4) above occurs and is
continuing, the principal of, premium, if any, and accrued and unpaid interest
on all the debt securities will become and be immediately due and payable
without any declaration or other act on the part of the Trustee or any holders.
The holders of a majority in aggregate principal amount of the outstanding debt
securities of a series may waive all past defaults (except with respect to
nonpayment of principal, premium or interest) and rescind any such acceleration
with respect to the debt securities of that series and its consequences if
rescission would not conflict with any judgment or decree of a court of
competent jurisdiction and all existing Events of Default, other than the
nonpayment of the principal of, premium, if any, and interest on the debt
securities of that series that have become due solely by such declaration of
acceleration, have been cured or waived.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, if an Event of Default occurs and is continuing, the Trustee will be
under no obligation to exercise any of the rights or powers under the Indenture
at the request or direction of any of the holders unless such holders have
offered to the Trustee reasonable indemnity or security against any loss,
liability or expense. Except to enforce the right to receive payment of
principal, premium, if any, or interest when due, no holder may pursue any
remedy with respect to the Indenture or the debt securities unless:
(1) such holder has previously given the Trustee notice that an Event of
Default is continuing;
(2) holders of at least 25% in principal amount of the outstanding debt
securities of that series have requested the Trustee to pursue the
remedy;
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(3) such holders have offered the Trustee reasonable security or indemnity
against any loss, liability or expense;
(4) the Trustee has not complied with such request within 60 days after the
receipt of the request and the offer of security or indemnity; and
(5) the holders of a majority in principal amount of the outstanding debt
securities of that series have not given the Trustee a direction that,
in the opinion of the Trustee, is inconsistent with such request within
such 60-day period.
Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding debt securities of a series are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust or power conferred on the
Trustee with respect to that series of debt securities. The Trustee, however,
may refuse to follow any direction that conflicts with law or the Indenture or
that the Trustee determines is unduly prejudicial to the rights of any other
holder or that would involve the Trustee in personal liability. Prior to taking
any action under the Indenture, the Trustee will be entitled to indemnification
satisfactory to it in its sole discretion against all losses and expenses
caused by taking or not taking such action.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder notice of the
Default within 90 days after it occurs. Except in the case of a Default in the
payment of principal of, premium, if any, or interest on any debt securities,
the Trustee may withhold notice if and so long as a committee of trust officers
of the Trustee in good faith determines that withholding notice is in the
interests of the holders. In addition, the Issuer is required to deliver to the
Trustee, within 120 days after the end of each fiscal year, a certificate
indicating whether the signers thereof know of any Default that occurred during
the previous year. The Issuer also is required to deliver to the Trustee,
within 30 days after the occurrence thereof, written notice of any events which
would constitute certain Defaults, their status and what action the Issuer is
taking or proposes to take in respect thereof.
Amendments and Waivers
Modifications and amendments of the Indenture may be made by the Issuer, the
Guarantor and the Trustee with the consent of the holders of a majority in
principal amount of all debt securities then outstanding under the Indenture
(including consents obtained in connection with a tender offer or exchange
offer for the debt securities). However, without the consent of each holder of
outstanding debt securities of each series affected thereby, no amendment may,
among other things:
(1) reduce the amount of debt securities whose holders must consent to an
amendment;
(2) reduce the stated rate of or extend the stated time for payment of
interest on any debt securities;
(3) reduce the principal of or extend the stated maturity of any debt
securities;
(4) reduce the premium payable upon the redemption of any debt securities
or change the time at which any debt securities may be redeemed as
described above under "Optional Redemption" or any similar provision;
(5) make any debt securities payable in money other than that stated in the
debt securities;
(6) impair the right of any holder to receive payment of, premium, if any,
principal of and interest on such holder's debt securities on or after
the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's debt securities;
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(7) make any change in the amendment provisions which require each
holder's consent or in the waiver provisions; or
(8) release the Guarantor or modify the Guarantee in any manner adverse to
the holders.
The holders of a majority in aggregate principal amount of the outstanding
debt securities of each series affected thereby, on behalf of all such holders,
may waive compliance by the Issuer and the Guarantor with certain restrictive
provisions of the Indenture. Subject to certain rights of the Trustee as
provided in the Indenture, the holders of a majority in aggregate principal
amount of the debt securities of each series affected thereby, on behalf of all
such holders, may waive any past default under the Indenture (including any
such waiver obtained in connection with a tender offer or exchange offer for
the debt securities), except a default in the payment of principal, premium or
interest or a default in respect of a provision that under the Indenture that
cannot be modified or amended without the consent of all holders of the series
of debt securities that is affected.
Without the consent of any holder, the Issuer, the Guarantor and the Trustee
may amend the Indenture to:
(9) cure any ambiguity, omission, defect or inconsistency;
(10) provide for the assumption by a successor corporation, partnership,
trust or limited liability company of the obligations of the Guarantor
or the Issuer under the Indenture;
(11) provide for uncertificated debt securities in addition to or in place
of certificated debt securities (provided that the uncertificated debt
securities are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated debt
securities are described in Section 163(f) (2) (B) of the Code);
(12) add guarantees with respect to the debt securities;
(13) secure the debt securities;
(14) add to the covenants of the Guarantor or the Issuer for the benefit of
the holders or surrender any right or power conferred upon the
Guarantor or the Issuer;
(15) make any change that does not adversely affect the rights of any
holder; or
(16) comply with any requirement of the Commission in connection with the
qualification of the Indenture under the Trust Indenture Act.
The consent of the holders is not necessary under the Indenture to approve
the particular form of any proposed amendment. It is sufficient if such consent
approves the substance of the proposed amendment. After an amendment under the
Indenture becomes effective, the Issuer is required to mail to the holders a
notice briefly describing such amendment. However, the failure to give such
notice to all the holders, or any defect therein, will not impair or affect the
validity of the amendment.
Defeasance
The Issuer at any time may terminate all its obligations under a series of
debt securities and the Indenture ("legal defeasance"), except for certain
obligations, including those respecting the defeasance trust and obligations to
register the transfer or exchange of the debt securities, to replace mutilated,
destroyed, lost or stolen debt securities and to maintain a registrar and
paying agent in respect of the debt securities. If the Issuer exercises its
legal defeasance option, the Guarantee will terminate with respect to that
series.
The Issuer at any time may terminate its obligations under covenants
described under "Certain Covenants" (other than "Merger and Consolidation"),
the bankruptcy provisions with respect to the
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Guarantor and the Guarantee provision described under "Events of Default" above
with respect to a series of debt securities ("covenant defeasance").
The Issuer may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Issuer exercises its
legal defeasance option, payment of the affected series of debt securities may
not be accelerated because of an Event of Default with respect thereto. If the
Issuer exercises its covenant defeasance option, payment of the affected series
of debt securities may not be accelerated because of an Event of Default
specified in clause (3), (4), (with respect only to the Guarantor) or (5) under
"Events of Default" above.
In order to exercise either defeasance option, the Issuer must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal, premium, if any, and
interest on the series of debt securities to redemption or maturity, as the
case may be, and must comply with certain other conditions, including delivery
to the Trustee of an opinion of counsel (subject to customary exceptions and
exclusions) to the effect that holders of the series of debt securities will
not recognize income, gain or loss for Federal income tax purposes as a result
of such deposit and defeasance and will be subject to Federal income tax on the
same amount and in the same manner and at the same times as would have been the
case if such deposit and defeasance had not occurred. In the case of legal
defeasance only, such opinion of counsel must be based on a ruling of the
Internal Revenue Service or other change in applicable Federal income tax law.
No Personal Liability of General Partner
The General Partner and its directors, officers, employees, incorporators
and stockholders, as such, shall have no liability for any obligations of the
Guarantor or the Issuer under the debt securities, the Indenture or the
Guarantee or for any claim based on, in respect of, or by reason of, such
obligations or their creation. Each holder by accepting a debt security waives
and releases all such liability. The waiver and release are part of the
consideration for issuance of the debt securities. Such waiver may not be
effective to waive liabilities under the federal securities laws and it is the
view of the Commission that such a waiver is against public policy.
Subordination
Debt securities of a series may be subordinated to Senior Indebtedness (as
defined below) to the extent set forth in the Prospectus Supplement relating
thereto. Subordinated debt securities will be subordinate in right of payment,
to the extent and in the manner set forth in the Indenture and the Prospectus
Supplement relating thereto, to the prior payment of all indebtedness of the
Issuer and the Guarantor that is designated as "Senior Indebtedness" with
respect to the series. "Senior Indebtedness" is defined generally to include
all notes or other evidences of indebtedness for money borrowed by the Issuer,
including guarantees, not expressed to be subordinate or junior in right of
payment to any other indebtedness of the Issuer.
Upon any payment or distribution of assets of the Issuer to creditors or
upon a total or partial liquidation or dissolution of the Issuer or in a
bankruptcy, receivership or similar proceeding relating to the Issuer or its
property, holders of Senior Indebtedness shall be entitled to receive payment
in full in cash of the Senior Indebtedness before holders of subordinated debt
securities shall be entitled to receive any payment of principal, premium or
interest with respect to the subordinated debt securities, and until the Senior
Indebtedness is paid in full, any distribution to which holders of subordinated
debt securities would otherwise be entitled shall be made to the holders of
Senior Indebtedness (except that the holders may receive shares of stock and
any debt securities that are subordinated to Senior Indebtedness to at least
the same extent as the subordinated debt securities).
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We may not make any payments of principal, premium or interest with respect
to subordinated debt securities, make any deposit for the purpose of defeasance
of the subordinated debt securities, or repurchase, redeem or otherwise retire
(except, in the case of subordinated debt securities that provide for a
mandatory sinking fund, by our delivery of subordinated debt securities to the
Trustee in satisfaction of our sinking fund obligation) any subordinated debt
securities if (a) any principal, premium or interest with respect to Senior
Indebtedness is not paid within any applicable grace period (including at
maturity), or (b) any other default on Senior Indebtedness occurs and the
maturity of the Senior Indebtedness is accelerated in accordance with its
terms, unless, in either case, the default has been cured or waived and the
acceleration has been rescinded, the Senior Indebtedness has been paid in full
in cash, or the Issuer and the Trustee receive written notice approving the
payment from the representatives of each issue of "Designated Senior
Indebtedness" (which will include any specified issue of Senior Indebtedness of
at least $100 million). During the continuance of any default (other than a
default described in clause (a) or (b) above) with respect to any Senior
Indebtedness pursuant to which the maturity thereof may be accelerated
immediately without further notice (except such notice as may be required to
effect the acceleration) or the expiration of any applicable grace periods, the
Issuer may not pay the subordinated debt securities for a period (the "Payment
Blockage Period") commencing on the receipt by the Issuer and the Trustee of
written notice of the default from the representative of any Designated Senior
Indebtedness specifying an election to effect a Payment Blockage Period (a
"Blockage Notice"). The Payment Blockage Period may be terminated before its
expiration by written notice to the Trustee and us from the person who have the
Blockage Notice, by repayment in full in cash of the Senior Indebtedness with
respect to which the Blockage Notice was given, or because the default giving
rise to the Payment Blockage Period is no longer continuing. Unless the holders
of the Senior Indebtedness shall have accelerated the maturity thereof, the
Issuer may resume payments on the subordinated debt securities after the
expiration of the Payment Blockage Period. Not more than one Blockage Notice
may be given in any period of 360 consecutive days unless otherwise provided in
the Prospectus Supplement relating to a series of subordinated debt securities.
In no event, however, may the total number of days during which any Payment
Blockage Period or Periods is in effect exceed 179 days in the aggregate during
any period of 360 consecutive days. After all Senior Indebtedness is paid in
full and until the subordinated debt securities are paid in full, holders of
the subordinated debt securities shall be subrogated to the rights of holders
of Senior Indebtedness to receive distributions applicable to Senior
Indebtedness.
By reason of the subordination, in the event of insolvency, our creditors
who are holders of Senior Indebtedness, as well as certain of our general
creditors, may recover more, ratably, than the holders of the subordinated debt
securities.
Book Entry, Delivery and Form
The debt securities of a series may be issued in whole or in part in the
form of one or more global certificates that will be deposited with a
depositary identified in a Prospectus Supplement.
Unless otherwise stated in any Prospectus Supplement, The Depository Trust
Company, New York, New York ("DTC") will act as depositary. Book-entry debt
securities of a series will be issued in the form of a global security that
will be deposited with DTC. This means that we will not issue certificates to
each holder. One global security will be issued to DTC who will keep a
computerized record of its participants (for example, your broker) whose
clients have purchased the debt securities. The participant will then keep a
record of its clients who purchased the debt securities. Unless it is exchanged
in whole or in part for certificated securities, a global security may not be
transferred; except that DTC, its nominees and their successors may transfer a
global security as a whole to one another.
Beneficial interests in global securities will be shown on, and transfers of
global securities will be made only through, records maintained by DTC and its
participants.
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DTC has provided us the following information: DTC is a limited-purpose
trust company organized under the New York Banking Law, a "banking
organization" with the meaning of the New York Banking Law, a member of the
United States Federal Reserve System, a "clearing corporation" within the
meaning of the New York Uniform Commercial Code and a "clearing agency"
registered under the provisions of Section 17A of the Securities Exchange Act
of 1934. DTC holds securities that its participants ("Direct Participants")
deposit with DTC. DTC also records the settlement among Direct Participants of
securities transactions, such as transfers and pledges, in deposited securities
through computerized records for Direct Participant's accounts. This eliminates
the need to exchange certificates. Direct Participants include securities
brokers and dealers, banks, trust companies, clearing corporations and certain
other organizations.
DTC's book-entry system is also used by other organizations such as
securities brokers and dealers, banks and trust companies that work through a
Direct Participant. The rules that apply to DTC and its participants are on
file with the Commission.
DTC is owned by a number of its Direct Participants and by the New York
Stock Exchange, Inc., The American Stock Exchange, Inc. and the National
Association of Securities Dealers, Inc.
We will wire principal and interest payments to DTC's nominee. We and the
Trustee will treat DTC's nominee as the owner of the global securities for all
purposes. Accordingly, we, the Trustee and any paying agent will have no direct
responsibility or liability to pay amounts due on the global securities to
owners of beneficial interests in the global securities.
It is DTC's current practice, upon receipt of any payment of principal or
interest, to credit Direct Participants' accounts on the payment date according
to their respective holdings of beneficial interests in the global securities
as shown on DTC's records. In addition, it is DTC's current practice to assign
any consenting or voting rights to Direct Participants whose accounts are
credited with debt securities on a record date, by using an omnibus proxy.
Payments by participants to owners of beneficial interests in the global
securities, and voting by participants, will be governed by the customary
practices between the participants and owners of beneficial interests, as is
the case with debt securities held for the account of customers registered in
"street name." However, payments will be the responsibility of the participants
and not of DTC, the Trustee or us.
Debt securities represented by a global security will be exchangeable for
certificated securities with the same terms in authorized denominations only
if:
. DTC notifies us that it is unwilling or unable to continue as depositary
or if DTC ceases to be a clearing agency registered under applicable law
and a successor depositary is not appointed by us within 90 days; or
. we determine not to require all of the debt securities of a series to be
represented by a global security and notify the Trustee of our decision.
Limitations on Issuance of Bearer Securities
The debt securities of a series may be issued as Registered Securities
(which will be registered as to principal and interest in the register
maintained by the registrar for the debt securities) or Bearer Securities
(which will be transferable only by delivery). If the debt securities are
issuable as Bearer Securities, certain special limitations and conditions will
apply.
In compliance with United States federal income tax laws and regulations, we
and any underwriter, agent or dealer participating in an offering of Bearer
Securities will agree that, in connection with the original issuance of the
Bearer Securities and during the period ending 40 days after the issue date,
they will not offer, sell or deliver any such Bearer Securities, directly or
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indirectly, to a United States Person (as defined below) or to any person
within the United States, except to the extent permitted under United States
Treasury regulations.
Bearer Securities will bear a legend to the following effect: "Any United
States person who holds this obligation will be subject to limitations under
the United States federal income tax laws, including the limitations provided
in Sections 165(j) and 1287(a) of the Internal Revenue Code." The sections
referred to in the legend provide that, with certain exceptions, a United
States taxpayer who holds Bearer Securities will not be allowed to deduct any
loss with respect to, and will not be eligible for capital gain treatment with
respect to any gain realized on the sale, exchange, redemption or other
disposition of, the Bearer Securities.
For this purpose, "United States" includes the United States of America and
its possessions, and "United States person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States, or an estate or trust the income of
which is subject to United States federal income taxation regardless of its
source.
Pending the availability of a definitive global security or individual
Bearer Securities, as the case may be, debt securities that are issuable as
Bearer Securities may initially be represented by a single temporary global
security, without interest coupons, to be deposited with a common depositary in
London for Morgan Guaranty Trust Company of New York, Brussels Office, as
operator of the Euroclear System ("Euroclear"), or Centrale de Livraison de
Valeurs Mobilieres S.A. ("CEDEL") for credit to the accounts designated by or
on behalf of the purchasers thereof. Following the availability of a definitive
global security in bearer form, without coupons attached, or individual Bearer
Securities and subject to any further limitations described in the applicable
Prospectus Supplement, the temporary global security will be exchangeable for
interests in the definitive global security or for the individual Bearer
Securities, respectively, only upon receipt of a "Certificate of Non-U.S.
Beneficial Ownership," which is a certificate to the effect that a beneficial
interest in a temporary global security is owned by a person that is not a
United States Person or is owned by or through a financial institution in
compliance with applicable United States Treasury regulations. No Bearer
Security will be delivered in or to the United States. If so specified in the
applicable Prospectus Supplement, interest on a temporary global security will
be paid to each of Euroclear and CEDEL with respect to that portion of the
temporary global security held for its account, but only upon receipt as of the
relevant interest payment date of a Certificate of Non-U.S. Beneficial
Ownership.
The Trustee
We may appoint a separate Trustee for any series of debt securities. As used
herein in the description of a series of debt securities, the term "Trustee"
refers to the Trustee appointed with respect to the series of debt securities.
We may maintain banking and other commercial relationships with the Trustee
and its affiliates in the ordinary course of business, and the Trustee may own
debt securities.
Governing Law
The Indenture provides that it and the debt securities will be governed by,
and construed in accordance with, the laws of the State of New York.
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DESCRIPTION OF COMMON UNITS
The Units
As of September 30, 1999, we have outstanding 45,552,915 Common Units,
21,409,870 Subordinated Units and 14,500,000 Convertible Special Units. The
Common units, the Subordinated Units and the Convertible Special Units
represent limited partner interests in the Company, which entitle the holders
thereof to participate in Company distributions and exercise the rights or
privileges available to limited partners under our Partnership Agreement. A
Summary of the important provisions of our Partnership Agreement and a copy of
our Partnership Agreement are included in our reports filed with the
Commission. Capitalized terms used in this Description of Common Units have the
meanings specified in the Partnership Agreement.
The outstanding Common Units are listed on the New York Stock Exchange under
the symbol "EPD." Any additional Common Units we issue will also be listed on
the NYSE.
Cash Distribution Policy
General
We distribute to our partners, on a quarterly basis, all of our Available
Cash. Available Cash is defined in the Partnership Agreement and generally
means, with respect to any calendar quarter, all cash on hand at the end of
such quarter less the amount of cash reserves that is necessary or appropriate
in the reasonable discretion of the General Partner to (i) provide for the
proper conduct of the Company's business, (ii) comply with applicable law or
any Company debt instrument or other agreement or (iii) provide funds for
distributions to Unitholders and the General Partner in respect of any one or
more of the next four quarters.
Cash distributions are characterized as distributions from either Operating
Surplus or Capital Surplus. This distinction affects the amounts distributed to
Unitholders relative to the General Partner, and under certain circumstances it
determines whether holders of Subordinated Units receive any distributions. See
"--Quarterly Distributions of Available Cash."
Operating Surplus is defined in the Partnership Agreement and refers
generally to (a) the sum of (i) the cash balance of the Company on July 31,
1998, the closing date of our initial public offering of Common Units
(excluding $46.5 million expected to be spent from the proceeds of that
offering on new projects), (ii) all cash receipts of the Company from its
operations since July 31, 1998 (excluding cash receipts from Interim Capital
Transactions, except for up to $60 million of such cash receipts from Interim
Capital Transactions that the General Partner designates as Operating Surplus),
less (b) the sum of (i) all Company operating expenses, (ii) debt service
payments (including reserves therefor but not including payments required in
connection with the sale of assets or any refinancing with the proceeds of new
indebtedness or an equity offering), (iii) maintenance capital expenditures and
(iv) reserves established for future Company operations, in each case since
July 31, 1998. Capital Surplus is also defined in the Partnership Agreement and
is generally generated only by borrowings (other than borrowings for working
capital purposes), sales of debt and equity securities and sales or other
dispositions of assets for cash (other than inventory, accounts receivable and
other assets all as disposed of in the ordinary course of business).
To avoid the difficulty of trying to determine whether Available Cash
distributed by the Company is from Operating Surplus or from Capital Surplus,
all Available Cash distributed by the Company from any source will be treated
as distributed from Operating Surplus until the sum of all Available Cash
distributed since July 31, 1998 equals the Operating Surplus as of the end of
the quarter prior to such distribution. Any Available Cash in excess of such
amount will be deemed to be from Capital Surplus and distributed accordingly.
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If Available Cash from Capital Surplus is distributed in respect of each
Common Unit in an aggregate amount per Common Unit equal to the $22.00 initial
public offering price of the Common Units (the "Initial Unit Price"), plus any
Common Unit Arrearages, the distinction between Operating Surplus and Capital
Surplus will cease, and all distributions of Available Cash will be treated as
if they were from Operating Surplus. We do not anticipate that there will be
significant distributions from Capital Surplus.
The Subordinated Units are a separate class of interests in the Company, and
the rights of holders of such interests to participate in distributions to
partners differ from the rights of the holders of Common Units. For any given
quarter, any Available Cash will be distributed to the General Partner and to
the holders of Common Units, and may also be distributed to the holders of
Subordinated Units depending upon the amount of Available Cash for the quarter,
the amount of Common Unit Arrearages, if any, and other factions discussed
below.
The 14,500,000 Convertible Special Units were issued as part of the purchase
price of Tejas Natural Gas Liquids LLC. These Units do not accrue distributions
and are not entitled to cash distributions until their conversion into an equal
number of Common Units between August 1, 2000 and August 1, 2002. We will also
issue up to 6,000,000 more Convertible Special Units to the seller if the
volumes of natural gas that we process for Shell Oil Company and its affiliates
reach certain agreed upon levels in 2000 and 2001. These additional Units would
convert into an equal number of Common Units between August 1, 2002 and August
1, 2003.
The Incentive Distributions represent the right of the General Partner to
receive an increasing percentage of quarterly distributions of Available Cash
from Operating Surplus after the Target Distribution Levels have been achieved.
The Target Distribution Levels are based on the amounts of Available Cash from
Operating Surplus distributed in excess of the payments made with respect to
the Minimum Quarterly Distribution and Common Unit Arrearages, if any, and the
related 2% distribution to the General Partner.
Subject to certain limitations contained in the Partnership Agreement, the
Company has the authority to issue additional Common Units or other equity
securities of the Company for such consideration and on such terms and
conditions as are established by the General Partner in its sole discretion and
without the approval of the Unitholders. It is possible that the Company will
fund acquisitions of assets or other capital projects through the issuance of
additional Common Units or other equity securities of the Company. Holders of
any additional Common Units issued by the Company will be entitled to share
equally with the then-existing holders of Common Units in distributions of
Available Cash by the Company. In addition, the issuance of additional Common
Units may dilute the value of the interests of the then-existing holders of
Common Units in the net assets of the Company. The General Partner will be
required to make an additional capital contribution to the Company or the
Operating Partnership in connection with the issuance of additional Common
Units.
The discussion in the sections below indicates the percentages of cash
distributions required to be made to the General Partner and the holders of
Common Units and the circumstances under which holders of Subordinated Units
are entitled to receive cash distributions and the amounts thereof.
Quarterly Distributions of Available Cash
The Company will make distributions to its partners with respect to each
calendar quarter of the Company prior to its liquidation in an amount equal to
100% of its Available Cash for such quarter. The Company expects to make
distributions of all Available Cash within approximately 45 days after the end
of each quarter, commencing with the quarter ending September 30, 1998, to
holders of
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record on the applicable record date. The Minimum Quarterly Distribution and
the Target Distribution Levels for the period from the closing of this offering
through September 30, 1998 will be adjusted downward based on the actual length
of such period. The Minimum Quarterly Distribution and the Target Distribution
Levels are also subject to certain other adjustments as described below under
"--Distributions from Capital Surplus" and "--Adjustment of Minimum Quarterly
Distribution and Target Distribution Levels."
With respect to each quarter during the Subordination Period, to the extent
there is sufficient Available Cash, the holders of Common Units will have the
right to receive the Minimum Quarterly Distributions, plus any Common Unit
Arrearages, prior to any distribution of Available Cash to the holders of
Subordinated Units. This subordination feature will enhance the Company's
ability to distribute the Minimum Quarterly Distribution on the Common Units
during the Subordination Period. There is no guarantee, however, that the
Minimum Quarterly Distribution will be made on the Common Units. Upon
expiration of the Subordination Period, all Subordinated Units will be
converted on a one-for-one basis into Common Units and will participate pro
rata with all other Common Units in future distributions of Available Cash.
Under certain circumstances, up to 50% of the Subordinated Units may convert
into Common Units prior to the expiration of the Subordination Period. Common
Units will not accrue arrearages with respect to distributions for any quarter
after the Subordination Period, and Subordinated Units will not accrue any
arrearages with respect to distributions for any quarter.
Distributions from Operating Surplus during Subordinated Period
The Subordination Period will generally extend from July 31, 1998 until the
first day of any quarter beginning after June 30, 2003 in respect of which (i)
distributions of Available Cash from Operating Surplus on the Common Units and
the Subordinated Units with respect to each of the three consecutive, non-
overlapping, four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the
outstanding Common Units and Subordinated Units during such periods, (ii) the
Adjusted Operating Surplus generated during each of the three consecutive, non-
overlapping, four-quarter periods immediately preceding such date equaled or
exceeded the sum of the Minimum Quarterly Distribution on all of the Common
Units and Subordinated Units that were outstanding during such period on a
fully diluted basis and the related distribution on the general partner
interests in the Company and the Operating Partnership and (iii) there are no
outstanding Common Unit Arrearages.
Prior to the end of the Subordination Period, a portion of the Subordinated
Units will convert into Common Units on a one-for-one basis on the first day
after the record date established for the distribution in respect of any
quarter ending on or after (a) June 30, 2001 with respect to one-quarter of the
Subordinated Units (5,352,468 Subordinated Units), and (b) June 30, 2002 with
respect of which (i) distributions of Available Cash from Operating Surplus on
the Common Units and the Subordinated Units with respect to each of the three
consecutive, non-overlapping, four-quarter periods immediately preceding such
date equaled or exceeded the sum of the Minimum Quarterly Distribution on all
of the outstanding Common Units and Subordinated Units that were outstanding
during such period on a fully diluted basis and the related distribution on the
general partner interests in the Company and the Operating Partnership and
(iii) there are no outstanding Common Unit Arrearages; provided, however, that
the early conversion of the second one-quarter of Subordinated Units may not
occur until at least one year following the early conversion of the first one-
quarter of Subordinated Units.
Upon expiration of the Subordination Period, all remaining Subordinated
Units will convert into Common Units on a one-for-one basis and will thereafter
participate, pro rata, with the other Common Units in distribution on Available
Cash. In addition, if the General Partner is removed as
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the general partner of the Company under circumstances where Cause does not
exist and Units held by the General Partner and its affiliates are not voted in
favor of such removal, (i) the Subordination Period will end all outstanding
Subordinated Units will immediately convert into Common Units on a one-for-one
basis, (ii) any existing Common Unit Arrearages will be extinguished and (iii)
the General Partner will have the right to convert its general partner interest
into Common Units or to receive cash in exchange for such interests.
Adjusted Operating Surplus for any period generally means Operating Surplus
generated during such period, less (a) any net increase in working capital
borrowing during such period and (b) any net reduction in cash reserves for
Operating Expenditures during such period not relating to an Operating
Expenditure made during such period, and plus (x) any net decrease in working
capital borrowings during such period and (y) any net increase in cash reserves
for Operating Expenditures during such period required by any debt instrument
for the repayment of principal, interest or premium. Operating Surplus
Generated during a period is equal to the difference between (i) the Operating
Surplus determined at the end of such period and (ii) the Operating Surplus
determined at the beginning of such period.
Distributions by the Company of Available Cash from Operating Surplus with
respect to any quarter during the Subordination Period will be made in the
following manner:
first, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding Common
Unit an amount equal to the Minimum Quarterly Distribution for such quarter.
second, 98% to the Common Unitholders, pro rata, and 2% to the General
Partner, until there has been distributed in respect of each outstanding Common
Unit an amount equal to any Common Unit Arrearages accrued and unpaid with
respect to any prior quarters during the Subordination Period;
third, 98% to the Subordinated Unitholders, pro rata and 2% to the General
Partner, until there has been distributed in respect of each outstanding Common
Unit an amount equal to the Minimum Quarterly Distribution for such quarter.
and
thereafter, in the manner described in "--Incentive Distributions--
Hypothetical Annualized Yield" below.
The above references to the 2% of Available Cash from Operating Surplus
distributed to the General Partner are references to the amount of the
percentage interest in distributions from the Company and the Operating
Partnership of the General Partner (exclusive of its or any of its affiliates'
interests as holders of Common Units or Subordinated Units). The General
Partner owns a 1% general partner interests in the Company and a 1.0101%
general partner interests in the Operating Partnership. With respect to any
Common Unit, the term "Common Unit Arrearages" refers to the amount by which
the Minimum Quarterly Distribution in any quarter during the Subordination
Period exceeds the distribution of Available Cash from Operating Surplus
actually made for such quarter on a Common Unit issued in our initial public
offering, cumulative for such quarter and all prior quarters during the
Subordination Period. Common Unit Arrearages will not accrue interest.
Distributions from Operating Surplus after Subordination Period
Distributions by the Company of Available Cash from the Operating Surplus
with respect to any quarter after the Subordination Period will be made in the
following manner:
first, 98% to all Unitholders, pro rata and 2% to the General Partner, until
there has been distributed in respect of each Unit an amount equal to the
Minimum Quarterly Distribution for such quarter; and
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thereafter, in the manner described in "--Incentive Distributions" below.
Incentive Distributions
For any quarter for which Available Cash from Operating Surplus is
distributed to the Common and Subordinated Unitholders in an amount equal to
the Minimum Quarterly Distribution on all Units and to the Common Unitholders
in an amount equal to any unpaid Common Unit Arrearages, then any additional
Available Cash from Operating Surplus in respect of such quarter will be
distributed among the Unitholders and the General Partner in the following
manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Unitholders have received (in addition to any distribution to Common
Unitholders to eliminate Common Unit Arrearages) a total of $0.506 for such
quarter in respect of each outstanding Unit ( the "First Target Distribution");
second, 85% to all Unitholders, pro rata, and 15% to the General Partner,
until the Unitholders have received (in addition to any distribution to Common
Unitholders to eliminate Common Unit Arrearages) a total of $0.617 for such
quarter in respect of each outstanding Unit (the "Second Target Distribution");
third, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until the Unitholders have received ( in addition to any distributions to
Common Unitholders to eliminate Common Unit Arrearages) a total of $0.784 for
such quarter in respect of each outstanding Unit ( the "Third Target
Distribution"); and
thereafter, 50% to all Unitholders, pro rate, and 50% to the General
Partner.
The distribution to the General Partner set forth above that are in excess
of its aggregate 2% general partner interest represent the Incentive
Distributions.
Distributions from Capital Surplus
Distributions by the Company of Available Cash from Capital Surplus will be
made in the following manner:
first, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until the Company has distributed, in respect of each outstanding Common
Unit issued in our initial public offering, Available Cash from Capital
Surplus in an aggregate amount per Common Unit equal to the Initial Unit
Price;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the Company has distributed, in respect of each
outstanding Common Unit, Available Cash from Capital Surplus in an
aggregate amount equal to any unpaid Common Unit Arrearages with respect to
such Common Unit; and
thereafter, all distributions of Available Cash from Capital Surplus
will be distributed as if they were from Operating Surplus.
As a distribution of Available Cash from Capital Surplus is made, it is
treated as if it were a repayment of the Initial Unit Price. To reflect such
repayment, the Minimum Quarterly Distribution and the Target Distribution
Levels will be adjusted downward by multiplying each such amount by a fraction,
the numerator of which is the Unrecovered Capital of the Common Units
immediately after giving effect to such repayment and the denominator of which
is the Unrecovered Capital of the Common Units immediately prior to such
repayment. This adjustment to the Minimum Quarterly Distribution may make it
more likely that Subordinated Units will be converted into Common Units
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(whether pursuant to the termination of the Subordination Period or to the
provisions permitting early conversion of some Subordinated Units) and may
accelerate the dates at which such conversions occur.
When "payback" of the Initial Unit Price has occurred, i.e., when the
Unrecovered Capital of the Common Units is zero (and any accrued Common Unit
Arrearages have been paid), the Minimum Quarterly Distribution and each of the
Target Distribution Levels will have been reduced to zero for subsequent
quarters. Thereafter, all distributions of Available Cash from all sources will
be treated as if they were from Operating Surplus. Because the Minimum
Quarterly Distribution and the Target Distribution Levels will have been
reduced to zero, the General Partner will be entitled thereafter to receive 50%
of all distributions of Available Cash in its capacity as General Partner (in
addition to any distributions to which it or its affiliates may be entitled as
holders of Units).
Distributions of Available Cash from Capital Surplus will not reduce the
Minimum Quarterly Distribution or Target Distribution Levels for the quarter
with respect to which they are distributed.
Adjustment of Minimum Quarterly Distribution and Target Distribution Levels
In addition to reductions of the Minimum Quarterly Distribution and Target
Distribution Levels made upon a distribution of Available Cash from Capital
Surplus, the Minimum Quarterly Distribution, the Target Distribution Levels,
the Unrecovered Capital, the number of additional Common Units issuable during
the Subordination Period without a Unitholder vote, the number of Common Units
issuable upon conversion of the Subordinated Units and other amounts calculated
on a per Unit basis will be proportionately adjusted upward or downward, as
appropriate, in the event of any combination or subdivision of Common Units
(whether effected by a distribution payable in Common Units or otherwise), but
not by reason of the issuance of additional Common Units for cash or property.
For example, in the event of a two-for-one split of the Common Units (assuming
no prior adjustments), the Minimum Quarterly Distribution, each of the Target
Distribution Levels and the Unrecovered Capital of the Common Units would each
be reduced to 50% of its initial level.
The Minimum Quarterly Distribution and the Target Distribution Levels may
also be adjusted if legislation is enacted or if existing law is modified or
interpreted by the relevant governmental authority in a manner that causes the
Company to become taxable as a corporation or otherwise subjects the Company to
taxation as an entity for federal, state or local income tax purposes. In such
event, the Minimum Quarterly Distribution and the Target Distribution Levels
would be reduced to an amount equal to the product of (i) the Minimum Quarterly
Distribution and each of the Target Distribution Levels, respectively,
multiplied by (ii) one minus the sum of (x) the maximum effective federal
income tax rate to which the Company is then subject as an entity plus (y) any
increase that results from such legislation in the effective overall state and
local income tax rate to which the Company is subject as an entity for the
taxable year in which such event occurs (after taking into account the benefit
of any deduction allowable for federal income tax purposes with respect to the
payment of state and local income taxes). For example, assuming the Company was
not previously subject to state and local income tax, if the Company were to
become taxable as an entity for federal income tax purposes and the Company
became subject to a maximum marginal federal, and effective state and local,
income tax rate of 38%, then the Minimum Quarterly Distribution and the Target
Distribution Levels would each be reduced to 62% of the amount thereof
immediately prior to such adjustment.
Distributions of Cash upon Liquidation
Following the commencement of the dissolution and liquidation of the
Company, assets will be sold or otherwise disposed of from time to time and the
partners' capital account balances will be
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adjusted to reflect any resulting gain or loss in the manner provided in the
Partnership Agreement. The proceeds of such liquidation will first be applied
to the payment of creditors of the Company in the order of priority provided in
the Partnership Agreement and bylaw and, thereafter, by distributed to the
Unitholders and the General Partner in accordance with their respective capital
account balances as so adjusted.
Partners are entitled to liquidating distributions in accordance with
capital account balances. The allocations of gains and losses upon liquidation
are intended, to the extent possible, to entitle the holders of outstanding
Common Units to a preference over the holders of outstanding Subordinated Units
upon the liquidation of the Company, to the extent required to permit Common
Unitholders to receive their Unrecovered Capital plus any unpaid Common Unit
Arrearages. Thus, net losses recognized upon liquidation of the Company will be
allocated to the holders of the Subordinated Units to the extent of their
capital account balances before any loss is allocated to the holders of the
Common Units, and net gains recognized upon liquidation will be allocated first
to restore negative balances in the capital account of the General Partner and
any Unitholders and then to the Common Unitholders until their capital account
balances equal their Unrecovered Capital plus unpaid Common Unit Arrearages.
However, no assurance can be given that there will be sufficient gain upon
liquidation of the Company to enable the holders of Common Units to fully
recover all of such amounts, even though there may be cash available after such
allocation for distribution to the holders of Subordinated Units.
If the liquidation of the Company occurs before the end of the Subordination
Period, any net gain (or unrealized gain attributable to assets distributed in
kind) will be allocated to the partners as follows:
first, to the General Partner and the holders of Units having negative
balances in their capital accounts to the extent of and in proportion to
such negative balances;
second, 98% to the holders of Common Units, pro rata, and 2% to the
General Partner, until the capital account for each Common Unit is equal to
the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
the amount of the Minimum Quarterly Distribution for the quarter during
which liquidation of the Company occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
third, 98% to the holders of Subordinated Units, pro rata, and 2% to the
General Partner, until the capital account for each Common Unit is equal to
the sum of (i) the Unrecovered Capital in respect of such Common Unit, (ii)
the amount of the Minimum Quarterly Distribution for the quarter during
which liquidation of the Company occurs and (iii) any unpaid Common Unit
Arrearages in respect of such Common Unit;
fourth, 98% to all Unitholders, pro rata, and 2% to the General Partner,
until there has been allocated under this paragraph fourth an amount per
Unit equal to (a) the sum of the excess of the First Target Distribution
per Unit over the Minimum Quarterly Distribution per Unit for each quarter
of the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Minimum Quarterly Distribution per Unit that were distributed 98% to the
Unitholders, pro rata, and 2% to the General Partner for each quarter of
the Company's existence;
fifth, 85% to all Unitholders, pro rata, and 15% to the General Partner,
until there has been allocated under this paragraph fifth an amount per
Unit equal to (a) the sum of the excess of the Second Target Distribution
per Unit over the First Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
First Target Distribution per Unit that were distributed 85% to the
Unitholders, pro rata, and 15% to the General Partner for each quarter of
the Company's existence;
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sixth, 75% to all Unitholders, pro rata, and 25% to the General Partner,
until there has been allocated under this paragraph sixth an amount per
Unit equal to (a) the sum of the excess of the Third Target Distribution
per Unit over the Second Target Distribution per Unit for each quarter of
the Company's existence, less (b) the cumulative amount per Unit of any
distributions of Available Cash from Operating Surplus in excess of the
Second Target Distribution per Unit that were distributed 75% to the
Unitholders, pro rata, and 25% to the General Partner for each quarter of
the Company's existence; and
thereafter, 50% to all Unitholders, pro rata, and 50% to the General
Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that clauses
(ii) and (iii) of paragraph second above and all of paragraph third above will
no longer be applicable.
Upon liquidation of the Company, any loss will generally be allocated to
the General Partner and the Unitholders as follows:
first, 98% to holders of Subordinated Units in proportion to the
positive balances in their respective capital accounts and 2% to the
General Partner, until the capital accounts of the holders of the
Subordinated Units have been reduced to zero;
second, 98% to the holders of Common Units in proportion to the positive
balances in their respective capital accounts and 2% to the General
Partner, until the capital accounts of the Common Unitholders have been
reduced to zero; and
thereafter, 100% to the General Partner.
If the liquidation occurs after the Subordination Period, the distinction
between Common Units and Subordinated Units will disappear, so that all of
paragraph first above will no longer be applicable.
In addition, interim adjustments to capital accounts will be made at the
time the Company issues additional partnership interests in the Company or
makes distributions of property. Such adjustments will be based on the fair
market value of the partnership interests or the property distributed and any
gain or loss resulting therefrom will be allocated to the Unitholders and the
General Partner in the same manner as gain or loss is allocated upon
liquidation. In the event that positive interim adjustments are made to the
capital accounts, any subsequent negative adjustments to the capital accounts
resulting from the issuance of additional partnership interests in the
Company, distributions of property by the Company, or upon liquidation of the
Company, will be allocated in a manner which results, to the extent possible,
in the capital account balances of the General Partner equaling the amount
which would have been the General Partner's capital account balances if no
prior positive adjustments to the capital accounts had been made.
Transfer Agent and Registrar
ChaseMellon Shareholder Services, LLC is our registrar and transfer agent
for the Common Units. You may contact them at the following address:
ChaseMellon Shareholder Services, L.L.C.
Overpeck Center
85 Challenger Road
Ridgefield Park, NJ 07760
All fees charged by the Transfer Agent for transfers of Common Units will be
borne by us and not by the holders of Common Units, except that fees similar
to those customarily paid by stockholders for
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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.
Transfer of Common Units
Until a Common Unit has been transferred on the books of the Company, the
Company and the Transfer Agent, notwithstanding any notice to the contrary, may
treat the record holder thereof as the absolute owner for all purposes, except
as otherwise required by law or stock exchange regulations. Any transfers of a
Common Unit will not be recorded by the Transfer Agent or recognized by the
Company unless the transferee executes and delivers a Transfer Application. By
executing and delivering a Transfer Application (the form of which is set forth
on the reverse side of the certificates representing the Common Units), the
transferee of Common Units (i) becomes the record holder of such Common Units
and shall constitute an assignee until admitted into the Company as a
substitute limited partner, (ii) automatically requests admission as a
substituted limited partner in the Company, (iii) agrees to be bound by the
terms and conditions of, and executes, the Partnership Agreement, (iv)
represents that such transferee has the capacity, power and authority to enter
into the Partnership Agreement, (v) grants powers of attorney to officers of
the General Partner and any liquidator of the Company as specified in the
Partnership Agreement and (vi) makes the consents and waivers contained in the
Partnership Agreement. An assignee will become a substituted limited partner of
the Company in the respect of the transferred Common Units upon the consent of
the General Partner and the recordation of the name of the assignee on the
books and records of the company. Such consent may be withheld in the sole
discretion of the General Partner.
Common Units are securities and are transferable according to the laws
governing transfer of securities. In addition to other rights acquired upon
transfer, the transferor gives the transferee the right to request admission as
a substituted limited partner in the Company in the respect of transferred
Common Units. A purchaser or transferee of Common Units who does not execute
and deliver a Transfer Application obtains only (a) the right to assign the
Common Units to a purchaser or other transferee and (b) the right to transfer
the right to seek admission as a substituted limited partner in the Company
with respect to the transferred Common Units. Thus, a purchaser or transferee
of Common Units who does not execute and deliver a Transfer Application will
not receive cash distributions or federal income tax allocations unless the
Common Units are held in a nominee or "street name" account and the nominee or
broker has executed and delivered a Transfer Application with respect to such
Common Units, and may not receive certain federal income tax information or
reports furnished to record holders of Common Units. The transferor of Common
Units will have a duty to provide such transferee with all information that may
be necessary to obtain registration of the transfer of Common Units, that the
transferor will not have a duty to insure the execution of the Transfer
Application by the transferee and will have no liability or responsibility if
such transferee neglects to or chooses not to execute and forward the Transfer
Application to the Transfer Agent.
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FEDERAL INCOME TAX CONSIDERATIONS
This section is a summary of material federal income tax considerations that
may be relevant to prospective Unitholders and, to the extent set forth below
under "--Legal Opinions and Advice," expresses the opinion of our counsel,
Vinson & Elkins L.L.P., ("Counsel"), insofar as it relates to matters of United
States federal income tax law and legal conclusions. This section is based upon
current provisions of the Code, existing and proposed Treasury regulations
thereunder and current administrative rulings and court decisions, all of which
are subject to change at any time. Subsequent changes in such authorities may
cause the tax consequences to vary substantially from the consequences
described below. Unless the context otherwise requires, references in this
section to "we," "our," and "us" refer to both the Company and the Operating
Partnership.
No attempt has been made in the following discussion to comment on all
federal income tax matters affecting our Unitholders or us. Moreover, the
discussion focuses on our Unitholders who are individual citizens or residents
of the United States and has only limited application to corporations, estates,
trusts, nonresident aliens or other Unitholders subject to specialized tax
treatment (such as tax-exempt institutions, foreign persons, IRAs, REITs or
mutual funds). Prospective investors are urged to consult their own tax
advisors as to the particular tax consequences to them of the acquisition,
ownership and disposition of an investment in the Common Units, including the
applicability of any federal income, federal estate or gift tax, state, local
and foreign tax laws, changes in applicable tax laws and any pending or
proposed legislation.
Legal Opinions and Advice
Counsel is of the opinion that, based on the accuracy of the representations
and subject to the qualifications set forth in the detailed discussion that
follows, for federal income tax purposes (i) we and the Operating Partnership
will each be treated as a partnership, and (ii) owners of Common Units (with
certain exceptions, as described in "--Limited Partner Status" below) will be
treated as our partners (but not partners of 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.
We have not requested any ruling from the IRS with respect to the foregoing
issues or any other matter affecting our Unitholders or us. An opinion of
counsel represents only that counsel's best legal judgment and does not bind
the IRS or the courts. Thus, we cannot assure you that the opinions and
statements set forth in this prospectus would be sustained by a court if
contested by the IRS. Any such contest with the IRS may materially and
adversely impact the market for the Common Units and the prices at which Common
Units trade. In addition, the costs of any contest with the IRS will be borne
directly or indirectly by the Unitholders and the General Partner. Furthermore,
we cannot assure you that the treatment of the Company or an investment therein
will not be significantly modified by future legislative or administrative
changes or court decisions. Any modification may or may not be retroactively
applied.
Partnership Status
A partnership is not a taxable entity and incurs no federal income tax
liability. Instead, each partner is required to take into account his allocable
share of items of income, gain, loss, deduction and credit of the partnership
in computing his federal income tax liability, regardless of whether cash
distributions are made. Distributions by a partnership to a partner generally
are not taxable unless the amount of any cash distributed is in excess of the
partner's adjusted basis in his partnership interest.
An entity generally will be classified as a partnership rather than as a
corporation for federal income tax purposes if the entity (i) is treated as a
partnership under Treasury regulations, effective
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January 1, 1997, relating to entity classification (the "Check-the-Box
Regulations") and (ii) is not a "publicly traded partnership" taxed as a
corporation under Section 7704 of the Code. In general, under the Check-the-Box
Regulations, an unincorporated domestic entity with at least two members may
elect to be classified either as an association taxable as a corporation or as
a partnership. If such an entity fails to make any election, it will be treated
as a partnership for federal income tax purposes.
Section 7704 of the Code provides that publicly-traded partnerships will, as
a general rule, be taxed as corporations. However, an exception (the
"Qualifying Income Exception") exists with respect to publicly-traded
partnerships of which 90% or more of the gross income for every taxable year
consists of "qualifying income." Qualifying income includes interest (from
other than a financial business), dividends and income and gains from the
exploration, development, mining or production, processing, refining,
transportation and marketing of any mineral or natural resource. In the instant
case, the Company's gross income that is derived from the processing or
refining of ethane, propane, MTBE, isobutane, natural gasoline, propylene and
the transportation of NGLs is qualifying income. We estimate that less than 1%
of our gross income is not qualifying income under this test; however, this
estimate could change from time to time. Based upon and subject to that
estimate, the factual representations made by us and the General Partner and a
review of the applicable legal authorities, Counsel is of the opinion that at
least 90% of our gross income constitutes qualifying income.
If we fail to meet the Qualifying Income Exception (other than a failure
which is determined by the IRS to be inadvertent and which is cured within a
reasonable time after discovery), we will be treated as if we had transferred
all of our assets (subject to liabilities) to a newly formed corporation (on
the first day we fail to meet the Qualifying Income Exception) in return for
stock in the corporation, and then distributed that stock to the partners in
liquidation of their interests in us. This contribution and liquidation should
be tax-free to Unitholders and us, so long as we, at such time, do not have
liabilities in excess of the tax basis of our assets. Thereafter, we would be
treated as a corporation for federal income tax purposes.
If we or the Operating Partnership were treated as an association or
otherwise taxable as a corporation in any taxable year, as a result of a
failure to meet the Qualifying Income Exception or otherwise, our items of
income, gain, loss and deduction would be reflected only on our tax return
rather than being passed through to the Unitholders, and our net income would
be taxed at the entity level at corporate rates. In addition, any distribution
made to a Unitholder would be treated as either taxable dividend income (to the
extent of our current or accumulated earnings and profits), 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 either us or the Operating Partnership as an association or
otherwise taxable as a corporation would result in a material reduction in a
Unitholder's cash flow and after-tax return.
No ruling has been or will be sought from the IRS as to our status or the
status of the Operating Partnership as a partnership for federal income tax
purposes. Instead we have relied on the opinion of Counsel that, based upon the
Code, the Treasury regulations promulgated thereunder, published revenue
rulings and court decisions, the Company and the Operating Partnership will
each be classified as a partnership for federal income tax purposes.
In rendering its opinion, Counsel has relied on certain factual
representations made by the General Partner and us. Such factual matters are as
follows:
(a) neither we nor the Operating Partnership has elected or will elect to
be treated as an association taxable as a corporation;
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(b) the General Partner will at all times act independently of the limited
partners;
(c) for each taxable year, more than 90% of our gross income will be income
from sources that Counsel has or will opined is "qualifying income";
(d) we and the Operating Partnership are organized and will be operated in
accordance with (i) all applicable partnership statutes, (ii) its and
our respective partnership agreements, and (iii) its and our
description in the Registration Statement.
The discussion below is based on the assumption that the Company and the
Operating Partnership will be classified as a partnership for federal income
tax purposes.
Limited Partner Status
Our Unitholders who have become limited partners will be treated as partners
of the Company 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,
Counsel is also of the opinion that (a) assignees who have executed and
delivered Transfer Applications and are awaiting admission as limited partners
and (b) Unitholders whose Common Units are held in street name or by a nominee
and who have the right to direct the nominee in the exercise of all substantive
rights attendant to the ownership of their Common Units will be treated as our
partners 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,
losses or credit would not appear to be reportable by these Unitholders, and
any cash distributions received by such Unitholders would therefore be fully
taxable as ordinary income. These holders should consult their own tax advisors
with respect to their status as partners 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 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
We will pay no federal income tax. Instead, each of our Unitholders will be
required to report on his income tax return his allocable share of our income,
gains, losses and deductions without regard to whether corresponding cash
distributions are received by him. Consequently, we may allocate income to our
Unitholders although they have not received a cash distribution in respect of
that income.
Treatment of Company Distributions
Our distributions to any of our Unitholders generally will not be taxable to
the Unitholder for federal income tax purposes to the extent of his tax basis
in his Common Units immediately before
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the distribution. Cash distributions in excess of a Unitholder's tax basis
generally will be considered to be gain from the sale or exchange of the Common
Units, taxable in accordance with the rules described under "--Disposition of
Common Units" below. Any reduction in a Unitholder's share of our liabilities
for which no partner, including the General Partner, bears the economic risk of
loss ("nonrecourse liabilities") will be treated as a distribution of cash to
that Unitholder.
Basis of Common Units
A Unitholder's initial tax basis for his Common Units will be the amount he
paid for the Common Units plus his share of our nonrecourse liabilities. The
initial tax basis for a Common Unit will be increased by the Unitholder's share
of our income and by any increase in the Unitholder's share of our nonrecourse
liabilities. The basis for a Common Unit will be decreased (but not below zero)
by our distributions, including any decrease in the Unitholder's share of our
nonrecourse liabilities, by the Unitholder's share of our losses and by his
share of our expenditures that are not deductible in computing the Unitholder's
taxable income and are not required to be capitalized. A Unitholder's share of
our nonrecourse liabilities generally will be based on the Unitholder's share
of our profits.
Limitations on Deductibility of Company Losses
To the extent we incur losses, a Unitholder's share of deductions for the
losses will be limited to the tax basis of his Units or, in the case of an
individual Unitholder or a corporate Unitholder if more than 50% of the value
of its stock is owned directly or indirectly by or for five or fewer
individuals or some tax-exempt organizations, to the amount that the Unitholder
is considered to be "at risk" with respect to our activities, if that is less
than the Unitholder's basis. A Unitholder must recapture losses deducted in
previous years to the extent that our distributions cause the Unitholder's at
risk amount to be less than zero at the end of any taxable year. Losses
disallowed to a Unitholder or recaptured as a result of these limitations will
carry forward and will be allowable to the extent that the Unitholder's basis
or at risk amount (whichever is the limiting factor) is increased.
In general, a Unitholder will be at risk to the extent of the purchase price
of his Units, but this will be less than the Unitholder's basis for his Units
by the amount of the Unitholder's share of any of our nonrecourse liabilities.
A Unitholder's at risk amount will increase or decrease as the basis for the
Unitholder's Units increases or decreases except that changes in our
nonrecourse liabilities will not increase or decrease the at risk amount.
The passive loss limitations generally provide that individuals, estates,
trusts and some closely-held corporations and personal service corporations can
only deduct losses from passive activities (generally, activities in which the
taxpayer does not materially participate) that are not in excess of the
taxpayer's income from passive activities or investments. The passive loss
limitations are applied separately with respect to each publicly-traded
partnership. Consequently, any losses generated by us will only be available to
offset future income that we generate 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 that
are not deductible because they exceed the Unitholder's income that we generate
may be deducted in full when the Unitholder disposes of his entire investment
in us in a fully taxable transaction to an unrelated party. The passive
activity loss rules are applied after other applicable limitations on
deductions such as the at risk rules and the basis limitation.
A Unitholder's share of our net income may be offset by any of our suspended
passive losses, but it may not be offset by any other current or carryover
losses from other passive activities, including those attributable to other
publicly-traded partnerships. The IRS has announced that Treasury Regulations
will be issued that characterize net passive income from a publicly-traded
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partnership as investment income for purposes of the limitations on the
deductibility of investment interest.
Limitations on Interest Deductions
The deductibility of a non-corporate taxpayer's "investment interest
expense" is generally limited to the amount of the taxpayer's "net investment
income." As noted, a Unitholder's share of our net passive income will be
treated as investment income for this purpose. In addition, the Unitholder' s
share of our portfolio income will be treated as investment income. Investment
interest expense includes.
. interest on indebtedness properly allocable to property held for
investment;
. our interest expense attributed to portfolio income; and
. the portion of interest expense incurred to purchase or carry an
interest in a passive activity to the extent attributable to portfolio
income.
The computation of a Unitholder's investment interest expense will take into
account interest on any margin account borrowing or other loan incurred to
purchase or carry a Unit to the extent attributable to his portfolio income.
Net investment income includes gross income from property held for investment,
gain attributable to the disposition of property held for investment and
amounts treated as portfolio income pursuant to the passive loss rule for
deductible expenses (other than interest) directly connected with the
production of investment income.
Allocation of Income, Gain, Loss and Deduction
Our partnership agreement provides that a capital account be maintained for
each partner, that the capital accounts generally be maintained in accordance
with the applicable tax accounting principles set forth in applicable Treasury
Regulations and that all allocations to a partner be reflected by an
appropriate increase or decrease in his capital account. Distributions upon our
liquidation are generally to be made in accordance with positive capital
account balances.
In general, if we have a net profit, items of income, gain, loss and
deduction will be allocated among the General Partner and our Unitholders in
accordance with their respective percentage interests in us. A class of our
Unitholders that receives more cash than another class, on a per unit basis,
with respect to a year, will be allocated additional income equal to that
excess. If we have a net loss, items of income, gain, loss and deduction will
generally be allocated for both book and tax purposes (1) first, to the General
Partner and the Unitholders in accordance with their respective Percentage
Interests to the extent of their positive capital accounts and (2) second, to
the General Partner.
Notwithstanding the above, as required by Section 704(c) of the Code, some
items of our 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 us ("Contributed Property") or owned by us at the time new Units
are sold by us ("Adjusted Property"). In addition, some items of recapture
income will be allocated to the extent possible to the partner allocated the
deduction giving rise to the treatment of the gain as recapture income in order
to minimize the recognition of ordinary income by some Unitholders. Finally,
although we do not expect that our operations will result in the creation of
negative capital accounts, if negative capital accounts nevertheless result,
items of our income and gain will be allocated in an amount and manner
sufficient to eliminate the negative balance as quickly as possible.
Regulations provide that an allocation of items of our income, gain, loss,
deduction or credit, other than an allocation required by Section 704(b) of the
Code to eliminate the disparity between a
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partner's "book" capital account (credited with the fair market value of
Contributed Property and credited or debited with any gain of loss attributable
to an Adjusted Property) and "tax" capital account (credited with the tax basis
of Contributed Property) (the "Book-Tax Disparity"), will generally be given
effect for federal income tax purposes in determining a partner's distributive
share of an item of income, gain, loss or deduction only if the allocation has
substantial economic effect. In any other case, a partner's distributive share
of an item will be determined on the basis of the partner's interest in us,
which will be determined by taking into account all the facts and
circumstances, including the partner's relative contributions to us, the
interests of the partners in economic profits and losses, the interest of the
partners in cash flow and other non-liquidating distributions and rights of the
partners to distributions of capital upon liquidation.
Counsel is of the opinion that allocations under the Partnership Agreement
will be given effect for federal income tax purposes in determining a
Unitholder's distributive share of an item of income, gain, loss or deduction.
Tax Treatment of Operations
Accounting Method and Taxable Year
We use the calendar year as our taxable year and adopt the accrual method of
accounting for federal income tax purposes.
Initial Tax Basis, Depreciation and Amortization
The tax basis established for our various assets will be used for purposes
of computing depreciation and cost recovery deductions and, ultimately, gain or
loss on the disposition of those assets. Our assets initially had an aggregate
tax basis equal to the tax basis of the assets in the possession of EPCO
immediately prior to our formation.
To the extent allowable, our General Partner may elect to use the
depreciation and cost recovery methods that will result in the largest
depreciation deductions in our early years. Property that we subsequently
acquired or construct may be depreciated using accelerated methods permitted by
the Code.
If we dispose of depreciable property by sale, foreclosure or otherwise, all
or a portion of any gain (determined by reference to the amount of depreciation
previously deducted and the nature of the property) may be subject to the
recapture rules and taxed as ordinary income rather than capital gain.
Similarly, a partner who has taken cost recovery or depreciation deductions
with respect to property owned by us may be required to recapture such
deductions as ordinary income upon a sale of his interest. See "--Tax
Consequences of Common Unit Ownership--Allocation of Our Income, Gain, Loss ,
Deduction and Credit" and "--Tax Consequences of Common Unit Ownership--
Disposition of Common Units--Recognition of Gain or Loss."
Costs we incurred in organizing may be amortized over any period we select
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. There are uncertainties regarding the classification of costs as
organization expenses, which may be amortized, and as syndication expenses,
which may not be amortized.
Section 754 Election
We previously made the election permitted by Section 754 of the Code. This
election is irrevocable without the consent of the IRS. The election generally
permits a purchaser of a Unit to adjust his share of the basis in our
properties ("inside basis") pursuant to Section 743(b) of the
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Code to fair market value (as reflected by his Unit price). See "Tax
Considerations--Allocation of Our Income, Gain, Loss and Deduction." The
Section 743(b) adjustment is attributed solely to a purchaser of units and is
not added to the basis of our assets associated with all of our Unitholders.
(For purposes of this discussion, a partner's inside basis in the Company's
assets will be considered to have two components: (1) his share of our actual
basis in our assets (the "Common Basis") and (2) his Section 743(b) adjustment
allocated to each of our assets.)
Proposed Treasury Regulation Section 1.197-2(g)(3) generally requires that
the Section 743(b) adjustment attributable to amortizable intangible assets
should be treated as a newly-acquired asset placed in service on the date when
the transfer occurs. Under Treasury Regulation Section 1.167(c)- 1(a)(6), a
Section 743(b) adjustment attributable to property subject to depreciation
under Section 167 of the Code rather than cost recovery deductions under
Section 168 is generally required to be depreciated using either the straight-
line method or the 150% declining balance method. The depreciation and
amortization methods and useful lives associated with the Section 743(b)
adjustment, therefore, may differ from the methods and useful lives generally
used to depreciate the common basis in such properties. Pursuant to the
Partnership Agreement, our General Partner is authorized to adopt a convention
to preserve the uniformity of Units even if such convention is not consistent
with Treasury Regulation Section 1.197-2(g)(3) or Proposed Treasury Regulation
Section 1.167(c)-1(a)(6). See "--Tax Consequences of Common Unit Ownership--
Uniformity of Units."
Although Counsel is unable to opine as to the validity of such an approach,
we intend 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 our property. This method
is consistent with the proposed regulations under Section 743 but is arguably
inconsistent with Treasury Regulation Section 1.197-2(g)(3). To the extent that
the Section 743(b) adjustment is attributable to appreciation in value in
excess of the unamortized Book-Tax Disparity, we will apply the rules described
in the Treasury Regulations and legislative history. If we determine that this
position cannot reasonably be taken, we may adopt a depreciation or
amortization convention under which all purchasers acquiring Units in the same
month would receive depreciation or amortization, whether attributable to the
Common Basis or the Section 743(b) basis, based upon the same applicable rate
as if they had purchased a direct interest in our property. This aggregate
approach may result in lower annual depreciation or amortization deductions
than would otherwise be allowable to some of our Unitholders. See "--Tax
Consequences of Common Unit Ownership--Uniformity of Units."
The allocation of the Section 743(b) adjustment must be made in accordance
with the principles of section 1060 of the Code. Based on these principles, the
IRS may seek to reallocate some or all of any Section 743(b) adjustment not so
allocated by us to goodwill. Alternatively, it is possible that the IRS may
seek to treat the portion of the Section 743(b) adjustment attributable to the
Underwriter's discount as if allocable to a non-deductible syndication cost.
A Section 754 election is advantageous if the transferee's basis in his
Units is higher than his Units' share of the aggregate basis of our assets
immediately prior to the transfer. In such a case, pursuant to the election,
the transferee would take a new and higher basis in his share of our assets for
purposes of calculating, among other items, his depreciation deductions and his
share of any gain or loss on a sale of our assets. Conversely, a Section 754
election is disadvantageous if the transferee's basis in his Units is lower
than his Units' share of the aggregate basis of our assets immediately prior to
the transfer. Thus, the amount that a Unitholder will be able to obtain upon
the sale of his Units may be affected either favorably or adversely by the
election.
The calculations involved in the Section 754 election are complex and we
will make them on the basis of some assumptions as to the value of our assets
and other matters. There is no
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assurance that the determinations we make will not be successfully challenged
by the IRS and that the deductions attributable to them will not be disallowed
or reduced. Should the IRS require a different basis adjustment to be made, and
should, in our General Partner's opinion, the expense of compliance exceed the
benefit of the election, our General Partner may seek permission from the IRS
to revoke our Section 754. If such permission is granted, a purchaser of Units
probably will incur increased tax liability.
Alternative Minimum Tax
Each Unitholder will be required to take into account his distributive share
of any items of our income, gain or loss for purposes of the alternative
minimum tax. A portion of our depreciation deductions may be treated as an item
of tax preference for this purpose.
A Unitholder's alternative minimum taxable income derived from us may be
higher than his share of our net income because we may use more accelerated
methods of depreciation for purposes of computing federal taxable income or
loss. The minimum tax rate for individuals is 26% on the first $175,000 of
alternative minimum taxable income in excess of the exemption amount and 28% on
any additional alternative minimum taxable income. You should consult with your
tax advisors as to the impact of an investment in Units on your liability for
the alternative minimum tax.
Valuation of Our Property
The federal income tax consequences of the ownership and disposition of
Units will depend in part on our estimates of the relative fair market values,
and determinations of the initial tax basis, of our assets. Although we 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 solely by us. These estimates are subject to challenge and will not be
binding on the IRS or the courts. In the event the estimates of fair market
value are subsequently found to be incorrect, the character and amount of items
of income, gain, loss, deductions or credits previously reported by Unitholders
might change, and Unitholders might be required to amend their previously filed
tax returns or to file claims for refunds.
Treatment of Short Sales
A Unitholder who engages in a short sale (or a transaction having the same
effect) with respect to the Units will be required to recognize the gain (but
not the loss) inherent in the Units that are sold short. See "--Tax
Consequences of Common Unit Ownership--Disposition of Common Units." In
addition, it would appear that a Unitholder whose Units are loaned to a "short
seller" to cover a short sale of Units may be considered as having transferred
beneficial ownership of those Units, and would, thus, no longer be a partner
with respect to those Units during the period of the loan. As a result, during
this period, any of our income, gain, deduction, loss or credit with respect to
those Units would appear not to be reportable by the Unitholder, any cash
distributions received by the Unitholder with respect to those Units would be
fully taxable and all of those distributions would appear to be treated as
ordinary income. The IRS may also contend that a loan of common units to a
"short seller" constitutes a taxable exchange. If the IRS successfully made
this contention, the lending Unitholder may be required to recognize gain or
loss. Unitholders desiring to assure their status as partners should modify any
of their brokerage account agreements to prohibit their brokers from borrowing
their Units.
Disposition of Common Units.
Recognition of Gain or Loss
Gain or loss will be recognized on a sale of Units equal to the difference
between the amount realized and the Unitholder's tax basis for the Units sold.
A Unitholder's amount realized will be
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measured by the sum of the cash or the fair market value of other property
received plus his share of our nonrecourse liabilities. Since the amount
realized includes a Unitholder's share of our nonrecourse liabilities, the gain
recognized on the sale of Units may result in a tax liability in excess of any
cash received from the sale.
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 twelve months will generally
be taxable as long-term capital gain or loss. A substantial portion of this
gain or loss, however, will be separately computed and taxed as ordinary income
or loss under Section 751 of the Code to the extent attributable to assets
giving rise to depreciation recapture or other "unrealized receivables" or to
"inventory items" we own. The term "unrealized receivables" includes potential
recapture items, including depreciation recapture. Ordinary income attributable
to unrealized receivables, inventory items and depreciation recapture may
exceed net taxable gain realized upon the sale of the Unit and may be
recognized even if there is a net taxable loss realized on the sale of the
Unit. Any loss recognized on the sale of Units will generally be a capital
loss. 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 a corporation.
The IRS has ruled that a partner acquiring interests in a partnership in
separate transactions at different prices must maintain an aggregate adjusted
tax basis in a single partnership interest and that, upon sale or other
disposition of some of the interests, a portion of the aggregate tax basis must
be allocated to the interests sold on the basis of some equitable apportionment
method. This ruling is unclear as to how the holding period of these interests
is affected by this aggregation concept. If this ruling is applicable to you,
the aggregation of your tax basis effectively prohibits you from choosing among
Units with varying amounts of unrealized gain or loss as would be possible in a
stock transaction. Thus, the ruling may result in an acceleration of gain or
deferral of loss on a sale of a portion of your Units. It is not clear whether
the ruling applies to publicly-traded partnerships, such as us, the interests
in which are evidenced by separate interest, and accordingly Counsel is unable
to opine as to the effect this ruling will have on you. If you are considering
the purchase of additional Common Units or a sale of Common Units purchased at
differing prices, you should consult your tax advisor as to the possible
consequences of this ruling.
Allocations Between Transferors and Transferees
In general, our taxable income and losses will be determined annually and
will be prorated on a monthly basis and subsequently apportioned among the
Unitholders in proportion to the number of Units they owned as of the close of
the first business day of the month (the "Allocation Date"). However, gain or
loss realized on a sale or other disposition of our assets other than in the
ordinary course of business will be allocated among the Unitholders on the
Allocation Date in the month in which the gain or loss is recognized. As a
result of this allocation procedure, a Unitholder transferring Common Units in
the open market may be allocated income, gain, loss, deduction, and credit
accrued after the date of transfer.
The use of the allocation procedure discussed above may not be permitted by
existing Treasury regulations and, 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 an allocation procedure is not
allowed by the Treasury Regulations (or only applies to transfers of less than
all of the Unitholder's interest), our taxable income or losses might be
reallocated among the Unitholders. We are authorized to revise our method of
allocation between 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.
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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 distribution with respect to that
quarter will be allocated items of our income and gain attributable to the
quarter during which his Units were owned but will not be entitled to receive
distributions with respect to that quarter.
Notification Requirements
A Unitholder who sells or exchanges Units is required to notify us in
writing of the 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. We are 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 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 which the sale or exchange occurred, that
set forth the amount of the consideration paid for the Unit that is allocated
to our goodwill or going concern value. Failure to satisfy these reporting
obligations may lead to the imposition of substantial penalties.
Constructive Termination
We and the Operating Partnership will be considered to be terminated if
there is a sale or exchange of 50% or more of the total interests in Company
capital and profits within a 12-month period. A constructive termination
results in the closing of a partnership's taxable year for all partners. A
termination could result in non-uniformity of Units for federal income tax
purposes. Our constructive termination will cause a termination of our
operating limited partnerships. A termination could also result in penalties or
loss of basis adjustments under the Code if we were unable to determine that
the termination had occurred.
In the case of a Unitholder reporting on a fiscal year other than a calendar
year, the closing of our tax year may result in more than 12 months of our
taxable income or loss of the Company 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 constructively distributed to him (including
any net reduction in his share of partnership nonrecourse liabilities) exceeds
the adjusted basis of his Units. New tax elections we are required to make,
including a new election under Section 754 of the Code, must be made subsequent
to the constructive termination. A constructive termination would also result
in a deferral of our deductions for depreciation. In addition, a termination
might either accelerate the application of or subject us to any tax legislation
enacted with effective dates after the closing of the offering made hereby.
Entity-Level Collections
If we are required 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, we are authorized to pay those taxes from our funds. The payments,
if made, will be deemed current distributions of cash to the Unitholder and the
General Partner. Our general Partner 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 the deemed distributions, the priority and characterization of
distributions otherwise applicable under the Partnership Agreement is
maintained as nearly as is practicable. These payments 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.
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Uniformity of Units
Since we 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 Treasury Regulation Section 1.167(c)-1(a)(6) or Proposed
Treasury Regulation Section 1.197-2(g)(3). Any non-uniformity could have a
negative impact on the value of the Units. See "Tax Treatment of Operations--
Section 754 Election."
We intend to depreciate the portion of a Section 743(b) adjustment
attributable to unrealized appreciation in the value of Contributed Property or
Adjusted Property (to the extent of any unamortized Book-Tax Disparity) using
the rate of depreciation derived from the depreciation method and useful life
applied to the Common Basis of our property, consistent with the proposed
regulations under Section 743, but despite its inconsistency with Treasury
Regulation Section 1.167(c)-1(a)(6) or Proposed Treasury Regulation Section
1.197-2(g)(3). See "--Tax Treatment of Operations--Section 754 Election." If we
determine that this position cannot reasonably be taken, we may adopt
depreciation and amortization conventions under which all purchasers acquiring
Units in the same month would receive depreciation and amortization deductions,
whether attributable to the Common Basis or the Section 743(b) basis, based
upon the same applicable rate as if they had purchased a direct interest in our
property. If this aggregate approach is adopted, it may result in lower annual
depreciation and amortization deductions than would otherwise be allowable to
some of our Unitholders and risk the loss of depreciation and amortization
deductions not taken in the year that such deductions are otherwise allowable.
We will not adopt this convention if we determine that the loss of depreciation
and amortization deductions will have a material adverse effect on the
Unitholders. If we choose not to utilize this aggregate method, we may use any
other reasonable depreciation and amortization 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 or amortizing the Section 743(b) adjustment described in
this paragraph. If this challenge were sustained, the uniformity of Units might
be affected.
Tax-Exempt Organizations and Some 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 these persons and,
as described below, may have substantially adverse tax consequences.
Employee benefit plans and most other organizations exempt from federal
income tax (including IRAs and other retirement plans) are subject to federal
income tax on unrelated business taxable income. Much of the taxable income
derived by these organizations from the ownership of a Unit will be unrelated
business taxable income and thus will be taxable to these Unitholder.
Regulated investment companies are required to derive 90% or more of their
gross income from interest, dividends, gains from the sale of stocks or
securities or foreign currency or some related sources. It is not anticipated
that any significant amount of our gross income will qualify as income from
these sources.
Non-resident aliens and foreign corporations, trusts or estates that acquire
Units will be considered to be engaged in business in the United States on
account of their ownership of Units, and as a consequence they will be required
to file federal tax returns in respect of their distributive shares of our
income, gain, loss, deduction or credit and pay federal income tax at regular
rates on
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our income. 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, we will withhold at the rate of 39.6% on actual cash
distributions made quarterly to foreign Unitholders. Each foreign Unitholder
must obtain a taxpayer identification number from the IRS and submit that
number to the Transfer Agent of the Company on a Form W-8 in order to obtain
credit for the taxes withheld. Subsequent adoption of Treasury Regulations or
the issuance of other administrative pronouncements may require us to change
these procedures.
Because a foreign corporation that owns Units will be treated as engaged in
a United States trade or business, it 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 our earnings and profits (as adjusted for changes in
the foreign corporation's "U.S. net equity") that are effectively connected
with the conduct of a United States trade or business. That tax may be reduced
or eliminated by an income tax treaty between the United States and the
country with respect to which the foreign corporate Unitholder is a "qualified
resident."
Under a ruling of the IRS, a foreign Unitholder who sells or otherwise
disposes of a Unit will be subject to federal income tax on gain realized on
the disposition of such Unit to the extent that such gain is effectively
connected with a United States trade or business of the foreign Unitholder.
Apart from the ruling, a foreign Unitholder will not be taxed upon the
disposition of a Unit if that foreign Unitholder has held less than 5% in
value of the Units during the five-year period ending on the date of the
disposition and if the Units are regularly traded on an established securities
market at the time of the disposition.
Administrative Matters
Company Information Returns and Audit Procedures
We intend to furnish to each Unitholder, within 90 days after the close of
each calendar year, tax information, including a Schedule K-1, that sets forth
each Unitholder's allocable share of our income, gain, loss, deduction and
credit. In preparing this information that will generally not be reviewed by
counsel, we will use various accounting and reporting conventions, some of
which have been mentioned in the previous discussion, to determine the
respective Unitholder's allocable share of income, gain, loss, deduction and
credit. There is no assurance that any of those conventions will yield a
result which conforms to the requirements of the Code, regulations or
administrative interpretations of the IRS. The Company cannot assure
prospective Unitholders that the IRS will not successfully contend in court
that such accounting and reporting conventions are impermissible.
The federal income tax information returns we file may be audited by the
IRS. Adjustments resulting from any IRS audit may require some or all of the
Unitholders to file amended tax returns, and possibly may result in an audit
of Unitholders' own returns. Any audit of a Unitholder's return could result
in adjustments of non-Company as well as Company items.
Partnerships generally are treated as separate entities for purposes of
federal tax audits, judicial review of administrative adjustments by the IRS
and tax settlement proceedings. The tax treatment of partnership items of
income, gain, loss, deduction and credit are determined are determined at the
partnership level in a unified 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. Our Partnership
Agreement appoints the General Partner as the Tax Matters Partner.
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The Tax Matters Partner will make certain elections on our behalf and on our
Unitholders' behalf and can extend the statute of limitations for assessment of
tax deficiencies against Unitholders with respect to our items. The Tax Matters
Partner may bind a Unitholder with less than a 1% profits interest in the
Company to a settlement with the IRS unless that Unitholder elects, by filing a
statement with the IRS, not to give such authority to the Tax Matters Partner.
The Tax Matters Partner may seek judicial review (by which all the Unitholders
are bound) of a final partnership administrative adjustment and, if the Tax
Matters Partner fails to seek judicial review, such review may be sought by any
Unitholder having at least a 1% interest in our profits 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 our return to avoid the requirement that all items be
treated consistently on both returns. Intentional or negligent disregard of the
consistency requirement may subject a Unitholder to substantial penalties.
Nominee Reporting
Persons who hold an interest in the Company as a nominee for another person
are required to furnish to us:
. the name, address and taxpayer identification number of the beneficial
owner and the nominee;
. whether the beneficial owner is (i) a person that is not a United States
person, (ii) a foreign government, an international organization or any
wholly-owned agency or instrumentality of either of the foregoing, or
(iii) a tax-exempt entity;
. the amount and description of Units held, acquired or transferred for
the beneficial owner; and
. 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 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 this information to us. The nominee is required to
supply the beneficial owner of the Units with the information furnished to us.
Registration as a Tax Shelter
The 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 we
are not subject to the registration requirement on the basis that (i) we do not
constitute a tax shelter or (ii) we constitute a projected income investment
exempt from registration. However, the General Partner, as our principal
organizer, has registered us as a tax shelter with the Secretary of the
Treasury because of the absence of assurance that we will not be subject to tax
shelter registration and in light of the substantial penalties which might be
imposed if registration is required and not undertaken. ISSUANCE OF THE
REGISTRATION NUMBER DOES NOT INDICATE THAT AN INVESTMENT IN THE COMPANY OR THE
CLAIMED TAX BENEFITS HAVE BEEN REVIEWED, EXAMINED OR APPROVED BY THE IRS. We
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
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transferor of a Unit to furnish the registration number to the transferee is
$100 for each such failure. The Unitholders must disclose the tax shelter
registration number of the Company on Form 8271 to be attached to the tax
return on which any income, gain, loss, deduction or credit of the Company is
included. A Unitholder who fails to disclose the tax shelter registration
number on his return, without reasonable cause for that failure, will be
subject to a $50 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 that is attributable to one or more of certain listed
causes, including 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 the position are
disclosed on the return. More stringent rules apply to "tax shelters," a term
that in this context does not appear to include us. If items of our income,
gain, loss, deduction or credit included in the distributive shares of
Unitholders might result in such an "understatement" of income for which no
"substantial authority" exists, we must disclose the pertinent facts on our
return. In addition, we will make a reasonable effort to furnish sufficient
information for Unitholders to make adequate disclosure on their returns to
avoid liability for this penalty.
A substantial valuation misstatement exists if the value of any property (or
the adjusted basis of any property) claimed on a tax return is 200% or more of
the amount determined to be the correct amount of the valuation or adjusted
basis. No penalty is imposed unless the portion of the underpayment
attributable to a substantial valuation misstatement exceeds $5,000 ($ 10,000
for most corporations). If the valuation claimed on a return is 400% or more
than the correct valuation, the penalty imposed increases to 40%.
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 we do business or own property. Although an analysis of
those various taxes is not presented here, each prospective Unitholder should
consider the potential impact of such taxes on his investment in us. A
Unitholder will be required to file state income tax returns and to pay state
income taxes in some or all of the states in which we do business or own
property and may be subject to penalties for failure to comply with those
requirements. In certain states, tax losses may not produce a tax benefit in
the year incurred (if, for example, we have 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 us, or we may elect, to withhold a
percentage of income from amounts to be distributed to a Unitholder who is not
a resident of the state. Withholding, the amount of which may be greater or
less than a particular Unitholder's income tax liability to the state,
generally does not relieve 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 us. See "--
Disposition of Common Units Entity--Level Collections". Based on current law
and its estimate of our future
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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 us. Accordingly, each prospective Unitholder should consult, and
must depend upon, his own tax counsel or other advisor with regard to those
matters. Further, it is the responsibility of each Unitholder to file all state
and local, as well as U.S. federal, tax returns that may be required of such
Unitholder. Counsel has not rendered an opinion on the state or local tax
consequences of an investment in us.
Tax Consequences of Ownership of Debt Securities
A description of the material federal income tax consequences of the
acquisition, ownership and disposition of debt securities will be set forth in
the prospectus supplement relating to the offering of debt securities.
SELLING UNITHOLDERS
In addition to covering our offering of securities, this Prospectus covers
the offering for resale of an unspecified number of Common Units by Selling
Unitholders. The applicable Prospectus Supplement will set forth, with respect
to each Selling Unitholder,
(1) the name of the Selling Unitholder,
(2) the nature of any position, office or other materials relationship
which the Selling Unitholder will have had within the prior three years
with us or any of our predecessors or affiliates,
(3) the number of Common Units owned by the Selling Unitholders prior to
the offering,
(4) the amount of Common Units to be offered for the Selling Unitholder's
account, and
(5) the amount and (if one percent or more) the percentage of the Common
Units to be owned by the Selling Unitholders after completion of the
offering.
PLAN OF DISTRIBUTION
We may sell the Common Units or Debt Securities directly, through agents, or
to or through underwriters or dealers. Please read the Prospectus Supplement to
find the terms of the Common Unit or Debt Securities offering including:
. the names of any underwriters, dealers or agents;
. the offering price;
. underwriting discounts;
. sales agents' commissions;
. other forms of underwriter or agent compensation;
. discounts, concessions or commissions that underwriters may pass on to
other dealers;
. any exchange on which the Common Units or Debt Securities are listed.
We may change the offering price, underwriter discounts or concessions, or
the price to dealers when necessary. Discounts or commissions received by
underwriters or agents and any profits on the resale of Common Units or Debt
Securities by them may constitute underwriting discounts and commissions under
the Securities Act of 1933.
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Unless we state otherwise in the Prospectus Supplement, underwriters will
need to meet certain requirements before purchasing Common Units or Debt
Securities. Agents will act on a "best efforts" basis during their appointment.
We will also state the net proceeds from the sale in the Prospectus Supplement.
Any brokers or dealers that participate in the distribution of the Common
Units or Debt Securities may be "underwriters" within the meaning of the
Securities Act for such sales. Profits, commissions, discounts or concessions
received by such broker or dealer may be underwriting discounts and commissions
under the Securities Act.
When necessary, we may fix Common Unit or Debt Securities distribution using
changeable, fixed prices, market prices at the time of sale, prices related to
market prices, or negotiated prices.
We may, through agreements, indemnify underwriters, dealers or agents who
participate in the distribution of the Units or Debt Securities against certain
liabilities including liabilities under the Securities Act. We may also provide
funds for payments such underwriters, dealers or agents may be required to
make. Underwriters, dealers and agents, and their affiliates may transact with
us and our affiliates in the ordinary course of their business.
Distribution by Selling Unitholders
Distribution of any Common Units to be offered by one or more of the Selling
Unitholders may be effected from time to time in one or more transactions
(which may involve block transactions) (1) on the New York Stock Exchange, (2)
in the over-the-counter market, (3) in transactions otherwise than on the New
York Stock Exchange or in the over-the-counter market or (4) in a combination
of any of these transactions. The transactions may be effected by the Selling
Unitholders at market prices prevailing at the time of sale, at prices related
to the prevailing market prices, at negotiated prices or at fixed prices. The
Selling Unitholders may offer their shares through underwriters, brokers,
dealers or agents, who may receive compensation in the form of underwriting
discounts, commissions or concessions from the Selling Unitholders and/or the
purchasers of the shares for whom they act as agent. The Selling Unitholders
may engage in short sales, short sales against the box, puts and calls and
other transactions in our securities, or derivatives thereof, and may sell and
deliver their Common Units in connection therewith. In addition, the Selling
Unitholders may from time to time sell their Common Units in transactions
permitted by Rule 144 under the Securities Act.
As of the date of this Prospectus, we have not engaged any underwriter,
broker, dealer or agent in connection with the distribution of Common Units
pursuant to this Prospectus by the Selling Unitholders. To the extent required,
the number of Common Units to be sold, the purchase price, the name of any
applicable agent, broker, dealer or underwriter and any applicable commissions
with respect to a particular offer will be set forth in the applicable
Prospectus Supplement. The aggregate net proceeds to the Selling Unitholders
from the sale of their Common Units offered hereby will be the sale price of
those shares, less any commissions, if any, and other expenses of issuance and
distribution not borne by us.
The Selling Unitholders and any brokers, dealers, agents or underwriters
that participate with the Selling Unitholders in the distribution of shares may
be deemed to be "underwriters" within the meaning of the Securities Act, in
which event any discounts, concessions and commissions received by such
brokers, dealers, agents or underwriters and any profit on the resale of the
shares purchased by them may be deemed to be underwriting discounts and
commissions under the Securities Act.
The applicable Prospectus Supplement will set forth the extent to which we
will have agreed to bear fees and expenses of the Selling Unitholders in
connection with the registration of the
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Common Units being offered hereby by them. We may, if so indicated in the
applicable Prospectus Supplement, agree to indemnify Selling Unitholders
against certain civil liabilities, including liabilities under the Securities
Act.
LEGAL MATTERS
Vinson & Elkins L.L.P., our counsel, will issue an opinion for us about the
legality of the Common Units and Debt Securities and the material federal
income tax considerations regarding the Common Units. Any underwriter will be
advised about other issues relating to any offering by their own legal counsel.
EXPERTS
The consolidated financial statements of Enterprise Products Partners L.P.
and the financial statements of Belvieu Environmental Fuels, which are
incorporated by reference in this prospectus from the Annual Report on Form
10-K of Enterprise Products Partners L.P. for the year ended December 31, 1998
and the financial statements of Tejas Natural Gas Liquids, LLC and Subsidiary
which are incorporated by reference in this prospectus from the Amended Current
Report on Form 8-K/A No. 1 of Enterprise Products Partners L.P., have been
audited by Deloitte & Touche LLP, independent auditors, as stated in their
reports, which are incorporated herein by reference, and have been so
incorporated in reliance upon the reports of such firm given upon their
authority as experts in accounting and auditing.
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